On April 6, 2016, the U.S. Department of Labor (“DOL”) issued final regulations and exemptions redefining the term “Fiduciary” under the Employee Retirement Income Security Act of 1974 (“ERISA”) and finalized the Conflict of Interest Rule applicable to retirement investment advice. The final fiduciary rule made a number of changes and clarifications to the originally proposed rule in April 2015 and is released along with the following set of exemptions:
- the final regulation for the Best Interest Contract Exemption (“BICE“),
- an “Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24” (“PTE Amendment“), and
- Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1 (“Class Exemptions“).
The following is a summary highlight of the BICE only. The Fiduciary redefinition (summarized in a prior writing), PTE Amendment and Class Exemptions are not addressed hereunder.
60-days after April 8, 2016 when it is published in the Federal Register, 29 CFR Part 2550
April 10, 2017
What has not changed?
ERISA requires that Plani fiduciaries comply with fundamental obligations rooted in the law of trusts. Plan fiduciaries must manage plan assets prudently and with undivided loyalty to the plans and their participants and beneficiaries1. In addition, they must refrain from engaging in non-exempted “prohibited transactions,” which ERISA does not permit because of the dangers posed by the fiduciaries’ conflicts of interest with respect to the transactions.2 When fiduciaries violate ERISA’s fiduciary duties or the prohibited transaction rules, they may be held personally liable for the breach.3 In addition, violations of the prohibited transaction rules are subject to excise taxes under the Internal Revenue Code (“Code”).
What is the Status Prior to BICE?
ERISAand the Code generally prohibit a fiduciary from receiving payments from third parties and from acting on conflicts of interest, including using their authority to affect or increase their own compensation, in connection with transactions involving a benefits Planor IRAii. Certain types of fees and compensation common in the retail market, such as brokerage or insurance commissions, 12b-1 fees and revenue sharing payments, may fall within these prohibitions when received by fiduciaries as a result of transactions involving advice to the Plan,planparticipants and beneficiaries, and IRA owners. However, IRA owners do not have a statutory right to bring suit against fiduciaries for violations of the prohibited transaction rules.
What is the BICE in general terms?
BICE is a statutory exemption that
- permits Advisersiii, the Financial Institutionsiv that employ or otherwise retain them and their Affiliatesvand Related Entitiesvi(collectively referred to as “AFAR”) to receive many common forms of compensation that ERISA and the Code would otherwise prohibit, and
- gives advice to Retirement Investorsviithat is in their Best Interestviii and the Financial Institution implements basic protections against the dangers posed by conflicts of interest.
Who may rely on BICE?
BICE is broadly available to Advisersand Financial Institutions to include Investment advisers registered under the Investment Advisers Act of 1940 or state law, broker-dealers, and insurance companies, and their agents and representatives
How does the BICE involve institutions?
All Financial Institutions relying on the BICE must notify the DOL in advance and retain records that can be made available to the DOL and Retirement Investors for evaluating compliance with the exemption. The BICE holds Financial Institutions and their Advisers responsible for adhering to fundamental standards of fiduciary conduct and fair dealing, while leaving them the flexibility and discretion necessary to determine how best to satisfy these basic standards in light of the unique attributes of their particular businesses.
- For Plans covered by Title I of ERISA, the Financial Institutions:
- Adopt anti-conflict policies and procedures that are reasonably designed to ensure that Advisers adhere to the Impartial Conduct Standards(to be defined below) and
- Provide disclosure of important information about the Financial Institutions’ services, applicable fees and compensation.
- For Plansnot covered by Title I of ERISA (such as an IRA), the Financial Institutions agree that they andtheir Advisers will adhere to the exemption’s standards in a written contract that is enforceable by the Retirement Investors. For new clients, the contract terms may be incorporated into account opening documents
Who are excluded from the BICE?
- The Plan is covered by Title I of ERISA, and
- the Adviser, Financial Institution or any Affiliate is the employer of employees covered by the Plan or
- the Adviser or Financial Institution is a named fiduciary or Plan administrator (ERISA section 3(16)(A)) with respect to the Plan, or an affiliate thereof, that was selected to provide advice to the Plan by a fiduciary who is not Independentix;
- A principal transaction;
- Robo advice without the involvement of an individual adviser where compensation is received as a result of investment advice to a Retirement Investor generated solely by an
interactive Website in which computer software-based models or applications provide investment advice based on personal information investors provide through the Website; or
- The Adviser exercises any discretionary control in management or disposition of or in the administration of the Plan or IRA assets.
