The U.S. Department of Labor will ban retroactive payout grids and back-end recruitment bonuses, according to interpretive guidance released by the department on Thursday. The changes are associated with the DOL’s new fiduciary rule for retirement accounts.
Notably, the DOL’s guidance, under the heading “Conflict of Interest Exemptions FAQs,” said that back-end recruitment incentives would be forbidden as of the date of the notice, or October 27.
“So with two hours notice, you have to stop all recruitment deals,” said Howard Diamond, general counsel at Diamond Consultants, a recruiting firm. “I’m aghast, dumbfounded” at the DOL’s action, he said.
People had expected any changes to take effect next April when the rule goes into effect, Diamond said.
The FAQs caused Morgan Stanley to pull its deals yesterday, Diamond added.
Morgan Stanley spokesman James Wiggins declined comment.
Existing recruitment deals with back-end incentives for bringing on clients and assets are grandfathered under the guidance, but the DOL said firms must establish an “especially strict system of supervision and monitoring of conflicts of interest, particularly as the adviser approaches sales targets” in a back-end arrangement.
The guidance also put the nix on retroactive payout schedules that most traditional firms use, whereby advisors earn a higher payout rate on past production once they reach a higher threshold.
A new, higher rate “should apply only to new investments made once the threshold is reached,” the DOL said. “Retroactive application of an increased rate of pay for past investments … is likely to create acute conflicts of interest.”
Spokespersons for Wells Fargo Advisors and Raymond James said the firms were still analyzing the guidance and had no comment. A spokesperson for Merrill Lynch declined comment. A representative for UBS was not immediately available for comment Friday.
DOL To Nix Retro Grids, Back-End Bonuses As Morgan Stanley Pulls Deals
October 28, 2016
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You, being a liberal, must find it difficult to justify these draconian methods utilized by the DOL to increase their power and influence of the securities markets. This is solely a government agency run amok. They have inserted themselves into an area of regulation that they know next to nothing about and have no reasonable means to determine just what the results of their actions will be. Their actions will be counterproductive and will result in creating an environment that will, ultimately, harm investor not help them.
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It is evident that the DOL is Empire Building. at the expense of law and common sense. The Department of Labor appears to feel as though their passage of the highly-flawed Fiduciary Rule has given it powers well beyond those that can even imaginatively be credited to the Rule. Suddenly, with no correlation to the qualified money that the Fiduciary Rule seeks to contain and administer, the DOL assumes that because a “foot in the door†of the securities industry, that they can now dictate broker compensation, in toto. Now this is not just an attempt to direct bonus payment rules for RIA’s who write qualified business, but is an attempt to dictate terms for ALL brokers, no matter what the business mix is. This effort so typifies what picture the DOL is painting of itself and that picture is beginning to look more and more like “Dorian Greyâ€. It appears as though the taste of power has tainted the in-the-past altruistic attitude of the DOL and has created a monster, which now desires to grow and feed by dictating new powers to itself, in spite of law. custom, and statute. Best Wishes, Generally, I, being a liberal, would be in favor of these methods of regulation in the private sector, but here. Here , I know and work in the industry and was an active opponent of the attempt to securitize Equity Indexed Annuities, under proposed Rule 151. That proposed Rule was thrown out by both the Court and the House and was an attempt by both the SEC and FINRA to gain oversight control of a life insurance product. Now, with the DOL RULE is attempting to again change what is clearly, by its method of operation, benefit structure, and Risk exposure, a Life Insurance product rather that a Security, bet the BICE was amended, I suspect because of comments from the SEC, FINRA, REIT’s. and the Variable Annuity Industry because they wish to make it more difficult for consumers consumers to purchase Fixed-Indexed Annuities.