The scope of the rule is quite broad, but the DOL has created several exclusions from its new definition of “investment advice.”
So long as communications or transactions fall under one of the excluded categories, they will not be deemed to be fiduciary advice, even if those communications or transactions involve providing investment-related recommendations to retirement clients.
Of course, the parties involved will not be excluded from the “fiduciary” definition if they affirmatively acknowledge their status as fiduciary advisors when offering their incidental advice.
Here, however, is a list of seven exclusions that could apply when parties avoid accepting fiduciary status.
1. Platform Providers
The exclusion applies to providers of investment platforms for defined contribution plans with participant-directed investments, such as 401(k) recordkeepers.
As long as the applicable conditions are met, the platform provider will be able to market various investment funds from its platform, which in turn may be offered as investment options to plan participants.
The provider will need to market these investments without regard to the individualized needs of the particular plan or its participants. The provider will also need to disclose in writing that it is not undertaking to provide impartial fiduciary advice.
2. Investment Education
The investment education exclusion under the DOL’s new rule is based on the existing safe harbor for non-fiduciary investment education under DOL Interpretive Bulletin 96-1.
Consistent with that safe harbor, there are four categories of investment-related guidance that may be provided to retirement clients without triggering fiduciary status. They include:
- plan information,
- general financial, investment and retirement information,
- asset allocation models, and
- interactive investment materials such as retirement calculators and questionnaires.
3. General Communications
Certain kinds of “general communications” are excluded from investment “recommendations” so long as a reasonable person would not view such communication as an investment recommendation.
Examples include general circulation newsletters as well as commentary in publicly broadcast talk shows. It also includes widely attended speeches and conferences, as well as research or news reports prepared for general distribution.
Also covered by this exclusion are general market data, performance reports and prospectuses for investment products.
4. Sales to Institutional Fiduciaries
Under the new DOL rule, there is an exclusion from the fiduciary definition for sellers of investment products to institutional fiduciary clients with authority over plan or IRA assets.
The exclusion generally applies when the seller is acting as a counterparty in an arm’s length purchase, sale or loan transaction.
The purpose of this exclusion is to give the seller the flexibility to provide incidental advice to an institutional fiduciary in connection with the transaction, without being deemed a fiduciary advisor.
For the seller to take advantage of this exclusion, the institutional fiduciary client must have at least $50 million in plan assets under management, or it must be a bank, insurance company, registered investment advisor or broker-dealer with plan or individual retirement account client assets.
To be eligible for this exclusion, the seller must inform the institutional fiduciary client that it is not providing impartial fiduciary advice. In addition, the seller must not receive any direct compensation for providing the incidental advice. Unlike many of the other exclusions available under the new fiduciary rule, this one does not sanction variable compensation.
The seller must also reasonably believe that the institutional fiduciary is capable of evaluating the investment risks, and that the institutional fiduciary is responsible for exercising independent judgment in evaluating the transaction.
5. Swap Counterparty
Swaps are financial derivative transactions routinely utilized by many institutional plans on a routine basis. For example, a plan and a counterparty bank might enter into an equity swap where the parties exchange the future cash flow values of two hypothetical investments, one linked to an equity investment like the S&P 500 and the other linked to an interest rate.
The exclusion from the fiduciary definition for swap counterparties covers any related advice provided by swap dealers (as well as security-based swap dealers) and major swap participants who are engaging in swap transactions with plans. To qualify for this exclusion, the swap dealer or major swap participant must be acting merely as a swap counterparty, and not as an “advisor” to the plan for purposes of the Commodity Exchange Act and the Securities Exchange Act.
The swap counterparty is not permitted to receive any direct compensation from the plan. Furthermore, before providing any recommendations relating to the swap transaction, the swap counterparty must obtain written representations from the plan fiduciary client that the client understands that the advice is not impartial fiduciary advice, and the client is exercising independent judgment in evaluating the swap counterparty’s recommendations.
6. Plan Sponsor Employees
Under the DOL’s new rule, any investment advice to a plan sponsor (or a plan fiduciary such as the investment committee) relating to the sponsor’s own in-house plan from an employee will not be deemed to be fiduciary advice.
To qualify for this exclusion from the fiduciary definition, the employee must not earn any additional compensation for providing such advice beyond the employee’s normal pay. Thus, even though the plan sponsor may be viewed as a fiduciary to its own in-house plan, the employee individually will not be considered a fiduciary.
Accordingly, the employee will be personally protected against any potential liability for any alleged fiduciary violations under the Employee Retirement Income Security Act (ERISA).
7. Incidental Advice
An unanswered question under the proposed regulation was whether certain incidental communications could amount to fiduciary investment advice.
For example, some commentators thought a literal reading of the proposal could result in a third party administrator, call center or other service provider becoming an inadvertent fiduciary if it responded to a question from a retirement plan client about available investment advisers or managers, even though the respondent’s fee was not related to or contingent on the response.
One ERISA statutory requirements is that fiduciary status applies to a service provider only if it receives compensation in connection with its referral or recommendation.
— Read 6 Things to Know About Tim Kaine and Insurance on ThinkAdvisor.