Once the exemption is elected, what is the incentive for complying with BICE?
When Financial Institutions and Advisers breach their obligations under the exemption and cause losses to Retirement Investors, it is generally critical that the investors have a remedy to redress the injury. The existence of enforceable rights and remedies gives Financial Institutions and Advisers a powerful incentive to comply with the exemption’s standards, implement policies and procedures that are more than window-dressing, and carefully police conflicts of interest to ensure that the conflicts of interest do not taint the advice.
How to comply with BICE?
FOR PLANS COVERED BY ERISA
The Best Interest Contract must include the following written affirmation by the Financial Institution and its Adviser:
- FIDUCIARY STATUS. Act as fiduciaries under ERISA and/or the Codewith respect to any investment advice provided, and with respect to any investment recommendations regarding the Plan or participant or beneficiary account.
- IMPARTIAL CONDUCT STANDARD. Adhere to theImpartial Conduct Standard:
- When providing investment advice, the Financial Institution and the Adviserprovide investment advice that is, at the time of the recommendation, in the Best Interest of the Retirement Investor based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of AFAR, or other party;
- The recommended transaction willnot cause AFAR to receive, directly or indirectly,compensation for their services that isin excess of reasonable compensationx.
- Disclosures by the Financial Institution and its Adviser about the recommended transaction, fees and compensation, Material Conflicts of Interestxi, and any other matters relevant to a Retirement Investor’s investment decisions will not be materially
misleading at the time they are made.
- WARRANTIES. The Financial Institution affirmatively warrants, and in fact complies with, the following:
- It has adopted and will comply with written policies and procedures reasonably and prudently designed to ensure that its Advisers adhere to the Impartial Conduct Standards;
- In formulating its policies and procedures, the Financial Institution has specifically identified and documented its Material Conflicts of Interest; adopted measures reasonably and prudently designed to prevent Material Conflicts of Interest from causing violations of the Impartial Conduct Standards; anddesignated individual(s),identified by name, title or function,responsible for addressing MaterialConflicts of Interest and monitoringtheir Advisers’ adherence to theImpartial Conduct Standards.
- Its policiesand procedures require that AFARdo notuse or rely upon quotas,appraisals, performance or personnelactions, bonuses, contests, specialawards, differential compensation orother actions or incentives that areintended or would reasonably beexpected to cause Advisers to makerecommendations that are not in theBest Interest of the Retirement Investor.
Notwithstanding the foregoing, this does notprevent theFinancial Institution, its Affiliates orRelated Entities from providingAdvisers with differential compensation(whether in type or amount, andincluding, but not limited to,commissions) based on investmentdecisions by Plans, participant orbeneficiary accounts, or IRAs, to theextent that the Financial Institution’spolicies and procedures and incentivepractices, when viewed as a whole, arereasonably and prudently designed toavoid a misalignment of the interests ofAdvisers with the interests of theRetirement Investors they serve asfiduciaries (such compensationpractices can include differentialcompensation based on neutral factorstied to the differences in the servicesdelivered to the Retirement Investorcan take the following forms and the Financial Institution must maintain an electronic copy of the contract on its Web site that is accessible by the Retirement Investor:
- DISCLOSURES. Disclosures to Retirement Investor
- whether the Financial Institution offers Proprietary Productsxii or receives Third Party Paymentsxiii with respect to any recommended investments; and to the extent the Financial Institution or Adviser limits investment recommendations, in whole or part, to Proprietary Products or investments that generate Third Party Payments, and
- regarding the limitations placed on the universe of investments that the Adviser may offer for purchase, sale, exchange, or holding by the Retirement Investor.
It is deemed insufficient if the disclosure merely states that the Financial Institution or Adviser ”may” limit investment recommendations based on whether the investments are Proprietary Products or generate Third Party Payments, without specific disclosure of the extent to which recommendations are, in fact, limited on that basis.
