Understanding the DOL’s New “IRA” Fiduciary · Goals of the DOL – Obama Administration 1....

Copyright 2017© Collin W. Fritz & Associates, Ltd. “The Pension Specialists” All rights reserved. No part of this presentation may be reproduced in any form and by any means

without prior written permission from Collin W. Fritz & Associates, Ltd.

The Webinar will be

starting shortly

Rev. 3/27/2017

Understanding the DOL’s New

“IRA” Fiduciary

Investment Advice Definition and

the

New Prohibited Transaction Exemptions.

1

8:30 am CST or

1:00 pm CST

Reminder:

2 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"

This is copyrighted material.

No Video or Audio Recording is permitted without prior written

consent from

Collin W. Fritz & Associates, Ltd.

Thank you for your compliance.


The Audio Portion of this presentation is available either by phone or

by using the speakers and microphone on your PC. The phone

number is provided to you in the confirmation from CWF and again at

the time you join the meeting.

You will need the access code that was emailed to you in the

confirmation from CWF. The confirmation code is 9 digits in length

e.g. 123-456-789

You will also need the Audio Pin # which is shown to you at the time

you join this meeting

If you have trouble re-connecting please call CWF at 800-346-3961

Goals of the DOL – Obama Administration

1. The DOL had a number of goals when it decided to change the definition

of fiduciary and also various prohibited transaction exemptions. The DOL

had concluded that some IRA custodians and trustees were engaged in

benefiting themselves to too large a degree rather than the IRA owner or

the plan participant. Transactions are to be made that are in the best

interest of the individual.

The DOL estimates that 1.7 trillion of IRA assets are invested in assets

where conflict of interest situations exist.

2. Require more transparency regarding IRA fees and related compensation.

3. Increase the ability of individuals to pursue legal actions when financial

institutions and their advisors charge more than reasonable fees for

processing various IRA Transactions.


IRAs and Pension Plans are Important to Individuals and the U.S. Government

See Retirement Plan Asset Chart on the next page

The IRA Funds Must be Invested

IRAs and Plans Must be Administered

There is much business related to IRAs and pension Plans. Assets are

continuously being bought and sold or being held as long term investments.

No one works for free.

More than 38 million households have one or more IRA types.


6

New DOL Rules

Goal – Impact IRA and Pension Rollovers


IRAs and Pension Plans are Important

Rollovers from 2016-2020 are estimated to be 2.4 trillion.

Annually the average is $400 billion.

See Rollover Chart for 2004-2008 below.

Rollovers from 2004-2008

Number of Taxpayers Rollover Amounts (1,000’s) Average

2004 3,636,027 $214,878,446 $59,097

2005 3,754,759 $228,495,888 $60,855

2006 4,150.140 $281,976,971 $67,944

2007 4,478,322 $316,646,832 $70,707

2008 5,609,522 $272,104,973 $48,508

Total 21,628,770 $1,314,103,110 $60,757


9

10

IRAs and Pension Plans are Important

Fees may/will be charged and paid to numerous parties.

Commissions and fees may be paid directly by the IRA or Plan.

There may be commissions or fees paid by others related to investment or

administrative tasks. There may be trailing commissions, sales loads, 12b-1

fees, revenue sharing payments, volume discounts due to the large size of

the contributions and other payments by investment product manufactures or

other third parties to financial institution and the advisors.

DOL Goal

The DOL reminds everyone that fees must be reasonable, that there should

be fee/compensation transparency and that there should be minimal conflicts

of interest. If there are conflicts of interest, they must be disclosed.


The Trumps Administration’s Actions Regarding the IRA Fiduciary Rules

President Trump’s Memorandum February 3, 2017

Proposed Extension of Applicability March 2, 2017

Date of April 10, 2017 to June 9, 2017

Deadlines for Comments

March 17, 2017 Should there be an extension ?

April 17, 2017 Should the new Rules be

Revised or Revoked ?

EBSA/DOL intends to Rule by April 9, 2017 if the Applicability Dates will be

postponed ?


13

Enforcement Policy – New DOL Rule

Enforcement is suspended while the new DOL is conducting its review.

Right now there has been no decision to delay the April 10th Applicability date. The DOL as stated it intends to do so, but if it does not, there will not be any enforcement.

Field Assistance Bulletin No. 2017-01

Date: March 10, 2017

Memorandum For: Mabel Capolongo, Director of Enforcement Regional Directors

From: John J. Canary Director of Regulations and Interpretations

Subject: Temporary Enforcement Policy on Fiduciary Duty Rule

14


Temporary Enforcement Policy

In recognition for the foregoing transitional and other concerns, the Department is adopting the following temporary enforcement policy:

A. In the event the Department issues a final rule after April 10 implementing a delay in the applicability date of the fiduciary duty rule and related PTEs, the Department will not initiate an enforcement action because an adviser or financial institution did not satisfy conditions of the rule or the PTEs during the “gap” period in which the rule becomes applicable before a delay is implemented, including a failure to provide retirement investors with disclosures or other related PTEs.

15



B. In the event the Department decides not to issue a delay in the fiduciary duty rule and the related PTEs, the Department will not initiate an enforcement action because an adviser or financial institution, as of April 10 applicability date of the rule, failed to satisfy conditions of the rule or the PTEs, including sending our required disclosures or other documents to retirement investors, within a reasonable period after the publication of a decision not to delay the April 10 applicability date. The Department will also treat the 30-day cure period under section IX(d)(2)(vi) of the BIC Exemption and Section VII(d)(2)(v) of the Principal Transactions Exemption as available to financial institutions that, as of the April 10 applicability date, did not provide to retirement investors the disclosures or other documents described in Section IX(d)(2)(vi) of the BIX Exemption and Section VII(d)(2)(v) of the Principal Transactions Exemption.

16



To the extent that circumstances surrounding the decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including prohibited transaction relief, EBSA will consider taking additional steps as necessary.

This Bulletin is an expression of EBSA’s temporary enforcement policy: it should not be read as expressing any view on any decision regarding a final rule on the March 2 proposal, and it does not address the rights or obligations of other parties.

17


DOL enforcement v. IRS enforcement

18


Non-Applicability of Excise Taxes Under Section 4975 To Conform With

DOL Temporary Enforcement Policy on Fiduciary Duty Rule

Announcement 2017–4

This announcement provides relief from certain excise taxes under §4975 of the

Internal Revenue Code (Code), and any related reporting requirements, to conform to

the temporary enforcement policy described by the Department of Labor (DOL) in Field

Assistance Bulletin (FAB) 2017-01 with respect to the final fiduciary duty rule published

in the Federal Register on April 8, 2016 (81 F.R. 20946), entitled “Definition of the Term

‘Fiduciary’; Conflict of Interest Rule –Retirement Investment Advice” and related

prohibited transaction exemptions, including the Best Interest Contract Exemption (BIC

Exemption), the Class Exemption for Principal Transactions in Certain Assets Between

Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal

Transactions Exemption), and certain amended prohibited transaction exemptions

(collectively, PTEs).

19


BACKGROUND

Section 4975(a) imposes an excise tax on each prohibited transaction equal to 15

percent of the amount involved with respect to the prohibited transaction for each year

(or part thereof) in the taxable period. Section 4975(b) increases the tax to 100 percent

of the amount involved in any cases in which an initial tax is imposed under §4975(a)

on a prohibited transaction and the transaction is not corrected within the taxable

period. In each case, the tax is imposed on any disqualified person who participates in

the prohibited transaction (other than a fiduciary acting only as such). Section 4975(c)

provides a definition of a prohibited transaction and authorizes the Department of the

Treasury (Treasury Department) to grant administrative exemptions from the prohibited

transaction provisions in the Code. Section 4975(c)(1)(A) through (D) prohibits the

direct or indirect sale, exchange, leasing of property, or loan of money, or other

extension of credit, between a plan (including an individual retirement account or

individual retirement annuity (IRA)) and a disqualified person, or the direct or indirect

transfer to, or use by or for the benefit of, a disqualified person of the income or assets

of a plan. Section 4975(c)(1)(E) and (F) prohibits fiduciaries from dealing with the

income or assets of a plan in their own interest or for their own account or receiving any

consideration for their own personal account from any party dealing with the plan in

connection with a transaction involving the income or assets of the plan. Section

4975(d) provides a series of exemptions from the prohibitions in § 4975(c), and §

4975(e) provides a series of definitions, including the definition of a disqualified person

to whom the tax may apply. Section 4975(e)(2)(A) provides that a disqualified person

includes a fiduciary.

