Broker-Dealers' Proposal to Expand the Carve-Out for Investment Education to Include Recommendations of Specific Investment Alternatives Impermissibly Creates a Loophole, and Would Not Meet ERISA’s Standards for the Grant of Exemptive Relief.
Advice, whether it is provided to one person, to a small group, or to a large group, is advice.
Advice is advice. It does matter if it is given in-person, over the phone, in a one-on-one conversation, in a group setting, by e-mail, by facsimile, by computer program, by video, or by any other means.
Under ERISA, the provision of advice is a fiduciary act.
Under the DOL’s Conflict of Interest rule proposal and PTE proposals, the use of asset allocation models that identify specific investment products (i.e., funds) would not be treated as non-fiduciary investment education. This appears entirely proper. Advice is advice, even when delivered in group “educational” settings. Substance trumps form.
Yet, some of the comment letters submitted by broker-dealer firms seek a grand expansion of the education advice exemption, even to situations in which very specific recommendations on investment products is provided.
Given the extension of the definition of “fiduciary” under the DOL’s proposed “Conflicts of Interest” rule, there appears to be no need to any exemption for investment education. Education should be provided by fiduciaries.
The “education exemption” was initiated to provide for consumer education at a time when most “retirement plan consultants” were not fiduciaries. The purpose of the exemption was to encourage education of a general nature.
Yet, with the DOL’s extension of the definition of fiduciary to encompass nearly all who provide advice to plan sponsors and plan participants, one must ask - why is there a need for the education exemption at all? Why wouldn’t you hold a fiduciary to a plan sponsor responsible for education provided to plan participants, especially if that advice touches on important subjects such as asset allocation?
I would urge the DOL to sunset the education exemption, perhaps after a period of one year.
It is simply no longer necessary.
Recommendations of specific securities clearly are investment advice. Any ability by a non-fiduciary advisor to undertake specific security recommendations would create a giant loophole, which over time would swallow up ERISA’s important fiduciary protections.
Should the DOL amend its proposed PTE to provide that specific investment recommendations could be made to plan participants on specific investments, in group educational sessions, the result will be the delivery of investment advice by brokers and insurance agents almost exclusively under this arrangement.
The non-application of fiduciary standards to the delivery of specific investment recommendations is, simply put, nonsensical - which the DOL has recognized in its most recent proposals.
Accordingly, any expansion of the education exemption would not be protective of plan beneficiaries, nor in their interests, and hence would fail to satisfy the requirements for the grant of exemptive relief.
Substantial abuse which could take place if specific investment advice, including specific advice on which investment products to choose to implement a client’s investment plan, were permitted to occur in group “educational” sessions.
There is no longer any need for the education exemption. Those who provide education to plan participants, including advice on asset allocation (perhaps the most important decision an individual faces in terms of designing an investment policy), should be held to a fiduciary standard with respect to such advice.
At the minimum, any BD's proposal to expand the proposed PTE to encompass the recommendation of specific products would create a giant loophole, into which non-fiduciaries would jump wholeheartedly. And, the plan participants would, unfortunately, follow them into this non-fiduciary black hole of conflicted advice delivered under the meaningless (from the standpoint of consumer protections) standard of suitability.