Since the election of Donald Trump, there has been steady debate around the future of the Department of Labor (“DOL”) fiduciary rule (the “Rule”). As of now, compliance with the rule is still scheduled to be required as April 8, 2017. Given the fast approaching deadline, we continue to recommend that all registered investment adviser (“RIA”) firms plan to comply with the rule as scheduled. This past week, the DOL issued its second of three FAQs in regards to the fiduciary rule. This follows the release of its first set of FAQs that previously helped to clarify how and when RIA firms can utilize the “Level Fee Exemption.” This latest list of FAQs focuses on drawing the distinction between “non-fiduciary investment education” and “fiduciary recommendations” subject to the Rule.
Note: RIA in a Box LLC is not a law firm and does not provide legal advice. We strongly advise that all RIA firms that provide services to individual retirement investors, pension plans, profit sharing plans, and/or retirement plans to consult with a qualified Employee Retirement Income Security Act of 1974 (ERISA) attorney in matters relating to Department of Labor (DOL) and ERISA law. This overview is provided for general information purposes only and should not be relied upon to take any action.
This post below is as January 17, 2017. As the DOL issues additional guidance, we anticipate additional updates and/or modifications will be made to this solely educational overview. Reference Sources: Best Interest Contract Exemption issued by the Employee Benefits Security Administration released on April 8, 2016 and Conflict of Interest FAQs (Part II-Rule) published on January 13, 2017. Phased-in deadline for compliance begins on April 10, 2017 with January 1, 2018 the deadline to be in full compliance with the new retirement account advice rules.
This second round of FAQs provides 35 answers to frequently asked questions. Questions and answers numbered 1 to 17 are most relevant to fee-based investment advisers. In this latest release, the DOL staff attempts to better explain under what circumstances an advisor may or may not be providing “fiduciary investment advice.” In particular, the staff notes that the Rule’s applicability to retirement accounts focuses on two key components:
- “Whether the advising person makes a ‘recommendation’ regarding an investment or investment management;
- and receives direct or indirect fees or other compensation.”
In question 1, the DOL staff further clarifies the term “recommendation”:
“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 investment-related course of action. In general, a recommendation is a “call to action” — a communication that a reasonable person would view as recommending that he or she actually buy, hold, or sell a particular investment, or as a recommendation on managing investments or investment accounts. Providing a selective list of securities to a particular advice recipient as appropriate for that investor would be a recommendation as to the advisability of acquiring securities even if no recommendation is made with respect to any one security. The more individually tailored the communication is to a 2 specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.”
In question 1, the DOL staff also further clarifies the term “fee or other compensation”:
“The adviser must also receive a “fee or other compensation” for a communication to be investment advice covered under the Rule. This includes both any explicit fee or compensation for the advice which is received by the adviser (or by an affiliate) from any source, as well as any other fee or compensation received from any source in connection with or as a result of the recommended transaction or service, including such things as commissions, loads, finder’s fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, underwriting compensation, payments to firms in return for shelf space, recruitment compensation, gifts and gratuities, and expense reimbursements. The Rule provides that “`a` fee or compensation is paid ‘in connection with or as a result of’ such transaction or service if the fee or compensation would not have been paid but for the transaction or service or if eligibility for or the amount of the fee or compensation is based in whole or in part on the transaction or service.”
In question 6, the DOL staff confirms that an advisor will not be held liable as a fiduciary for investment decisions made by the client against an advisor’s recommendations:
“Neither the Rule nor the Best Interest Contract Exemption requires an adviser or financial institution to take responsibility for a client’s investment decisions made against the adviser’s recommendation”
The staff also goes to great length to further draw a distinction between “non-fiduciary investment education” and “fiduciary recommendations” by highlighting the four categories of non-fiduciary education:
- “Plan and investment information (information and materials that describe investments or plan alternatives without specifically recommending particular investments or strategies). Thus, for example, an adviser would not act as a fiduciary merely by describing the investment objectives and philosophies of plan investment options, mutual funds, or other investments; their risk and return characteristics; historical returns; the fees associated with the investment; distribution options; contract features; or similar information about the investment.”
- “General financial, investment, and retirement information. Similarly, one does not become a fiduciary merely by providing information on standard financial and investment concepts, such as diversification, risk and return, tax deferred investments; historic differences in rates of return between different asset classes 6 (e.g., equities, bonds, cash); effects of inflation; estimating future retirement needs and investment time horizons; assessing risk tolerance; or general strategies for managing assets in retirement. All of this is non-fiduciary education as long as the adviser does not cross the line to recommending a specific investment or investment strategy.”
- “Asset allocation models. Here too, firms and advisers can provide non-fiduciary information and materials on hypothetical asset allocations as long as they are based on generally accepted investment theories, explain the assumptions on which they are based, and do not cross the line to making specific investment recommendations. In the case of ERISA-covered plans, the models may reference specific designated investment alternatives on the plan’s menu as hypothetical examples to aid participant understanding, as long as the examples meet the Rule’s protective conditions.”
- “Interactive investment materials. Again, firms and advisers can provide a variety of questionnaires, worksheets, software, and similar materials that enable workers to estimate future retirement needs and to assess the impact of different investment allocations on retirement income, as long as the adviser meets conditions similar to those described for asset allocation models.”
In question 12, DOL staff also confirms that an advisor can receive a fee for providing “general educational information” without being considered an “investment advice fiduciary”:
“Charging compensation for providing educational services does not change the nature of the communication into investment advice. Rather, whether a communication is an investment recommendation is governed by the definition of investment recommendation in the Rule.”
However, in question 13, the staff does clarify that if an advisor provides “general educational information” but then “refers the plan participant to a recommended third party who provides investment advice and the person receives a referral fee from the third party,” the person, or advisor in this instance, would be subject to the Rule:
“Recommending a third party who provides investment advice and receiving a referral fee as a result of that recommendation would be investment advice covered by the Rule, and the receipt of a referral fee for such a recommendation would also be a prohibited transaction unless the person complied with an applicable exemption.”
In question 17, the staff states that “a free dinner seminar offered by an investment adviser” is likely not considered to be in the category of “widely attended speeches or conferences within the meaning of the general communications provision”:
“The Department does not consider such free-meal seminars to be widely attended speeches or conferences within the meaning of the general communications provision. Moreover, in the Department’s view, a reasonable person attending such a seminar could view statements by the investment adviser as investment recommendations even if the statements were made to all the attendees. Whether the particular communications at the seminar could reasonably be viewed as a suggestion that the advice recipients engage in or refrain from taking a particular course of action (i.e., a recommendation) would be a matter of facts and circumstances.”
As RIA compliance consultants, we continue to strongly recommend that all investment advisers make any necessary operational changes in order to qualify the firm to utilize “Level Fee Exemption” to avoid the more stringent “Best Interest Contract” requirement. We suggest that all RIA firm principals continue to follow future developments by tracking “The Top 5 DOL Fiduciary Rule Experts Every RIA Firm Should Follow” and by reviewing “How an RIA Firm can Comply with the DOL Fiduciary Rule.”