As discussed in our publication dated April 14, 2016, the final Department of Labor fiduciary rule provides for two new prohibited transaction exemptions, the Best Interest Contract Exemption (the "BIC Exemption") and the Principal Transaction Exemption (the "PT Exemption"). Financial institutions seeking to rely on these exemptions must make detailed disclosures to their retail clients, the Department of Labor and the general public. This publication focuses on these disclosure requirements.1

Our April 14 publication discussed the BIC Exemption and the PT Exemption in detail. Financial institutions may rely on the BIC Exemption when receiving certain types of compensation such as 12b-1 fees, commissions and revenue sharing payments that are affected by the investment recommendations and products sold to their retail retirement clients. The PT Exemption may be utilized when a financial institution is a principal in the purchase or sale of certain securities. Note that each of the BIC Exemption and the PT Exemption contain specific definitions of "financial institutions" and "advisers" for purposes of determining what entities may avail themselves of the respective exemptions.

The chart below describes the different disclosure requirements applicable under each of the BIC Exemption and the PT Exemption. In considering the chart, keep in mind the meanings of the following key terms:

  • Best Interest: For purposes of the exemptions, 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 acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, 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.
  • Best Interest Contract: For purposes of the chart, the term "Best Interest Contract" refers to the financial institution's existing or new client agreements that set forth the terms required by the BIC Exemption. These agreements could include, for example, investment advisory agreements, investment program agreements, account opening agreements, insurance contracts or annuity contracts.
  • Impartial Conduct Standards: Under the exemptions, adherence to the Impartial Conduct Standards means that (1) the financial institution and adviser will provide investment advice that is in the Best Interest of the retail retirement client, (2) the compensation received in connection with the recommended transaction is not in excess of reasonable compensation and (3) the financial institution and the adviser do not make materially misleading statements to the retail retirement client regarding the recommended transaction, fees and compensation, material conflicts of interest and any other matters relevant to a retail retirement client's investment decision.
  • Material Conflicts of Interest: The exemptions note that these exist 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.
  • Third-Party Payments: Under the BIC Exemption, Third-Party Payments refer to sales charges not paid directly by the Retirement Investor, gross dealer concessions, revenue sharing payments, 12b-1 fees, distribution, solicitation or referral fees, volume-based fees, fees for seminars and educational programs and any other compensation, consideration or financial benefit provided to the financial institution or an affiliate by a third party as a result of a transaction involving a Retirement Investor.

1 The final rule and related prohibited transaction exemptions are available at: https://www.dol.gov/ebsa/regs/conflictsofinterest.html. For a complete overview of the final rule, please see our client publication: "The US Department of Labor's Final Fiduciary Rule Incorporates Concessions to Financial Industry but Still Poses Key Challenges," available at: The final rule and related prohibited transaction exemptions are available at: https://www.dol.gov/ebsa/regs/conflictsofinterest.html. For a complete overview of the final rule, please see our client publication: "The US Department of Labor's Final Fiduciary Rule Incorporates Concessions to Financial Industry but Still Poses Key Challenges," available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/04/The-US-Department-of-Labor-Final-Fiduciary-Rule-Incorporates-Concessions-to-Financial-Service-Industry-CGE-041416.pdf.

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