BACKGROUND - Continued

20

Sections 406 and 408 of the Employee Retirement Income Security Act of

1974, Public Law 93-406 (88 Stat. 829 (1974)), as amended (ERISA), contain

provisions on prohibited transactions that are substantially similar to the

provisions of §4975 of the Code, although the ERISA provisions prohibit the

fiduciary from engaging in the transactions and provide for civil liability and

remedies rather than imposing an excise tax. The DOL is the agency

responsible for interpreting and enforcing the ERISA provisions as they apply

to employee benefit plans. ERISA §408(a) includes an authorization for the

Secretary of Labor to grant administrative exemptions from ERISA’s

prohibited transaction provisions that parallels the similar authorization in §

4975(c) for the Treasury Department to grant administrative exemptions from

the prohibited transaction provisions in the Code. New DOL Rule

21

To ensure consistency in application, Reorganization Plan No. 4 of 1978, 5

U.S.C. App. 1, 92 Stat. 3790, provides that the authority of the Treasury

Department to issue regulations, rulings, opinions, and exemptions under

§4975 of the Code is transferred, with certain exceptions not relevant here, to

the Secretary of Labor. As a result, the Internal Revenue Service (IRS) is

responsible for enforcing the excise tax provisions in §4975(a) and (b) of the

Code, but generally is bound by the DOL’s interpretive regulations, rulings,

opinions, and exemptions in determining whether a prohibited transaction has

occurred. Section 3003 of ERISA provides that the DOL and the Treasury

Department are to consult with each other from time to time with respect to

the provisions of §4975 of the Code relating to prohibited transactions and

exemptions in order to coordinate the rules applicable under such standards.

Section 3004 of ERISA further provides that whenever the DOL and the

Treasury Department are required to carry out provisions relating to the same

subject matter, the agencies are required to coordinate and develop rules,

regulations, and practices that, to the extent appropriate for the efficient

administration of such shared provisions, are designed to reduce duplication

of effort, duplication of reporting, conflicting or overlapping requirements, and

burden of compliance by plan administrators, employers, and participants and

beneficiaries.


22

On April 8, 2016, the DOL published a final regulation defining who is a

“fiduciary” of an employee benefit plan under §3(21)(A)(ii) of ERISA as a

result of giving investment advice to a plan or its participants or beneficiaries.

The final rule also applies to the definition of a “fiduciary” of a plan under §

4975(e)(3)(B) of the Code. The final rule treats persons who provide

investment advice or recommendations for a fee or other compensation with

respect to assets of a plan as fiduciaries in a wider array of advice

relationships than was true of the prior regulatory definition. On this same

date, the DOL published the PTEs, which provide two new administrative

class exemptions from the prohibited transaction provisions of ERISA and the

Code, as well as amendments to previously granted exemptions. The PTEs

would allow, subject to appropriate safeguards, certain broker-dealers,

insurance agents, and others that act as investment advice fiduciaries, as

defined under the final rule, to continue to receive a variety of forms of

compensation that would otherwise violate prohibited transaction rules,

triggering excise taxes and civil liability.


23

The final fiduciary duty rule became effective on June 7, 2016, and has an

applicability date of April 10, 2017. The PTEs also have an applicability date

of April 10, 2017, with a phased implementation period ending on January 1,

2018, for the BIC Exemption and the Principal Transactions Exemption. The

President, by Memorandum to the Secretary of Labor dated February 3,

2017, directed the DOL to examine whether the fiduciary duty rule may

adversely affect the ability of Americans to gain access to retirement

information and financial advice and to prepare an updated economic and

legal analysis concerning the likely impact of the rule as part of that

examination. On March 2, 2017, the DOL published a notice in the Federal

Register (82 FR 12319) seeking public comments on (i) a proposal to adopt a

60-day delay of the April 10 applicability date described above, (ii) the

questions raised in the Presidential Memorandum, and (iii) general questions

of law and policy concerning the fiduciary duty rule and the related PTEs. The

March 2 notice stated that, if adopted as a final rule, the proposed 60-day

delay would be effective on the date of publication in the Federal Register of

a final rule delaying the April 10 applicability date.


24

The DOL issued FAB 2017-01 on March 10, 2017, to announce a temporary

enforcement policy related to its proposal to extend for 60 days the

applicability date of the fiduciary duty rule and the related PTEs. The policy

provides that: A. In the event the DOL issues a final rule after April 10 implementing a delay in the

applicability date of the fiduciary duty rule and related PTEs, the DOL will not

initiate an enforcement action because an adviser or financial institution did not

satisfy conditions of the rule or the PTEs during the “gap” period in which the rule

becomes applicable before a delay is implemented, including a failure to provide

retirement investors with disclosures or other documents intended to comply with

provisions of the rule or the related PTEs.

B. In the event the DOL decides not to issue a delay in the fiduciary duty rule and

related

PTEs, the DOL will not initiate an enforcement action because an adviser or

financial institution, as of the April 10 applicability date of the rule, failed to

satisfy conditions of the rule or the PTEs, provided that the adviser or

financial institution satisfies the applicable conditions of the rule or PTEs,

including sending out required disclosures or other documents to retirement

investors, within a reasonable period after the publication of a decision not to

delay the April 10 applicability date.


25

Field Assistance Bulletin 2017-01 provides that, to the extent circumstances

surrounding its decision on the proposed delay of the April 10 applicability date

give rise to the need for other temporary relief, including retroactive prohibited

transaction relief, the DOL will consider taking such additional steps as

necessary with respect to the arrangements and transactions covered by the

DOL temporary enforcement policy and any subsequent related DOL

enforcement guidance. Following the issuance of the FAB, stakeholders have

raised concerns about the potential application of excise taxes under §4975 and

related reporting obligations in cases covered by the DOL’s temporary

enforcement policy.


26

Because the Code and ERISA contemplate consistency in the enforcement of

the prohibited transaction rules by the IRS and the DOL, as further reflected

in and facilitated by the statutory Reorganization Plan, the Treasury

Department and the IRS have determined that it is appropriate to adopt a

temporary excise tax non-applicability policy that conforms with the DOL’s

temporary enforcement policy described in FAB 2017-01. Accordingly, the

IRS will not apply §4975 and related reporting obligations with respect to any

transaction or agreement to which the DOL’s temporary enforcement policy,

or other subsequent related enforcement guidance, would apply.

.

TRANSITION RELIEF

27

DOL /EBSA Proposes Extended Compliance/Applicability Date For Fiduciary Rule and Related Exemptions From April 10, 2017 to June 9, 2017

The DOL/EBSA has formally issued a notice that it is proposing that the fiduciary applicability date be changed to be June 9, 2017, rather than April 10, 2017. Other applicability dates are also extended. This proposal is being published in the Federal Register on March 2, 2017, in order to allow the “new” DOL/EBSA to collect additional information and review it before the new Fiduciary rules go into effect and decide if changes in the Obama rules are warranted.

Comments on the subject of the proposed extension must be submitted by March 17, 2017 (a Friday). This is 15 days following its publication.

Comments on the subjects raised in the presidential memorandum must be submitted by April 17, 2017 (a Monday). This is 46 days following its publication as the 45th day is a Sunday and so the deadline is the following Monday.

28


Comment submissions must include the agency name (Department of Labor/Employee Benefits Security Administration) and the Regulatory Identification Number (RIN) of RIN 1210-AB79. Submitters are encouraged to use one of the electronic submission options rather than submitting a paper submission. These comments will be available to the public.

Comments may be submitted using one of the following methods.

