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How to Comply With DOL's BICE

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The new rule from the Department of Labor changed the definition of “fiduciary” on June 7, and effectively treats all people who provide investment advice for compensation with respect to retirement plans or IRAs as fiduciaries subject to ERISA.

The Best Interest Contract Exemption, which will apply to transactions made on or after April 10, 2017, allows fiduciaries to receive various forms of compensation that, in the absence of an exemption, would not be permitted under ERISA and the Internal Revenue Code.

The rule permits advisors who qualify as “level fee fiduciaries” to use BICE without executing a best interest contract if the only fee or compensation they receive is a “level fee that is disclosed in advance to the retirement investor.” Level fees could either be calculated as a percentage of AUM or as a set retainer fee, and may not include any commission or revenue sharing compensation.

Non-level fee fiduciaries seeking to rely on BICE must comply with each of the following five general requirements detailed below:

1. Acknowledge fiduciary status in writing. While it is already incredibly common for RIAs to include such acknowledgments in their advisory agreements, this requirement is intended to terminate the argument (by, for example, a broker-dealer rep) that investment advice has been provided in a non-fiduciary capacity or “salesperson” capacity in which only a suitability standard would apply.

2. Adhere to “Impartial Conduct Standards.” Compliance with Impartial Conduct Standards requires advisors to comply with the following:

a. Give advice that is in the retirement investor’s “best interest.” This particular requirement generated great consternation among financial industry professionals over the last six years. Thankfully, it does not hold advisors to the draconian obligation to find the absolute best and cheapest investment product for a particular retirement investor, which would be evaluated and litigated with the benefit of hindsight.

Rather, under BICE, investment advice is in an investor’s best interest when the individual or entity rendering the advice acts with the “care, skill, prudence and diligence under the circumstances then prevailing” of a prudent person in a similar scenario “without regard to the financial or other interests” of the advice giver. In other words, the analysis is whether a similar prudent professional in a similar role would have given the same advice.

b. Charge no more than reasonable compensation. Much like the best interest standard above, “reasonable compensation” is measured by comparison to prevailing rates in the industry and does not require advisors to charge the lowest possible fee. If an advisor’s fee is challenged as being unreasonable, the advisor may defend the reasonableness not only by corollary to other similarly situated advisors (e.g., geographic area, size, complexity of the engagement), but also based on other services it provides as part of its investment management duties (e.g., limited financial planning and consulting, non-discretionary consulting to family members without additional charge).

c. Make no misleading statements about investment transactions, compensation and conflicts of interest. While this prong seems straightforward, its inclusion signals the intent of the DOL to provide it (or a retirement investor) with a cause of action to challenge an advisor’s reliance on BICE and therefore trigger excise tax and personal liability for the fiduciary (as applicable). Therefore, advisors should carefully evaluate all communications to retirement investors in advertising documents, advisory contracts, disclosure documents and even day-to-day communications, and lean toward over-disclosure whenever possible.

3. Implement policies and procedures reasonably and prudently designed to prevent violations of the Impartial Conduct Standards. Even though BICE takes effect in 2017, advisors are not required to implement these policies and procedures until Jan. 1, 2018. Once that requirement takes effect, however, they will be required to have in place policies and procedures subject to DOL examination and enforcement. A violation of this prong could result in the total revocation of BICE, rendering all related activity a prohibited transaction subject to enforcement and remedies. It is critical that policies and procedures are narrowly tailored to ensure compliance with the three prongs of the Impartial Conduct Standards described above.

4. Refrain from using incentives for advisors to act contrary to the customer’s best interest. Simply put, this prohibits advisors from offering “quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended or would reasonably be expected to cause advisors to make recommendations that are not in the best interest of the retirement investor.”

5. Fairly disclose fees, compensation and material conflicts of interest associated with recommendations. An advisor would meet this prong by incorporating the necessary terms and conditions into a best interests contract with the retirement investor bearing upon the applicable accounts.

A “material conflict of interest” exists when an advisor “or financial institution has a financial interest that a reasonable person would conclude could affect the exercise of its best judgment as a fiduciary.” The breadth and subjective nature of this standard should cause all advisors to seriously consider any arrangement that could potentially constitute a material conflict of interest and err on the side of over-disclosure if there is any doubt as to whether a reasonable person would conclude that an advisor’s best judgment could be tainted.

Advisors must “clearly and prominently” inform retirement investors in writing that they have the right to obtain copies of the advisor’s written policies and procedures under BICE, as well as the disclosure of costs, fees and compensation (including third-party payments) regarding recommended transactions. Likewise, advisors relying on BICE are required to include a link to their website; and inform the investor that model contract disclosures updated as necessary on a quarterly basis are maintained on the website, and that the firm’s written policies and procedures in accordance with Section II(d) are available free of charge on the website.

Advisors who rely on BICE must also disclose whether the advisor offers proprietary products or receives third-party payments with respect to any recommended investments. To the extent the advisor limits investment recommendations to such products, the advisor must notify the investor of the limitations placed on the universe of investments available.

Disclosures must also provide contact information (telephone and email) for a representative the retirement investor can contact with concerns about the advice or service he or she has received.

Finally, advisors who rely on BICE must describe whether or not the advisor will monitor the retirement investor’s investments and alert the investor to any recommended change, the frequency with which that monitoring will occur and the reasons for which the investor will be alerted.

Advisors cannot rely on BICE if the best interest contract with the retirement investor includes:

  • Exculpatory provisions disclaiming or otherwise limiting liability of the advisor for a violation of the contract’s terms

  • A provision that waives the retirement investor’s right to participate in a class action lawsuit

  • A provision that requires arbitration or mediation “in venues that [...] unreasonably limit the ability of the retirement investors to assert the claims safeguarded” by BICE.


Any investment advisor who provides rollover recommendations for compensation as a fiduciary, must avoid engaging in prohibited transactions. Therefore, if the advisor can increase his or her compensation as a result of a rollover recommendation, such recommendation would be a prohibited transaction absent an exemption.

As discussed above, the BICE is the primary means of relief for advisors who provide rollover recommendations under the new fiduciary rule. An advisor relying upon the BICE must provide: 1.) a general statement of the best interest standard of care (as defined above); and a disclosure relating to the advisor’s material conflicts of interest and related disclosures.

However, many advisors are level fee fiduciaries and therefore may be able to avail themselves of the BICE on a streamlined basis. To do so, they must provide retirement investors with a written fiduciary statement and comply with the Impartial Conduct Standards described above. Additionally, when recommending a rollover from an ERISA plan to an IRA, a rollover from another IRA, or a switch from a commission-based account to a fee-based account, the level fee fiduciary must document the reasons why the level fee arrangement was considered to be in the best interest of the retirement investor.

— Read more from Tom Giachetti on the DOL fiduciary rule in “Prohibited Transactions in a Post-Fiduciary Rule World.”