U.S. Labor Department Proposes to Expand ERISA “Fiduciary” Coverage of Providers of Investment-Related Services to Employee Benefit Plans and IRAs

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: 

  • The person must 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;  
  • Such provision of services must be 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 
  • The advice must be individualized based on the particular needs of the plan. 

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. 

The Proposal 

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[1] if both prongs of the following are satisfied: 

  • First, the person:
    • Provides advice, or an appraisal or fairness opinion, concerning the value of securities or other property; 
    • Makes recommendations as to the advisability of investing in, purchasing, holding, or selling securities or other property; or 
    • Provides advice or makes recommendations as to the management of securities or other property (which would include, for example, recommendations as to the exercise of proxy rights). 
  • Second, the person:
    • Represents or acknowledges that it is acting as fiduciary with respect to providing such advice or recommendations;  
    • Otherwise is a fiduciary with respect to the plan under the alternative definitions of fiduciary outlined in the first paragraph under "Background" above;  
    • Is an investment adviser within the meaning of section 202(a)(11) of the Investment Advisers Act of 1940; or 
    • Provides advice or makes recommendations described above pursuant to an agreement, arrangement or understanding that such advice may be considered in connection with making investment or management decisions with respect to plan assets, and will be individualized to the needs of the plan or a plan participant or beneficiary. 

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: 

  • Provision of investment education and materials as described in prior Labor Department guidance;  
  • Marketing or making available (e.g., through a platform or similar mechanism), without regard to the individualized needs of the plan or its participants, securities or other property that a plan fiduciary may select as investment alternatives into which plan participants may direct the investment of their accounts, if the person making the platform available discloses in writing to the plan fiduciary that the person is not undertaking to provide impartial investment advice; and 
  • Where the person otherwise is a fiduciary, providing general financial information and data to assist a plan fiduciary’s selection or monitoring of securities or other property as plan investment alternatives, if the person providing such information or data discloses in writing to the plan fiduciary that the person is not undertaking to provide impartial investment advice. 

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: 

  • The extension of fiduciary status to providers of appraisal services and fairness opinions. 
  • The impact of the proposed rules on broker-dealers that also provide investment advice to clients, including on commission arrangements and the ability of broker-dealers to trade on a principal basis with client plans and to sell proprietary products.  It is unclear at this time how the Labor Department and Securities and Exchange Commission will reconcile any conflicts between these proposals and the uniform standard of care initiative under the Dodd-Frank Act. 
  • The possible impact of the proposed rules on the ability of proxy advisory service firms to provide other corporate governance services. 
  • The fact that advisers who provide advice on a one-time or an ad hoc basis (and not on a "regular basis") will clearly be fiduciaries, unlike under current law.  
  • The possibility that financial planners who provide generalized advice will be considered ERISA fiduciaries. 

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. 

[1]  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 LLP 

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, [email protected])
Eugene Scalia – Washington, D.C. (202-955-8206, [email protected])
Stephen W. Fackler – Palo Alto (650-849-5385, [email protected])
David I. Schiller – Dallas (214-698-3205, [email protected])
Paul Blankenstein  – Washington, D.C. (202-955-8693, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (213-229-7579, [email protected])
Amber Busuttil Mullen – Los Angeles (213-229-7023, [email protected])
Dina R. Bernstein – Los Angeles (213-229-7206, [email protected])

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