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News January 10, 2011 Issue

DOL Extends Comment Period For Definition of Pension Plan "Fiduciary"

Advisers have a little more time to weigh in on just who will be considered an ERISA fiduciary by reason of giving advice to an employee benefit plan or the planís participants.

The comment period on the rule proposal, originally slated to close on January 20, has been extended through February 3. The Department of Laborís Employee Benefits Security Administration (EBSA) will hold a hearing on the proposal scheduled for March 1 that will extend, if necessary, to March 2. After that hearing, the record will be held open for a "reasonable period of time" for commenters to address any additional issues that may arise during the hearing. "For this process to work efficiently, however, all comments [on the rule proposal] must be submitted no later than February 3," said EBSA assistant secretary Phyllis Borzi.

In late October, EBSA proposed amending ERISA to revise "a thirty-five year old rule that may inappropriately limit the types of investment advice relationships that give rise to fiduciary duties."

Fundamental to ERISA (Employee Retirement Income Security Act) law is that it makes certain service providers to a plan, its participants, or its beneficiaries accountable as fiduciaries. Fiduciaries are personally liable for losses sustained by a plan that result from a violation of ERISA rules.

Shortly after ERISA was enacted in 1974, DOL promulgated a regulation (3-21(c)) that significantly narrowed the definition of fiduciary. Plan advisers with discretionary authority over plan assets were clearly fiduciaries. For advisers without discretionary authority, the regulation established a five-part test that DOL must show before a person is treated as a fiduciary by reason of rendering investment advice.

To be a fiduciary, an adviser without discretion over plan assets must be shown to:

(1) Render advice to the plan as to the value of securities or other property, or make recommendations regarding investing in, purchasing or selling securities or other property;

(2) On a regular basis;

(3) Pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that

(4) The advice will serve as a primary basis for investment decisions with respect to plan assets, and that

(5) The advice will be individualized based on the particular needs of the plan.

DOL said in the proposal that it has found itself repeatedly in the frustrating position of having to "focus on establishing each of the elements of the 5-part test rather than on the precise misconduct at issue."

Also, said DOL, the times have changed. In the 35 years since the regulation was established, the financial marketplace has changed significantly. There are a wider variety of products and services available to plans, and they are more complex. The retirement plan community has shifted from a defined benefits focus to a defined contribution focus.

Changes in plan investment practices and relationships between advisers and their plan clients necessitate a re-examination of the types of advisory relationships that should give rise to fiduciary duties, said DOL. DOL noted a "variety" of circumstances outside the confines of the current regulation "under which plan fiduciaries seek out impartial assistance and expertise of persons such as consultants, advisers and appraisers to advise them on investment-related matters."

Plan fiduciaries expect impartiality and an ability to rely on the expertise of persons and entities that may operate with conflicts of interest that they need not disclose, said DOL. Such advisers, appraisers and other professionals outside the definition of fiduciary have limited liability under ERISA for the advice they provide.

DOLís solution Ė update the definition of what constitutes "investment advice," and bring more advisers under ERISAís standards of fiduciary conduct. The five-part test, along with all of current paragraph (c)(1), would be scrapped in favor of a broader, simpler definition. Some elements of the test would be retained in other areas of the proposal, but the requirement that advice be made on a continuous basis would be completely removed, as would any requirement of a mutual agreement between an adviser and any plan fiduciary that the advice will serve as the primary basis for plan investment decisions.

Advice rendered to a plan would include directly or indirectly compensated "advice, appraisals or fairness opinions concerning the value of securities or other property; recommendations as to the advisability of investing in, purchasing, holding or selling securities or other property, or advice or recommendations as to the management of securities or other property."

The proposal seeks in part to capture relationships through affiliates and relationships that involve no direct compensation, like the securities valuation for a captive employee stock option plan (ESOP). The proposal noted that incorrect valuation of employer securities was a common problem identified by DOL in its ESOP national enforcement project. The rule proposal specifically mentions the goal of bringing ESOP appraisers under a fiduciary mantle. Application of the proposal to such appraisers, said DOL, "may directly or indirectly address these issues, and align the duties of persons who provide these opinions with those of fiduciaries who rely on them."

The proposal also makes clear DOLís "long-standing interpretation of the current regulation" that fiduciary status may result from the provision of advice or recommendations not only to a plan fiduciary, but also to a plan participant or beneficiary.

The current rule, said Borzi, "simply is not working." Dramatic marketplace advances, coupled with DOL investigative and litigation enforcement activities over the past three decades, have made it "perfectly clear that these arcane rules really interfere with the ability of the Department and fiduciaries to understand where the lines are being drawn, and to protect beneficiaries and participants," she said.

So mark your calendars for March 1, and keep those cards and letters coming. The DOLís mailbox on this matter is open through February 3.