POLICY AND PROCEDURES BIC EXEMPTION REQUIREMENTS

Transcription

1 POLICY AND PROCEDURES BIC EXEMPTION REQUIREMENTS Contents I. Required Elements of Policies and Procedures... 1 II. BIC Exemption Preamble Comments on Policies and Procedures... 2 III. Sketch of Policies and Procedures/ Mapping of Existing Policies Statement of Purpose and Applicability Fiduciary Compliance Organizational Structure Impartial Conduct Standard Component Material Conflicts of Interest Component Policy & Procedures Summary... 5 I. Required Elements of Policies and Procedures 1. Impartial Conduct Standard. Policies and procedures must be reasonably and prudently designed to ensure that its Advisers adhere to the Impartial Conduct Standards. The Impartial Conduct Standards have three components: a. The Financial Institution and the Adviser provide investment advice that is, at the time of the recommendation, in the Best Interest of the Retirement Investor b. Financial Institution and Adviser receive no more than reasonable compensation c. Financial Institution and Adviser make no materially misleading statements regarding recommended transaction, fees and compensation, Material Conflicts of Interest, or any other matter relevant to the investment decision. According to the preamble, the modifier reasonably designed is used to avoid a construction that required standards that ensured perfect compliance, a potentially unattainable standard. Note: The Preamble explains that this requirement (a) is intended to establish a general standard, while requirements (b) and (c) above provide specific rules regarding the policies and procedures requirement. 2. Material Conflicts. In formulating its policies and procedures, the Financial Institution must: a. specifically identify and document its Material Conflicts of Interest A Material Conflict of Interest exists when an Adviser or Financial Institution has 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. Policy And Procedures BIC Exemption Requirements Page 1

2 b. adopt measures reasonably and prudently designed to prevent Material Conflicts of Interest from causing violations of the Impartial Conduct Standards c. designate a person or persons, identified by name, title or function, responsible for addressing Material Conflicts of Interest and monitoring their Advisers adherence to the Impartial Conduct Standards 3. Compensation a. Policies and procedures must provide that the Financial Institution (and its Affiliates or Related Entities) will not use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended or would reasonably be expected to cause Advisers to make recommendations that are not in the Best Interest of the Retirement Investor. The preamble explains that the phrase intended or would reasonably be expected to cause is used to require that procedures reasonably address Advisers incentives, not guarantee perfection. b. Differential compensation is permitted, but only to the extent that the Financial Institution s policies and procedures and incentive practices, when viewed as a whole, are reasonably and prudently designed to avoid a misalignment of the interests of Advisers with the interests of the Retirement Investors they serve as fiduciaries. 4. Policies and Procedures Summary. The Financial Institution must prepare a written document describing the Financial Institution s policies and procedures and make copies of the document readily available to Retirement Investors, free of charge, upon request as well as on the Financial Institution s Web site. The written description must describe or summarize key components of the policies and procedures relating to conflict-mitigation and incentive practices in a manner that permits Retirement Investors to make an informed judgment about the stringency of the Financial Institution s protections against conflicts of interest. 5. DOL Request. Financial Institutions must provide their complete policies and procedures to the Department upon request. II. BIC Exemption Preamble Comments on Policies and Procedures 1. Flexibility. BIC Exemption does not specify the precise content of the anti-conflict policies and procedures, but rather sets out the overarching standards for assessing their adequacy. This flexibility is intended to allow Financial Institutions to develop policies and procedures that are effective for their particular business models, while prudently ensuring compliance with their and their Advisers fiduciary obligations and the Impartial Conduct Standards. 2. Monitoring Policies and Procedures. It is important that the Financial Institution carefully monitor whether the policies and procedures are, in fact, working to prevent the provision of biased advice. The Financial Institution must correct isolated or systemic violations of the Impartial Conduct Standards and reasonably revise policies and procedures when failures are identified. Policy And Procedures BIC Exemption Requirements Page 2

