On April 14, 2015, the Department of Labor ("DOL") issued a long-awaited proposed guidance addressing its long-standing concern about conflicts of interest among retirement advisors. The new guidance expands the definition of fiduciary investment advice and includes several new prohibited transaction exemptions. The full text of the proposed guidance may be found here

The proposed guidance likely will undergo several changes and clarifications before it becomes final. However, it appears certain that the final guidance will result in more investment professionals being considered "fiduciaries," will require contracts and disclosures to be rewritten, will necessitate enhanced training, and will expand exposure to fiduciary liability.

Proposed Rule Redefines "Investment Advice"

The proposed rule redefines the scope of fiduciary "investment advice" and will apply to various investment professionals including but not limited to registered investment advisers, insurance agents, and brokers-dealers. This alert refers to these professionals simply as "advisors."

Under the proposed rule, an advisor renders fiduciary investment advice if the advisor provides certain recommendations or appraisals directly to a plan, plan fiduciary, participant or beneficiary, or an individual retirement account ("IRA") owner or fiduciary for a fee or other compensation, whether direct or indirect. The following types of recommendations or appraisals may trigger fiduciary status:

  • A recommendation as to the advisability of acquiring, holding, disposing or exchanging securities or other property, including a recommendation to take a distribution of benefits or a recommendation as to the investment of securities or other property to be rolled over or otherwise distributed from the plan or IRA
  • A recommendation as to the management of securities or other property, including recommendations as to the management of securities or other property to be rolled over or otherwise distributed from the plan or IRA
  • An appraisal, fairness opinion, or similar statement whether verbal or written concerning the value of securities or other property if provided in connection with a specific transaction or transactions involving the acquisition, disposition, or exchange of such securities or other property by the plan or IRA
  • A recommendation of a person who is also going to receive a fee or other compensation for providing any of the types of advice described above

In addition, to become a fiduciary the advisor must either (a) acknowledge the fiduciary nature of the advice, or (b) act pursuant to an agreement, arrangement, or understanding with the advice recipient that the advice is individualized to, or specifically directed to, the recipient for consideration in making investment or management decisions regarding plan assets.

Carve-Outs The proposed rule carves out the following activities from the definition of fiduciary investment advice as long as the advisor meets the requirements of the carve-out and does not represent that the advisor is a fiduciary:

  • Retirement or investment "education"
  • Statements or recommendations made to a large plan investor with financial expertise by a counterparty acting in an arm's length transaction (this carve out is meant to cover sales pitches that are part of arm's length transactions where neither party assumes that the counterparty to the plan is acting as an impartial trusted advisor)
  • Swap transactions with independent plan fiduciaries
  • Mandatory plan reporting and disclosure filings
  • Statements or recommendations by an employee of a plan sponsor if the employee receives no fee beyond his or her normal compensation
  • Marketing or making available a platform of investment alternatives to be selected by a plan fiduciary for an ERISA participant-directed individual account plan or IRA
  • The identification of investment alternatives that meet objective criteria (e.g., stated parameters concerning expense ratios, size of fund, type of asset, credit quality) specified by a plan fiduciary of an ERISA plan or IRA or the provision of objective financial data and comparisons with independent benchmarks to such fiduciary
  • Providing an appraisal, fairness opinion or a statement of value to an ESOP regarding employer securities, to a collective investment vehicle holding plan assets, or to a plan for meeting reporting and disclosure requirements

An advisor that may newly be considered a "fiduciary" may wish to begin examining its advice and compensation practices in light of the fiduciary duty to act in a client's best interest and avoid prohibited transactions. If the advisor is conflicted, the advisor should examine potential prohibited transaction exemptions, such as the new Best Interest Contract exemption described below.

The proposal revises the definition of "investment education" in DOL Interpretive Bulletin 96-1 and, if finalized, will supercede the Bulletin. Advisors who intend to provide "investment education" rather than "investment advice" should carefully review the new definitions and adjust their investment education programs as necessary to stay within the new definition of "investment education."

Proposed Best Interest Contract Prohibited Transaction Exemption ("BIC PTE"). The BIC PTE is designed to promote investment advice to retail investors such as plan participants and beneficiaries, IRA owners, and small plans. It allows an advisor to continue to set its own compensation practices as long as the advisor:

  • Commits to providing advice in the client's best interest,
  • Avoids misleading statements about fees and conflicts of interest,
  • Warrants that the advisor has adopted policies and procedures designed to mitigate conflicts of interest,
  • Clearly and prominently discloses any conflicts of interest that might prevent the advisor from providing advice in the client's best interest,
  • Complies with a variety of disclosure obligations with respect to investment costs and the advisor's compensation,
  • Permits customers to pursue a private right of action against the advisor for contractual breaches, and
  • Notifies the DOL of its use of the BIC PTE.

An advisor intending to rely on this exemption may need to increase the scope and detail of its disclosures and establish new policies and procedures. Thus, advisors may want to evaluate and prepare for the costs of compliance with the BIC PTE.

Proposed Principal Transactions Exemption. The proposed Principal Transactions Exemption allows an advisor to recommend certain fixed-income securities and sell them directly from an advisor's own inventory as long as the advisor adheres to certain conditions.

Proposed Amendments to Existing Prohibited Transaction Exemptions.The DOL also proposes amending several PTEs to require fiduciaries relying on one or more of the PTEs to adhere to the same conduct standards required in the BIC PTE, and to make certain other clarifying changes. Specifically, the DOL proposes to amend PTEs 86-128, 84-24, 83-1, 80-83, and 75-1.

Final Guidance The proposed guidance will have a period of public comment. The DOL will review the public comments and decide what to include in the final guidance. When final guidance is published, it will not be effective immediately upon publication but rather will be effective eight months after publication.

Although advisors will have some time to adjust to the new fiduciary investment advice regime, advisors should review the proposed guidance in order to determine whether their existing advice and compensation structures may need adjustments to comply.