The Financial Institution will not fail to satisfy these disclosure requirements, or considered a violation of a contractual provision, solely because it, acting in good faith and with reasonable diligence, makes an error or omission in disclosing the required information, provided the Financial Institution discloses the correct information as soon as practicable, but not later than 30 days after the date on which it discovers or reasonably should have discovered the error or omission. To the extent compliance with disclosure requires Advisers and Financial Institutions to obtain information from entities that are not closely affiliated4 with them (e.g. Morningstar), they may rely in good faith on information and assurances from the other entities, as long as they do not know that the materials are incomplete or inaccurate.
- CONTACT. Provides telephone and email for a representative of the Financial
Institution that the Retirement Investor can use to contact the Financial Institution with any concerns about the advice or service they have received; and, if applicable, a statement explaining that the Retirement Investor can research the Financial Institution and its Advisers using FINRA’s BrokerCheck database or the Investment Adviser Registration Depository (IARD), or other database maintained by a governmental agency or instrumentality, or self-regulatory organization.
- ONGOING MONITORING. Describes whether or not the Adviser and Financial Institution will monitor the Retirement Investor’s investments and alert the Retirement Investor to any recommended change to those investments, and, if so monitoring, the frequency with which the monitoring will occur and the reasons for which the Retirement Investor will be alerted.
- NO RELIEF. Relief is not available under the exemption if a Financial Institution’s contract contains the following:
- Exculpatory provisions disclaiming or otherwise limiting liability of the Adviser or FinancialInstitution for a violation of the contract’s terms;
- Except as provided in paragraph (4) below, a provision under which the Plan, IRA or Retirement Investor waives or qualifies its right to bring or participate in a class action or other representative action in court in a dispute with the Adviser or Financial Institution, or in an individual or class claim agrees to an amount representing
liquidated damages for breach of thecontract; provided that, the parties may knowingly agree to waive the Retirement Investor’s right to obtain punitive damages or
rescission of recommended transactions to the extent such a waiver is permissible under applicable state or federal law; or
- Agreements to arbitrate or mediate individual claims in venues that are distant or that otherwise unreasonably limit the ability of the Retirement Investors to assert the claims safeguarded by this exemption.
- In the event that the provision on pre-dispute arbitration agreements for class or representative claims in paragraph (2) above is ruled invalid by a court of competent jurisdiction, this provision shall not be a condition of this exemption with respect to contracts subject to the court’s jurisdiction unless and until the court’s decision is reversed, but all other terms of the exemption shall remain in effect.
- CONTRACT EXECUTION. There are a number of ways the Best Interest Contract can be established or entered into:
- A New Written Contract
- the Financial Institution enters into a written contract with the Retirement Investorno later than the execution of the recommended transaction. Contract must include the Fiduciary Status (section A), Impartial Conduct Standard (section B) and Warranties (section C) above.
- the contract may appear in a standalone document or may be incorporated into an investment advisory agreement, investment program agreement, and account opening agreement, insurance or annuity contract or application, or similar document, or amendment thereto.
- must be enforceable against the Financial Institution.
- By Negative Consent
- the Financial Institution may amend Existing Contractsxiv to include the terms by
delivering the proposed amendment to the Retirement Investor prior to January 1, 2018, and considering the failure to terminate the amended contract within 30 days as (a negative) consent. Contract must include the Fiduciary Status (section A), Impartial Conduct Standard (section B), Warranties (section C) and Disclosures (section D) above.
- the Financial Institution may not impose any new contractual obligations, restrictions, or liabilities on the Retirement Investor by negative consent.
- the Financial Institution may amend Existing Contractsxiv to include the terms by
- A New Written Contract
FOR PLANS NOT COVERED BY ERISA
- With respect to IRAs and other Plans not covered by Title I of ERISA, the Financial Institutions must agree that they and their Advisers will adhere to the exemption’s standards in a written contract that is enforceable by the Retirement Investors on the part of the Financial Institution. The contract must cover advice rendered prior to the contract execution in order for the exemption to apply.
