Newsletter Inside Benefits

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1 Newsletter Inside Benefits July 29, 2016 New Rule: Higher Bar for Investment Advisors The Department of Labor (DOL) recently issued a final rule regarding fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code) (also known as the conflict of interest rule) 1. This final rule amends the previous regulatory definition of fiduciary of a plan [including an individual retirement account (IRA)] under ERISA and the Code. Once effective, it may provide significant protections for plan sponsors, fiduciaries, participants, and beneficiaries if investment advisors fail to follow it. The rule goes into effect on April 10, 2017, and applies to ERISA benefit plans (including multiemployer plans) and some non-erisa benefit plans, including IRAs, health savings accounts (HSAs), Archer Medical Savings Accounts, and Coverdell Education Savings Accounts. By way of background, Congress enacted ERISA "to protect plan participants and beneficiaries, the integrity of employee benefit plans, and the security of retirement, health, and other critical benefits." ERISA imposes strict fiduciary obligations, including duties of loyalty and prudence, on persons responsible for important plan activities and requires plan fiduciaries to refrain from participating in prohibited transactions. ERISA's definition of fiduciary is very broad and includes any person who exercises "any authority or control" over plan assets. Under Sandra M. Roth Employment Law Employee Benefits Business Law ERISA, an investment advice fiduciary is any person who provides "investment advice for a fee or other compensation, direct or indirect," regardless of whether the person has authority or control over plan assets and regardless of the person's status as an investment advisor or broker under federal securities laws. The Code "protects individuals who save for retirement through tax-favored accounts that are not generally covered by ERISA, such as IRAs, through more limited regulation of fiduciary conduct." Although the Code's fiduciary protections do not include fiduciary duties of prudence and loyalty, Code fiduciaries are subject to the prohibited transaction rules. In 1975 the DOL created a five-part test to determine whether a person was an investment advice fiduciary and has not changed that framework until now. The change in position, as detailed in the final rule, is due to the changing financial market and the fact that individuals, as opposed to large employers and professional money managers, are taking more responsibility for their own investments. The 1975 test no longer promotes ERISA's goals and creates situations where those who should be accountable for investment advice are not FR (April 1, 2016) 2016 Anderson, Helgen, Davis & Cefalu, PA. All rights reserved

2 In response to the dramatically different market for retirement advice, the DOL enacted this final rule in an effort to better protect "plans, participants, beneficiaries, and IRA owners from conflicts of interest, imprudence, and disloyalty." The final rule attempts to ensure that individuals and entities that provide investment advice and who should be treated as fiduciaries are treated as fiduciaries and are required to act in accordance with fiduciary norms and basic standards of fair dealing. The DOL also published new prohibited transactions exemptions (the Best Interest Contract Exemption and the Exemption from Principal Transactions) and amended previous exemptions in another rule published at the same time as the conflict of interest rule. These topics will be discussed in a future newsletter. THE RULE The final rule provides guidance regarding the types of communications that qualify as investment advice ("Recommendations") and describes when such communications give rise to fiduciary investment advice responsibilities ("Fiduciary Investment Advisor"). Recommendations Under the final rule, the threshold question is whether a "recommendation" has occurred. There are two types of "recommendations" or advice that generally give rise to fiduciary status when the advice is provided for a fee or other compensation, direct or indirect: A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA; and A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services; selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made. "Recommendation" is defined to mean "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." The recommendation inquiry is objective rather than subjective, and a series of actions should be considered in the aggregate when determining whether a recommendation has occurred. Notably, the final rule's inclusion of recommendations on rollovers, benefit distributions, and transfers from a plan or IRA as investment advice supersedes the DOL's position in Advisory Opinion A. This Advisory Opinion provided that "it is not fiduciary advice to make a recommendation as to distribution options even if accompanied by a recommendation as to where the distribution would be invested." The final rule also distinguishes between recommendations that constitute fiduciary investment advice and educational information and materials. An individual does not provide 2016 Anderson, Helgen, Davis & Cefalu, PA. All rights reserved

