4 versions of the Best Interest Contract Exemption
4 versions of the Best Interest Contract Exemption
Alternative forms of the DOL fiduciary rule’s BIC exemption that apply to advisory, brokerage and insurance firms
By Nick Thornton – LifeHealthPro – October 21, 2016
During a comprehensive presentation on the Department of Labor’s fiduciary rule, attorney Marcia Wagner called the regulation “the most significant and groundbreaking rulemaking to ever emerge” from the DOL.
The advisors and stakeholders endeavoring to adapt to the massive rule are likely in agreement with Wagner, founder of Boston-based The Wagner Law Group, a firm specializing in consulting and litigating matters under the Employee Retirement Income Security Act.
During an hour-long webinar hosted by the Retirement Income Industry Association, Wagner interpreted the roughly 1,000-page edict in clean bullet points, accompanied by her elaboration of the rule’s impact on industry.
Her analysis of the Best Interest Contract Exemption, which DOL designed to enforce its expanded definition of fiduciary under ERISA, likely caught the attention of participating stakeholders.
That’s because, in reality, there is not one Best Interest Contract Exemption, but four, according to Wagner’s interpretation of the rule.
Wagner defined alternative forms of the exemption that apply to advisory, brokerage and insurance firms depending on the type of client being advised and existing compensation agreements.
Here are the four BIC Exemption alternatives. Wagner cautioned attendees that she coined the definitions of each, and not the DOL, but that industry is beginning to adopt her language, a feather in Wagner’s cap that she said is “pretty cool.”
1. “Full Blown” BIC: For IRAs and Non-ERISA plans
The DOL rule allows brokers and advisors to receive variable — or commission-based — compensation, but only in compliance with the “Full Blown” BIC Exemption, which Wagner called the most extensive and complicated of the contract’s alternatives.
The agreement, signed by both the fiduciary and the individual client receiving rollover advice, or being advised on the management of IRA assets, must reflect the “full best interest standard” established in the fiduciary rule, said Wagner.
The advisor’s compensation must be disclosed, and fees and compensation on specific investments must be provided upon the client’s request.
The contract must disclose all conflicts of interest and explain a firm’s compliance policies for mitigating potential conflicts.
Fees on transactions of investments must also be disclosed. Firms will also be required to have business model and potential conflicts explained via a website.
The Full Blown exemption also must allow for arbitration over client disputes within a “reasonable venue,” and cannot limit class action rights, according to Wagner’s presentation.
2. “Disclosure” BIC: ERISA plans
This “slightly” easier contract, the “Disclosure” BIC exemption, does mirror much of the Full Blown BIC, but differs in that no written contract is required, according to Wagner’s presentation.
Advisors must give a written statement of fiduciary status and give “general” disclosure on compensation and conflicts of interest.
Specific compensation figures must be made available upon request. Like the Full Blown BIC, contracts must define a firm’s compliance policies and provide transaction disclosures on investments, and firms must provide a webpage “focusing on business model and conflicts.”
3. “Streamlined” BIC: Level-fee fiduciary
Existing RIA fiduciaries compensated on fees are not off the hook when it comes to the BIC exemption.
They will need to issue a “streamlined” contract when offering IRA rollover advice to plan participants of an existing sponsor client, when that advice results in higher fees. Thus, the “Streamlined” BIC exemption.
It will also affect level-fee fiduciaries when they give rollover advice to “off the street” clients — those they do not have a previous relationship to via a plan sponsor client.
Also, when level-fee fiduciaries move a client from a commission to a fee-based account, they will have to operate under a Streamlined BIC exemption.
That contract is less onerous, explained Wagner. It must include written statements declaring the fiduciary status of the advisor, and it requires the advisory firm to internally document the reason why the rollover recommendation is in the client’s best interest.
The Streamlined BIC does not require disclosure of compliance policies.
4. “Transition” BIC: For all IRA and plan clients
This optional alternative to the Full Blown BIC, the “Transition BIC,” may be of use to firms that are not ready to fully comply with the rule come April 10, 2017, the deadline for the first round of compliance.
The most onerous of the rule’s requirements will not go into effect until Jan. 1, 2018. The Transition BIC exemption gives those firms not fully ready to operate under the Full Blown, Disclosure, or Streamlined BIC by April 10 the chance to buy a bit more time.
With this alternative, advisors will have to provide a written statement acknowledging their fiduciary status, as well as conflict disclosures, which can be provided via email.
The name of the compliance officer who is monitoring complete implementation of the contract in the interim period will also have to be disclosed.
Wagner said there will be no need for compliance policies or other disclosures when issuing the Transition contract.
