White Paper - Disclosure of Noncash Compensation and Third-Party Payments in Response to the DOL Fiduciary Rule
Bank, Trust and Retirement Advisory Committee
Broker/Dealer Advisory Committee
Chief Compliance Officer Committee
Operations Committee
Pension Committee
Pension Operations Advisory Committee
Sales and Marketing Committee
Small Funds Committee
Transfer Agent Advisory Committee SUBJECTS: Compliance
Disclosure
Distribution
Fees and Expenses
Operations
Recordkeeping
Transfer Agency RE: White Paper - Disclosure of Noncash Compensation and Third-Party Payments in Response to the DOL Fiduciary Rule
We are pleased to announce the publication of a new white paper, Disclosure of Noncash Compensation and Third-Party Payments in Response to the DOL Fiduciary Rule.
On April 6, 2016, the Department of Labor (DOL) issued a final rule defining who is a “fiduciary” under Section 3(21) of the Employee Retirement Income Security Act of 1974 and Section 4975(e)(3) of the Internal Revenue Code as a result of giving investment advice to an employee benefit plan, plan fiduciary, plan participant or beneficiary, individual retirement account (IRA), or IRA owner. The final rule treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan or IRA as fiduciaries in a wider array of advice relationships.
Intermediaries operating as fiduciaries under the Best Interest Contract exemption (BICE)[1] are required to disclose all fees, compensation, and material conflicts of interest[2] to retirement investors. Use of the BICE requires certain disclosures to occur either before or concurrent with a recommended investment transaction, certain information to be provided upon request, and additional disclosures to be included on a publicly available website that is reviewed and updated as needed each quarter. The transaction and website disclosure provisions have an applicability date of January 1, 2018.
An ICI working group of fund companies, intermediaries, and service providers drafted this paper to explore the disclosure of noncash compensation and third-party payments in response to the final rule. The paper identifies potential data sources intermediaries can use to help fulfill their disclosure requirements. It also highlights various types of information that fund companies and intermediaries may need to share to support disclosure.
The white paper can be obtained here and is published as part of the ICI DOL Fiduciary Duty Rule Resource Center.
Questions or comments on the paper may be directed to the undersigned (jeff.naylor@ici.org; 202-326-5844).
Jeff Naylor
Director, Operations and Distribution
endnotes
[1] 81 Fed. Reg. p. 21002 (April 8, 2016). Along with the final rule, the DOL issued a number of prohibited transaction exemptions, including the BICE. The Best Interest Contract is an agreement between the retirement investor and the financial institution that, if the specific terms outlined within the exemption are met (e.g., written acknowledgment of the adviser’s and financial institution’s fiduciary duty to the investor, disclosure of compensation and other fee information), allows “reasonable” compensation otherwise prohibited under the final rule to be paid.
[2] 81 Fed. Reg. p. 21084. A material conflict of interest exists when an adviser or financial institution has a financial interest that a reasonable person would conclude could affect the exercise of its best judgment as a fiduciary in rendering advice to a retirement investor.