The Department of Labor’s (DOL) proposed fiduciary rules change the playing field for service providers that may make recommendations for the sale of their own products and services. If a service provider including a stable value product provider or an investment manager were to acquire fiduciary status in connection with sales of its own products or services, it could face a prohibited conflict of interest with respect to the receipt of compensation. This result may be avoidable if the Department of Labor’s proposed exceptions can be used or an existing prohibited transaction exemption is in place. A brief summary of these provisions follows.
The Proposed Rule defines a person as an ERISA fiduciary if, for a fee or other compensation, the person provides one of following four types of advice (“Covered Advice”) directly to a plan, plan fiduciary, participant or beneficiary under an agreement, arrangement or understanding that the advice is individualized to, or specifically directed to, the advice recipient for consideration in making investment or management decisions with respect to securities or other property–
- recommendations as to the advisability of acquiring, holding, disposing or exchanging securities or other property;
- recommendations as to the management of securities or other property;
- appraisals or fairness opinions concerning the value of securities or other property if made in connection with a specific transaction involving the plan; and
- recommendations of a person who will also receive a fee or other compensation for providing any of the three Covered Advice categories listed above.
The DOL also proposed several carve-outs that allow persons who may otherwise be deemed investment advice fiduciaries to avoid fiduciary status —
Counterparty Exceptions. The first “carve-out” category is referred to as the “Counterparty Exceptions.” These sales exceptions allow a person, acting as or on behalf of a counterparty, to provide Covered Advice to an independent plan fiduciary in an arm’s-length sale, purchase, loan or bilateral contract or proposal for such a transaction if certain other conditions are met, as follows.
A Counterparty Exception is available for transactions with plans represented by a fiduciary with responsibility for managing at least $100 million in employee benefit plan assets. A Counterparty Exception is also available for transactions with plans with 100 or more participants, but the adviser counterparty must obtain a written representation from the plan fiduciary that it exercises authority and control with respect to the management and disposition of plan and will not rely on the person to act in the best interest of the plan, to provide impartial investment advice, or to give advice in a fiduciary capacity. Notably, the Counterparty Exception does not exempt transactions with small plans (i.e., fewer than 100 participants) whose discretionary investment manager has less than $100 million in plan assets under management.
For any transaction to be covered by a Counterparty Exception, the adviser/counterparty must fairly inform the fiduciary representing the plan that the adviser/counterparty is not undertaking to provide impartial investment advice. Further, the adviser/counterparty may not receive any fee or other compensation directly from the plan or plan fiduciary for the provision of investment advice in connection with the transaction.
Appraisal Carve-Out. A person furnishing an appraisal or fairness opinion will not be deemed a fiduciary provided that the appraisal was rendered for (1) an investment fund which holds the assets of more than one unaffiliated plan; or (2) for purposes of complying with ERISA’s reporting or disclosure requirements.
Platform Provider Carve-Out. The DOL carves-out from fiduciary status those who market and make available platforms for a plan fiduciary to select and monitor investment alternatives that are offered to participants and beneficiaries provided that the person acknowledges in writing that they are not providing investment advice to the plan. Moreover, in connection with those platform provider services, a platform provider may avoid fiduciary status if the person “merely identifies investment alternatives that meet objective criteria specified by the plan fiduciary (e.g., stated parameters concerning expense ratios, size of fund, type of asset, credit quality)”; or “merely provides objective financial data and comparisons with independent benchmarks to the plan fiduciary.”
Investment Education Carve-Out. Lastly, the DOL also attempted to exclude from the definition of fiduciary advice the provision of investment education. Most notably, investment allocation models may not refer to a specific investment product available under the plan. This is a departure from current guidance that would allow asset allocation models to be populated with specific investment choices. Under the DOL’s new approach asset allocation models would be populated with asset classes, and not specific investment choices, regardless of whether a disclaimer is included that specifically highlights that other investment options are available under the plan.
All service providers are encouraged to review the DOL regulations to determine how the proposed regulations may impact their business and to provide comments to the DOL by July 20, 2015.