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Northwest OH Legal Blog

Tuesday, July 21, 2015

United States Department of Labor Proposes Expanded Definition of ERISA Fiduciary

On April 20, 2015, more than three years after withdrawing a similar proposal that was staunchly opposed by the financial services industry, the United States Department of Labor (“DOL”) published a proposal to amend certain parts of the definition of the term “fiduciary” under the Employee Retirement Income Security Act of 1974 (“ERISA”) and regulations that were issued in 1975.  Under this regulatory proposal, the definition of a fiduciary would be expanded to encompass certain activities that were previously considered non-fiduciary in nature, or at least fell into a gray area of fiduciary status.

Background.  ERISA’s current definition of the term “fiduciary” includes any party who “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 position is that the current definition of “investment advice” is too narrow, and does not cover some parties who are giving potentially conflicted investment advice to ERISA-governed plans and individual retirement accounts (“IRAs”) concerning the investment of plan assets.

DOL Proposal.  Pursuant to the DOL’s proposed definition of a fiduciary, a person is considered to be a fiduciary with respect to an ERISA-governed plan or IRA if the person gives advice under the following circumstances: 

  • pursuant to an agreement, arrangement or understanding,
  • when the advice is individualized or specifically directed for use in making investment decisions for a plan or IRA concerning securities or other property,
  • when the advice is provided for a fee or other compensation, or
  • when the advice falls into one of the following four categories:
    • recommendations on acquiring, holding, disposing or exchanging securities or other property (including distributions from a plan or IRA),
    • recommendations on managing securities or other property (including distributions from a plan or IRA),
    • appraisals, opinions or other statements on the value of securities or other property in connection with a specific transaction involving those securities or other property, or
    • recommendations of a person to give the plan or IRA advice described in the prior three categories for a fee or other compensation.

This new definition of a fiduciary is broader than the definition in current DOL regulations.  The new definition expands the categories of advice that can trigger fiduciary status, and does not require that the advice be given on a regular basis, or be a primary basis for investment decisions, in order for the advice-giver to be considered a fiduciary. In addition, even though IRAs are generally not ERISA-governed plans, the DOL proposal specifically addresses fiduciary status with respect to IRAs.

The DOL proposal does, however, retain a provision in the current DOL regulations shielding broker-dealers from fiduciary status.  Under this provision, a broker-dealer is not considered to be a fiduciary merely as a result of executing securities transactions on behalf of an ERISA-governed plan or IRA pursuant to specific instructions from an unaffiliated fiduciary.

Exclusions.  The proposed DOL regulation provides an exclusion from fiduciary status for certain classes of persons who provide investment advice, including the following:

  • employees of a plan sponsor (e.g., a chief financial officer or corporate treasury personnel) who provide advice to a fiduciary of the employer’s plan for no additional compensation,
  • “investment platform providers” that develop a set of investment alternatives (e.g., mutual funds) that a participant-directed plan (e.g., a typical 401(k) plan) could make available to its participants,
  • persons who provide certain financial reports and valuations to plans and collective investment funds, and
  • persons providing “investment education” to plan participants.

There are also carve-outs under certain circumstances for investment advice given to a small (fewer than 100 participants) ERISA-governed plan, an independent fiduciary with at least $100 million in employee plan assets under management, or an independent fiduciary on potential swap transaction matters.

Prohibited Transaction Class Exemption.  The DOL proposal includes a prohibited transaction class exemption for so-called “best interest contracts.”  Under this exemption, advisers such as brokers and insurance agents would be allowed to give investment advice (as defined in the proposed regulation) to an ERISA-governed plan or IRA client and receive commissions or other compensation resulting from that advice, provided that they comply with the following requirements:

  • a commitment to provide advice in the client’s best interest,
  • adopting and following policies and procedures designed to identify and mitigate conflicts of interest, and
  • disclosure (including disclosure on a webpage) of conflicts of interest such as hidden fees or payments from third parties.

The DOL also proposed amendments to several current prohibited transaction class exemptions in order to harmonize those exemptions with the proposed “best interest contract” exemption.  In addition, the DOL proposed a prohibited transaction class exemption that would permit advisers to enter into principal transactions in debt securities with ERISA-governed plans or IRAs under conditions similar to those of the “best interest contract” exemption. 

Conclusion.  The DOL has established a 75-day comment period, running until July 6, 2015, for the proposed regulation, the proposed exemptions, and the proposed amendments to existing exemptions.  Within 30 days after the close of the comment period, the DOL will hold a public hearing on its proposals.  The proposed regulation would become effective 60 days after it is published in final form in the Federal Register.  However, the DOL has proposed that compliance with the final regulation would not be required until eight months after publication. 

 

 

 

 


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