1. Send an email to: [email protected]. In the subject line of your email include RIN 1210-AB79.

2. Go to the Federal eRulemaking portal and follow the instructions for submitting comments. The portal is located at (http:/www.regulations.gov).

mailto:[email protected]







29


3. Mail your written commends to: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, WASHINGTON, DC 20210, Attention: Fiduciary Rule Examination.

The 15 day and 45 day submission deadlines will require an individual to act promptly. We expect there will be many comment submissions.

30


The Trump administration is going to review whether or not the Fiduciary rule as created by the Obama administration should go into effect. On February 3, 2017, the President issued a memorandum directing the DOL/EBSA to examine the Fiduciary rules and the new and revised prohibited transaction exemptions to determine if such changes are not cost effective and may actually result in Americans having reduced access to retirement information, financial advice and investments.

The new definition of fiduciary was to go into effect as of April 10, 2017, as were various prohibited transaction exemptions.

What Investments May be Bought and Sold by an IRA ?

IRA Contributions may be invested in almost any type of investment except

as described below and except when the transaction would be a prohibited

transaction. IRA funds may be invested in stocks, bonds, mutual funds, real

estate, mortgages, etc. However, many IRA funds with financial institutions

are still invested in savings accounts and time deposits.


What Investments Are Not Permissible for an IRA ?

Article III of IRS Model 5305-A reads as follows

Article III

1. No part of the custodial funds may be invested in life insurance contracts,

nor may the assets of the custodial account be commingled with other

property except in a common trust funds or common investment funds

(within the meaning of section 408(a)(5)).

2. No part of the custodial funds may be invested in collectibles (within the

meaning of section 408(m)) except as otherwise permitted by section

408(m))(3) which provides exception for certain gold, silver, and platinum

coins, coins issued under the laws of any state and certain bullion.


What Investments Are Not Permissible for an IRA ?

An IRA may not own any life insurance, including viatical contracts, and any

collectibles. A collectible is any type of tangible personal property such as

antique cars, oriental rugs, jewelry, art, etc. However, IRA funds may be

invested in certain gold and silver coins issued by the U.S., or in any coin

issued under the laws of any state after November 10, 1998, and certain

coins grandfathered in prior to the law which prohibited investment in

collectibles.

In addition, IRA funds cannot be combined with non-IRA funds. Exception –

IRA funds can be combined with other IRA funds if done within a common

trust or investment fund.


Self-Directed and/or Trust Investments

General Rules

A. Regular, annual contributions to the IRA must be in cash, not property.

The Accountholder cannot contribute property he or she already owns to

the self-directed IRA. Rollovers and transfers from existing IRAs and QPs

can be in cash and/or property.

B. Life insurance is not a permissible IRA investment. Annuities can be IRA

investments but not regular life insurance contracts.

C. The assets of the IRA may not be commingles with any other property

except in a common trust or investment fund. Before attempting to

establish a common trust of investment funds, consult with legal counsel

as the Securities and Exchange Commission imposed stringent

requirements on these funds. Assets purchased in blocks using a

nominee name is permitted.



General Rules - continued

D. Margin accounts may be used in the IRA. The law does not prohibit the

use of margin within an IRA. However, the prohibited transaction rules

must be complied with. Buying on margin brings into play the unrelated

business income tax rules as debt exists since margin, by definition

involves the extending of credit. We strongly suggest that an IRA

custodian or trustee very clearly communicated to the part extending the

credit (i.e. the margin) to the IRA that is only the IRA assets which can be

looked to satisfy any margin call. The individual or the IRA

custodian/trustee are not legally liable or permitted to make up any

“shortage” amount. Any type of guaranty, direct or indirect, would be a

prohibited transaction.

E. Collectibles are generally prohibited. Collectibles include art, antiques,

gems, most coins, precious metals, stamps, alcoholic beverages and any

other tangible property specified by the Secretary of the Treasury.



General Rules - continued

F. Purchasing or selling an investment must not constitute a prohibited

transaction. An IRA can be subject to severe penalties, even

disqualifications, if it engages in a prohibited transaction. The prohibited

transaction rules basically exist to prevent a transaction where there could

be a conflict of interest between the IRA and the accountholder or certain

people or entities related to the accountholder.

Whenever you are dealing with self-directed investment directions from an

IRA accountholder protect your financial institution by documenting his or

her instructions in writing. A form such as CWF Form # 54-SD provides

clear instructions from the accountholder and places responsibility for the

transaction on the accountholder. It also sets out exactly how the

transaction will take place. The form serves as documentation for the

custodian/trustee, thereby providing protection for the financial institution.


Overview of Prohibited Transactions

Generally, a prohibited transaction is any improper use of your traditional IRA

account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family

(Spouse, ancestor, lineal descendant, and any spouse of lineal descendant).

The following are examples of prohibited transactions with a traditional IRA.

• Borrowing money from it

• Selling property to it

• Receiving unreasonable compensation for managing it

• Using is as security for a loan

• Buying property for personal use (present or future) with funds


Overview of Prohibited Transactions - continued

You will note that the discussion covers traditional IRAs, but not Roth IRAs.

Roth IRAs became available in 1998. The IRS certainly could have added by

now a section discussing the PT’s in the Roth IRA section of Publication 590

if it had wanted to do so. The IRS must have a reason for not doing so. For

whatever reason, the IRS has chosen to not explain as fully as the IRS

should the consequence(s) of having a PT occur with respect to a Roth IRA.

It may be that the IRS fees the rules are so easy to understand and apply that

a separate discussion should not be necessary.

We at CWF disagree. We believe the IRS should try to assist individuals and

IRA/ROTH IRA custodians/trustees as much as possible. Some guidance is better than

no guidance. The IRS needs to explain the PT rules for Roth IRAs since there will be

some differences from traditional IRAs. Roth IRA custodians/trustees will want to be

vigilant to make sure they do not participate or assist with a PT transaction for Roth

IRAs. As with any PT situation, the individual may well harbor ill-feelings because of

the “tax losses” even though he or she wanted to do the investment.


DOL vs. IRS – Jurisdiction for IRA Transactions

The DOL has primary jurisdiction with respect to IRAs and prohibited

transactions. If a transaction is not a prohibited transaction the DOL has no

authority with respect to IRAs.

The DOL has the authority to issue administrative exemptions under both

ERISA and the Internal Revenue Code. The DOL may conditionally or

unconditionally exempt any fiduciary or transaction, or class of fiduciaries or

transactions, from all or part of the prohibited transaction rules.

Normally, an exemption is granted on a prospective basis. In limited

situations an exemption will be granted on a retroactive basis.

What surprises many people is the fact that there is no filing fee to be paid in

order to have DOL process a request for a PT exemption.


DOL vs. IRS – Jurisdiction for IRA Transactions - continued

Under Reorganization Plan # 4 of 1978, 5 U.S.C. App. 1, 92 Stat.3790, the

authority of the Secretary of the Treasury to issue regulations, rulings,

opinions, and exemptions under section 4975 of the Code has been

transferred, with certain exceptions not have relevant, to the Secretary of the

Labor.

The sole statutory sanction for engaging in the illegal transactions is the

assessment of an excise tax enforced by the Internal Revenue Service (IRS).

Thus, unlike participants in plans covered by Title I of ERISA, IRA owners do

not have a statutory right to bring suit against fiduciaries under ERISA for

violation of the prohibited transaction rules.


Definition – Prohibited Transactions

A prohibited transaction means any direct or indirect –

A. Sale or exchange, or leasing, of any property between a plan and a disqualified person:

B. Lending of money or other extension of credit between a plan and a disqualified person:

C. Furnishing of goods, services, or facilities between a plan and a disqualified person;

D. Transfers to, or use by or for the benefit of, a disqualified person of the income or assets of a

plan;

E. Act by a disqualified person who is a fiduciary whereby he deals with income or assets of a

plan interest or for his own account; or

F. Receipt of any consideration for his own personal account by any disqualified person who is a

fiduciary from any party dealing with the plan in connection with a transaction involving the

income or assets of the plan.

The Terms “plan” and “disqualified person” are defined in Code section 4975(e) as set

forth later. These terms certainly cover the IRA plan and accountholder.

