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Copyright 2017© Collin W. Fritz & Associates, Ltd. “The Pension Specialists” All rights reserved. No part of this presentation may be reproduced in any form and by any means
without prior written permission from Collin W. Fritz & Associates, Ltd.
The Webinar will be
starting shortly
Rev. 3/27/2017
Understanding the DOL’s New
“IRA” Fiduciary
Investment Advice Definition and
the
New Prohibited Transaction Exemptions.
1
8:30 am CST or
1:00 pm CST
Reminder:
2 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
This is copyrighted material.
No Video or Audio Recording is permitted without prior written
consent from
Collin W. Fritz & Associates, Ltd.
Thank you for your compliance.
3 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
The Audio Portion of this presentation is available either by phone or
by using the speakers and microphone on your PC. The phone
number is provided to you in the confirmation from CWF and again at
the time you join the meeting.
You will need the access code that was emailed to you in the
confirmation from CWF. The confirmation code is 9 digits in length
e.g. 123-456-789
You will also need the Audio Pin # which is shown to you at the time
you join this meeting
If you have trouble re-connecting please call CWF at 800-346-3961
Goals of the DOL – Obama Administration
1. The DOL had a number of goals when it decided to change the definition
of fiduciary and also various prohibited transaction exemptions. The DOL
had concluded that some IRA custodians and trustees were engaged in
benefiting themselves to too large a degree rather than the IRA owner or
the plan participant. Transactions are to be made that are in the best
interest of the individual.
The DOL estimates that 1.7 trillion of IRA assets are invested in assets
where conflict of interest situations exist.
2. Require more transparency regarding IRA fees and related compensation.
3. Increase the ability of individuals to pursue legal actions when financial
institutions and their advisors charge more than reasonable fees for
processing various IRA Transactions.
4 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
IRAs and Pension Plans are Important to Individuals and the U.S. Government
See Retirement Plan Asset Chart on the next page
The IRA Funds Must be Invested
IRAs and Plans Must be Administered
There is much business related to IRAs and pension Plans. Assets are
continuously being bought and sold or being held as long term investments.
No one works for free.
More than 38 million households have one or more IRA types.
5 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
6
New DOL Rules
Goal – Impact IRA and Pension Rollovers
7 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
IRAs and Pension Plans are Important
Rollovers from 2016-2020 are estimated to be 2.4 trillion.
Annually the average is $400 billion.
See Rollover Chart for 2004-2008 below.
Rollovers from 2004-2008
Number of Taxpayers Rollover Amounts (1,000’s) Average
2004 3,636,027 $214,878,446 $59,097
2005 3,754,759 $228,495,888 $60,855
2006 4,150.140 $281,976,971 $67,944
2007 4,478,322 $316,646,832 $70,707
2008 5,609,522 $272,104,973 $48,508
Total 21,628,770 $1,314,103,110 $60,757
8 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
9
10
IRAs and Pension Plans are Important
Fees may/will be charged and paid to numerous parties.
Commissions and fees may be paid directly by the IRA or Plan.
There may be commissions or fees paid by others related to investment or
administrative tasks. There may be trailing commissions, sales loads, 12b-1
fees, revenue sharing payments, volume discounts due to the large size of
the contributions and other payments by investment product manufactures or
other third parties to financial institution and the advisors.
DOL Goal
The DOL reminds everyone that fees must be reasonable, that there should
be fee/compensation transparency and that there should be minimal conflicts
of interest. If there are conflicts of interest, they must be disclosed.
11 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
The Trumps Administration’s Actions Regarding the IRA Fiduciary Rules
President Trump’s Memorandum February 3, 2017
Proposed Extension of Applicability March 2, 2017
Date of April 10, 2017 to June 9, 2017
Deadlines for Comments
March 17, 2017 Should there be an extension ?
April 17, 2017 Should the new Rules be
Revised or Revoked ?
EBSA/DOL intends to Rule by April 9, 2017 if the Applicability Dates will be
postponed ?
12 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
13
Enforcement Policy – New DOL Rule
Enforcement is suspended while the new DOL is conducting its review.
Right now there has been no decision to delay the April 10th Applicability date. The DOL as stated it intends to do so, but if it does not, there will not be any enforcement.
Field Assistance Bulletin No. 2017-01
Date: March 10, 2017
Memorandum For: Mabel Capolongo, Director of Enforcement Regional Directors
From: John J. Canary Director of Regulations and Interpretations
Subject: Temporary Enforcement Policy on Fiduciary Duty Rule
14
Enforcement Policy – New DOL Rule
Temporary Enforcement Policy
In recognition for the foregoing transitional and other concerns, the Department is adopting the following temporary enforcement policy:
A. In the event the Department issues a final rule after April 10 implementing a delay in the applicability date of the fiduciary duty rule and related PTEs, the Department will not initiate an enforcement action because an adviser or financial institution did not satisfy conditions of the rule or the PTEs during the “gap” period in which the rule becomes applicable before a delay is implemented, including a failure to provide retirement investors with disclosures or other related PTEs.
15
Enforcement Policy – New DOL Rule
Temporary Enforcement Policy
B. In the event the Department decides not to issue a delay in the fiduciary duty rule and the related PTEs, the Department will not initiate an enforcement action because an adviser or financial institution, as of April 10 applicability date of the rule, failed to satisfy conditions of the rule or the PTEs, including sending our required disclosures or other documents to retirement investors, within a reasonable period after the publication of a decision not to delay the April 10 applicability date. The Department will also treat the 30-day cure period under section IX(d)(2)(vi) of the BIC Exemption and Section VII(d)(2)(v) of the Principal Transactions Exemption as available to financial institutions that, as of the April 10 applicability date, did not provide to retirement investors the disclosures or other documents described in Section IX(d)(2)(vi) of the BIX Exemption and Section VII(d)(2)(v) of the Principal Transactions Exemption.
16
Enforcement Policy – New DOL Rule
Temporary Enforcement Policy
To the extent that circumstances surrounding the decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including prohibited transaction relief, EBSA will consider taking additional steps as necessary.
This Bulletin is an expression of EBSA’s temporary enforcement policy: it should not be read as expressing any view on any decision regarding a final rule on the March 2 proposal, and it does not address the rights or obligations of other parties.
17
Enforcement Policy – New DOL Rule
DOL enforcement v. IRS enforcement
18
Enforcement Policy – New DOL Rule
Non-Applicability of Excise Taxes Under Section 4975 To Conform With
DOL Temporary Enforcement Policy on Fiduciary Duty Rule
Announcement 2017–4
This announcement provides relief from certain excise taxes under §4975 of the
Internal Revenue Code (Code), and any related reporting requirements, to conform to
the temporary enforcement policy described by the Department of Labor (DOL) in Field
Assistance Bulletin (FAB) 2017-01 with respect to the final fiduciary duty rule published
in the Federal Register on April 8, 2016 (81 F.R. 20946), entitled “Definition of the Term
‘Fiduciary’; Conflict of Interest Rule –Retirement Investment Advice” and related
prohibited transaction exemptions, including the Best Interest Contract Exemption (BIC
Exemption), the Class Exemption for Principal Transactions in Certain Assets Between
Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal
Transactions Exemption), and certain amended prohibited transaction exemptions
(collectively, PTEs).
19
Enforcement Policy – New DOL Rule
BACKGROUND
Section 4975(a) imposes an excise tax on each prohibited transaction equal to 15
percent of the amount involved with respect to the prohibited transaction for each year
(or part thereof) in the taxable period. Section 4975(b) increases the tax to 100 percent
of the amount involved in any cases in which an initial tax is imposed under §4975(a)
on a prohibited transaction and the transaction is not corrected within the taxable
period. In each case, the tax is imposed on any disqualified person who participates in
the prohibited transaction (other than a fiduciary acting only as such). Section 4975(c)
provides a definition of a prohibited transaction and authorizes the Department of the
Treasury (Treasury Department) to grant administrative exemptions from the prohibited
transaction provisions in the Code. Section 4975(c)(1)(A) through (D) prohibits the
direct or indirect sale, exchange, leasing of property, or loan of money, or other
extension of credit, between a plan (including an individual retirement account or
individual retirement annuity (IRA)) and a disqualified person, or the direct or indirect
transfer to, or use by or for the benefit of, a disqualified person of the income or assets
of a plan. Section 4975(c)(1)(E) and (F) prohibits fiduciaries from dealing with the
income or assets of a plan in their own interest or for their own account or receiving any
consideration for their own personal account from any party dealing with the plan in
connection with a transaction involving the income or assets of the plan. Section
4975(d) provides a series of exemptions from the prohibitions in § 4975(c), and §
4975(e) provides a series of definitions, including the definition of a disqualified person
to whom the tax may apply. Section 4975(e)(2)(A) provides that a disqualified person
includes a fiduciary.
