The Employee Retirement Income Security Act (“ERISA”) provides that a person is a fiduciary with respect to a plan to the extent:
- He exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets;
- He renders investment advice 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; or
- He has any discretionary authority or discretionary responsibility in the administration of such plan.
The Code of Federal Regulations pertaining to the DOL (the “DOL Regulations”) defines the circumstances under which a person renders “investment advice” to an employee benefit plan within the meaning under ERISA. Under the DOL Regulations, for advice to constitute “investment advice,” an advisor who does not have discretionary authority or control with respect to the purchase or sale of securities or other property for the plan must:
- Advise as to the value of securities or other property; or
- Make recommendations as to the advisibility of investing in purchasing or selling securities or other property
This advice or recommendation is made on a regular basis persuant to a mutual agreement, arrangement or understanding with a plan or plannedfiduciary. The advice or recommendation will be particularized to the specific needs of the plan and will serve as the primary basis for the investment decision with repect to the plan.
In a 1976 advisory opinion, the DOL concluded that a valuation of closely held employer securities that would be relied on in the purchase of the securities by an Employee Stock Ownership Plan (“ESOP”) would not constitute “investment advice” under the current regulation.
The newly proposed rule
In October 2010, the DOL proposed a rule which expands the definition of fiduciary under ERISA by amending the DOL Regulations. The DOL’s newly proposed rule defines fiduciary as any individual who renders investment advice to a plan for a direct or indirect fee or other compensation:
- Who provides to a plan fiduciary, participant or beneficiary
- Advice, appraisals or fairness opinions as to the value of securities or other property,
- Recommendations as to the purchasing, selling or holding of securities or other property, or
- Advice regarding the management of securities or other property,
2. Who either directly or indirectly
- Acknowledges its fiduciary status under ERISA relating to discretionary authority or control relating to the investment or administration of a plan,
- Is a plan administration or discretionary asset management fiduciary under section 3(21)(A) of ERISA,
- Is an investment advisor under the Investment Advisors Act of 1940, or
Provides advice pursuant to an agreement or understanding with a plan, a plan participant or a fiduciary that may be considered in connection with making investment or management decisions with respect to plan assets and will be individualized to the needs of a plan or a participant.
The exceptions to the newly proposed rule
There are exceptions to the newly proposed rule which include individuals who:
- Do not represent themselves to be ERISA fiduciaries, and who make it clear to the plan that they are acting for a purchaser/seller on the opposite side of the transaction from the plan rather than providing impartial advice;
- Provide general financial/investment information, such as recommendations on asset allocation to 401(k) participants under existing guidance on investment education;
- Market investment option platforms to 401(k) plan fiduciaries on a non-individualized basis and disclose in writing that they are not providing impartial advice; and
- Are appraisers who provide investment values to plans to use only for reporting their assets to the DOL and IRS.
The DOL has stated that the re-proposal is designed to inform judgments, ensure an open exchange of views and protect consumers while avoiding unjustified costs and burdens. The decision to re-propose will allow for additional input, review and consideration. The DOL has stated that this extended input will supplement more than 260 written public comments already received, as well as two days of open hearings and more than three dozen individual meetings with interested parties held by the agency.
EBSA anticipates revising provisions of the rule to clarify that fiduciary advice is limited to individualized advice directed to specific parties. This would respond to concerns about the application of the regulation to routine appraisals and clarify the limits of the rule’s application to arm’s length commercial transactions. EBSA also anticipates revising provisions of the rule to provide for exemptions addressing concerns about the impact of the new regulation on the current fee practices of brokers and advisers, and to clarify the continued applicability of exemptions that have long been in existence that allow brokers to receive commissions in connection with mutual funds, stocks and insurance products. EBSA is expecting to develop new or amended exemptions that can best preserve beneficial fee practices, while at the same time protecting plan participants and individual retirement account owners from abusive practices and conflicted advice.
The new proposed rule is expected to be issued in early 2012. As a result of the decision to re-propose the rule, the DOL closed the public record on the original proposed rule. Interested parties will be provided with an opportunity for comment at the time the rule is re-proposed.
Dale R. Vlasek
Meredith R. Fergus
or any of our Employee Benefits attorneys by clicking on the link below.
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