Best Interest Contract Exemption; Correction, 44773-44784 [2016-16355]

Download as PDF Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations used to apply a specified temperature to the skin surface. (b) Classification. Class II (special controls). The special controls for this device are: (1) The patient-contacting components of the device must be demonstrated to be biocompatible. (2) Performance testing must demonstrate electromagnetic compatibility and electrical safety. (3) Non-clinical performance testing must demonstrate that the device performs as intended under anticipated conditions of use. The following performance characteristics must be evaluated: (i) Thermal performance of the device, including maintenance of the target temperature, must be evaluated under simulated use conditions. (ii) Mechanical testing to demonstrate the device can withstand forces under anticipated use conditions. (iii) Mechanical testing to demonstrate the device is resistant to leakage under anticipated use conditions. (4) Software verification, validation, and hazard analysis must be performed. (5) Patient labeling must be provided to convey information regarding safe use of the device, including instructions for assembly. Dated: July 5, 2016. Leslie Kux, Associate Commissioner for Policy. [FR Doc. 2016–16351 Filed 7–8–16; 8:45 am] BILLING CODE 4164–01–P DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2550 [Application No. D–11712; Prohibited Transaction Exemption 2016–01] [ZRIN 1210–ZA25] Best Interest Contract Exemption; Correction Employee Benefits Security Administration (EBSA), U.S. Department of Labor. ACTION: Technical corrections. AGENCY: This document makes technical corrections to the Department of Labor’s Best Interest Contract Exemption, which was published in the Federal Register on April 8, 2016. The Best Interest Contract Exemption allows certain persons that are fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) or the ehiers on DSK5VPTVN1PROD with RULES SUMMARY: VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 Internal Revenue Code (the Code), or both, by reason of providing investment advice, to receive compensation that may otherwise be prohibited. The corrections in this document fix typographical errors, make minor clarifications to provisions that might otherwise be confusing, and confirm insurers’ broad eligibility to rely on the exemption, consistent with the exemption’s clearly intended scope and the analysis and data relied upon in the Department’s final regulatory impact analysis (RIA). DATES: Issuance date: These technical corrections are issued July 11, 2016, without further action or notice. Applicability date: The Best Interest Contract Exemption, as corrected herein, is applicable to transactions occurring on or after April 10, 2017. FOR FURTHER INFORMATION CONTACT: Brian Shiker or Susan Wilker, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor, (202) 693–8824 (this is not a toll-free number). SUPPLEMENTARY INFORMATION: Background The Best Interest Contract Exemption was granted pursuant to ERISA section 408(a) and Code section 4975(c)(2), and in accordance with the procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)). It was adopted by the Department in connection with the publication of a final regulation defining who is a fiduciary of an employee benefit plan under ERISA as a result of giving investment advice to a plan or its participants or beneficiaries (Regulation).1 The Regulation also applies to the definition of a ‘‘fiduciary’’ of a plan (including an IRA) under the Code. The exemption provides relief from provisions of ERISA and the Code that generally prohibit fiduciaries with respect to employee benefit plans and individual retirement accounts (IRAs) from engaging in self-dealing and receiving compensation from third parties in connection with transactions involving the plans and IRAs. The exemption allows entities such as registered investment advisers, brokerdealers, banks and insurance companies (referred to in the exemption as Financial Institutions), and their employees, agents and representatives (referred to as Advisers), that are ERISA or Code fiduciaries by reason of the provision of investment advice, to receive compensation that may PO 00000 1 81 FR 20945 (April 8, 2016). Frm 00015 Fmt 4700 Sfmt 4700 44773 otherwise give rise to prohibited transactions as a result of their advice to plan participants and beneficiaries, IRA owners and certain plan fiduciaries (including small plan sponsors). The exemption is subject to protective conditions to safeguard the interests of the plans, participants and beneficiaries and IRA owners. The Best Interest Contract Exemption is broadly available for Advisers and Financial Institutions that make investment recommendations to retail ‘‘Retirement Investors,’’ including plan participants and beneficiaries, IRA owners, and non-institutional fiduciaries (referred to in the exemption as ‘‘Retail Fiduciaries’’). As a condition of receiving compensation that would otherwise be prohibited under ERISA and the Code, the exemption requires Financial Institutions to acknowledge their fiduciary status and the fiduciary status of their Advisers in writing. The Financial Institution and Advisers must adhere to enforceable standards of fiduciary conduct and fair dealing with respect to their advice. In the case of IRAs and non-ERISA plans, the exemption requires that the standards be set forth in an enforceable contract with the Retirement Investor; the exemption permits reliance on a negative consent process for existing contract holders. Under the exemption’s terms, Financial Institutions are not required to enter into a contract with ERISA plan investors, but they must adhere to these same standards of fiduciary conduct, which the investors can effectively enforce pursuant to ERISA sections 502(a)(2) and (3). Likewise, ‘‘Level Fee’’ Fiduciaries that, with their Affiliates, receive only a Level Fee in connection with advisory or investment management services, do not have to enter into a contract with Retirement Investors, but they must provide a written statement of fiduciary status, adhere to standards of fiduciary conduct, and prepare a written documentation of the reasons for the recommendation. Explanation of Corrections This document makes technical corrections to the Best Interest Contract Exemption as described below. In addition, the document adds an identifier, Prohibited Transaction Exemption 2016–01, to the heading of the Best Interest Contract Exemption. For convenience, the text of the corrected exemption is reprinted in its entirety at the conclusion of this document. The preamble to the originally granted exemption provides a general overview of the exemption, at 81 FR 21002. E:\FR\FM\11JYR1.SGM 11JYR1 ehiers on DSK5VPTVN1PROD with RULES 44774 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations 1. In the preamble discussion of the negative consent procedure for entering into the contract with existing contract holders, page 21023, the Best Interest Contract Exemption stated that ‘‘If the Retirement Investor does terminate the contract within that 30-day period, this exemption will provide relief for 14 days after the date on which the termination is received by the Financial Institution.’’ However, Section II(a)(1)(ii) of the exemption text regarding the negative consent procedure, page 21077, inadvertently failed to include that sentence. Section II(a)(1)(ii) is corrected to insert that sentence as the second sentence of the section. This correction will provide certainty to parties relying on the exemption as to the period of relief following termination of the contract by any Retirement Investor. 2. Section II(a)(1)(ii) of the exemption defines an existing contract as ‘‘an investment advisory agreement, investment program agreement, account opening agreement, insurance contract, annuity contract, or similar agreement or contract that was executed before January 1, 2018, and remains in effect.’’ There is an error in the quotation of that language on page 21023 of the preamble, which, rather than using the date ‘‘January 1, 2018,’’ referred to the ‘‘Applicability Date.’’ For avoidance of doubt, the Department confirms that January 1, 2018, is the correct date of reference for existing contracts. 3. Section II(h) of the exemption, page 21079, lacked a comma between ‘‘(g)’’ and ‘‘III.’’ The first sentence of Section II(h) is corrected to read ‘‘Sections II(a), (d), (e), (f), (g), III and V do not apply to recommendations by Financial Institutions and Advisers that are Level Fee Fiduciaries.’’ 4. Section VI of the exemption, page 21082, is entitled ‘‘Exemption for Purchases and Sales, Including Insurance and Annuity Contracts.’’ However, the text of Section VI(b) referred only to a ‘‘purchase’’ and inadvertently omitted reference to a ‘‘sale.’’ Section VI(b) is corrected to insert ‘‘or sale’’ immediately following ‘‘purchase,’’ and, on line 9 to replace ‘‘from’’ with ‘‘with,’’ to conform to the section heading and accurately describe the transactions covered by the exemption. 5. Section VII(b)(3), page 20182, included an unmatched close parenthesis. Section VII(b)(3) is corrected to delete ’’)’’ after the word ‘‘contract.’’ 6. The definition of ‘‘Adviser’’ in Section VIII(a) of the exemption provided, in relevant part, that an Adviser ‘‘means an individual who: (1) VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 Is a fiduciary of the Plan or IRA solely by reason of the provision of investment advice described in ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B), or both, and the applicable regulations, with respect to the assets of the Plan or IRA involved in the recommended transaction (emphasis added).’’ In contrast, Section I(c)(4) of the exemption provided an exclusion for an Adviser that ‘‘has or exercises any discretionary authority or discretionary control with respect to the recommended transaction.’’ Section I(c)(4) reflects the Department’s intent that the exemption not apply if the Adviser has or exercises discretion regarding the recommended transaction. The Department did not intend to prevent Advisers from using the exemption if they have discretionary authority over other assets of the Plan or IRA that are not subject to the investment advice or if they previously had, or subsequently gain, discretionary authority over assets of the Plan or IRA. To avoid any doubt as to the availability of the exemption under these circumstances, Section VIII(a)(1) is corrected to delete the word ‘‘solely.’’ 7. Under Section VIII(e)(3)(iii), insurance companies relying on the exemption must be ‘‘domiciled in a state whose law requires that actuarial review of reserves be conducted annually by an Independent firm of actuaries and reported to the appropriate regulatory authority.’’ This condition inadvertently limited the availability of the exemption with respect to insurance companies because, while state laws generally require annual actuarial reviews of insurance company reserves to be conducted by a qualified actuary appointed by the board of directors, they do not generally require that such reviews be performed by an ‘‘Independent firm of actuaries.’’ See National Association of Insurance Commissioners (NAIC) Actuarial Opinion and Memorandum Model Regulation, April 2010.2 As evidenced by the Department’s Regulatory Impact Analysis (RIA), the Department clearly intended to make the exemption broadly available to insurance companies. To ensure that the exemption is available to insurance companies as the Department clearly intended in its original rulemaking, Section VIII(e)(3)(iii) is 2 Available at http://www.naic.org/store/free/ MDL-822.pdf. Section VIII(e)(3)(iii) was in the proposed exemption (80 FR 21960, 21988 (April 20, 2015)) and was based on several prior individual exemptions issued by the Department related to reinsurance by captive insurance companies (see e.g., PTE 2000–48, 65 FR 60452 (Oct. 11, 2000), PTE 2013–06, 78 FR 19323 (March 29, 2013), and PTE 2015–10, 80 FR 44765 (July 27, 2015)). PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 corrected to delete the phrase ‘‘by an Independent firm of actuaries.’’ 8. Section VIII(j) of the exemption defines the term ‘‘Plan’’ to mean ‘‘any employee benefit plan described in section 3(3) of the Act and any plan described in section 4975(e)(1)(A) of the Code.’’ The word ‘‘Act’’ refers to the Employee Retirement Income Security Act of 1974, which is defined in the exemption as ‘‘ERISA.’’ To avoid uncertainty as to the meaning of the word ‘‘Act,’’ Section VIII(j) is corrected to replace the words ‘‘the Act’’ with the word ‘‘ERISA.’’ Based on the limited, corrective purpose of these changes, the Department finds for good cause that notice and public comment procedure is unnecessary. All of the corrections either fix typographical errors; clarify provisions that might otherwise be confusing; or bring the text of the exemption into agreement with the common understanding during the rulemaking of the exemption’s application to insurance companies, as well as with the Department’s clear intent, as expressed in the preamble and RIA analyses for the final rule and exemptions. The corrections set forth in this document will not alter the analysis and data contained in the RIA applicable to the rulemaking, including the assessment of its costs and benefits. Executive Order 12866 Under Executive Order 12866, ‘‘significant’’ regulatory actions are subject to the requirements of the Executive Order and review by the OMB. Section 3(f) of Executive Order 12866, defines a ‘‘significant regulatory action’’ as an action that is likely to result in a rule (1) having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local or tribal governments or communities (also referred to as ‘‘economically significant’’ regulatory actions); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. Principally due to correction no. 7, described above, and in light of the significance of the original rulemaking, this action is being treated as ‘‘significant’’ within the meaning of E:\FR\FM\11JYR1.SGM 11JYR1 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations ehiers on DSK5VPTVN1PROD with RULES Section 3(f)(1) of the Executive Order. The analysis and data contained in the final RIA applicable to the rulemaking, including the assessment of its costs and benefits, will now more appropriately represent the rule as amended by this action and as originally intended. As a result, these corrections were submitted to the Office of Management and the Budget (OMB) for review. As noted above, the technical corrections to the Best Interest Contact Exemption published in the Federal Register on April 8, 2016 (81 FR 21002) fix typographical errors, make minor clarifications to provisions that might otherwise be confusing, and confirm insurers’ broad eligibility to rely on the exemption, consistent with the exemption’s clearly intended scope and the analysis and data relied upon in the Department’s final regulatory impact analysis (RIA). Thus, for purpose of compliance with Executive Order 12866, with respect to these corrections, the Department directs the attention of interested parties to the Department’s complete RIA, which was published on the Department’s Web site at the same time that the final rule and exemptions were published in the Federal Register, and which is available at https:// www.dol.gov/ebsa/pdf/conflict-ofinterest-ria.pdf. Paperwork Reduction Act Statement As part of its continuing effort to reduce paperwork and respondent burden, the Department conducts a preclearance consultation program to provide the general public and Federal agencies with an opportunity to comment on proposed and continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public understands the Department’s collection instructions, respondents can provide the requested data in the desired format, reporting burden (time and financial resources) in minimized, collection instructions are clearly understood, and the Department can properly assess the impact of collection requirements on respondents. As discussed above, the Department is issuing technical corrections to its final Best Interest Contract Exemption, which was published in the Federal Register on April 8, 2016 (81 FR 21002). All of the corrections either correct typographical errors, clarify provisions that might otherwise be confusing, or bring the text of the exemption into agreement with the Department’s intent, as expressed in the PRA analyses for the final rule and exemptions. The collections of information for the final VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 exemption were approved under OMB control number 1210–0156, which is currently scheduled to expire on June 30, 2019. In FR Doc. 2016–07925, appearing on page 21002 in the Federal Register of Friday, April 8, 2016, the following corrections are made. On pages 21075 through 21085, the Best Interest Contract Exemption is corrected to read as follows: Exemption Section I—Best Interest Contract Exemption (a) In general. ERISA and the Internal Revenue Code prohibit fiduciary advisers to employee benefit plans (Plans) and individual retirement plans (IRAs) from receiving compensation that varies based on their investment advice. Similarly, fiduciary advisers are prohibited from receiving compensation from third parties in connection with their advice. This exemption permits certain persons who provide investment advice to Retirement Investors, and associated Financial Institutions, Affiliates and other Related Entities, to receive such otherwise prohibited compensation as described below. (b) Covered transactions. This exemption permits Advisers, Financial Institutions, and their Affiliates and Related Entities, to receive compensation as a result of their provision of investment advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) to a Retirement Investor. As defined in Section VIII(o) of the exemption, a Retirement Investor is: (1) A participant or beneficiary of a Plan with authority to direct the investment of assets in his or her Plan account or to take a distribution; (2) the beneficial owner of an IRA acting on behalf of the IRA; or (3) a Retail Fiduciary with respect to a Plan or IRA. As detailed below, Financial Institutions and Advisers seeking to rely on the exemption must adhere to Impartial Conduct Standards in rendering advice regarding retirement investments. In addition, Financial Institutions must adopt policies and procedures designed to ensure that their individual Advisers adhere to the Impartial Conduct Standards; disclose important information relating to fees, compensation, and Material Conflicts of Interest; and retain records demonstrating compliance with the exemption. Level Fee Fiduciaries that will receive only a Level Fee in connection with advisory or investment management services must comply with more streamlined conditions designed PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 44775 to target the conflicts of interest associated with such services. The exemption provides relief from the restrictions of ERISA section 406(a)(1)(D) and 406(b) and the sanctions imposed by Code section 4975(a) and (b), by reason of Code section 4975(c)(1)(D), (E) and (F). The Adviser and Financial Institution must comply with the applicable conditions of Sections II–V to rely on this exemption. This document also contains separate exemptions in Section VI (Exemption for Purchases and Sales, including Insurance and Annuity Contracts) and Section VII (Exemption for Pre-Existing Transactions). (c) Exclusions. This exemption does not apply if: (1) The Plan is covered by Title I of ERISA, and (i) the Adviser, Financial Institution or any Affiliate is the employer of employees covered by the Plan, or (ii) the Adviser or Financial Institution is a named fiduciary or plan administrator (as defined in ERISA section 3(16)(A)) with respect to the Plan, or an affiliate thereof, that was selected to provide advice to the Plan by a fiduciary who is not Independent; (2) The compensation is received as a result of a Principal Transaction; (3) The compensation is received as a result of investment advice to a Retirement Investor generated solely by an interactive Web site in which computer software-based models or applications provide investment advice based on personal information each investor supplies through the Web site without any personal interaction or advice from an individual Adviser (i.e., ‘‘robo-advice’’) unless the robo-advice provider is a Level Fee Fiduciary that complies with the conditions applicable to Level Fee Fiduciaries; or (4) The Adviser has or exercises any discretionary authority or discretionary control with respect to the recommended transaction. Section II—Contract, Impartial Conduct, and Other Requirements The conditions set forth in this section include certain Impartial Conduct Standards, such as a Best Interest Standard, that Advisers and Financial Institutions must satisfy to rely on the exemption. In addition, Section II(d) and (e) requires Financial Institutions to adopt anti-conflict policies and procedures that are reasonably designed to ensure that Advisers adhere to the Impartial Conduct Standards, and requires disclosure of important information about the Financial Institutions’ services, applicable fees and compensation. With respect to IRAs and E:\FR\FM\11JYR1.SGM 11JYR1 ehiers on DSK5VPTVN1PROD with RULES 44776 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations other Plans not covered by Title I of ERISA, the Financial Institutions must agree that they and their Advisers will adhere to the exemption’s standards in a written contract that is enforceable by the Retirement Investors. To minimize compliance burdens, the exemption provides that the contract terms may be incorporated into account opening documents and similar commonly-used agreements with new customers, permits reliance on a negative consent process with respect to existing contract holders, and provides a method of meeting the exemption requirement in the event that the Retirement Investor does not open an account with the Adviser but nevertheless acts on the advice through other channels. Advisers and Financial Institutions need not execute the contract before they make a recommendation to the Retirement Investor. However, the contract must cover any advice given prior to the contract date in order for the exemption to apply to such advice. There is no contract requirement for recommendations to Retirement Investors about investments in Plans covered by Title I of ERISA, but the Impartial Conduct Standards and other requirements of Section II(b)–(e), including a written acknowledgment of fiduciary status, must be satisfied in order for relief to be available under the exemption, as set forth in Section II(g). Section II(h) provides conditions for recommendations by Level Fee Fiduciaries, which, with their Affiliates, will receive only a Level Fee in connection with advisory or investment management services with respect to the Plan or IRA assets. Section II(i) provides conditions for referral fees received by banks and bank employees pursuant to Bank Networking Arrangements. Section II imposes the following conditions on Financial Institutions and Advisers: (a) Contracts With Respect to Investments in IRAs and Other Plans Not Covered by Title I of ERISA. If the investment advice concerns an IRA or a Plan that is not covered by Title I of ERISA, the advice is subject to an enforceable written contract on the part of the Financial Institution, which may be a master contract covering multiple recommendations, that is entered into in accordance with this Section II(a) and incorporates the terms set forth in Section II(b)–(d). The Financial Institution additionally must provide the disclosures required by Section II(e). The contract must cover advice rendered prior to the execution of the contract in order for the exemption to VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 apply to such advice and related compensation. (1) Contract Execution and Assent— (i) New Contracts. Prior to or at the same time as the execution of the recommended transaction, the Financial Institution enters into a written contract with the Retirement Investor acting on behalf of the Plan, participant or beneficiary account, or IRA, incorporating the terms required by Section II(b)–(d). The terms of the contract may appear in a standalone document or they may be incorporated into an investment advisory agreement, investment program agreement, account opening agreement, insurance or annuity contract or application, or similar document, or amendment thereto. The contract must be enforceable against the Financial Institution. The Retirement Investor’s assent to the contract may be evidenced by handwritten or electronic signatures. (ii) Amendment of Existing Contracts by Negative Consent. As an alternative to executing a contract in the manner set forth in the preceding paragraph, the Financial Institution may amend Existing Contracts to include the terms required in Section II(b)–(d) by delivering the proposed amendment and the disclosure required by Section II(e) to the Retirement Investor prior to January 1, 2018, and considering the failure to terminate the amended contract within 30 days as assent. If the Retirement Investor does terminate the contract within that 30-day period, this exemption will provide relief for 14 days after the date on which the termination is received by the Financial Institution. An Existing Contract is an investment advisory agreement, investment program agreement, account opening agreement, insurance contract, annuity contract, or similar agreement or contract that was executed before January 1, 2018, and remains in effect. If the Financial Institution elects to use the negative consent procedure, it may deliver the proposed amendment by mail or electronically, but it may not impose any new contractual obligations, restrictions, or liabilities on the Retirement Investor by negative consent. (iii) Failure To Enter Into Contract. Notwithstanding a Financial Institution’s failure to enter into a contract as required by subsection (i) above with a Retirement Investor who does not have an Existing Contract, this exemption will apply to the receipt of compensation by the Financial Institution, or any Adviser, Affiliate or Related Entity thereof, as a result of the Adviser’s or Financial Institution’s investment advice to such Retirement PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 Investor regarding an IRA or non-ERISA Plan, provided: (A) The Adviser making the recommendation does not receive compensation, directly or indirectly, that is reasonably attributable to the Retirement Investor’s purchase, holding, exchange or sale of the investment; (B) The Financial Institution’s policies and procedures prohibit the Financial Institution and its Affiliates and Related Entities from providing compensation to their Advisers in lieu of compensation described in subsection (iii)(A), including, but not limited to bonuses or prizes or other incentives, and the Financial Institution reasonably monitors such policies and procedures; (C) The Adviser and Financial Institution comply with the Impartial Conduct Standards set forth in Section II(c), the policies and procedures requirements of Section II(d) (except for the requirement of a warranty with respect to those policies and procedures), the web disclosure requirements of Section III(b) and, as applicable, the conditions of Sections IV(b)(3)–(6) (Conditions for Advisers and Financial Institution that restrict recommendations, in whole or part, to Proprietary Products or to investments that generate Third Party Payments) with respect to the recommendation; and (D) The Financial Institution’s failure to enter into the contract is not part of an effort, attempt, agreement, arrangement or understanding by the Adviser or the Financial Institution designed to avoid compliance with the exemption or enforcement of its conditions, including the contractual conditions set forth in subsections (i) and (ii). (2) Notice. The Financial Institution maintains an electronic copy of the Retirement Investor’s contract on its Web site that is accessible by the Retirement Investor. (b) Fiduciary. The Financial