New Fiduciary Definition
Rev. 11/12/10; E-mail Alert 2010-17

Proposed Regulation on ERISA Definition of Fiduciary; Part One

On October 22, 2010, the DOL issued proposed regulations that would expand the definition of persons who are considered fiduciaries under §3(21)(A)(ii) of ERISA.  This section of ERISA specifically relates to individuals who become a fiduciary by providing investment advice for a fee.  The regulation defining fiduciary status has not been updated since originally issued in 1975 when ERISA covered mostly defined benefit plans and employer directed defined contribution plans. The DOL recognized that changes are necessary to broaden the definition to accommodate the change to participant directed individual account plans as well as for changes in the financial industry and the expectations of plan officials and participants for protection against certain conflicts in interest and abuse.  Public comment on the proposed regulations can be made up until January 20, 2011.  The regulations would become effective 180 days after being published as final regulations in the Federal Register.

Background
Under current rules, a five-part test is applied under §3(21)(A)(ii) to determine when a person is considered a fiduciary as a result of rendering investment advice for a fee or other compensation.  Individuals must meet every part of the five-part test to be determined to have a fiduciary status under ERISA.

An individual who gives investment advice will be considered a fiduciary if they render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property:

• On a regular basis
• Pursuant to a mutual agreement, arrangement, or understanding, with the plan or a plan fiduciary; that
• The advice will serve as a primary basis for investment decisions with respect to plan assets; and that
• The advice will be individualized based on the particular needs of the plan

Proposed Rule
Under the news rules an individual will be considered a fiduciary if they render, directly or indirectly, any of the following services to a retirement plan, plan fiduciary, plan participant or a beneficiary for a fee or other compensation:

• Provides advice or an appraisal of fairness regarding the value of securities or other property,
• Makes a recommendation as to the advisability of investing in, purchasing, holding or selling securities or other property, or
• Provides advice or makes recommendations regarding the management of securities or other property

Such individual will attain fiduciary status where he or she:

• Formally represents or acknowledges that he or she is acting as a fiduciary under ERISA,
• Exercises discretionary authority or control regarding plan management, management or disposition of plan assets, or plan administration,
• Is a registered investment advisor as defined by the Investment Advisors Act of 1940, or
• Provides individualized advice or recommendations to a plan, a plan fiduciary, a plan participant or a beneficiary concerning the value of securities or other property pursuant to a written agreement (or unwritten understanding or arrangement) that such advice may be considered in making plan asset investment or management decisions.

The most notable omissions from the existing 5-part test are that such advice no longer needs to be provided on a regular basis nor does it have to be the primary basis for making investment decisions.  The removal of those conditions may result in certain individuals who previously did not meet the 5-part test to meet the definition of a fiduciary. Further, the regulation would extend fiduciary status to plan-specific appraisals and fairness opinions, also broadening the exposure to a finding of fiduciary status.

Exceptions to the rule
Although the proposed regulations would widen the fiduciary definition, the proposal also contains several key exemptions:

Providing Investment Education

• Individuals who provide investment education (as defined by DOL regulation 2509.96-1(d)) will not be deemed to be providing investment advice.

Example: An education specialist meets with a group of newly eligible participants to distribute information that explains the benefits of plan participation, increasing contributions, and the impact pre-retirement withdrawals will have on retirement income.

Distributing this type of plan information would not cause the investment education specialist to be considered a fiduciary.

Non-Impartial Advice

• A person who is a purchaser or seller of a security or other property whose interests are adverse to the interests of the plan or its participants will not be considered to be providing investment advice if the recipient is made aware of the fact the individual is not providing impartial investment advice.

Providing General Financial Information

• Individuals who provide general financial information and data to assist a plan fiduciary’s selection or monitoring of securities are exempt as long as the individual discloses in writing to the fiduciary they are not providing impartial investment advice.

General Appraisals

• The preparation of general reports or statements to reflect the value of plan investments will not create fiduciary status unless the report “involves assets for which there is not a generally recognized market and serves as a basis on which a plan may make distributions to plan participants and beneficiaries” (hard-to-value assets).

Definition of Fee
The proposed rules also include the definition of “Fee or other compensation” as:

any fee or compensation for the advice received by the person (or by an affiliate) 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 compensation includes, for example, brokerage, mutual fund sales, and insurance sales commissions. It includes fees and commissions based on multiple transactions involving different parties.