DOL “Investment Advice” FAQs: Considerations for Investment Advisers, Broker-Dealers and Insurance Companies

by Dechert LLP

Dechert LLP

The U.S. Department of Labor (DOL) issued in April 2016 the final version of its controversial “investment advice” regulation and various related exemptions (collectively, Final Rules), which are widely expected to have a significant impact on the financial services industry. Recently, the DOL issued a first set of FAQs regarding the Final Rules.

As discussed in previous Dechert OnPoints,1 the Final Rules expand the universe of those considered to be “fiduciaries” under the Employee Retirement Income Security Act of 1974 (ERISA), and section 4975(e)(3)(B) of the Internal Revenue Code (Code), through the provision of investment advice to retirement investors (including retirement plans and individual retirement accounts (IRAs)). As a result, a financial institution2 or adviser3 dealing with a retirement investor must either: (i) avoid giving advice that results in fiduciary status under the Final Rules; or (ii) operate in compliance with the Final Rules (including the requirements of any exemption necessary to receive compensation or engage in a transaction that would otherwise be prohibited for an ERISA fiduciary).4

Dechert previously published a general discussion of the FAQs that may be viewed here. This OnPoint focuses on the FAQs from the perspective of financial institutions, including investment advisers, broker-dealers, insurance companies and other intermediaries. Also discussed in this OnPoint is the indirect impact of the Final Rules on registered investment companies, namely the impact on their distribution channels. Specifically, this OnPoint discusses: (i) the availability of the “Best Interest Contract” Exemption (BIC Exemption) and its streamlined version, sometimes referred to as “BIC Lite,” for certain transactions; (ii) the impact of the Final Rules on investment advisers with discretionary authority over retirement assets; (iii) the structure of compensation paid by financial institutions to advisers; (iv) compliance with disclosure requirements of the BIC Exemption; (v) sales of annuities; and (vi) grandfathering.

Although not groundbreaking, the FAQs provide long-awaited guidance to industry participants as they evaluate the impact of the Final Rules and methods for compliance. The DOL indicated that it expects to issue additional FAQs in the future.

Availability of the BIC Exemption

In General

A number of the FAQs discuss the availability of the BIC Exemption for particular types of transactions, setting forth the DOL’s view that the exemption is “broadly available” for the provision of advice to retail retirement investors.5 As discussed in greater detail below, this includes recommendations with respect to rollovers. As a starting point, however, the DOL notes that the Final Rules do not treat financial institutions or advisers as “investment advice” fiduciaries solely based on the execution of a transaction at the customer’s direction. Moreover, an investment recommendation triggers fiduciary status only where the person making the recommendation receives direct or indirect compensation in connection with the advice. Accordingly, reliance on an exemption such as the BIC Exemption is needed only where a person both makes a recommendation and, as a result, receives direct or indirect compensation. Of course, determining whether a recommendation was made, or compensation was received (particularly indirectly), can be a complicated exercise in some cases.

The FAQs reiterate that the BIC Exemption is not available with respect to advice provided solely through models or other applications on an interactive website (so-called “robo-advice”), although BIC Lite is available if the robo-advice provider qualifies as a “level-fee fiduciary.” The FAQs also clarify that the BIC Exemption does not prohibit a financial institution or adviser from discounting prices that a customer pays for services (such as a discount based on account size), provided that the pricing schedule satisfies the BIC Exemption’s requirement that recommended transactions not result in compensation in excess of reasonable compensation.