Institution affirmatively states in writing that it and the Adviser(s) act as fiduciaries under ERISA or the Code, or both, with respect to any investment advice provided by the Financial Institution or the Adviser subject to the contract or, in the case of an ERISA plan, with respect to any investment recommendations regarding the Plan or participant or beneficiary account. (c) Impartial Conduct Standards. The Financial Institution affirmatively states that it and its Advisers will adhere to the following standards and, they in fact, comply with the standards: (1) When providing investment advice to the Retirement Investor, the Financial E:\FR\FM\11JYR1.SGM 11JYR1 ehiers on DSK5VPTVN1PROD with RULES Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations Institution and the Adviser(s) provide investment advice that is, at the time of the recommendation, in the Best Interest of the Retirement Investor. As further defined in Section VIII(d), such advice reflects 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; (2) The recommended transaction will not cause the Financial Institution, Adviser or their Affiliates or Related Entities to receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2). (3) Statements by the Financial Institution and its Advisers to the Retirement Investor about the recommended transaction, fees and compensation, Material Conflicts of Interest, and any other matters relevant to a Retirement Investor’s investment decisions, will not be materially misleading at the time they are made. (d) Warranties. The Financial Institution affirmatively warrants, and in fact complies with, the following: (1) The Financial Institution has adopted and will comply with written policies and procedures reasonably and prudently designed to ensure that its Advisers adhere to the Impartial Conduct Standards set forth in Section II(c); (2) In formulating its policies and procedures, the Financial Institution has specifically identified and documented its Material Conflicts of Interest; adopted measures reasonably and prudently designed to prevent Material Conflicts of Interest from causing violations of the Impartial Conduct Standards set forth in Section II(c); and designated a person or persons, identified by name, title or function, responsible for addressing Material Conflicts of Interest and monitoring their Advisers’ adherence to the Impartial Conduct Standards. (3) The Financial Institution’s policies and procedures require that neither the Financial Institution nor (to the best of its knowledge) any Affiliate or Related Entity use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 intended or would reasonably be expected to cause Advisers to make recommendations that are not in the Best Interest of the Retirement Investor. Notwithstanding the foregoing, this Section II(d)(3) does not prevent the Financial Institution, its Affiliates or Related Entities from providing Advisers with differential compensation (whether in type or amount, and including, but not limited to, commissions) based on investment decisions by Plans, participant or beneficiary accounts, or IRAs, to the extent that the Financial Institution’s policies and procedures and incentive practices, when viewed as a whole, are reasonably and prudently designed to avoid a misalignment of the interests of Advisers with the interests of the Retirement Investors they serve as fiduciaries (such compensation practices can include differential compensation based on neutral factors tied to the differences in the services delivered to the Retirement Investor with respect to the different types of investments, as opposed to the differences in the amounts of Third Party Payments the Financial Institution receives in connection with particular investment recommendations). (e) Disclosures. In the Best Interest Contract or in a separate single written disclosure provided to the Retirement Investor with the contract, or, with respect to ERISA plans, in another single written disclosure provided to the Plan prior to or at the same time as the execution of the recommended transaction, the Financial Institution clearly and prominently: (1) States the Best Interest standard of care owed by the Adviser and Financial Institution to the Retirement Investor; informs the Retirement Investor of the services provided by the Financial Institution and the Adviser; and describes how the Retirement Investor will pay for services, directly or through Third Party Payments. If, for example, the Retirement Investor will pay through commissions or other forms of transaction-based payments, the contract or writing must clearly disclose that fact; (2) Describes Material Conflicts of Interest; discloses any fees or charges the Financial Institution, its Affiliates, or the Adviser imposes upon the Retirement Investor or the Retirement Investor’s account; and states the types of compensation that the Financial Institution, its Affiliates, and the Adviser expect to receive from third parties in connection with investments recommended to Retirement Investors; (3) Informs the Retirement Investor that the Investor has the right to obtain PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 44777 copies of the Financial Institution’s written description of its policies and procedures adopted in accordance with Section II(d), as well as the specific disclosure of costs, fees, and compensation, including Third Party Payments, regarding recommended transactions, as set forth in Section III(a), below, described in dollar amounts, percentages, formulas, or other means reasonably designed to present materially accurate disclosure of their scope, magnitude, and nature in sufficient detail to permit the Retirement Investor to make an informed judgment about the costs of the transaction and about the significance and severity of the Material Conflicts of Interest, and describes how the Retirement Investor can get the information, free of charge; provided that if the Retirement Investor’s request is made prior to the transaction, the information must be provided prior to the transaction, and if the request is made after the transaction, the information must be provided within 30 business days after the request; (4) Includes a link to the Financial Institution’s Web site as required by Section III(b), and informs the Retirement Investor that: (i) Model contract disclosures updated as necessary on a quarterly basis are maintained on the Web site, and (ii) the Financial Institution’s written description of its policies and procedures adopted in accordance with Section II(d) are available free of charge on the Web site; (5) Discloses to the Retirement Investor whether the Financial Institution offers Proprietary Products or receives Third Party Payments with respect to any recommended investments; and to the extent the Financial Institution or Adviser limits investment recommendations, in whole or part, to Proprietary Products or investments that generate Third Party Payments, notifies the Retirement Investor of the limitations placed on the universe of investments that the Adviser may offer for purchase, sale, exchange, or holding by the Retirement Investor. The notice is insufficient if it merely states that the Financial Institution or Adviser ‘‘may’’ limit investment recommendations based on whether the investments are Proprietary Products or generate Third Party Payments, without specific disclosure of the extent to which recommendations are, in fact, limited on that basis; (6) Provides contact information (telephone and email) for a representative of the Financial Institution that the Retirement Investor can use to contact the Financial E:\FR\FM\11JYR1.SGM 11JYR1 ehiers on DSK5VPTVN1PROD with RULES 44778 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations Institution with any concerns about the advice or service they have received; and, if applicable, a statement explaining that the Retirement Investor can research the Financial Institution and its Advisers using FINRA’s BrokerCheck database or the Investment Adviser Registration Depository (IARD), or other database maintained by a governmental agency or instrumentality, or self-regulatory organization; and (7) Describes whether or not the Adviser and Financial Institution will monitor the Retirement Investor’s investments and alert the Retirement Investor to any recommended change to those investments, and, if so monitoring, the frequency with which the monitoring will occur and the reasons for which the Retirement Investor will be alerted. (8) The Financial Institution will not fail to satisfy this Section II(e), or violate a contractual provision based thereon, solely because it, acting in good faith and with reasonable diligence, makes an error or omission in disclosing the required information, provided the Financial Institution discloses the correct information as soon as practicable, but not later than 30 days after the date on which it discovers or reasonably should have discovered the error or omission. To the extent compliance with this Section II(e) requires Advisers and Financial Institutions to obtain information from entities that are not closely affiliated with them, they may rely in good faith on information and assurances from the other entities, as long as they do not know that the materials are incomplete or inaccurate. This good faith reliance applies unless the entity providing the information to the Adviser and Financial Institution is (1) a person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Adviser or Financial Institution; or (2) any officer, director, employee, agent, registered representative, relative (as defined in ERISA section 3(15)), member of family (as defined in Code section 4975(e)(6)) of, or partner in, the Adviser or Financial Institution. (f) Ineligible Contractual Provisions. Relief is not available under the exemption if a Financial Institution’s contract contains the following: (1) Exculpatory provisions disclaiming or otherwise limiting liability of the Adviser or Financial Institution for a violation of the contract’s terms; (2) Except as provided in paragraph (f)(4) of this Section, a provision under which the Plan, IRA or Retirement VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 Investor waives or qualifies its right to bring or participate in a class action or other representative action in court in a dispute with the Adviser or Financial Institution, or in an individual or class claim agrees to an amount representing liquidated damages for breach of the contract; provided that, the parties may knowingly agree to waive the Retirement Investor’s right to obtain punitive damages or rescission of recommended transactions to the extent such a waiver is permissible under applicable state or federal law; or (3) Agreements to arbitrate or mediate individual claims in venues that are distant or that otherwise unreasonably limit the ability of the Retirement Investors to assert the claims safeguarded by this exemption. (4) In the event that the provision on pre-dispute arbitration agreements for class or representative claims in paragraph (f)(2) of this Section is ruled invalid by a court of competent jurisdiction, this provision shall not be a condition of this exemption with respect to contracts subject to the court’s jurisdiction unless and until the court’s decision is reversed, but all other terms of the exemption shall remain in effect. (g) ERISA plans. Section II(a) does not apply to recommendations to Retirement Investors regarding investments in Plans that are covered by Title I of ERISA. For such investment advice, relief under the exemption is conditioned upon the Adviser and Financial Institution complying with certain provisions of Section II, as follows: (1) Prior to or at the same time as the execution of the recommended transaction, the Financial Institution provides the Retirement Investor with a written statement of the Financial Institution’s and its Advisers’ fiduciary status, in accordance with Section II(b). (2) The Financial Institution and the Adviser comply with the Impartial Conduct Standards of Section II(c). (3) The Financial Institution adopts policies and procedures incorporating the requirements and prohibitions set forth in Section II(d)(1)–(3), and the Financial Institution and Adviser comply with those requirements and prohibitions. (4) The Financial Institution provides the disclosures required by Section II(e). (5) The Financial Institution and Adviser do not in any contract, instrument, or communication: purport to disclaim any responsibility or liability for any responsibility, obligation, or duty under Title I of ERISA to the extent the disclaimer would be prohibited by ERISA section 410; purport to waive or qualify the PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 right of the Retirement Investor to bring or participate in a class action or other representative action in court in a dispute with the Adviser or Financial Institution, or require arbitration or mediation of individual claims in locations that are distant or that otherwise unreasonably limit the ability of the Retirement Investors to assert the claims safeguarded by this exemption. (h) Level Fee Fiduciaries. Sections II(a), (d), (e), (f), (g), III and V do not apply to recommendations by Financial Institutions and Advisers that are Level Fee Fiduciaries. For such investment advice, relief under the exemption is conditioned upon the Adviser and Financial Institution complying with certain other provisions of Section II, as follows: (1) Prior to or at the same time as the execution of the recommended transaction, the Financial Institution provides the Retirement Investor with a written statement of the Financial Institution’s and its Advisers’ fiduciary status, in accordance with Section II(b). (2) The Financial Institution and Adviser comply with the Impartial Conduct Standards of Section II(c). (3)(i) In the case of a recommendation to roll over from an ERISA Plan to an IRA, the Financial Institution documents the specific reason or reasons why the recommendation was considered to be in the Best Interest of the Retirement Investor. This documentation must include consideration of the Retirement Investor’s alternatives to a rollover, including leaving the money in his or her current employer’s Plan, if permitted, and must take into account the fees and expenses associated with both the Plan and the IRA; whether the employer pays for some or all of the plan’s administrative expenses; and the different levels of services and investments available under each option; and (ii) in the case of a recommendation to rollover from another IRA or to switch from a commission-based account to a level fee arrangement, the Level Fee Fiduciary documents the reasons that the arrangement is considered to be in the Best Interest of the Retirement Investor, including, specifically, the services that will be provided for the fee. (i) Bank Networking Arrangements. An Adviser who is a bank employee, and a Financial Institution that is a bank or similar financial institution supervised by the United States or a state, or a savings association (as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)), may receive compensation pursuant to a Bank Networking E:\FR\FM\11JYR1.SGM 11JYR1 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations Arrangement as defined in Section VIII(c), in connection with their provision of investment advice to a Retirement Investor, provided the investment advice adheres to the Impartial Conduct Standards set forth in Section II(c). The remaining conditions of the exemption do not apply. ehiers on DSK5VPTVN1PROD with RULES Section III—Web and Transaction-Based Disclosure The Financial Institution must satisfy the following conditions with respect to an investment recommendation, to be covered by this exemption: (a) Transaction Disclosure. The Financial Institution provides the Retirement Investor, prior to or at the same time as the execution of the recommended investment in an investment product, the following disclosure, clearly and prominently, in a single written document, that: (1) States the Best Interest standard of care owed by the Adviser and Financial Institution to the Retirement Investor; and describes any Material Conflicts of Interest; (2) Informs the Retirement Investor that the Retirement Investor has the right to obtain copies of the Financial Institution’s written description of its policies and procedures adopted in accordance with Section II(d), as well as specific disclosure of costs, fees and other compensation including Third Party Payments regarding recommended transactions. The costs, fees, and other compensation may be described in dollar amounts, percentages, formulas, or other means reasonably designed to present materially accurate disclosure of their scope, magnitude, and nature in sufficient detail to permit the Retirement Investor to make an informed judgment about the costs of the transaction and about the significance and severity of the Material Conflicts of Interest. The information required under this Section must be provided to the Retirement Investor prior to the transaction, if requested prior to the transaction, and, if the request is made after the transaction, the information must be provided within 30 business days after the request; and (3) Includes a link to the Financial Institution’s Web site as required by Section III(b) and informs the Retirement Investor that: (i) Model contract disclosures or other model notices, updated as necessary on a quarterly basis, are maintained on the Web site, and (ii) the Financial Institution’s written description of its policies and procedures as required under Section III(b)(1)(iv) are available free of charge on the Web site. VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 (4) These disclosures do not have to be repeated for subsequent recommendations by the Adviser and Financial Institution of the same investment product within one year of the provision of the contract disclosure in Section II(e) or a previous disclosure pursuant to this Section III(a), unless there are material changes in the subject of the disclosure. (b) Web Disclosure. For relief to be available under the exemption for any investment recommendation, the conditions of Section III(b) must be satisfied. (1) The Financial Institution maintains a Web site, freely accessible to the public and updated no less than quarterly, which contains: (i) A discussion of the Financial Institution’s business model and the Material Conflicts of Interest associated with that business model; (ii) A schedule of typical account or contract fees and service charges; (iii) A model contract or other model notice of the contractual terms (if applicable) and required disclosures described in Section II(b)–(e), which are reviewed for accuracy no less frequently than quarterly and updated within 30 days if necessary; (iv) A written description of the Financial Institution’s policies and procedures that accurately describes or summarizes key components of the policies and procedures relating to conflict-mitigation and incentive practices in a manner that permits Retirement Investors to make an informed judgment about the stringency of the Financial Institution’s protections against conflicts of interest; (v) To the extent applicable, a list of all product manufacturers and other parties with whom the Financial Institution maintains arrangements that provide Third Party Payments to either the Adviser or the Financial Institution with respect to specific investment products or classes of investments recommended to Retirement Investors; a description of the arrangements, including a statement on whether and how these arrangements impact Adviser compensation, and a statement on any benefits the Financial Institution provides to the product manufacturers or other parties in exchange for the Third Party Payments; (vi) Disclosure of the Financial Institution’s compensation and incentive arrangements with Advisers including, if applicable, any incentives (including both cash and non-cash compensation or awards) to Advisers for recommending particular product manufacturers, investments or categories of investments to Retirement PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 44779 Investors, or for Advisers to move to the Financial Institution from another firm or to stay at the Financial Institution, and a full and fair description of any payout or compensation grids, but not including information that is specific to any individual Adviser’s compensation or compensation arrangement. (vii) The Web site may describe the above arrangements with product manufacturers, Advisers, and others by reference to dollar amounts, percentages, formulas, or other means reasonably calculated to present a materially accurate description of the arrangements. Similarly, the Web site may group disclosures based on reasonably-defined categories of investment products or classes, product manufacturers, Advisers, and arrangements, and it may disclose reasonable ranges of values, rather than specific values, as appropriate. But, however constructed, the Web site must fairly disclose the scope, magnitude, and nature of the compensation arrangements and Material Conflicts of Interest in sufficient detail to permit visitors to the Web site to make an informed judgment about the significance of the compensation practices and Material Conflicts of Interest with respect to transactions recommended by the Financial Institution and its Advisers. (2) To the extent the information required by this Section is provided in other disclosures which are made public, including those required by the SEC and/or the Department such as a Form ADV, Part II, the Financial Institution may satisfy this Section III(b) by posting such disclosures to its Web site with an explanation that the information can be found in the disclosures and a link to where it can be found. (3) The Financial Institution is not required to disclose information pursuant to this Section III(b) if such disclosure is otherwise prohibited by law. (4) In addition to providing the written description of the Financial Institution’s policies and procedures on its Web site, as required under Section III(b)(1)(iv), Financial Institutions must provide their complete policies and procedures adopted pursuant to Section II(d) to the Department upon request. (5) In the event that a Financial Institution determines to group disclosures as described in subsection (1)(vii), it must retain the data and documentation supporting the group disclosure during the time that it is applicable to the disclosure on the Web site, and for six years after that, and make the data and documentation E:\FR\FM\11JYR1.SGM 11JYR1 ehiers on DSK5VPTVN1PROD with RULES 44780 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations available to the Department within 90 days of the Department’s request. (c)(1) The Financial Institution will not fail to satisfy the conditions in this Section III solely because it, acting in good faith and with reasonable diligence, makes an error or omission in disclosing the required information, or if the Web site is temporarily inaccessible, provided that, (i) in the case of an error or omission on the Web site, the Financial Institution discloses the correct information as soon as practicable, but not later than seven (7) days after the date on which it discovers or reasonably should have discovered the error or omission, and (ii) in the case of an error or omission with respect to the transaction disclosure, the Financial Institution discloses the correct information as soon as practicable, but not later than 30 days after the date on which it discovers or reasonably should have discovered the error or omission. (2) To the extent compliance with the Section III disclosures requires Advisers and Financial Institutions to obtain information from entities that are not closely affiliated with them, they may rely in good faith on information and assurances from the other entities, as long as they do not know that the materials are incomplete or inaccurate. This good faith reliance applies unless the entity providing the information to the Adviser and Financial Institution is (i) a person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Adviser or Financial Institution; or (ii) any officer, director, employee, agent, registered representative, relative (as defined in ERISA section 3(15)), member of family (as defined in Code section 4975(e)(6)) of, or partner in, the Adviser or Financial Institution. (3) The good faith provisions of this Section apply to the requirement that the Financial Institution retain the data and documentation supporting the group disclosure during the time that it is applicable to the disclosure on the Web site and provide it to the Department upon request, as set forth in subsection (b)(1)(vii) and (b)(5) above. In addition, if such records are lost or destroyed, due to circumstances beyond the control of the Financial Institution, then no prohibited transaction will be considered to have occurred solely on the basis of the unavailability of those records; and no party, other than the Financial Institution responsible for complying with subsection (b)(1)(vii) and (b)(5) will be subject to the civil penalty that may be assessed under ERISA section 502(i) or the taxes imposed by Code section 4975(a) and VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 (b), if applicable, if the records are not maintained or provided to the Department within the required timeframes. Section IV—Proprietary Products and Third Party Payments (a) General. A Financial Institution that at the time of the transaction restricts Advisers’ investment recommendations, in whole or part, to Proprietary Products or to investments that generate Third Party Payments, may rely on this exemption provided all the applicable conditions of the exemption are satisfied. (b) Satisfaction of the Best Interest standard. A Financial Institution that limits Advisers’ investment recommendations, in whole or part, based on whether the investments are Proprietary Products or generate Third Party Payments, and an Adviser making recommendations subject to such limitations, shall be deemed to satisfy the Best Interest standard of Section VIII(d) if: (1) Prior to or at the same time as the execution of the recommended transaction, the Retirement Investor is clearly and prominently informed in writing that the Financial Institution offers Proprietary Products or receives Third Party Payments with respect to the purchase, sale, exchange, or holding of recommended investments; and the Retirement Investor is informed in writing of the limitations placed on the universe of investments that the Adviser may recommend to the Retirement Investor. The notice is insufficient if it merely states that the Financial Institution or Adviser ‘‘may’’ limit investment recommendations based on whether the investments are Proprietary Products or generate Third Party Payments, without specific disclosure of the extent to which recommendations are, in fact, limited on that basis; (2) Prior to or at the same time as the execution of the recommended transaction, the Retirement Investor is fully and fairly informed in writing of any Material Conflicts of Interest that the Financial Institution or Adviser have with respect to the recommended transaction, and the Adviser and Financial Institution comply with the disclosure requirements set forth in Section III above (providing for web and transaction-based disclosure of costs, fees, compensation, and Material Conflicts of Interest); (3) The Financial Institution documents in writing its limitations on the universe of recommended investments; documents in writing the Material Conflicts of Interest associated with any contract, agreement, or PO 00000 Frm 00022 Fmt 4700 Sfmt 4700 arrangement providing for its receipt of Third Party Payments or associated with the sale or promotion of Proprietary Products; documents in writing any services it will provide to Retirement Investors in exchange for Third Party Payments, as well as any services or consideration it will furnish to any other party, including the payor, in exchange for the Third Party Payments; reasonably concludes that the limitations on the universe of recommended investments