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Finra Flags Problems with DOL’s Fiduciary Rule (May 27)

By Bruce Love December 30, 2016

In FA-IQ readers’ favorite practice management article, published May 27, it was revealed that Finra thought parts of the new fiduciary rule are “problematic” for the broker community and could act as a dampener on business.

The new rule, released in April by the Department of Labor, forces advisors to act in the best interest of clients when advising on retirement accounts.

As part of the DOL’s view of the client’s best interest, it forbids variable commissions when an advisor conducts transactions within a client’s retirement account. Simply put, advisors can’t sell products which earn them different commission levels.

Firms themselves can still use the compensation models they have now — which can include sales commissions — provided the arrangements are considered “reasonable compensation” and provided they inform clients of their fiduciary status.

As per the best interest provision, they must also be sure to give “prudent and impartial advice,” as well as disclose their revenue model and highlight any potential conflicts of interest.

But advisors can still earn commissions which vary by product if they take advantage of an exemption included in the rule referred to as the Best Interest Contract Exemption (BICE).

Robert Colby, Finra’s chief legal officer, said at the time he was concerned that the wording of the rule’s BICE provision is unclear.

Speaking at Finra’s annual conference in Washington, D.C. in May, Colby said he felt the BICE was “problematic” in a number of areas — especially the policies and procedures to ensure broker compensation doesn’t incline a person to create a conflict.

Colby said that while the fiduciary rule generally forbids individuals from receiving commissions in retirement accounts, there is potential for confusion as to how the individuals themselves can be paid because their firms are allowed commission fees.


And though he said DOL’s fiduciary rule, part of the Employee Retirement Income Security Act, “wasn’t meant to act as a throttle for the business,” the regulator nonetheless has some specific concerns that the BICE may do just that.

When reached subsequent to Colby’s remarks, Finra declined further comment.

Securities lawyer Andrew Oringer said at the time that longstanding uncertainty under ERISA about how permissible compensation should be handled at the individual, institutional and affiliate levels has seeped into the new Fiduciary rule.

“But to the extent that there’s some ambiguity, the point is too fundamental for the DOL not to eventually address it with some clarity,” said Oringer, a New York-based partner at the law firm Dechert. “Once there is more clarity, people can decide what business they want to engage in and how they want to structure compensation.”

The rule contains a grandfathering clause, which means advisors do not need to comply with the best interest provision for accounts where investment recommendations were made prior to April 10, 2017.

After that date, advisors who make investment recommendations which trigger remuneration in the form of commissions or 12b-1 fees must make their recommendations in compliance with the BICE.

See the original article, which ran May 27, here.