BACKGROUND - Continued
20
Sections 406 and 408 of the Employee Retirement Income Security Act of
1974, Public Law 93-406 (88 Stat. 829 (1974)), as amended (ERISA), contain
provisions on prohibited transactions that are substantially similar to the
provisions of §4975 of the Code, although the ERISA provisions prohibit the
fiduciary from engaging in the transactions and provide for civil liability and
remedies rather than imposing an excise tax. The DOL is the agency
responsible for interpreting and enforcing the ERISA provisions as they apply
to employee benefit plans. ERISA §408(a) includes an authorization for the
Secretary of Labor to grant administrative exemptions from ERISA’s
prohibited transaction provisions that parallels the similar authorization in §
4975(c) for the Treasury Department to grant administrative exemptions from
the prohibited transaction provisions in the Code. New DOL Rule
21
To ensure consistency in application, Reorganization Plan No. 4 of 1978, 5
U.S.C. App. 1, 92 Stat. 3790, provides that the authority of the Treasury
Department to issue regulations, rulings, opinions, and exemptions under
§4975 of the Code is transferred, with certain exceptions not relevant here, to
the Secretary of Labor. As a result, the Internal Revenue Service (IRS) is
responsible for enforcing the excise tax provisions in §4975(a) and (b) of the
Code, but generally is bound by the DOL’s interpretive regulations, rulings,
opinions, and exemptions in determining whether a prohibited transaction has
occurred. Section 3003 of ERISA provides that the DOL and the Treasury
Department are to consult with each other from time to time with respect to
the provisions of §4975 of the Code relating to prohibited transactions and
exemptions in order to coordinate the rules applicable under such standards.
Section 3004 of ERISA further provides that whenever the DOL and the
Treasury Department are required to carry out provisions relating to the same
subject matter, the agencies are required to coordinate and develop rules,
regulations, and practices that, to the extent appropriate for the efficient
administration of such shared provisions, are designed to reduce duplication
of effort, duplication of reporting, conflicting or overlapping requirements, and
burden of compliance by plan administrators, employers, and participants and
beneficiaries.
BACKGROUND - Continued
22
On April 8, 2016, the DOL published a final regulation defining who is a
“fiduciary” of an employee benefit plan under §3(21)(A)(ii) of ERISA as a
result of giving investment advice to a plan or its participants or beneficiaries.
The final rule also applies to the definition of a “fiduciary” of a plan under §
4975(e)(3)(B) of the Code. The final rule treats persons who provide
investment advice or recommendations for a fee or other compensation with
respect to assets of a plan as fiduciaries in a wider array of advice
relationships than was true of the prior regulatory definition. On this same
date, the DOL published the PTEs, which provide two new administrative
class exemptions from the prohibited transaction provisions of ERISA and the
Code, as well as amendments to previously granted exemptions. The PTEs
would allow, subject to appropriate safeguards, certain broker-dealers,
insurance agents, and others that act as investment advice fiduciaries, as
defined under the final rule, to continue to receive a variety of forms of
compensation that would otherwise violate prohibited transaction rules,
triggering excise taxes and civil liability.
BACKGROUND - Continued
23
The final fiduciary duty rule became effective on June 7, 2016, and has an
applicability date of April 10, 2017. The PTEs also have an applicability date
of April 10, 2017, with a phased implementation period ending on January 1,
2018, for the BIC Exemption and the Principal Transactions Exemption. The
President, by Memorandum to the Secretary of Labor dated February 3,
2017, directed the DOL to examine whether the fiduciary duty rule may
adversely affect the ability of Americans to gain access to retirement
information and financial advice and to prepare an updated economic and
legal analysis concerning the likely impact of the rule as part of that
examination. On March 2, 2017, the DOL published a notice in the Federal
Register (82 FR 12319) seeking public comments on (i) a proposal to adopt a
60-day delay of the April 10 applicability date described above, (ii) the
questions raised in the Presidential Memorandum, and (iii) general questions
of law and policy concerning the fiduciary duty rule and the related PTEs. The
March 2 notice stated that, if adopted as a final rule, the proposed 60-day
delay would be effective on the date of publication in the Federal Register of
a final rule delaying the April 10 applicability date.
BACKGROUND - Continued
24
The DOL issued FAB 2017-01 on March 10, 2017, to announce a temporary
enforcement policy related to its proposal to extend for 60 days the
applicability date of the fiduciary duty rule and the related PTEs. The policy
provides that: A. In the event the DOL issues a final rule after April 10 implementing a delay in the
applicability date of the fiduciary duty rule and related PTEs, the DOL will not
initiate an enforcement action because an adviser or financial institution did not
satisfy conditions of the rule or the PTEs during the “gap” period in which the rule
becomes applicable before a delay is implemented, including a failure to provide
retirement investors with disclosures or other documents intended to comply with
provisions of the rule or the related PTEs.
B. In the event the DOL decides not to issue a delay in the fiduciary duty rule and
related
PTEs, the DOL will not initiate an enforcement action because an adviser or
financial institution, as of the April 10 applicability date of the rule, failed to
satisfy conditions of the rule or the PTEs, provided that the adviser or
financial institution satisfies the applicable conditions of the rule or PTEs,
including sending out required disclosures or other documents to retirement
investors, within a reasonable period after the publication of a decision not to
delay the April 10 applicability date.
BACKGROUND - Continued
25
Field Assistance Bulletin 2017-01 provides that, to the extent circumstances
surrounding its decision on the proposed delay of the April 10 applicability date
give rise to the need for other temporary relief, including retroactive prohibited
transaction relief, the DOL will consider taking such additional steps as
necessary with respect to the arrangements and transactions covered by the
DOL temporary enforcement policy and any subsequent related DOL
enforcement guidance. Following the issuance of the FAB, stakeholders have
raised concerns about the potential application of excise taxes under §4975 and
related reporting obligations in cases covered by the DOL’s temporary
enforcement policy.
BACKGROUND - Continued
26
Because the Code and ERISA contemplate consistency in the enforcement of
the prohibited transaction rules by the IRS and the DOL, as further reflected
in and facilitated by the statutory Reorganization Plan, the Treasury
Department and the IRS have determined that it is appropriate to adopt a
temporary excise tax non-applicability policy that conforms with the DOL’s
temporary enforcement policy described in FAB 2017-01. Accordingly, the
IRS will not apply §4975 and related reporting obligations with respect to any
transaction or agreement to which the DOL’s temporary enforcement policy,
or other subsequent related enforcement guidance, would apply.
.
TRANSITION RELIEF
27
DOL /EBSA Proposes Extended Compliance/Applicability Date For Fiduciary Rule and Related Exemptions From April 10, 2017 to June 9, 2017
The DOL/EBSA has formally issued a notice that it is proposing that the fiduciary applicability date be changed to be June 9, 2017, rather than April 10, 2017. Other applicability dates are also extended. This proposal is being published in the Federal Register on March 2, 2017, in order to allow the “new” DOL/EBSA to collect additional information and review it before the new Fiduciary rules go into effect and decide if changes in the Obama rules are warranted.
Comments on the subject of the proposed extension must be submitted by March 17, 2017 (a Friday). This is 15 days following its publication.
Comments on the subjects raised in the presidential memorandum must be submitted by April 17, 2017 (a Monday). This is 46 days following its publication as the 45th day is a Sunday and so the deadline is the following Monday.
28
DOL /EBSA Proposes Extended Compliance/Applicability Date For Fiduciary Rule and Related Exemptions From April 10, 2017 to June 9, 2017
Comment submissions must include the agency name (Department of Labor/Employee Benefits Security Administration) and the Regulatory Identification Number (RIN) of RIN 1210-AB79. Submitters are encouraged to use one of the electronic submission options rather than submitting a paper submission. These comments will be available to the public.