Thus, it would be impermissible for a person to sell any personal investments to the

IRA and it would be impermissible for the person to rent or use any of the assets of the

IRA.


Definition – Prohibited Transactions - continued

Plan. For purposes of this section, the term “plan” means –

a. A trusts described in section 401(a) which forms a part of the plan, or a plan

described in section 403(a), which trust or plan is exempt from tax under

section 501(a).

b. An individual retirement account described in section 408(a)

c. An individual retirement account described in section 408(b)

d. An Archer MSA described in section 220(d)

e. A health savings account described in section 223(d)

f. A Coverdell education savings account described in section 530, or

g. A trust, plan, account, or annuity which, at any time, has been determined by

the Secretary to be described in any preceding subparagraph of this

paragraph.



Disqualified person. For purposes of this section, the term “disqualified person” means

a person who is –

a. a fiduciary;

b. A person providing services to the plan;

c. An employer any of whose employees are covered by the plan;

d. An employee organization any of whose members are covered by the plan;

e. An owner, direct or indirect, of 50 percent or more of –

i. The combined voting power of all classes of stock entitled to vote or the total value

of shares of all classes of stock of a corporation,

ii. The capital interest if the profits interest of a partnership, or

iii. The beneficial interest of a trust or unincorporated enterprise, which is an employer

or an employee organization described in subparagraph(C) or (D);

f. A member of a family (as defined in paragraph (6)) of any individual described in

subparagraph (A), (B), (C), or (E);


***

***


g. A corporation, partnership, or trust or estate of which (or in which) 50 percent or more of

i. The combined voting power of all classes of stock entitled to vote or the total value

of shares of all classes of stock of such corporation,

ii. The capital interest or profits interest of such partnership, or

iii. The beneficial interest of such trust or estate, is allowed directly or indirectly, or

held by persons described in subparagraph (A), (B), (C), (D), or (E);

h. An officer, director (or an individual having powers or responsibilities similar to those of

officers or directors), a 10 percent or more shareholder, or a highly compensated

employee (earning 10 percent or more of the yearly wages of an employer) of a person

described in subparagraph (C), (D), (E), or (G); or

i. A 10 percent or more (in capital or profits) partner or joint venturer of a person described

in subparagraph (C), (D), (E), or (G)., The Secretary, after consultation and coordination

with the Secretary of Labor or his delegate, may by regulation prescribe a percentage

lower than 50 percent for subparagraphs (E) and (G) and lower than 10 percent for

Subparagraphs (H) and (I).



A prohibited transaction means any direct or indirect –

A. Sale or exchange, or leasing, of any property between a plan and a disqualified person:

B. Lending of money or other extension of credit between a plan and a disqualified person:

C. Furnishing of goods, services, or facilities between a plan and a disqualified person;

D. Transfers to, or use by or for the benefit of, a disqualified person of the income or assets of a

plan;

E. Act by a disqualified person who is a fiduciary whereby he deals with income or assets of a

plan interest or for his own account; or

F. Receipt of any consideration for his own personal account by any disqualified person who is a

fiduciary from any party dealing with the plan in connection with a transaction involving the

income or assets of the plan.

The Terms “plan” and “disqualified person” are defined in Code section 4975(e) as set

forth later. These terms certainly cover the IRA plan and accountholder.

Thus, it would be impermissible for a person to sell any personal investments to the

IRA and it would be impermissible for the person to rent or use any of the assets of the

IRA.



3. Fiduciary. For purposes of this section, the term “fiduciary” means a person who

a. Exercises any discretionary authority or discretionary control respecting

management of such plan or exercises any authority or control respecting

management or disposition of assets,

b. Renders investment advice for a fee or other compensation, direct or indirect,

with respect to any moneys or other property of such plan, or has any

authority or responsibility to do so, or

c. Has any discretionary authority or discretionary responsibility in the

administration of such plan. Such term includes any person designated under

section 405(c)(1)(B) of the Employee Retirement Income Security Act of

1974.

4.Stockholdings. For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be taken

into account indirect stockholdings which would be taken into account under section

267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated

as providing that the members of the family of an individual are the members within the

meaning of paragraph(6).



5. Partnerships; trusts. For purposes of paragraphs(2)(e)(ii) and (iii), (G)(ii) and (iii)

and (I) the ownership of profits or beneficial interests shall be determined in

accordance with the rules for constructive ownership of stock provided in section

267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be

treated as providing that the members of the family of an individual are the

members within the meaning of paragraph (6).

6. Member of family. For purposes of paragraph (2)(F), the family of any individual

shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal

descendant,

CWF Comment. Both IRS and DOL have written that siblings will also be family

members for purposes of the PT rules.


Common Prohibited Transactions

• The accountholder sells or buys something from his or her IRA. For example, the

IRA account holds 1,000 shares of AT&T and the individual pays the IRA for these

shares, Even if the fair market value is paid, this is a prohibited transaction.

• The accountholder pledges his or her IRA as collateral for a personal loan.

• The accountholder’s IRA owns real estate which is leased to a relative or

controlled business.

• The financial institution which is the IRA trustee sells investments which it owns to

the IRA.

• The financial institution which is the IRA trustee is paid commissions by a mutual

fund for the volume of purchases/sales of its mutual funds by numerous IRAs.


Reasonable Compensation

The BICE and the Impartial Conduct Standards require that the total compensation

received by a financial institution, its advisers, and any affiliates is reasonable.

This standard or requirement is not new. It is long established.

It is set forth in ERISA section 408((b)(2) and Code section 4975(d)(2). It also applies

to a fiduciary under the common law of agency and trusts.

This requirement applies to a service provider even when the service provider is not a

fiduciary.

It must be set forth in the contract for IRA and non-ERISA plan retirement investors.


Reasonable Compensation - continued

Total compensation is determined by aggregating direct compensation paid by the IRA

or plan and indirect compensation paid by a third party.

The important determination is whether the compensation is reasonable in relation to

everything the investor receives. No single factor is determinative. The particular facts

and circumstances existing at the time of the recommendation are to be reviewed in

determining if the compensation is unreasonable. If there is a bundling, every item in

the bundle is to be considered.

Whether compensation being received is reasonable is determined by considering the

market. One is to review the complexity of the investment product, the size of the

investments, the other services being provided and the market pricing of identical and

similar products and services.


Reasonable Compensation - continued

Burden of Proof – To be Borne by the Financial Institution or service provider, as applicable.

The fact that another Fiduciary might sign-off and agree to pay the fees as charged

does not negate the fact that the fees must be reasonable.

Although not required, an institution may seek an impartial review of its fee structure to

protect against situations of unreasonable compensation.


The Statutory Class Exemption

Bank’s Own Time Deposit – Needs to be authorized by the IRA plan or the

pension plan

Example.

You may also instruct us in writing to invest your traditional IRA into one or

more of the savings or time deposit instruments which we are offering at that

time. You expressly authorize this even though we are acting as the IRA

trustee of your IRA. Our name is set forth on the IRA application. Such

deposit account must bear a reasonable rate of interest as determined by the

terms of the deposit instruments and the short and long term economic

conditions. The terms of any such accounts are incorporated by reference

into this agreement


Transition Rule

June 7, 2016 to April 10, 2017

Fiduciary Investment Advice

The new definition of a fiduciary is effective as of June 7, 2016, the date the DOL

issued the final regulation and the Best Interest Contract Exemption (BICE) is effective

as of the same date. Financial institutions and IRAs and Plans may comply with the

new rules immediately if they would choose to do so.

A modified version of the old definition of fiduciary continues to apply between June 7,

2016 and April 10, 2017. This is a transition period. The new fiduciary rules are

effective as of 4-10-2017 which is the applicability date. Between June 7, 2016 and

April 10, 2017 a person is deemed to be rendering “investment advice” only if the

person renders advice as to the value of an investment or makes a recommendation as

to the advisability of investing in purchasing, or selling such investment and such

person either directly or indirectly has discretionary authority or control regarding such

investments or renders any such advice on a regular basis pursuant to a mutual

agreement, arrangement or understanding written or otherwise between such person or

a fiduciary that such services will serve as the primary basis for investment decisions

and that such person will render individualized investment advice based on the

particular needs of the IRA owner.


