DOL Fiduciary rule
Designating a Conflicts officer or Conflicts Committee
As covered firms continue to operationalize the Department of Labor’s (DOL) Conflict of Interest Rule and the related prohibited transaction exemptions ahead of the initial April 2017 compliance date, the industry is faced with making challenging strategic decisions regarding the designation of a conflicts officer under the rule, and questions continue to arise. This paper considers several of the most fundamental questions, including the timing of the designation, the composition (in the case of a committee approach), and where in the organization the Chief Conflicts Officer or Conflicts Committee should sit.
- Best Interest Contract (BIC)
- Comply with the BIC exemption
- Designate a person or a committee?
- Attributes firms seek in a candidate
- Next Steps
The Best Interest Contract (BIC) Exemption requires1 firms to designate a person or persons responsible for:
- Addressing “material conflicts of interest” (i.e., when an adviser or financial institution has a 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) and
- Monitoring advisers’ adherence to impartial conduct standards outlined by the exemption.2
This provision, which was included as a recommendation in the proposed version of the BIC exemption but adopted as an explicit requirement in the final version, is not very prescriptive, leaving the details of the designation largely up to the firm. However, the proposed version may be helpful in conveying the DOL’s thinking with respect to the designation of an employee or group of employees, referred to as either “Chief Conflicts Officer” or “Conflicts Committee” throughout this document.
The final version of the BIC exemption simply notes that one “important consideration” in addressing conflicts of interest is an institution’s “attentiveness to the qualifications and disciplinary history of the persons it employs to provide such advice.”3 The proposed version of the exemption elaborates a bit further, stating that an “individual compliance officer or a committee could monitor adherence to the Impartial Conduct Standards and consider ways to ensure compliance.”4 Unlike the final version, which does not explicitly suggest the designation of a “committee” to fulfill this role, the proposed version seems to convey the DOL’s belief that such an approach to this requirement is acceptable.
When is an institution required to appoint a Chief Conflicts Officer of Conflicts Committee?
Institutions are required to comply with the BIC exemption—including the requirements to adhere to impartial conduct standards and to appoint a Chief Conflicts Officer or Conflicts Committee—by April 10, 2017.
However, a firm would be well-advised to make its designation in advance of this applicability date in order to allow the officer or committee to become an integral part of the firm’s larger compliance preparation efforts. Specifically, the officer or committee should have an active role in the formulation of the policies and procedures required by the BIC exemption and their operationalization, and in setting policy to address conflicts of interest.
Should a firm designate a person or a committee?
Although it is clear that the DOL leaves this question open to institutions—and the industry view is still forming—the initial sentiment seems to favor a committee approach.
Among other advantages offered by this model are the ability to:
- Leverage existing committee structures
- Shield one individual from a perceived sense of full liability,5
- Access the expertise and transparency that senior cross-functional members can provide, providing the committee a better view to
identifyand address conflicts.
In addition, advocates of the committee model point out that the breadth and depth of responsibilities associated with this role underscore the need for having more than one person performing these functions.
Yet, there seem to be certain advantages
Firms should remain cognizant that, no matter which approach they take, the DOL has stressed above all else the “qualifications and disciplinary history” of the person or persons responsible for addressing material conflicts of interest and monitoring adherence to impartial conduct standards outlined by the BIC exemption. Given the broad mandate of the Chief Conflicts Officer or Conflicts Committee, any individual that is designated to serve in this role—in either operating model—will need to have sufficient access to information within the firm as well as authority to set appropriate policies at the firm so as to properly perform the mandates under the exemption.
What attributes should a firm seek in candidate?
In order to effectively carry out the responsibilities of this position, a firm should look for the following attributes in candidates for the Chief Conflicts Officer position or members of the Conflicts Committee:
- Power: Able to raise issues with senior management and make impactful decisions
- Independence: Being uninfluenced by business goals or conflicted revenues
- Knowledge: Understands the business, including services and products offered by the firm and its affiliates
- Experience: Has experience in monitoring and/or surveillance, whether directly or through an oversight or reporting line function
Of course, this list is non-exhaustive but represents a good starting point for firms considering candidates for this role.
If a firm opts to establish a committee structure, it should consider a range of types of positions and people to serve on it, including the Chief Compliance Officer, Chief Operating Officer, Chief Legal Officer, the head of the new products committee, the heads of various business lines, and the head of distribution/sales. Again, this list is non-exhaustive but gives firms a sense of how they might position their Conflicts Committee.
Deloitte continues to analyze the DOL final rule and prohibited transaction exemptions and will continue to provide our point of view on what steps organizations should take to mobilize and implement the substantial changes that will be required by April 10, 2017.
We have designed a structured approach for implementation that helps organizations to both comply with the rule and capitalize on the opportunities that its disruption has created. Organizations may contact Deloitte with questions about the rule and activities to support planning, preparation, implementation, and compliance.
1Department of Labor, “Best Interest Contract Exemption,” 81. Fed. Reg. 21002, (April 8, 2016), available at https://www.gpo.gov/fdsys/pkg/FR-2016-04-08/pdf/2016-07925.pdf.
2Id, at 21033.
3Id, at 21035, n.63.
4Department of Labor, “Proposed Best Interest Contract Exemption,” 80 Fed. Reg. 21960, (April 20, 2015), available at https://www.gpo.gov/fdsys/pkg/FR-2015-04-20/pdf/2015-08832.pdf.
5Although the exemption does not attach any increased liability to the role, Chief Compliance Officers in other contexts have been named in recent enforcement actions. In addition, enforcement actions related to failures to supervise compliance personnel have recently been announced.
Get in touch
Susan Levey, Deloitte Risk and Financial Advisory managing director, Deloitte & Touche LLP
Maria Gattuso, Deloitte Risk and Financial Advisory principal, Deloitte & Touche LLP
George Hanley, Deloitte Risk and Financial Advisory managing director, Deloitte & Touche LLP
Scott Parker, principal, Deloitte Consulting LLP
Daniel Rosshirt, principal, Deloitte Consulting LLP
Karl Ehrsam, Deloitte Risk and Financial Advisory principal, Deloitte & Touche LLP
Bruce Marcus, Deloitte Risk and Financial Advisory managing director, Deloitte & Touche LLP
Josh Uhl, Deloitte Risk and Financial Advisory senior manager, Deloitte & Touche LLP
Sean Cunniff, specialist leader, Deloitte Consulting LLP
Craig Friedman, Deloitte Risk and Financial Advisory senior manager, Deloitte & Touche LLP
Jared Bixler, Deloitte Risk and Financial Advisory senior manager, Deloitte & Touche LLP
Alex LePore, Deloitte Risk and Financial Advisory senior consultant, Deloitte & Touche LLP
The impact of regulatory changes and uncertainty
Rule still expected to be finalized next year