Comments may be submitted using one of the following methods.
1. Send an email to: [email protected]. In the subject line of your email include RIN 1210-AB79.
2. Go to the Federal eRulemaking portal and follow the instructions for submitting comments. The portal is located at (http:/www.regulations.gov).
29
DOL /EBSA Proposes Extended Compliance/Applicability Date For Fiduciary Rule and Related Exemptions From April 10, 2017 to June 9, 2017
3. Mail your written commends to: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, WASHINGTON, DC 20210, Attention: Fiduciary Rule Examination.
The 15 day and 45 day submission deadlines will require an individual to act promptly. We expect there will be many comment submissions.
30
DOL /EBSA Proposes Extended Compliance/Applicability Date For Fiduciary Rule and Related Exemptions From April 10, 2017 to June 9, 2017
The Trump administration is going to review whether or not the Fiduciary rule as created by the Obama administration should go into effect. On February 3, 2017, the President issued a memorandum directing the DOL/EBSA to examine the Fiduciary rules and the new and revised prohibited transaction exemptions to determine if such changes are not cost effective and may actually result in Americans having reduced access to retirement information, financial advice and investments.
The new definition of fiduciary was to go into effect as of April 10, 2017, as were various prohibited transaction exemptions.
What Investments May be Bought and Sold by an IRA ?
IRA Contributions may be invested in almost any type of investment except
as described below and except when the transaction would be a prohibited
transaction. IRA funds may be invested in stocks, bonds, mutual funds, real
estate, mortgages, etc. However, many IRA funds with financial institutions
are still invested in savings accounts and time deposits.
31 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
What Investments Are Not Permissible for an IRA ?
Article III of IRS Model 5305-A reads as follows
Article III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other
property except in a common trust funds or common investment funds
(within the meaning of section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section
408(m))(3) which provides exception for certain gold, silver, and platinum
coins, coins issued under the laws of any state and certain bullion.
32 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
What Investments Are Not Permissible for an IRA ?
An IRA may not own any life insurance, including viatical contracts, and any
collectibles. A collectible is any type of tangible personal property such as
antique cars, oriental rugs, jewelry, art, etc. However, IRA funds may be
invested in certain gold and silver coins issued by the U.S., or in any coin
issued under the laws of any state after November 10, 1998, and certain
coins grandfathered in prior to the law which prohibited investment in
collectibles.
In addition, IRA funds cannot be combined with non-IRA funds. Exception –
IRA funds can be combined with other IRA funds if done within a common
trust or investment fund.
33 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Self-Directed and/or Trust Investments
General Rules
A. Regular, annual contributions to the IRA must be in cash, not property.
The Accountholder cannot contribute property he or she already owns to
the self-directed IRA. Rollovers and transfers from existing IRAs and QPs
can be in cash and/or property.
B. Life insurance is not a permissible IRA investment. Annuities can be IRA
investments but not regular life insurance contracts.
C. The assets of the IRA may not be commingles with any other property
except in a common trust or investment fund. Before attempting to
establish a common trust of investment funds, consult with legal counsel
as the Securities and Exchange Commission imposed stringent
requirements on these funds. Assets purchased in blocks using a
nominee name is permitted.
34 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Self-Directed and/or Trust Investments
General Rules - continued
D. Margin accounts may be used in the IRA. The law does not prohibit the
use of margin within an IRA. However, the prohibited transaction rules
must be complied with. Buying on margin brings into play the unrelated
business income tax rules as debt exists since margin, by definition
involves the extending of credit. We strongly suggest that an IRA
custodian or trustee very clearly communicated to the part extending the
credit (i.e. the margin) to the IRA that is only the IRA assets which can be
looked to satisfy any margin call. The individual or the IRA
custodian/trustee are not legally liable or permitted to make up any
“shortage” amount. Any type of guaranty, direct or indirect, would be a
prohibited transaction.
E. Collectibles are generally prohibited. Collectibles include art, antiques,
gems, most coins, precious metals, stamps, alcoholic beverages and any
other tangible property specified by the Secretary of the Treasury.
35 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Self-Directed and/or Trust Investments
General Rules - continued
F. Purchasing or selling an investment must not constitute a prohibited
transaction. An IRA can be subject to severe penalties, even
disqualifications, if it engages in a prohibited transaction. The prohibited
transaction rules basically exist to prevent a transaction where there could
be a conflict of interest between the IRA and the accountholder or certain
people or entities related to the accountholder.
Whenever you are dealing with self-directed investment directions from an
IRA accountholder protect your financial institution by documenting his or
her instructions in writing. A form such as CWF Form # 54-SD provides
clear instructions from the accountholder and places responsibility for the
transaction on the accountholder. It also sets out exactly how the
transaction will take place. The form serves as documentation for the
custodian/trustee, thereby providing protection for the financial institution.
36 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Overview of Prohibited Transactions
Generally, a prohibited transaction is any improper use of your traditional IRA
account or annuity by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family
(Spouse, ancestor, lineal descendant, and any spouse of lineal descendant).
The following are examples of prohibited transactions with a traditional IRA.
• Borrowing money from it
• Selling property to it
• Receiving unreasonable compensation for managing it
• Using is as security for a loan
• Buying property for personal use (present or future) with funds
37 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Overview of Prohibited Transactions - continued
You will note that the discussion covers traditional IRAs, but not Roth IRAs.
Roth IRAs became available in 1998. The IRS certainly could have added by
now a section discussing the PT’s in the Roth IRA section of Publication 590
if it had wanted to do so. The IRS must have a reason for not doing so. For
whatever reason, the IRS has chosen to not explain as fully as the IRS
should the consequence(s) of having a PT occur with respect to a Roth IRA.
It may be that the IRS fees the rules are so easy to understand and apply that
a separate discussion should not be necessary.
We at CWF disagree. We believe the IRS should try to assist individuals and
IRA/ROTH IRA custodians/trustees as much as possible. Some guidance is better than
no guidance. The IRS needs to explain the PT rules for Roth IRAs since there will be
some differences from traditional IRAs. Roth IRA custodians/trustees will want to be
vigilant to make sure they do not participate or assist with a PT transaction for Roth
IRAs. As with any PT situation, the individual may well harbor ill-feelings because of
the “tax losses” even though he or she wanted to do the investment.
38 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
DOL vs. IRS – Jurisdiction for IRA Transactions
The DOL has primary jurisdiction with respect to IRAs and prohibited
transactions. If a transaction is not a prohibited transaction the DOL has no
authority with respect to IRAs.
The DOL has the authority to issue administrative exemptions under both
ERISA and the Internal Revenue Code. The DOL may conditionally or
unconditionally exempt any fiduciary or transaction, or class of fiduciaries or
transactions, from all or part of the prohibited transaction rules.
Normally, an exemption is granted on a prospective basis. In limited
situations an exemption will be granted on a retroactive basis.
What surprises many people is the fact that there is no filing fee to be paid in
order to have DOL process a request for a PT exemption.
39 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
DOL vs. IRS – Jurisdiction for IRA Transactions - continued
Under Reorganization Plan # 4 of 1978, 5 U.S.C. App. 1, 92 Stat.3790, the
authority of the Secretary of the Treasury to issue regulations, rulings,
opinions, and exemptions under section 4975 of the Code has been
transferred, with certain exceptions not have relevant, to the Secretary of the
Labor.
The sole statutory sanction for engaging in the illegal transactions is the
assessment of an excise tax enforced by the Internal Revenue Service (IRS).
Thus, unlike participants in plans covered by Title I of ERISA, IRA owners do
not have a statutory right to bring suit against fiduciaries under ERISA for
violation of the prohibited transaction rules.
40 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Definition – Prohibited Transactions
A prohibited transaction means any direct or indirect –
A. Sale or exchange, or leasing, of any property between a plan and a disqualified person:
B. Lending of money or other extension of credit between a plan and a disqualified person:
C. Furnishing of goods, services, or facilities between a plan and a disqualified person;
D. Transfers to, or use by or for the benefit of, a disqualified person of the income or assets of a
plan;
E. Act by a disqualified person who is a fiduciary whereby he deals with income or assets of a
plan interest or for his own account; or
F. Receipt of any consideration for his own personal account by any disqualified person who is a
fiduciary from any party dealing with the plan in connection with a transaction involving the
income or assets of the plan.