and Material Conflicts of Interest will not cause the Financial Institution or its Advisers to receive compensation in excess of reasonable compensation for Retirement Investors as set forth in Section II(c)(2); reasonably determines, after consideration of the policies and procedures established pursuant to Section II(d), that these limitations and Material Conflicts of Interest will not cause the Financial Institution or its Advisers to recommend imprudent investments; and documents in writing the bases for its conclusions; (4) The Financial Institution adopts, monitors, implements, and adheres to policies and procedures and incentive practices that meet the terms of Section II(d)(1) and (2); and, in accordance with Section II(d)(3), neither the Financial Institution nor (to the best of its knowledge) any Affiliate or Related Entity uses or relies upon 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 the Adviser to make imprudent investment recommendations, to subordinate the interests of the Retirement Investor to the Adviser’s own interests, or to make recommendations based on the Adviser’s considerations of factors or interests other than the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor; (5) At the time of the recommendation, the amount of compensation and other consideration reasonably anticipated to be paid, directly or indirectly, to the Adviser, Financial Institution, or their Affiliates or Related Entities for their services in connection with the recommended transaction is not in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2); and (6) The Adviser’s recommendation reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such E:\FR\FM\11JYR1.SGM 11JYR1 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations 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; and the Adviser’s recommendation is not based on the financial or other interests of the Adviser or on the Adviser’s consideration of any factors or interests other than the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor. ehiers on DSK5VPTVN1PROD with RULES Section V—Disclosure to the Department and Recordkeeping This Section establishes record retention and disclosure conditions that a Financial Institution must satisfy for the exemption to be available for compensation received in connection with recommended transactions. (a) EBSA Disclosure. Before receiving compensation in reliance on the exemption in Section I, the Financial Institution notifies the Department of its intention to rely on this exemption. The notice will remain in effect until revoked in writing by the Financial Institution. The notice need not identify any Plan or IRA. The notice must be provided by email to e-BICE@dol.gov. (b) Recordkeeping. The Financial Institution maintains for a period of six (6) years, in a manner that is reasonably accessible for examination, the records necessary to enable the persons described in paragraph (c) of this Section to determine whether the conditions of this exemption have been met with respect to a transaction, except that: (1) If such records are lost or destroyed, due to circumstances beyond the control of the Financial Institution, then no prohibited transaction will be considered to have occurred solely on the basis of the unavailability of those records; and (2) No party, other than the Financial Institution responsible for complying with this paragraph (c), will be subject to the civil penalty that may be assessed under ERISA section 502(i) or the taxes imposed by Code section 4975(a) and (b), if applicable, if the records are not maintained or are not available for examination as required by paragraph (c), below. (c)(1) Except as provided in paragraph (c)(2) of this Section or precluded by 12 U.S.C. 484, and notwithstanding any provisions of ERISA section 504(a)(2) and (b), the records referred to in paragraph (b) of this Section are reasonably available at their customary location for examination during normal business hours by: VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 (i) Any authorized employee or representative of the Department or the Internal Revenue Service; (ii) Any fiduciary of a Plan that engaged in an investment transaction pursuant to this exemption, or any authorized employee or representative of such fiduciary; (iii) Any contributing employer and any employee organization whose members are covered by a Plan described in paragraph (c)(1)(ii), or any authorized employee or representative of these entities; or (iv) Any participant or beneficiary of a Plan described in paragraph (c)(1)(ii), IRA owner, or the authorized representative of such participant, beneficiary or owner; and (2) None of the persons described in paragraph (c)(1)(ii)–(iv) of this Section are authorized to examine records regarding a recommended transaction involving another Retirement Investor, privileged trade secrets or privileged commercial or financial information of the Financial Institution, or information identifying other individuals. (3) Should the Financial Institution refuse to disclose information on the basis that the information is exempt from disclosure, the Financial Institution must, by the close of the thirtieth (30th) day following the request, provide a written notice advising the requestor of the reasons for the refusal and that the Department may request such information. (4) Failure to maintain the required records necessary to determine whether the conditions of this exemption have been met will result in the loss of the exemption only for the transaction or transactions for which records are missing or have not been maintained. It does not affect the relief for other transactions. Section VI—Exemption for Purchases and Sales, Including Insurance and Annuity Contracts (a) In general. In addition to prohibiting fiduciaries from receiving compensation from third parties and compensation that varies based on their investment advice, ERISA and the Internal Revenue Code prohibit the purchase by a Plan, participant or beneficiary account, or IRA of an investment product, including insurance or annuity product from an insurance company that is a service provider to the Plan or IRA. This exemption permits a Plan, participant or beneficiary account, or IRA to engage in a purchase or sale with a Financial Institution that is a service provider or other party in interest or disqualified person to the Plan or IRA. This PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 44781 exemption is provided because investment transactions often involve prohibited purchases and sales involving entities that have a preexisting party in interest relationship to the Plan or IRA. (b) Covered transactions. The restrictions of ERISA section 406(a)(1)(A) and (D), and the sanctions imposed by Code section 4975(a) and (b), by reason of Code section 4975(c)(1)(A) and (D), shall not apply to the purchase or sale of an investment product by a Plan, participant or beneficiary account, or IRA, with a Financial Institution that is a party in interest or disqualified person. (c) The following conditions are applicable to this exemption: (1) The transaction is effected by the Financial Institution in the ordinary course of its business; (2) The compensation, direct or indirect, for any services rendered by the Financial Institution and its Affiliates and Related Entities is not in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2); and (3) The terms of the transaction are at least as favorable to the Plan, participant or beneficiary account, or IRA as the terms generally available in an arm’s length transaction with an unrelated party. (d) Exclusions, The exemption in this Section VI does not apply if: (1) The Plan is covered by Title I of ERISA and (i) the Adviser, Financial Institution or any Affiliate is the employer of employees covered by the Plan, or (ii) the Adviser and Financial Institution is a named fiduciary or plan administrator (as defined in ERISA section 3(16)(A)) with respect to the Plan, or an affiliate thereof, that was selected to provide advice to the plan by a fiduciary who is not Independent. (2) The compensation is received as a result of a Principal Transaction; (3) The compensation is received as a result of investment advice to a Retirement Investor generated solely by an interactive Web site in which computer software-based models or applications provide investment advice based on personal information each investor supplies through the Web site without any personal interaction or advice from an individual Adviser (i.e., ‘‘robo-advice’’) unless the robo-advice provider is a Level Fee Fiduciary that complies with the conditions applicable to Level Fee Fiduciaries; or (4) The Adviser has or exercises any discretionary authority or discretionary control with respect to the recommended transaction. E:\FR\FM\11JYR1.SGM 11JYR1 ehiers on DSK5VPTVN1PROD with RULES 44782 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations Section VII—Exemption for Pre-Existing Transactions (a) In general. ERISA and the Internal Revenue Code prohibit Advisers, Financial Institutions and their Affiliates and Related Entities from receiving compensation that varies based on their investment advice. Similarly, fiduciary advisers are prohibited from receiving compensation from third parties in connection with their advice. Some Advisers and Financial Institutions did not consider themselves fiduciaries within the meaning of 29 CFR 2510–3.21 before the applicability date of the amendment to 29 CFR 2510–3.21 (the Applicability Date). Other Advisers and Financial Institutions entered into transactions involving Plans, participant or beneficiary accounts, or IRAs before the Applicability Date, in accordance with the terms of a prohibited transaction exemption that has since been amended. This exemption permits Advisers, Financial Institutions, and their Affiliates and Related Entities, to receive compensation, such as 12b-1 fees, in connection with a Plan’s, participant or beneficiary account’s or IRA’s purchase, sale, exchange, or holding of securities or other investment property that was acquired prior to the Applicability Date, as described and limited below. (b) Covered transaction. Subject to the applicable conditions described below, the restrictions of ERISA section 406(a)(1)(A), 406(a)(1)(D), and 406(b) and the sanctions imposed by Code section 4975(a) and (b), by reason of Code section 4975(c)(1)(A), (D), (E) and (F), shall not apply to the receipt of compensation by an Adviser, Financial Institution, and any Affiliate and Related Entity, as a result of investment advice (including advice to hold) provided to a Plan, participant or beneficiary or IRA owner in connection with the purchase, holding, sale, or exchange of securities or other investment property (i) that was acquired before the Applicability Date, or (ii) that was acquired pursuant to a recommendation to continue to adhere to a systematic purchase program established before the Applicability Date. This Exemption for Pre-Existing Transactions is conditioned on the following: (1) The compensation is received pursuant to an agreement, arrangement or understanding that was entered into prior to the Applicability Date and that has not expired or come up for renewal post-Applicability Date; (2) The purchase, exchange, holding or sale of the securities or other VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 investment property was not otherwise a non-exempt prohibited transaction pursuant to ERISA section 406 and Code section 4975 on the date it occurred; (3) The compensation is not received in connection with the Plan’s, participant or beneficiary account’s or IRA’s investment of additional amounts in the previously acquired investment vehicle; except that for avoidance of doubt, the exemption does apply to a recommendation to exchange investments within a mutual fund family or variable annuity contract pursuant to an exchange privilege or rebalancing program that was established before the Applicability Date, provided that the recommendation does not result in the Adviser and Financial Institution, or their Affiliates or Related Entities, receiving more compensation (either as a fixed dollar amount or a percentage of assets) than they were entitled to receive prior to the Applicability Date; (4) The amount of the compensation paid, directly or indirectly, to the Adviser, Financial Institution, or their Affiliates or Related Entities in connection with the transaction is not in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2); and (5) Any investment recommendations made after the Applicability Date by the Financial Institution or Adviser with respect to the securities or other investment property reflect 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, and are made without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party. Section VIII—Definitions For purposes of these exemptions: (a) ‘‘Adviser’’ means an individual who: (1) Is a fiduciary of the Plan or IRA by reason of the provision of investment advice described in ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B), or both, and the applicable regulations, with respect to the assets of the Plan or IRA involved in the recommended transaction; (2) Is an employee, independent contractor, agent, or registered representative of a Financial Institution; and PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 (3) Satisfies the federal and state regulatory and licensing requirements of insurance, banking, and securities laws with respect to the covered transaction, as applicable. (b) ‘‘Affiliate’’ of an Adviser or Financial Institution means— (1) Any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Adviser or Financial Institution. For this purpose, ‘‘control’’ means the power to exercise a controlling influence over the management or policies of a person other than an individual; (2) Any officer, director, partner, employee, or relative (as defined in ERISA section 3(15)), of the Adviser or Financial Institution; and (3) Any corporation or partnership of which the Adviser or Financial Institution is an officer, director, or partner. (c) A ‘‘Bank Networking Arrangement’’ is an arrangement for the referral of retail non-deposit investment products that satisfies applicable federal banking, securities and insurance regulations, under which employees of a bank refer bank customers to an unaffiliated investment adviser registered under the Investment Advisers Act of 1940 or under the laws of the state in which the adviser maintains its principal office and place of business, insurance company qualified to do business under the laws of a state, or broker or dealer registered under the Securities Exchange Act of 1934, as amended. For purposes of this definition, a ‘‘bank’’ is a bank or similar financial institution supervised by the United States or a state, or a savings association (as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)), (d) 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. Financial Institutions that limit investment recommendations, in whole or part, based on whether the investments are Proprietary Products or generate Third Party Payments, and E:\FR\FM\11JYR1.SGM 11JYR1 ehiers on DSK5VPTVN1PROD with RULES Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations Advisers making recommendations subject to such limitations are deemed to satisfy the Best Interest standard when they comply with the conditions of Section IV(b). (e) ‘‘Financial Institution’’ means an entity that employs the Adviser or otherwise retains such individual as an independent contractor, agent or registered representative and that is: (1) Registered as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) or under the laws of the state in which the adviser maintains its principal office and place of business; (2) A bank or similar financial institution supervised by the United States or a state, or a savings association (as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)); (3) An insurance company qualified to do business under the laws of a state, provided that such insurance company: (i) Has obtained a Certificate of Authority from the insurance commissioner of its domiciliary state which has neither been revoked nor suspended, (ii) Has undergone and shall continue to undergo an examination by an Independent certified public accountant for its last completed taxable year or has undergone a financial examination (within the meaning of the law of its domiciliary state) by the state’s insurance commissioner within the preceding 5 years, and (iii) Is domiciled in a state whose law requires that actuarial review of reserves be conducted annually and reported to the appropriate regulatory authority; (4) A broker or dealer registered under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); or (5) An entity that is described in the definition of Financial Institution in an individual exemption granted by the Department under ERISA section 408(a) and Code section 4975(c), after the date of this exemption, that provides relief for the receipt of compensation in connection with investment advice provided by an investment advice fiduciary, under the same conditions as this class exemption. (f) ‘‘Independent’’ means a person that: (1) Is not the Adviser, the Financial Institution or any Affiliate relying on the exemption; (2) Does not have a relationship to or an interest in the Adviser, the Financial Institution or Affiliate that might affect the exercise of the person’s best judgment in connection with transactions described in this exemption; and VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 (3) Does not receive or is not projected to receive within the current federal income tax year, compensation or other consideration for his or her own account from the Adviser, Financial Institution or Affiliate in excess of 2% of the person’s annual revenues based upon its prior income tax year. (g) ‘‘Individual Retirement Account’’ or ‘‘IRA’’ means any account or annuity described in Code section 4975(e)(1)(B) through (F), including, for example, an individual retirement account described in section 408(a) of the Code and a health savings account described in section 223(d) of the Code. (h) A Financial Institution and Adviser are ‘‘Level Fee Fiduciaries’’ if the only fee received by the Financial Institution, the Adviser and any Affiliate in connection with advisory or investment management services to the Plan or IRA assets is a Level Fee that is disclosed in advance to the Retirement Investor. 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. (i) 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 judgment as a fiduciary in rendering advice to a Retirement Investor. (j) ‘‘Plan’’ means any employee benefit plan described in section 3(3) of ERISA and any plan described in section 4975(e)(1)(A) of the Code. (k) A ‘‘Principal Transaction’’ means a purchase or sale of an investment product if an Adviser or Financial Institution is purchasing from or selling to a Plan, participant or beneficiary account, or IRA on behalf of the Financial Institution’s own account or the account of a person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Financial Institution. For purposes of this definition, a Principal Transaction does not include the sale of an insurance or annuity contract, a mutual fund transaction, or a Riskless Principal Transaction as defined in Section VIII(p) below. (l) ‘‘Proprietary Product’’ means a product that is managed, issued or sponsored by the Financial Institution or any of its Affiliates. (m) ‘‘Related Entity’’ means any entity other than an Affiliate in which the Adviser or Financial Institution has an PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 44783 interest which may affect the exercise of its best judgment as a fiduciary. (n) A ‘‘Retail Fiduciary’’ means a fiduciary of a Plan or IRA that is not described in section (c)(1)(i) of the Regulation (29 CFR 2510.3–21(c)(1)(i)). (o) ‘‘Retirement Investor’’ means— (1) A participant or beneficiary of a Plan subject to Title I of ERISA or described in section 4975(e)(1)(A) of the Code, with authority to direct the investment of assets in his or her Plan account or to take a distribution, (2) The beneficial owner of an IRA acting on behalf of the IRA, or (3) A Retail Fiduciary with respect to a Plan subject to Title I of ERISA or described in section 4975(e)(1)(A) of the Code or IRA. (p) A ‘‘Riskless Principal Transaction’’ is a transaction in which a Financial Institution, after having received an order from a Retirement Investor to buy or sell an investment product, purchases or sells the same investment product for the Financial Institution’s own account to offset the contemporaneous transaction with the Retirement Investor. (q) ‘‘Third-Party Payments’’ include sales charges when not paid directly by the Plan, participant or beneficiary account, or IRA; 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 or Related Entity by a third party as a result of a transaction involving a Plan, participant or beneficiary account, or IRA. Section IX—Transition Period for Exemption (a) In general. ERISA and the Internal Revenue Code prohibit fiduciary advisers to Plans and IRAs from receiving compensation that varies based on their investment advice. Similarly, fiduciary advisers are prohibited from receiving compensation from third parties in connection with their advice. This transition period provides relief from the restrictions of ERISA section 406(a)(1)(D), and 406(b) and the sanctions imposed by Code section 4975(a) and (b) by reason of Code section 4975(c)(1)(D), (E), and (F) for the period from April 10, 2017, to January 1, 2018 (the Transition Period) for Advisers, Financial Institutions, and their Affiliates and Related Entities, to receive such otherwise prohibited compensation subject to the conditions described in Section IX(d). E:\FR\FM\11JYR1.SGM 11JYR1 ehiers on DSK5VPTVN1PROD with RULES 44784 Federal Register / Vol. 81, No. 132 / Monday, July 11, 2016 / Rules and Regulations (b) Covered transactions. This provision permits Advisers, Financial Institutions, and their Affiliates and Related Entities to receive compensation as a result of their provision of investment advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) to a Retirement Investor, during the Transition Period. (c) Exclusions. This provision does not apply if: (1) The Plan is covered by Title I of ERISA, and (i) the Adviser, Financial Institution or any Affiliate is the employer of employees covered by the Plan, or (ii) the Adviser or Financial Institution is a named fiduciary or plan administrator (as defined in ERISA section 3(16)(A)) with respect to the Plan, or an Affiliate thereof, that was selected to provide advice to the Plan by a fiduciary who is not Independent; (2) The compensation is received as a result of a Principal Transaction; (3) The compensation is received as a result of investment advice to a Retirement Investor generated solely by an interactive Web site in which computer software-based models or applications provide investment advice based on personal information each investor supplies through the Web site without any personal interaction or advice from an individual Adviser (i.e., ‘‘robo-advice’’); or (4) The Adviser has or exercises any discretionary authority or discretionary control with respect to the recommended transaction. (d) Conditions. The provision is subject to the following conditions: (1) The Financial Institution and Adviser adhere to the following standards: (i) When providing investment advice to the Retirement Investor, the Financial Institution and the Adviser(s) provide investment advice that is, at the time of the recommendation, in the Best Interest of the Retirement Investor. As further defined in Section VIII(d), such advice reflects 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; (ii) The recommended transaction does not cause the Financial Institution, Adviser or their Affiliates or Related Entities to receive, directly or indirectly, compensation for their services that is VerDate Sep<11>2014 13:54 Jul 08, 2016 Jkt 238001 in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2). (iii) Statements by the Financial Institution and its Advisers to the Retirement Investor about the recommended transaction, fees and compensation, Material Conflicts of Interest, and any other matters relevant to a Retirement Investor’s investment decisions, are not materially misleading at the time they are made. (2) Disclosures. The Financial Institution provides to the Retirement Investor, prior to or at the same time as, the execution of the recommended transaction, a single written disclosure, which may cover multiple transactions or all transactions occurring within the Transition Period, that clearly and prominently: (i) Affirmatively states that the Financial Institution and the Adviser(s) act as fiduciaries under ERISA or the Code, or both, with respect to the recommendation; (ii) Sets forth the standards in paragraph (d)(1) of this Section and affirmatively states that it and the Adviser(s) adhered to such standards in recommending the transaction; (iii) Describes the Financial Institution’s Material Conflicts of Interest; and (iv) Discloses to the Retirement Investor whether the Financial Institution offers Proprietary Products or receives Third Party Payments with respect to any investment recommendations; and to the extent the Financial Institution or Adviser limits investment recommendations, in whole or part, to Proprietary Products or investments that generate Third Party Payments, notifies the Retirement Investor of the limitations placed on the universe of investment recommendations. The notice is insufficient if it merely states that the Financial Institution or Adviser ‘‘may’’ limit investment recommendations based on whether the investments are Proprietary Products or generate Third Party Payments, without specific disclosure of the extent to which recommendations are, in fact, limited on that basis. (v) The disclosure may be provided in person, electronically or by mail. It does not have to be repeated for any subsequent recommendations during the Transition Period. (vi) The Financial Institution will not fail to satisfy this Section IX(d)(2) solely because it, acting in good faith and with reasonable diligence, makes an error or omission in disclosing the required information, provided the Financial Institution discloses the correct PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 information as soon as practicable, but not later than 30 days after the date on which it discovers or reasonably should have discovered the error or omission. To the extent compliance with this Section IX(d)(2) requires Financial Institutions to obtain information from entities that are not closely affiliated with them, they may rely in good faith on information and assurances from the other entities, as long as they do not know, or unless they should have known, that the materials are incomplete or inaccurate. This good faith reliance applies unless the entity providing the information to the Adviser and Financial Institution is (1) a person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Adviser or Financial Institution; or (2) any officer, director, employee, agent, registered representative, relative (as defined in ERISA section 3(15)), member of family (as defined in Code section 4975(e)(6)) of, or partner in, the Adviser or Financial Institution. (3) The Financial Institution designates a person or persons, identified by name, title or function, responsible for addressing Material Conflicts of Interest and monitoring Advisers’ adherence to the Impartial Conduct Standards; and (4) The Financial Institution complies with the recordkeeping requirements of Section V(b) and (c). Signed at Washington, DC. Phyllis C. Borzi, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor. [FR Doc. 2016–16355 Filed 7–7–16; 4:15 pm] BILLING CODE 4510–29–P DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2550 [Application No. D–11713; Prohibited Transaction Exemption 2016–02] ZRIN 1210–ZA25 Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs; Correction Employee Benefits Security Administration (EBSA), U.S. Department of Labor. ACTION: Technical corrections. AGENCY: E:\FR\FM\11JYR1.SGM 11JYR1

