The Department of Labor (the "DOL") has now issued final regulations, which revises the definition on who is considered to be a "fiduciary", for ERISA purposes, by providing "investment advice". The DOL has also issued two new prohibited transaction exemptions, and amended others, to help implement the revised definition. To introduce the revised definition, and the new and amended exemptions, the DOL has released a Fact Sheet. Here is a summary of what the Fact Sheet says:
I. What Is Covered Investment Advice Under the Revised Definition?
The revised definition describes the kinds of communications that would constitute investment advice, and then describes the types of relationships in which those communications would give rise to fiduciary investment advice responsibilities.
Covered investment advice is defined as a recommendation to a plan, plan fiduciary, plan participant or beneficiary or IRA owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA.
Covered investment advice also includes recommendations as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, and selection of investment account arrangements (e.g., brokerage versus advisory). It also includes recommendations with respect 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.
Under the revised definition, the fundamental threshold element in establishing the existence of fiduciary investment advice is whether a "recommendation" occurred. A "recommendation" is 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. The more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.
The types of relationships that must exist for such recommendations to give rise to fiduciary investment advice responsibilities include recommendations made either directly or indirectly (e.g. through or together with any affiliate) by a person who:
• represents or acknowledges that they are acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code (Code);
• renders 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
• directs the advice to a specific 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.
The recommendation must be provided in exchange for a fee or other compensation.
II. What Is Not Covered Investment Advice Under the Revised Definition?
The following is NOT treated as covered investment advice:
--general communications that a reasonable person would not view as an investment recommendation;
--providing a platform of investment alternatives to plan fiduciaries;
--communication by advisors to independent plan fiduciaries with financial expertise;
--communications and activities by advisers in swap transactions if certain conditions are met; and
--normal communications from company employees.
III. The Best Interest Contract Exemption
In order to ensure retirement investors receive advice that is in their best interest while also allowing advisers to continue receiving commission-based compensation, the DOL is issuing the Best Interest Contract Exemption (the "BICE"). Under ERISA and the Code, individuals providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners are not permitted to receive payments creating conflicts of interest without a prohibited transaction exemption (a "PTE").
BICE requires a financial institution providing advice to acknowledge fiduciary status for itself and its advisers. The financial institution and advisers must adhere to basic standards of impartial conduct, including giving prudent advice that is in the customer's best interest, avoiding making misleading statements, and receiving no more than reasonable compensation. The financial institution also must have policies and procedures designed to mitigate harmful impacts of conflicts of interest and must disclose basic information about their conflicts of interest and the cost of their advice.
BICE includes disclosure requirements, including descriptions of material conflicts of interest, fees or charges paid by the retirement investor, and a statement of the types of compensation the firm expects to receive from third parties in connection with recommended investments. Investors also have the right to obtain specific disclosure of costs, fees, and other compensation upon request. In addition, a website must be maintained and updated regularly that includes information about the financial institution's business model and associated material conflicts of interest, a written description of the financial institution's policies and procedures that mitigate conflicts of interest, and disclosure of compensation and incentive arrangements with advisers, among other information.
BICE provides for enforcement of the standards it establishes.
IV. Additional Exemptive Relief
In addition to the BICE, the DOL is issuing a Principal Transactions Exemption, which permits investment advice fiduciaries to sell or purchase certain recommended debt securities and other investments out of their own inventories to or from plans and IRAs. As with the BICE, this requires, among other things, that investment advice fiduciaries adhere to certain impartial conduct standards, including obligations to act in the customer's best interest, avoid misleading statements, and seek to obtain the best execution reasonably available under the circumstances for the transaction.
The DOL is also finalizing an amendment to an existing exemption, PTE 84-24, which provides relief for insurance agents and brokers, and insurance companies, who receive compensation for recommending fixed rate annuity contracts to plans and IRAs. As amended, PTE 84-24 contains increased safeguards for the protection of retirement investors. This exemption has more streamlined conditions than the BICE, which will facilitate access by plans and IRAs to these relatively simple lifetime income products.
The DOL is amending other existing exemptions, as well, to ensure that plan and IRA investors receiving investment advice are consistently protected by impartial conduct standards, regardless of the particular exemption upon which the adviser relies.
V. Applicability Date
Compliance with the revised definition of fiduciary and the new and amended PTEs is required as of the date which is one year after the day on which the final regulations are published in the Federal Register. (that one year anniversary being April 8, 2017). However, the new and amended PTEs are subject to a phased-in implementation approach, with full compliance required by January 1, 2018 .
The final regulation, the BICE, the Principal Transactions Exemptions and amendments to the other PCEs are here.