November 1, 2010
The United States Labor Department has proposed an important amendment to its regulations defining fiduciary status under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). If the amendment is finalized in its proposed form, it will substantially expand the classes of service providers subject to ERISA’s fiduciary duty and prohibited transaction rules. In addition, the changes to the definition also impact the prohibited transaction rules applicable to fiduciaries of individual retirement arrangements under the Internal Revenue Code.
Under ERISA, a person is a fiduciary to the extent that he or she (i) exercises discretionary authority or control with respect to management of the plan or management or disposition of its assets, (ii) renders investment advice for a fee with respect to any monies or other property of the plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or responsibility with respect to the administration of the plan. If a person is an ERISA fiduciary, he or she is subject to Section 404(a) of ERISA, which imposes various duties on fiduciaries (including the requirements to act prudently and solely in the interests of plan participants and beneficiaries). In addition, section 406(b) of ERISA and, with respect to IRAs, section 4975 of the Internal Revenue Code, prohibit fiduciaries from engaging in self-dealing and transactions that present conflicts of interest.
Regulations in place since 1975 have fairly narrowly interpreted prong (ii) of the definition above, the provision of investment advice by parties that do not have the discretion to actually cause the plan to enter into transactions. For a person to be an ERISA fiduciary under this prong, in addition to receiving a fee:
As outlined below, the Labor Department’s proposal would substantially expand the situations in which a person is considered to offer investment advice under these rules. The Department states that these modifications are necessary due to changes in the market since 1975 (in particular, the development of participant-directed defined contribution plans) and to address problems that the Department has uncovered during audits of employee stock ownership plans and other employee benefit plans.
Under the proposal, a person will be considered a fiduciary by reason of providing investment advice to the plan, a plan fiduciary or plan participants or beneficiaries for a fee if both prongs of the following are satisfied:
However, notwithstanding the discussion above, unless a person has acknowledged that he or she is a fiduciary, the person will not be a fiduciary with respect to the provision of 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 (i) is acting directly or as an agent for another person whose interests are adverse to the interests of the plan, and (ii) has not undertaken to provide impartial investment advice. With respect to defined contribution retirement plans, the following activities would not be considered fiduciary acts:
In addition, the proposed regulations provide that the terms "advice, or appraisal or fairness opinion" do not include the preparation of a general report or statement that merely reflects the value of an investment and is provided for purposes of compliance with the reporting and disclosure requirements of ERISA or the Internal Revenue Code, unless the report or statement covers assets for which there is no generally-recognized market and serves as a basis on which a plan may make distributions to plan participants and beneficiaries.
Due Date for Comments/Proposed Effective Date
Service providers should carefully review the proposed amendments in order to determine whether they may be impacted by the changes. The proposed changes most likely to engender comment include:
Comments are due to the Labor Department on or before January 20, 2011, and it can be expected that many comments will be submitted. The regulations are proposed to be effective 180 days after they are published in final form in the Federal Register.
 Fee is broadly defined to include direct and indirect compensation, such as brokerage fees and commissions. It also includes fees and commissions based on multiple transactions involving different parties.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or
William J. Kilberg – Washington, D.C. (202-955-8573, firstname.lastname@example.org)
Eugene Scalia – Washington, D.C. (202-955-8206, email@example.com)
Stephen W. Fackler – Palo Alto (650-849-5385, firstname.lastname@example.org)
David I. Schiller – Dallas (214-698-3205, email@example.com)
Paul Blankenstein – Washington, D.C. (202-955-8693, firstname.lastname@example.org)
Michael J. Collins – Washington, D.C. (202-887-3551, email@example.com)
Sean C. Feller – Los Angeles (213-229-7579, firstname.lastname@example.org)
Amber Busuttil Mullen – Los Angeles (213-229-7023, email@example.com)
Dina R. Bernstein – Los Angeles (213-229-7206, firstname.lastname@example.org)
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