Published on *The National Law Review* (http://www.natlawreview.com)

Article By:

Fred Reish

This is 53^{rd} article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

In recent conversations I have learned that many broker-dealers and RIAs do not understand how the prohibited transaction rules and exemptions (and, particularly, the Best Interest Contract Exemption) apply differently to discretionary accounts and non-discretionary accounts. This article discusses some of those differences.

One similarity, though, is that ERISA’s prudent man rule and duty of loyalty apply for both discretionary and non-discretionary advice to retirement plans and participants.

However, ERISA does not generally govern investment advice to IRAs. As a result, absent the need for a prohibited transaction exemption, advisers to IRAs will not be governed by fiduciary/best interest standard of care. For example, where an adviser (and his or her supervisory entity) provides discretionary or non-discretionary investment advice to an IRA on a “pure” level fee basis, the adviser and the entity are subject to the fiduciary standards under the securities laws, but are not covered by the new fiduciary rule. That is because, where an adviser is providing advice for a reasonable level fee, it is not a prohibited transaction. As a result, an exemption is not needed. (By the way, a “pure” level fee is compensation that does not vary based on the advisory decisions or recommendations and that is not paid by third parties, *e.g.*, 12b-1 fees, insurance commissions, etc. Also, the fee must be level across all related and affiliated parties.)

However, where there is a financial conflict of interest for non-discretionary or discretionary investment advice to an IRA, a prohibited transaction results. That includes, for example, where the adviser or supervisory entity (or any affiliated or related party) receives compensation in addition to the level fee. Examples of those additional, and conflicted, payments are: 12b-1 fees; insurance commissions and trails; proprietary products; asset-based revenue sharing; and payments from custodians.

Where conflicted payments are received, and a prohibited transaction occurs, the adviser and the supervisory entity will need an exemption. If the adviser provides non-discretionary investment advice, the Best Interest Contract Exemption (BICE) is available, if its conditions are satisfied. BICE requires only that the adviser and the supervisory entity comply with the Impartial Conduct Standards during the transition period (the transition period is from June 9 to December 31, 2017, but will likely be extended). The Impartial Conduct Standards are that the adviser and entity adhere to the best interest standard of care, receive no more than reasonable compensation for their services, and make no materially misleading statements. The entity–-the broker-dealer or RIA firm-–also needs to have procedures and practices to ensure that the conflicts do not result in advice that is not in the best interest of the retirement investor.

However, BICE cannot be used for prohibited transactions that result from discretionary investment management. In fact, there are only a few exemptions for discretionary investment management, and none as broad as BICE. For example, there is an exemption for the use of proprietary mutual funds.

As a result, many—and perhaps most—financial conflicts (that is, prohibited transactions) that result from discretionary investment management decisions are absolutely prohibited, because there are not exemptions for the conflicted payments.

The moral of this story is that RIA firms and broker-dealers need to distinguish between discretionary investment management and non-discretionary investment advice. For the time being, at least, most conflicts of interest for nondiscretionary advisers are permissible, if the Impartial Conduct Standards are satisfied. However, for discretionary investment management, there are few exemptions and most financial conflicts will be prohibited without any available exemptions. To the extent that the prohibited transaction rules are being inadvertently violated for managed IRAs, now is the time to correct the errors.

*The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.*

Part 1- Interesting Angles on DOL’s Fiduciary Rule #1

Part 2 - Best Interest Standard of Care: Interesting Angles on the DOL’s Fiduciary Rule #2

Part 3 - Hidden Preamble Observations: Interesting Angles on the DOL’s Fiduciary Rule #3

Part 4 - TV Stock Tips and Fiduciary Advice: Interesting Angles on DOL’s Fiduciary #4

Part 5 - Level Fee Fiduciary Exemption: Interesting Angles on DOL’s Fiduciary Rule #5

Part 6 - Fiduciary Regulation And The Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #6

Part 7 - Fiduciary Regulations And The Exemptions : Interesting Angles on the DOL’s Fiduciary Rule #7

Part 8 - Designated Investment Alternatives: Interesting Angles on the DOL’s Fiduciary Rule #8

Part 9 - Best Interest Standard and the Prudent Man Rule: Interesting Angles on the DOL’s Fiduciary Rule #9

Part 10 - FINRA Regulatory Notice: Interesting Angles on the DOL’s Fiduciary Rule #10

Part 11-ERISA and the Internal Revenue Code: Interesting Angles on the DOL’s Fiduciary Rule #11

Part 12- Potential Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #12

Part 13-Investment Policies: Interesting Angles on the DOL’s Fiduciary Rule #13

Part 14- Investment Suggestions: Interesting Angles on the DOL’s Fiduciary Rule #14

Part 15- Best Interest Contract Exemption: Interesting Angles on the DOL’s Fiduciary Rule #15

Part 16 - Adviser Recommendations: Interesting Angles on DOL’s Fiduciary Rule #16

Part 17 - Level Fee Fiduciary: Interesting Angles on DOL’s Fiduciary Rule #17

Part 19- Interesting Angles on the DOL’s Fiduciary Rule #19: Advisors' Use of "Hire Me" Practices.