- Failure to enter into Contract
An exemption is applicable to the receipt of compensation by AFAR, as a result of the Adviser’s or Financial Institution’s investment advice to such Retirement Investor, provided:
- the Adviser making the recommendation does not receive compensation, directly or indirectly, that is reasonably attributable to the Retirement Investor’s purchase, holding, exchange or sale of the investment;
- the Financial Institution’s policies and procedures prohibit the Financial Institution and its Affiliates and Related Entities from providing compensation to their Advisers in lieu of compensation described in this “section a” above,including, but not limited to bonuses or prizes or other incentives, and the Financial Institution reasonably monitors such policies and procedures;
- the Adviser and Financial Institution comply with the Impartial Conduct Standards, the policies and procedures requirements (except for the requirement of a warranty with respect to those policies and procedures), the web disclosure requirements and, as applicable, the conditions for Advisers and Financial Institution that restrict recommendations, in whole or part, to Proprietary Products or to investments that generate Third Party Payments with respect to the recommendation; and
- the Financial Institution’s failure to enter into the contract is not part of an effort, attempt, agreement, arrangement or understanding by the Adviser or the Financial Institution designed to avoid compliance with the exemption or enforcement of its conditions,
What are the provisions Level Fee Fiduciaries must comply with to receive exemption?
For Level Fee Fiduciariesxv, Warranties, Disclosures and Ineligible Contractual Provisions do not apply. However, the Adviser and Financial Institution must comply with the following:
- No later than the execution of the recommended transaction, the Financial Institution provides the Retirement Investor with a written statement of the Financial Institution’s and its Advisers’ fiduciary status.
- The Financial Institution and Adviser comply with the Impartial Conduct Standards
- In the case of a recommendation to rollover from an ERISA Plan to an IRA, the Financial Institution documents the specific reason or reasons why the recommendation was considered to be in the Best Interest of the Retirement Investor and include consideration for alternatives to a rollover, and take into account the fees and expenses associated with both the Plan and the IRA;
- Document reasons for recommending rollover from another IRA or to switch from a commission-based account to a level fee arrangement and how the recommendation is in the Best Interest of the Retirement Investor, including, specifically, the services that will be provided for the fee.
How does BICE address Web and Transaction-Based Disclosure?
To be covered by the exemption, the following summarizes Transaction Disclosuresthat must be provided5. In a single document, the following provisions must be included:
- States the Best Interest standard of care owed to the Retirement Investor; and describes any Material Conflicts of Interest;
- Retirement Investor has the right to obtain copies of the Financial Institution’s written description of its policies and procedures adopted and specific disclosure of costs, fees
and other compensation including Third Party Payments regarding recommended transactions in sufficient detail to permit the Retirement Investor to make an informed judgment about the significance and severity of the Material Conflicts of Interest; and
- Includes a link to the Financial Institution’s website regarding:
- model contract disclosures or other model notices,updated as necessary on a quarterly basis, are maintained on the website, and
- the Financial Institution’s written description of its policies and procedures are available free of charge on the website.
- Unless there are material changes in the subject of the disclosure, repeat disclosure is not needed for the same investment product within one year of the provision of the contract disclosure
To be covered by the exemption, the following Web Disclosures must be provided:
- The Financial Institution maintains a freely accessible website to the public and updated no less than quarterly, which contains:
- A discussion of the Financial Institution’s business model and the Material Conflicts of Interest associated with that business model;
- A schedule of typical account or contract fees and service charges;
- A model contract or other model notice of the contractual terms and the required disclosures, which are reviewed for accuracy no less frequently than quarterly and updated within 30 days if necessary;
- A written description of the Financial Institution’s policies and procedures that accurately describes or summarizes key components of the policies and procedures relating toconflict-mitigation and incentive practices in a manner that permits Retirement Investors to makean informed judgment about the stringency of the Financial Institution’s protections againstconflicts of interest;
- To the extent applicable, a list of all product manufacturers and other parties withwhom the Financial Institution maintains arrangements that provide Third Party Payments to either the Adviser or the Financial Institution with respect to specific investment products orclasses of investments recommended to Retirement Investors; a description of the arrangements, including a statement on whether and how these arrangements impact Adviser compensation, and a statement on any benefits the Financial Institution
provides to the product manufacturers or other parties in exchange for the Third Party Payments;
- Disclosure of the Financial Institution’s compensation and incentive arrangements
with Advisers including, if applicable, any incentives (including both cash and non-cash
compensation or awards) to Advisers for recommending particular product manufacturers,investments or categories of investments to Retirement Investors, or for Advisers to move to the Financial Institution from another firm or to stay at the Financial Institution, and a full and fair description of any payout or compensation grids, but not including information that is specific to any individual Adviser’s compensation or compensation arrangement.
