The ERISA Litigation Newsletter - November 2011

Editor's Overview

This month, we review the Department of Labor's decision to re-propose a controversial regulation expanding the definition of an ERISA fiduciary. In response to public criticism and Congressional intervention, the DOL announced it will re-propose the regulation originally published one year ago, citing the need for further public comment and economic analysis.

We also present the insights of several of Proskauer's ERISA practice attorneys regarding the following hot topics: high deductible health plan/health savings account re-design and planning for open enrollment; the constitutionality of the individual mandate under the Affordable Care Act, an issue now ripe for Supreme Court review; the Supreme Court's Decision in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011); and reconciling obligations relating to the production of documents under ERISA § 104(b)(4) versus the claims regulation, 29 C.F.R. § 2560.503-1.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.

"Never Mind" – DOL Withdraws Proposed Regulation on the Definition of an ERISA "Fiduciary"1

Contributed by Charles F. Seemann III

In October 2010, the Department of Labor (DOL) issued a proposed regulation setting forth a new, broader interpretation of the statutory definition of a "fiduciary" under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001, et seq. After nearly a year of public criticism and intervention by numerous members of Congress, DOL announced last month that it will withdraw its initial proposal and re-propose a revised regulation in early 2012. In doing so, DOL has pledged to address concerns that its original proposal was overbroad, would raise administrative costs of ERISA plans, and might force many smaller service providers out of business.


Under Section 3(21)(A) of ERISA,2

... a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 1105(c)(1)(B) of this title. In 1975, DOL issued an interpretive regulation elaborating on fiduciary status attained by those who provide "investment advice for a fee."3 This regulation specifies that a person provides fiduciary investment advice only if the person wields direct or indirect discretionary authority over the plan's purchases or sales of securities or other investment property, or, alternatively, if the person satisfies a multi-part test set forth in the regulation. This test provides that an investment adviser is a fiduciary only if the adviser provides investment advice (1) on a regular basis, (2) pursuant to a mutual understanding that (3) the advice will serve as the primary basis for investment decisions, and (4) the advice itself is based on the particular needs of the plan.4

In the thirty-five years since DOL first issued that regulation, the landscape of retirement plans has changed substantially. In 1975, private defined-benefit plans covered over 27 million participants, with assets totaling nearly $186 billion. Defined-contribution plans covered 11 million participants, with assets of $74 billion. By 2008, however, defined-contribution plans covered 67 million participants, while the number of participants in defined-benefit plans had slipped to just 19 million. In addition, the proportion of participant-directed accounts rose dramatically: for example, as of 2008, there were approximately 60 million participants in 401(k) plans, of whom ninety-five percent bore some responsibility for directing the investment of their accounts.5

DOL's Proposal to Expand the Definition of the Term "Fiduciary"

Accompanying the evolution in retirement plan vehicles have been equally dramatic changes in the plan investment services. The types of products and services available to investors have become considerably more numerous and more complex.6 These changes, coupled with the trend towards more defined-contribution plans offering greater participant control, created concerns at DOL over the potential for conflicts-of-interest and self-dealing.7 As one example, DOL posited that financial services firms advising plans on mutual-fund options frequently recommend mutual funds that made revenue-sharing payments to recommending firms.8 Consequently, in October 2010, DOL proposed an amended version of the regulation governing fiduciary investment advice.

The supplementary information accompanying the proposed regulation makes it clear that DOL seeks to depart from its earlier interpretation of ERISA's "investment advice for a fee" provision, and to broaden the circumstances in which fiduciary status is attained. DOL took pains to justify the proposed departure from thirty-five years of practice, characterizing the earlier regulation as narrowing ERISA's application in ways not warranted by the statutory text.9 In addition, DOL decried the original regulation's effects, insofar as it permitted advisers to avoid attribution of ERISA fiduciary status (and therefore ERISA liability) in cases where advice was not provided on a regular basis,10 or was not given pursuant to a mutual understanding that such advice would serve as the primary basis for investment decisions, yet still played a significant role in plan investment decisions.11

The regulation proposed in October 2010 identifies three categories of activity that constitute "advice" for purposes of evaluating fiduciary status: (1) appraisals and fairness opinions; (2) recommendations regarding the advisability of purchasing, holding, or selling investment assets; and (3) recommendations regarding the management of securities or other investment property. Under the proposed regulation, persons who receive a fee for these types of advice are ERISA fiduciaries if they give advice to plans, plan fiduciaries, participants, or beneficiaries and (1) represent themselves as acting as an ERISA fiduciary; (2) already exercise authority as an ERISA fiduciary; (3) are an investment adviser under the Investment Adviser Act of 1940 (1940 Act); or (4) provide advice that, pursuant to an agreement or understanding, "may be considered in connection with" an investment decision.12 The proposed regulation thus purports to modify past practice in several significant ways, including:

Appraisals and Fairness Opinions – The text of the proposed regulation expressly includes "appraisals and fairness opinions." This revision represents an intentional departure from past practice, and expressly seeks to supersede a prior DOL advisory opinion13 indicating that valuation services provided to an employee stock ownership plan (ESOP) in connection with the purchase of closely held employer securities do not qualify as fiduciary investment advice. In contrast to prior practice, the proposed regulation would treat such services as fiduciary advice. Additionally, appraisals and fairness opinions would be treated as fiduciary advice in contexts beyond employer securities, such as the provision of real estate valuation.14

Advice to Participants and Beneficiaries – The proposed regulation also codifies the long-standing DOL view that fiduciary status may flow from providing advice or recommendations to plan participants and beneficiaries. In proposing the new regulation, however, DOL specifically requested comment on whether to exclude advice given to plan participants regarding otherwise-permitted plan distributions from the category of fiduciary investment advice.15

Expansion of Existing "Investment Advice" Status – Under the current regulation, a person giving advice is an ERISA fiduciary only if each part of the multi-step test is satisfied. Under the proposed regulation, however, fiduciary status can be established without examining all of the relationship's characteristics, such as when the adviser purports to be an ERISA fiduciary, or when the adviser already serves as an adviser under the 1940 Act. Thus, the proposed regulation relaxes the existing test for fiduciary adviser status in several ways. First, the advice need not be given on a "regular basis," as previously required; rather, a single instance of advice can support a finding of fiduciary conduct. Second, under the proposed regulation, fiduciary status no longer depends on a mutual understanding that the advice serve as the "primary basis" for an investment decision. Rather, the proposed regulation will treat advice as fiduciary advice where the adviser is aware that the advice may be "considered" in connection with an investment decision.16

Limitations on the Term "Advice" – The proposed regulation sets forth several limitations on fiduciary "advice" as well. For instance, it states that providing "investment education information and materials" does not constitute fiduciary investment advice. The act of providing a plan fiduciary with "general financial information and data" to assist in the selection of plan investment options is also excluded from the definition of "advice," so long as the information is accompanied by a disclosure that the information is not intended to be impartial investment advice.17

Public Resistance

The proposed regulation not only expands the reach of ERISA's fiduciary provisions to previously unaffected arrangements, but also represents a marked departure from thirty-five years of industry practice established in reliance on DOL's existing interpretation. It is not surprising, then, that the proposed regulation has met with stiff resistance...

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