The Terms “plan” and “disqualified person” are defined in Code section 4975(e) as set
forth later. These terms certainly cover the IRA plan and accountholder.
Thus, it would be impermissible for a person to sell any personal investments to the
IRA and it would be impermissible for the person to rent or use any of the assets of the
IRA.
41 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Definition – Prohibited Transactions - continued
Plan. For purposes of this section, the term “plan” means –
a. A trusts described in section 401(a) which forms a part of the plan, or a plan
described in section 403(a), which trust or plan is exempt from tax under
section 501(a).
b. An individual retirement account described in section 408(a)
c. An individual retirement account described in section 408(b)
d. An Archer MSA described in section 220(d)
e. A health savings account described in section 223(d)
f. A Coverdell education savings account described in section 530, or
g. A trust, plan, account, or annuity which, at any time, has been determined by
the Secretary to be described in any preceding subparagraph of this
paragraph.
42 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Definition – Prohibited Transactions - continued
Disqualified person. For purposes of this section, the term “disqualified person” means
a person who is –
a. a fiduciary;
b. A person providing services to the plan;
c. An employer any of whose employees are covered by the plan;
d. An employee organization any of whose members are covered by the plan;
e. An owner, direct or indirect, of 50 percent or more of –
i. The combined voting power of all classes of stock entitled to vote or the total value
of shares of all classes of stock of a corporation,
ii. The capital interest if the profits interest of a partnership, or
iii. The beneficial interest of a trust or unincorporated enterprise, which is an employer
or an employee organization described in subparagraph(C) or (D);
f. A member of a family (as defined in paragraph (6)) of any individual described in
subparagraph (A), (B), (C), or (E);
43 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
***
***
Definition – Prohibited Transactions - continued
g. A corporation, partnership, or trust or estate of which (or in which) 50 percent or more of
i. The combined voting power of all classes of stock entitled to vote or the total value
of shares of all classes of stock of such corporation,
ii. The capital interest or profits interest of such partnership, or
iii. The beneficial interest of such trust or estate, is allowed directly or indirectly, or
held by persons described in subparagraph (A), (B), (C), (D), or (E);
h. An officer, director (or an individual having powers or responsibilities similar to those of
officers or directors), a 10 percent or more shareholder, or a highly compensated
employee (earning 10 percent or more of the yearly wages of an employer) of a person
described in subparagraph (C), (D), (E), or (G); or
i. A 10 percent or more (in capital or profits) partner or joint venturer of a person described
in subparagraph (C), (D), (E), or (G)., The Secretary, after consultation and coordination
with the Secretary of Labor or his delegate, may by regulation prescribe a percentage
lower than 50 percent for subparagraphs (E) and (G) and lower than 10 percent for
Subparagraphs (H) and (I).
44 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Definition – Prohibited Transactions - continued
A prohibited transaction means any direct or indirect –
A. Sale or exchange, or leasing, of any property between a plan and a disqualified person:
B. Lending of money or other extension of credit between a plan and a disqualified person:
C. Furnishing of goods, services, or facilities between a plan and a disqualified person;
D. Transfers to, or use by or for the benefit of, a disqualified person of the income or assets of a
plan;
E. Act by a disqualified person who is a fiduciary whereby he deals with income or assets of a
plan interest or for his own account; or
F. Receipt of any consideration for his own personal account by any disqualified person who is a
fiduciary from any party dealing with the plan in connection with a transaction involving the
income or assets of the plan.
The Terms “plan” and “disqualified person” are defined in Code section 4975(e) as set
forth later. These terms certainly cover the IRA plan and accountholder.
Thus, it would be impermissible for a person to sell any personal investments to the
IRA and it would be impermissible for the person to rent or use any of the assets of the
IRA.
45 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Definition – Prohibited Transactions - continued
3. Fiduciary. For purposes of this section, the term “fiduciary” means a person who
a. Exercises any discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control respecting
management or disposition of assets,
b. Renders investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of such plan, or has any
authority or responsibility to do so, or
c. Has any discretionary authority or discretionary responsibility in the
administration of such plan. Such term includes any person designated under
section 405(c)(1)(B) of the Employee Retirement Income Security Act of
1974.
4.Stockholdings. For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be taken
into account indirect stockholdings which would be taken into account under section
267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated
as providing that the members of the family of an individual are the members within the
meaning of paragraph(6).
46 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Definition – Prohibited Transactions - continued
5. Partnerships; trusts. For purposes of paragraphs(2)(e)(ii) and (iii), (G)(ii) and (iii)
and (I) the ownership of profits or beneficial interests shall be determined in
accordance with the rules for constructive ownership of stock provided in section
267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be
treated as providing that the members of the family of an individual are the
members within the meaning of paragraph (6).
6. Member of family. For purposes of paragraph (2)(F), the family of any individual
shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal
descendant,
CWF Comment. Both IRS and DOL have written that siblings will also be family
members for purposes of the PT rules.
47 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Common Prohibited Transactions
• The accountholder sells or buys something from his or her IRA. For example, the
IRA account holds 1,000 shares of AT&T and the individual pays the IRA for these
shares, Even if the fair market value is paid, this is a prohibited transaction.
• The accountholder pledges his or her IRA as collateral for a personal loan.
• The accountholder’s IRA owns real estate which is leased to a relative or
controlled business.
• The financial institution which is the IRA trustee sells investments which it owns to
the IRA.
• The financial institution which is the IRA trustee is paid commissions by a mutual
fund for the volume of purchases/sales of its mutual funds by numerous IRAs.
48 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Reasonable Compensation
The BICE and the Impartial Conduct Standards require that the total compensation
received by a financial institution, its advisers, and any affiliates is reasonable.
This standard or requirement is not new. It is long established.
It is set forth in ERISA section 408((b)(2) and Code section 4975(d)(2). It also applies
to a fiduciary under the common law of agency and trusts.
This requirement applies to a service provider even when the service provider is not a
fiduciary.
It must be set forth in the contract for IRA and non-ERISA plan retirement investors.
49 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Reasonable Compensation - continued
Total compensation is determined by aggregating direct compensation paid by the IRA
or plan and indirect compensation paid by a third party.
The important determination is whether the compensation is reasonable in relation to
everything the investor receives. No single factor is determinative. The particular facts
and circumstances existing at the time of the recommendation are to be reviewed in
determining if the compensation is unreasonable. If there is a bundling, every item in
the bundle is to be considered.
Whether compensation being received is reasonable is determined by considering the
market. One is to review the complexity of the investment product, the size of the
investments, the other services being provided and the market pricing of identical and
similar products and services.
50 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Reasonable Compensation - continued
Burden of Proof – To be Borne by the Financial Institution or service provider, as applicable.
The fact that another Fiduciary might sign-off and agree to pay the fees as charged
does not negate the fact that the fees must be reasonable.
Although not required, an institution may seek an impartial review of its fee structure to
protect against situations of unreasonable compensation.
51 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
The Statutory Class Exemption
Bank’s Own Time Deposit – Needs to be authorized by the IRA plan or the
pension plan
Example.
You may also instruct us in writing to invest your traditional IRA into one or
more of the savings or time deposit instruments which we are offering at that
time. You expressly authorize this even though we are acting as the IRA
trustee of your IRA. Our name is set forth on the IRA application. Such
deposit account must bear a reasonable rate of interest as determined by the
terms of the deposit instruments and the short and long term economic
conditions. The terms of any such accounts are incorporated by reference
into this agreement
52 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Transition Rule
June 7, 2016 to April 10, 2017
Fiduciary Investment Advice
The new definition of a fiduciary is effective as of June 7, 2016, the date the DOL
issued the final regulation and the Best Interest Contract Exemption (BICE) is effective
as of the same date. Financial institutions and IRAs and Plans may comply with the
new rules immediately if they would choose to do so.
A modified version of the old definition of fiduciary continues to apply between June 7,
2016 and April 10, 2017. This is a transition period. The new fiduciary rules are
effective as of 4-10-2017 which is the applicability date. Between June 7, 2016 and
April 10, 2017 a person is deemed to be rendering “investment advice” only if the
person renders advice as to the value of an investment or makes a recommendation as
to the advisability of investing in purchasing, or selling such investment and such
person either directly or indirectly has discretionary authority or control regarding such
investments or renders any such advice on a regular basis pursuant to a mutual
agreement, arrangement or understanding written or otherwise between such person or
a fiduciary that such services will serve as the primary basis for investment decisions
and that such person will render individualized investment advice based on the
particular needs of the IRA owner.