Agencies

[Federal Register Volume 81, Number 132 (Monday, July 11, 2016)]
[Rules and Regulations]
[Pages 44773-44784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16355]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

[Application No. D-11712; Prohibited Transaction Exemption 2016-01]
[ZRIN 1210-ZA25]


Best Interest Contract Exemption; Correction

AGENCY: Employee Benefits Security Administration (EBSA), U.S. 
Department of Labor.

ACTION: Technical corrections.

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SUMMARY: This document makes technical corrections to the Department of 
Labor's Best Interest Contract Exemption, which was published in the 
Federal Register on April 8, 2016. The Best Interest Contract Exemption 
allows certain persons that are fiduciaries under the Employee 
Retirement Income Security Act of 1974 (ERISA) or the Internal Revenue 
Code (the Code), or both, by reason of providing investment advice, to 
receive compensation that may otherwise be prohibited. The corrections 
in this document fix typographical errors, make minor clarifications to 
provisions that might otherwise be confusing, and confirm insurers' 
broad eligibility to rely on the exemption, consistent with the 
exemption's clearly intended scope and the analysis and data relied 
upon in the Department's final regulatory impact analysis (RIA).

DATES: Issuance date: These technical corrections are issued July 11, 
2016, without further action or notice.
    Applicability date: The Best Interest Contract Exemption, as 
corrected herein, is applicable to transactions occurring on or after 
April 10, 2017.

FOR FURTHER INFORMATION CONTACT: Brian Shiker or Susan Wilker, Office 
of Exemption Determinations, Employee Benefits Security Administration, 
U.S. Department of Labor, (202) 693-8824 (this is not a toll-free 
number).

