Whether an advisor is subject to the rule depends on these definitions of 'fiduciary,' 'investment advice,' and 'compensation.'
W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.
Last month in this column, we explained that the Conflict of Interest Rule (Rule) promulgated by the U.S. Department of Labor on April 8, 2016, pertains to only one "kind" of the three kinds of fiduciaries described in section 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA), which can be thought of as "Fiduciary Central." That one kind of fiduciary--an ERISA section 3(21)(A)(ii) fiduciary--is a non-discretionary advice-giver.
All three elements described in section 3(21)(A)(ii)--1) a fiduciary 2) that renders (non-discretionary) investment advice 3) for compensation--must be present in order for the Rule to apply to an advisor communicating with a plan participant or an IRA owner.
Element 1: Fiduciary
The Rule broadens the class of entities--which it defines as "Financial Institutions"--that will bear the "fiduciary" moniker come April 10. These include registered investment advisors, broker/dealers, banks, and insurance companies. This definition also includes any employees, contractors, agents, representatives, affiliates, or related entities of a given Financial Institution.
Element 2: Investment Advice
The Rule also broadens the definition of "investment advice." More precisely, "retirement investment advice" that's rendered to 1) participants in ERISA plans such as 401(k) plans, profit-sharing plans, money purchase pension plans, and defined benefit plans, as well as 2) owners of IRAs and participants in non-ERISA plans. Note that the Rule does not pertain to investment advice rendered to those investing in taxable accounts and non-retirement accounts. That retail environment remains within the purview of the SEC.
Determining whether an advisor has rendered "retirement investment advice" in a given situation requires posing a threshold question: Has the advisor made a "recommendation" as defined by the Rule? If there's no recommendation, then there's no investment advice, and since, as noted, investment advice is one of the three elements of ERISA section 3(21)(A)(ii), an advisor's communication will not make it a fiduciary subject to the Rule.
So how does the Rule define a "recommendation"?