3 3. Example of Anti-Conflict Procedures in Commission-Based System. Preamble describes example components of a prudent supervisory structure for a firm that provides transactionbased commissions: a. Establishment of a comprehensive system to monitor and supervise Adviser recommendations, evaluate the quality of the advice individual customers receive, properly train Advisers, and correct any identified problems. Particular attention is given to recommendations associated with higher compensation and recommendations at key liquidity events of an investor (e.g., rollovers). b. Systems to evaluate whether Advisers recommend imprudent reliance on investment products sold by or through the Financial Institution c. The use of metrics for behavior (e.g., red flags), comparing an Adviser s behavior against those metrics, and basing compensation in part on them. These metrics include measures aimed at preventing conflicts from transaction-based fees from biasing advice (e.g., churning measures). d. Penalizing Advisers and supervisors (including the branch manager) by reducing compensation based on the receipt of customer complaints or indications that conflicts are not being carefully managed, and/or using clawback provisions to revoke some or all of deferred compensation based on the failure to properly manage conflicts of interest. e. Appointment of a committee to assess the risks and conflicts associated with new investment products, determine the prudence of the products for retirement investors, and assess the adequacy of the Financial Institution s procedures to police any associated conflicts of interest. f. The Financial Institution periodically reviews, and revises as necessary, the policies and procedures to ensure that they are appropriately safeguarding proper fiduciary conduct, and that the factors used to justify any compensation differentials (e.g., time) remain appropriate, that they reflect neutral factors tied to differences in the services delivered to the investor (as opposed to differences in the amounts paid to the Financial Institution by different mutual fund complexes), and that they are neutral in application as well as selection. In this regard, the Financial Institution needs to take special care in defining the categories to ensure that they reflect the application of such neutral factors to genuine differences in the nature of the advice relationship. III. Sketch of Policies and Procedures/ Mapping of Existing Policies 1. Statement of Purpose and Applicability a. Statement of purpose b. Identification of transactions subject to BIC Exemption Compensation that varies based on investment advice Qualified money only - Qualified plan transactions (including recommendations to rollover or otherwise take distributions from a qualified plan) - IRA transactions Policy And Procedures BIC Exemption Requirements Page 3

4 2. Fiduciary Compliance Organizational Structure a. Identification of compliance officer by name, title or function b. Description of fiduciary compliance team c. Coordination with other compliance teams (Suitability Review Team, etc.) d. Oversight by senior compliance officers 3. Impartial Conduct Standard Component a. Description of regulatory requirement Best Interest standard Rule against misleading statements b. Rules for Financial Institution provided materials and communications Advertising standards Call center guidelines Policy coordination with current guidelines Advertising Guidelines New business packets c. Description of Adviser training and behavior policies Describe / incorporate Best Interest training protocol Identify / incorporate agent-facing policies and tools Manager Guide for Client Suitability Suitability Guidelines for Advisers d. Transaction approval Allocation of monitoring responsibility Required procedure for Advisers - Required Adviser documentation - Information submitted for Financial Institution approval Suitability Evaluation Worksheets Customer Identification & Suitability Confirmation Worksheet Heightened/escalated review - Red flag identifiers (similar to suitability) - Key liquidity events (rollovers) - Higher-compensation products Process Flow Narrative Review Levels e. Adviser monitoring Adviser onboarding Triggers for Adviser review (consumer complaints, performance metrics, etc.) Process for Adviser review Policy And Procedures BIC Exemption Requirements Page 4

5 Disciplinary actions Data collection to identify systemic problems Advicer Monitoring Process Flow Narrative Adviser Termination for Cause Policy f. Monitoring and evaluation of Financial Institution s distribution partners 4. Material Conflicts of Interest Component a. Statement of regulatory definition b. Description of conflict of interest review process Processes for identifying conflicts - Existing products/compensation - New product approval process - Non-product-based conflicts - Periodic review Process for approving processes/products after conflict is identified c. Documentation of existing Material Conflicts of Interest (Consider drafting as stand-alone document and providing a summary in policies and procedures) Catalog of quotas, appraisals, bonuses, contests, special awards, and differential compensation (commissions) Commission amounts by product Non-compensation-based conflicts (limited product range, etc.)? d. Statement justifying compensation practices Reasonableness of compensation - Identification of services provided - Cross-market comparisons Justification of differential compensation - Identify neutral factors tied to differences in the services delivered to the investor - Product complexity e. Measures adopted to prevent Material Conflicts of Interest from causing violations of the Impartial Conduct Standards. (Will any measures be different from the Impartial Conduct Standards processes?) 5. Policy & Procedures Summary a. Statement that summary is available and will be available on website Policy And Procedures BIC Exemption Requirements Page 5