Editor’s Note: This article appeared in NTSA Net and ASPPA Net, and, at the request of the NTSA Communications Committee, is now being included in the NTSA MarketBeat since it is of interest to NTSA members.
The Department of Labor (DOL) has made some “technical corrections”
to the Best Interest Contract (BIC) Exemption of the fiduciary regulation. The DOL had published the BIC Exemption in the April 8, 2016 Federal Register.
The DOL notes that all of the corrections either fix typographical errors, clarify provisions that might otherwise be confusing, or bring the text of the exemption into agreement with what the department viewed as “common understanding” during the rulemaking of the exemption’s application to insurance companies, as well as what they viewed as the agency’s “clear intent” (as expressed in the preamble and RIA analyses for the final rule and exemptions).
There were at least two potentially significant points of clarification in those technical corrections
. First, that an adviser may rely on the BIC Exemption even if it has discretion over some assets of a plan or IRA, as long as the adviser does not have discretion over the transaction the BIC Exemption will be used to cover.
Specifically, according to the DOL the definition of “adviser” in Section VIII(a) of the exemption provided, in relevant part, that “an adviser” means “an individual who: (1) Is a fiduciary of the 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 of the Plan or IRA involved in the recommended transaction.” In contrast, Section I(c)(4) of the exemption provided an exclusion for an adviser that “has or exercises any discretionary authority or discretionary control with respect to the recommended transaction.”
Section I(c)(4) reflects the DOL’s intent that the exemption not apply if the adviser has or exercises discretion regarding the recommended transaction. However, the DOL says it did not intend to prevent advisers from using the exemption if they have discretionary authority over other assets of the plan or IRA that are not subject to the investment advice or if they previously had, or subsequently gain, discretionary authority over assets of the plan or IRA. To avoid any doubt as to the availability of the exemption under these circumstances, Section VIII(a)(1) is corrected to delete the word “solely.”
The change makes clear that an adviser may rely on the BIC Exemption if it has discretion over other assets that are not a part of the recommended transaction.
Insurance Company Clarification
Secondly, perhaps the most significant clarification has to do with the ability of insurance companies to avail themselves of the BIC. The DOL explains that, under Section VIII(e)(3)(iii), insurance companies relying on the exemption must be “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.”
However, the DOL notes that this condition inadvertently limited the availability of the exemption with respect to insurance companies because, while state laws generally require annual actuarial reviews of insurance company reserves to be conducted by a qualified actuary appointed by the board of directors, they do not generally require that such reviews be performed by an “independent firm of actuaries.” Thus, to ensure that the exemption is available to insurance companies as the DOL says it “clearly intended in its original rulemaking,” Section VIII(e)(3)(iii) is corrected to delete the phrase “by an Independent firm of actuaries.”
In the preamble discussion of the negative consent procedure for entering into the contract with existing contract holders for the BIC it states that “If the Retirement Investor does terminate the contract within that 30-day period, this exemption will provide relief for 14 days after the date on which the termination is received by the Financial Institution,” but Section II(a)(1)(ii) of the exemption text regarding the negative consent procedure inadvertently failed to include that sentence. So, the DOL has corrected Section II(a)(1)(ii) to insert that sentence as the second sentence of the section.
Section II(a)(1)(ii) of the exemption defines an existing contract as “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.” However, DOL notes that there is an error in the quotation of that language (on page 21023 of the preamble), which, rather than using the date “January 1, 2018,” referred to the “Applicability Date.” To avoid doubt, the DOL confirms that Jan.1, 2018, is the correct date of reference for existing contracts.
Section II(h) of the exemption, page 21079, lacked a comma between “(g)” and “III.” The first sentence of Section II(h) is corrected to read “Sections II(a), (d), (e), (f), (g), III and V do not apply to recommendations by Financial Institutions and Advisers that are Level Fee Fiduciaries.”
Section VI of the exemption, page 21082, is entitled “Exemption for Purchases and Sales, Including Insurance and Annuity Contracts.” However, the text of Section VI(b) referred only to a “purchase” and inadvertently omitted reference to a “sale.” Section VI(b) is corrected to insert “or sale” immediately following “purchase,” and, on line 9 to replace “from” with “with,” to conform to the section heading and accurately describe the transactions covered by the exemption.
Section VII(b)(3), page 20182, included an unmatched close parenthesis.
Section VII(b)(3) is corrected to delete “)” after the word “contract.”
Section VIII(j) of the exemption defines the term “Plan” to mean “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.” The word “Act” refers to the Employee Retirement Income Security Act of 1974, which is defined in the exemption as “ERISA.” However, to avoid uncertainty as to the meaning of the word “Act,” Section VIII(j) is corrected to replace the words “the Act” with the word “ERISA.”
Principal Transactions Exemption
The DOL also addressed some issues regarding the Principal Transactions Exemption (PTE) that was adopted with the publication of a final regulation defining who is a fiduciary of an employee benefit plan under ERISA as a result of giving investment advice to a plan or its participants or beneficiaries. This exemption allows an individual investment advice fiduciary (an adviser) and the firm that employs or otherwise contracts with the adviser (a financial institution) to engage in principal transactions and riskless principal transactions involving certain investments, with plans, participant and beneficiary accounts, and IRAs. The exemption limits the type of investments that may be purchased or sold and contains conditions which the adviser and financial institution must satisfy in order to rely on the exemption.
In addition to removing the word “solely” from Section VI(a)(1) of the PTE (as it did Section VIII(a) of the BIC Exemption), the regulatory text now reads that an adviser includes an individual who “[i]s a fiduciary of the Plan or IRA 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 of the Plan or IRA involved in the recommended transaction.”
The technical corrections also clarify that in order to meet the definition of a financial institution under Section VI(e) of the PTE, an entity is only required to meet one rather than all of the conditions in subsections (1), (2), and (3). Those changes can be found here.
The DOL’s technical corrections have added formal headings to the exemptions; the BIC Exemption and PTE are now known as Prohibited Transaction Exemption 2016-01 and Prohibited Transaction Exemption 2016-02, respectively.
All in all, some pretty technical technical corrections — though one suspects that the clarity will be appreciated by some. However, based on what it described as the “limited, corrective purpose of these changes,” the DOL felt that a notice and public comment procedure was unnecessary.
The full text of the technical corrections for the BIC is available here