Uncle Sam taketh away, and then he giveth.

The U.S. Department of Labor’s fiduciary rule imposes a high standard on advisors making recommendations to retirement accounts—standards that appear to forbid the use of certain annuities, managed account programs and other products within retirement accounts—but it also gives advisors a powerful exemption that allows the use of such products to continue: the best interest contract.

The fiduciary rule, released last month in its final form, forbids advisors to receive variable commissions for conducting transactions within a client’s retirement account, said Marcia Wagner, principal of the Boston-based Wagner Law Group, in a web conference last month.

“In order to earn commissions that vary by product, the transaction would need to qualify for an exemption,” Wagner said. “To address that need, the DOL created the best interest contract exemption, or BICE.”

The exemption is the most sweeping form of relief from the most stringent parts of the rule. It can be used for any assets and products offered to retirement plan and IRA investors, as long as the advisor is providing non-discretionary advice.

“I want to highlight the fact that the BICE does not provide relief from any variable compensation rising from the discretionary advice of fiduciary advisors,” Wagner says. “Let’s say the investment manager has the ability to invest IRA assets without approval from the end client. If they earn any compensation or revenue sharing, the arrangement would be a violation of the prohibited transaction rules and the BICE would not apply because the advice is discretionary. It’s a complicated exemption.”

The exemption will permit firms to use many of their current compensation models as long as they acknowledge their fiduciary status, give prudent and impartial advice, disclose potential conflicts of interest and information about their revenue model, avoid misleading statements and receive no more than reasonable compensation.

The sale of variable annuities and fixed-indexed annuities to plan accounts and IRAs is now only permissible through the exemption.

There are four different types of best interest contracts, or BICs, classified by Wagner: the full-blown BIC, the disclosure BIC, the streamlined BIC and the transition BIC.

The full-blown contract applies to advice provided to IRAs and non-ERISA plans and will be the most relied-on variation, Wagner said.

“It implies that a fiduciary relationship must be in effect before any advisory arrangement is executed,” she said. “The agreement must reflect the relevant standards for advice and include general disclosures concerning compensation and any related conflicts.”

The contract provides for mandatory arbitration in individual disputes, but also retains a client’s right to participate in class action litigation against an advice provider.

The disclosure contract applies to advice given to ERISA plans—since such advice is already bound to the law’s fiduciary standard, advisors aren’t required to sign a written contract.

“Instead, a written statement stating compensation and the advisor’s fiduciary status is required,” Wagner said. Advisors are also required to provide the same disclosures on compensation and potential conflicts called for in the full-blown best interest contract.

Only level-fee fiduciaries can use the streamlined BIC. Since these advisors by definition typically meet the DOL standard when giving advice, the streamlined contract is most likely to be used by advisors counseling on IRA rollovers that might lead the clients to move assets into an account with higher fees, Wagner said.

“To transition a client into an advisory relationship, the advisor would need a BIC covering the higher ongoing fee,” Wagner said. “There’s still an impact for level-fee fiduciaries that might come as a surprise to some RIAs.”

The streamlined BIC requires that the advisor provide a written statement of fiduciary status and a written rationale for why their recommendation is in the client’s best interest, Wagner said, but otherwise there would be no need for other disclosures.

The transition BIC can only be used during the 2017 transition period, said Wagner.

“The transition BIC may be beneficial for firms who are not yet ready to comply with the full-blown BIC by April 2017,” Wagner said. “Many requirements are waived. It requires the advisor to provide a written statement of fiduciary status and revenue disclosures. It can be provided electronically or by mail.”

In their final form, best-interest contracts will require broker-dealers to describe to investors any differential compensation paid to their associated representatives.

“A broker-dealer firm cannot pay more to a rep simply because a recommended product carries a higher commission,” Wagner said. “Differential compensation must be tied to neutral factors, to services that arise when certain investment categories are recommended, like additional time to research or vet investments. The DOL appeals to broker-dealers to change their payout grids.”

Thus, if the firm requires a level amount of time and resources to sell and maintain the variable annuity contracts on its platform, to qualify for the BICE the expenses and fees must also be level, Wagner said. Before receiving variable compensation relying on the BICE, firms will also have to file the contracts and any disclosures with the DOL.

“There is no processing or waiting period once the notices are filed; these are not intended to be onerous requirements,” Wagner said. “The regulation will require thousands of firms to file with the DOL. It appears that the DOL will compile the information for investigative and other related functions.”

The BICE does not apply to fixed-index annuities, which Wagner said are only permissible through "fee levelization"—the elimination of all differential compensation within the account.

Investors currently in commission-based retirement accounts can be grandfathered in with negative consent in lieu of a written contract, as long as the existing relationship is demonstrably in the client’s best interests—for example, if remaining in their current account would be less expensive than transitioning to an alternative.

“When the investment was originally set up, it must have been in compliance with the prohibited transaction rules,” Wagner said. “Compensation must be reasonable, and there’s no relief for any additional investment after April 10, 2017… if an advisor no longer provides advice to a client, it’s unclear if ongoing commissions would qualify as reasonable compensation.”

The final rule also makes the BICE available to brokers receiving variable compensation like commissions in the small plan marketplace, reversing a proposal that would have prevented brokers receiving 12b-1 fees or commissions from working in plans with fewer than 100 participants.

Brokers will have to be careful, says Wagner—if the plan’s participant count exceeds 100, the BICE no longer applies and receiving variable compensation could be considered a prohibited transaction. For the DOL’s purposes, the count includes any participants with an account balance, be they active or former employees, and anyone else eligible to participate in the plan.

The DOL does not make clear how the BICE will be enforced, except through litigation, or to what extent it will be applied.

“Nevertheless, the BICE imposes some fairly heavy requirements, and is an interesting piece of rule-making,” Wagner said. “As a technical matter, the Department of Labor is responsible for defining what a fiduciary is for IRAs and plans, and it’s also required to define exemptions, but the IRS has exclusive enforcement jurisdiction over IRAs. The DOL has no power over the IRA client or the advisor. Thus they give the IRA owners the contractual power to enforce any violations of the rule.”