Code Section 4975(e)(3)

3. Fiduciary. For purposes of this section, the term “fiduciary” means a person who

a. Exercises any discretionary authority or discretionary control respecting

management of such plan or exercises any authority or control respecting

management or disposition of assets,

b. Renders investment advice for a fee or other compensation, direct or indirect,

with respect to any moneys or other property of such plan, or has any

authority or responsibility to do so, or

c. Has any discretionary authority or discretionary responsibility in the

administration of such plan. Such term includes any person designated under

section 405(c)(1)(B) of the Employee Retirement Income Security Act of

1974.


***

A Fiduciary’s Legal Responsibility

Liability for Breach of Fiduciary Duty

Section 409. (a) Any person who is a fiduciary with respect to a plan who breaches

any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title

shall be personally be liable to make good to such plan any losses to the plan resulting

from such breach, and to restore to such plan any profits of such fiduciary which have

been made through use of assets of the plan by the fiduciary, and shall be subject to

such other equitable or remedial relief as the court may deem appropriate, including

removal of such fiduciary. A Fiduciary may also be removed for a violation of section

411 of this act.

(b)No fiduciary shall be liable with respect to a breach of fiduciary duty under this title if

such breach was committed before he became a fiduciary or after he ceased to be a

fiduciary

Pension plan versus IRA


DOL’s Old Definition of Fiduciary

1975 regulation provided for a five-part test to determine if a person was a

fiduciary. Under this rule a person is a fiduciary only if he or she :

1. Makes recommendations on investing in, purchasing or selling securities or other

property: or gives advice as to their value;

2. On a regular basis

3. Pursuant to a mutual understanding that the advice

4. Will server as a primary basis for investment decisions; and

5. Will be individualized to the particular needs of the IRA or plan.

A person who did not meet all five conditions was and is not a fiduciary. The

current EBSA believes there are situations where a person should be a

fiduciary even though they are not one under existing law. One example, an

investment representative selling an investment product to an IRA owner

making a rollover contribution is not a fiduciary since he or she most likely is

not performing services on a “regular basis”. So, the new rule has been

proposed with the goal to make many more individual fiduciaries.


DOL’s New Definition of Fiduciary Investment Advice – Effective Date ?

Sec. 2510.3-21 Definition of “Fiduciary” Investment Advice

(A) Investment Advice. For purposes of section 3(21)(A)(ii) of the Employee Retirement

Income Security act of 1974 (Act) and section 4975(e)(3)(B) of the Internal Revenue Code

(Code), except as provided in paragraph (b) of this section, a person renders investment

advice with respect to moneys or other property of a plan or IRA described in paragraph

(f)(2) of this section if —

(1) Such person provides, directly to a plan, plan fiduciary, plan participant or beneficiary,

IRA, or IRA owner the

Following types of advice in exchange for a fee or other compensation, whether direct or

indirect.

(i) A recommendation as to the advisability of acquiring, holding, disposing or

exchanging securities or other property, including a recommendation to take a

distribution of benefits or a recommendation as to the investment of securities or

other property to be rolled over or otherwise distributed from the plan or IRA.

(ii) A recommendation as to the management of securities or other property, including

recommendations as to the management of securities or other property to be

rolled over or otherwise distributed from the plan or IRA;


DOL’s New Definition of Fiduciary Investment Advice - continued

Sec. 2510.3-21 Definition of “Fiduciary” Investment Advice

(iii) An appraisal. Fairness opinion, or similar statement whether verbal or written

concerning the value of securities or other property if provided in connection

with a specific transaction or transactions involving the acquisition, disposition,

or exchange, of such securities or other property by the plan or IRA;

(iv) A recommendation of a person who is also going to receive a fee or other

compensation for providing any of the types if advice described in paragraphs (i)

through (iii); and

2) Such person, either directly or indirectly (e.g., through or together with any affiliate), --

(i) Represents or acknowledges that it is acting as a fiduciary within the meaning of

the Act with respect to the advice described in paragraph (a)(1) of this section; or

(ii) Renders the advice pursuant to a written or verbal agreement, arrangement or

understanding that the advice is individualized to, or that such advice is

specifically directed to, the advice recipient for consideration in making

investment or management decisions with respect to securities or other property

of the plan or IRA.


Requirement – Investment/Distribution Recommendation

Investment advice will be found to exist if the IRA custodian furnishes one of

following four communications:

1. A ‘’recommendation’’ related to any distribution, rollover or transfer from an IRA or

plan, including consideration of whether it should be done, in what amount and to

what destination.

2. A “recommendation” how to invest the IRA assets after decision has been made to

take a distribution, or do a rollover or transfer.

3. A “recommendation” how to invest the IRA assets in general - what assets should

be acquired, retained, disposed, exchanged, etc.

4. A “recommendation” how to invest/manage the IRA assets, considering

recommendations on investment policies/strategies, portfolio composition, the

possible selection of hiring a third person to provide investment advice, manage

services or to have brokerage versus advisory arrangements.


Requirement – Investment/Distribution Recommendation - continued

An IRA custodian which does not make an investment recommendation

should not have concerns arising from the investment advice rules.

An IRA custodian which does not receive any compensation for making the

investment recommendation is not furnished an investment recommendation

to the individual is not furnshing an investment recommendation. That is, the

individual makes his or her investment decision without the receipt of any

investment advice recommendation.

The final regulation defines a “recommendation” as the communication that based on

its content and context would reasonable be understood that the recipient should act or

refrain from taking a particular course of action. The more the communication is

individually tailored the more likely it will be viewed as a recommendation. Furnishing

investment educational materials is not a “recommendation”.


Prohibited Transaction Exemptions

Certain PTs are given exceptions called exemptions. These transactions are

permissible under the law even though they do constitute a PT. Sufficient safeguards

are considered to exist. There are really three types of exemptions under the law;

a. Statutory exemptions

b. Class exemptions

c. Individual exemptions

The statutory exemptions are set forth in Code section 4975(d) and ERISA section 408.

Most of these exemptions do not apply to IRAs


Prohibited Transaction Exemptions

Certain PTs are allowed to occur because an exemption permits it. These transactions

are permissible under the law even though they do constitute a PT. Sufficient

safeguards are considered to exist. There are really three types of exemptions under

the law;

a. Statutory exemptions

b. Class exemptions

c. Individual exemptions

The statutory exemptions are set forth in Code section 4975(d).

Most of these exemptions do not apply to IRAs


Actions by a Financial Institution Not Rising

to the Level of Being a Recommendation

1. General Financial Information/Communications

As long as a reasonable person would not view furnishing the following information

as an investment recommendation, such will not be an investment advice

recommendation.

a. Marketing materials

b. Market data

c. Newsletters (general)

d. General research

e. Prospectuses

f. Speeches and reports of conferences

g. Price Quotes


Actions by a Financial Institution Not Rising - continued


2. General Investment Education Information/Communications

a. Plan provisions relating to participation, distributions, investment options and

procedures and related fee and expense information.

b. General retirement information.

c. General Financial and investment information. Cannot discuss specific

investment option.

d. General asset allocation models and interactive materials.


Actions by a Financial Institution Not Rising - continued


3. Investment options Platform – Made available to a fiduciary.

The furnishing of a platform of various investments is not a recommendation of

investment advice as long as the platform sponsor is independent of the plan

fiduciary.

The platform sponsor must disclose in writing to the plan fiduciary that the platform

does not provide impartial advice or advice in a fiduciary capacity.


Conflict of Interest and Revenue Issues

Three Methods to Comply with the New DOL Rules for Conflicts of Interest

and Revenue Issues

1. Use the Special Bank Networking Arrangement Rule.

2. Use the Level Fee Rule

3. Use the Best Interest Contract Exemption (BICE) Rule


Use the Special Bank Network Arrangement Rule

A “Banking Network Arrangement: is a business arrangement relating to

employees of a bank, savings association or similar financial institution

referring bank customers to an unaffiliated registered investment adviser or

state authorized investment adviser, insurance company or a registered

broker or dealer so that the customers might purchase retail non-deposit

investment products. This arrangement must comply with applicable federal

banking, securities and insurance regulations.

