In order for fiduciaries to receive compensation that varies based on their investment advice (e.g., commissions) or from third parties in connection with their advice (e.g., revenue sharing), they must comply with a prohibited transaction exemption. In connection with the release of the new “investment advice” regulation, the Department of Labor (DOL) also issued two new class exemptions: the Best Interest Contract (BIC) exemption and the Principal Transactions In Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (“Principal Transactions”) exemption.
Section II(f)(2) of both the BIC and Principal Transactions exemptions makes the exemptions unavailable if a financial institution’s contract with the advice recipient (a requirement of both exemptions) includes a waiver or qualification of the advice recipient’s right to bring or participate in a class action. Section II(g)(5) of both exemptions applies this condition to ERISA plans, which are not required to enter into the contract discussed previously.
The DOL’s current litigating position is that it will no longer defend these provisions prohibiting class action waivers as applied to arbitration agreements. In light of this change of position, the DOL has announced a new enforcement policy indicating it will not pursue a claim against any fiduciary based on the failure to satisfy the BIC or Principal Transactions exemption, or treat any fiduciary as being in violation of either exemption, if the sole failure of the fiduciary to comply with either exemption is a failure to comply with the exemptions’ arbitration limitation. The DOL indicated that the policy will continue to apply as long as the exemptions include the arbitration limitation.
If you have questions or need additional information, please contact James Jorden at (305) 347-6801, jjorden@carltonfields.com, Brian Perryman at (202) 295-6525, bperryman@carltonfields.com; Michael Valerio at (860) 392-5046, mvalerio@carltonfields.com; or Stephen Kraus at (202) 965-8147, skraus@carltonfields.com.
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