BIC Lite

“Level-fee fiduciaries” (those that receive compensation based on a fixed percentage of the value of assets or which does not otherwise vary with the particular recommended investment) are eligible for a streamlined version of the BIC Exemption referred to as “BIC Lite.” The DOL states in the FAQs that, “[i]n general, level fee fiduciaries do not have the sorts of conflicts of interest that give rise to prohibited transactions or require reliance on an exemption”6 therefrom, but this does not mean that fee-based accounts are viewed as being free from conflicts. The DOL notes, for example, that prohibited transactions could be deemed to occur if an adviser were to recommend that a plan “participant roll money out of a plan into a fee-based account that will generate ongoing fees [that the adviser] would not otherwise receive,”7 or provide “investment advice to switch from a commission-based account to an account that charges a fixed percentage of assets under management on an ongoing basis.”8

Further, in the case of financial institutions and advisers that sell mutual fund shares to retirement investors, the DOL states in the FAQs that BIC Lite is not available where a financial institution or adviser receives any third party payments – such as Rule 12b-1 fees or revenue sharing payments – in connection with an investment it recommends, even where the Rule 12b-1 fees and revenue sharing payments are the same in amount or percentage for each investment offered. The FAQs state that, because the payments are made only with respect to the investments that are part of the arrangement, these are transaction-based fees and vary based on the investment. This DOL position could be another factor leading intermediaries to request that funds offer share classes without distribution charges or 12b-1 fees.

Similarly, the FAQs state that BIC Lite is not available where a financial institution and its advisers sell only proprietary products for which the advisers receive the same commission from the financial institution regardless of the particular investment selected. In this situation and that described in the preceding paragraph, financial institutions and advisers that are investment advice fiduciaries must rely on – and comply with – the full BIC Exemption.

The FAQs further indicate that a financial institution is not required to offer solely level-fee accounts in order to be able to rely on BIC Lite with respect to its level-fee accounts (i.e., a financial institution can rely on BIC Lite for certain accounts and the standard BIC Exemption or other exemption for other accounts).

Impact on Discretionary Asset Managers


Because the BIC Exemption applies only to persons who render non-discretionary investment advice, and not to discretionary investment advisers (who were ERISA fiduciaries before the adoption of the Final Rules),9 the BIC Exemption and BIC Lite do not provide general relief for discretionary advisers’ decisions to invest plan assets.10 However, these exemptions can be used to cover distinct transactions in which discretionary advisers render investment advice, such as in situations where the discretionary advisers make recommendations that bring additional retirement assets under their management. The FAQs highlight the use of the BIC Exemption and BIC Lite as tools that discretionary managers can use during the intake process when advising on rolling over a retirement plan account to an IRA. The FAQs also note that these exemptions can be used to transition an account from a fee-based account to a commission-based account or vice versa.

The FAQs indicate that the BIC Exemption is available for investment advice to roll over a retirement account to an IRA, provided that: (i) the adviser does not exercise discretionary authority or control with respect to the rollover decision; and (ii) other conditions of the exemption are satisfied. If all conditions are satisfied, the exemption is available even where the adviser serves as a discretionary fiduciary for the plan or a participant’s account or will provide fiduciary advice following the rollover.

The FAQs indicate that BIC Lite is also designed to provide relief for investment advice provided with respect to discrete transactions, including decisions to: (a) roll money out of a plan into a fee-based account that will generate ongoing fees; and (b) switch from a commission-based account to an account that charges a fixed percentage of assets. A discretionary manager seeking to rely on BIC Lite with respect to such advice must: (i) provide written acknowledgment of its and its advisers’ fiduciary status to the retirement investor; (ii) satisfy the “Impartial Conduct Standards;” and (iii) document the reasons why the advice is in the best interests of the retirement investor. Specifically within the context of a rollover, this last requirement obligates an adviser to document its consideration of: (a) the investor’s alternatives11 to a rollover, taking into account the fees and expenses associated with both the existing plan and new IRA; (b) whether the employer pays for some or all of the plan’s administrative expenses; and (c) the different levels of services and investments available under each option.12

“Hire Me”

The FAQs also address use of the BIC Exemption to make recommendations regarding whom the investor should hire to serve as an investment adviser. FAQ 3 indicates that the exemption “broadly covers recommendations to retail investors, including recommendations with respect to all categories of assets, advice to roll over plan assets, and recommendations on persons the customer should hire to serve as investment advisers or managers.” The latter portion of the clarification (a recommendation to hire someone as an investment adviser) includes situations where a financial institution or adviser markets its services by participating in a request for proposal (RFP) or client pitch.

