The Department of Labor (DOL) has issued a proposed regulation that would amend the definition of “fiduciary” under ERISA. The regulation would broaden the kind of service providers that would be fiduciaries. The DOL believes that this change will enhance its ability to cure abuses that it believes currently exist in the market, such as undisclosed fees, misrepresentation of compensation arrangements and biased appraisals of the value of employer securities and of other plan investments. The regulation is complex and has only been issued in proposed form thus far. Comments on the proposal are due to the DOL by January 20, 2011. We will provide you with additional details in an Alert after the regulation is finalized.
Section 3(21)(A)(ii) of ERISA provides one definition of fiduciary – a person (or entity) that renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of a plan, or has any authority or responsibility to do so. The DOL’s current regulations under that section provide that a person provides this investment advice 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 or sale of securities or other property for the plan or, in the alternative, the person (i) renders this advice, (ii) on a regular basis, (iii) pursuant to a mutual agreement, arrangement or understanding between the person and the plan or a plan fiduciary that (iv) this advice will serve as a primary basis for investment decisions with respect to plan assets, and that (v) this advice will be individualized based on the particular needs of the plan (the “Five-Part Test”). Each element of the test must be met for the person providing the investment advice to be treated as a fiduciary under the alternative definition.
According to the DOL, the proposed regulation is designed to protect participants from conflicts of interest and self-dealing by giving a broader and clearer understanding of when persons providing investment advice are fiduciaries and therefore subject to ERISA’s fiduciary standards. Under the proposed regulation, a person who provides the following types of advice and recommendations to a plan fiduciary or participant may result in the person’s being a fiduciary under ERISA: (i) advice, appraisals or fairness opinions concerning the value of securities or other property; (ii) recommendations as to the advisability of investing in, purchasing, holding or selling securities or other property; or (iii) advice or recommendations as to the management of securities or other property.
Under the proposed regulations, at least one of the following alternative conditions must also be met by a person described above in order for the person to be an ERISA fiduciary. These conditions are that (i) the person represents or acknowledges in writing or orally that the person is acting as a fiduciary; (ii) the person exercises any discretionary authority or discretionary control with respect to management of the plan, exercises any authority or control with respect to management or disposition of its assets, or has any discretionary authority or discretionary responsibility in the administration of the plan; (iii) the person is an “investment adviser” under the Investment Advisers Act of 1940; or (iv) the person meets the basics of the Five-Part Test (removing the elements that require advice on a “regular basis” and a “mutual understanding” that the advice will be the primary basis for investment decisions). Satisfaction of any one of these alternative conditions may result in the person being an ERISA fiduciary if that person is also providing investment advice for a fee.
Providing investment advice for a fee or other compensation, direct or indirect, means any fee or compensation for the advice received by the person providing the advice (or by an affiliate of the person) from any source and any fee or compensation incident to the transaction in which the investment advice has been rendered or will be rendered. The term “fee or other compensation” includes, but is not limited to, brokerage, mutual fund sales and insurance sales commissions, and also includes fees and commissions based on multiple transactions involving different parties.
The proposed regulation sets forth certain investment advice that may be given without the person giving the advice being an ERISA fiduciary. Specifically, a person will not be a fiduciary with respect to the provision of investment advice or recommendations if the person 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 to the recipient in the capacity of a purchaser or seller of a security or other property, or as an agent of or an appraiser for a purchaser or seller, whose interests are adverse to the interests of the plan or its participants, and that the person is not undertaking to provide impartial investment advice. In addition, if the person merely furnishes any of four specific types of information and materials – (i) plan information (including general reports on the value of investments or legal compliance), (ii) general financial and investment information, (iii) asset allocation models, and (iv) interactive materials – the person will not be an ERISA fiduciary. Finally, a person will not be a fiduciary if the person merely markets or makes available securities or other property (e.g., on a platform), without regard to the individualized needs of the plan or its participants, from which a plan fiduciary may designate investment alternatives into which participants may direct their accounts, provided the person discloses in writing that the person is not undertaking to provide impartial investment advice.