How many of you remember the classic children’s’ story “Are you My Mother?” by P.D. Eastman?  In that delightful story, we follow a confused but determined baby bird who is looking for his mother.  He sets off to find her, asking various creatures along the way (a dog, a cow, a plane) whether they are his mother, and in the end happily finds his way beneath her protective wing.

The parallels between this story and the proposed Conflict of Interest Regulations are clear (at least to some of us).  The proposed guidance examines the various service providers encountered by retirement plans and IRA owners, as well as their participants and beneficiaries (“retirement investors”) and evaluates whether or not such service providers are fiduciaries who offer a protective wing.  Moreover, the guidance expands the types of services which will be treated as fiduciary in nature, thus increasing the odds that the retirement investors will in fact find the fiduciary protection they seek.

ERISA has always defined a fiduciary to include:

  • a named fiduciary,
  • a person who exercises discretion with respect to management or administration of the plan,
  • a person who exercises discretion with respect to management or disposition of plan assets, or
  • a person who provides investment advice for a fee.

Years ago, regulations were issued to further define who would be regarded as a fiduciary by virtue of rendering investment advice for a fee.   The recently issued proposed regulations seek to expand those old regulations to include a much broader category of service providers.

Specifically, under the proposed regulations, a person will be treated as providing the protective wing of a fiduciary if that person provides any of the following types of advice and satisfies the agreement requirement noted below:

  • Recommendations as to the advisability of acquiring, holding, disposing or exchanging securities or other property – including a recommendation to take a distribution or reinvestment of a rollover;
  • Recommendations as to management of securities or property;
  • Appraisals, fairness opinions or similar statements regarding the value of securities or property in connection with acquisition, disposition or exchange of that property (but NOT in connection with an ESOP); or
  • Recommendations of person(s) who will receive a fee or compensation for providing any of the above advice.

In addition to providing one of the services described above, the person must also (i) represent or acknowledge that he/she is acting as a fiduciary or (ii) render the advice pursuant to an agreement (written or verbal) that the advice is individualized to, or specifically directed to, the recipient for consideration in making investment/management decisions regarding plan property.

EXCLUSIONS: The proposed regulations provide a number of specified exclusions to the definition of fiduciary. For instance a person will not be treated as a fiduciary if s/he provides advice to an independent plan fiduciary who exercises authority regarding management or disposition of assets of a large plan (> 100 Participants or at least $100 million in plans assets) if that person satisfies certain requirements, including a disclosure requirement. A person also may not be treated as a fiduciary in certain swaps or securities based swaps if the plan is represented by an independent fiduciary and certain requirements are satisfied.

A number of other specific exclusions include:

  • Employee (of plan sponsor) who provides advice to a fiduciary and receives no fee for the advice
  • Provider of investment alternatives platform if the provider discloses in writing to the fiduciary that it is not acting as a fiduciary
  • Selection and monitoring of investment alternatives that meet objective criteria specified by a fiduciary or provide to the fiduciary objective financial data comparisons with independent benchmarks
  • Provision of financial reports and valuations for reporting / disclosure purposes
  • Provision of certain investment education so long as the provider does not provide recommendations regarding specific investment products or alternatives
  • Provision of certain asset allocation models and interactive investment materials
  • Securities transaction exclusion for a broker dealer who executes a transaction pursuant to instructions of the fiduciary
  • Lawyers, accountants and actuaries who provide professional assistance regarding a particular investment transaction

The proposed regulations provide a number of exemptions deigned to preserve business practices (such as common fee and compensation practices) in the delivery of investment advice. For instance, the Best Interest Contract Exemption provides conditional relief in connection with investment advice to “retail retirement investors” (i.e., participants/beneficiaries of participant-directed plans; IRA owners; sponsors of non-participant directed plans with < 100 employees under which the sponsor is a fiduciary regarding plan investment decisions). These exemptions will be discussed in a separate blog.

When the proposed regulation becomes effective (likely in 2016), plan sponsors, IRA owners and plan participants should be asking – “Are You My Fiduciary”? Understanding whether or not the protective wing of a fiduciary pertains to the plan or IRA will require an analysis of both the proposed expansion of the rule and its complex exceptions.