While it is possible for a financial institution or adviser to market its services without triggering fiduciary status, marketing that includes recommendations as to how to invest account assets, or with respect to taking a distribution from an ERISA-covered plan or IRA, can trigger fiduciary status. As a result, in certain instances in connection with the RFP process, a financial institution or adviser promoting its services could trigger fiduciary status under the Final Rules.

For example, if a financial institution or adviser provided a general presentation on its services to a potential client, without discussing what it could do for the client, then the presentation would likely not be considered a recommendation under the Final Rules. However, if a financial institution or adviser provided the same presentation, but also discussed why the potential client should hire that entity or person (“we’d be great for you because… ;” “here’s what we can do for you;” “you should roll over your IRA and invest in…”), the presentation would likely be considered a recommendation, potentially triggering fiduciary status. In the latter scenario, if the financial institution or adviser is then hired by the potential client, any compensation paid to such entity or person would meet the compensation element of the Final Rules. As clarified in FAQ 4, “a ‘fee or other compensation, direct or indirect,’ includes any explicit fee or compensation for the advice received by the adviser (or an affiliate) from any source, and any other fee or compensation received from any source in connection with or as a result of the recommended purchase or sale of a security or the provision of investment advice services.…” As a result, compensation paid to a financial institution or adviser after being hired can be considered compensation paid to such entity or person in connection with the RFP or business pitch that preceded the hiring decision. It follows logically that if a financial institution or adviser is not hired, then fiduciary status does not arise because the compensation element is not satisfied.

As a result of potential triggers during the RFP process or other client marketing activities, financial institutions and advisers are encouraged to document their interactions with potential clients. One way to avoid triggering fiduciary status under the Final Rules is to refrain from providing personalized recommendations during a client pitch, although most client pitches are likely to include a discussion of services and strategies tailored to a potential client’s needs. If financial institutions or advisers decide to provide more detailed information that rises to the level of a recommendation during a pitch, they should be mindful of the need to comply with the Final Rules.

Compensation Arrangements for Advisers

The FAQs include a detailed discussion of the types of internal incentive compensation arrangements financial institutions may implement under the Final Rules. In particular, the FAQs focus on compensation paid by financial institutions to advisers. In assessing whether a compensation structure is compliant, it is of primary importance to consider whether the adviser’s interests are aligned with those of the investor. Specifically, the payment structure may not be intended or reasonably expected to cause advisers to recommend investments that are not in the best interests of investors.

FAQ 9 outlines five factors to consider when analyzing whether a compensation structure (and, in particular, a compensation grid with differing levels of compensation) is misaligned with investors’ interests.

  1. The Grid. Financial institutions should avoid passing on firm-level conflicts to advisers. For example, if a mutual fund complex pays a higher commission rate to a financial institution than a different mutual fund complex, the financial institution should not pay its advisers more for recommending higher commission funds and less for recommending lower commission funds. In such case, investor and adviser interests would be misaligned if an adviser was given a fixed percentage of the commission generated for the financial institution, since the adviser would be incentivized to recommend products from a mutual fund complex that paid higher commission rates to the financial institution.
  2. Neutral Factors. Financial institutions can pay different commissions for different broad categories of investments, so long as the difference in compensation is based on neutral factors (i.e., not based on profitability for the financial institution), such as the time and complexity associated with different types of investment products. Neutral factors are based on significant differences in the work performed by the adviser in making a recommendation, such that the work justifies drawing distinctions between categories and compensation. The DOL has acknowledged that, if there is a neutral basis for the distinction, a financial institution may adopt one commission structure for mutual fund investments and a different structure for annuities. However, the DOL cautions that financial institutions with such arrangements should pay attention to whether advisers are actually performing the additional work that is associated with recommending a particular investment product.
  3. Size of Steps. To the extent grids have increases in commission rates, these should be modest, to avoid incentivizing advisers to reach thresholds that will dramatically increase their compensation.
  4. Retroactivity. Once a compensation threshold is reached and an adviser is eligible to receive an increased level of compensation, the new rate should apply only to new investments, and should not apply retroactively to old investments. If new rates were retroactive, advisers would be heavily incentivized to make the sales necessary to reach a higher incentive threshold, regardless of the investor’s interest, in order to earn higher commissions on prior investments.
  5. Oversight. Financial institutions should pay close attention to, and increase supervision of, adviser sales activity at or near compensation thresholds to make sure that such thresholds do not create undue sales incentives.

