The DOL Rule - are you ready? Part1
DOL Rule: Are You Ready?
The new Department of Labor (DOL) Fiduciary Rule requires initial implementation by June 9, 2017 – and that date has now come and gone. Have you taken steps to ensure you can comply with the new Rule?
To continue to conduct FIA business, there must be a Financial Institution (FI) who will sign the Best Interest Contract (BIC) for you and your distribution partners. The FI may be your broker/dealer, your Registered Investment Advisor, the insurance carrier – or even your marketing organization, if you receive FI status from the DOL.
The FI is taking on significant liability by signing the BIC, and they will likely expect their distribution partners to demonstrate their knowledge of, and compliance with, the DOL Rule requirements. The DOL Rule is complex, and given the breadth of required changes to comply with it, it’s important that you begin planning for it now. The DOL specifically noted that it is not enough to merely announce new procedures or develop policies that appear to be just “window dressing.” Firms need to develop, implement and actively monitor strong compliance controls on an on-going basis.
Firms moving proactively to meet the implementation deadline will be in a much stronger competitive position. What should you be doing to prepare now?
We recommend these four places to start:
DUE DILIGENCE
Develop a process to assess new producers at the on-boarding phase and on-going. Your process may include what information you will review, what your thresholds are, how decisions are made, and how often the information is revisited and re-assessed.
TRAINING AND COMMUNICATION
Design a communication program. Both your staff and your distribution partners need to be well-versed in the compliance requirements of the Rule. Employees should know how their actions affect the firm’s liability. Producers need to understand how their practice needs to change, by determining best interest, file documentation, record retention, managing advertising compliance rules, and more. You can protect your business by demonstrating that you have an effective and regular training and communication platform in place which helps ward off problems due to lack of information or understanding.
PROCESS
Decide how you will process the daily business. Whether your firm is signing the BIC or merely reviewing it before sending it to the FI for review, you will want to develop a process to help assess best interest. This may include an enhanced financial questionnaire, a review of the producer’s products, criteria for the items considered during the review, file documentation and retention, assistance with the 84-24 disclosure document (post-June 9 and pre-January 1, 2018), and more.
SUPERVISION AND OVERSIGHT
Manage your risks. To truly know your producers and be comfortable that the sale met the "best interest" standard when signing the BIC, it’s critical to actively manage your producers’ compliance with the Rule. A thoughtful and balanced supervisory structure will provide you with the tools you need to review important areas that could highlight problems. Your program may consider a review of your producers’ advertising, an annual compliance questionnaire, off-site documentation review, on-site visits and inspections, and more.
the dol rule - are you ready? Part 2
Topic: Due Diligence
This paper is Part 2 of our 5-part series on ways to prepare yourself and your firm for implementation of the new DOL Conflict of Interest (Fiduciary) Rule. Click here to review Part 1 in the series.
Much has already been written about the many risks associated with acting as aFinancial Institution (FI) under the DOL Rule. Given that insurance carriers, broker-dealers, and other entities have been hesitant to confirm or share information aboutwhat direction they plan to go, it makes sense that there aren't a lot of detailedsolutions available yet. However, it's vital that IMOs that are planning to becomeFIs, or even considering it, begin mapping out what will need to be done now. The April deadline is right around the corner and it will take substantial time andresources to design, build, and document the processes necessary to comply withthe DOL Rule.
This article focuses on the topic of Due Diligence, and a fewthings you may want to consider before on-boarding aproducer:
Criminal background checks have historically been completed byinsurance carriers and may continue to be, as they will continue to have stateinsurance regulations and federal laws to comply with. However, the criteriautilized by insurance carriers to determine if a producer is "acceptable" or notcan vary significantly.
Ask yourself a few questions. Will insurance carriers share the criminalbackground check results with you? Will you run your own criminalbackground checks and develop your own criteria for what is "acceptable?” How often? What type of background check and from what areas? Shouldyou include a so-called national criminal background check?
It would make a lot of sense for an FI to run their own criminal backgroundchecks and determine what is "acceptable" on their own. The FI isresponsible for supervising the producer and should be making decisionsabout which producers have criminal histories that pose too much risk toclients or the FI. Don't forget to consider reputational and litigation risk as well. A producer with a criminal record (or an FI with a history ofonboarding producers with criminal records) could make any potentiallitigation defense more difficult for your firm.
Credit checks have also historically been completed by insurance carriers. The rationale is generally twofold: 1) a person who is helping consumers withtheir finances ought to be able to manage their own finances and; 2) aproducer with financial pressure from too much debt, tax liens, etc. may bemore likely to make an inappropriate sale to earn compensation.
You may want to consider these questions: Will insurance carriers share thecredit check results with you? Will you run your own credit checks onproducers and establish your own criteria for what is "acceptable?” Howoften?
