BICE No More: How the DOL Rule Will Make You Accountable

More content gets published each day about the U.S. Department of Labor’s (DOL) new fiduciary rule and requirements it will place on financial professionals. The rule prohibits calls to action, withdrawals or recommendations to IRA accounts without following specific guidelines. These guidelines, BICE, 84-24 and the level-fee exemption will change how all of us behave. The emphasis of content published has focused on prohibited transactions and these guidelines. Much less has been published about compliance manifestations and enforcement protocol for the BICE or the rule in entirety, causing discontent and uncertainty among financial professionals.  

Clear confirmation or interpretation of enforcement measures remains blurred at best, potentially because of the number of enforcement agencies engaged in the process. The IRS and Department of Labor hold keys to enforce compliance. One of those keys is BICE rescindment. Once advisors and financial institutions fulfill qualification requirements for the exemption, they must continue to establish policies and parameters reinforcing the concept of fiduciary responsibility or else run the risk of losing access to class wide prohibited transaction exemptions, such as 84/24 or The Best Interest Contract Exemption. . To best understand the DOL’s enforcement landscape going forward, it’s helpful to understand the agency’s current measures.  

The Current State of Fiduciary Enforcement

According to The Federal Register, a daily journal of the United States Government, only participants and beneficiaries in plans that are covered by Title I of ERISA have the right to bring suit against fiduciaries for violation of the prohibited transaction rules. With the finalization of the DOL rule, investors in IRAs and non-ERISA retirement plans will also have a mechanism to exercise their rights via the contractual requirements set forth in The Best Interest Contract.

As it stands, The Internal Revenue Service (IRS) is the government agency with enforcement jurisdiction over IRAs, imposing excise taxes for prohibited transaction violations. Generally speaking, excise taxes equal roughly 15 percent of the questionable transaction amount which have been historically self-identified, reported and remedied by involved financial services professionals. Excise taxes and penalties are a strong motivator of complying.  

Otherwise, prohibited transaction enforcement efforts are scattered. Brokers, for example, who aren’t fiduciaries would not be subject to the current rules if they gave conflicted retirement investment advice. Overcoming potential blurry lines and protecting investors is a driving force behind the DOL’s creation of the BICE. Once the final rule is phased in, the BICE will more uniformly govern investment advice given in the IRA market.

Today, investors can sue brokers or pursue arbitration if they believe they have been wronged, but the burden of proving a broker is a fiduciary becomes the investor’s responsibility. Without a contract in place guaranteeing fiduciary status, like the one required once the DOL rule is finalized, proving a broker’s advice is continuous or did serve as the primary basis for the investor’s decision can be dicey.

Once the rule is final and a Best Interest Contract for qualifying transactions is required, the question of whether or not a broker is indeed fiduciary becomes more clarified making it easier for investors to prove their claims in court. While the DOL will become the main enforcement authority once the fiduciary rule is finalized, it does not plan on keeping the power all to itself.

Shifting Power Into The Hands of Investors and Plaintiff Attorneys

The DOL, with the finalization of its fiduciary rule, effectively moved contractual power to enforce the BICE into the hands of investors. Previously, violations of the prohibited transaction provisions and excise taxes were mostly self-enforced by advisors who reported a violation and paid the tax once they realized a prohibited transaction had occurred.  With a shift in enforcement power to the hands of the investors and their attorneys, pressure on advisors and firms to continuously self-enforce the concepts of client best interest and fiduciary responsibility increases.

Some professionals believe self-enforcement will occur naturally due to the increased fiduciary accountability and contractual obligations of advisors and financial institutions. Others are waiting patiently to see what types of litigation happen after the rule is finalized in April 2017. Penalties for breach of fiduciary responsibility under the BICE include litigation, excise taxes, and an arguably worst case scenario of the BICE rescission. In the DOL’s view, threats of make-whole compensatory relief are enough to incentivize compliance and right the wrongs caused by fiduciary misconduct. It sees revocation of the BICE as a measure of last resort and has provided advisors and firms with several provisions to correct good faith errors in disclosure without facing loss of the exemption.

A key and fundamental takeaway of current and future enforcement mechanisms is the paramount importance for advisors and firms to create and exercise their own enforcement protocol. Achieving fiduciary status requires work on an advisor’s part to meet qualification requirements and then maintain them, but doing so is likely easier and less costly than the litigation process and possible recission that comes with a breach. As the old proverb goes, an ounce of prevention is worth a pound of cure. Financial services professionals who who exercise discipline and consistency in fiduciary self-enforcement can position themselves for avoiding excise taxes and the BICE exemption being rescinded.

Prepare for the upcoming DOL rule compliance deadline with expert insights and tips. Download the factsheet, “5 Things You Didn’t Know About the DOL Conflict of Interest Rule But Should.”