A new DOL rule permits a bank employee who is an adviser or the bank itself

may receive compensation pursuant to a Bank Networking Arrangement

related to providing investment advice to an IRA owner as long as the advice

complies with the Impartial Conduct Standards. The IRA custodian must

affirmatively state that it and its advisers will in actuality follow the following

standards.

1. Provide investment advice that at the time of recommendation is in the IRA owner’s

best interest;


Use the Special Bank Network Arrangement Rule

2. Such advice reflects the care, skill, prudence, and diligence that a prudent person

acting in a like capacity and familiar with the current situation would use after

considering the investment objectives, risk tolerance, financial circumstances, and

needs of the individual without regard to the needs or desires of any other person

or party, including the IRA custodian or any adviser of the IRA custodian.

3. The recommended transaction will not cause the payment of any reasonable

compensation to the IRA custodian, any affiliate or any adviser for services.

4. Statements must not be materially misleading at the time they are made regarding

the commended transaction, fees and compensation, material conflicts of interest

and any other information relevant to making the investment decision.


Use the Level Fee Rule

A level fee is a set fee that does not vary with the particular investment

recommended. Therefore, if a fee is commission based or transaction based

it cannot qualify as a level fee. A fee is based on a formula based on a fixed

percentage of the value of the assets is a level fee.

Financial institutions (and any adviser) qualifies as a level fee fiduciary as

long as the only fee or compensation received is a level fee. This “level fee”

must be disclosed in advance of any transaction.

A financial institution which is a level fee fiduciary qualifies for special

exemptive relief and is not required to meet the standard requirements of the

BICE. It allows to meet the following requirements:

1. The financial institution (and advisers) must furnish a written statement to the

individual acknowledging its fiduciary status.

2. The financial institution (and advisers) must comply with the Impartial Conduct

standards.


Use the Level Fee Rule - continued

3. In the case of a recommendation to roll over from an ERISA plan to an

IRA, the financial institution must explain by giving specific reasons why

the recommendation to make the specific rollover is in the individual’s best

interest.

4. In the case of a recommendation to roll over from another IRA, the financial

institution must explain by giving specific reasons why the recommendation to

make the specific rollover is in the individual’s best interest.

5. In the case of a recommendation to switch from a commission-based account to a

level fee arrangement the financial institution (and advisers) must explain by giving

specific reasons why the recommendation to make the specific rollover is in the

individual’s best interest, including the services that will be provided for the fee.


Best Interest Contract Exemption (BICE)

The exemption requires Financial Institutions to acknowledge their fiduciary

status and the fiduciary status of their Advisers in writing. The Financial

Institution and Advisers must adhere to enforceable standards of fiduciary

conduct and fair dealing with respect to their advice. In the case of IRAs and

non-ERISA plans, the exemption requires that the standards be set forth in an

enforceable contract with the Retirement Investor. Under the exemption’s

terms, Financial Institutions are not required to enter into a contract with

ERISA plan investors, but they are obligated to adhere to these same

standards of fiduciary conduct, which the investors can effectively enforce

pursuant to ERISA section 502(a)(2) and (3). Likewise, “Level Fee”

Fiduciaries that, with their Affiliates, receive only a Level Fee in connection

with advisory or investment management services, do not have to enter into a

contract with Retirement Investors, but they must provide a written statement

of fiduciary status, adhere to standards of fiduciary conduct, and prepare a

written documentation of the reasons for the recommendation.


Best Interest Contract Exemption (BICE) - continued

In order to protect the interests of the plan participants and beneficiaries, IRA

owners and plan fiduciaries, the exemption requires the Financial Institution

to acknowledge fiduciary status for itself and its Advisers. The Financial

Institutions and Advisers must adhere to basic standards of impartial conduct.

In particular, under this standards-based approach, the Adviser and Financial

Institution must give prudent advice that is in the customer’s best interest,

avoid misleading statements, and receive no more than reasonable

compensation. Additionally, Financial Institutions generally must adopt

policies and procedures reasonably designed to mitigate any harmful impact

if conflicts of interest, and disclose basic information about their conflicts of

interest and the cost of their advise.

1

2


Use the Best Interest Contract Exemption (BICE)

The DOL has created a new exemption called the Best Interest Contract

Exemption (BICE). It is designed to allow an IRA custodian to provide

investment advice in the best interest of the individual, while allowing the IRA

custodian to receive certain types of compensation and fees from the

individual and third parties. AN IRA custodian qualifies to use this new

exemption only if certain conditions as discussed below are met. These rules

are long and complicated with many special rules.


Use the Best Interest Contract Exemption (BICE) - continued

In general, the IRA custodian (and its employees) must enter into an

enforceable contract with the IRA owner wherein both IRA custodian and any

adviser must acknowledge being a fiduciary. This enforceable contact must

be signed prior to or at the same time the first recommended investment is

made. The contract may be signed in writing or electronically. Such contract

cannot include provisions limiting the liability of the IRA custodian/trustee or

its employees, requiring forfeiture of a class action lawsuit, mandatory use of

arbitration and liquidated damage provisions.

These contract provisions may be set forth in standard account opening

forms or documents.



The IRA custodian must affirmatively state in the contract that is has

established and that it and its advisers will follow the Impartial Conduct

Standards as discussed below and comply with various disclosure and

recordkeeping requirements. The requirements differ for IRA owners with

existing contracts and those without an existing contract.

IRA owners without an existing contract must:

1. Provide investment advice that at the time of recommendation is in the IRA owner’s

best interest;

2. Such advice must reflect the care, skill, prudence, and diligence that a prudent

person acting in a like capacity and familiar with the current situation would use

after considering the investment objective, risk tolerance, financial circumstances,

and needs of the individual without regard to the needs or desires of any other

person or party, including the IRA custodian or any adviser of the IRA custodian.



3. The recommended transaction will not cause the payment of any unreasonable

compensation to the IRA custodian, any affiliate or any adviser for services.

4. Statements must not be materially misleading at the time they are made regarding

the recommended transaction, fees and compensation, material conflicts of interest

and any other information relevant to making the investment decision

The IRS custodian is entitled to receive fees or compensation on account of this BICE

only if it has complied with the recordkeeping requirements and its previously notified

the DOL of its intention to use the BICE.



IRA owners with an existing contract must meet the same requirements, but they are

not required to sign the new and revised contract.

Such owners will be deemed to have consented to the new contract terms if they are

furnished an amendment and given the opportunity to terminate the contract. They

have 30 days to terminate the contract. If the contract is not so terminated, the

amended or revised contract becomes effective.

The old five part test to be a fiduciary has been repealed and replaced with a new test.

Now an “investment advice fiduciary” is a person (or entity) who renders investment

advise for a fee or other compensation.


Important DOL/NICE Compliance Dates

April 10, 2017 to January 1, 2018

There is a longer transition period with respect to the BICE. In order for an IRA trustee

to gain the tax relief there must be compliance with the BICE rules by January 1, 2018.

This is when the contract provisions become effective as do the full disclosure

requirements. Between April 10, 2017, through January 1, 2018 a financial institution is

granted PT relief for its transactions even though the new contract and disclosure

requirements are not being met.


BICE Requirements

Financial Institution Must Notify DOL It Will Use BICE and Must Comply With

Record Keeping Requirements

This is a requirement to the BICE. A financial institution must notify the DOL by

providing an email to [email protected] that it will use the BICE. The notice can be

generic. That is, it will need to not mention any specific IRA or any specific plan. If the

notice requirement has been met, then the financial institution may receive

compensation. The notice remains in effect until it would be revoked by the financial

institution.