53 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Code Section 4975(e)(3)
3. Fiduciary. For purposes of this section, the term “fiduciary” means a person who
a. Exercises any discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control respecting
management or disposition of assets,
b. Renders investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of such plan, or has any
authority or responsibility to do so, or
c. Has any discretionary authority or discretionary responsibility in the
administration of such plan. Such term includes any person designated under
section 405(c)(1)(B) of the Employee Retirement Income Security Act of
1974.
54 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
***
A Fiduciary’s Legal Responsibility
Liability for Breach of Fiduciary Duty
Section 409. (a) Any person who is a fiduciary with respect to a plan who breaches
any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title
shall be personally be liable to make good to such plan any losses to the plan resulting
from such breach, and to restore to such plan any profits of such fiduciary which have
been made through use of assets of the plan by the fiduciary, and shall be subject to
such other equitable or remedial relief as the court may deem appropriate, including
removal of such fiduciary. A Fiduciary may also be removed for a violation of section
411 of this act.
(b)No fiduciary shall be liable with respect to a breach of fiduciary duty under this title if
such breach was committed before he became a fiduciary or after he ceased to be a
fiduciary
Pension plan versus IRA
55 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
DOL’s Old Definition of Fiduciary
1975 regulation provided for a five-part test to determine if a person was a
fiduciary. Under this rule a person is a fiduciary only if he or she :
1. Makes recommendations on investing in, purchasing or selling securities or other
property: or gives advice as to their value;
2. On a regular basis
3. Pursuant to a mutual understanding that the advice
4. Will server as a primary basis for investment decisions; and
5. Will be individualized to the particular needs of the IRA or plan.
A person who did not meet all five conditions was and is not a fiduciary. The
current EBSA believes there are situations where a person should be a
fiduciary even though they are not one under existing law. One example, an
investment representative selling an investment product to an IRA owner
making a rollover contribution is not a fiduciary since he or she most likely is
not performing services on a “regular basis”. So, the new rule has been
proposed with the goal to make many more individual fiduciaries.
56 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
DOL’s New Definition of Fiduciary Investment Advice – Effective Date ?
Sec. 2510.3-21 Definition of “Fiduciary” Investment Advice
(A) Investment Advice. For purposes of section 3(21)(A)(ii) of the Employee Retirement
Income Security act of 1974 (Act) and section 4975(e)(3)(B) of the Internal Revenue Code
(Code), except as provided in paragraph (b) of this section, a person renders investment
advice with respect to moneys or other property of a plan or IRA described in paragraph
(f)(2) of this section if —
(1) Such person provides, directly to a plan, plan fiduciary, plan participant or beneficiary,
IRA, or IRA owner the
Following types of advice in exchange for a fee or other compensation, whether direct or
indirect.
(i) A recommendation as to the advisability of acquiring, holding, disposing or
exchanging securities or other property, including a recommendation to take a
distribution of benefits or a recommendation as to the investment of securities or
other property to be rolled over or otherwise distributed from the plan or IRA.
(ii) A recommendation as to the management of securities or other property, including
recommendations as to the management of securities or other property to be
rolled over or otherwise distributed from the plan or IRA;
57 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
DOL’s New Definition of Fiduciary Investment Advice - continued
Sec. 2510.3-21 Definition of “Fiduciary” Investment Advice
(iii) An appraisal. Fairness opinion, or similar statement whether verbal or written
concerning the value of securities or other property if provided in connection
with a specific transaction or transactions involving the acquisition, disposition,
or exchange, of such securities or other property by the plan or IRA;
(iv) A recommendation of a person who is also going to receive a fee or other
compensation for providing any of the types if advice described in paragraphs (i)
through (iii); and
2) Such person, either directly or indirectly (e.g., through or together with any affiliate), --
(i) Represents or acknowledges that it is acting as a fiduciary within the meaning of
the Act with respect to the advice described in paragraph (a)(1) of this section; or
(ii) Renders the advice pursuant to a written or verbal agreement, arrangement or
understanding that the advice is individualized to, or that such advice is
specifically directed to, the advice recipient for consideration in making
investment or management decisions with respect to securities or other property
of the plan or IRA.
58 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Requirement – Investment/Distribution Recommendation
Investment advice will be found to exist if the IRA custodian furnishes one of
following four communications:
1. A ‘’recommendation’’ related to any distribution, rollover or transfer from an IRA or
plan, including consideration of whether it should be done, in what amount and to
what destination.
2. A “recommendation” how to invest the IRA assets after decision has been made to
take a distribution, or do a rollover or transfer.
3. A “recommendation” how to invest the IRA assets in general - what assets should
be acquired, retained, disposed, exchanged, etc.
4. A “recommendation” how to invest/manage the IRA assets, considering
recommendations on investment policies/strategies, portfolio composition, the
possible selection of hiring a third person to provide investment advice, manage
services or to have brokerage versus advisory arrangements.
59 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Requirement – Investment/Distribution Recommendation - continued
An IRA custodian which does not make an investment recommendation
should not have concerns arising from the investment advice rules.
An IRA custodian which does not receive any compensation for making the
investment recommendation is not furnished an investment recommendation
to the individual is not furnshing an investment recommendation. That is, the
individual makes his or her investment decision without the receipt of any
investment advice recommendation.
The final regulation defines a “recommendation” as the communication that based on
its content and context would reasonable be understood that the recipient should act or
refrain from taking a particular course of action. The more the communication is
individually tailored the more likely it will be viewed as a recommendation. Furnishing
investment educational materials is not a “recommendation”.
60 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Prohibited Transaction Exemptions
Certain PTs are given exceptions called exemptions. These transactions are
permissible under the law even though they do constitute a PT. Sufficient safeguards
are considered to exist. There are really three types of exemptions under the law;
a. Statutory exemptions
b. Class exemptions
c. Individual exemptions
The statutory exemptions are set forth in Code section 4975(d) and ERISA section 408.
Most of these exemptions do not apply to IRAs
61 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Prohibited Transaction Exemptions
Certain PTs are allowed to occur because an exemption permits it. These transactions
are permissible under the law even though they do constitute a PT. Sufficient
safeguards are considered to exist. There are really three types of exemptions under
the law;
a. Statutory exemptions
b. Class exemptions
c. Individual exemptions
The statutory exemptions are set forth in Code section 4975(d).
Most of these exemptions do not apply to IRAs
62 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Actions by a Financial Institution Not Rising
to the Level of Being a Recommendation
1. General Financial Information/Communications
As long as a reasonable person would not view furnishing the following information
as an investment recommendation, such will not be an investment advice
recommendation.
a. Marketing materials
b. Market data
c. Newsletters (general)
d. General research
e. Prospectuses
f. Speeches and reports of conferences
g. Price Quotes
63 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Actions by a Financial Institution Not Rising - continued
to the Level of Being a Recommendation
2. General Investment Education Information/Communications
a. Plan provisions relating to participation, distributions, investment options and
procedures and related fee and expense information.
b. General retirement information.
c. General Financial and investment information. Cannot discuss specific
investment option.
d. General asset allocation models and interactive materials.
64 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Actions by a Financial Institution Not Rising - continued
to the Level of Being a Recommendation
3. Investment options Platform – Made available to a fiduciary.
The furnishing of a platform of various investments is not a recommendation of
investment advice as long as the platform sponsor is independent of the plan
fiduciary.
The platform sponsor must disclose in writing to the plan fiduciary that the platform
does not provide impartial advice or advice in a fiduciary capacity.
65 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Conflict of Interest and Revenue Issues
Three Methods to Comply with the New DOL Rules for Conflicts of Interest
and Revenue Issues
1. Use the Special Bank Networking Arrangement Rule.
2. Use the Level Fee Rule
3. Use the Best Interest Contract Exemption (BICE) Rule
66 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Use the Special Bank Network Arrangement Rule
A “Banking Network Arrangement: is a business arrangement relating to
employees of a bank, savings association or similar financial institution
referring bank customers to an unaffiliated registered investment adviser or
state authorized investment adviser, insurance company or a registered
broker or dealer so that the customers might purchase retail non-deposit
investment products. This arrangement must comply with applicable federal
banking, securities and insurance regulations.
