Q&As — Now That the DOL’s Fiduciary Rule Is Applicable

June 22, 2017

Q 1: What representations should a private investment fund get from new “benefit plan investors”?

A: Assuming that an investment manager or “you” are not intending to rely on the “best interest contract” (“BIC”) prohibited transaction exemption and except as discussed in Q 2 below, a private investment fund can only be offered to an ERISA plan or IRA which employs an “independent fiduciary with financial expertise” (“IFFE”) in connection with the investment into the fund. Under the Department of Labor fiduciary rule (the “Rule”), you can rely on representations from investors as to their qualifications as an IFFE.

We recommend that any new investment from a “benefit plan investor” only be accepted if the investor can and does make representations and warranties as to IFFE involvement (Exhibit A provides a sample representation form). While the Rule also requires that an IFFE meet several other requirements, we do not believe that during the “transition period” (i.e., through December 31, 2017), additional representations are required in order for a private investment fund to rely on the IFFE exception to the Rule. The representations from “benefit plan investors” in Seward & Kissel’s typical subscription agreements contain several provisions that address these other requirements, which, we believe, when used in conjunction with the additional representations set forth on Exhibit A, should suffice during the “transition period”.

Q 2: Can a private investment fund accept new investments from IRAs and ERISA Plans affiliated with the investment manager?

A: Yes, provided no fees are charged. The Rule does not affect “No Fee” investments from ERISA plans or IRAs. While there are several considerations that should be reviewed with counsel before investing an affiliated ERISA plan or IRA without charge into a private investment fund, the no fee offering will not make the investment manager an “advice fiduciary” under the Rule.

Q 3: Is there anything a private investment fund should do in respect of additional contributions from existing “benefit plan investors”?

A: Yes, while amounts invested prior to June 9, 2017 are grandfathered, additional contributions from grandfathered benefit plan investors should be treated similarly to new investments from new benefit plan investors. Accordingly, we recommend that any additional investments from a “benefit plan investor” only be accepted if the investor can and does make the required representations and warranties as to IFFE involvement. This restriction would not apply in respect of drawdowns on capital commitments committed to prior to June 9, 2017.

Q 4: Is a private investment fund required to send a letter to existing benefit plan investors?

A: No, there is no requirement to send a letter to existing or “grandfathered” investors regarding whether or not the investor is relying on an IFFE.

Q 5: Should a private investment fund add additional disclaimers to its marketing and client communications?

A: Yes, in respect of post-June 9, 2017 communications to investors, we suggest adding the following sentence to all client communications:

The [foregoing/following] information has not been provided in a fiduciary capacity, and it is not intended to be, and should not be considered as, impartial investment advice.


If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.