How the Fiduciary Rule Affects Investment Manager Marketing

By ASPPA Net Staff • June 17, 2016 • 0 Comments

A new white paper from Groom Law outlines the ways in which the Department of Labor’s (DOL) fiduciary regulation could change how investment managers work with advisors and plan fiduciaries.

In “The Final Fiduciary Rule: Impact on Investment Managers,” Groom Law authors Erin K. Cho, Richard K. Matta, David C. Olstein, and Alexander P. Ryan note that the fiduciary rule’s reference to recommending “other persons to provide investment management services” suggests that typical marketing discussions between an investment manager and potential investors would fall outside the definition of investment advice.

Indeed, the DOL explained in the preamble to the fiduciary rule that it did not intend for an investment manager to “become a fiduciary merely by engaging in the normal activity of marketing oneself or an affiliate as a potential fiduciary.” The DOL cautioned, however, that “when a recommendation to ‘hire me’ effectively includes a recommendation on how to invest or manage plan or IRA assets … that recommendation would need to be evaluated separately under the provisions in the final rule.”

However, they note that this significant limitation of the “hire me” exception may raise issues for many investment managers looking to rely on this exception in connection with the marketing of their services, including investment managers:

  • associated with a specific investment strategy;

  • who provide their services exclusively through collective investment vehicles; and

  • who provide their services exclusively to IRAs sponsored or trusteed by a particular financial institution.

Marketing Practices

The authors note that, while investment managers customarily acknowledge fiduciary status in connection with the provision of discretionary investment management services to benefit plan investor clients after they are hired, “the potential extension of fiduciary status to statements made in connection with the marketing of such services to potential benefit plan investor clients should prompt investment managers to carefully scrutinize their existing marketing practices.”

Investment managers whose marketing practices involve recommendations that may be characterized as investment advice and who do not satisfy an exception under the fiduciary rule by the April 10, 2017, applicability date risk violating prohibited transaction rules that bar a fiduciary from advising a benefit plan investor to engage in transactions that result in the payment of additional fees to the fiduciary or related parties.

The exceptions identified are:

  • The Independent Fiduciary Exception — for investment recommendations made to an independent fiduciary of a benefit plan investor in connection with an arm’s-length transaction “related to the investment of securities or other investment property,” provided the independent fiduciary meets certain financial sophistication requirements.

  • General Communications — investment advice does not include furnishing to a benefit plan investor “general communications that a reasonable person would not view as an investment recommendation,” including general marketing materials and prospectuses.

  • Investment Education — investment advice does not include the furnishing of “investment education” information and materials, a provision that tracks closely (and supersedes) Investment Bulletin 96-1, which also provided relief from “fiduciary” status in the investment education context.

Review and Revise

While the specific consequences of this regulation in the investment management arena are still unfolding, Groom notes that investment managers will need to consider how their existing practices fit within the new regulatory framework, and whether they need to alter those practices to comply with the fiduciary rule.

The paper notes as examples of things that will need to be reviewed and revised subscription agreements, investment management agreements and offering and marketing materials. In addition, the paper notes that sales personnel and placement agents who market to benefit plan investors,
particularly those who are not represented by independent fiduciaries, will need to ensure that their communications to such investors satisfy one or more of the other exceptions outlined, and that investment managers will also need to carefully assess their potential exposure and their ability to navigate through the conditions of the various exceptions.






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