The financial institution must maintain for six years the records necessary for certain

persons to determine whether the conditions of the BICE have been met with respect to

each specific transaction. Upon request the following individuals must have the right to

examine these records during normal business hours:

1. Any authorized employee or representative of the IRS;

2. Any plan fiduciary which has participated in an investment transaction pursuant to

the BICE,







BICE Requirements - continued

3. Any authorized employee or representative of a plan fiduciary which has

participated in an investment transaction pursuant to the BICE;

4. Any contributing employer and any employee organization whose employees or

members are covered by the plan;

5. An authorized employee or representative of a contributing employer and any

employee organization which has participated in an investment transaction

pursuant to the BICE; or

6. Any IRA owner or plan participant or inheriting beneficiary or an authorized

representative if such persons.

None of the individuals are authorized to examine records regarding a recommended

transaction of another retirement adviser, privileged trade secrets or privileged

commercial or financial information of the financial institution or information identifying

other information.


BICE Requirements - continued

When a financial institution refuses to furnish requested information for a reason stated

above, it has 30 days in which to inform the requestor for denying the request and that

the DOL if requested could request such information.

If the required records are not maintained, there is a loss of exemption only for that

transaction or transactions for which the records are missing or have not been

maintained. Other transactions will still qualify for the BICE if those records are

maintained. If the records are lost or destroyed, due to circumstances beyond the

control of the financial institutions, then no prohibited transaction will be considered to

have occurred solely on the basis of the unavailability of those records.

The financial institution is the party who is responsible to pay the ERISA civil penalty

under section 502 or the taxes under section 4975 if the required records are not

maintained.


BICE Requirements – Maintain Website

In order to meet BICE requirements, the financial institution is required to

maintain a Web site, freely accessible by the public which must be set forth

the following:

1. A discussion of its IRA business model(s) along with a discussion of the

inherent material conflicts of interest.

2. A schedule of typical fees and service charges

3. A copy of a model contract along with required disclosures. Such must be

reviewed quarterly, and if applicable, updated within 30 days. It is also

possible to set forth a notice describing the contractual terms rather than

including it in the contract.

4. A written description of the financial institution’s policies and procedures

relating to conflict mitigation and incentive practices so an IRA owner is

able to determine how seriously the financial institution is to guard against

conflicts of interest.


BICE Requirements – Maintain Website - continued

5. A list of third parties with whom the financial institution has business

arrangements that result in third party payments being made to the

financial institution or its advisers for recommending investments to the

IRA owner. In addition, the financial institution must furnish a statement

setting forth what product or services it furnishes the third party in

exchange for the third party payments.

6. An explanation of the financial institutions policies for paying

compensation and other incentive arrangements to its advisers for: (i)

recommending the investments being sold by a specific third party; (ii)

recommending specific investments of a specific third party or for an

adviser to move from another financial institution to this financial institution

or for an adviser to stay with the financial institution and full and fair

description of any payout or compensation grids. There is no requirement

to set forth information for any individual adviser.


Understanding the New DOL BICE Rules When A Financial Institution

has Sales of Proprietary Products and Other Non-deposit Investment

Products

The FDIC has issued a pocket guide of financial institutions covering

uninsured investment products. This may be found at the FDIC’s website.

(www.fdic.gov)

If a financial institution serving as an IRA custodian is receiving compensation

which to any degree is on account of “IRA business going to a third party

vendor’’, then the financial institution is going to want to comply with Best

Interest Contact Exemption rules unless it may use the Bank Networking or

Level Fee rules.

The DOL in the final regulation has made clear that the Best Interest Contract

Exemption may still be used by a financial institution even if it imposes

restrictions requiring use of products or investments that generate third party

fees or are proprietary products/investments as long as all exemption

requirements are met.

The key is, all exemption requirements must be met.


http://www.fdic.gov/







Products - continued

The Financial institution and an advisor must ensure that its recommendation

is prudent, compensation and fees being earned are reasonable, all conflicts

are disclosed and the conflicts are managed in such a way that the Adviser’s

focus is on the customer’s best interest.

Proprietary products of the financial institution for purposes of the BICE are

defined to be products that are managed, issued, or sponsored by the

financial institution or any affiliate.

Third party payments exist when a financial institution is being paid by

someone other than the IRA owner or the IRA. For example, the financial

institution is paid by a third party the following types of compensation as a

result of an IRA transaction: revenue sharing payments, gross dealer

concessions, sales charges that are not paid directly by the IRA, 12b-1 fees,

distribution referral or solicitation fees, volume based fees, fees for seminars,

training or educational and any other compensation or consideration.





Both the financial institution and adviser are deemed to satisfy the Best

Interest Standard of Section VIII(d) of BICE if:

1. The IRA owner is informed in writing that the Adviser is limited regarding

the investment he or she may recommend. Such limitations must be

defined and explained. Such writing must be furnished prior to or at the

same time as the transaction occurs. Such written explanation must be

clear and prominent that the Institution offers proprietary products and/or

receives third party payments on account of its recommendations or

assistance with respect the buying, selling, or holding the investment

being made available.

There must be an explanation that the limiting of the investments is a

Material Conflict of Interest.





2. The Financial Institution must disclose in writing what it will do in

exchange for the third party payments and also disclose the services or

consideration it will furnish to any other party for such payments. The

Financial institution must determine it will receive only reasonable

compensation form all third parties and the investment limitations will not

result in imprudent investment recommendations for the IRA owner. It

must state its rationale for its decisions and positions.

3. The Adviser must make his or her “limited” investment recommendation to

the IRA owner using the prudent person rule. That is, his or her

recommendation must reflect the care, skill, prudence, and diligence

under the circumstances then prevailing that a prudent person acting in a

like capacity and familiar with such matters would use in the conduct of an

enterprise of like character with like aims, based on the investment

objectives, risk tolerance, financial circumstances, and needs of the IRA

owner.





4. The Financial institution must define the compensation program applying

to its Advisers in such a way that it does not or reasonably would not be

expected to cause an Adviser to recommend to an IRA owner investments

which are imprudent for that person, or more in favor of the Adviser’s

interests rather than the IRA owner after considering the IRA owner’s

investment adjectives, risk tolerance, financial circumstances and other

needs.

5. The Financial institution must comply with the Web Disclosure Rules and

also disclose the fees charged and compensation earned with respect to

transaction.

The Financial institution must maintain a Web site freely accessible to the

public. Its business model for IRAs and describe the material conflicts of

this business model.


Exemption for Purchases and Sales - Transactions, Including

Insurance and Annuity Sales and Purchases

This exemption permits a financial institution that is a service provider and an

IRA (or other plan) of the IRA owner (or other retirement investor) to engage

in a transaction to purchase of sell an investment since the financial institution

is not receiving compensation from third party. The following requirements

must be met to qualify to use this exemption. 1. The transaction is effected by the financial institution in the ordinary course of its

business;

2. The direct and indirect compensation received by the financial institution for

services rendered must not exceed what is reasonable compensation.

3. The terms of the transaction must as favorable to the IRA or IRA owner (or plan or

plan participants) as terms generally available to an unrelated party when there is

an arm’s length transaction.



Insurance and Annuity Sales and Purchases - continued

This exemption is inapplicable in the following situations; 1. The compensation is received as a result of a principal transaction;

2. The adviser has or exercises any discretionary authority or discretionary control

with respect to the recommended transaction;

3. Robo advice




In order to meet the BICE requirements, the financial institution is required to

maintain a Web site, freely accessible by the public which must set forth the

following; 1. A discussion of its IRA business model(s) along with a discussion of the inherent

material conflicts of interest;

2. A schedule of typical fees and service charges;

3. A copy of a model contract along with required disclosures. Such must be reviewed

quarterly and if applicable, updated within 30 days. It is also possible to set forth a

notice describing the contractual terms rather than the contract.

4. A written description of the financial institution’s policies and procedures relating to

conflict mitigation and incentive practices so an IRA owner is able to determine how

seriously the financial institution is to guard against conflicts of interest.




5. A list of third parties with whom the financial institution has business arrangements

that result in third party payments being made to the financial institution or its

advisers for recommending investments to the IRA owner. In addition, the financial

institution must furnish a statement setting forth what is furnishes the third party in

exchange for the third party payments.