3 fiduciary investment advice if it provides educational materials that, for example: describe the terms and operation of the plan or IRA; discuss what benefits are available under a plan; provide information regarding the benefits of increasing plan contributions and the effect of withdrawals; and provide information regarding general methods and strategies for managing retirement assets. The final rule identifies some examples of communications that are recommendations, such as recommendations to switch from a commissionbased account to an advisory fee based account. COMMITTED to meeting clients needs through OUTSTANDING client service, creativity, flexibility, and responsiveness general market data and performance reports. Service providers who provide a platform or selection of investment alternatives do not make a recommendation covered by the rule simply because they make a platform of investment options available if: The platform is provided without regard to the individualized needs of the plan or its participants; The plan fiduciary is independent of the person who markets or makes available the investment alternatives; and The final rule also provides examples of communications that are not recommendations, such as guidelines and other information on proxy voting policies provided to a class of investors, without regard to individual investment interests or policies. The DOL noted that it has decided to address appraisals and valuations in a separate regulatory initiative. For this reason, for now, appraisals, fairness opinions, and other similar statements are not considered fiduciary investment advice. Communications That Are Not Recommendations Certain communications are not recommendations covered by the final rule or fiduciary investment advice. These include general, non-specific communications; communications in connection with marketing or providing a platform of investment alternatives; and investment and retirement education materials. General communications, including, for example, general circulation newsletters; television, radio, and public media talk show commentary; statements in widely attended speeches or conferences; research reports prepared for general distribution; and The person discloses in writing to the plan fiduciary that he or she is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity. However, this platform exception does not apply to recommendations made to individual IRA owners or participants who have individually-directed brokerage accounts. Because these platforms tend to be more targeted and do not have the protection of a plan fiduciary reviewing the platform alternatives, limited investment lineups presented to individual IRA owners and participants with individually-directed brokerage accounts should be evaluated under the general recommendation test and take into account all facts and circumstances surrounding the communication. Investment education and retirement education materials, including plan information; general financial, investment, and retirement information; asset allocation models; and interactive investment materials (including educational asset allocation models so long as such models are presented as hypothetical models and not as investment advice). The education materials exception applies to information provided to plan fiduciaries, participants, 2016 Anderson, Helgen, Davis & Cefalu, PA. All rights reserved

4 beneficiaries, and IRA owners. The exception does not depend on whether the education material is provided by a service provider, plan sponsor, or fiduciary. The final rule also adds a provision clarifying that asset allocation models and interactive investment materials may identify a specific investment product or alternative available under a plan if certain criteria are satisfied. This exception regarding the use of asset allocation models and interactive investment materials to identify a specific investment product or alternative is not available in the IRA context or with respect to a self-directed brokerage account. The final rule includes this limitation because these types of accounts do not have the same plan fiduciary review and prudent selection characteristics. There is also a high likelihood that the presented options could be misconstrued as investment advice. It is important to note that an employer or plan sponsor that engages a service provider does not necessarily become an investment advice fiduciary merely because it engaged a service provider to provide education investment advice. However, the ERISA fiduciary duties that govern selection and monitoring of services providers still apply. Fiduciary Investment Advisor Attorneys experienced in employee benefits, labor and employment, general business, health and associated litigation is based on the particular investment needs of the advice recipient; or Directs the advice (recommendation) to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA. Ultimately, the main question is whether the person offering the recommendation was "reasonably understood to hold itself out as a fiduciary with respect to communication with the plan or IRA investor." Persons Who are Not Deemed to Be Fiduciary Investment Advisors The final rule clarifies that there are some situations, described below, in which individuals should not be considered to be fiduciary investment advisors, even though the recommendation may otherwise qualify as a recommendation under the final rule. Seller's/Counterparty Exception The seller s/counterparty exception may be available when a person provides advice to an independent fiduciary as part of an arm s length transaction involving the investment of securities or other property. A person is a fiduciary investment advisor with respect to a recommendation if the advisor who makes the recommendation is a person who: Represents or acknowledges that it is acting as a fiduciary within the meaning of ERISA or the Code with respect to the recommendations described above; Renders the advice (recommendation) pursuant to a written or verbal agreement, arrangement or understanding that the advice The exception applies if the person providing the advice knows or reasonably believes that they are dealing with a fiduciary of the plan or IRA who is (1) independent from the person providing the advice and (2) one of the following: a regulated and supervised bank or similar institution; an insurance carrier qualified in more than one state to manage, acquire, and dispose of plan assets; a registered investment advisor; a registered broker-dealer; or a person acting as an independent fiduciary that holds or has under management or control, total assets of at least fifty million dollars Anderson, Helgen, Davis & Cefalu, PA. All rights reserved

5 Whether a party is independent will generally involve an analysis of whether there is a financial interest, ownership interest, or other relationship, agreement, or understanding that would affect the party's ability to perform its fiduciary responsibility beyond the control or influence of others involved in the transaction. Additionally, the seller s/counterparty except applies only if person offering the advice: Fairly informs the independent plan fiduciary that the person is not providing impartial investment advice, or giving advice in a fiduciary capacity, in connection with the transaction; Fairly informs the independent plan fiduciary of the existence and nature of the person's financial interests in the transaction; Knows or reasonably believes that the independent fiduciary of the plan or IRA is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies; Knows or reasonably believes that the independent fiduciary is a fiduciary under ERISA or the Code, or both, with respect to the transaction and is responsible for exercising independent judgment in evaluating the transaction; and Does not receive a fee or other compensation directly from the plan, or plan fiduciary, for the provision of investment advice (as opposed to other services) in connection with the transaction. The seller's/counterparty exception does not extend to advice provided to small retail employee benefit plan investors or IRA owners. Swap and Security-Based Swap Exception The final rule also excludes persons acting as swap dealers, major swap participants, or major securitybased swap participants with respect to communications made during the course of a swap or security-based swap transaction regulated under the Dodd-Frank Act. The "swap dealer" exception is subject to the following conditions: In the case of a swap dealer or security-based swap dealer, the person must not be acting as an advisor to the plan, within the meaning of the applicable business conduct standards under the Commodity Exchange Act or the Securities Exchange Act; The employee benefit plan must be represented in the transaction by an independent plan fiduciary; The person must not receive a fee or other compensation directly from the plan or plan fiduciary for the provision of investment advice (as opposed to other services) in connection with the transaction; Before providing any recommendation with respect to a swap or security-based swap transaction or series of transactions, the person providing the recommendation must obtain from the independent fiduciary a written representation that the independent plan fiduciary understands that the person is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with the transaction and that the independent plan fiduciary is exercising independent judgment in evaluating the recommendation. Plan Employee Exception Employees of a plan sponsor, employee benefit plan, or plan fiduciary are not investment advice fiduciaries if they do not receive a fee or other 2016 Anderson, Helgen, Davis & Cefalu, PA. All rights reserved