SUPPLEMENTARY INFORMATION: 

Background

    The Best Interest Contract Exemption was granted pursuant to ERISA 
section 408(a) and Code section 4975(c)(2), and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637 
(October 27, 2011)). It was adopted by the Department in connection 
with the publication of a final regulation defining who is a fiduciary 
of an employee benefit plan under ERISA as a result of giving 
investment advice to a plan or its participants or beneficiaries 
(Regulation).\1\ The Regulation also applies to the definition of a 
``fiduciary'' of a plan (including an IRA) under the Code.
---------------------------------------------------------------------------

    \1\ 81 FR 20945 (April 8, 2016).
---------------------------------------------------------------------------

    The exemption provides relief from provisions of ERISA and the Code 
that generally prohibit fiduciaries with respect to employee benefit 
plans and individual retirement accounts (IRAs) from engaging in self-
dealing and receiving compensation from third parties in connection 
with transactions involving the plans and IRAs. The exemption allows 
entities such as registered investment advisers, broker-dealers, banks 
and insurance companies (referred to in the exemption as Financial 
Institutions), and their employees, agents and representatives 
(referred to as Advisers), that are ERISA or Code fiduciaries by reason 
of the provision of investment advice, to receive compensation that may 
otherwise give rise to prohibited transactions as a result of their 
advice to plan participants and beneficiaries, IRA owners and certain 
plan fiduciaries (including small plan sponsors). The exemption is 
subject to protective conditions to safeguard the interests of the 
plans, participants and beneficiaries and IRA owners.
    The Best Interest Contract Exemption is broadly available for 
Advisers and Financial Institutions that make investment 
recommendations to retail ``Retirement Investors,'' including plan 
participants and beneficiaries, IRA owners, and non-institutional 
fiduciaries (referred to in the exemption as ``Retail Fiduciaries''). 
As a condition of receiving compensation that would otherwise be 
prohibited under ERISA and the Code, the exemption requires Financial 
Institutions to acknowledge their fiduciary status and the fiduciary 
status of their Advisers in writing. The Financial Institution and 
Advisers must adhere to enforceable standards of fiduciary conduct and 
fair dealing with respect to their advice. In the case of IRAs and non-
ERISA plans, the exemption requires that the standards be set forth in 
an enforceable contract with the Retirement Investor; the exemption 
permits reliance on a negative consent process for existing contract 
holders. Under the exemption's terms, Financial Institutions are not 
required to enter into a contract with ERISA plan investors, but they 
must adhere to these same standards of fiduciary conduct, which the 
investors can effectively enforce pursuant to ERISA sections 502(a)(2) 
and (3). Likewise, ``Level Fee'' Fiduciaries that, with their 
Affiliates, receive only a Level Fee in connection with advisory or 
investment management services, do not have to enter into a contract 
with Retirement Investors, but they must provide a written statement of 
fiduciary status, adhere to standards of fiduciary conduct, and prepare 
a written documentation of the reasons for the recommendation.

Explanation of Corrections

    This document makes technical corrections to the Best Interest 
Contract Exemption as described below. In addition, the document adds 
an identifier, Prohibited Transaction Exemption 2016-01, to the heading 
of the Best Interest Contract Exemption. For convenience, the text of 
the corrected exemption is reprinted in its entirety at the conclusion 
of this document. The preamble to the originally granted exemption 
provides a general overview of the exemption, at 81 FR 21002.

[[Page 44774]]

    1. In the preamble discussion of the negative consent procedure for 
entering into the contract with existing contract holders, page 21023, 
the Best Interest Contract Exemption stated that ``If the Retirement 
Investor does terminate the contract within that 30-day period, this 
exemption will provide relief for 14 days after the date on which the 
termination is received by the Financial Institution.'' However, 
Section II(a)(1)(ii) of the exemption text regarding the negative 
consent procedure, page 21077, inadvertently failed to include that 
sentence. Section II(a)(1)(ii) is corrected to insert that sentence as 
the second sentence of the section. This correction will provide 
certainty to parties relying on the exemption as to the period of 
relief following termination of the contract by any Retirement 
Investor.
    2. Section II(a)(1)(ii) of the exemption defines an existing 
contract as ``an investment advisory agreement, investment program 
agreement, account opening agreement, insurance contract, annuity 
contract, or similar agreement or contract that was executed before 
January 1, 2018, and remains in effect.'' There is an error in the 
quotation of that language on page 21023 of the preamble, which, rather 
than using the date ``January 1, 2018,'' referred to the 
``Applicability Date.'' For avoidance of doubt, the Department confirms 
that January 1, 2018, is the correct date of reference for existing 
contracts.
    3. Section II(h) of the exemption, page 21079, lacked a comma 
between ``(g)'' and ``III.'' The first sentence of Section II(h) is 
corrected to read ``Sections II(a), (d), (e), (f), (g), III and V do 
not apply to recommendations by Financial Institutions and Advisers 
that are Level Fee Fiduciaries.''
    4. Section VI of the exemption, page 21082, is entitled ``Exemption 
for Purchases and Sales, Including Insurance and Annuity Contracts.'' 
However, the text of Section VI(b) referred only to a ``purchase'' and 
inadvertently omitted reference to a ``sale.'' Section VI(b) is 
corrected to insert ``or sale'' immediately following ``purchase,'' 
and, on line 9 to replace ``from'' with ``with,'' to conform to the 
section heading and accurately describe the transactions covered by the 
exemption.
    5. Section VII(b)(3), page 20182, included an unmatched close 
parenthesis. Section VII(b)(3) is corrected to delete '')'' after the 
word ``contract.''
    6. The definition of ``Adviser'' in Section VIII(a) of the 
exemption provided, in relevant part, that an Adviser ``means an 
individual who: (1) Is a fiduciary of the Plan or IRA solely by reason 
of the provision of investment advice described in ERISA section 
3(21)(A)(ii) or Code section 4975(e)(3)(B), or both, and the applicable 
regulations, with respect to the assets of the Plan or IRA involved in 
the recommended transaction (emphasis added).'' In contrast, Section 
I(c)(4) of the exemption provided an exclusion for an Adviser that 
``has or exercises any discretionary authority or discretionary control 
with respect to the recommended transaction.'' Section I(c)(4) reflects 
the Department's intent that the exemption not apply if the Adviser has 
or exercises discretion regarding the recommended transaction. The 
Department did not intend to prevent Advisers from using the exemption 
if they have discretionary authority over other assets of the Plan or 
IRA that are not subject to the investment advice or if they previously 
had, or subsequently gain, discretionary authority over assets of the 
Plan or IRA. To avoid any doubt as to the availability of the exemption 
under these circumstances, Section VIII(a)(1) is corrected to delete 
the word ``solely.''
    7. Under Section VIII(e)(3)(iii), insurance companies relying on 
the exemption must be ``domiciled in a state whose law requires that 
actuarial review of reserves be conducted annually by an Independent 
firm of actuaries and reported to the appropriate regulatory 
authority.'' This condition inadvertently limited the availability of 
the exemption with respect to insurance companies because, while state 
laws generally require annual actuarial reviews of insurance company 
reserves to be conducted by a qualified actuary appointed by the board 
of directors, they do not generally require that such reviews be 
performed by an ``Independent firm of actuaries.'' See National 
Association of Insurance Commissioners (NAIC) Actuarial Opinion and 
Memorandum Model Regulation, April 2010.\2\ As evidenced by the 
Department's Regulatory Impact Analysis (RIA), the Department clearly 
intended to make the exemption broadly available to insurance 
companies. To ensure that the exemption is available to insurance 
companies as the Department clearly intended in its original 
rulemaking, Section VIII(e)(3)(iii) is corrected to delete the phrase 
``by an Independent firm of actuaries.''
---------------------------------------------------------------------------

    \2\ Available at http://www.naic.org/store/free/MDL-822.pdf. 
Section VIII(e)(3)(iii) was in the proposed exemption (80 FR 21960, 
21988 (April 20, 2015)) and was based on several prior individual 
exemptions issued by the Department related to reinsurance by 
captive insurance companies (see e.g., PTE 2000-48, 65 FR 60452 
(Oct. 11, 2000), PTE 2013-06, 78 FR 19323 (March 29, 2013), and PTE 
2015-10, 80 FR 44765 (July 27, 2015)).
---------------------------------------------------------------------------

    8. Section VIII(j) of the exemption defines the term ``Plan'' to 
mean ``any employee benefit plan described in section 3(3) of the Act 
and any plan described in section 4975(e)(1)(A) of the Code.'' The word 
``Act'' refers to the Employee Retirement Income Security Act of 1974, 
which is defined in the exemption as ``ERISA.'' To avoid uncertainty as 
to the meaning of the word ``Act,'' Section VIII(j) is corrected to 
replace the words ``the Act'' with the word ``ERISA.''
    Based on the limited, corrective purpose of these changes, the 
Department finds for good cause that notice and public comment 
procedure is unnecessary. All of the corrections either fix 
typographical errors; clarify provisions that might otherwise be 
confusing; or bring the text of the exemption into agreement with the 
common understanding during the rulemaking of the exemption's 
application to insurance companies, as well as with the Department's 
clear intent, as expressed in the preamble and RIA analyses for the 
final rule and exemptions. The corrections set forth in this document 
will not alter the analysis and data contained in the RIA applicable to 
the rulemaking, including the assessment of its costs and benefits.

Executive Order 12866

    Under Executive Order 12866, ``significant'' regulatory actions are 
subject to the requirements of the Executive Order and review by the 
OMB. Section 3(f) of Executive Order 12866, defines a ``significant 
regulatory action'' as an action that is likely to result in a rule (1) 
having an annual effect on the economy of $100 million or more, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant'' regulatory actions); (2) 
creating serious inconsistency or otherwise interfering with an action 
taken or planned by another agency; (3) materially altering the 
budgetary impacts of entitlement grants, user fees, or loan programs or 
the rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. 
Principally due to correction no. 7, described above, and in light of 
the significance of the original rulemaking, this action is being 
treated as ``significant'' within the meaning of

[[Page 44775]]

Section 3(f)(1) of the Executive Order. The analysis and data contained 
in the final RIA applicable to the rulemaking, including the assessment 
of its costs and benefits, will now more appropriately represent the 
rule as amended by this action and as originally intended. As a result, 
these corrections were submitted to the Office of Management and the 
Budget (OMB) for review.
    As noted above, the technical corrections to the Best Interest 
Contact Exemption published in the Federal Register on April 8, 2016 
(81 FR 21002) fix typographical errors, make minor clarifications to 
provisions that might otherwise be confusing, and confirm insurers' 
broad eligibility to rely on the exemption, consistent with the 
exemption's clearly intended scope and the analysis and data relied 
upon in the Department's final regulatory impact analysis (RIA). Thus, 
for purpose of compliance with Executive Order 12866, with respect to 
these corrections, the Department directs the attention of interested 
parties to the Department's complete RIA, which was published on the 
Department's Web site at the same time that the final rule and 
exemptions were published in the Federal Register, and which is 
available at https://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf.

Paperwork Reduction Act Statement

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department conducts a preclearance consultation program to 
provide the general public and Federal agencies with an opportunity to 
comment on proposed and continuing collections of information in 
accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 
3506(c)(2)(A)). This helps to ensure that the public understands the 
Department's collection instructions, respondents can provide the 
requested data in the desired format, reporting burden (time and 
financial resources) in minimized, collection instructions are clearly 
understood, and the Department can properly assess the impact of 
collection requirements on respondents.
    As discussed above, the Department is issuing technical corrections 
to its final Best Interest Contract Exemption, which was published in 
the Federal Register on April 8, 2016 (81 FR 21002). All of the 
corrections either correct typographical errors, clarify provisions 
that might otherwise be confusing, or bring the text of the exemption 
into agreement with the Department's intent, as expressed in the PRA 
analyses for the final rule and exemptions. The collections of 
information for the final exemption were approved under OMB control 
number 1210-0156, which is currently scheduled to expire on June 30, 
2019.
    In FR Doc. 2016-07925, appearing on page 21002 in the Federal 
Register of Friday, April 8, 2016, the following corrections are made. 
On pages 21075 through 21085, the Best Interest Contract Exemption is 
corrected to read as follows:

Exemption

Section I--Best Interest Contract Exemption

    (a) In general. ERISA and the Internal Revenue Code prohibit 
fiduciary advisers to employee benefit plans (Plans) and individual 
retirement plans (IRAs) from receiving compensation that varies based 
on their investment advice. Similarly, fiduciary advisers are 
prohibited from receiving compensation from third parties in connection 
with their advice. This exemption permits certain persons who provide 
investment advice to Retirement Investors, and associated Financial 
Institutions, Affiliates and other Related Entities, to receive such 
otherwise prohibited compensation as described below.
    (b) Covered transactions. This exemption permits Advisers, 
Financial Institutions, and their Affiliates and Related Entities, to 
receive compensation as a result of their provision of investment 
advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 
4975(e)(3)(B) to a Retirement Investor.
    As defined in Section VIII(o) of the exemption, a Retirement 
Investor is: (1) A participant or beneficiary of a Plan with authority 
to direct the investment of assets in his or her Plan account or to 
take a distribution; (2) the beneficial owner of an IRA acting on 
behalf of the IRA; or (3) a Retail Fiduciary with respect to a Plan or 
IRA.
    As detailed below, Financial Institutions and Advisers seeking to 
rely on the exemption must adhere to Impartial Conduct Standards in 
rendering advice regarding retirement investments. In addition, 
Financial Institutions must adopt policies and procedures designed to 
ensure that their individual Advisers adhere to the Impartial Conduct 
Standards; disclose important information relating to fees, 
compensation, and Material Conflicts of Interest; and retain records 
demonstrating compliance with the exemption. Level Fee Fiduciaries that 
will receive only a Level Fee in connection with advisory or investment 
management services must comply with more streamlined conditions 
designed to target the conflicts of interest associated with such 
services. The exemption provides relief from the restrictions of ERISA 
section 406(a)(1)(D) and 406(b) and the sanctions imposed by Code 
section 4975(a) and (b), by reason of Code section 4975(c)(1)(D), (E) 
and (F). The Adviser and Financial Institution must comply with the 
applicable conditions of Sections II-V to rely on this exemption. This 
document also contains separate exemptions in Section VI (Exemption for 
Purchases and Sales, including Insurance and Annuity Contracts) and 
Section VII (Exemption for Pre-Existing Transactions).
    (c) Exclusions. This exemption does not apply if:
    (1) The Plan is covered by Title I of ERISA, and (i) the Adviser, 
Financial Institution or any Affiliate is the employer of employees 
covered by the Plan, or (ii) the Adviser or Financial Institution is a 
named fiduciary or plan administrator (as defined in ERISA section 
3(16)(A)) with respect to the Plan, or an affiliate thereof, that was 
selected to provide advice to the Plan by a fiduciary who is not 
Independent;
    (2) The compensation is received as a result of a Principal 
Transaction;
    (3) The compensation is received as a result of investment advice 
to a Retirement Investor generated solely by an interactive Web site in 
which computer software-based models or applications provide investment 
advice based on personal information each investor supplies through the 
Web site without any personal interaction or advice from an individual 
Adviser (i.e., ``robo-advice'') unless the robo-advice provider is a 
Level Fee Fiduciary that complies with the conditions applicable to 
Level Fee Fiduciaries; or
    (4) The Adviser has or exercises any discretionary authority or 
discretionary control with respect to the recommended transaction.

