PLANADVISER - January/February 2018 - 46

ERISA vista
Policies Under
The Fiduciary Rule
What the DOL expects, to ensure firms comply
QUESTION: I am an adviser who occasionally recommends that
an investor roll over ERISA [Employee Retirement Income Security
Act] plan assets to an IRA [individual retirement account]
that I advise. Also, I sometimes recommend that an investor
transfer his existing IRA to one I advise. I know that these recommendations
are fiduciary acts under the DOL [Department of
Labor] fiduciary rule that result in a prohibited transaction [PT]
for which the best interest contract exemption [BICE] is needed.
Does the BICE require that I amend my policies and procedures?
ANSWER: During the fiduciary rule's transition period, June
9, 2017, through July 1, 2019, the BICE does not specifically
require that you adopt policies and procedures addressing
these conflicts. However, failing to do so will make it
more difficult to prove you complied with the exemption.
Also, the DOL has stated that it expects such policies to
be adopted, and it could view your failure as an indication
that you are not making diligent and good faith efforts to
comply with the rule-which would mean you'd lose the
protection of the current nonenforcement policy provided
by the DOL and Internal Revenue Service (IRS).
The only stated requirement in the BICE is that, during
the transition period, you need to adhere to the impartial
conduct standards (ICS), which consist of three elements:
* The recommendation must be in the investor's best
interest-i.e., a standard that mirrors ERISA's prudent man
rule and duty of loyalty;
* The fee charged to the IRA must be no more than
reasonable compensation for your services; and
* No materially misleading statements may be made.
While there is no specific obligation to adopt policies
and procedures to ensure compliance with the ICS, the
DOL has stated on a number of occasions that it expects
financial institutions, such as registered investment advisory
(RIA) firms, to adopt them. In its frequently asked
questions (FAQ) issued last May, the DOL expressed this
expectation in Q&A-6, saying it " expects financial institutions
to adopt such policies and procedures as they reasonably
conclude are necessary to ensure that advisers comply
with the impartial conducts standards. " The DOL also
noted that firms " retain flexibility to choose precisely how
to safeguard compliance " with the standards " whether by
tamping down conflicts of interest associated with adviser
compensation, increased monitoring and surveillance
of investment recommendations, or other approaches or
combination of approaches. "
This language suggests that the DOL expects firms to
adopt policies, procedures, supervision and/or compensation
practices, as needed, to mitigate any such conflicts. For
plan rollover recommendations and IRA-to-IRA transfer
recommendations, this would mean the firm should adopt
policies and procedures that describe: the conflict of interest
that arises when such recommendations are made, the use
of the BICE to mitigate the conflict, and the requirements
of the BICE that need to be satisfied-i.e., currently, the ICS.
For instance, in the case of a plan rollover recommendation,
the policy should reflect the best interest process
described in the BICE preamble by requiring that the
adviser first consider the investor's options-i.e., to stay in
the plan, roll over to an IRA, take a distribution or transfer
to another employer, if permitted-and then compare the
services, costs and investments of the plan and the IRA
to determine which option best aligns with the investor's
needs and circumstances. Similarly, for IRA-to-IRA transfer
recommendations, the policy should require that the
adviser compare the services, fees and investments of each
to determine which option best suits the investor.
Additional documentation-such as best interest checklists-could
be developed to support the basis for the recommendation
and then referenced in the firm's policies. Additionally,
the policies could require that the adviser make
diligent efforts to obtain information from the investor,
such as the plan participant disclosure statement-i.e., the
404a-5 disclosure-in the case of plan rollovers. The firm
should also implement practices to train advisers on this
process and then monitor the rollover and/or IRA transfer
recommendations to insure that the process is undertaken
as the policy sets forth.
The IRS and DOL have stated that they will not pursue
claims against fiduciaries who are working " diligently and
in good faith " to comply with the rule. Establishing such
policies is a way to establish diligent and good faith efforts
to comply with the rule so this nonenforcement policy can
apply. The policy does not prevent private enforcement of
the rule. That said, implementing such policies will also
put you in a strong position if you need to defend against a
private enforcement action brought by an investor.
Fred Reish is chair of the financial services ERISA practice at the
law firm Drinker Biddle & Reath LLP. A nationally recognized expert in
employee benefits law, Reish has written four books and many articles
on ERISA, pension plan disputes, and audits by the Internal Revenue
Service and Department of Labor. Joan Neri is counsel in the firm's
financial services ERISA practice, where she focuses on all aspects of
ERISA compliance affecting registered investment advisers and other
plan service providers.
46 | planadviser.com january-february 2018 Art by Tim Bower
http://www.planadviser.com
PLANADVISER - January/February 2018

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