6 compensation for their advice. The exception applies to employees acting in their capacity as employees and to employees acting in their capacity as plan participants or beneficiaries, but the requirements differ for each situation. If an employee, in his or her capacity as an employee, provides advice to a plan fiduciary, employee, independent contractor, or employee benefit plan, the employee must not receive a fee or other compensation in connection with the advice that is above the employee's normal compensation. If the employee offers the advice in their capacity as a plan participant or beneficiary, the following requirements must be satisfied: The person's job responsibilities must not involve the provision of investment advice or investment recommendations; The person must not be registered or licensed under federal or state securities or insurance laws; The advice they provide must not require the person to be registered or licensed under federal or state securities or insurance laws; and Key takeaways Three key takeaways from the new rule are: 1. The analysis of whether a recommendation has occurred is based on the facts and circumstances surrounding the communication, including the identity of the persons involved and the substance of the communication. 2. General investment and educational information that does not recommend a specific investment action to a specific person or group of persons will not be considered a recommendation. 3. Persons wanting to take advantage of the seller s/ counterparty and swap exceptions are subject to specific disclosure requirements in addition to any other requirements that must be satisfied to qualify for one of the exceptions. The nuances of this new rule are complicated and subtle, but it is clear that the new rule imposes a higher standard on investment advisors. As always, the benefits counsel at Anderson, Helgen, Davis & Cefalu are available to answer any questions you may have. The person must not receive any fee or other compensation, direct or indirect, in connection with the advice that is above the employee's normal compensation for work performed for the employer. Although the changes made by the final rule are significant, the DOL has stated that it intends to initially emphasize compliance assistance over investigations and enforcement actions as affected parties transition to the new rule. The DOL intends to provide "extensive compliance assistance, which should be available at This AHDC Inside Benefits Bulletin is published by Anderson, Helgen, Davis & Cefalu, PA to provide a summary of recent developments to our clients and business colleagues. AHDC Inside Benefits Bulletins are informational and do not constitute legal advice. If further guidance is needed, please contact an attorney. This Bulletin may be considered attorney advertising under the rules of some jurisdictions Anderson, Helgen, Davis & Cefalu, PA. All rights reserved

7 David S. Anderson ERISA, Benefits, Nonprofit Corporations News and information you may find of interest: July 22: The U.S. Bank Stadium opened go Vikes Anderson, Helgen, Davis & Cefalu, PA is a fullservice law firm. Our seven highly-skilled attorneys at have over 105 combined years of delivering results-oriented legal solutions. August 3 & 4: Attorney Cindy Davis will present at the ECFC 29th Annual Administrators Symposium. She previously presented at the Minnesota Association of Health Underwriters 2016 Annual Convention. Business & Corporate Law Employee Benefits Labor & Employment Law Intellectual Property Litigation Health Care Law If you would like more information regarding the subject of this AHDC Inside Benefits, or if you have any legal needs, please contact Anderson, Helgen, Davis & Cefalu or any of our attorneys at: Anderson, Helgen, Davis & Cefalu, PA 333 South Seventh Street, Suite 310 Minneapolis, MN To subscribe to these AHDC Inside Benefits newsletters and other updates, please pvb@andersonhelgen.com. Henry M. Helgen III Litigation, IP, M&A, Employment, Administrative Law hmh@andersonhelgen.com Cindy L. Davis Benefits, ERISA, Commercial Real Estate, Business cld@andersonhelgen.com Amanda R. Cefalu Business Litigation, Intellectual Property, Employment arc@andersonhelgen.com Christopher L. Goodman Personal & Products Liability, Insurance Coverage clg@andersonhelgen.com Bryan J. Morben Employment, ERISA, Insurance bjm@andersonhelgen.com Sandra M. Roth Employee Benefits, Employment, Business Law smr@andersonhelgen.com 2016 Anderson, Helgen, Davis & Cefalu, PA. All rights reserved