Best Interest Contract Exemption (BICE)

The Best Interest Contract Exemption (BICE) was a regulatory mechanism created by the U.S. Department of Labor in April 2016 alongside its fiduciary rule. It allowed broker-dealers, registered investment advisers, and insurance companies to continue receiving variable compensation, such as commissions, 12b-1 fees, and revenue-sharing payments, when advising retirement account investors, provided they formally acknowledged fiduciary status and agreed to put clients' interests first. Without the BICE, those compensation arrangements would have constituted prohibited transactions under ERISA.

Think of it as a conditional license: you can earn commission-based pay on retirement accounts, but only if you sign a contract committing to the fiduciary standard and disclosing your conflicts of interest.

Why the BICE Existed at All

ERISA generally prohibits fiduciaries from receiving compensation that varies based on the products they recommend, because variable pay creates obvious conflicts of interest. But the DOL recognized that banning all variable compensation would effectively eliminate the entire commission-based distribution model for retirement products, causing advisors to abandon smaller accounts they can no longer profitably serve.

The BICE threaded that needle by allowing variable compensation to continue, but attaching substantive conditions to it. The financial institution had to acknowledge fiduciary status, adhere to what the DOL called "Impartial Conduct Standards," disclose all material conflicts of interest, limit advisor incentives that could push unsuitable recommendations, and implement written policies supporting the best-interest standard.

The Four Conditions Required for BICE Compliance

To rely on the BICE, a financial institution had to satisfy four core requirements when providing advice to retirement investors.

• Formally acknowledge fiduciary status under ERISA or the Internal Revenue Code.
• Adhere to Impartial Conduct Standards, meaning the advice must be in the retirement investor's best interest, compensation must be no more than reasonable, and no misleading statements may be made.
• Warrant in writing that it has adopted policies and procedures designed to implement the best-interest standard and that it does not use quotas, bonuses, or contests that incentivize advisers to act against client interests.
• Provide specific disclosures to the retirement investor about compensation structures and conflicts of interest.

The BICE Was Vacated in 2018

The DOL's 2016 fiduciary rule and the BICE were challenged in federal court almost immediately. In March 2018, the Fifth Circuit Court of Appeals vacated the entire regulatory package, finding that the DOL had exceeded its statutory authority and had defined "fiduciary" too broadly relative to what Congress intended in ERISA. The BICE never fully took effect as law.

The DOL subsequently issued Prohibited Transaction Exemption 2020-02, which functions similarly to the BICE. It allows investment advice fiduciaries to receive variable compensation when they comply with Impartial Conduct Standards and provide specific disclosures. The 2020-02 exemption operates under the reinstated 1975 five-part test for determining who qualifies as a fiduciary in the first place, which is narrower than the 2016 rule's definition.

Sources:
https://www.gklaw.com/Insights/Department-of-Labors-Final-Fiduciary-Rule-and-Best-Interest-Contract-Exemption.htm
https://legalclarity.org/the-vacated-dol-fiduciary-rule-and-best-interest-standards/
https://www.congress.gov/crs-product/IF10686
https://www.kitces.com/blog/best-interests-contract-exemption-bice-and-dol-fiduciary-bic-requirements/