The 4th Impartial Conduct Standard

By ASPPA Net Staff • June 19, 2017 • 0 Comments

The Department of Labor recently issued a set of FAQs on the fiduciary rule. In a recent blog post, Fred Reish says that one of those “raises some significant issues” for broker-dealers and RIAs.

As a general rule, Reish explains, the Best Interest Contract Exemption (BICE) requires only that broker-dealer and RIAs comply with the Impartial Conduct Standards, specifically:

  • The best interest standard of care.

  • No more than reasonable compensation.

  • No materially misleading statements.

Reish cites text from FAQ 6, commenting that this sentence has the effect of adding a fourth requirement: “During the transition period, the Department expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the impartial conduct standards.” He cautions that this language should not be ignored because “among other reasons, the non-enforcement policy requires that financial institutions, such as broker-dealers and RIAs, make a ‘diligent and good-faith’ effort to comply with BICE.”

As a result, Reish recommends that RIAs and broker-dealers, as financial institutions, adopt policies and procedures “as they reasonably conclude are necessary to ensure that advisers comply with the Impartial Conduct Standards.” He also notes that since this additional requirement is imposed as a condition of BICE, “it seems difficult to imagine that the non-enforcement policy would be available to a broker-dealer or RIA who did not adopt appropriate policies, procedures, practices and supervision.”

So what’s “appropriate”? Reish outlines several alternatives from the FAQ, including:

  • Review and determine that existing policies, procedures and supervision is adequate for ensuring that the impartial conduct standards are met.

  • Review and revise existing policies, procedures and supervision, as needed.

  • Adjust adviser compensation to reduce and/or to otherwise manage the effects of conflicts of interest that arise from varying levels of compensation.

  • Heightened scrutiny, surveillance and supervision of transactions involving conflicts of interest.

  • Monitor advisers’ sales practices and recommendations, including documenting the basis for recommendations.

  • A combination of the above and/or possibly other reasonable practices.

Reish suggests that a good approach is for a financial institution to review its existing policies, procedures, compensation practices and supervision, and document (because they might be required to demonstrate that they did this) why they will “ensure that advisers comply with the Impartial Conduct Standards.”

Reish closes by noting that during the transition period, it is possible, perhaps even likely, that the DOL will accept any reasonable efforts to comply with this requirement, though he acknowledges that the attorneys who represent investors — most likely in arbitration proceedings — will probably push for a higher standard.







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