The Department of Labor (“DOL”) has issued its final rule on redefining the circumstances under which a person becomes a fiduciary in connection with an employee retirement plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) or an individual retirement account (“IRA”). A fiduciary must provide investment advice in the best interests of the potential client. Previously, the standard of review was whether the advice resulted in the sale of a product “suitable to the Client’s needs.” The fiduciary standard imposes a higher duty upon the one providing advice.
Fiduciary status is based on such person’s “render[ing] [of] investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan ….” 29 U.S.C. § 1002(21)(A)(ii) (2016). See 81 FR 20946 (2016). The final rule extensively amends the definition of a fiduciary based on the provision of investment advice contained in 29 CFR § 2510.3-21. As a result, the amended rule materially widens the categories of persons who will be deemed to be fiduciaries with respect to employee retirement plans and IRAs.
The DOL has also granted an exemption from ERISA’s prohibited transactions provisions known as the Best Interest Contract Exemption (“BICE”) which allows financial institutions such as registered investment advisers, broker-dealers and insurance companies that are ERISA fiduciaries by reason of the provision of investment advice to receive compensation that may otherwise give rise to prohibited transactions, in exchange for which such entities must acknowledge their fiduciary status and agree to adhere to certain Impartial Conduct Standards. See 81 FR 21002 (2016). 
We set forth below some of the key amendments to Section 2510.3-21 along with a summary of the BICE:
- A person becomes a fiduciary as the result of rendering investment advice with respect to the assets of a plan or IRA where (A) she provides, “for a fee or other compensation, direct or indirect,” the following types of advice: (i) a recommendation as to “the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property,” (ii) a recommendation as to “how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA,” (iii) a recommendation as to “the management of securities or other investment property, including among other things recommendations on investment policies or strategies [and] portfolio composition …,” (iv) a recommendation as to “rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made;” and (B) the recommendation is made directly or indirectly by a person who (i) “represents or acknowledges that it is acting as a fiduciary….,” (ii) renders the advice “pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the advice recipient,” or (iii) “directs the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.” (29 U.S.C. § 2510.3-21(a)(1) and (2) (2016)).
- The term “recommendation” is defined as “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action,” with the determination as to whether a recommendation has been made being “an objective rather than subjective inquiry.” (29 U.S.C. § 2510.3-21(b)(1) (2016)).
- Excluded from the definition of a “recommendation” are the following: (A) “[m]arketing or making available to a plan fiduciary of a plan, without regard to the individualized needs of the plan, its participants, or beneficiaries a platform … from which a plan fiduciary may select or monitor investment alternatives … into which plan participants or beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts, provided the plan fiduciary is independent of the person who markets or makes available the platform …, and the person discloses in writing to the plan fiduciary that the person is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity,” (B) in connection with the foregoing platform providers activities (i) “[i]dentifying investment alternatives that meet objective criteria specified by the plan fiduciary … provided that the person identifying the investment alternatives discloses in writing whether the person has a financial interest in any of the identified investment alternatives, and if so the precise nature of such interest,” (ii) in response to a request for information or similar solicitation by a plan, “identifying a limited or sample set of investment alternatives based on only the size of the employer or plan, the current investment alternatives designated under the plan, or both, provided that the response is in writing and discloses whether the person identifying the limited or sample set of investment alternatives has a financial interest in any of the alternatives, and if so the precise nature of such interest,” or (iii) “providing objective financial data and comparisons with independent benchmarks to the plan fiduciary,” (C) furnishing “general communications that a reasonable person would not view as an investment recommendation, including general circulation newsletters, commentary in publicly broadcast talk shows…, research or news reports prepared for general distribution … [and] general market data ….” and (D) certain types of “investment-related information and materials….,” including information about the plan, general financial, investment and retirement information, asset allocation models and interactive investment questionnaires and similar materials. (29 U.S.C. § 2510.3-21(b)(2)(i)-(iv) (2016)).
- The term “fee or other compensation, direct or indirect,” is defined as “any explicit fee or compensation for the advice received by the person … from any source, and any other fee or compensation received from any source in connection with or as a result of the purchase or sale of a security or provision of investment advice services, including , though not limited to, commissions, loads, finder’s fees …, marketing or distribution fees [and] underwriting compensation….” (29 U.S.C. § 2510.3-21(g)(3) (2016)).
- The BICE enables Financial Institutions such as broker-dealers, registered investment advisors and insurance companies to receive forms of compensation for providing advice to “Retirement Investors” such as IRA owners which would otherwise be prohibited. These include: commissions, trailing commissions, sales loads, 12b-1 fees, and revenue-sharing payments from investment providers or other third parties to such Financial Institutions.
- In exchange for compensation, the Financial Institution must (A) acknowledge fiduciary status with respect to investment advice provided to the Retirement Investor; and (B) adhere to “Impartial Conduct Standards” requiring them to inter alia (i) give advice that is in the Retirement Investor’s Best Interest, (ii) charge no more than reasonable compensation, (iii) make no misleading statements about investment transactions, compensation, and conflicts of interest, and (iv) refrain from giving or using incentives for advisers to act contrary to the customer’s best interest.
- Advisers relying on the BICE must adhere to the Impartial Conduct Standards when making investment recommendations.
- In the case of IRAs and non-ERISA plans, the exemption generally requires the Financial Institution to commit to the Impartial Conduct Standards in an enforceable contract with Retirement Investor customers.
- While the BICE does not similarly require the Financial Institution to execute a separate contract with ERISA plan investors, the Financial Institution must nonetheless acknowledge its fiduciary status and that of its advisers; ERISA investors can enforce their rights to proper fiduciary conduct under Section 502(a)(2) and (3) of ERISA.
Both amended Section 2510.3-21 and the BICE become effective on June 7, 2016. To allow enough time for plans and their affected financial services and other service providers to adjust to the change from non-fiduciary to fiduciary status, amended Section 2510.3-21 does not become applicable until April 10, 2017. Likewise, the BICE is applicable to transactions occurring on or after April 10, 2017. While the impact of these new rules on regulated persons will, in part, depend upon implementation of the regulators, increased customer complaints based upon breaches of the newly enhanced standards are likely.