BISA Magazine - Quarter 3, 2016 - 28

COMPLIANCE & REGULATORY WATCH * General Marketing Communications General Marketing Communications encompass many different forms, but some of the more common are general circulation newsletters, market data and indices, and research reports prepared for general distribution. Now that fiduciary status has been determined based on investment advice given as a result of a recommendation, what does it all actually mean? What is the Conflict the DOL Fiduciary Rule Addresses? Registered Investment Advisors have always operated as fiduciaries. Brokers have operated under FINRA's suitability standard. So what is so different about the new rule? By definition, a fiduciary must act prudently and in the customer's interest. It is important to understand that the DOL fiduciary rule is designed to help protect investors from conflicts of interest. Brokers - whether in a wire house, bank or other location - and insurance agents who deal with IRA accounts receive commissions for what they sell. The DOL has stated this is inherently a conflict to act in the investor's best interest. Under FINRA's suitability rule, a broker can evaluate different investment alternatives for a client that may be considered suitable based on the client's situation. Afterwards, he or she recommends the option that pays the highest commission while still complying with the suitability standard. This is the conflict the DOL fiduciary rule was designed to address. Under the new rule, commissions, trails, 12b-1 fees and other transactionbased compensation are prohibited based on this inherent conflict. (It is important to note that the prohibited nature of the compensation is without the BIC Exemption, which will be covered in a later section.) The next question is, how will brokers and insurance agents who sell products to IRA accounts be paid? Compensating Advisors of IRA Accounts Transactions that inherently pose a conflict of interest are prohibited under the DOL fiduciary rule. However, there are two ways under the rule that an advisor (e.g., brokers or insurance agents) can conduct certain activity. The first is to use an existing exclusion such as those discussed previously. The second is to see if there is an exemption to a prohibited transaction. Since none of the seven exclusions apply to transaction-based compensation, the next step is to look for a Prohibited Transaction Exemption (PTE). The DOL recognizes that many advi- By definition, a fiduciary must act prudently and in the customer's interest. It is important to understand that the DOL fiduciary rule is designed to help protect investors from conflicts of interest. 28 www.bisanet.org sors who work with IRA accounts earn transaction-based compensation. As a result, the new rule includes a mechanism that allows for these advisors to continue to receive this type of compensation, while also addressing the inherent conflict of interest. In order to accomplish this, PTE 2016-01, the Best Interest Contract Exemption ("BIC Exemption"), was created. The BIC Exemption The BIC Exemption, as noted in its title, is a contract between the financial institution and the plan or IRA account holder in which the advisor adheres to the fiduciary standard: acting in the best interest of the customer. To do this, the BIC Exemption introduces the Impartial Conduct Standard, which states that a financial institution and its advisors must: * give investment advice in the best interest of the customer; * receive no more than reasonable compensation; and * give no misleading statements. Insurance companies are included, as the sale of equity index and variable annuities for a commission can only occur using the BIC Exemption (fixed annuities are allowed under a separate PTE). The BIC Exemption is a contract and therefore has associated legal consequences. One consequence that has caused particular concern is that the financial institution cannot put language in the contract that disallows class action lawsuits. Firms are also struggling to understand and address the BIC Exemption's concept of "reasonable" compensation. In addition, the BIC Exemption requires many disclosures, including compensation and potential conflicts, both in writing and on the firm's website. Advisors and financial institutions must also be able to demonstrate that recommendations are in the best interest of their clients. http://www.bisanet.org

Table of Contents for the Digital Edition of BISA Magazine - Quarter 3, 2016