What is the Best Interest Contract Exemption?
faq 2020-01-15

The Best Interest Contract Exemption is a component of the regulatory package that aligns individual advisers’ interests with those of the plan or IRA customer, while leaving the adviser and financial institution substantial flexibility in designing the business model that best serves their clients.

Specifically, the exemption allows firms to continue to use certain compensation arrangements that might otherwise be forbidden so long as they, among other things, commit to putting their client’s best interest first, adopt anti-conflict policies and procedures (including avoiding certain incentive practices) and disclose any conflicts of interest that could affect their best judgment as a fiduciary rendering advice. Common forms of compensation, such as commissions, revenue sharing and 12b-1 fees, are permitted under this exemption, whether paid by the client or a third party such as a mutual fund, provided the conditions of the exemption are satisfied. This exemption is available to advisers that advise IRA savers, individual plan participants and small plans.

In addition to this new Best Interest Contract Exemption, the regulatory package revises many existing exemptions. It also includes a new exemption for principal transactions, which allows advisers to recommend investments, such as certain debt securities, and sell them to the customer directly from the adviser’s own inventory, or purchase investment property from the customer, as long as the adviser adheres to the exemption’s consumer-protective conditions.

In response to comments received during the notice and comment period, the Best Interest Contract Exemption was revised in a number of ways to facilitate implementation and compliance with the exemption’s terms. Examples include: streamlining conditions for level fee fiduciaries that receive only a level fee for advisory or investment management services; eliminating the contract requirement for advisers to ERISA plans and participants; permitting reliance on a negative consent process for existing contract holders; simplifying the pre-transaction disclosure to eliminate the proposed required projections of the total costs of the investment over time; and eliminating the proposed annual disclosure and proposed data collection conditions.

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