- The website may describe the above arrangements with product manufacturers, Advisers, and others by reference to dollar amounts, percentages, formulas, or other means reasonably calculated to present a materially accurate description of the arrangements. The website must fairly disclose the scope, magnitude, and nature of the compensation arrangements and Material Conflicts of Interest in sufficient detail to permit an informed judgment about the significance of the compensation practices and Material Conflicts of Interest with respect to transactions recommended by the Financial Institution and its Advisers.
- To the extent the information required is provided in other disclosures which are made public, the Financial Institution may satisfy this by posting such disclosures to its website with an explanation that the information can be found in the disclosures and a link to where it can be found.
- The same exemption for “Failure to enter into Contract” is available here as well.
How are Proprietary Products and Third Party Payments treated under the exemption?
A Financial Institution that limits Advisers’ investment recommendations, in whole or part, based on whether the investments are Proprietary Products or generate Third Party Payments, and an Adviser making recommendations subject to such limitations, shall be deemed to satisfy the Best Interest standard if Prior to or at the same time as the execution of the recommended transaction the Retirement Investor is clearly, fairly and prominently informed in writing that:
- The Financial Institution offers Proprietary Products or receives Third Party Payments with respect to the recommended investments; and the Retirement Investor is informed in writing of the limitations placed on the investments universe that the Adviser may recommend to the Retirement Investor.
- There are any Material Conflicts of Interest the Financial Institution or Adviser have with respect to the recommended transaction, and the Adviser and Financial Institution comply with Web and Transaction-Based Disclosure requirements.
- The Financial institution documents:
- its investment universe limitations
- Material Conflicts of Interest associated with any contract, agreement, or arrangement providing for its receipt of Third Party Payments or associated with the sale or promotion of Proprietary Products;
- any services it will provide to Retirement Investors in exchange for Third Party Payments, as well as any services or consideration it will furnish to any other party, including the payor, in exchange for the Third Party Payments;
- the reasonable conclusion that these factors will not cause the Financial Institution or its Advisers to receive compensation in excess of reasonable compensation;
- the reasonable determination, after consideration of the policies and procedures established that these limitations and Material Conflicts of Interest will not cause the Financial Institution or its Advisers to recommend imprudent investments; and
- the bases for its conclusions
- The Financial Institution adopts, monitors, implements, and adheres to policies and
procedures and incentive practices that meet the terms of Best Interest Contract Warranties, neither the Financial Institution nor (to the best of itsknowledge) any Affiliate or Related Entity uses or relies upon quotas, appraisals, performance orpersonnel actions, bonuses, contests, special awards, differential compensation or other actionsor incentives that are intended or would reasonably be expected to cause the Adviser to makeimprudent investment recommendations, to subordinate the interests of the Retirement Investorto the Adviser’s own interests, or to make recommendations based on the Adviser’s considerations of factors or interests other than the investment objectives, risk tolerance,financial circumstances, and needs of the Retirement Investor;
- At the time of the recommendation, the amount of compensation and other
consideration reasonably anticipated to be paid, directly or indirectly, to the AFAR for their services in connection with the recommended transaction is not in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2); and
- The Adviser’s recommendation reflects ERISA Prudent Man Rule6 and based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor; and the Adviser’s recommendation is not based on the financial or other interests
of the Adviser or on the Adviser’s consideration of any factors or interests other than the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor.
What is the requirement of Financial Institution for record retention and disclosure conditions?
The following conditions must be met in order for a Financial Institution in order for the exemption to be available:
- Before receiving compensation, the Financial Institution notifies the DOL of its intention to rely on this exemption. The notice (without identifying any Plan or IRA)will remain in effect until revoked in writing by the Financial Institution.
- The Financial Institution maintains for a period of six (6) years, in a manner that is reasonably accessible for examination, the records necessary to enable DOL or the IRS to determine whether the conditions of this exemption have been met with respect to a transaction.
Are insurance and annuity contracts exempted too?
