November 21, 2017

November 21, 2017

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November 20, 2017

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DOL Proposes to Revise Definition of “Fiduciary” Under ERISA

On April 20, the US Department of Labor (DOL) published a proposal to revise portions of the definition of a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA) in the Federal Register. Following is a summary of the proposed new rules. Please note that parts of the proposal are very detailed, and that this is only a summary.

ERISA’s definition of “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 has come to believe 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 plans (plans) and individual retirement accounts (IRAs) concerning the investment of plan assets. The new proposed definition provides that a person is a fiduciary with respect to a plan or IRA if the person gives advice (1) pursuant to an agreement, arrangement or understanding, (2) the advice is individualized or specifically directed for use in making investment decisions for a plan or IRA concerning securities or other property, (3) the advice is provided for a fee or other compensation and (4) the advice falls into one of four categories: (a) recommendations on acquiring, holding, disposing or exchanging securities or other property (including distributions from a plan or IRA), (b) recommendations on managing securities or other property (including distributions from a plan or IRA), (c) 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 (4) recommendations of a person to give the plan or IRA advice described in (a), (b) or (c) for a fee or other compensation.

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

Certain classes of persons who provide advice described in the proposed definition are excluded from the definition of a fiduciary: (1) 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, (2) “investment platform providers” that put together 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, (3) persons who provide certain financial reports and valuations to plans and collective investment funds, and (4) persons providing “investment education” to plan participants. There are also carve-outs, subject to strict conditions  for counterparties that have provided advice of a type described in the proposed regulation that is: (1) given to a plan with under 100 participants where a plan fiduciary acknowledges that it is not relying on the counterparty to provide impartial advice or to act as a fiduciary, the counterparty discloses its financial interest in the transaction (e.g., that it will receive a commission) and the counterparty is not directly compensated by the plan or the plan’s fiduciary, (2) advice by the counterparty to an independent fiduciary with at least $100 million in employee plan assets under management, where the counterparty acknowledges that it is not providing impartial advice or acting as a fiduciary, and the counterparty is not directly compensated by the plan or the plan’s fiduciary and (3) advice from a regulated swap dealer to an independent plan fiduciary on potential swap transactions, where the fiduciary acknowledges in writing that it is not relying on the dealer’s recommendations.

The DOL also proposed a prohibited transaction class exemption for a “best interest contract” that would allow advisers such as brokers and insurance agents to give investment advice (as defined in the proposed regulation) to a plan or IRA client and receive commissions or other compensation resulting from that advice, provided that they comply with strict requirements, including (1) a commitment to provide advice in the client’s best interest, (2) adopting and following policies and procedures designed to identify and mitigate conflicts of interest and (3) disclosure (including disclosure on a webpage) on 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 them with the proposed “best interest contract” exemption, and a proposed prohibited transaction class exemption that would permit advisers to enter into principal transactions in debt securities with plans or IRAs under conditions similar to those of the “best interest contract” exemption.

This is an ambitious initiative by the DOL that already has drawn criticism and opposition. The comment period on the proposals runs until July 6. After the comment period has closed, the DOL stated that there also will be a public hearing on the comments and the DOL indicated that it intends to reopen the comment period then. Any results from this initiative likely will not appear for some time.

©2017 Katten Muchin Rosenman LLP

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About this Author

 Gary W. Howell, Katten Muchin Law Firm, Financial Institutions Lawyer
Partner

Gary W. Howell focuses his practice in Employee Retirement Income Security Act (ERISA) fiduciary matters, tax-qualified retirement plans and ERISA litigation. A significant portion of Gary’s practice involves advising plans and investment managers on compliance with ERISA in managing plan assets. In this area, he provides advice on fee structures, fiduciary status, identification of plan assets, prohibited transactions and fiduciary duty. Gary has obtained prohibited transaction exemptions and advisory opinions under ERISA from the US Department of Labor. He works closely with other...

312-902-5610
Christopher K. Buch, Labor Law Attorney, Katten Muchin Law Firm
Associate

Christopher Buch’s practice encompasses a wide range of employee benefits matters: qualified plans including employee stock ownership plans; non-qualified plans and Section 409A compliance; executive compensation; Health Insurance Portability and Accountability Act (HIPAA) compliance; health and welfare benefits; fringe benefits; ERISA matters including fiduciary advice and prohibited transactions; and employee benefits issues that arise in corporate transactions.

Prior to joining the firm, Christopher worked in the employee benefits and executive compensation practice of a national public accounting firm, where he assisted clients with a diverse set of tax and benefits-related issues, including executive compensation and golden parachute payments, qualified plans, non-qualified plans, health and welfare plans, health care reform, audit support, and merger and acquisition due diligence to determine transactional human capital costs.

312-902-5509