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INVESTMENT MANAGEMENT
Recent Investment Management Developments
April 2016
Below is a summary of recent investment
management developments that affect registered
investment companies, private equity funds, hedge
funds, investment advisers, and others in the
investment management industry.
DOL Finalized Conflict of Interest Rule
[Note: Please see our article on the rule proposal
referenced in this article, which appears at the end of
this Update.]
The U.S. Department of Labor (DOL) published its
long-awaited conflict of interest final rules (the Final
Rules) revising the standards for becoming a fiduciary
to retirement plans under the Employee Retirement
Income Security Act of 1974 (ERISA), and to
individual retirement accounts (IRAs) under the
Internal Revenue Code of 1986 (the Code). The Final
Rules, published April 8, 2016, were based on a
proposal by DOL made in April 20, 2015 (the
Proposed Rule). The DOL also adopted certain other
exemptions, including the Best Interest Contract
Exemption (BIC Exemption), a class exemption for
allowing principal transactions in certain debt
securities, and amendments to existing exemptions
allowing fiduciaries to receive compensation in
connection with certain securities transactions.
The Final Rule
DOL received an enormous amount of feedback on
the Proposed Rule from the financial services and
employee benefits industries. In response to the
feedback the DOL incorporated the following
revisions into the Final Rule:
• Clarifying the standard for determining whether a
person has made a "recommendation" covered by
the final rule
• Clarifying that marketing oneself or one's service
without making an investment recommendation is
not fiduciary investment advice
• Removing appraisals from the rule and reserving
them for a separate rulemaking project
• Allowing asset allocation models and interactive
materials to identify specific investment products
or alternatives for ERISA and other plans (but
not IRAs) without being considered fiduciary
investment advice, subject to conditions
2
• Providing an expanded seller's exception for
recommendations to independent fiduciaries of
plans or IRAs with financial expertise and plan
fiduciaries with at least $50 million in assets under
management;
• Clarifying the difference between "education" and
"advice"
The BIC Exemption
In conjunction with the final rule, as noted above, the
DOL also finalized series of prohibited transaction
exemptions (PTEs), one of which is the BIC
Exemption. The DOL adopted the BIC exemption
with the following revisions:
• Eliminating the limited asset list
• Expanding its coverage to include advice
provided to sponsors of small 401(k) plans
• Eliminating the contract requirement for ERISA
plans and participants
• Not requiring contract execution prior to advisers'
recommendations
• Specially allowing for the required contract terms
to be incorporated in account-opening documents
• Providing a negative consent process for existing
clients to avoid having to get new signatures from
those clients
• Simplifying execution of the contract by requiring
the financial institution to execute the contract
rather than also requiring each individual adviser
to sign
• Clarifying how a financial institution that limits its
offerings to proprietary products can satisfy the
best interest standard
• Streamlining compliance for fiduciaries that
recommend a rollover from a plan to an IRA or
moving from a commission-based account or
moving from one IRA to another and will receive
only level fees
• Eliminating most of the proposed data collection
requirements and some of the more detailed
proposed disclosure requirements
• Requiring the most detailed disclosures
envisioned by the BIC exemption to be made
available only upon request
• Providing a mechanism to correct good faith
violations of the disclosure conditions without
losing the benefit of the exemption
The final rule is effective June 7, 2016 and the
compliance date is April 10, 2017. However, certain
requirements (including the written contract
requirement) will have a compliance date of January 1,
2018.
SEC’s Chair White Speaks on Role of Fund
Boards
Mary Jo White, Chair of the Securities and Exchange
Commission (SEC), spoke about the role of mutual
fund directors, particularly independent directors, in
light of recent developments in the fund industry. She
made her remarks to a group gathered at a conference
of the Mutual Fund Directors Forum on March 29,
2016.
Chair White addressed the historical evolution of the
role of independent directors of mutual funds, and
then focused on the role of fund directors in assessing
more recent risks in the industry. She also discussed
recent SEC enforcement actions against fund
directors.
Evolving Role of Independent Fund Directors
Chair White noted that the Investment Company Act
of 1940 (as amended, the 1940 Act) established a
corporate governance framework in which the boards
of mutual funds, which often lack any employees of
their own, provide an independent check on the
management of the funds’ investment advisers. Since
1940, Chair White observed, courts, Congress, and
the SEC have articulated additional and specific
responsibilities that fund directors bear.
