Proposed DOL Regulations Expand Definition of 'Fiduciary' Related to Investment Advice

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:

  • 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 property.

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 or beneficiaries.
  • 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 obligations.
  • 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 or beneficiary.

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 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:

  • 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 beneficiaries.
  • 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 investment advice.

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.

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