By Fred Reish, Bruce Ashton, Brad Campbell, Joan Neri and Josh Waldbeser

This Alert summarizes our conclusions about the impact on participant investment “recommendations” of the Department of Labor (DOL) proposal to expand the definition of fiduciary investment advice.  We also discuss the proposed “Best Interest Contract” Exemption (BICE) permitting financial institutions to receive variable and indirect compensation based on advisor recommendations. 

The proposal would significantly impact broker-dealers in assisting participants.  (We use “advisors” to mean a broker-dealer’s registered representatives and/or investment advisor representatives where the firm is dual registered.  For the impact on independent RIAs, see RIA Alert; for the impact on sales of insurance products, see Insurance Products Alert.)

Here are our conclusions, and a link to our more in-depth analysis:

  • The proposal expands the definition of fiduciary investment advice by providing that a “recommendation” to a participant would trigger fiduciary status.  A “recommendation” is a communication that would reasonably be viewed as a “suggestion” that a participant engage in or refrain from a particular course of action.  Under this standard, many common sales and investment education practices would constitute fiduciary advice.
  • Advisors could provide generalized investment education to participants without triggering fiduciary status and prohibited transaction (PT) concerns, if they avoid “recommendations.”  But this will be challenging – under the proposal, referencing available investment options would likely be a fiduciary act.
  • Broker-dealers receive 12b-1 fees and other variable/indirect compensation from investment products they sell.  Advisors who recommend investments to participants influence this compensation.  This would constitute a “fiduciary self-dealing” PT under the proposal, and exemptive relief is needed.
  • BICE would provide an exemption permitting broker-dealers to receive variable and indirect compensation based on their advisors’ non-discretionary recommendations.  However, BICE imposes disclosure and other requirements that may be practically impossible, or prohibitively expensive, to comply with.
  • Broker-dealers and advisors could instead rely on the Pension Protection Act (PPA) exemptions for non-discretionary participant advice, but this provides limited relief and compliance is challenging.
  • For participant non-discretionary investment advice and discretionary management, advisors could use a third-party computer-based asset allocation service – permitted in the DOL’s “SunAmerica” advisory opinion – since the advisor wouldn’t be influencing the broker-dealer’s compensation through its own recommendations.

This is a brief summary of our conclusions.  For the rationale for these conclusions, see our analysis here.