November 4, 2010
On October 22, 2010, the DOL’s Employee Benefits Security Administration (EBSA) released proposed regulations that would revise the circumstances under which a person who gives investment advice to an employee benefit plan or a plan’s participants is considered to be a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA).
The proposed regulations are intended to update and expand the existing rule to reflect the changes in the financial industry, and the expectations of plan officials and participants who receive investment advice. According to EBSA, the new rule will better protect participants from conflicts of interest and self-dealing, by giving a broader and clearer understanding of when persons providing investment advice are ERISA fiduciaries, subject to duties of loyalty and prudence. Any breach of these duties may result in personal liability for advisors.
Advice Must be Provided for Compensation
Like the existing rule, the proposed regulations indicate that a person must provide advice for compensation (whether direct or indirect) to become an ERISA fiduciary. Compensation may include brokerage, mutual fund sales and insurance commissions, as well as fees and commissions based on multiple transactions involving different parties.
Expanded Definition of Advice
The proposed regulations state that persons who provide the following types of advice or recommendations to a plan, plan fiduciary, or plan participant or beneficiary will be considered ERISA fiduciaries:
Under the proposed regulations, persons who either directly or indirectly take any of the actions described below are ERISA fiduciaries:
Importantly, the proposed regulations remove the requirement that the advice must be provided on a regular basis. The preamble to the proposed regulations suggests that the significance of the advice is not diminished simply because the advice is only rendered once, as opposed to on an on-going basis. Furthermore, the advice need not be the primary basis for making plan investment decisions for it to subject an advisor to ERISA fiduciary standards.
Because of the DOL position that proxy voting is a fiduciary act, providing advice on proxy voting is a service that can make the person providing advice into a fiduciary, if the person is otherwise covered, such as a registered investment adviser.
Exceptions to Fiduciary Status
Despite the expansive view of advice that would subject a person to ERISA fiduciary status, the proposed regulations state that the following individuals will not be considered ERISA fiduciaries:
Finally, the proposed regulations indicate that the preparation of a general report or statement to plan fiduciaries that reflects the value of investments held by the plan or a participant, will not cause an individual to become an ERISA fiduciary if the report or statement is provided in order to comply with the reporting and disclosure requirements of ERISA or the Internal Revenue Code.