The Department of Labor (“DOL”) issued a proposed regulation on October 21, 2010 that would, if adopted, modify an existing regula-tion1 to more broadly define the circumstances under which a person is considered to be a “fiduciary” under the Employee Retirement Income Security Act of 1974 (“ERISA”) and Section 4975 of the Internal Revenue Code as a result of giving investment advice to an IRA, an employee benefit plan or a plan’s fiduciaries, participants or beneficiaries. The DOL indicated that, by giving a broader and clearer under-standing of the circumstances that will cause persons providing such advice to be subject to ERISA’s fiduciary standards, the proposed regulation would better protect plan partici-pants from conflicts of interest and self-dealing. The following is a brief description of the proposed regulations.
- Giving the following types of advice and recommendations to a plan fiduciary, plan participant or beneficiary may result in fiduciary status under the proposed regulation: advice, appraisals or fairness opinions concerning the value of securi-ties or other property; recommendations as to the advisability of investing in, pur-chasing, holding, or selling securities or other property; or advice or recommen-dations as to the management of securi-ties or other property (including recom-mendations as to proxy voting and the se-lection of asset managers).
The DOL acknowledged that the specific inclusion of appraisals and fairness opin-ions would supersede its current position (stated in Advisory Opinion 76-65A) that a valuation of closely-held employer secu-rities would not constitute investment ad-vice.
- If a person renders advice as described above, the person will be treated as a fi-duciary under ERISA if any one of the fol-lowing four conditions is met:
- The person represents or acknowl-edges that it is acting as a fiduci-ary within the meaning of ERISA with respect to such advice or rec-ommendations. (Thus, such a rep-resentation or acknowledgment in connection with providing advice would be sufficient under the pro-posed regulation to result in fiduci-ary status if provided for a fee or other compensation, direct or indi-rect.)
- The person exercises any discre-tionary authority or discretionary control with respect to manage-ment of the plan, exercises any au-thority or control with respect to management or disposition of its assets, or has any discretionary au-thority or discretionary responsibil-ity in the administration of the plan.
- The person is an investment ad-viser within the meaning of Section 202(a)(11) of the Investment Ad-visers Act of 1940.
- The person provides advice or makes rec-ommendations described above pursuant to an agreement, written or otherwise, be-tween such person and the plan, a plan fi-duciary, or a plan participant or benefici-ary, 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 par-ticipant or beneficiary.
The DOL emphasized that, unlike the cur-rent regulation, the proposed regulation does not require the advice to be provided on a regular basis. Thus, a service provider that provides discrete advice with respect to distinct investment transactions could be a fiduciary.
Also, unlike the current regulation, the pro-posed regulation would not require that the parties have a mutual understanding that the advice will serve as a primary basis for plan investment decisions. It would be suf-ficient if the understanding of the parties is that the advice will be considered in con-nection with making a decision relating to plan assets.
The proposed regulation would not, however, apply generally with respect to a person (unless that person represented that it is a fiduciary) who can demonstrate that the recipient of the advice knows or, under the circumstances, reasonably should know, that the person is providing the advice or making the recommendation in its capacity as a purchaser or seller of a security or other property (or as an agent of such a purchaser or seller) whose interests are adverse to the interests of the plan or its participants or beneficiaries, and that the person is not undertaking to provide impartial invest-ment advice.
Further, the following acts in connection with an individual account plan would not, in and of themselves, be treated as rendering investment advice:
- Making available a menu of investments from which a plan fiduciary may select a more limited menu that will be available under the plan for in-vestment if the person making available such in-vestments discloses in writing to the plan fiduci-ary that the person is not undertaking to provide impartial investment advice;
- In connection with making available a menu of investments as described above, providing to the fiduciary general financial information and data regarding matters such as historic performance of asset classes and of the investments available through the provider, if the person providing such information or data discloses in writing to the plan fiduciary that the person is not undertaking to provide impartial investment advice;
- Providing investment education information (within the meaning of the DOL safe harbor de-scribed in Interpretative Bulletin 96-1).
The DOL noted that it has taken the position in Advisory Opinion 2005-23A that, generally, a recommendationto a plan participant to take an otherwise permissible plan distribution (including a recommendation as to how the distribution should be invested) does not constitute investment advice. The DOL has requested comments on whether or to what extent the final regulation should define “investment advice” to encompass recommenda-tions related to taking a plan distribution.
The general deadline for submitting written comments on the proposed regulations is January 20, 2011.