PLANADVISER - July/August 2020 - 39

compliance consult
David Kaleda
Investment Advice Revisited
A new proposal introduces a broad exemption for advisers
ON JUNE 29, the Department of Labor (DOL) issued a notice
of proposed class exemption titled " Improving Investment
Advice for Workers and Retirees. " At that point, the ink was
still drying on advisers' Form CRSs and Regulation Best
Interest (Reg BI) disclosures. Now, the department has introduced
a new exemption for advisers who
act as fiduciaries to Employee Retirement
Income Security Act (ERISA)-covered plans,
individual retirement accounts (IRAs) and
other tax preferred accounts.
More
importantly,
in the
preamble,
the DOL provides a potentially significant
expansion of the definition of " investment
advice. " This expansion applies not only
to broker/dealers (B/Ds), but also to other
financial institutions such as registered
investment advisers (RIAs), banks, insurance
companies, recordkeepers and all of
their respective employees, representatives and agents.
The agency proposed the exemption in order to allow
must certify that he has reviewed a report summarizing the
compliance review and that the firm has adopted policies
and procedures that comply with the exemption.
While the proposed exemption is significant, arguably
While some of
the conditions
resemble prior
DOL guidance,
others will
be unfamiliar.
financial institutions and their representatives to give
investment advice, as defined under ERISA Section 3(21) and
Internal Revenue Code (IRC) Section 4975(e)(3), notwithstanding
the existence of certain conflicts of interest. Thus,
the adviser could receive transaction-based and other
conflicted compensation and would be able to engage in
principal transactions under certain circumstances.
Advisers would need to comply with the DOL's impartial
conduct standards. These require that the adviser: 1) make
recommendations in accordance with a best interest standard,
which is articulated the same way as the standard of
conduct under Reg BI; 2) receive reasonable compensation;
and 3) not make any materially misleading statements. The
adviser must also provide written disclosures acknowledging
fiduciary status and describing the services to be
provided and material conflicts of interest.
Further, the firm must also establish policies and procedures
prudently designed to ensure compliance with the
impartial conduct standards and to mitigate conflicts of
interest. Here, the firm must document the rationale for any
rollover and account transfer recommendations.
While some of the conditions resemble prior DOL guidance,
others will be unfamiliar. For one, the adviser would
need to conduct an annual retrospective review to help
him detect and prevent violations of the impartial conduct
standards or his policies and procedures. The firm's CEO
the most important developments appear in its preamble.
There, the DOL changes its view on how
to determine when an adviser provides
investment advice, particularly when
recommending a participant take a distribution
and roll the money into an IRA.
In the preamble, the DOL states it will
nullify Advisory Opinion 2005-23A, often
referred to as the Deseret letter. In that, the
agency wrote that someone not already a
fiduciary to a benefit plan was not acting as
a fiduciary when he recommended taking a
distribution and rolling it into an IRA, even
if he would give investment advice once the
assets were moved. It now says advisers should apply the
1975 five-part test found in 29 CFR [Code of Federal Regulations]
2510.3-21(c)(1) in determining whether a rollover or any
other recommendation as to the advisability of investing in,
purchasing or selling securities or other property is investment
advice.
The DOL went on to explain its interpretation of each
prong of the five-part test. The result completely reverses
the DOL's position in the Deseret letter. The agency also
expresses its views on the " mutual agreement, arrangement
or understanding " and " primary basis " prongs of the test. In
so doing, it broadens the circumstances as to when adviser/
customer interactions rise to a fiduciary advice relationship.
The proposed exemption, particularly the language in the
preamble, is a significant development. Some advisers will
find it helpful, at least in principle, others may find its conditions
unworkable in the current form.
Whether the DOL will issue a final exemption remains
to be seen. Yet, the preamble and application of the fivepart
test suggests a shift in thinking as to when an adviser
provides investment advice and indicates this thinking will
continue to apply, final exemption or not.
David Kaleda is a principal in the fiduciary responsibility practice group
at Groom Law Group, Chartered, in Washington, D.C. He has an extensive
background in the financial services sector. His range of experience
includes handling fiduciary matters affecting investment managers,
advisers, broker/dealers, insurers, banks and service providers.
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PLANADVISER - July/August 2020

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