Client Update: The DOL’s Final Conflict of Interest Rule, Part 2

Investment Recommendations that Trigger Fiduciary Obligations

June 28, 2016

The Department of Labor’s much-anticipated Final Conflict of Interest Rule is the most significant regulatory undertaking by the DOL since the enactment of ERISA. Greensfelder is releasing a series of client updates to help broker-dealers and registered investment advisors understand, implement and remain compliant in the wake of this new rule. This second installment delves further into the types of investment communications that constitute “recommendations” as defined by the rule.

The Department of Labor (DOL) released its Final Conflict of Interest Rule in April 2016, applying a fiduciary standard to those who provide retirement investment recommendations. Application of this fiduciary standard depends on (1) whether a recommendation is made and (2) the relationship between the individual making the recommendation and the advice recipient.


As background, the rule intends to hold individuals providing advice relating to retirement assets to the standard currently applicable to ERISA fiduciaries. This includes the prohibition on conflicts of interest. ERISA Section 406(b) provides that a fiduciary shall not “receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.” 29 U.S.C. § 1106(b)(3). Consequently, unless an exemption applies (which will be discussed in later installments of this series) financial advisors may not receive certain types of transactional compensation (e.g. revenue sharing, commissions, 12b-1 fees, et cetera) in connection with recommendations relating to retirement assets.

Investment Recommendations

In order to comply with this new rule, it is necessary to understand the difference between recommendations that trigger fiduciary obligations and other investment-related communications. A recommendation is defined 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.” This definition applies to communications for a fee or other compensation with a plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner. A communication that falls within this definition is a recommendation regardless of whether it was directly or indirectly made, or whether it was initiated by a person or a computer software program.

The rule specifically designates certain communications as recommendations that may trigger the fiduciary obligations:

  1. Communications regarding the advisability of buying, holding, selling or exchanging securities or other investment properties;
  2. Advice about the management of securities, such as communications regarding investment strategies or portfolio composition, or communications regarding how to select other professionals for retirement advice or investment management services;
  3. Communications regarding rollovers, transfers or distributions from a plan or IRA, including whether, in what amount, in what form and to what destination the rollover, transfer or distribution should be made; and
  4. Selective lists of securities provided as appropriate choices for an investor, even if the list does not include a recommendation with respect to any particular security.

The more individually tailored the communication is, the more likely it will be viewed as a recommendation. Suggesting an individual purchase or sell a particular stock certainly would be on the “recommendation” end of the spectrum, while a radio broadcast about the benefits of saving for retirement would be on the other.

Communications are also considered in the aggregate. Thus, a series of actions that would not be recommendations individually may become a recommendation when viewed altogether.

Though the definition of a recommendation is broad, the rule provides that the below communications are not recommendations, and do not, therefore, trigger the fiduciary standard:

  1. “Platform providers.” A platform or similar mechanism that allows independent plan fiduciaries to select or monitor investment alternatives is not a recommendation.
  2. “Selection and monitoring assistance.” The identification of investment alternatives that meet objective criteria specified by the plan fiduciary, or in response to a request for information or proposal by a plan based on the size of the plan and/or the current investment alternatives designated under the plan, are not recommendations.
  3. “General communications.” General communications that a reasonable person would not view as an investment recommendation — including commentary in publicly broadcast talk shows, general circulation newsletters, remarks in presentations in widely attended speeches and conferences, general market data and prospectuses — are not recommendations.
  4. “Investment education.” Information about particular plans without reference to the appropriateness of any individual investment alternative (e.g. fee and expense information, historical return information, etc.), general financial information, asset allocation models based on portfolios of hypothetical individuals, and interactive investment materials like worksheets and quizzes that help estimate future retire income needs are not recommendations.

Relationship With Advice Recipient  

This second element to invoke the fiduciary standard will typically be met. For example, it may be met if a financial advisor or firm represents or acknowledges to a customer that they are acting in a fiduciary capacity. Similarly, the element is fulfilled if the advisor and firm enter a contract whereby it is agreed that any advice will be made on the particular investment needs of the advice recipient. Finally, in an apparent catch-all, providing advice that is directed to a specific client or class of clients with respect to retirement assets also fulfills this element and will invoke the fiduciary standard. It should be noted that the DOL requires firms to fulfill this requirement via the Best Interest Contract exemption by mandating firms and their associated persons to acknowledge by contract that they are acting as fiduciaries.


Firms should carefully analyze the rule, as it may require additional disclosures before the communication is successfully carved out from the “recommendation” category. For example, someone relying on the “selection and monitoring assistance” exclusion to identify investment alternatives that meet certain objective criteria without making a recommendation must disclose in writing the precise nature of any financial interest the person has in any of the identified alternatives.

The rule requires compliance by April 10, 2017. Consequently, firms should review their policies and procedures to identify which communications made to existing current and prospective clients may be considered “recommendations” that potentially trigger fiduciary obligations.

Accordingly, firms may need to develop further training for financial advisors and other employees to avoid running afoul of the rule. A financial advisor may not realize that merely providing a list of securities, without recommending any particular security on the list, might be construed to be a recommendation. The financial advisor could unwittingly violate the rule, depending on the revenue structure of the securities on the list.

If you have questions about the rule and its implications, please contact any member of Greensfelder's Securities and Financial Services Group or your regular Greensfelder contact for additional information.

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