On October 22, 2010, the DOL issued proposed rules under ERISA that would more broadly define the circumstances under which a person is considered to be a fiduciary by reason of giving investment advice to an employee benefit plan or a plan's participants. The proposal amends a 35-year-old rule that, according to the DOL, may inappropriately limit the types of investment advice relationships that give rise to fiduciary duties on the part of the investment advisor. In addition, the proposed regulation would update the "investment advice" definition of the regulations to establish additional circumstances where investment advice providers are subject to ERISA fiduciary responsibilities.

Background

Section 3(21)(A)(ii) of ERISA defines a fiduciary as a person who renders investment advice to a plan for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so. The DOL noted that the current regulation provides that a person provides "investment advice" for purposes of section 3(21)(A)(ii) of ERISA only if the person renders advice as to the purchase, sale, or value of securities or other property and either has discretionary authority or control with respect to the purchase of property for the plan, or, in the alternative, the person (1) renders advice as to the purchase, sale, or value of securities or other property, (2) on a regular basis, (3) pursuant to a mutual agreement, arrangement, or understanding, written or otherwise, between such person and the plan or a plan fiduciary, that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan, commonly referred to as the "five-part test."

According to the DOL, under the current regulation, a plan service provider must satisfy each element of the five-part test in order to be considered a fiduciary under ERISA section 3(21)(A)(ii) unless the service provider renders advice and has discretionary authority or control with respect to purchasing or selling securities or other property for the plan.

General Overview of Proposal

The proposed rule provides that a person is a fiduciary if the person (1) renders investment advice described in the proposal to a plan, plan fiduciary, or plan participant or beneficiary for a fee or other compensation and (2) directly or indirectly represents or acknowledges that he or she is acting as a fiduciary within the meaning of ERISA with respect to the plan in rendering the advice. The proposed rule is intended to simplify the current rule's five-part test. The proposal removes the requirement that advice must be provided on a "regular basis."

In addition, the proposal does not require the parties to have a mutual understanding that the advice will serve as a "primary basis" for plan investment decisions. The DOL notes that under the proposal it is sufficient if the parties understand that the advice will be considered in connection with making a decision relating to plan assets.

Meaning of "Investment Advice" for a Fee  

Under the proposed regulations, the types of advice and recommendations that may result in fiduciary status under ERISA section 3(21)(A)(ii) are:

  • Advice, appraisals, or fairness opinions concerning the value of securities or other property  
  • Recommendations as to the advisability of investing in, purchasing, holding, or selling securities or other property  
  • Advice or recommendations as to the management of securities or other property

In addition, a person may be considered a fiduciary as a result of the person's rendering of "investment advice" for a fee or other compensation if the person:  

  • Represents or acknowledges that he or she is acting as a fiduciary within the meaning of ERISA with respect to the plan in rendering the advice  
  • Is a fiduciary with respect to the plan within the meaning of ERISA section 3(21)(A)(i) or (iii) (specifically, section 3(21)(A)(i) and (iii) describe a fiduciary as any person who exercises any discretionary authority or control with respect to management of the plan, management or disposition of its assets, or in the administration of the plan)  
  • Is an investment adviser within the meaning of section 202(a)(11) of the Investment Advisers Act of 1940  
  • Provides advice or makes recommendations pursuant to an agreement, arrangement, or understanding, written or otherwise, with the plan, a plan fiduciary, or a plan participant or beneficiary, where such advice may be considered in making investment or management decisions with respect to plan assets, and the advice will be individualized to the needs of the plan, a plan fiduciary, or a participant or beneficiary

These provisions generally encompass the same types of investment-related advice and recommendations as covered by the current regulation, except that it (a) specifically includes the provision of appraisals and fairness opinions and (b) specifically includes advice and recommendations as to the management of securities or other property (for example, voting proxies, selection of persons to manage plan investments). In addition, the proposed regulation provides that fiduciary status under section 3(21)(A)(ii) may result from the provision of advice or recommendations not only to a plan fiduciary, but also to a plan participant or beneficiary. The preamble notes that this "reflects the Departmentʼs long-standing interpretation of the current regulation."

Exceptions to Fiduciary Status

The proposed regulations do provide for certain activities taken in connection with individual account plans that will not, in and of themselves, be treated as rendering investment advice and would not result in fiduciary status. These include:  

  • Providing certain investment education information and materials  
  • The marketing or making available (for example, through a platform or similar mechanism) investment alternatives which participants may select, or the providing general financial information and data to assist a plan fiduciary's selection or monitoring of such plan investment alternatives, if the person making available such investments discloses in writing to the plan fiduciary that the person is not providing impartial investment advice  
  • The preparation of general report or statements pursuant to ERISA's or the Code's disclosure and reporting requirements