DOL fiduciary rule: When advisers actively seek to use BICE

Many advisers are embracing an exemption they've frequently derided, even though a less-contentious one is available for annuity sales

Jun 14, 2017 @ 2:15 pm

By Greg Iacurci

+ Zoom

To opponents of the Department of Labor's fiduciary rule, the best-interest contract exemption is something akin to the spawn of Satan.

This provision of the rule, which raised investment advice standards in retirement accounts, allows broker-dealers to continue providing investment advice deemed conflicted by the DOL, but under certain conditions.

It inspires such ire and consternation primarily due to the fact that it exposes broker-dealers to class-action lawsuits from investors. BICE also comes with several different disclosure requirements that stakeholders are none too fond of.

Yet these very same naysayers are wholeheartedly and voluntarily embracing BICE for annuity sales through January, when the full force of the fiduciary rule is set to kick in, even though another exemption is available.

That exemption, Prohibited Transaction Exemption 84-24, covers the sale of insurance products such as annuities. It had previously been considered less onerous than BICE by most stakeholders, until DOL action in April reversed that line of thinking.

"BICE was bad, 84-24 was better," Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm, said of firms' thinking. "But right now it's kind of the flip side. BICE, ironically, is less onerous than 84-24."

When the Department of Labor delayed the phased implementation period of the rule by 60 days, to June 9 from April 10, it also deferred some compliance requirements of BICE until January 2018.

Until then, all that's required for those providing fiduciary investment advice is adherence to the impartial conduct standards: providing best-interest advice, receiving reasonable compensation, and making no materially misleading statements to clients.

Those impartial conduct standards also apply to PTE 84-24. However, there are additional disclosure requirements that go along with this exemption during the rule's transition period. Brokers, for instance, must disclose their initial and recurring compensation, and the client must acknowledge receipt of that information in writing and affirm the transaction.

"Folks that qualify as a fiduciary are tending to want to rely on transition BICE, because it's easier, quite frankly, than 84-24," said Bruce Ashton, a partner at Drinker Biddle & Reath. "There are no formal disclosure requirements, as there are under 84-24."

Previous to the DOL's rule change, firms using BICE would have had to deliver a written statement to clients acknowledging fiduciary status; state in writing the firm and adviser will comply with the impartial conduct standards and disclose material conflicts of interest; and deliver a one-time disclosure to clients if they had proprietary products or products based on third-party payments, Mr. Thompson said.

Firms' reversal in thinking on BICE is all the more striking since annuity distributors and manufacturers were in an uproar last year upon discovering indexed annuities and variable annuities were required to be sold under BICE.

During the rule's transition period, these annuities are able to be sold under PTE 84-24, but in large part firms aren't doing so, observers said.

One group that is: independent marketing organizations, which market insurance products like indexed annuities to independent insurance agents. Because of a quirk in the rule, most don't qualify to use BICE. So, at least until January, IMOs can continue selling indexed annuities under PTE 84-24.

Of course, these strategies are all in flux given the potential for the DOL to change the rule, in response to a directive from the Trump administration to review it. Some believe some provisions in BICE may be watered down, or that the January date for full rule compliance will be delayed.

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