Yes, the exemption is granted to allow a Plan, participant or beneficiary account, or IRA to purchase an investment product to include insurance and annuity contracts from an insurance company that is a service provider to the Plan or IRA.
- The following conditions are applicable to this exemption:
- The transaction is effected by the Financial Institution in the ordinary course of its
- The compensation, direct or indirect, for any services rendered by the Financial
Institution and its Affiliates and Related Entities is not in excess of Reasonable Compensation; and
- The terms of the transaction are at least as favorable to the Plan, participant orbeneficiary account, or IRA as the terms generally available in an arm’s length transaction withan unrelated party.
- The transaction is effected by the Financial Institution in the ordinary course of its
- Exclusions. This exemption does not apply if:
- The Plan is covered by Title I of ERISA (i.e. the exemption is available to IRAs) and
- the Adviser, Financial Institution orany Affiliate is the employer of employees covered by the Plan, or
- the Adviser and FinancialInstitution is a named fiduciary or ERISA section 3(16)(A)plan administrator with respect to the Plan, or an affiliate thereof, that was selected to provide advice to the Plan bya fiduciary who is not Independent.
- The compensation is received as a result of a Principal Transaction;
- The compensation is received as a result of investment advice to a RetirementInvestor generated solely by an interactive website in which computer software-based models or
applications provide investment advice based on personal information each investor suppliesthrough the website without any personal interaction or advice from an
individual Adviser (i.e. “robo-advice”) unless the robo-advice provider is a Level Fee Fiduciary that complies with theconditions applicable to Level Fee Fiduciaries; or
- The Adviser has or exercises any discretionary authority or discretionary controlwith respect to the recommended transaction.
- The Plan is covered by Title I of ERISA (i.e. the exemption is available to IRAs) and
Is there relieve for Pre-Existing Transactions?
This exemption permits AFAR to receive compensation, such as12b-1 fees, in connection with a Plan’s, participant or beneficiary account’s or IRA’s purchase, sale, exchange, or holding of securities or other investment property that was either acquired prior to April 10, 2017 or pursuant to a recommendation to continue to adhere to a systematic purchase program established before April 10, 2017.
This Exemption for Pre-Existing Transactions is conditioned on the following:
- The compensation is received pursuant to an agreement, arrangement or
understanding that was entered into prior to April 10, 2017, and that has not expired orcome up for renewal post-April 10, 2017;
- The purchase, exchange, holding or sale of the securities or other investmentproperty was not otherwise a non-exempt prohibited transaction pursuant to ERISA section 406and Code section 4975 on the date it occurred;
- The compensation is not received in connection with the Plan’s, participant orbeneficiary account’s or IRA’s investment of additional amounts in the previously acquiredinvestment vehicle; except that for avoidance of doubt, the exemption does apply to arecommendation to exchange investments within a mutual fund family or variable annuitycontract) pursuant to an exchange privilege or rebalancing program that was established before April 10, 2017, provided that the recommendation does not result in the AFAR receiving more compensation (either as a fixed dollar amount or a percentage of assets) than they were entitled to receive prior to April 10, 2017.
- The amount of the compensation paid, directly or indirectly, to the AFAR in connection with the transaction is not in excess of Reasonable Compensation; and
- Any investment recommendations made after April 10, 2017 by the Financial Institution or Adviser with respect to the securities or other investment property reflect ERISA Prudent man Rule and based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, and are made without regard to the financial or other interests of AFAR or other party.
- ERISA section 404(a)
- ERISA section 406. ERISA also prohibits certain transactions between a plan and a “party in interest.”
- ERISA section 409
- (1) a person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Adviser or Financial Institution; or (2) any officer, director, employee, agent, registered representative, relative (as defined in ERISA section 3(15)), member of family (as defined in Code section 4975(e)(6)) of, or partner in, the Adviser or Financial Institution.
- The information required under this Section must be provided to the Retirement Investor prior to the transaction, if requested prior to the transaction, and, if the request is made after the transaction, the information must be provided within 30 business days after the request
- ERISA Section 404(a)(1)(B) – A ERISA fiduciary must discharge his duties with the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
- “Plan” means 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.
- “Individual Retirement Account” or “IRA” means any account or annuity described in Code section 4975(e)(1)(B) through (F), including, for example, an individual retirement account described in section 408(a) of the Code and a health savings account described in section 223(d) of the Code.
