Here’s the Skinny…
As it turns out, almost every institution, including BDs, RIAs, IMOs and insurance companies, abandoned their advisors to fend for themselves under the scrutiny of DOL PTE 84-24 (Prohibited Transaction Exemption 84-24), because they wanted to distance themselves from any risk and liability related to the advisors’ business, but of course they still want to be paid the same …
… meaning advisors inherited 100% of the risk and liability under PTE 84-24 – many of whom never even realized what they’d actually just become subjected to – and it’s nothing to scoff at.
You see, an advisor’s affiliated partners (those you hang your licenses, registrations and contracts with), could have covered you under BICE (the Best Interest Contract Exemption) had they chosen to extend such a courtesy, however, most instead opted to subject you to 100% of the liability and forced you to “go it alone” under the disclosure requirements of PTE 84-24.
To explain, let me quickly categorize how BICE and PTE coexist.
DOL TRANSITIONAL RELIEF BACKGROUND SUMMARY:
Here is a brief summary via bullet point of the “current scenario” known as the DOL’s “transitional relief” – applicable June 9, 2017, through January 1, 2018 (on August 9, 2017, the Department of Labor submitted a request to the White House’s Office of Management and Budget proposing to extend the transition period and delay the final applicability of the DOL’s fiduciary rule from January 1, 2018 to July 1, 2019) – Meaning the Transitional Relief (that which is described below) will likely continue to be in effect until July 1, 2019:
• Advisors to retirement investors, on all qualified monies and related advice, will be treated as fiduciaries and have an obligation to give advice that adheres to “impartial conduct standards” beginning on June 9, 2017. These fiduciary standards require advisors to adhere to a “best interest standard” when making investment recommendations, charge and/or receive no more than reasonable compensation for their services, refrain from making misleading statements and manage any conflicts.
• The Best Interest Contract Exemption (BICE) applies only to hierarchies involving a Financial Institution (FI), which the DOL recognizes as a BD, RIA, bank or insurance company. FI’s and their advisors must adhere to that stated above, however, all other remaining conditions are delayed until January 1, 2018 (expected to soon be pushed to July 1, 2019), such as requirements to make specific written disclosures and representations of fiduciary compliance in communications with investors (meaning written disclosure and client signature is not required under BICE).
• The amendments to the Prohibited Transaction Exemption 84-24 (PTE 84-24), which applies only to agents/advisors (not including FIs), relating to insurance and annuities is delayed until January 1, 2018 (expected to push to July 1, 2019), other than that listed above which is applicable on June 9, 2017. Under the transitional PTE 84-24, the agents/advisors must disclose conflicts of interest plus the sales commission, expressed as a percentage of gross annual premium payments for the first year and for each of the succeeding renewal years, that will be paid to the agent in connection with the purchase of the product. Documentation must be provided to and signed by the client and retained by the agent/advisor for 6 years (meaning written disclosure and client signature is required).
Reference: DOL website https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2
Documents including the 1) Federal Register Notice – Final; 2) Best Interest Contract Exemption with Amended Applicability Dates; 3) Class Exemption for Principal Transactions with Amended Applicability Dates; 4) PTE 84-24 with Amended Applicability Dates; 5) News Release – US Labor Department Extends Fiduciary Rule Applicability Date.
Here is a DOL compliance flowchart schematic that may help you visualize the “real life flow” and structure as mandated by the DOL Transitional Relief period under the DOL Fiduciary Rule.
Unfortunately, many advisors mistakenly believed (or were told) that the transitional PTE 84-24 was “the solution they’d been praying for.” While it is ONE solution, it most definitely is not THE solution that many had hoped for – especially given its ominous disclosure requirement. And to further dismay, many advisors have exposed themselves by not following the disclosure requirements under PTE 84-24. Talk about a ticking time bomb.
WHAT DOES THIS REALLY MEAN?
What this really means, in my opinion anyway, is that whatever firm(s) are being compensated by your production due to a contractual hierarchy should be covering you under BICE, eliminating the necessary compensation disclosure, client signatures, and document retention as they are being compensated accordingly. This doesn’t mean you bear zero liability or risk, but you share in it appropriately with your affiliated organization. On the other hand, under PTE 84-24, you are independently held accountable with 100% of the liability – required to provide compensation disclosure, secure client signatures and retain documentation.
In other words, if you are a registered rep, investment advisor rep, and/or insurance agent and you are being subjected to PTE 84-24, you may want to reconsider the quality of who you are partnering with and/or affiliating with. To reiterate, the key question is, “Who else is being compensated along with your production?” If others are sharing in the compensation, should they not also be sharing in the risk and liability plus making your life easier under BICE?
Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” DOL has rolled back the tide via their transitional relief rules. Are the organizations you rely upon just standing onshore letting you swim around naked? Think about it.
That’s the Skinny,
Mike Walters, CEO