A new DOL rule permits a bank employee who is an adviser or the bank itself
may receive compensation pursuant to a Bank Networking Arrangement
related to providing investment advice to an IRA owner as long as the advice
complies with the Impartial Conduct Standards. The IRA custodian must
affirmatively state that it and its advisers will in actuality follow the following
standards.
1. Provide investment advice that at the time of recommendation is in the IRA owner’s
best interest;
67 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Use the Special Bank Network Arrangement Rule
2. Such advice reflects the care, skill, prudence, and diligence that a prudent person
acting in a like capacity and familiar with the current situation would use after
considering the investment objectives, risk tolerance, financial circumstances, and
needs of the individual without regard to the needs or desires of any other person
or party, including the IRA custodian or any adviser of the IRA custodian.
3. The recommended transaction will not cause the payment of any reasonable
compensation to the IRA custodian, any affiliate or any adviser for services.
4. Statements must not be materially misleading at the time they are made regarding
the commended transaction, fees and compensation, material conflicts of interest
and any other information relevant to making the investment decision.
68 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Use the Level Fee Rule
A level fee is a set fee that does not vary with the particular investment
recommended. Therefore, if a fee is commission based or transaction based
it cannot qualify as a level fee. A fee is based on a formula based on a fixed
percentage of the value of the assets is a level fee.
Financial institutions (and any adviser) qualifies as a level fee fiduciary as
long as the only fee or compensation received is a level fee. This “level fee”
must be disclosed in advance of any transaction.
A financial institution which is a level fee fiduciary qualifies for special
exemptive relief and is not required to meet the standard requirements of the
BICE. It allows to meet the following requirements:
1. The financial institution (and advisers) must furnish a written statement to the
individual acknowledging its fiduciary status.
2. The financial institution (and advisers) must comply with the Impartial Conduct
standards.
69 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Use the Level Fee Rule - continued
3. In the case of a recommendation to roll over from an ERISA plan to an
IRA, the financial institution must explain by giving specific reasons why
the recommendation to make the specific rollover is in the individual’s best
interest.
4. In the case of a recommendation to roll over from another IRA, the financial
institution must explain by giving specific reasons why the recommendation to
make the specific rollover is in the individual’s best interest.
5. In the case of a recommendation to switch from a commission-based account to a
level fee arrangement the financial institution (and advisers) must explain by giving
specific reasons why the recommendation to make the specific rollover is in the
individual’s best interest, including the services that will be provided for the fee.
70 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Best Interest Contract Exemption (BICE)
The exemption requires Financial Institutions to acknowledge their fiduciary
status and the fiduciary status of their Advisers in writing. The Financial
Institution and Advisers must adhere to enforceable standards of fiduciary
conduct and fair dealing with respect to their advice. In the case of IRAs and
non-ERISA plans, the exemption requires that the standards be set forth in an
enforceable contract with the Retirement Investor. Under the exemption’s
terms, Financial Institutions are not required to enter into a contract with
ERISA plan investors, but they are obligated to adhere to these same
standards of fiduciary conduct, which the investors can effectively enforce
pursuant to ERISA section 502(a)(2) and (3). Likewise, “Level Fee”
Fiduciaries that, with their Affiliates, receive only a Level Fee in connection
with advisory or investment management services, do not have to enter into a
contract with Retirement Investors, but they must provide a written statement
of fiduciary status, adhere to standards of fiduciary conduct, and prepare a
written documentation of the reasons for the recommendation.
71 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Best Interest Contract Exemption (BICE) - continued
In order to protect the interests of the plan participants and beneficiaries, IRA
owners and plan fiduciaries, the exemption requires the Financial Institution
to acknowledge fiduciary status for itself and its Advisers. The Financial
Institutions and Advisers must adhere to basic standards of impartial conduct.
In particular, under this standards-based approach, the Adviser and Financial
Institution must give prudent advice that is in the customer’s best interest,
avoid misleading statements, and receive no more than reasonable
compensation. Additionally, Financial Institutions generally must adopt
policies and procedures reasonably designed to mitigate any harmful impact
if conflicts of interest, and disclose basic information about their conflicts of
interest and the cost of their advise.
1
2
72 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Use the Best Interest Contract Exemption (BICE)
The DOL has created a new exemption called the Best Interest Contract
Exemption (BICE). It is designed to allow an IRA custodian to provide
investment advice in the best interest of the individual, while allowing the IRA
custodian to receive certain types of compensation and fees from the
individual and third parties. AN IRA custodian qualifies to use this new
exemption only if certain conditions as discussed below are met. These rules
are long and complicated with many special rules.
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Use the Best Interest Contract Exemption (BICE) - continued
In general, the IRA custodian (and its employees) must enter into an
enforceable contract with the IRA owner wherein both IRA custodian and any
adviser must acknowledge being a fiduciary. This enforceable contact must
be signed prior to or at the same time the first recommended investment is
made. The contract may be signed in writing or electronically. Such contract
cannot include provisions limiting the liability of the IRA custodian/trustee or
its employees, requiring forfeiture of a class action lawsuit, mandatory use of
arbitration and liquidated damage provisions.
These contract provisions may be set forth in standard account opening
forms or documents.
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Use the Best Interest Contract Exemption (BICE) - continued
The IRA custodian must affirmatively state in the contract that is has
established and that it and its advisers will follow the Impartial Conduct
Standards as discussed below and comply with various disclosure and
recordkeeping requirements. The requirements differ for IRA owners with
existing contracts and those without an existing contract.
IRA owners without an existing contract must:
1. Provide investment advice that at the time of recommendation is in the IRA owner’s
best interest;
2. Such advice must reflect the care, skill, prudence, and diligence that a prudent
person acting in a like capacity and familiar with the current situation would use
after considering the investment objective, risk tolerance, financial circumstances,
and needs of the individual without regard to the needs or desires of any other
person or party, including the IRA custodian or any adviser of the IRA custodian.
75 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Use the Best Interest Contract Exemption (BICE) - continued
3. The recommended transaction will not cause the payment of any unreasonable
compensation to the IRA custodian, any affiliate or any adviser for services.
4. Statements must not be materially misleading at the time they are made regarding
the recommended transaction, fees and compensation, material conflicts of interest
and any other information relevant to making the investment decision
The IRS custodian is entitled to receive fees or compensation on account of this BICE
only if it has complied with the recordkeeping requirements and its previously notified
the DOL of its intention to use the BICE.
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Use the Best Interest Contract Exemption (BICE) - continued
IRA owners with an existing contract must meet the same requirements, but they are
not required to sign the new and revised contract.
Such owners will be deemed to have consented to the new contract terms if they are
furnished an amendment and given the opportunity to terminate the contract. They
have 30 days to terminate the contract. If the contract is not so terminated, the
amended or revised contract becomes effective.
The old five part test to be a fiduciary has been repealed and replaced with a new test.
Now an “investment advice fiduciary” is a person (or entity) who renders investment
advise for a fee or other compensation.
77 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Important DOL/NICE Compliance Dates
April 10, 2017 to January 1, 2018
There is a longer transition period with respect to the BICE. In order for an IRA trustee
to gain the tax relief there must be compliance with the BICE rules by January 1, 2018.
This is when the contract provisions become effective as do the full disclosure
requirements. Between April 10, 2017, through January 1, 2018 a financial institution is
granted PT relief for its transactions even though the new contract and disclosure
requirements are not being met.
78 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
BICE Requirements
Financial Institution Must Notify DOL It Will Use BICE and Must Comply With
Record Keeping Requirements
This is a requirement to the BICE. A financial institution must notify the DOL by
providing an email to [email protected] that it will use the BICE. The notice can be
generic. That is, it will need to not mention any specific IRA or any specific plan. If the
notice requirement has been met, then the financial institution may receive
compensation. The notice remains in effect until it would be revoked by the financial
institution.
