Reed Smith Client Alerts

Authors: Allison Warden Sizemore Russell J. Boehner

Executive Summary On April 6, 2016, the DOL issued long-awaited final regulations that define who is an investment advice fiduciary for purposes of the ERISA, along with coordinating prohibited transaction exemptions. These rules largely track the 2015 proposed rules but are softened in several respects.

On April 6, 2016, the Department of Labor (the “DOL”) issued long-awaited final regulations that define who is an investment advice fiduciary for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Accompanying the final regulations are new prohibited transaction exemptions (“PTEs”) – most notably the “best interest contract” PTE (also known as the “BICE”) – and several coordinating amendments to existing PTEs.

The DOL’s final rule and associated PTEs are voluminous and complex. At a high level, they track the proposed regulations and PTEs published in April 2015, but have been softened in some key respects based on input from commentators. Key changes from the 2015 proposed rule include:

  • Basing a covered “recommendation” on the standard adopted by the Financial Industry Regulatory Authority (FINRA) as 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 course of action.”
  • Expanding and clarifying the definition of investment “education” that may be provided on a non-fiduciary basis.
  • Clarifying that advertising and similar solicitations to hire a particular adviser are not fiduciary investment advice.
  • Removing appraisals and fairness opinions from the rule.
  • Eliminating the limited list of assets under the BICE, such that advice to invest in all asset classes may be covered by the BICE.
  • Expanding the “seller’s carve-out” under the BICE to include small plans and, in some cases, IRAs.
  • Substantially relaxing the contractual requirement in the BICE for investment advisers, a welcome change to the financial industry that had complained that the 2015 proposed rule required an unwieldy and unrealistic contractual structure. Specifically:
    • The contract requirement was eliminated completely for ERISA plans (on the theory that ERISA already provides adequate enforcement tools)
    • The contractual requirements for IRAs and non-ERISA plans can be included with other account opening documents, even if executed after some of the advice (provided the contract applies to the prior advice)
    • A negative consent procedure was provided for contractual updates for existing IRA and non-ERISA plan clients, and
    • Relief is available for limited good faith failures to obtain an executed contract
  • Providing guidance on how advisers may continue to sell proprietary products consistent with the BICE’s best interest standard.
  • Streamlining and relaxing the client disclosure requirements.
  • Removing the data-retention requirements, although the DOL notes that firms have an obligation to maintain sufficient records to demonstrate compliance with the applicable PTE.
  • Providing grandfathering provisions for investments made prior to the applicability date.

Compliance with the new regulation is not required until April 2017, and a transition period until January 1, 2018, is available for the BICE and the “Principal Transactions” PTE during which fewer conditions apply. Although this timeline represents an extension from the eight-month implementation contemplated by the proposed rule, it is still anticipated that prompt and significant efforts will be required in the interim on the part of affected financial firms in order to come into compliance by next year’s effective date.

If you have questions regarding the impact of these final rules on your business, or any other employee benefits-related questions, please contact one of the authors or your Reed Smith attorney.


Client Alert 2016-093