Again, it may make a lot of sense for an FI to make this determination on theirown. It's another piece of the puzzle for managing risk related to producers. If you choose to run your own credit checks, be careful to comply with theFair Credit Reporting Act and state laws. Violations can carry civil andcriminal penalties and state laws vary dramatically.
Performing other regulatory background checks can also yieldimportant information. Examples include reviewing FINRA Brokercheckreports, checking for revoked licenses or designations (teaching, real estate,CFP, etc.), reviewing the Producer DataBase (PDB) for insurance licensureand regulatory actions, etcObviously, regulatory or other disciplinaryactions should be reviewed closely as part of the holistic risk profile of aproducer.
Internet Searches can be a very effective method of performing due diligence on a producer. Identification of articles, blogs, social media content, presence in trade publications, advertising, memberships in organizations, business interests, general reputation, and other publicly available information can all be helpful in determining the amount of risk an individual producer may represent.
Reviewing Advertising is a key component of due diligence. It provides insights into the types of businesses the producer is involved in (insurance-only, asset management, seminars, radio shows, affinity marketing, etc.), his/her sales practices, methods of advertising, and whether or not they appear to be attuned to compliance issues. The producer's website is typically a great place to start and will often provide you with a good overview of the producer. Reviewing their seminar materials and other marketing content also provides greater transparency into how they conduct business and discuss products and services with consumers.
FIs are going to need experienced compliance professionals with relevantexpertise to help them identify these and other risks, and introduce methods toconsistently mitigate them. Only by developing robust policies & proceduresand implementing best practices can an FI remain successful under the new DOLRule.
the dol rule - are you ready? part 3
Topic: Training and Communication
The new Department of Labor (DOL) Fiduciary Rule requires initial implementation by June 9, 2017 – and that date has now come and gone. Have you taken the right steps to ensure you can comply with the Rule?
This paper is part 3 of our 5-part series on ways to prepare yourself and your firm for implementation of the new DOL Conflict of Interest (Fiduciary) Rule.Visit http://www.summitcompliancegroup.com/dol-rule-are-you-ready/ to review all articles.
As of now, over twenty Independent Marketing Organizations have filed exemption requests with the DOL, requesting Financial Institution (FI) status. These organizations have agreed to take on the compliance responsibilities of the new Rule, which includes being a party to the Best Interest Contract required in certain annuity transactions in which the producer will earn compensation. As a result, they must develop strong compliance platforms to help balance the additional risks they will face under the Rule.
The DOL has begun releasing a series of FAQ’s to assist in the understanding and implementation of the Rule. Are you ready for the June 2017 initial implementation date?
It’s vital that IMOs that are planning to become FIs, or even considering it, start mappingout what they need to do now. The April deadline is fast approaching and it will requiresubstantial time and resources to design, build, and document the processes required tocomply with the DOL Rule.
This article in our 5-part series considers the areas of Training & Communication, to ensure your staff and your producers understand how to comply with the Rule.
Why is Training and Communication so important?
A critical component of an FI’s success will be education and training on the fiduciaryresponsibility and the crux of the Rule. Both your staff and your distribution partners needto be well-versed in the compliance requirements of the new Rule.
Many producers will now be held to the higher standard, which will be completely new to them. Even investment advisers, who hold fiduciary status under Securities and Exchange Commission rules, will need to understand what it means to be a fiduciary under the Rule.
Producers need to understand how to manage the compliance aspect of their practice in the new environment. They will need guidance on determining best interest, filedocumentation, record retention, managing advertising compliance rules, and other areas.
Your employees are critical in assisting your producers with their business. It’s important that they understand how their actions may create additional liability for your firm.
As an FI, you need to be able to demonstrate that you're training and educating your producers and employees to ensure that they’re compliant with the Rule’s requirements.
For example, language in the best-interest contract exemption portion of the Rule says,“Financial Institutions generally must adopt policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest.”
Education and training programs are critical to address such a requirement. In addition, attorneys may be more motivated to pursue legal action against firms they know aren't making much of an effort to comply with the Rule as opposed to those that are.
What topics should you cover in your training?
The Rule will have a significant impact on the qualified money business, so the list of topics to be covered is long. A few key items to include are:
· What exactly is the Fiduciary Rule and what is its purpose?
· Conflicts of interest
· Suitability vs. Fiduciary
· Developing processes & procedures at the FI
· BIC and PTE 84-24
· Communications with the Public
· At what point does one become a fiduciary
· Factors to help determine best interest
· Documentation and record retention requirements
Where do we begin?
Your initial training needs will likely focus on ensuring all persons understand the Rule, how it affects their day-to-day business, and what your firm’s specific requirements are for them.
