Art by Tim BowerRegistered investment advisers (RIAs) often use unaffiliated
solicitors, placement agents and other similar third parties to sell their
advisory services or private funds. For example, advisers may utilize the
services of those in the financial services industry, as well as accountants,
lawyers and various other professionals. As a result of the Department of Labor
(DOL)’s final regulation defining “investment advice,” sellers will now, in
many cases, be acting as fiduciaries for purposes of the Employee Retirement
Income Security Act (ERISA) or the Internal Revenue Code (IRC). Thus, advisers
and sellers must consider whether fiduciary status will arise in connection
with their sales transactions.
Effective April 10, 2017, a person provides investment
advice to an ERISA-covered account or individual retirement account (IRA) if
he, among other things, makes an investment recommendation or suggests other
persons to provide investment advice or investment management services. The DOL
broadly defines a “recommendation” 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.” Based upon the broad range of communications deemed to constitute a
“recommendation,” it appears most advisers will provide “investment advice”
under the final regulation.
Notably, while the regulation includes a “hire me” concept
whereby a person is not considered to provide “investment advice” when he
merely markets his own advisory or management services or those of an
affiliate, that concept does not apply to third-party sellers that are
unaffiliated with the RIA.
Alternatively, sellers may qualify for the independent
fiduciary exception. In the case of an ERISA plan, a seller may qualify if a
fiduciary to the plan independent of the seller controls more than $50 million.
In the case of an IRA, the exception may apply if the IRA owner is represented
by a fiduciary, independent of the seller and adviser, that is a broker/dealer
(B/D), bank, insurance company or registered investment adviser.
In either case, the seller must know or reasonably believe
that the independent fiduciary is a fiduciary under ERISA or the IRC and is
capable of, and responsible for, exercising independent judgment in evaluating
the sales transaction. A seller may not state that he acts as a fiduciary; must
inform the independent fiduciary that he is not undertaking to provide
impartial investment advice; and must disclose the existence and nature of the
seller’s financial interests in the sales transaction. Finally, the seller may
not receive a fee or other compensation directly from the plan, IRA or IRA
owner for the provision of investment advice.
If sellers fail to qualify for the independent fiduciary
exception or some other exception, they likely will be considered fiduciaries
in connection with a sales transaction involving an ERISA account or IRA.
Therefore, sellers must comply with an exemption under ERISA or the IRC, as
The DOL also issued the Best Interest Contract (BIC)
exemption, which allows for streamlined conditions if the seller and its
affiliates receive only a “level fee” as defined in the exemption.
Alternatively, the seller may comply with the “full” BIC exemption, which
involves additional compliance requirements, including various disclosures and
In all cases, the BIC exemption is available only if the
adviser is supervised by a “financial institution,” as defined in the
exemption. In the typical situation, a seller would ordinarily be an adviser
and the manager would be a financial institution if the manager complies with
SEC [Securities and Exchange Commission] Rule 206(4)-3. However, the BIC
exemption may not be available in all circumstances. If the exemption is
unavailable, a seller, and possibly the manager as well, must look for another
possible exemption. Importantly, in the case of an ERISA account, the fiduciary
duty and remedial provisions of ERISA will apply regardless of whether the BIC
exemption is relied upon.
In summary, the regulation will make most sellers
fiduciaries with respect to the sale of advisory services and private funds to
ERISA accounts and IRAs, unless an exception, most likely the independent
fiduciary exception, applies. This means that persons who would never have
conceived of themselves as fiduciaries under ERISA or the IRC will be
fiduciaries as of April 10, 2017. Further, in the view of the DOL, sellers are
inherently conflicted because they receive no compensation unless they make a
sale. Therefore, in order to receive compensation, a seller will most likely
need to comply with the BIC exemption or some other exemption in order to
David Kaleda is a principal in the Fiduciary Responsibility
practice group at the Groom Law Group 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. He served on the DOL’s
ERISA Advisory Council from 2012 through 2014.