Section II--Contract, Impartial Conduct, and Other Requirements

    The conditions set forth in this section include certain Impartial 
Conduct Standards, such as a Best Interest Standard, that Advisers and 
Financial Institutions must satisfy to rely on the exemption. In 
addition, Section II(d) and (e) requires Financial Institutions to 
adopt anti-conflict policies and procedures that are reasonably 
designed to ensure that Advisers adhere to the Impartial Conduct 
Standards, and requires disclosure of important information about the 
Financial Institutions' services, applicable fees and compensation. 
With respect to IRAs and

[[Page 44776]]

other Plans not covered by Title I of ERISA, the Financial Institutions 
must agree that they and their Advisers will adhere to the exemption's 
standards in a written contract that is enforceable by the Retirement 
Investors. To minimize compliance burdens, the exemption provides that 
the contract terms may be incorporated into account opening documents 
and similar commonly-used agreements with new customers, permits 
reliance on a negative consent process with respect to existing 
contract holders, and provides a method of meeting the exemption 
requirement in the event that the Retirement Investor does not open an 
account with the Adviser but nevertheless acts on the advice through 
other channels. Advisers and Financial Institutions need not execute 
the contract before they make a recommendation to the Retirement 
Investor. However, the contract must cover any advice given prior to 
the contract date in order for the exemption to apply to such advice. 
There is no contract requirement for recommendations to Retirement 
Investors about investments in Plans covered by Title I of ERISA, but 
the Impartial Conduct Standards and other requirements of Section 
II(b)-(e), including a written acknowledgment of fiduciary status, must 
be satisfied in order for relief to be available under the exemption, 
as set forth in Section II(g). Section II(h) provides conditions for 
recommendations by Level Fee Fiduciaries, which, with their Affiliates, 
will receive only a Level Fee in connection with advisory or investment 
management services with respect to the Plan or IRA assets. Section 
II(i) provides conditions for referral fees received by banks and bank 
employees pursuant to Bank Networking Arrangements. Section II imposes 
the following conditions on Financial Institutions and Advisers:
    (a) Contracts With Respect to Investments in IRAs and Other Plans 
Not Covered by Title I of ERISA. If the investment advice concerns an 
IRA or a Plan that is not covered by Title I of ERISA, the advice is 
subject to an enforceable written contract on the part of the Financial 
Institution, which may be a master contract covering multiple 
recommendations, that is entered into in accordance with this Section 
II(a) and incorporates the terms set forth in Section II(b)-(d). The 
Financial Institution additionally must provide the disclosures 
required by Section II(e). The contract must cover advice rendered 
prior to the execution of the contract in order for the exemption to 
apply to such advice and related compensation.
    (1) Contract Execution and Assent--(i) New Contracts. Prior to or 
at the same time as the execution of the recommended transaction, the 
Financial Institution enters into a written contract with the 
Retirement Investor acting on behalf of the Plan, participant or 
beneficiary account, or IRA, incorporating the terms required by 
Section II(b)-(d). The terms of the contract may appear in a standalone 
document or they may be incorporated into an investment advisory 
agreement, investment program agreement, account opening agreement, 
insurance or annuity contract or application, or similar document, or 
amendment thereto. The contract must be enforceable against the 
Financial Institution. The Retirement Investor's assent to the contract 
may be evidenced by handwritten or electronic signatures.
    (ii) Amendment of Existing Contracts by Negative Consent. As an 
alternative to executing a contract in the manner set forth in the 
preceding paragraph, the Financial Institution may amend Existing 
Contracts to include the terms required in Section II(b)-(d) by 
delivering the proposed amendment and the disclosure required by 
Section II(e) to the Retirement Investor prior to January 1, 2018, and 
considering the failure to terminate the amended contract within 30 
days as assent. If the Retirement Investor does terminate the contract 
within that 30-day period, this exemption will provide relief for 14 
days after the date on which the termination is received by the 
Financial Institution. An Existing Contract is an investment advisory 
agreement, investment program agreement, account opening agreement, 
insurance contract, annuity contract, or similar agreement or contract 
that was executed before January 1, 2018, and remains in effect. If the 
Financial Institution elects to use the negative consent procedure, it 
may deliver the proposed amendment by mail or electronically, but it 
may not impose any new contractual obligations, restrictions, or 
liabilities on the Retirement Investor by negative consent.
    (iii) Failure To Enter Into Contract. Notwithstanding a Financial 
Institution's failure to enter into a contract as required by 
subsection (i) above with a Retirement Investor who does not have an 
Existing Contract, this exemption will apply to the receipt of 
compensation by the Financial Institution, or any Adviser, Affiliate or 
Related Entity thereof, as a result of the Adviser's or Financial 
Institution's investment advice to such Retirement Investor regarding 
an IRA or non-ERISA Plan, provided:
    (A) The Adviser making the recommendation does not receive 
compensation, directly or indirectly, that is reasonably attributable 
to the Retirement Investor's purchase, holding, exchange or sale of the 
investment;
    (B) The Financial Institution's policies and procedures prohibit 
the Financial Institution and its Affiliates and Related Entities from 
providing compensation to their Advisers in lieu of compensation 
described in subsection (iii)(A), including, but not limited to bonuses 
or prizes or other incentives, and the Financial Institution reasonably 
monitors such policies and procedures;
    (C) The Adviser and Financial Institution comply with the Impartial 
Conduct Standards set forth in Section II(c), the policies and 
procedures requirements of Section II(d) (except for the requirement of 
a warranty with respect to those policies and procedures), the web 
disclosure requirements of Section III(b) and, as applicable, the 
conditions of Sections IV(b)(3)-(6) (Conditions for Advisers and 
Financial Institution that restrict recommendations, in whole or part, 
to Proprietary Products or to investments that generate Third Party 
Payments) with respect to the recommendation; and
    (D) The Financial Institution's failure to enter into the contract 
is not part of an effort, attempt, agreement, arrangement or 
understanding by the Adviser or the Financial Institution designed to 
avoid compliance with the exemption or enforcement of its conditions, 
including the contractual conditions set forth in subsections (i) and 
(ii).
    (2) Notice. The Financial Institution maintains an electronic copy 
of the Retirement Investor's contract on its Web site that is 
accessible by the Retirement Investor.
    (b) Fiduciary. The Financial Institution affirmatively states in 
writing that it and the Adviser(s) act as fiduciaries under ERISA or 
the Code, or both, with respect to any investment advice provided by 
the Financial Institution or the Adviser subject to the contract or, in 
the case of an ERISA plan, with respect to any investment 
recommendations regarding the Plan or participant or beneficiary 
account.
    (c) Impartial Conduct Standards. The Financial Institution 
affirmatively states that it and its Advisers will adhere to the 
following standards and, they in fact, comply with the standards:
    (1) When providing investment advice to the Retirement Investor, 
the Financial

[[Page 44777]]

Institution and the Adviser(s) provide investment advice that is, at 
the time of the recommendation, in the Best Interest of the Retirement 
Investor. As further defined in Section VIII(d), such advice reflects 
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;
    (2) The recommended transaction will not cause the Financial 
Institution, Adviser or their Affiliates or Related Entities to 
receive, directly or indirectly, compensation for their services that 
is in excess of reasonable compensation within the meaning of ERISA 
section 408(b)(2) and Code section 4975(d)(2).
    (3) Statements by the Financial Institution and its Advisers to the 
Retirement Investor about the recommended transaction, fees and 
compensation, Material Conflicts of Interest, and any other matters 
relevant to a Retirement Investor's investment decisions, will not be 
materially misleading at the time they are made.
    (d) Warranties. The Financial Institution affirmatively warrants, 
and in fact complies with, the following:
    (1) The Financial Institution has adopted and will comply with 
written policies and procedures reasonably and prudently designed to 
ensure that its Advisers adhere to the Impartial Conduct Standards set 
forth in Section II(c);
    (2) In formulating its policies and procedures, the Financial 
Institution has specifically identified and documented its Material 
Conflicts of Interest; adopted measures reasonably and prudently 
designed to prevent Material Conflicts of Interest from causing 
violations of the Impartial Conduct Standards set forth in Section 
II(c); and designated a person or persons, identified by name, title or 
function, responsible for addressing Material Conflicts of Interest and 
monitoring their Advisers' adherence to the Impartial Conduct 
Standards.
    (3) The Financial Institution's policies and procedures require 
that neither the Financial Institution nor (to the best of its 
knowledge) any Affiliate or Related Entity use or rely upon 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 
the Retirement Investor. Notwithstanding the foregoing, this Section 
II(d)(3) does not prevent the Financial Institution, its Affiliates or 
Related Entities from providing Advisers with differential compensation 
(whether in type or amount, and including, but not limited to, 
commissions) based on investment decisions by Plans, participant or 
beneficiary accounts, or IRAs, to the extent that the Financial 
Institution's policies and procedures and incentive practices, when 
viewed as a whole, are reasonably and prudently designed to avoid a 
misalignment of the interests of Advisers with the interests of the 
Retirement Investors they serve as fiduciaries (such compensation 
practices can include differential compensation based on neutral 
factors tied to the differences in the services delivered to the 
Retirement Investor with respect to the different types of investments, 
as opposed to the differences in the amounts of Third Party Payments 
the Financial Institution receives in connection with particular 
investment recommendations).
    (e) Disclosures. In the Best Interest Contract or in a separate 
single written disclosure provided to the Retirement Investor with the 
contract, or, with respect to ERISA plans, in another single written 
disclosure provided to the Plan prior to or at the same time as the 
execution of the recommended transaction, the Financial Institution 
clearly and prominently:
    (1) States the Best Interest standard of care owed by the Adviser 
and Financial Institution to the Retirement Investor; informs the 
Retirement Investor of the services provided by the Financial 
Institution and the Adviser; and describes how the Retirement Investor 
will pay for services, directly or through Third Party Payments. If, 
for example, the Retirement Investor will pay through commissions or 
other forms of transaction-based payments, the contract or writing must 
clearly disclose that fact;
    (2) Describes Material Conflicts of Interest; discloses any fees or 
charges the Financial Institution, its Affiliates, or the Adviser 
imposes upon the Retirement Investor or the Retirement Investor's 
account; and states the types of compensation that the Financial 
Institution, its Affiliates, and the Adviser expect to receive from 
third parties in connection with investments recommended to Retirement 
Investors;
    (3) Informs the Retirement Investor that the Investor has the right 
to obtain copies of the Financial Institution's written description of 
its policies and procedures adopted in accordance with Section II(d), 
as well as the specific disclosure of costs, fees, and compensation, 
including Third Party Payments, regarding recommended transactions, as 
set forth in Section III(a), below, described in dollar amounts, 
percentages, formulas, or other means reasonably designed to present 
materially accurate disclosure of their scope, magnitude, and nature in 
sufficient detail to permit the Retirement Investor to make an informed 
judgment about the costs of the transaction and about the significance 
and severity of the Material Conflicts of Interest, and describes how 
the Retirement Investor can get the information, free of charge; 
provided that if the Retirement Investor's request is made prior to the 
transaction, the information must be provided prior to the transaction, 
and if the request is made after the transaction, the information must 
be provided within 30 business days after the request;
    (4) Includes a link to the Financial Institution's Web site as 
required by Section III(b), and informs the Retirement Investor that: 
(i) Model contract disclosures updated as necessary on a quarterly 
basis are maintained on the Web site, and (ii) the Financial 
Institution's written description of its policies and procedures 
adopted in accordance with Section II(d) are available free of charge 
on the Web site;
    (5) Discloses to the Retirement Investor whether the Financial 
Institution offers Proprietary Products or receives Third Party 
Payments with respect to any recommended investments; and to the extent 
the Financial Institution or Adviser limits investment recommendations, 
in whole or part, to Proprietary Products or investments that generate 
Third Party Payments, notifies the Retirement Investor of the 
limitations placed on the universe of investments that the Adviser may 
offer for purchase, sale, exchange, or holding by the Retirement 
Investor. The notice is insufficient if it merely states that the 
Financial Institution or Adviser ``may'' limit investment 
recommendations based on whether the investments are Proprietary 
Products or generate Third Party Payments, without specific disclosure 
of the extent to which recommendations are, in fact, limited on that 
basis;
    (6) Provides contact information (telephone and email) for a 
representative of the Financial Institution that the Retirement 
Investor can use to contact the Financial

[[Page 44778]]

Institution with any concerns about the advice or service they have 
received; and, if applicable, a statement explaining that the 
Retirement Investor can research the Financial Institution and its 
Advisers using FINRA's BrokerCheck database or the Investment Adviser 
Registration Depository (IARD), or other database maintained by a 
governmental agency or instrumentality, or self-regulatory 
organization; and
    (7) Describes whether or not the Adviser and Financial Institution 
will monitor the Retirement Investor's investments and alert the 
Retirement Investor to any recommended change to those investments, 
and, if so monitoring, the frequency with which the monitoring will 
occur and the reasons for which the Retirement Investor will be 
alerted.
    (8) The Financial Institution will not fail to satisfy this Section 
II(e), or violate a contractual provision based thereon, solely because 
it, acting in good faith and with reasonable diligence, makes an error 
or omission in disclosing the required information, provided the 
Financial Institution discloses the correct information as soon as 
practicable, but not later than 30 days after the date on which it 
discovers or reasonably should have discovered the error or omission. 
To the extent compliance with this Section II(e) requires Advisers and 
Financial Institutions to obtain information from entities that are not 
closely affiliated with them, they may rely in good faith on 
information and assurances from the other entities, as long as they do 
not know that the materials are incomplete or inaccurate. This good 
faith reliance applies unless the entity providing the information to 
the Adviser and Financial Institution is (1) a person directly or 
indirectly through one or more intermediaries, controlling, controlled 
by, or under common control with the Adviser or Financial Institution; 
or (2) any officer, director, employee, agent, registered 
representative, relative (as defined in ERISA section 3(15)), member of 
family (as defined in Code section 4975(e)(6)) of, or partner in, the 
Adviser or Financial Institution.
    (f) Ineligible Contractual Provisions. Relief is not available 
under the exemption if a Financial Institution's contract contains the 
following:
    (1) Exculpatory provisions disclaiming or otherwise limiting 
liability of the Adviser or Financial Institution for a violation of 
the contract's terms;
    (2) Except as provided in paragraph (f)(4) of this Section, a 
provision under which the Plan, IRA or Retirement Investor waives or 
qualifies its right to bring or participate in a class action or other 
representative action in court in a dispute with the Adviser or 
Financial Institution, or in an individual or class claim agrees to an 
amount representing liquidated damages for breach of the contract; 
provided that, the parties may knowingly agree to waive the Retirement 
Investor's right to obtain punitive damages or rescission of 
recommended transactions to the extent such a waiver is permissible 
under applicable state or federal law; or
    (3) Agreements to arbitrate or mediate individual claims in venues 
that are distant or that otherwise unreasonably limit the ability of 
the Retirement Investors to assert the claims safeguarded by this 
exemption.
    (4) In the event that the provision on pre-dispute arbitration 
agreements for class or representative claims in paragraph (f)(2) of 
this Section is ruled invalid by a court of competent jurisdiction, 
this provision shall not be a condition of this exemption with respect 
to contracts subject to the court's jurisdiction unless and until the 
court's decision is reversed, but all other terms of the exemption 
shall remain in effect.
    (g) ERISA plans. Section II(a) does not apply to recommendations to 
Retirement Investors regarding investments in Plans that are covered by 
Title I of ERISA. For such investment advice, relief under the 
exemption is conditioned upon the Adviser and Financial Institution 
complying with certain provisions of Section II, as follows:
    (1) Prior to or at the same time as the execution of the 
recommended transaction, the Financial Institution provides the 
Retirement Investor with a written statement of the Financial 
Institution's and its Advisers' fiduciary status, in accordance with 
Section II(b).
    (2) The Financial Institution and the Adviser comply with the 
Impartial Conduct Standards of Section II(c).
    (3) The Financial Institution adopts policies and procedures 
incorporating the requirements and prohibitions set forth in Section 
II(d)(1)-(3), and the Financial Institution and Adviser comply with 
those requirements and prohibitions.
    (4) The Financial Institution provides the disclosures required by 
Section II(e).
    (5) The Financial Institution and Adviser do not in any contract, 
instrument, or communication: purport to disclaim any responsibility or 
liability for any responsibility, obligation, or duty under Title I of 
ERISA to the extent the disclaimer would be prohibited by ERISA section 
410; purport to waive or qualify the right of the Retirement Investor 
to bring or participate in a class action or other representative 
action in court in a dispute with the Adviser or Financial Institution, 
or require arbitration or mediation of individual claims in locations 
that are distant or that otherwise unreasonably limit the ability of 
the Retirement Investors to assert the claims safeguarded by this 
exemption.
    (h) Level Fee Fiduciaries. Sections II(a), (d), (e), (f), (g), III 
and V do not apply to recommendations by Financial Institutions and 
Advisers that are Level Fee Fiduciaries. For such investment advice, 
relief under the exemption is conditioned upon the Adviser and 
Financial Institution complying with certain other provisions of 
Section II, as follows:
    (1) Prior to or at the same time as the execution of the 
recommended transaction, the Financial Institution provides the 
Retirement Investor with a written statement of the Financial 
Institution's and its Advisers' fiduciary status, in accordance with 
Section II(b).
    (2) The Financial Institution and Adviser comply with the Impartial 
Conduct Standards of Section II(c).
    (3)(i) In the case of a recommendation to roll over from an ERISA 
Plan to an IRA, the Financial Institution documents the specific reason 
or reasons why the recommendation was considered to be in the Best 
Interest of the Retirement Investor. This documentation must include 
consideration of the Retirement Investor's alternatives to a rollover, 
including leaving the money in his or her current employer's Plan, if 
permitted, and must take into account the fees and expenses associated 
with both the Plan and the IRA; whether the employer pays for some or 
all of the plan's administrative expenses; and the different levels of 
services and investments available under each option; and (ii) in the 
case of a recommendation to rollover from another IRA or to switch from 
a commission-based account to a level fee arrangement, the Level Fee 
Fiduciary documents the reasons that the arrangement is considered to 
be in the Best Interest of the Retirement Investor, including, 
specifically, the services that will be provided for the fee.
    (i) Bank Networking Arrangements. An Adviser who is a bank 
employee, and a Financial Institution that is a bank or similar 
financial institution supervised by the United States or a state, or a 
savings association (as defined in section 3(b)(1) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(b)(1)), may receive compensation 
pursuant to a Bank Networking

[[Page 44779]]

Arrangement as defined in Section VIII(c), in connection with their 
provision of investment advice to a Retirement Investor, provided the 
investment advice adheres to the Impartial Conduct Standards set forth 
in Section II(c). The remaining conditions of the exemption do not 
apply.

