“A broker-dealer firm cannot pay more to a rep simply because a recommended product carries a higher commission,” Wagner said. “Differential compensation must be tied to neutral factors, to services that arise when certain investment categories are recommended, like additional time to research or vet investments. The DOL appeals to broker-dealers to change their payout grids.”
Thus, if the firm requires a level amount of time and resources to sell and maintain the variable annuity contracts on its platform, to qualify for the BICE the expenses and fees must also be level, Wagner said. Before receiving variable compensation relying on the BICE, firms will also have to file the contracts and any disclosures with the DOL.
“There is no processing or waiting period once the notices are filed; these are not intended to be onerous requirements,” Wagner said. “The regulation will require thousands of firms to file with the DOL. It appears that the DOL will compile the information for investigative and other related functions.”
The BICE does not apply to fixed-index annuities, which Wagner said are only permissible through "fee levelization"—the elimination of all differential compensation within the account.
Investors currently in commission-based retirement accounts can be grandfathered in with negative consent in lieu of a written contract, as long as the existing relationship is demonstrably in the client’s best interests—for example, if remaining in their current account would be less expensive than transitioning to an alternative.
“When the investment was originally set up, it must have been in compliance with the prohibited transaction rules,” Wagner said. “Compensation must be reasonable, and there’s no relief for any additional investment after April 10, 2017… if an advisor no longer provides advice to a client, it’s unclear if ongoing commissions would qualify as reasonable compensation.”
The final rule also makes the BICE available to brokers receiving variable compensation like commissions in the small plan marketplace, reversing a proposal that would have prevented brokers receiving 12b-1 fees or commissions from working in plans with fewer than 100 participants.
Brokers will have to be careful, says Wagner—if the plan’s participant count exceeds 100, the BICE no longer applies and receiving variable compensation could be considered a prohibited transaction. For the DOL’s purposes, the count includes any participants with an account balance, be they active or former employees, and anyone else eligible to participate in the plan.
The DOL does not make clear how the BICE will be enforced, except through litigation, or to what extent it will be applied.
“Nevertheless, the BICE imposes some fairly heavy requirements, and is an interesting piece of rule-making,” Wagner said. “As a technical matter, the Department of Labor is responsible for defining what a fiduciary is for IRAs and plans, and it’s also required to define exemptions, but the IRS has exclusive enforcement jurisdiction over IRAs. The DOL has no power over the IRA client or the advisor. Thus they give the IRA owners the contractual power to enforce any violations of the rule.”