7 Exclusions From the Fiduciary Rule ‘Investment Advice’ Definition

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.

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