The financial institution must maintain for six years the records necessary for certain
persons to determine whether the conditions of the BICE have been met with respect to
each specific transaction. Upon request the following individuals must have the right to
examine these records during normal business hours:
1. Any authorized employee or representative of the IRS;
2. Any plan fiduciary which has participated in an investment transaction pursuant to
the BICE,
79 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
BICE Requirements - continued
3. Any authorized employee or representative of a plan fiduciary which has
participated in an investment transaction pursuant to the BICE;
4. Any contributing employer and any employee organization whose employees or
members are covered by the plan;
5. An authorized employee or representative of a contributing employer and any
employee organization which has participated in an investment transaction
pursuant to the BICE; or
6. Any IRA owner or plan participant or inheriting beneficiary or an authorized
representative if such persons.
None of the individuals are authorized to examine records regarding a recommended
transaction of another retirement adviser, privileged trade secrets or privileged
commercial or financial information of the financial institution or information identifying
other information.
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BICE Requirements - continued
When a financial institution refuses to furnish requested information for a reason stated
above, it has 30 days in which to inform the requestor for denying the request and that
the DOL if requested could request such information.
If the required records are not maintained, there is a loss of exemption only for that
transaction or transactions for which the records are missing or have not been
maintained. Other transactions will still qualify for the BICE if those records are
maintained. If the records are lost or destroyed, due to circumstances beyond the
control of the financial institutions, then no prohibited transaction will be considered to
have occurred solely on the basis of the unavailability of those records.
The financial institution is the party who is responsible to pay the ERISA civil penalty
under section 502 or the taxes under section 4975 if the required records are not
maintained.
81 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
BICE Requirements – Maintain Website
In order to meet BICE requirements, the financial institution is required to
maintain a Web site, freely accessible by the public which must be set forth
the following:
1. A discussion of its IRA business model(s) along with a discussion of the
inherent material conflicts of interest.
2. A schedule of typical fees and service charges
3. A copy of a model contract along with required disclosures. Such must be
reviewed quarterly, and if applicable, updated within 30 days. It is also
possible to set forth a notice describing the contractual terms rather than
including it in the contract.
4. A written description of the financial institution’s policies and procedures
relating to conflict mitigation and incentive practices so an IRA owner is
able to determine how seriously the financial institution is to guard against
conflicts of interest.
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BICE Requirements – Maintain Website - continued
5. A list of third parties with whom the financial institution has business
arrangements that result in third party payments being made to the
financial institution or its advisers for recommending investments to the
IRA owner. In addition, the financial institution must furnish a statement
setting forth what product or services it furnishes the third party in
exchange for the third party payments.
6. An explanation of the financial institutions policies for paying
compensation and other incentive arrangements to its advisers for: (i)
recommending the investments being sold by a specific third party; (ii)
recommending specific investments of a specific third party or for an
adviser to move from another financial institution to this financial institution
or for an adviser to stay with the financial institution and full and fair
description of any payout or compensation grids. There is no requirement
to set forth information for any individual adviser.
83 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Understanding the New DOL BICE Rules When A Financial Institution
has Sales of Proprietary Products and Other Non-deposit Investment
Products
The FDIC has issued a pocket guide of financial institutions covering
uninsured investment products. This may be found at the FDIC’s website.
(www.fdic.gov)
If a financial institution serving as an IRA custodian is receiving compensation
which to any degree is on account of “IRA business going to a third party
vendor’’, then the financial institution is going to want to comply with Best
Interest Contact Exemption rules unless it may use the Bank Networking or
Level Fee rules.
The DOL in the final regulation has made clear that the Best Interest Contract
Exemption may still be used by a financial institution even if it imposes
restrictions requiring use of products or investments that generate third party
fees or are proprietary products/investments as long as all exemption
requirements are met.
The key is, all exemption requirements must be met.
84 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Understanding the New DOL BICE Rules When A Financial Institution
has Sales of Proprietary Products and Other Non-deposit Investment
Products - continued
The Financial institution and an advisor must ensure that its recommendation
is prudent, compensation and fees being earned are reasonable, all conflicts
are disclosed and the conflicts are managed in such a way that the Adviser’s
focus is on the customer’s best interest.
Proprietary products of the financial institution for purposes of the BICE are
defined to be products that are managed, issued, or sponsored by the
financial institution or any affiliate.
Third party payments exist when a financial institution is being paid by
someone other than the IRA owner or the IRA. For example, the financial
institution is paid by a third party the following types of compensation as a
result of an IRA transaction: revenue sharing payments, gross dealer
concessions, sales charges that are not paid directly by the IRA, 12b-1 fees,
distribution referral or solicitation fees, volume based fees, fees for seminars,
training or educational and any other compensation or consideration.
85 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Understanding the New DOL BICE Rules When A Financial Institution
has Sales of Proprietary Products and Other Non-deposit Investment
Products - continued
Both the financial institution and adviser are deemed to satisfy the Best
Interest Standard of Section VIII(d) of BICE if:
1. The IRA owner is informed in writing that the Adviser is limited regarding
the investment he or she may recommend. Such limitations must be
defined and explained. Such writing must be furnished prior to or at the
same time as the transaction occurs. Such written explanation must be
clear and prominent that the Institution offers proprietary products and/or
receives third party payments on account of its recommendations or
assistance with respect the buying, selling, or holding the investment
being made available.
There must be an explanation that the limiting of the investments is a
Material Conflict of Interest.
86 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Understanding the New DOL BICE Rules When A Financial Institution
has Sales of Proprietary Products and Other Non-deposit Investment
Products - continued
2. The Financial Institution must disclose in writing what it will do in
exchange for the third party payments and also disclose the services or
consideration it will furnish to any other party for such payments. The
Financial institution must determine it will receive only reasonable
compensation form all third parties and the investment limitations will not
result in imprudent investment recommendations for the IRA owner. It
must state its rationale for its decisions and positions.
3. The Adviser must make his or her “limited” investment recommendation to
the IRA owner using the prudent person rule. That is, his or her
recommendation must reflect the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent person acting in a
like capacity and familiar with such matters would use in the conduct of an
enterprise of like character with like aims, based on the investment
objectives, risk tolerance, financial circumstances, and needs of the IRA
owner.
87 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Understanding the New DOL BICE Rules When A Financial Institution
has Sales of Proprietary Products and Other Non-deposit Investment
Products - continued
4. The Financial institution must define the compensation program applying
to its Advisers in such a way that it does not or reasonably would not be
expected to cause an Adviser to recommend to an IRA owner investments
which are imprudent for that person, or more in favor of the Adviser’s
interests rather than the IRA owner after considering the IRA owner’s
investment adjectives, risk tolerance, financial circumstances and other
needs.
5. The Financial institution must comply with the Web Disclosure Rules and
also disclose the fees charged and compensation earned with respect to
transaction.
The Financial institution must maintain a Web site freely accessible to the
public. Its business model for IRAs and describe the material conflicts of
this business model.
88 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Exemption for Purchases and Sales - Transactions, Including
Insurance and Annuity Sales and Purchases
This exemption permits a financial institution that is a service provider and an
IRA (or other plan) of the IRA owner (or other retirement investor) to engage
in a transaction to purchase of sell an investment since the financial institution
is not receiving compensation from third party. The following requirements
must be met to qualify to use this exemption. 1. The transaction is effected by the financial institution in the ordinary course of its
business;
2. The direct and indirect compensation received by the financial institution for
services rendered must not exceed what is reasonable compensation.
3. The terms of the transaction must as favorable to the IRA or IRA owner (or plan or
plan participants) as terms generally available to an unrelated party when there is
an arm’s length transaction.
89 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Exemption for Purchases and Sales - Transactions, Including
Insurance and Annuity Sales and Purchases - continued
This exemption is inapplicable in the following situations; 1. The compensation is received as a result of a principal transaction;
2. The adviser has or exercises any discretionary authority or discretionary control
with respect to the recommended transaction;
3. Robo advice
90 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Exemption for Purchases and Sales - Transactions, Including
Insurance and Annuity Sales and Purchases - continued
In order to meet the BICE requirements, the financial institution is required to
maintain a Web site, freely accessible by the public which must set forth the
following; 1. A discussion of its IRA business model(s) along with a discussion of the inherent
material conflicts of interest;
2. A schedule of typical fees and service charges;
3. A copy of a model contract along with required disclosures. Such must be reviewed
quarterly and if applicable, updated within 30 days. It is also possible to set forth a
notice describing the contractual terms rather than the contract.
4. A written description of the financial institution’s policies and procedures relating to
conflict mitigation and incentive practices so an IRA owner is able to determine how
seriously the financial institution is to guard against conflicts of interest.