The FAQs also discuss whether it is permissible for financial institutions to pay recruitment bonuses or awards to advisers. The DOL acknowledges that awards based on an adviser’s continued service in good standing at a financial institution (i.e., signing awards, bonuses, front-end awards) are permissible. However, the DOL indicates that back-end awards, which commonly result in large amounts of income paid on an “all or nothing basis” and make payment contingent on meeting revenue or asset targets, are not consistent with BIC Exemption requirements. Notably, the DOL has acknowledged that financial institutions may continue to honor contractual arrangements that predated the FAQs, provided: the financial institutions engage in stringent oversight of the relevant advisers; the remaining time period is reasonable and consistent with industry practice; and the arrangement does not otherwise violate the BIC Exemption, ERISA, or section 4975 of the Code.

BIC Exemption Disclosure Requirements

The FAQs also provide clarification regarding disclosure requirements under the BIC Exemption. With respect to the requirement that financial institutions make a copy of the best interest contract accessible to an investor online, the FAQs indicate that the best practice is for a financial institution to maintain an executed copy of a particular investor’s contract at a site accessible by that investor. Nonetheless, the FAQs indicate that if a financial institution uses a model contract that does not vary for a class of customers, the financial institution may choose to post that model contract, together with an acknowledgement that it is bound by the terms of the contract with respect to those customers. However, the FAQs indicate that financial institutions must exercise care when posting model contracts, as the conditions of the BIC Exemption are not satisfied if the contract: does not express the terms of the contract actually executed; does not include all of the mandatory terms for a given customer; or is later disclaimed by the financial institution. The FAQs provide similar guidance with respect to amending existing contracts through negative consent in order to satisfy BIC Exemption requirements.

The FAQs also clarify that the BIC Exemption’s transaction-based disclosure requirements apply only to purchase recommendations, and not to hold or sell recommendations. In addition, the FAQs specify that information about costs, fees or other compensation, which financial institutions relying on the BIC Exemption are required to provide to investors on request, should generally be as of the date of the recommendation. Such information should not be provided as of the date of the request, unless the investor requests otherwise (i.e., if a financial institution makes a recommendation about an investment on May 1, but the investor does not request such information until June 1, the information should be provided as of May 1). A financial institution must provide information in response to a request made in advance of a transaction, before the actual transaction, and otherwise must provide such information within 30 business days.

Sales of Annuities

The FAQs clarify that the BIC Exemption and Prohibited Transaction Exemption (PTE) 84-24 allow insurance-only agents and independent insurance agents to receive commissions for selling fixed rate and fixed indexed annuities to retirement investors. Under PTE 84-24 commissions can be received for selling a fixed rate annuity contract, which includes immediate annuities, fixed annuities, traditional annuities and declared rate annuities. As discussed in the FAQs, although insurance commissions for the sale of fixed indexed annuities and variable annuities are not exempt under PTE 84-24, the full BIC Exemption provides broader relief for compensation received on annuity sales, and allows insurance agents to receive insurance commissions on these products. The FAQs further note that PTE 84-24 and the BIC Exemption do not require insurance companies to use any particular distribution channel. As a result, insurance companies can rely on a captive sales force to distribute proprietary products, or they can distribute annuities through independent insurance agents or other channels in reliance on these exemptions.