Some firms, particularly larger ones with more resources, may choose to build out education and training internally rather than turn to third parties. However, many other firms will need to rely on third-party training, particularly for a basic understanding of what the Rule means.
However, it’s important to also ensure your training is customized. Firms have different business models and methods of distribution, and will need different training due to their varying approaches. There's no one-size-fits-all answer, and training for company A could be very different than training for company B.
On-going training will also be important. Interpretations of the Rule may change, and your own processes may evolve over time. You will want to ensure you have a regular training platform to keep your producers and employees informed and educated.
The DOL Rule: Are You Ready? Part 4
Topic: Your Firm’s "Best Interest" Process
The new Department of Labor (DOL) Fiduciary Rule requires initial implementation by June 9, 2017 – and that date has now come and gone. Are you taking steps to ensure you can comply with the new Rule?
This paper is part 4 of our 5-part series on ways to prepare yourself and your firm for implementation of the new DOL Conflict of Interest (Fiduciary) Rule. (Click on the links to the left to review all articles).
As of the writing of this article, numerous Independent Marketing Organizations have filed exemption requests with the DOL to request Financial Institution (FI) status, and the DOL has committed to providing further guidance to IMOs requesting FI status. These organizations have agreed to take on the compliance responsibilities of the new Rule, which includes being a party to the Best Interest Contract required in certain annuity transactions in which the producer will earn compensation. As a result, they must develop strong compliance platforms to help balance the additional risks they will face under the Rule.
With industry experts expressing opposing opinions about the new President-Elect’s impact on the Rule’s future, and the various lawsuits against the DOL having no success as of the date of this writing, the question remains the same:
Is your firm taking reasonable steps to comply with the Rule now and on January 1, 2018?
This article in our 5-part series considers the area of PROCESS, to ensure your staff and your producers understand how to comply with the Rule.
If your firm is a Financial Institution, you will need to design, document, and implement a method for processing business that provides you with the confidence that the client’s best interest is reflected in each transaction.
BUT FIRST – A FEW QUESTIONS -
Before you can build your process, you will need to consider many variables and make important decisions that will affect what your end process will look like.
Some examples include:
• What compensation structure will you have, and is it finalized with the carriers you represent?
• How do you determine what “reasonable compensation” is?
• Will you help your producers develop and complete the 84-24 disclosure document, if they choose to use it?
• How will you determine which products your producers can offer to determine best interest?
• What will you do with producers who are with a broker/dealer or RIA?
• Who will determine the “best interest” – the producer or your IMO?
• Will you treat qualified and non-qualified money in the same manner?
These are just a few of many decisions you will make before you develop your process.
BUILDING YOUR PROCESS
Your process will need to be robust and thoroughly documented to ensure your staff and producers understand what they need to do to comply with the Rule. Here are a few things to consider as you determine how you will process the business:
• How will comparisons be done to determine best interest?
• Are you using a compliant tool for product comparisons?
• How will you handle add-premium for grandfathered accounts? Will you require a BIC? How will you monitor for this activity?
• How will you handle source of funds issues?
• How will you handle RMDs – do you consider them qualified money or not?
• For orphan accounts - who will answer their questions and will it be considered covered investment advice?
• How will you handle recommendations that are not in the client’s best interest?
What will you do if the carrier rejects the applications for suitability purposes?
• How will you integrate existing state insurance and/or securities regulations into the BIC process?
• What criteria will you require producers to follow regarding documentation?
The list goes on, and you will uncover many more questions that will require decisions as you build out your process.
As you can see, designing your process will take considerable time and effort to manage your risks and anticipate all of the various scenarios you may encounter.
Once your process is developed, you will need to ensure it is documented and communicated to your staff and your producers. On-going communication and training will be key to ensuring all parties understand how to comply with the Rule.
DOL Rule: Are You Ready? - Part 5
TOPIC: SUPERVISION AND OVERSIGHT
With the partial implementation date of June 9, 2017 still in effect, firms are advised to continue their compliance preparations in anticipation of full implementation on January 1, 2018. Are you taking steps now to ensure you can comply with the new Rule?
This paper is part 5 of our 5-part series on ways to prepare yourself and your firm for implementation of the new DOL Conflict of Interest (Fiduciary) Rule. (Click on the links to the left to review all articles).
To conduct FIA business under the Rule, there must be a Financial Institution (FI) who will sign the Best Interest Contract (BIC) with clients. The FI may be a broker/dealer, a Registered Investment Advisor, the insurance carrier – or even an independent marketing organization, if they receive FI status from the DOL under the proposed exemption.
The DOL Rule is complex, and given the breadth of required changes to comply with it, it’s important to have processes in place to manage the Rule’s requirements. The DOL specifically noted that it is not enough to merely announce new procedures or develop policies that appear to be just “window dressing.” Firms need to develop, implement and actively monitor strong compliance controls on an on-going basis.
