Do I Need to Notify the DOL About My RIA's Reliance on the Best Interest Contract Exemption?

July 18, 2016

Do I Need to Notify the DOL About My RIA's Reliance on the Best Interest Contract Exemption?

Recently, one of my law firm clients posed a question to me whether or not his Registered Investment Advisor ("RIA") had to send an email notice to the Department of Labor ("DOL") noting his firm's reliance on the Best Interest Contract Exemption provided under DOL's Conflict of Interest Final Rule (the "Rule")Such notice is required from certain RIAs but as to which and when is not always clear under the new or revised Rule. Many RIAs were unsure as to what parts of the Rule they were required to follow. On July 11, 2016, DOL made a very minor revision to the Rule but the change did little to dispel the confusion. 

In answering my client's notice-filing question, I started with the fact that he was a "fee-only" adviser with no brokerage business. He refers to his firm as "plain vanilla" (who am I to argue?). My client's firm provides financial planning and asset allocation services, but does not:

i) charge or receive commissions, 
ii) recommend any affiliated products, or
iii) have any relationship with a broker dealer.  

My client only charged a level asset management fee (i.e. 1%). The only prohibited transactions that his firm engaged in were recommendations to clients and prospective clients that they "rollover" their retirement assets to be managed by his firm.

Taking all the factors above into consideration, my answer to the client's question was "no, you don't need to notify the DOL that you would be relying on the Best Interest Contract Exemption."  Given the ongoing confusion with this practice, let me share with you some aspects of my legal analysis.

The Rulebook: Level Fee Fiduciary

A "Level Fee Fiduciary" is defined in the Rule at Section VIII(h): 

A Financial Institution and Adviser are ‘Level Fee Fiduciaries' if the only fee received by the Financial Institution, the Adviser and any Affiliate in connection with advisory or investment management services to the Plan or IRA assets is a Level Fee that is disclosed in advance to the Retirement Investor. A ‘Level Fee' is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended, rather than a commission or other transaction-based fee.

Since any rollover recommendation made by my client's RIA would only result in his firm receiving a fee that was based on a "fixed percentage of the value of the assets," his firm met the definition of Level Fee Fiduciary.  

A further analysis of the Rule indicates that under Section II(h): 

(h) Level Fee Fiduciaries. Sections II(a), (d), (e), (f), (g), III and V do not apply to recommendations by Financial Institutions and Advisers that are Level Fee Fiduciaries. For such investment advice, relief under the exemption is conditioned upon the Adviser and Financial Institution complying with certain other provisions of Section II, as follows: (1) Prior to or at the same time as the execution of the recommended transaction, the Financial Institution provides the Retirement Investor with a written statement of the Financial Institution's and its Advisers' fiduciary status, in accordance with Section II(b). (2) The Financial Institution and Adviser comply with the Impartial Conduct Standards of Section II(c). (3)(i) In the case of a recommendation to roll over from an ERISA Plan to an IRA, the Financial Institution documents the specific reason or reasons why the recommendation was considered to be in the Best Interest of the Retirement Investor. This documentation must include consideration of the Retirement Investor's alternatives to a rollover, including leaving the money in his or her current employer's Plan, if permitted, and must take into account the fees and expenses associated with both the Plan and the IRA; whether the employer pays for some or all of the plan's administrative expenses; and the different levels of services and investments available under each option; and (ii) in the case of a recommendation to rollover from another IRA or to switch from a commission-based account to a level fee arrangement, the Level Fee Fiduciary documents the reasons that the arrangement is considered to be in the Best Interest of the Retirement Investor, including, specifically, the services that will be provided for the fee.

Section V(a) requires Financial Institutions to provide an email notice to, prior to receiving compensation in reliance of the Best Interest Contract Exemption. Section II(h) (as referenced above) states, however, that Section V does not apply to Level Fee Fiduciaries. Section V is notably titled "Disclosure to the Department and Recordkeeping." 

Practice Pointer

Level Fee Fiduciary does not need to notify the Department of Labor of its intention to rely on the Best Interest Contract Exemption.  Such fiduciaries must simply comply with those items listed in Section II(h)(1)-(3).


Stark & Stark Law Firm
Associate Attorney
993 Lenox Dr, Building 2
Lawrenceville, NJ 08648
Telephone: 609.219.7452
Max L. Schatzow is a member of Stark & Stark's Securities and Investment Management Group in the New Jersey office. Mr. Schatzow concentrates his practice on counseling financial service entities including investment advisers, broker-dealers and private investment companies (e.g., hedge funds, private equity funds, real estate funds, and "fund of funds") about registration, compliance, liability, and litigation issues.

Mr. Schatzow's practice also focuses on the formation of domestic and international investment funds (e.g., hedge funds, private equity funds, real estate funds, and "fund of funds"). He advises fund managers with respect to day-to-day legal, fund maintenance, and operational matters, including internal general partner and management company issues. As part of his practice with hedge funds and "fund of funds," Mr. Schatzow regularly advises clients on CFTC and NFA registrations and exemptions for commodity pool operators, commodity trading advisors, associated persons, and principals.

Prior to joining Stark & Stark, Mr. Schatzow was an Associate for a law firm in New Jersey, where he specialized in representation of private and public companies in connection with public offerings, reverse mergers, "PIPE" transactions, and general corporate matters. He also has advised public companies regarding compliance with their 1934 Exchange Act requirements, including all periodic filings on Forms 10-K, 10-Q, and 8-K.

During his second year of law school, Mr. Schatzow was selected as a member of the inaugural class of the University of Miami School of Law's Investor Rights Clinic, where he represented clients in securities arbitration claims before FINRA. He was also selected to compete in FINRA's Securities Dispute Resolution Triathlon in 2012 at St. John's University School of Law in New York, New York. Mr. Schatzow served as a Law Clerk for the Division of Law and Public Safety, Office of the Attorney General in Trenton, New Jersey after he served as a Legislative Aide for the New Jersey General Assembly Minority Whip David Rible.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.