Impartial Conduct Standard: More Than Meets the Eye

By ASPPA Net Staff • April 21, 2017 • 0 Comments
A new blog post by noted ERISA attorney Fred Reish takes a look at requirements that aren’t obvious on the face of the Impartial Conduct Standards (ICS).

Reish starts by referencing the new, and greatly expanded, definition of fiduciary advice that becomes applicable on June 9, which means that almost any investment or insurance recommendation to a plan, participant or IRA will be a fiduciary act. During the period from June 9 to Dec. 31, he says the likely exemption will be “transition” BIC; that is, the transition rule under the Best Interest Contract Exemption. And he reminds that to do so there is only one condition, but one with three parts. The condition is that the adviser (and the adviser’s financial institution) comply with the ICS, and the three parts of ICS are:

1. the best interest standard of care;
2. no more than reasonable compensation; and
3. no materially misleading statements.

Reish cautions that there is more to the rule than meets the eye because in the DOL’s final regulation extending the applicability date of the fiduciary rule, the department said:

Also note that even though the applicability date of the exemption conditions have been delayed during the transition period, it is nevertheless anticipated that firms that are fiduciaries will implement procedures to ensure that they are meeting their fiduciary obligations, such as changing their compensation structures and monitoring the sales practices of their advisers to ensure that conflicts in interest do not cause violations of the Impartial Conduct Standards, and maintaining sufficient records to corroborate that they are adhering to Impartial Conduct Standards.

In other words, Reish explains, while the explicit compensation requirement of the ICS is that advisers and financial institutions cannot receive more than reasonable compensation, the DOL is saying that a financial institution’s compensation structures cannot promote investment recommendations that are not in the best interest of the investor.

He notes that one possible interpretation is that, even though the compensation of the adviser can vary, both for similar products (e.g., mutual funds) and among product categories (e.g., mutual funds vs. variable annuities), the variation cannot be so great as to unreasonably promote advice that is inconsistent with the best interest standard of care.

Which, he says, raises the obvious question, how much is too much? Reish comments that the answer is likely along the lines of the famous Supreme Court position: “You know it when you see it.”

And that, he closes, means that broker-dealers, RIA firms, and other financial institutions should evaluate their compensation practices and consider whether they align with the quoted language.




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