EBIA Weekly Newsletter

DOL Makes Technical Corrections to the Best Interest Contract Exemption

   July 21, 2016

Best Interest Contract Exemption; Correction, 29 CFR Part 2550, 81 Fed. Reg. 44773 (July 11, 2016)

Available at https://www.gpo.gov/fdsys/pkg/FR-2016-07-11/pdf/2016-16355.pdf

The DOL has made technical corrections to the Best Interest Contract (BIC) exemption (also known as the BICE), a prohibited transaction exemption (PTE) that was originally published April 8, 2016 along with changes to the DOL fiduciary rule on providing investment advice for a fee to a retirement or other benefit plan or its participants (see our Checkpoint article). The changes to the fiduciary rule expand the group of investment advice providers that are ERISA fiduciaries and are intended to better protect plans and participants from conflicts of interest in the investment advice they receive for a fee. (The Code’s prohibited transaction rules cause the fiduciary rule to also apply to investment advice providers advising individual retirement account (IRA) and health savings account (HSA) owners.) The BIC exemption provides relief to investment advice fiduciaries for common compensation practices that might otherwise be prohibited transactions (for example, commissions, revenue sharing, and 12b-1 fees), if certain requirements are met. The DOL has published the corrected exemption in its entirety and assigned the exemption a PTE identifier, 2016-01. The fiduciary rule and the exemption are generally applicable to transactions occurring on and after April 10, 2017.

The corrections fix typographical errors (e.g., adding a comma) and make minor clarifications to provisions that might otherwise be confusing. For example, the original release failed to include a sentence in the negative consent procedure (which facilitates amending contracts with existing clients) that was explained in the preamble but inadvertently omitted from the exemption. Another correction clarifies that the exemption applies to the sales of investment products as well as purchases. The word “solely” is deleted from the definition of “Adviser” to clarify that, although the exemption does not apply if the Adviser has or exercises discretion regarding the recommended transaction, it can still apply if the Adviser has discretionary authority over plan assets that are not subject to the investment advice.

EBIA Comment: These minor clarifications more clearly articulate the DOL’s original intent. They change neither the substance of the BIC exemption nor the applicability date of April 10, 2017. Advice providers will want to refer to the corrected version to ensure they are relying on the most up-to-date language for relief. Technical corrections also were made to a companion exemption for principal transactions, PTE 2016-02. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.D (“Investment Advice Fiduciaries”) and XXIV.M (“Exemptions to Prohibited Transactions”); see also EBIA’s Consumer Driven Health Care manual at Section XVI.D (“Overview of HSA Prohibited Transaction Rules”).

Contributing Editors: EBIA Staff.