What Was the Best-Interest Contract Exemption (BICE)?

The best-interest contract exemption (BICE) allowed fiduciaries to be paid in ways that were otherwise prohibited, such as commissions or revenue sharing. The rule was passed as part of a new, more stringent definition of a fiduciary by the Department of Labor in a ruling that was subsequently vacated in June 2018. As such, the exemption is no longer applicable. The BICE allowed individuals, such as financial advisors who are subject to the fiduciary provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code, to accept compensation from selling proprietary products, as well as earn money based on commissions from recommending certain products. As a fiduciary, such compensation would normally be prohibited. The BICE was a key part of the rollout of the now-dead fiduciary rule.

Key Takeaways

  • The best-interest contract exemption (BICE) was a rule passed by the Department of Labor that was part of a now-vacated redefinition of fiduciary. 
  • The rule allowed financial advisors and others to be paid for selling proprietary products, and to earn commissions when they recommended select products.
  • This type of compensation would otherwise not be allowed under the new legislation, as per the regulations governing fiduciary provisions.
  • Under a fiduciary standard, financial professionals must prioritize their clients' best interests, rather than advocating for certain investments.
  • Had the larger Department of Labor Fiduciary Rule been put into effect, it would have dispensed of many of the commission structures that are part of the structure of the industry.

Breaking Down Best-Interest Contract Exemption (BICE)

The new fiduciary rule was meant to be applied to investment advisors and planners taking on the role of fiduciary investment advisors, meaning that they would have to follow more stringent rules and avoid conflicts of interest. Consequently, advisors who received additional commissions if a client picked a particular product might be in conflict if similar products that did not pay a commission were deemed to be comparable. BICE allowed the advisor to still receive that commission if they entered a contractual agreement stating that they would act in the best interest of the client and avoid any misrepresentation of the options. The best interest contract exemption (also known as "BIC exemption") provided a prohibited transaction exemption, as per the Department of Labor (DOL). This exemption was to be applied to any transactions that occurred on or after June 9, 2017. 

Best-Interest Contract Exemption: Advisor Perspective

The Department of Labor’s (DOL) fiduciary rule was not scheduled to come into full force until January 2018. President Trump, as part of a widespread effort to reduce government regulations, delayed its implementation, which was meant to start on April 10, 2017. As of June 21, 2018, the U.S. 5th Circuit Court of Appeals officially vacated the rule, effectively killing it. The rule, and the cost and burden of complying with it, was the source of much anxiety among financial advisors. In the original draft, there was a requirement of ongoing disclosure of compensation over the life of a product, and no clear limits on liability which would be decided by the plaintiffs’ bar.

Best-Interest Contract Exemption and Financial Services

During the lead-up to the fiduciary rule's implementation date, financial services companies had warned that the rule would limit professional investment advice for middle- and low-income savers. This is because such investors are not profitable enough for advisors and advisory firms to justify the costs of pursuing a BICE. Instead, these clients would likely need to turn to robo-advisors or other low-cost options for investment advice. Given that the compliance costs of any new rule are not fully understood until after implementation, advisors and companies were anxious about meeting a new compliance burden. Financial service firms had intended to run cost-benefit analyses on the BIC exemption to see whether it would be a practical alternative.