Dan Kuperstein, an attorney in our Roseland office, brought to my attention that the DOL/EBSA has released an Advisory Opinion clarifying “Prohibited Transaction” and “Party in Interest” rules pertaining to brokers providing services to ERISA plans. This is important stuff for both brokers and plan sponsors to be aware of so I have included the full text of his summary below:
"On February 11, 2011, the Department of Labor, Employee Benefits Security Administration(“DOL”)released Advisory Opinion 2011-06A (“the Opinion”), which discusses and clarifies the “prohibited transaction” and “party in interest” rules pertaining to broker-dealers that provide services to ERISA plans.
Under Sections 406, 404 and 3(14) of ERISA, relationships (and transactions) between a benefits plan and other parties become important, as they can lead to significant amounts of liability for those involved when a “prohibited transaction” occurs. Generally, a prohibited transaction involves self-dealing or selfish interests of an individual or company with important responsibilities with respect to a benefits plan. “Plan fiduciaries” and “parties in interest,” defined and discussed in these provisions, have heightened responsibilities with respect to plans.
At issue in the Opinion was whether service transactions between a group of brokers and certain employee benefit plans, for which an asset management firm acted as a plan fiduciary, violated ERISA’s prohibited transaction rules because of indirect ownership interests between the brokers and the asset management firm. Although the Opinion concluded that the ownership interest was not sufficient to find that the brokers were parties in interest, significantly, the Opinion makes clear that general standards of fiduciary conduct under ERISA apply to any selection of a service provider by a plan fiduciary, i.e., even where a plan fiduciary is not dealing with “parties in interest” under ERISA § 3(14). In the Opinion, the DOL says that whether a fiduciary has an interest in another party that may affect the fiduciary’s best judgment is an inherently factual question and one that requires consideration of all relevant facts and circumstances. In other words, all relationships (and all the relevant facts) matter when it comes to the issue of whether a prohibited transaction has occurred, not just relationships with parties in interest.
The Opinion also clarifies that Prohibited Transaction Exemption 84-14, Part I, providing an exemption from the prohibited transaction rules for plan asset transactions determined by independent qualified professional asset managers, provides an exemption only from violations of ERISA § 406(a) (pertaining to transactions between plans and parties in interest), and does not extend relief to transactions that violate ERISA § 406(b) (pertaining to transactions between plans and fiduciaries)."
I think that this opinion should serve as a reminder to plan sponsors and plan administrators that the selection of brokers (and other fund professionals) has to be carefully scrutinized, particularly if there is some other relationship between the parties. The "relatedness" of the professional has to be a consideration and there has to be some consideration of whether the relationship gives rise to the color of a prohibited transaction. Don't get caught with a fund professional that could give rise to a claim that the relationship fosters a "prohibited transaction."