RIA Compliance Blog
The Department of Labor (DOL) recently issued two new sets of FAQ guidance regarding the revised definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code), as well as the new prohibited transaction exemptions (PTEs). The first set of guidance is directed to retirement investors, not advisers, and answers basic questions investors may have regarding the new rule and how it will work. The second set of guidance is aimed at financial service providers and focuses mainly on the revised definition of fiduciary investment advice and the situations in which fiduciary duties will or will not attach under the new rule.
While the first set of FAQ guidance is not necessarily aimed at financial service providers, it did provide a few useful insights that I will briefly discuss here. The DOL stated that the new rule does not require advisers to indiscriminately move clients from commission-based accounts to fee-based accounts, and instead requires advisers to act in the client’s best interest when deciding what type of account to recommend. Regarding the best interest requirement, the DOL clarified that providing investment advice in a client’s best interest does not mean that advisers have a duty to find the best possible investment product for clients out of all the investments available in the marketplace.
In addition, the DOL made clear that advisers are not automatically liable if a client loses money after following the adviser’s advice. Rather, fiduciary advisers are responsible only for making investment advice recommendations that are prudent and based on the client’s interests at the time of the recommendation.
As stated above, the DOL’s second set of FAQ guidance is directed towards financial service providers and focuses mainly on the revised definition of fiduciary investment advice and the exceptions thereto. The DOL made several important clarifications regarding what constitutes a “recommendation” under the rule. The DOL noted that internal communications a firm sends to its employees such as training materials would not qualify as a fiduciary investment recommendation merely because the employee provides fiduciary investment advice to plans or IRAs. However, if those internal communications are forwarded or made available to retirement clients, it could become a fiduciary investment recommendation.
The DOL also stated that notifications provided in accordance with defined contribution plans which automatically roll over account balances of terminated vested plan participants of less than $5,000, in accordance with the DOL’s automatic rollover safe harbor under Rule 404a-2 generally would not qualify as fiduciary investment recommendations because these notifications do not involve a communication that suggests a particular course of action.
The DOL also reaffirmed the validity of Frost Advisory Opinion 97-15A, which held that fiduciary advisers who receive third-party compensation would not be engaging in a prohibited transaction if they offset any fully disclosed revenue sharing or other third-party payments against their advisory fee. While the preamble to the new rule had stated that nothing in the new rule would alter the analysis of Advisory Opinion 97-15A, many fiduciary advisers were still confused as to the extent to which advisers who receive these payments would have to comply with the full BIC exemption. The new guidance makes it clear that fiduciary advisers who level their fee in accordance with Advisory Opinion 97-15A are not committing any prohibited transactions, and thus do not need to comply with any PTE.
The DOL also expanded upon the categories of communications not included within the definition of “recommendation” such as communications provided in connection with platform services, general communications such as marketing materials, or general investment education materials. The DOL noted that persons can charge a fee for providing general investment education information to retirement clients without being considered an investment advice fiduciary, and that charging compensation does not automatically transform a general communication into fiduciary investment advice. However, referring the plan participant to a third-party adviser in exchange for a referral fee would fall under the definition of a fiduciary investment advice recommendation, and would be a prohibited transaction unless the person complied with an applicable exemption.
Non-fiduciary general communications are also excluded from the definition of “recommendation,” and include communications such as newsletters, marketing materials, and widely attended speeches and conferences, among other things. The DOL noted that it does not consider free dinner seminars offered by investment advisers to be widely attended speeches or conferences within the meaning of the general communications provision. Therefore, communications at these seminars are not automatically excluded from the definition of investment advice recommendations.
Furthermore, the DOL stated that a person attending one of these seminars could reasonably view statements by the investment adviser as fiduciary investment advice recommendations, even if the statements were made to all attendees and not individually directed at the person. Whether a statement made at one of these seminars is an investment advice recommendation is a question that depends on all the facts and circumstances, and will hinge on whether the communication contains a suggestion that the advice recipient engage in or refrain from taking a particular course of action.
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