As most of you have heard, on March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit issued an opinion vacating, in its entirety, the Department of Labor’s amendment to regulations defining “investment advice” for the purpose of determining who is a fiduciary (the “DOL Fiduciary Rule”) on the basis that the Department violated the Administrative Procedures Act and exceeded its regulatory authority.  The Department had the right to request an en banc review of the decision by the full Fifth Circuit panel within 45 days of the date of the decision and to appeal the decision to the U.S. Supreme Court within 90 days after the date of the decision.  The Department of Labor did not file the request for review or an appeal to the Supreme Court within such deadlines.  On June 21, 2018, the Fifth Circuit issued the mandate implementing its decision to vacate the DOL Fiduciary Rule.

When the DOL Fiduciary Rule became applicable in 2017, many sponsors of private funds revised their fund’s subscription agreements. The concern was that marketing personnel may inadvertently make a “recommendation” (within the meaning of the DOL Fiduciary Rule) to a potential investor who was not represented by a bank, insurance company, registered investment adviser, broker-dealer or other “independent sophisticated fiduciary.”  If such a situation arose, the marketing person would be swept into the definition of an ERISA fiduciary by virtue of providing such recommendation to an investor who did not satisfy the carve out in the DOL Fiduciary Rule for those benefit plan investors who are represented by an “independent sophisticated fiduciary.”  In light of this risk, some fund sponsors elected to bar investors who were not represented by an “independent sophisticated fiduciary” from investing in their funds.  Other managers required that such investors make additional representations, warranties and covenants to support a conclusion that no one working for, or affiliated with, the fund sponsor made a “recommendation” to such investor.  In addition, such sponsors trained their staff to carefully avoid making statements to benefit plan investors that could be construed as a “recommendation” within the meaning of the DOL Fiduciary Rule.

Now that the Fifth Circuit has vacated the DOL Fiduciary Rule, the prior regulation defining “investment advice” should be resurrected and fund sponsors should be able to remove the provisions added to their subscription agreements to address the rule. In the predecessor regulation defining “investment advice,” the Department of Labor created a five part test:  the advice must relate to the advisability of investing in, purchasing or selling securities or other property, be rendered on a regular basis, and be given pursuant to a mutual agreement, arrangement or understanding that the advice will serve as the primary basis for investment decisions with respect to plan assets, and that the advice will be individualized based on the particular needs of the benefit plan investor.  All five elements had to be present in order for an adviser to be deemed to be a fiduciary under ERISA.  For fund sponsors marketing interests in their private funds, the predecessor regulation offered much more certainty on how to avoid fiduciary status under ERISA because, if any advice had been given regarding the purchase or sale of such securities, such advice would only be rendered one time or sporadically and there would be no mutual understanding that such sales communications would serve as the primary basis for the investor’s investment decision.