Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor

Regulation and Compliance > Federal Regulation > DOL

Broker-Dealers Embrace DOL's Best Interest Contract Exemption

By Robert Bloink, William H. Byrnes

X
Your article was successfully shared with the contacts you provided.

Despite the flurry of lawsuits that have followed the release of the final Department of Labor (DOL) fiduciary rule, some insurance carriers are coming to terms with the new regime and have announced plans to comply with the seemingly burdensome rules. Particularly, several insurance carriers with affiliated broker-dealer networks have indicated that they will attempt to comply with the best interest contract exemption, rather than exiting certain lines of business.

This would allow various preexisting compensation arrangements to continue to be viable, if the exemption’s requirements are strictly followed—and could mark the next trend in the broker-dealer industry despite potential alternatives to embracing the best interest contract exemption.

Because the rule’s applicability date is fast approaching, however, now is the time to begin preparing to either comply or embrace an alternative solution.

Best Interest Contract Exemption v. Alternatives

While the best interest contract exemption (the BIC, or BICE) would allow advisors to continue to sell traditionally commission-based products, such as variable and equity indexed annuities, it also exposes the insurance carrier to a heightened liability standard. As a result, many have spent the months following release of the fiduciary rule exploring alternatives to strict compliance.

It has been widely anticipated that broker-dealers might largely exit the business of selling commission-based variable and indexed annuities entirely, in favor of operating as level fee fiduciaries. Level fee fiduciaries are those who receive a set percentage or specific dollar amount (rather than a variable commission) and are not subject to the more stringent aspects of the best interest contract exemption, as they are specifically exempt from the formal written contract requirement. 

It was previously thought that many insurance carriers would embrace fee-based annuities in order to qualify for this less onerous exemption.

Instead, firms have noted that because the DOL modified the final rule in order to ease compliance concerns (for example, the final rule allows for the sale of proprietary products while satisfying the best interest contract exemption), they will instead seek to fulfill the exemption’s requirements, so can continue to support advisors with commission-based compensation arrangements.

Rules for Compliance

The best interests contract exemption would allow advisors to receive commission-based compensation (as well as certain other forms of compensation, including revenue sharing and 12b-1 fees) only if the potential conflict presented by the fee structure is disclosed to the client and several other conditions are satisfied.

Specifically, the exemption requires that the advisor, the institution issuing the product and client enter into a contract that clearly commits the advisor to acting in the client’s best interests, using the care, skill and prudence that would be exercised by prudent person under the circumstances (the definition that generally governs a fiduciary’s duties in other contexts). Further, the institution involved must warrant that it has adopted policies and procedures designed to reduce conflicts of interest, and is the entity that is ultimately responsible for the advisor’s satisfying the best interests standard.

The contract must clearly disclose any conflicts of interest that do exist, and must give the client instructions as to how he or she can obtain online access to compensation arrangements entered into by the insurance carrier (the final rule, however, provides for a streamlined disclosure pursuant to which individualized information about specific advisors need not be listed).

The exemption also specifically states that the compensation paid to the advisor be “reasonable”—a seemingly amorphous standard that will require careful analysis by advisors and insurance carriers alike.

Conclusion

When all is said and done, it seems that firms are recognizing that the best interest contract exemption is the way forward for advisors who wish to continue selling financial products on a commission basis—and that now is the time for preparing for compliance in advance of the applicability date.

Related on ThinkAdvisor:

—

Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

To find out more, visit http://www.TaxFactsOnline.com. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without prior written permission

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.