What is a Best-Interest Contract Exemption?

The best-interest contract exemption (BICE) is a rule passed by the Department of Labor which allows fiduciaries to receive payments in ways that were previously prohibited. BICE permitted or exempted transactions that were not permitted earlier. With this rule, revenue sharing and commissions are allowed as forms of payment to fiduciaries. However, this exemption was short-lived as the ruling was vacated in June 2018. Before the ruling was vacated, fiduciaries were allowed to accept payments and compensation through commissions or compensation from selling proprietary products. As a fiduciary under the coverage of the Employee Retirement Income Security Act of 1974 (ERISA), such compensations were earlier prohibited.

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How Does the Best-Interest Contract Exemption Work?

The best-interest contract exemption (BICE) is otherwise called BIC exemption, this exemption became effective on June 9, 2017, and was only applicable to transactions that happen on/after the date. The best-interest contract exemption (BICE) is a new rule that allowed fiduciaries such as financial advisors and other individuals under fiduciary provisions to be paid in manners that were earlier prohibited. This rule was part of a more stringent definition of fiduciary. Generally, financial advisors and investment planners must avoid conflict of interest when performing fiduciary duties. With the passage of BICE, fiduciaries can receive commission or accept compensation after selling proprietary products. However, advisors must act in the best interest of their clients to avoid conflicts of interest that might occur through misrepresentation of clients and wrong advice.

Best-Interest Contract Exemption: Advisor Perspective

BICE was a fiduciary ruling by the Department of Labors (DOL) that became fully effective on January 2018 although this rule applies to transactions on or before June 9, 2017. The implementation of this rule was originally designed to commence on April 10, 2017. Six months after the best-interest contract exemption (BICE) came into full force, it was vacated by the U.S. 5th Circuit Court of Appeals and this brought an end to BICE.

Best-Interest Contract Exemption and Financial Services

The implementation of the best-interest contract exemption (BICE) gave rise to much anxiety and controversy in the financial services industry. One major fear of financial services companies is that the rule has a tendency of increasing unprofessionalism among financial advisors who might reduce the quality of service or advice they offer to clients. According to the arguments of experts in the financial services industry, the new rule would affect middle and low-income savers the more given that financial advisors will not profit much from them, thereby limiting the advice and attention they give to them. Furthermore, financial advisors and companies would incur compliance costs as a result of this new rule. This raised anxiety amongst them as they were not certain of what the compliance costs would be.