From the September 2017 issue of Investment Advisor • Subscribe!

What's Required Under DOL's Best-Interest Contract Exemption

For non-level-fee fiduciaries, a best-interest contract is a lot to digest

Did you know? You can earn continuing education credits by answering questions about this article.

Start earning credits
http://www.thinkadvisor.com/2017/07/03/the-dol-fiduciary-rule-managing-the-transition-per http://www.thinkadvisor.com/2017/07/03/the-dol-fiduciary-rule-managing-the-transition-per

In my last column, I began to address the DOL post-transition period. In this column, I will further address the post-transition period, specifically, the best-interest contract.

For non-level-fee fiduciaries, the compliance requirements are quite a bit more complex than for level-fee fiduciaries. As of the rule's effective date, any advisor who is not a level-fee fiduciary is required to execute a best-interest contract with each impacted client.

(Related: Fiduciary Rule Delay Comes With Its Own Set of Problems)

For new clients, this can be done by incorporating the required terms (detailed below) into the firm's existing advisory agreements or by creating a standalone best-interest contract.

For existing clients, the requirement can be met through a negative consent letter.

Similar to the requirements of the transition period, a best-interest contract must include both a fiduciary acknowledgment and an affirmative statement that the advisor will adhere to the Impartial Conduct Standards. In addition, the contract cannot include the following:

  • Exculpatory provisions that disclaim or otherwise limit the liability of the advisor for a violation of the contract's terms;

  • A liquidated damages provision; and

  • Limitations to the client's right to bring or participate in an individual or class-action suit, except as provided in a pre-dispute arbitration clause, which cannot force the client to pursue the remedy in a venue that unreasonably impairs the client's ability to assert a claim.

The contract must include specific affirmative warranties that the advisor has:

  • Adopted and will comply with policies and procedures designed to adhere to the Impartial Conduct Standards;

  • Specifically identified and documented material conflicts of interest, adopted measures reasonably designed to prevent material conflicts from interfering with the firm's compliance with the Impartial Conduct Standards, and a designated person or persons (identified by name, title or function) responsible for addressing material conflicts of interest and ensuring compliance with the Impartial Conduct Standards; and

  • Instituted policies and procedures that seek to prevent compensation arrangements that would reasonably be expected to cause the advisor to make recommendations that are not in the best interest of the client.

The contract must also include disclosures of:

  • The best-interest standard of care owed by the advisor;

  • The services provided by the advisor and how the client will pay for those services;

  • Any material conflicts of interest;

  • Any fees or charges imposed by the advisor or its affiliate;

  • Any compensation received by the advisor or its affiliate from third parties regarding investment recommendations;

  • The client's right to obtain copies of the advisor's written description of its policies and procedures adopted to address material conflicts of interest and the Impartial Conduct Standards;

  • Any costs, fees and compensation, including third-party payments, regarding recommended transactions;

  • Whether the advisor offers proprietary products or receives third-party payments in connection with any recommended transaction; if the firm limits a client's investment options to proprietary products or those that generate third-party payments, the client must be so notified;

  • Contact information for a representative the client can contact with concerns;

  • To the extent applicable, a statement explaining that the client can research the firm using BrokerCheck or the Investment Adviser Registration Depository; and

  • Whether and to what extent the advisor will monitor the client's investments and recommend any relevant changes.

Clearly, the best-interest contract is a lot to digest. But that's not all! In addition to the above, advisors must include disclosures about their website, and make certain information available there (see ThinkAdvisor.com for more details). Furthermore, an advisor seeking to benefit from the non-level-fee fiduciary version of the BICE is required to notify the DOL of its intention prior to receiving any compensation in connection with a recommended transaction. Notification can be made by email to e-bice@dol.gov.

Reprints Discuss this story
We welcome your thoughts. Please allow time for your contribution to be approved and posted. Thank you.

Most Recent Videos

Video Library ››