Section III--Web and Transaction-Based Disclosure

    The Financial Institution must satisfy the following conditions 
with respect to an investment recommendation, to be covered by this 
exemption:
    (a) Transaction Disclosure. The Financial Institution provides the 
Retirement Investor, prior to or at the same time as the execution of 
the recommended investment in an investment product, the following 
disclosure, clearly and prominently, in a single written document, 
that:
    (1) States the Best Interest standard of care owed by the Adviser 
and Financial Institution to the Retirement Investor; and describes any 
Material Conflicts of Interest;
    (2) Informs the Retirement Investor that the Retirement Investor 
has the right to obtain copies of the Financial Institution's written 
description of its policies and procedures adopted in accordance with 
Section II(d), as well as specific disclosure of costs, fees and other 
compensation including Third Party Payments regarding recommended 
transactions. The costs, fees, and other compensation may be described 
in dollar amounts, percentages, formulas, or other means reasonably 
designed to present materially accurate disclosure of their scope, 
magnitude, and nature in sufficient detail to permit the Retirement 
Investor to make an informed judgment about the costs of the 
transaction and about the significance and severity of the Material 
Conflicts of Interest. The information required under this Section must 
be provided to the Retirement Investor prior to the transaction, if 
requested prior to the transaction, and, if the request is made after 
the transaction, the information must be provided within 30 business 
days after the request; and
    (3) Includes a link to the Financial Institution's Web site as 
required by Section III(b) and informs the Retirement Investor that: 
(i) Model contract disclosures or other model notices, updated as 
necessary on a quarterly basis, are maintained on the Web site, and 
(ii) the Financial Institution's written description of its policies 
and procedures as required under Section III(b)(1)(iv) are available 
free of charge on the Web site.
    (4) These disclosures do not have to be repeated for subsequent 
recommendations by the Adviser and Financial Institution of the same 
investment product within one year of the provision of the contract 
disclosure in Section II(e) or a previous disclosure pursuant to this 
Section III(a), unless there are material changes in the subject of the 
disclosure.
    (b) Web Disclosure. For relief to be available under the exemption 
for any investment recommendation, the conditions of Section III(b) 
must be satisfied.
    (1) The Financial Institution maintains a Web site, freely 
accessible to the public and updated no less than quarterly, which 
contains:
    (i) A discussion of the Financial Institution's business model and 
the Material Conflicts of Interest associated with that business model;
    (ii) A schedule of typical account or contract fees and service 
charges;
    (iii) A model contract or other model notice of the contractual 
terms (if applicable) and required disclosures described in Section 
II(b)-(e), which are reviewed for accuracy no less frequently than 
quarterly and updated within 30 days if necessary;
    (iv) A written description of the Financial Institution's policies 
and procedures that accurately describes or summarizes key components 
of the policies and procedures relating to conflict-mitigation and 
incentive practices in a manner that permits Retirement Investors to 
make an informed judgment about the stringency of the Financial 
Institution's protections against conflicts of interest;
    (v) To the extent applicable, a list of all product manufacturers 
and other parties with whom the Financial Institution maintains 
arrangements that provide Third Party Payments to either the Adviser or 
the Financial Institution with respect to specific investment products 
or classes of investments recommended to Retirement Investors; a 
description of the arrangements, including a statement on whether and 
how these arrangements impact Adviser compensation, and a statement on 
any benefits the Financial Institution provides to the product 
manufacturers or other parties in exchange for the Third Party 
Payments;
    (vi) Disclosure of the Financial Institution's compensation and 
incentive arrangements with Advisers including, if applicable, any 
incentives (including both cash and non-cash compensation or awards) to 
Advisers for recommending particular product manufacturers, investments 
or categories of investments to Retirement Investors, or for Advisers 
to move to the Financial Institution from another firm or to stay at 
the Financial Institution, and a full and fair description of any 
payout or compensation grids, but not including information that is 
specific to any individual Adviser's compensation or compensation 
arrangement.
    (vii) The Web site may describe the above arrangements with product 
manufacturers, Advisers, and others by reference to dollar amounts, 
percentages, formulas, or other means reasonably calculated to present 
a materially accurate description of the arrangements. Similarly, the 
Web site may group disclosures based on reasonably-defined categories 
of investment products or classes, product manufacturers, Advisers, and 
arrangements, and it may disclose reasonable ranges of values, rather 
than specific values, as appropriate. But, however constructed, the Web 
site must fairly disclose the scope, magnitude, and nature of the 
compensation arrangements and Material Conflicts of Interest in 
sufficient detail to permit visitors to the Web site to make an 
informed judgment about the significance of the compensation practices 
and Material Conflicts of Interest with respect to transactions 
recommended by the Financial Institution and its Advisers.
    (2) To the extent the information required by this Section is 
provided in other disclosures which are made public, including those 
required by the SEC and/or the Department such as a Form ADV, Part II, 
the Financial Institution may satisfy this Section III(b) by posting 
such disclosures to its Web site with an explanation that the 
information can be found in the disclosures and a link to where it can 
be found.
    (3) The Financial Institution is not required to disclose 
information pursuant to this Section III(b) if such disclosure is 
otherwise prohibited by law.
    (4) In addition to providing the written description of the 
Financial Institution's policies and procedures on its Web site, as 
required under Section III(b)(1)(iv), Financial Institutions must 
provide their complete policies and procedures adopted pursuant to 
Section II(d) to the Department upon request.
    (5) In the event that a Financial Institution determines to group 
disclosures as described in subsection (1)(vii), it must retain the 
data and documentation supporting the group disclosure during the time 
that it is applicable to the disclosure on the Web site, and for six 
years after that, and make the data and documentation

[[Page 44780]]

available to the Department within 90 days of the Department's request.
    (c)(1) The Financial Institution will not fail to satisfy the 
conditions in this Section III solely because it, acting in good faith 
and with reasonable diligence, makes an error or omission in disclosing 
the required information, or if the Web site is temporarily 
inaccessible, provided that, (i) in the case of an error or omission on 
the Web site, the Financial Institution discloses the correct 
information as soon as practicable, but not later than seven (7) days 
after the date on which it discovers or reasonably should have 
discovered the error or omission, and (ii) in the case of an error or 
omission with respect to the transaction disclosure, the Financial 
Institution discloses the correct information as soon as practicable, 
but not later than 30 days after the date on which it discovers or 
reasonably should have discovered the error or omission.
    (2) To the extent compliance with the Section III disclosures 
requires Advisers and Financial Institutions to obtain information from 
entities that are not closely affiliated with them, they may rely in 
good faith on information and assurances from the other entities, as 
long as they do not know that the materials are incomplete or 
inaccurate. This good faith reliance applies unless the entity 
providing the information to the Adviser and Financial Institution is 
(i) a person directly or indirectly through one or more intermediaries, 
controlling, controlled by, or under common control with the Adviser or 
Financial Institution; or (ii) any officer, director, employee, agent, 
registered representative, relative (as defined in ERISA section 
3(15)), member of family (as defined in Code section 4975(e)(6)) of, or 
partner in, the Adviser or Financial Institution.
    (3) The good faith provisions of this Section apply to the 
requirement that the Financial Institution retain the data and 
documentation supporting the group disclosure during the time that it 
is applicable to the disclosure on the Web site and provide it to the 
Department upon request, as set forth in subsection (b)(1)(vii) and 
(b)(5) above. In addition, if such records are lost or destroyed, due 
to circumstances beyond the control of the Financial Institution, then 
no prohibited transaction will be considered to have occurred solely on 
the basis of the unavailability of those records; and no party, other 
than the Financial Institution responsible for complying with 
subsection (b)(1)(vii) and (b)(5) will be subject to the civil penalty 
that may be assessed under ERISA section 502(i) or the taxes imposed by 
Code section 4975(a) and (b), if applicable, if the records are not 
maintained or provided to the Department within the required 
timeframes.

Section IV--Proprietary Products and Third Party Payments

    (a) General. A Financial Institution that at the time of the 
transaction restricts Advisers' investment recommendations, in whole or 
part, to Proprietary Products or to investments that generate Third 
Party Payments, may rely on this exemption provided all the applicable 
conditions of the exemption are satisfied.
    (b) Satisfaction of the Best Interest standard. A Financial 
Institution that limits Advisers' investment recommendations, in whole 
or part, based on whether the investments are Proprietary Products or 
generate Third Party Payments, and an Adviser making recommendations 
subject to such limitations, shall be deemed to satisfy the Best 
Interest standard of Section VIII(d) if:
    (1) Prior to or at the same time as the execution of the 
recommended transaction, the Retirement Investor is clearly and 
prominently informed in writing that the Financial Institution offers 
Proprietary Products or receives Third Party Payments with respect to 
the purchase, sale, exchange, or holding of recommended investments; 
and the Retirement Investor is informed in writing of the limitations 
placed on the universe of investments that the Adviser may recommend to 
the Retirement Investor. The notice is insufficient if it merely states 
that the Financial Institution or Adviser ``may'' limit investment 
recommendations based on whether the investments are Proprietary 
Products or generate Third Party Payments, without specific disclosure 
of the extent to which recommendations are, in fact, limited on that 
basis;
    (2) Prior to or at the same time as the execution of the 
recommended transaction, the Retirement Investor is fully and fairly 
informed in writing of any Material Conflicts of Interest that the 
Financial Institution or Adviser have with respect to the recommended 
transaction, and the Adviser and Financial Institution comply with the 
disclosure requirements set forth in Section III above (providing for 
web and transaction-based disclosure of costs, fees, compensation, and 
Material Conflicts of Interest);
    (3) The Financial Institution documents in writing its limitations 
on the universe of recommended investments; documents in writing the 
Material Conflicts of Interest associated with any contract, agreement, 
or arrangement providing for its receipt of Third Party Payments or 
associated with the sale or promotion of Proprietary Products; 
documents in writing any services it will provide to Retirement 
Investors in exchange for Third Party Payments, as well as any services 
or consideration it will furnish to any other party, including the 
payor, in exchange for the Third Party Payments; reasonably concludes 
that the limitations on the universe of recommended investments and 
Material Conflicts of Interest will not cause the Financial Institution 
or its Advisers to receive compensation in excess of reasonable 
compensation for Retirement Investors as set forth in Section II(c)(2); 
reasonably determines, after consideration of the policies and 
procedures established pursuant to Section II(d), that these 
limitations and Material Conflicts of Interest will not cause the 
Financial Institution or its Advisers to recommend imprudent 
investments; and documents in writing the bases for its conclusions;
    (4) The Financial Institution adopts, monitors, implements, and 
adheres to policies and procedures and incentive practices that meet 
the terms of Section II(d)(1) and (2); and, in accordance with Section 
II(d)(3), neither the Financial Institution nor (to the best of its 
knowledge) any Affiliate or Related Entity uses or relies upon 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 
the Adviser to make imprudent investment recommendations, to 
subordinate the interests of the Retirement Investor to the Adviser's 
own interests, or to make recommendations based on the Adviser's 
considerations of factors or interests other than the investment 
objectives, risk tolerance, financial circumstances, and needs of the 
Retirement Investor;
    (5) At the time of the recommendation, the amount of compensation 
and other consideration reasonably anticipated to be paid, directly or 
indirectly, to the Adviser, Financial Institution, or their Affiliates 
or Related Entities for their services in connection with the 
recommended transaction is not in excess of reasonable compensation 
within the meaning of ERISA section 408(b)(2) and Code section 
4975(d)(2); and
    (6) The Adviser's recommendation reflects the care, skill, 
prudence, and diligence under the circumstances then prevailing that a 
prudent person acting in a like capacity and familiar with such

[[Page 44781]]

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; and the 
Adviser's recommendation is not based on the financial or other 
interests of the Adviser or on the Adviser's consideration of any 
factors or interests other than the investment objectives, risk 
tolerance, financial circumstances, and needs of the Retirement 
Investor.

Section V--Disclosure to the Department and Recordkeeping

    This Section establishes record retention and disclosure conditions 
that a Financial Institution must satisfy for the exemption to be 
available for compensation received in connection with recommended 
transactions.
    (a) EBSA Disclosure. Before receiving compensation in reliance on 
the exemption in Section I, the Financial Institution notifies the 
Department of its intention to rely on this exemption. The notice will 
remain in effect until revoked in writing by the Financial Institution. 
The notice need not identify any Plan or IRA. The notice must be 
provided by email to e-BICE@dol.gov.
    (b) Recordkeeping. The Financial Institution maintains for a period 
of six (6) years, in a manner that is reasonably accessible for 
examination, the records necessary to enable the persons described in 
paragraph (c) of this Section to determine whether the conditions of 
this exemption have been met with respect to a transaction, except 
that:
    (1) If such records are lost or destroyed, due to circumstances 
beyond the control of the Financial Institution, then no prohibited 
transaction will be considered to have occurred solely on the basis of 
the unavailability of those records; and
    (2) No party, other than the Financial Institution responsible for 
complying with this paragraph (c), will be subject to the civil penalty 
that may be assessed under ERISA section 502(i) or the taxes imposed by 
Code section 4975(a) and (b), if applicable, if the records are not 
maintained or are not available for examination as required by 
paragraph (c), below.
    (c)(1) Except as provided in paragraph (c)(2) of this Section or 
precluded by 12 U.S.C. 484, and notwithstanding any provisions of ERISA 
section 504(a)(2) and (b), the records referred to in paragraph (b) of 
this Section are reasonably available at their customary location for 
examination during normal business hours by:
    (i) Any authorized employee or representative of the Department or 
the Internal Revenue Service;
    (ii) Any fiduciary of a Plan that engaged in an investment 
transaction pursuant to this exemption, or any authorized employee or 
representative of such fiduciary;
    (iii) Any contributing employer and any employee organization whose 
members are covered by a Plan described in paragraph (c)(1)(ii), or any 
authorized employee or representative of these entities; or
    (iv) Any participant or beneficiary of a Plan described in 
paragraph (c)(1)(ii), IRA owner, or the authorized representative of 
such participant, beneficiary or owner; and
    (2) None of the persons described in paragraph (c)(1)(ii)-(iv) of 
this Section are authorized to examine records regarding a recommended 
transaction involving another Retirement Investor, privileged trade 
secrets or privileged commercial or financial information of the 
Financial Institution, or information identifying other individuals.
    (3) Should the Financial Institution refuse to disclose information 
on the basis that the information is exempt from disclosure, the 
Financial Institution must, by the close of the thirtieth (30th) day 
following the request, provide a written notice advising the requestor 
of the reasons for the refusal and that the Department may request such 
information.
    (4) Failure to maintain the required records necessary to determine 
whether the conditions of this exemption have been met will result in 
the loss of the exemption only for the transaction or transactions for 
which records are missing or have not been maintained. It does not 
affect the relief for other transactions.

Section VI--Exemption for Purchases and Sales, Including Insurance and 
Annuity Contracts

    (a) In general. In addition to prohibiting fiduciaries from 
receiving compensation from third parties and compensation that varies 
based on their investment advice, ERISA and the Internal Revenue Code 
prohibit the purchase by a Plan, participant or beneficiary account, or 
IRA of an investment product, including insurance or annuity product 
from an insurance company that is a service provider to the Plan or 
IRA. This exemption permits a Plan, participant or beneficiary account, 
or IRA to engage in a purchase or sale with a Financial Institution 
that is a service provider or other party in interest or disqualified 
person to the Plan or IRA. This exemption is provided because 
investment transactions often involve prohibited purchases and sales 
involving entities that have a pre-existing party in interest 
relationship to the Plan or IRA.
    (b) Covered transactions. The restrictions of ERISA section 
406(a)(1)(A) and (D), and the sanctions imposed by Code section 4975(a) 
and (b), by reason of Code section 4975(c)(1)(A) and (D), shall not 
apply to the purchase or sale of an investment product by a Plan, 
participant or beneficiary account, or IRA, with a Financial 
Institution that is a party in interest or disqualified person.
    (c) The following conditions are applicable to this exemption:
    (1) The transaction is effected by the Financial Institution in the 
ordinary course of its business;
    (2) The compensation, direct or indirect, for any services rendered 
by the Financial Institution and its Affiliates and Related Entities is 
not in excess of reasonable compensation within the meaning of ERISA 
section 408(b)(2) and Code section 4975(d)(2); and
    (3) The terms of the transaction are at least as favorable to the 
Plan, participant or beneficiary account, or IRA as the terms generally 
available in an arm's length transaction with an unrelated party.
    (d) Exclusions, The exemption in this Section VI does not apply if:
    (1) The Plan is covered by Title I of ERISA and (i) the Adviser, 
Financial Institution or any Affiliate is the employer of employees 
covered by the Plan, or (ii) the Adviser and Financial Institution is a 
named fiduciary or plan administrator (as defined in ERISA section 
3(16)(A)) with respect to the Plan, or an affiliate thereof, that was 
selected to provide advice to the plan by a fiduciary who is not 
Independent.
    (2) The compensation is received as a result of a Principal 
Transaction;
    (3) The compensation is received as a result of investment advice 
to a Retirement Investor generated solely by an interactive Web site in 
which computer software-based models or applications provide investment 
advice based on personal information each investor supplies through the 
Web site without any personal interaction or advice from an individual 
Adviser (i.e., ``robo-advice'') unless the robo-advice provider is a 
Level Fee Fiduciary that complies with the conditions applicable to 
Level Fee Fiduciaries; or
    (4) The Adviser has or exercises any discretionary authority or 
discretionary control with respect to the recommended transaction.