What can you be doing to prepare now?
This material focuses on a key component of a strong compliance platform – Supervision and oversight.
Some of the most common questions we receive involve the supervisory aspects of complying with the DOL Rule. What type of supervision is required? Do we only need to supervise the transaction or is the scope of supervision broader than that? How much should we do and for how long? There are few black and white answers and, like so many compliance issues, it comes down to managing risk. Here are just a handful of things you should consider as you design the supervisory element of your compliance program.
How was the producer able to get in front of the new client?
Was it a seminar or mailer that brought the client to the producer and allowed him/her to sell a product? If so, was the advertising approved? If so, by whom? If not, why not?
Advertising is one area where there appears to be general agreement about the need to supervise. Keep in mind that the impartial conduct rules require that no misleading statements be made. As a result, review and approval of advertising is a critical supervisory tool. Requiring pre-approval of all advertising, by properly trained and experienced compliance personnel, helps build a credible story about the effectiveness of an entity’s supervision.
What happened “across the kitchen table” and was the Financial Institution’s prescribed process followed?
Did the producer make any misrepresentations? Provide the required disclosures? Were any other “bad” sales practices or non-compliant sales tools utilized? Was the required information gathered, properly documented, and accurate? How was the best interest recommendation made? Was the Financial Institution’s process followed?
In the past, some entities could avoid learning about a producer’s sales practices without incurring too much risk. The DOL Rule has dramatically changed the equation. Understanding how a producer conducts business, and whether the producer is following the best interest process, is essential to reducing risk. Documenting a producer’s understanding of the process, monitoring compliance with the best interest process, conducting independent follow-up with clients on a sample basis, and completing on-site inspections of producers are some examples of methods that can be implemented to demonstrate adequate supervision of producers.
How will you monitor ongoing interactions with the client?
What if a sale is completed in January and then the producer gives additional covered investment advice in March that doesn’t result in a transaction? How will you supervise these interactions? How will it be documented?
Should you conduct an ongoing review of producers’ email? Require the recording and retention of phone calls? This type of supervision would likely decrease risk and would certainly provide some evidence of your attempt to impose a rigorous system of supervision. Is it the right step for you and your producers? Maybe. As with other compliance issues, it comes down to the risk appetite of the entity…at least until additional guidance is obtained from the DOL or from court decisions.
What other methods are available to detect problems with producers?
Developing strong exception and trending reports can be a highly effective method of supervision. Capturing data for each producer that can be aggregated is helpful in identifying higher risk producers. For example, is there a trend of a producer making recommendations that are determined to be not in the best interest of the client? A failure to provide required disclosures? Unapproved advertising? Not completing training on time? These can all be indicators of a need to take additional action pertaining to a producer.
Proactively monitoring producer advertising can also be an effective way to detect producer issues. Reviewing producer websites, conducting internet searches, etc. can allow you to find unapproved advertising, new marketing and sales tools being utilized, and provide you with current insights into a producer’s sales practices.
What will you do if there is a problem with a producer?
If an issue is noted, it is imperative that you have a defined process to help ensure consistent decision-making. While every case is a bit different, treating producers differently in similar situations can be a recipe for generating additional problems (lawsuits, regulatory actions, etc.). Building a process to deal with producer compliance issues should address what options are available (no action, additional education for the producer, termination of his/her appointment, etc.), who makes the decisions about what to do, who will ensure the action selected takes place, and how communication(s) with insurance carriers and the producer will be managed.
What about your downline?
If you have AFMOs or sub-IMOs, what will be their role? Who will ensure they are fulfilling your requirements when it comes to the supervision and training of producers? How will you monitor them to ensure there are no unapproved incentives or other compensation arrangements being offered? Documenting the training that was delivered to them is key, along with periodic visits to their office(s). Direct interaction with producers may also offer you insights into the interactions with your downline. Also, don’t forget that exception and trending reports can be valuable here as well. If producers with a certain entity are all demonstrating behavior that is concerning, it may be an indication that your downline is contributing to the problem.
What about securities and insurance regulations?
Don’t forget that these regulations don’t go away just because the DOL Rule goes into effect.
What about insurance carriers?
Insurance carriers are likely to complete some due diligence before agreeing to do business with an IMO that becomes a Financial Institution, to ensure they are comfortable with the way the IMO will complete its obligations. In addition, insurance carriers may choose to complete periodic inspections/audits of FIs to assure that the compliance program is operating as intended. Obviously, a key part of the compliance program is supervision and insurance carriers are likely to examine how effectively the IMO is supervising producers. Therefore, robust supervision is essential not only to mitigate risk from lawsuits and regulatory actions, but also to help ensure continuing relationships with insurance carrier