DOL Issues FAQ’s on New Fiduciary Rule Explaining, Inter Alia, Acceptable Compensation

The U.S. Department of Labor (the “DOL”) issued the first FAQ’s on its new rule requiring advisers giving advice on ERISA and similar plans to act as fiduciaries for the investors and in the best interest of investors rather than the firms for which they work.  See FAQs, here.  The new fiduciary rules are not scheduled to go into effect until April of 2017, with a transition period until January of 2018.  Advisers have many questions, however, and the first FAQs deal primarily with compensation.  Under the two exemptions that allow commissions to be charged, the Best Interest Contract Exemption (the “BIC Exemption”) and the Principal Transactions in Certain Assets between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (the “Principal Exemption”), compensation must be “reasonable”.  The DOL has indicated that the market and other extraneous factors must be taken into account, and that compensation generally cannot incentivize advisers to recommend one investment over another; such investments should be recommended based on inherent characteristics rather than adviser incentives.  “Level fee” arrangements, where a fee is charged based solely on assets under management or as a set fee, and don’t incentivize an adviser per se to recommend one investment over another, may still qualify for the BIC Exemption but under more streamlined requirements than commission arrangements.  See earlier blog entry.