On October 22, 2010, the DOL’s Employee Benefits Security Administration (EBSA)
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
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:
- Advice or an appraisal or a fairness opinion concerning the value of
securities or other property;
- Recommendations as to the advisability of investing in, purchasing,
holding, or selling securities or other property; or
- Advice or recommendations as to the management of securities or other
Under the proposed regulations, persons who either directly or indirectly
take any of the actions described below are ERISA fiduciaries:
- Represent or acknowledge that they are acting as fiduciaries with
respect to providing advice or making recommendations described above;
- Comment: DOL has taken the position that persons who say
they are ERISA fiduciaries are ERISA fiduciaries irrespective of the
nature of the advice provided to a plan, plan fiduciaries, participants
- Are fiduciaries within the meaning of Section 3(21) of ERISA;
- Are registered “investment advisers” under the Investment Advisers Act
of 1940; or
- Comment: This expansion of the existing rule could result
in many proxy advisory firms becoming subject to ERISA fiduciary
- Provide advice or make recommendations described in the preceding
paragraph pursuant to an agreement, arrangement or understanding between
such person and the plan, a plan fiduciary or a plan participant or
beneficiary that such advice may be considered in connection with making
investment or management decisions with respect to plan assets, and will be
individualized to the needs of the plan, a plan fiduciary, or a participant
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.
- Comment: This means that any advice, no matter how discrete,
could lead an advisor to become subject to ERISA fiduciary obligations.
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
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:
- Sellers of securities when the recipient of the advice or
recommendations knows or reasonably should know that the sellers have
interests adverse to the interests of the plan or its participants or
- Individuals who provide investment education information and materials
(i.e., plan information, general financial and investment information, asset
allocation models, and interactive materials).
- Individuals who market securities or other property from which a plan
fiduciary of an individual account plan may designate investment
alternatives in which participants may direct investments.
- In order to meet this exception, the individual conducting the
marketing must disclose in writing to the plan fiduciary that the person
is not providing impartial investment advice.
- Service providers, record keepers, or third-party administrators who
provide information and data to assist plan fiduciaries in making selections
or monitoring plan investment alternatives.
- Like the marketing exception, these individuals must inform the plan
fiduciary in writing that they are not undertaking to provide impartial
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.