[[Page 44782]]

Section VII--Exemption for Pre-Existing Transactions

    (a) In general. ERISA and the Internal Revenue Code prohibit 
Advisers, Financial Institutions and their Affiliates and Related 
Entities from receiving compensation that varies based on their 
investment advice. Similarly, fiduciary advisers are prohibited from 
receiving compensation from third parties in connection with their 
advice. Some Advisers and Financial Institutions did not consider 
themselves fiduciaries within the meaning of 29 CFR 2510-3.21 before 
the applicability date of the amendment to 29 CFR 2510-3.21 (the 
Applicability Date). Other Advisers and Financial Institutions entered 
into transactions involving Plans, participant or beneficiary accounts, 
or IRAs before the Applicability Date, in accordance with the terms of 
a prohibited transaction exemption that has since been amended. This 
exemption permits Advisers, Financial Institutions, and their 
Affiliates and Related Entities, to receive compensation, such as 12b-1 
fees, in connection with a Plan's, participant or beneficiary account's 
or IRA's purchase, sale, exchange, or holding of securities or other 
investment property that was acquired prior to the Applicability Date, 
as described and limited below.
    (b) Covered transaction. Subject to the applicable conditions 
described below, the restrictions of ERISA section 406(a)(1)(A), 
406(a)(1)(D), and 406(b) and the sanctions imposed by Code section 
4975(a) and (b), by reason of Code section 4975(c)(1)(A), (D), (E) and 
(F), shall not apply to the receipt of compensation by an Adviser, 
Financial Institution, and any Affiliate and Related Entity, as a 
result of investment advice (including advice to hold) provided to a 
Plan, participant or beneficiary or IRA owner in connection with the 
purchase, holding, sale, or exchange of securities or other investment 
property (i) that was acquired before the Applicability Date, or (ii) 
that was acquired pursuant to a recommendation to continue to adhere to 
a systematic purchase program established before the Applicability 
Date. This Exemption for Pre-Existing Transactions is conditioned on 
the following:
    (1) The compensation is received pursuant to an agreement, 
arrangement or understanding that was entered into prior to the 
Applicability Date and that has not expired or come up for renewal 
post-Applicability Date;
    (2) The purchase, exchange, holding or sale of the securities or 
other investment property was not otherwise a non-exempt prohibited 
transaction pursuant to ERISA section 406 and Code section 4975 on the 
date it occurred;
    (3) The compensation is not received in connection with the Plan's, 
participant or beneficiary account's or IRA's investment of additional 
amounts in the previously acquired investment vehicle; except that for 
avoidance of doubt, the exemption does apply to a recommendation to 
exchange investments within a mutual fund family or variable annuity 
contract pursuant to an exchange privilege or rebalancing program that 
was established before the Applicability Date, provided that the 
recommendation does not result in the Adviser and Financial 
Institution, or their Affiliates or Related Entities, receiving more 
compensation (either as a fixed dollar amount or a percentage of 
assets) than they were entitled to receive prior to the Applicability 
Date;
    (4) The amount of the compensation paid, directly or indirectly, to 
the Adviser, Financial Institution, or their Affiliates or Related 
Entities in connection with the transaction is not in excess of 
reasonable compensation within the meaning of ERISA section 408(b)(2) 
and Code section 4975(d)(2); and
    (5) Any investment recommendations made after the Applicability 
Date by the Financial Institution or Adviser with respect to the 
securities or other investment property reflect 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, and are 
made without regard to the financial or other interests of the Adviser, 
Financial Institution or any Affiliate, Related Entity, or other party.

Section VIII--Definitions

    For purposes of these exemptions:
    (a) ``Adviser'' means an individual who:
    (1) Is a fiduciary of the Plan or IRA by reason of the provision of 
investment advice described in ERISA section 3(21)(A)(ii) or Code 
section 4975(e)(3)(B), or both, and the applicable regulations, with 
respect to the assets of the Plan or IRA involved in the recommended 
transaction;
    (2) Is an employee, independent contractor, agent, or registered 
representative of a Financial Institution; and
    (3) Satisfies the federal and state regulatory and licensing 
requirements of insurance, banking, and securities laws with respect to 
the covered transaction, as applicable.
    (b) ``Affiliate'' of an Adviser or Financial Institution means--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the Adviser or Financial Institution. For this purpose, 
``control'' means the power to exercise a controlling influence over 
the management or policies of a person other than an individual;
    (2) Any officer, director, partner, employee, or relative (as 
defined in ERISA section 3(15)), of the Adviser or Financial 
Institution; and
    (3) Any corporation or partnership of which the Adviser or 
Financial Institution is an officer, director, or partner.
    (c) A ``Bank Networking Arrangement'' is an arrangement for the 
referral of retail non-deposit investment products that satisfies 
applicable federal banking, securities and insurance regulations, under 
which employees of a bank refer bank customers to an unaffiliated 
investment adviser registered under the Investment Advisers Act of 1940 
or under the laws of the state in which the adviser maintains its 
principal office and place of business, insurance company qualified to 
do business under the laws of a state, or broker or dealer registered 
under the Securities Exchange Act of 1934, as amended. For purposes of 
this definition, a ``bank'' is a bank or similar financial institution 
supervised by the United States or a state, or a savings association 
(as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 
U.S.C. 1813(b)(1)),
    (d) 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. Financial Institutions that limit 
investment recommendations, in whole or part, based on whether the 
investments are Proprietary Products or generate Third Party Payments, 
and

[[Page 44783]]

Advisers making recommendations subject to such limitations are deemed 
to satisfy the Best Interest standard when they comply with the 
conditions of Section IV(b).
    (e) ``Financial Institution'' means an entity that employs the 
Adviser or otherwise retains such individual as an independent 
contractor, agent or registered representative and that is:
    (1) Registered as an investment adviser under the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or under the laws of the 
state in which the adviser maintains its principal office and place of 
business;
    (2) A bank or similar financial institution supervised by the 
United States or a state, or a savings association (as defined in 
section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 
1813(b)(1));
    (3) An insurance company qualified to do business under the laws of 
a state, provided that such insurance company:
    (i) Has obtained a Certificate of Authority from the insurance 
commissioner of its domiciliary state which has neither been revoked 
nor suspended,
    (ii) Has undergone and shall continue to undergo an examination by 
an Independent certified public accountant for its last completed 
taxable year or has undergone a financial examination (within the 
meaning of the law of its domiciliary state) by the state's insurance 
commissioner within the preceding 5 years, and
    (iii) Is domiciled in a state whose law requires that actuarial 
review of reserves be conducted annually and reported to the 
appropriate regulatory authority;
    (4) A broker or dealer registered under the Securities Exchange Act 
of 1934 (15 U.S.C. 78a et seq.); or
    (5) An entity that is described in the definition of Financial 
Institution in an individual exemption granted by the Department under 
ERISA section 408(a) and Code section 4975(c), after the date of this 
exemption, that provides relief for the receipt of compensation in 
connection with investment advice provided by an investment advice 
fiduciary, under the same conditions as this class exemption.
    (f) ``Independent'' means a person that:
    (1) Is not the Adviser, the Financial Institution or any Affiliate 
relying on the exemption;
    (2) Does not have a relationship to or an interest in the Adviser, 
the Financial Institution or Affiliate that might affect the exercise 
of the person's best judgment in connection with transactions described 
in this exemption; and
    (3) Does not receive or is not projected to receive within the 
current federal income tax year, compensation or other consideration 
for his or her own account from the Adviser, Financial Institution or 
Affiliate in excess of 2% of the person's annual revenues based upon 
its prior income tax year.
    (g) ``Individual Retirement Account'' or ``IRA'' means any account 
or annuity described in Code section 4975(e)(1)(B) through (F), 
including, for example, an individual retirement account described in 
section 408(a) of the Code and a health savings account described in 
section 223(d) of the Code.
    (h) A Financial Institution and Adviser are ``Level Fee 
Fiduciaries'' if the only fee received by the Financial Institution, 
the Adviser and any Affiliate in connection with advisory or investment 
management services to the Plan or IRA assets is a Level Fee that is 
disclosed in advance to the Retirement Investor. 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.
    (i) 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 judgment as a 
fiduciary in rendering advice to a Retirement Investor.
    (j) ``Plan'' means any employee benefit plan described in section 
3(3) of ERISA and any plan described in section 4975(e)(1)(A) of the 
Code.
    (k) A ``Principal Transaction'' means a purchase or sale of an 
investment product if an Adviser or Financial Institution is purchasing 
from or selling to a Plan, participant or beneficiary account, or IRA 
on behalf of the Financial Institution's own account or the account of 
a person directly or indirectly, through one or more intermediaries, 
controlling, controlled by, or under common control with the Financial 
Institution. For purposes of this definition, a Principal Transaction 
does not include the sale of an insurance or annuity contract, a mutual 
fund transaction, or a Riskless Principal Transaction as defined in 
Section VIII(p) below.
    (l) ``Proprietary Product'' means a product that is managed, issued 
or sponsored by the Financial Institution or any of its Affiliates.
    (m) ``Related Entity'' means any entity other than an Affiliate in 
which the Adviser or Financial Institution has an interest which may 
affect the exercise of its best judgment as a fiduciary.
    (n) A ``Retail Fiduciary'' means a fiduciary of a Plan or IRA that 
is not described in section (c)(1)(i) of the Regulation (29 CFR 2510.3-
21(c)(1)(i)).
    (o) ``Retirement Investor'' means--
    (1) A participant or beneficiary of a Plan subject to Title I of 
ERISA or described in section 4975(e)(1)(A) of the Code, with authority 
to direct the investment of assets in his or her Plan account or to 
take a distribution,
    (2) The beneficial owner of an IRA acting on behalf of the IRA, or
    (3) A Retail Fiduciary with respect to a Plan subject to Title I of 
ERISA or described in section 4975(e)(1)(A) of the Code or IRA.
    (p) A ``Riskless Principal Transaction'' is a transaction in which 
a Financial Institution, after having received an order from a 
Retirement Investor to buy or sell an investment product, purchases or 
sells the same investment product for the Financial Institution's own 
account to offset the contemporaneous transaction with the Retirement 
Investor.
    (q) ``Third-Party Payments'' include sales charges when not paid 
directly by the Plan, participant or beneficiary account, or IRA; 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 
or Related Entity by a third party as a result of a transaction 
involving a Plan, participant or beneficiary account, or IRA.

Section IX--Transition Period for Exemption

    (a) In general. ERISA and the Internal Revenue Code prohibit 
fiduciary advisers to Plans and IRAs from receiving compensation that 
varies based on their investment advice. Similarly, fiduciary advisers 
are prohibited from receiving compensation from third parties in 
connection with their advice. This transition period provides relief 
from the restrictions of ERISA section 406(a)(1)(D), and 406(b) and the 
sanctions imposed by Code section 4975(a) and (b) by reason of Code 
section 4975(c)(1)(D), (E), and (F) for the period from April 10, 2017, 
to January 1, 2018 (the Transition Period) for Advisers, Financial 
Institutions, and their Affiliates and Related Entities, to receive 
such otherwise prohibited compensation subject to the conditions 
described in Section IX(d).

[[Page 44784]]

    (b) Covered transactions. This provision permits Advisers, 
Financial Institutions, and their Affiliates and Related Entities to 
receive compensation as a result of their provision of investment 
advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 
4975(e)(3)(B) to a Retirement Investor, during the Transition Period.
    (c) Exclusions. This provision does not apply if:
    (1) The Plan is covered by Title I of ERISA, and (i) the Adviser, 
Financial Institution or any Affiliate is the employer of employees 
covered by the Plan, or (ii) the Adviser or Financial Institution is a 
named fiduciary or plan administrator (as defined in ERISA section 
3(16)(A)) with respect to the Plan, or an Affiliate thereof, that was 
selected to provide advice to the Plan by a fiduciary who is not 
Independent;
    (2) The compensation is received as a result of a Principal 
Transaction;
    (3) The compensation is received as a result of investment advice 
to a Retirement Investor generated solely by an interactive Web site in 
which computer software-based models or applications provide investment 
advice based on personal information each investor supplies through the 
Web site without any personal interaction or advice from an individual 
Adviser (i.e., ``robo-advice''); or
    (4) The Adviser has or exercises any discretionary authority or 
discretionary control with respect to the recommended transaction.
    (d) Conditions. The provision is subject to the following 
conditions:
    (1) The Financial Institution and Adviser adhere to the following 
standards:
    (i) When providing investment advice to the Retirement Investor, 
the Financial Institution and the Adviser(s) provide investment advice 
that is, at the time of the recommendation, in the Best Interest of the 
Retirement Investor. As further defined in Section VIII(d), such advice 
reflects 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;
    (ii) The recommended transaction does not cause the Financial 
Institution, Adviser or their Affiliates or Related Entities to 
receive, directly or indirectly, compensation for their services that 
is in excess of reasonable compensation within the meaning of ERISA 
section 408(b)(2) and Code section 4975(d)(2).
    (iii) Statements by the Financial Institution and its Advisers to 
the Retirement Investor about the recommended transaction, fees and 
compensation, Material Conflicts of Interest, and any other matters 
relevant to a Retirement Investor's investment decisions, are not 
materially misleading at the time they are made.
    (2) Disclosures. The Financial Institution provides to the 
Retirement Investor, prior to or at the same time as, the execution of 
the recommended transaction, a single written disclosure, which may 
cover multiple transactions or all transactions occurring within the 
Transition Period, that clearly and prominently:
    (i) Affirmatively states that the Financial Institution and the 
Adviser(s) act as fiduciaries under ERISA or the Code, or both, with 
respect to the recommendation;
    (ii) Sets forth the standards in paragraph (d)(1) of this Section 
and affirmatively states that it and the Adviser(s) adhered to such 
standards in recommending the transaction;
    (iii) Describes the Financial Institution's Material Conflicts of 
Interest; and
    (iv) Discloses to the Retirement Investor whether the Financial 
Institution offers Proprietary Products or receives Third Party 
Payments with respect to any investment recommendations; and to the 
extent the Financial Institution or Adviser limits investment 
recommendations, in whole or part, to Proprietary Products or 
investments that generate Third Party Payments, notifies the Retirement 
Investor of the limitations placed on the universe of investment 
recommendations. The notice is insufficient if it merely states that 
the Financial Institution or Adviser ``may'' limit investment 
recommendations based on whether the investments are Proprietary 
Products or generate Third Party Payments, without specific disclosure 
of the extent to which recommendations are, in fact, limited on that 
basis.
    (v) The disclosure may be provided in person, electronically or by 
mail. It does not have to be repeated for any subsequent 
recommendations during the Transition Period.
    (vi) The Financial Institution will not fail to satisfy this 
Section IX(d)(2) solely because it, acting in good faith and with 
reasonable diligence, makes an error or omission in disclosing the 
required information, provided the Financial Institution discloses the 
correct information as soon as practicable, but not later than 30 days 
after the date on which it discovers or reasonably should have 
discovered the error or omission. To the extent compliance with this 
Section IX(d)(2) requires Financial Institutions to obtain information 
from entities that are not closely affiliated with them, they may rely 
in good faith on information and assurances from the other entities, as 
long as they do not know, or unless they should have known, that the 
materials are incomplete or inaccurate. This good faith reliance 
applies unless the entity providing the information to the Adviser and 
Financial Institution is (1) a person directly or indirectly through 
one or more intermediaries, controlling, controlled by, or under common 
control with the Adviser or Financial Institution; or (2) any officer, 
director, employee, agent, registered representative, relative (as 
defined in ERISA section 3(15)), member of family (as defined in Code 
section 4975(e)(6)) of, or partner in, the Adviser or Financial 
Institution.
    (3) The Financial Institution designates a person or persons, 
identified by name, title or function, responsible for addressing 
Material Conflicts of Interest and monitoring Advisers' adherence to 
the Impartial Conduct Standards; and
    (4) The Financial Institution complies with the recordkeeping 
requirements of Section V(b) and (c).

    Signed at Washington, DC.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, U.S. 
Department of Labor.
[FR Doc. 2016-16355 Filed 7-7-16; 4:15 pm]
BILLING CODE 4510-29-P