6. An explanation of the financial institution’s polices for paying compensation and

other incentive arrangements to its advisers for;

(i) recommending the investments being sold by a specific third party:

(ii) recommending specific investments of a specific third party or for an

Adviser to move from another financial institution to this financial

institution; or for an Adviser to stay with the financial institution and a full

and fair description of any payout or compensation grids. There is no

requirement to set forth information for any individual adviser.


A New Exemption For Certain Principal Transactions

The new exemption applies to a riskless principal transaction, but the BICE does not

apply to a principal transaction.

A riskless principal transaction occurs when there is a transaction in which the financial

institution after having received an order from the IRA owner or other retirement

investor to but or sell an investment product, purchases or sells the same investment

product for the financial institutions own account to offset the contemporaneous

transaction with the IRA owner or other retirement investor.

A principal transaction occurs when there is a purchase or sale of an investment

Product if a financial institution and/or its advisers and an IRA and/or the IRA owner is

purchasing from or selling to an IRA or a plan on behalf the financial institutions own

account. A principal transaction will also occur if the sale or purchase involves another

party controlling, controlled by, or under common control with the financial institution.


A New Exemption For Certain Principal Transactions - Continued

The DOL sees the possibility of acute conflicts of interest in a principal transaction as

the financial institution is on one side of the transaction (buying or selling and asset)

and the IRA and IRA owner are on the other side (selling or buying of an asset). Even

so, an example will be granted under the BICE if certain protective requirements are

met.

The DOL has created a new exemption for principal transactions. It permits investment

advice fiduciaries of an IRA and a Plan to sell and/or purchase certain debt securities

and other investments on principal transactions and riskless principal transactions. The

DOL expanded this new exemption to include all riskless principal transactions. That

is, it covers all investments and not just debt instruments.

However, for purposes of BICE, sales of insurance, annuity contracts or mutual fund

shares are not treated as principal transactions. That is, the DOL has concluded that

mutual fund transactions may occur on a riskless principal basis.



BICE Never Applies to the Following Transactions.

1. With respect to the recommended investment transaction where the Adviser has

any discretionary authority or control or exercises any discretionary authority or

control.

2. When compensation is received as a result of a principal transaction.

3. When compensation is received as a result of investment advice furnished to an

IRA owner or other retirement investor solely by an interactive Web site. The

individual furnishes personal information and the advice is provided without the

participation of an individual adviser. Exception, compensation may be received by

a robo-advice provider as long as the financial institution is a level fee fiduciary that

complies with requirements applying to a Level Fee Fiduciary.



4. The plan is covered by Title 1 of ERISA and the financial institution, any affiliate or

any adviser is the employer of the employees covered by the plan. Obviously, this

is inapplicably for IRAs.

5. The Plan is covered by Title 1 of ERISA and the financial institution or adviser (or

any affiliate) is named fiduciary or plan administrator of such plan that was selected

to provide advice to the Plan by a fiduciary who is not independent. Obviously, this

is inapplicable for IRAs.


Exemption for Pre-Existing Transactions (Limited Grandfathering)

This exemption permits the continued receipt if compensation for the continuation of a

systematic purchase program established before April 10, 2017.

This exemption permits the continued receipt of a compensation for a recommendation

to hold an investment that was established before April 10, 2017.

The DOL’s goal for this exemption is to assure financial institutions and advisers that

they continue to receive the compensation agreed to be paid before April 10, 2017 for

continuation of the investment transactions occurring prior to April 10, 2017.

This exemption has the following conditions.

1. The compensation being paid is due to an agreement or understanding that was

created prior to April 10, 2017, and such agreement or understanding has not

expired or come up for renewal after April 10, 2017.


Exemption for Pre-Existing Transactions (Limited Grandfathering) - continued

2. The prior investment transaction was not otherwise a non-exempt prohibited

transactions on the date it occurred.

3. The compensation is not received on account of additional amounts contributed to

the previously acquired investments. It is permissible to exchange funds within a

mutual fund company or variable annuity contract pursuant to an exchange feature

or a rebalancing provision as long as it was established prior to April 10, 2017 and

as long as the financial institution and advisers do not receive increased

compensation either as fixed dollar amount or a percentage of assets than they

were entitled to receive prior to April 10, 2017.

4. The amount of compensation paid to the financial institution, adviser or any affiliate

on account of the transaction is reasonable.


Exemption for Pre-Existing Transactions (Limited Grandfathering) - continued

5. Any investment recommendations made after April 10, 2017, by the financial

institution or an adviser must reflect the care, skill, prudence and diligence that a

prudent person acting in a like capacity and familiar with such matters would use in

the conduct of an enterprise of like character and with like aims, based on the

investment objectives, risk tolerance, financial circumstances and need of the IRA

owner or the retirement investor and are made with no consideration of the needs

or interests of the financial institution or its advisers.

The purpose of the exemption is not to exempt future advice and exempt future

investments from the important prohibite4d transaction rules and the BICE. The use of

BICE is only necessary if investment advice is made after April 10, 2017 with respect to

the pre-existing investments.


BICE Never Applies to the Following Transactions

1. With respect to the recommended investment transaction where the Adviser has

any discretionary authority or control or exercises any discretionary authority or

control.

2. When compensation is received as a result of a principal transaction.

3. When compensation is received as a result of investment advice furnished to an

IRA owner or other retirement investor solely by and interactive Web site. The

individual furnished personal information and the advice is provided without the

participation of an individual adviser. Exception, compensation may be received by

a robo-advice provider as long as the financial institution is a level fee Fiduciary.

4. The Plan is covered by Title I of ERISA and the financial institution, any affiliate or

any adviser is the employer of the employees covered by the plan. Obviously, this


5. The Plan is covered by Title I of ERISA and the financial institution or adviser (or

any affiliate) is named fiduciary or plan administrator of such plan that was selected

to provide advice to the Plan by a fiduciary who is not independent. Obviously, this



BICE Will Apply to Riskless Principal Transactions

But Not to Principal Transactions

The BICE applies to a riskless principal transaction, but the BICD does not apply to a

principal transaction.

A riskless principal transaction occurs when there is a transaction in which the financial

institution after having received an order from the IRA owner or other retirement

investor to buy or sell an investment product, purchases or sells the same investment

product for the financial institutions own account to offset the contemporaneous

transaction with the IRA owner or other retirement investor.

A principal transaction occurs when there is the purchase or sale of an investment

product if a financial institution and/or its adviser and an IRA and/or the IRA owner is

purchasing from or selling to an IRA or a plan on behalf of the financial institutions own

account. A principal transaction will also occur if the sale or purchases involves

another party controlling, controlled by, or under common control with the financial

institution.


BICE Will Apply to Riskless Principal Transactions

But Not to Principal Transactions - continued

The DOL sees the possibility of acute conflicts of interest in a principal transaction as

the financial institution is on one side if the transaction (buying or selling an asset) and

the IRA and IRA owner are on the other side (selling or buying of an asset). Even so,

an exemption will be granted under the BICE if certain protective requirements are met.

However, for purpose of BICE, sales of insurance, annuity contracts or mutual funds

shares are not treated as principal transactions. That is, the DOL has concluded that

mutual fund transactions may occur on a riskless basis.

An exemption applies to a riskless principal transaction. An exemption does not apply

a principal transaction. The DOL has created a new exemption for principal

transactions. It permits investment advice fiduciaries of an IRA and a Plan to sell

and/or purchase certain debt securities and other investments in principal transactions

and riskless principal transactions. The DOL expanded this new exemption to include

all riskless principal transactions. That is, it covers all investments and not just debt

instruments.


call us at 800.346.3961 or

send an e-mail to [email protected]

Copyright 2017 © Collin W. Fritz & Associates, Ltd. “The Pension Specialists” All rights reserved. No part of this presentation may be reproduced in any form and by any means

without prior written permission from Collin W. Fritz & Associates, Ltd.

Date post:	07-Aug-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Understanding the DOL’s New “IRA” Fiduciary · Goals of the DOL – Obama Administration 1....

Documents