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

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 [email protected].