Following the release in 2015 of the US Department of Labor's proposed fiduciary rule, many commentators feared that communications that had previously been characterized as "investment education" would now constitute "investment advice," thereby giving rise to fiduciary status and potential liability under ERISA. The DOL incorporated into the final rule,1 almost without change, an Interpretative Bulletin issued by the DOL in 1996 ("IB 96-1"), which drew a thin line between advice and education in four areas: (1) plan information, (2) general financial and investment information, (3) asset allocation models, and (4) interactive investment materials.2 The incorporation of the principles of IB 96-1 into the final rule is helpful but limited, as the final rule leaves a number of interactions between financial institutions and retail retirement clients in a gray zone, particularly when it comes to information provided on web sites and call centers where specific funds or investment products may be mentioned by name. This publication provides a description of non-fiduciary education under the final rule.
Under the final rule, information generally will not fit within the investment education categories if it includes advice or recommendations as to specific investment products or specific investment managers. This limitation was already a requirement of compliance with IB 96-13, but most advisers were arguably not subject to the limitation because they took the position that they were not rendering advice to retail investors "on a regular basis" and, therefore, they were not fiduciaries.
The final rule departs from IB 96-1 by excluding from the various investment education categories those asset allocation models and interactive materials that identify specific investment alternatives. The only exception to this prohibition is for asset allocation models and interactive materials that incorporate the designated investment alternatives in an ERISA plan,4 but only to the extent that the plan is subject to oversight by a plan fiduciary who is independent from the person who developed or marketed the investment alternative and the model or materials. Therefore, investment models and interactive materials available to IRAs and other non-ERISA plans, and to plan participants with self-directed brokerage accounts, generally will constitute investment advice if they refer to specific investment funds, securities or products.
The following chart provides a description of the four categories of non-fiduciary education under the final rule.
Categories of Investment Education
Beyond the Line
The line between investment education and investment advice will pose special challenges for broker and plan- specific call centers, where call center personnel have been specifically trained to know the details of a plan's investment options and the products and services available by the provider. This may result in separate call centers dedicated to IRA customers that provide less information about investment options than to retail customers generally. Similar limitations may also apply to plan specific web portals and the web sites of fund sponsors and broker dealers.
The prohibition on presenting asset allocation models and interactive materials that identify specific investment products or alternatives may be unduly limiting for participants in plans with self-directed accounts. Further, many asset managers and advisers, in reliance on IB 96-1, have invested in the development of sophisticated and innovative tools designed to enable investors to make informed decisions, and the use of these products may be curtailed or eliminated by some providers to avoid fiduciary status.
Obviously, many interpretive issues will surface over the next several months as financial organizations struggle with aligning their retail practices to the new DOL paradigm, and we anticipate that the DOL will be under considerable pressure to make good on the commitment to provide both flexibility during the transition period and additional clarifications and guidance.
Footnotes
1 The final rule is available at: https://www.dol.gov/ebsa/regs/conflictsofinterest.html. For a complete overview of the final rule, you may wish to refer to our client publication: "The US Department of Labor's Final "Fiduciary" Rule Incorporates Concessions to Financial Service Industry but Still Poses Key Challenges," available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/04/The-US-Department-of-Labor-Final-Fiduciary-Rule-Incorporates-Concessions-to-Financial-Service-Industry-CGE-041416.pdf. For a discussion of the disclosure requirements of the new prohibited transaction exemptions, you may wish to refer to our client publication: "The DOL's New Fiduciary Rule: The Details on Disclosure," available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/05/The-DOLs-New-Fiduciary-Rule--The-Details-on-Disclosure-CGE-05052016.pdf.
2 The final rule supersedes IB 96-1.
3 The DOL characterized this as a departure from IB 96-1 in the proposed release.
4 Designated investment alternatives are defined in 29 CFR 2550.404a-5(h)(4).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