The FAQs also clarify that PTE 84-24 and the full BIC Exemption allow insurance intermediaries, such as independent marketing organizations (IMOs), to distribute insurance products through independent insurance agents and to receive insurance commissions. IMOs do not fall within the scope of the term “financial institution” as defined by the full BIC Exemption, but are instead generally “affiliates” and “related entities” of advisers and financial institutions. As a result, IMOs cannot execute a best interest contract, but can continue to work with insurance companies and receive compensation, provided that the insurance agent and insurance company comply with the conditions of the BIC Exemption. In addition, the BIC Exemption includes a process for IMOs to apply to be treated as a “financial institution” with responsibility for executing the best interest contract and compliance with the BIC Exemption’s requirements.


The FAQs also discuss grandfathering under the BIC Exemption, stating that dividend reinvestment programs are “systematic purchase programs” eligible for grandfathering relief under the BIC Exemption. The FAQs note that the grandfathering relief applies to advice to continue to adhere to such a program, but does not apply to recommendations to make changes. The FAQs also discuss investment of additional amounts in a previously acquired investment vehicle (other than through a systematic purchase program); in this regard, the FAQs note that grandfathering relief is not available for new investments, but a new investment does not render the relief unavailable for the previous investment (i.e., grandfathering relief continues to be available for compensation attributable to the earlier investment).

With respect to sales of grandfathered investments, the FAQs specify that a recommendation to sell is covered by the grandfathering relief, but that a recommendation regarding the reinvestment of sale proceeds (and for which compensation was received) would need to be made in compliance with the BIC Exemption or another exemption.


The FAQs make clear that the DOL does not intend to extend the applicability date of the Final Rules. Specifically, the Final Rules will apply commencing on April 10, 2017, although full compliance with the BIC Exemption will not be required until January 1, 2018. It remains to be seen, however, whether the upcoming presidential transition will result in a successful legislative repeal of the Final Rules (a repeal previously had been attempted, but was vetoed by President Obama), or in some other delay in the applicability, or maybe even complete revocation, of the Final Rules. Despite such uncertainty, the financial services industry generally seems to be moving forward with plans to comply with the Final Rules, although final implementation steps are expected by some to be delayed, and the FAQs provide additional guidance for industry participants as they prepare for compliance by these dates.


1) Dechert previously published an in-depth discussion of the Final Rules available here, as well as three industry-focused OnPoints that may be viewed here, here and here.

2) A “financial institution” is a bank or similar financial institution, insurance company, registered investment adviser or registered broker-dealer, including a dually-registered broker-dealer and investment adviser, that employs or retains an “adviser.”

3) An “adviser” is an employee, independent contractor or other registered representative of a “financial institution” who satisfies applicable law and licensing with respect to the receipt of compensation, and therefore includes financial advisors and other associated persons of financial institutions.

4) FAQ 1.

5) FAQ 3.

6) FAQ 13.

7) Id.

8) FAQ 5.

9) “Persons with such discretionary investment authority have long been treated as fiduciaries under ERISA and the [Code]… To the extent discretionary fiduciaries worked with ERISA plans, the prudence and loyalty standards in ERISA section 404 were already applicable to them.” FAQ 8.

10) “The conditions of the BIC Exemption are tailored to the conflicts that arise in the context of the provision of investment advice, not the conflicts that could arise with respect to discretionary money managers.” FAQ 8.

11) Consideration of alternatives should include the option of leaving money in an existing plan.

12) FAQ 14 specifies that the financial institution and adviser are required to “make diligent and prudent efforts to obtain information on the existing plan,” which may include obtaining information from the investor or the plan’s most recent Form 5500.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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