- “Adviser” is an individual who:
(1) Is a fiduciary of a 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 involved in the transaction;
(2) Is an employee, independent contractor, agent, or registered representative of a Financial Institution; and
(3) Satisfies the applicable federal and state regulatory and licensing requirements of insurance, banking, and securities laws with respect to the covered transaction.
- “Financial Institution” refers to the entity that employs the Adviser or otherwise retains such individual as an independent contractor, agent or registered representative and that is:
(1) Registered as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) or
under the laws of the state in which the adviser maintains its principal office and place of business;
(2) A bank or similar financial institution supervised by the United States or state, or a savings association
(as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)), but only if the advice resulting in the compensation is provided through a trust department of the bank or similar financial institution or savings association which is subject to periodic examination and review by federal or state banking authorities;
(3) An insurance company qualified to do business under the laws of a state, provided that such insurance company:
(A) Has obtained a Certificate of Authority from the insurance commissioner of its domiciliary state which has neither been revoked nor suspended,
(B) Has undergone and shall continue to undergo an examination by an Independent certified public accountant for its last completed taxable year or has undergone a financial examination (within the meaning of the law of its domiciliary state) by the state’s insurance commissioner within the preceding 5 years, and
(C) Is 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; or
(4) A broker or dealer registered under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)
- “Affiliate” of an Adviser or Financial Institution means
(1) Any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Adviser or Financial Institution. For this purpose, ”control” means the power to exercise a controlling influence over the management or policies of a person other than an individual;
(2) Any officer, director, employee agent, registered representative, relative (as defined in ERISA section 3(15)),
member of family (as defined in Code section 4975(e)(6)) of, or partner in, the Adviser or Financial Institution; and
(3) Any corporation or partnership of which the Adviser or Financial Institution is an officer, director or employee or in which the Adviser or Financial Institution is a partner.
- “Related Entity” means any entity other than an Affiliate in which the Adviser or Financial Institution has an interest which may affect the exercise of its best judgment as a fiduciary.
- A “Retirement Investor” is:
(1) A participant or beneficiary of a Plan subject to Title I of ERISA with authority to direct the investment of assets in his or her Plan account or to take a distribution;
(2) The beneficial owner of an IRA acting on behalf of the IRA; or
(3) A plan sponsor as described in ERISA section 3(16)(B) (or any employee, officer or director thereof) of a non-participant-directed Plan subject to Title I of ERISA with fewer than 100 participants, to the extent it acts as a fiduciary who has authority to make investment decisions for the Plan.
- Investment advice is in the ”Best Interest” of the Retirement Investor when the Adviser and Financial Institution providing the advice act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.
- “Independent” means a person that:
(1) Is not the Adviser, the Financial Institution or any Affiliate relying on the exemption,
(2) Does not receive compensation or other consideration for his or her own account from the Adviser, the Financial Institution or Affiliate; and
(3) Does not have a relationship to or an interest in the Adviser, the Financial Institution or Affiliate that might affect the exercise of the person’s best judgment in connection with transactions described in this exemption.
- “Reasonable Compensation” as so defined within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2)
- A “Material Conflict of Interest” exists when an Adviser or Financial Institution has a financial interest that a reasonable person would conclude could affect the exercise of its best judgment as a fiduciary in rendering advice to a Retirement Investor.
- “Proprietary Product” means a product that is managed, issued or sponsored by the Financial Institution or any of its Affiliates.
- “Third-Party Payments” mean sales charges when not paid directly by the Plan, participant or beneficiary
account, or IRA, 12b–1 fees and other payments paid to the Financial Institution or an Affiliate or Related
Entity by a third party as a result of the purchase, sale or holding of an Asset by a Plan, participant or beneficiary account, or IRA.
- An “Existing Contract” is 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.
- A Financial Institution and Adviser are “Level Fee Fiduciaries” if the only fee received by the Financial Institution, the Adviser and any Affiliate in connection with advisory or investment management services to the Plan or IRA assets is a Level Fee that is disclosed in advance to the Retirement Investor. A “Level Fee” is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the
particular investment recommended, rather than a commission or other transaction-based fee.