Best Interest Contract Exemption: The best interest contract enables advisers to receive compensation that is otherwise prohibited to a fiduciary. The best interest contract must contain a promise that the adviser and its firm will adhere to certain "impartial conduct standards," which require the fiduciary to act in the client’s best interest, receive only “reasonable compensation,” make no misleading statements, and make certain transaction-based and website disclosures.
Best Interest Standard: The best interest standard is one of the elements of impartial conduct standards that ERISA fiduciaries and their firms must comply with which includes 1) a duty of loyalty, meaning they must act solely in the best interest of their clients, and 2) a duty of prudence, meaning they must act with the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity would use.”
BIC Lite/ Level Fee Exemption: The so-called “BIC Lite” is a prohibited transaction exemption available to advisors who receive only level fee compensation and disclose that fee in advance to the investor, adhere to the Impartial Conduct Standards, provide a written statement to the client acknowledging the adviser’s and the firm’s fiduciary obligations, and document the specific reasons why the recommended transaction was found to be in the client’s best interest.
Conflict of Interest (Material Conflict of Interest): A material conflict of interest exists when an adviser or financial institution has a financial interest that a reasonable person would conclude could affect the exercise of its best judgement as a fiduciary in rendering advice to a Retirement Investor (FR 21035). Situations that might lead to such a conclusion include quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended or would reasonably be expected to cause advisers to make recommendations that are not in the best interest of their clients.
Fiduciary: An adviser becomes a “fiduciary” when he or she, for compensation, 1) provides certain types of “investment advice” to a plan, a plan fiduciary, a plan beneficiary, an IRA or an IRA owner, and 2) renders the advice pursuant to a written or verbal understanding that the advice is based on the investment needs of the recipient, or directs advice to a specific recipient regarding a particular investment or management decision, or otherwise represents him or herself to be a fiduciary.
Financial Institution: Financial institution means an entity that employs the Advisor or otherwise retains such individual as independent contractor, agent of registered representative and is a bank, broker-dealer, investment adviser, or insurance company. Other types of organizations, such as independent insurance marketing organizations (IMOs), field marketing organizations (FMDs) and brokerage general agencies (BGAs) can apply to the DOL for approval to serve as a Financial Institution.
Grandfathering (Exemption for Existing Contacts): Grandfathering, though not technically true grandfathering, is colloquially used to refer to the rule’s Exemption for Existing Contracts. The exemption permits otherwise prohibited compensation to be received after April 10, 2017 for investments purchased prior to that date provided that the compensation received satisfies the “reasonable compensation” standard and any advice delivered with respect to such investments must satisfy the “best interests” standard.
Impartial Conduct Standards: Impartial conduct standard requires that advisers act in the best interest of the client (the “best interest standard”), accept only reasonable compensation, and make no misleading statements about recommended transactions, fees and other compensation, material conflicts of interest, and other matters relevant to the client’s decisions will not be materially misleading at the time they are made.
Insurance Commission: Insurance commission means a sales commission paid by the insurance company to the insurance agent or broker or pension consultant for the service of effecting the purchase of a Fixed Rate Annuity Contract or insurance contract including renewal fees and trailers, administrative fees, or marketing payments (FR 21176).
Investment Education: Under the education exemption, without becoming a fiduciary, an advisor can provide education information including plan information, general financial, investment, and retirement information, model asset allocation portfolios, and interactive investment materials.
Level Fee Compensation: Level fee compensation is a fixed amount, at either the account level or the product level, regardless of the specific products or actions you recommend to your clients.
Level Fee: A level fee is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended, rather than a commission or other transaction-based fee (FR 21084).
Prohibited Transaction: A prohibited transaction occurs when an ERISA fiduciary and/or their firm receives compensation from any third parties in connection with a recommendation, or compensation that varies depending on the particular investment being recommended. The receipt of such compensation is prohibited unless the adviser or firm complies with one of the prohibited transaction exemptions (PTEs).
Negative Consent (Exemption for Pre-Existing Transactions): The negative consent exemption allows firms to apprise clients existing as of April 17, 2017 in writing of any new contractual terms by the effective date of January 1, 2018 and, if no objection is made by within thirty days, the clients will be deemed to have consented to the new terms and the advisor may continue to receive revenue streams based on transaction that occurred prior to the applicability date until there is a new recommendation or prohibited transaction.
Prohibited Transaction Exemption (PTE) 84-24: PTE 84-24 is an exemption from the prohibited transaction rules that allows fiduciaries to receive “insurance commissions” for recommendations to purchase “fixed-rate annuity contracts” so long as the adviser acts in the client’s best interest, receives only reasonable compensation, and informs the client about any sales commission and any charges or fees imposed by the recommended annuity. (The sale of variable annuities, fixed indexed annuities, and other similar products are not be covered under this exemption.)
Reasonable Compensation: Reasonable compensation is determined based on a market based approach. Whether compensation is reasonable depends on whether it is in line with amounts being received by others in the market in connection with recommendations of similar products, as well as the services, rights, and benefits you and your firm provide to your clients.
Recommendation: A recommendation is a communication that — based on content, context and presentation — would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from an action. According to the DOL, determining whether a recommendation has occurred is an objective rather than subjective inquiry so that the more individually tailored a communication is to its recipient, the more likely it is to be viewed as a recommendation.
Suitability: Suitability requires that your recommendations be appropriate to your clients’ investment objectives, risk tolerance, financial circumstances, and needs.
Third Party Payments: Third-Party Payments refer to sales charges not paid directly by the client, 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 client.
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