A big question coming out of the Department of Labor’s (DOL) publication of the final fiduciary rule earlier this year asked how workable would be the portion of the rulemaking known as the Best-Interest Contract Exemption, or “BIC” for short.
On the DOL’s own explanation, the BIC Exemption “allows certain persons that are fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) or the Internal Revenue Code (the Code), or both, by reason of providing investment advice, to receive compensation that may otherwise be prohibited.”
The newly published corrections mainly fix typographical errors and make minor clarifications to provisions that “might otherwise be confusing.” Other changes could prove to be a little more substantial, though. For example, DOL says the technical update also “confirms insurers’ broad eligibility to rely on the exemption, consistent with the exemption’s clearly intended scope and the analysis and data relied upon in the Department’s final regulatory impact analysis.”
The update form DOL further “adds an identifier, Prohibited Transaction Exemption 2016-01, to the heading of the Best Interest Contract Exemption.” DOL expects this will help industry practitioners view and understand the final version of the BIC Exemption that will begin taking effect in the next two years.
A brief summary of the changes goes as follows, pulled directly from the Federal Register:
1. In the preamble discussion of the negative consent procedure for entering into the contract with existing contract holders, page 21023, the Best Interest Contract Exemption stated that “If the Retirement Investor does terminate the contract within that 30-day period, this exemption will provide relief for 14 days after the date on which the termination is received by the Financial Institution.” However, Section II(a)(1)(ii) of the exemption text regarding the negative consent procedure, page 21077, inadvertently failed to include that sentence. Section II(a)(1)(ii) is corrected to insert that sentence as the second sentence of the section. This correction will provide certainty to parties relying on the exemption as to the period of relief following termination of the contract by any Retirement Investor.
2. Section II(a)(1)(ii) of the exemption defines an existing contract as “an investment advisory agreement, investment program agreement, account opening agreement, insurance contract, annuity contract, or similar agreement or contract that was executed before January 1, 2018, and remains in effect.” There is an error in the quotation of that language on page 21023 of the preamble, which, rather than using the date “January 1, 2018,” referred to the “Applicability Date.” For avoidance of doubt, the Department confirms that January 1, 2018, is the correct date of reference for existing contracts.
3. Section II(h) of the exemption, page 21079, lacked a comma between “(g)” and “III.”
NEXT: Additional changes revealed by DOL
Further technical updates to the BIC Exemption published by DOL in the Federal Register go as follows:
4. Section VI of the exemption, page 21082, is entitled “Exemption for Purchases and Sales, Including Insurance and Annuity Contracts.” However, the text of Section VI(b) referred only to a “purchase” and inadvertently omitted reference to a “sale.” Section VI(b) is corrected to insert “or sale” immediately following “purchase,” and, on line 9 to replace “from” with “with,” to conform to the section heading and accurately describe the transactions covered by the exemption.
5. Section VII(b)(3), page 20182, included an unmatched close parenthesis. Section VII(b)(3) is corrected to delete ”)” after the word “contract.”
6. The definition of “Adviser” in Section VIII(a) of the exemption provided, in relevant part, that an Adviser “means an individual who: (1) Is a fiduciary of the Plan or IRA solely by reason of the provision of investment advice described in ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B), or both, and the applicable regulations, with respect to the assets of the Plan or IRA involved in the recommended transaction (emphasis added).” In contrast, Section I(c)(4) of the exemption provided an exclusion for an Adviser that “has or exercises any discretionary authority or discretionary control with respect to the recommended transaction.” Section I(c)(4) reflects the Department's intent that the exemption not apply if the Adviser has or exercises discretion regarding the recommended transaction. The Department did not intend to prevent Advisers from using the exemption if they have discretionary authority over other assets of the Plan or IRA that are not subject to the investment advice or if they previously had, or subsequently gain, discretionary authority over assets of the Plan or IRA. To avoid any doubt as to the availability of the exemption under these circumstances, Section VIII(a)(1) is corrected to delete the word “solely.”
7. Under Section VIII(e)(3)(iii), insurance companies relying on the exemption must be “domiciled in a state whose law requires that actuarial review of reserves be conducted annually by an Independent firm of actuaries and reported to the appropriate regulatory authority.” This condition inadvertently limited the availability of the exemption with respect to insurance companies because, while state laws generally require annual actuarial reviews of insurance company reserves to be conducted by a qualified actuary appointed by the board of directors, they do not generally require that such reviews be performed by an “independent firm of actuaries.” The Department clearly intended to make the exemption broadly available to insurance companies. To ensure that the exemption is available to insurance companies as the Department clearly intended in its original rulemaking, Section VIII(e)(3)(iii) is corrected to delete the phrase “by an Independent firm of actuaries.”
8. Section VIII(j) of the exemption defines the term “Plan” to mean “any employee benefit plan described in section 3(3) of the Act and any plan described in section 4975(e)(1)(A) of the Code.” The word “Act” refers to the Employee Retirement Income Security Act of 1974, which is defined in the exemption as “ERISA.” To avoid uncertainty as to the meaning of the word “Act,” Section VIII(j) is corrected to replace the words “the Act” with the word “ERISA.”
The full Federal Register entry is here.