If the scope of who may be considered afiduciary is expanded, has the definition of who is excluded from thatdefinition changed too?
Asof November of 2017, the latest guidance from the Department of Labor (“DOL”)on the Fiduciary Rule includes that Firms and advisors must do their best to complywith the rule and exemptions. If thescope of who may be considered a fiduciary is expanded, has the definition ofwho is excluded from that definition changed too? A key point in looking atthis issue is that both the DOL and the Securities Exchange Commission (“SEC”)have a say in exclusion from the definition of Investment Advice.
The first question may be, what countsas investment advice? Under DOL rules, interactions concerning a recommendationto hold or dispose of securities or how to invest them may be subject to theDOL’s fiduciary rule. So too will recommendations for managing securities orother investment products. The key is to look at the content, context and presentation. This seems to spill over into how the DOLrule looks to exclusions from the rule too.
First, the key to the DOL exclusions isthat they are category based, not action based. That is, so long asinteractions fit within the categories described below, whether the content ofthe interaction is investment-related advice is not an essential element. These categories include:
The simplest of the exclusions involvesgeneral communications. Where information is given out that includesgeneric commentary made to a wide audience, such as in speeches andconferences, it will not be considered an investment recommendation. This alsoincludes marketing information such as portfolio performance and general marketdata. This won’t include an exception if the marketing communication makes aspecific recommendation about how to handle investments or sets out a strategyor plan.
Platformproviders, those who offeraccess to a selection of investment funds, are exempt when theymarket their investments without regard to the specific needs of a plan or itsparticipants. This includes those who act as third party administratorshandling record keeping tasks.
InvestmentEducation also is excluded from the fiduciaryrule. Under this safe harbor, where guidance is given to plan participants, itwon’t trigger fiduciary status if it is about plan information, generalfinancial or retirement information, discusses models or modeling which caninclude investment calculators and other interactive tools. This includes using hypothetical situations,but care should be exercised here if the hypothetical is too specific to aparticular IRA. Mostinterestingly, those who sell to institutional investors, will be excluded fromthe definition of fiduciary.
Additionally,some communications may fall within an exemption from fiduciary status, if theperson involved in the interaction has not acknowledged that they are afiduciary (through a writing or otherwise).Some exemptions, not fully discussed here, require that the investmentadvisor disclaim in writing that they are a fiduciary (along with otherrequirements). Other exemptions includethose involved in security-based swap transactions. There are exemptions for employees of plansponsors and fiduciaries so long as those employees do not receive compensationbased on that advice (other than their salary).
Otherexemptions apply that allow a fiduciary to acknowledge their status but adoptpolicies designed to mitigate as reasonably as possible the risk of conflictsof interest, among other requirements.This requirement comes with a new standard of care for what constitutesthe best interest standard however and is limited to specific asset types.
How does this match up withother registration rules? Under the SEC’s Investment AdvisorRegistration Rule, other exclusions apply, including: banks and bank holdingcompanies, professionals, like lawyers or teachers, who do not receivecompensation for recommendations and whose advice is incidental to the performanceof their duties; magazine and news publishers and broker-dealers whose advisoryservices are incidental to the performance of their duties, basically, thosewho manage a transaction and receive a fee per transaction. Other exclusionsinclude investment advisors whose only clients are insurance companies.
Aquick comparison makes it clear that the platform based exception under theDOL’s fiduciary rule tracks the SEC’s exception for transaction-focusedbroker-dealers, and also those who advise only institutions.
TheSEC’s definition of investment advisor is, by the SEC’s own documents,construed broadly, and includes individuals who provide “advice about markettrends; advice in the form of statistical or historical data (unless the datais no more than an objective report of facts on a non-selective basis); adviceabout the selection of an investment adviser; advice concerning the advantagesof investing in securities instead of other types of investments; and a list ofsecurities from which a client can choose, even if the adviser does not makespecific recommendations from the list.” The SEC, like the DOL, excepts genericcommunications, that is those that provide “impersonal advice … not tailored tothe individual needs of a specific client….” Furthermore, the SEC exemptsadvisors who provide advice to charitable organizations, whereas the DOL rulemight not.
Additionalrestrictions and exemptions may apply where an investment advisor is regulatedby a state, under so called “Blue Sky Laws” – state based securities laws forsmaller investments and those with smaller pools of investors.