91 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Exemption for Purchases and Sales - Transactions, Including
Insurance and Annuity Sales and Purchases - continued
5. A list of third parties with whom the financial institution has business arrangements
that result in third party payments being made to the financial institution or its
advisers for recommending investments to the IRA owner. In addition, the financial
institution must furnish a statement setting forth what is furnishes the third party in
exchange for the third party payments.
6. An explanation of the financial institution’s polices for paying compensation and
other incentive arrangements to its advisers for;
(i) recommending the investments being sold by a specific third party:
(ii) recommending specific investments of a specific third party or for an
Adviser to move from another financial institution to this financial
institution; or for an Adviser to stay with the financial institution and a full
and fair description of any payout or compensation grids. There is no
requirement to set forth information for any individual adviser.
92 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
A New Exemption For Certain Principal Transactions
The new exemption applies to a riskless principal transaction, but the BICE does not
apply to a principal transaction.
A riskless principal transaction occurs when there is a transaction in which the financial
institution after having received an order from the IRA owner or other retirement
investor to but or sell an investment product, purchases or sells the same investment
product for the financial institutions own account to offset the contemporaneous
transaction with the IRA owner or other retirement investor.
A principal transaction occurs when there is a purchase or sale of an investment
Product if a financial institution and/or its advisers and an IRA and/or the IRA owner is
purchasing from or selling to an IRA or a plan on behalf the financial institutions own
account. A principal transaction will also occur if the sale or purchase involves another
party controlling, controlled by, or under common control with the financial institution.
93 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
A New Exemption For Certain Principal Transactions - Continued
The DOL sees the possibility of acute conflicts of interest in a principal transaction as
the financial institution is on one side of the transaction (buying or selling and asset)
and the IRA and IRA owner are on the other side (selling or buying of an asset). Even
so, an example will be granted under the BICE if certain protective requirements are
met.
The DOL has created a new exemption for principal transactions. It permits investment
advice fiduciaries of an IRA and a Plan to sell and/or purchase certain debt securities
and other investments on principal transactions and riskless principal transactions. The
DOL expanded this new exemption to include all riskless principal transactions. That
is, it covers all investments and not just debt instruments.
However, for purposes of BICE, sales of insurance, annuity contracts or mutual fund
shares are not treated as principal transactions. That is, the DOL has concluded that
mutual fund transactions may occur on a riskless principal basis.
94 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
A New Exemption For Certain Principal Transactions - Continued
BICE Never Applies to the Following Transactions.
1. With respect to the recommended investment transaction where the Adviser has
any discretionary authority or control or exercises any discretionary authority or
control.
2. When compensation is received as a result of a principal transaction.
3. When compensation is received as a result of investment advice furnished to an
IRA owner or other retirement investor solely by an interactive Web site. The
individual furnishes personal information and the advice is provided without the
participation of an individual adviser. Exception, compensation may be received by
a robo-advice provider as long as the financial institution is a level fee fiduciary that
complies with requirements applying to a Level Fee Fiduciary.
95 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
A New Exemption For Certain Principal Transactions - Continued
4. The plan is covered by Title 1 of ERISA and the financial institution, any affiliate or
any adviser is the employer of the employees covered by the plan. Obviously, this
is inapplicably for IRAs.
5. The Plan is covered by Title 1 of ERISA and the financial institution or adviser (or
any affiliate) is named fiduciary or plan administrator of such plan that was selected
to provide advice to the Plan by a fiduciary who is not independent. Obviously, this
is inapplicable for IRAs.
96 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Exemption for Pre-Existing Transactions (Limited Grandfathering)
This exemption permits the continued receipt if compensation for the continuation of a
systematic purchase program established before April 10, 2017.
This exemption permits the continued receipt of a compensation for a recommendation
to hold an investment that was established before April 10, 2017.
The DOL’s goal for this exemption is to assure financial institutions and advisers that
they continue to receive the compensation agreed to be paid before April 10, 2017 for
continuation of the investment transactions occurring prior to April 10, 2017.
This exemption has the following conditions.
1. The compensation being paid is due to an agreement or understanding that was
created prior to April 10, 2017, and such agreement or understanding has not
expired or come up for renewal after April 10, 2017.
97 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Exemption for Pre-Existing Transactions (Limited Grandfathering) - continued
2. The prior investment transaction was not otherwise a non-exempt prohibited
transactions on the date it occurred.
3. The compensation is not received on account of additional amounts contributed to
the previously acquired investments. It is permissible to exchange funds within a
mutual fund company or variable annuity contract pursuant to an exchange feature
or a rebalancing provision as long as it was established prior to April 10, 2017 and
as long as the financial institution and advisers do not receive increased
compensation either as fixed dollar amount or a percentage of assets than they
were entitled to receive prior to April 10, 2017.
4. The amount of compensation paid to the financial institution, adviser or any affiliate
on account of the transaction is reasonable.
98 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
Exemption for Pre-Existing Transactions (Limited Grandfathering) - continued
5. Any investment recommendations made after April 10, 2017, by the financial
institution or an adviser must reflect the care, skill, prudence and diligence that a
prudent person acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of like character and with like aims, based on the
investment objectives, risk tolerance, financial circumstances and need of the IRA
owner or the retirement investor and are made with no consideration of the needs
or interests of the financial institution or its advisers.
The purpose of the exemption is not to exempt future advice and exempt future
investments from the important prohibite4d transaction rules and the BICE. The use of
BICE is only necessary if investment advice is made after April 10, 2017 with respect to
the pre-existing investments.
99 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
BICE Never Applies to the Following Transactions
1. With respect to the recommended investment transaction where the Adviser has
any discretionary authority or control or exercises any discretionary authority or
control.
2. When compensation is received as a result of a principal transaction.
3. When compensation is received as a result of investment advice furnished to an
IRA owner or other retirement investor solely by and interactive Web site. The
individual furnished personal information and the advice is provided without the
participation of an individual adviser. Exception, compensation may be received by
a robo-advice provider as long as the financial institution is a level fee Fiduciary.
4. The Plan is covered by Title I of ERISA and the financial institution, any affiliate or
any adviser is the employer of the employees covered by the plan. Obviously, this
is inapplicable for IRAs.
5. The Plan is covered by Title I of ERISA and the financial institution or adviser (or
any affiliate) is named fiduciary or plan administrator of such plan that was selected
to provide advice to the Plan by a fiduciary who is not independent. Obviously, this
is inapplicable for IRAs.
100 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
BICE Will Apply to Riskless Principal Transactions
But Not to Principal Transactions
The BICE applies to a riskless principal transaction, but the BICD does not apply to a
principal transaction.
A riskless principal transaction occurs when there is a transaction in which the financial
institution after having received an order from the IRA owner or other retirement
investor to buy or sell an investment product, purchases or sells the same investment
product for the financial institutions own account to offset the contemporaneous
transaction with the IRA owner or other retirement investor.
A principal transaction occurs when there is the purchase or sale of an investment
product if a financial institution and/or its adviser and an IRA and/or the IRA owner is
purchasing from or selling to an IRA or a plan on behalf of the financial institutions own
account. A principal transaction will also occur if the sale or purchases involves
another party controlling, controlled by, or under common control with the financial
institution.
101 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
BICE Will Apply to Riskless Principal Transactions
But Not to Principal Transactions - continued
The DOL sees the possibility of acute conflicts of interest in a principal transaction as
the financial institution is on one side if the transaction (buying or selling an asset) and
the IRA and IRA owner are on the other side (selling or buying of an asset). Even so,
an exemption will be granted under the BICE if certain protective requirements are met.
However, for purpose of BICE, sales of insurance, annuity contracts or mutual funds
shares are not treated as principal transactions. That is, the DOL has concluded that
mutual fund transactions may occur on a riskless basis.
An exemption applies to a riskless principal transaction. An exemption does not apply
a principal transaction. The DOL has created a new exemption for principal
transactions. It permits investment advice fiduciaries of an IRA and a Plan to sell
and/or purchase certain debt securities and other investments in principal transactions
and riskless principal transactions. The DOL expanded this new exemption to include
all riskless principal transactions. That is, it covers all investments and not just debt
instruments.
102 Copyright © Collin W. Fritz & Associates, Ltd. "The Pension Specialist"
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