Part 20- Three Parts of "Best Interest Standard of Care": Interesting Angles on the DOL’s Fiduciary Rule #20

Part 22-Banks and Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #22

Part 24 - Differential Compensation Based on Neutral Factors: Interesting Angles on DOL’s Fiduciary Rule #24

Part 25-Reasonable Compensation Versus Neutral Factors: Interesting Angles on the DOL’s Fiduciary Rule #25

Part 27 - Definition of Compensation: Interesting Angles on DOL’s Fiduciary Rule #27

Part 28 - What About Rollovers that Aren’t Recommended?: Interesting Angles on the DOL’s Fiduciary Rule #28

Part 29- Capturing Rollovers: What Information is Needed?: Interesting Angles on the DOL’s Fiduciary Rule #29

Part 31 - “Un-levelizing” Level Fee Fiduciaries: Interesting Angles on the DOL’s Fiduciary Rule #31

Part 33- Discretionary Management, Rollovers and BICE: Interesting Angles on the DOL’s Fiduciary Rule #33

Part 34- Seminar Can Be Fiduciary Act: Interesting Angles on DOL’s Fiduciary Rule #34

Part 35- Presidential Memorandum on Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #35

Part 36 -Retirement Advice and the SEC: Interesting Angles on the DOL’s Fiduciary Rule #36

Part 37 - SEC Retirement-Targeted Examinations: Interesting Angles on the DOL’s Fiduciary Rule #37

Part 42 - Rollovers under DOL’s Final Rule: Interesting Angles on DOL’s Fiduciary Rule #42

Part 43 - BICE Transition: More Than the Eye Can See - Interesting Angles on DOL’s Fiduciary Rule #43

Part 44 - Basic Structure of Fiduciary Package (June 9): Interesting Angles on DOL’s Fiduciary Rule #44

Part 47- “Real” Requirements of Fiduciary Rule: Interesting Angles on DOL’s Fiduciary Rule #47

Part 49- The Requirement to Disclose Fiduciary Status: Interesting Angles on the DOL’s Fiduciary Rule #49

Part 50- Fourth Impartial Conduct Standard: Interesting Angles on DOL’s Fiduciary Rule #50

Part 51- Recommendations to Transfer IRAs: Interesting Angles on the DOL’s Fiduciary Rule #51

Part 54 - The DOL’s RFI and Possible changes to BICE: Interesting Angles on the DOL’s Fiduciary Rule #54

Part 55- DOL’s RFI and Recommendation of Annuities- Interesting Angles on DOL’s Fiduciary Rule #55

Part 58- Recommendations to Contribute to a Plan or IRA- Interesting Angles on the DOL’s Fiduciary Rule #58

Part 60- What the Tibble Decision Means to Advisers: Interesting Angles on the DOL’s Fiduciary Rule #60

Part 61- The Fiduciary Rule, Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #61

Part 65- Unexpected Consequences of Fiduciary Rule - Interesting Angles on the DOL’s Fiduciary Rule #65

Part 66- Concerns About 408(b)(2) Disclosures: Interesting Angles on the DOL’s Fiduciary Rule #66

Part 67- From the DOL to the SEC - Interesting Angles on the DOL’s Fiduciary Rule #67

Part 68-Recommendations of Distributions - Interesting Angles on the DOL’s Fiduciary Rule #68

Part 69- **Compensation Risks for Broker-Dealers and RIAs: **Interesting Angles on the DOL’s Fiduciary Rule #69

Part 70-The Fiduciary Rule and Recordkeeper Services: Interesting Angles on the DOL’s Fiduciary Rule #70

Part 71- Recordkeepers and Financial Wellness Programs: Interesting Angles on the DOL’s Fiduciary Rule #71

Part 72-The "Wholesaler" Exception: Interesting Angles on the DOL’s Fiduciary Rule #72

Part 74 -One More Fiduciary Issue for Recordkeepers: Interesting Angles on the DOL’s Fiduciary Rule #74

Part 75 - The Fiduciary Rule: Mistaken Beliefs-Interesting Angles on the DOL’s Fiduciary Rule #75

Part 77 - The Fiduciary Rule: Mistaken Beliefs (#2): Interesting Angles on the DOL’s Fiduciary Rule #77

Part 78 - The Fiduciary Rule: Mistaken Beliefs (#3): Interesting Angles on the DOL’s Fiduciary Rule #78

Part 79 - The Fiduciary Rule: Mistaken Beliefs (#4)- Interesting Angles on the DOL’s Fiduciary Rule #79

Part 80 - Enforceable During Transition?: Interesting Angles on the DOL’s Fiduciary Rule #80

Part 83 - Part 2 of Undisclosed (and Disclosed) 12b-1 Fees: Interesting Angles on the DOL’s Fiduciary Rule #83

Part 85 -The Fiduciary Rule: What’s Next (Part 1)? : Interesting Angles on the DOL’s Fiduciary Rule #85

Part 86- The Fiduciary Rule: What’s Next (Part 2)?: Interesting Angles on the DOL’s Fiduciary Rule #86

Part 87 - The Fiduciary Rule: What’s Next (Part 3)?: Interesting Angles on the DOL’s Fiduciary Rule #87

Part 88 -The Fiduciary Rule: What’s Next (Part 4)? : Interesting Angles on the DOL’s Fiduciary Rule #88