Impact of DOL’s Final Rule on Business Development Companies

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On April 6, 2016, the U.S. Department of Labor (DOL) released its final rule defining who is a fiduciary in connection with investment advice that is provided to benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA). The new rule is currently scheduled to become effective on April 10, 2017. Only employer-sponsored retirement accounts such as 401(k)s, defined benefit plans and certain types of individual retirement accounts (IRAs) are subject to the rule change because these accounts are under the authority of the DOL. Broker-dealers providing services to all other types of investment accounts, including traditional and Roth IRAs, would generally not be deemed fiduciaries, but would remain subject to the suitability requirements set forth in FINRA rules and SEC cases. Investment advisers are deemed fiduciaries with respect to all managed accounts.

Under the current fiduciary standard, a person is considered a fiduciary only if he or she provides investment advice on a regular basis pursuant to a mutual agreement, arrangement or understanding that is the primary basis for investment decisions and is individualized for the particular needs of the retirement investor. Under the new rule, the requirements that the investment advice (i) be given on a regular basis; (ii) be pursuant to a mutual agreement, arrangement or understanding; and (iii) be the primary basis for investment decisions are each removed. The new rule also expands the definition of investment advice to include any communication that could be reasonably viewed as a suggestion that the client take a certain action or refrain from taking a certain action in relation to a security or investment strategy.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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