Proposed DOL Regulations Expand Meaning of “Fiduciary”

Proposed regulations published last week by the Employee Benefits Security Administration (EBSA), part of the DOL, would modify the definition of “fiduciary” under ERISA by expanding the meaning of the term “investment advice.” The DOL explained that the definition of “investment advice” – which has remained unchanged since it was first promulgated in 1975 – is unduly narrow in light of the changes in the retirement plan community and the financial services market over the past 35 years. By describing more broadly the circumstances under which a person may be considered a “fiduciary” by reason of giving investment advice for a fee, the DOL hopes to provide greater protection to plan fiduciaries, participants, and beneficiaries, and also improve the quality of the investment advisory services rendered in connection with retirement plans.

The new proposed regulations modify the definition of “”iduciary” at 29 CFR 2510.3-21(c) both by expanding the kinds of activities that would be considered investment advice and by eliminating key conditions that operated to allow providers of investment advice to escape fiduciary status. The changes made by the proposed regulations include the following:

• While preserving the traditional activities that have always constituted investment advice (e.g., recommendations regarding investment selection and portfolio management), the regulations specify that the provision of appraisals and fairness opinions regarding securities or other property is investment advice.
• The regulations expressly adopt the long standing view of the DOL, reflected in agency guidance, that advice to participants and beneficiaries can be considered investment advice (no different from advice to a plan or plan fiduciaries).
• The new rule departs from the old rule in that it no longer requires the advice to be provided on a “regular basis.” In explaining that change the DOL noted that the significance of advice on a plan fiduciary’s decisions is not diminished merely because it is rendered only once.
• The regulations clarify that the receipt of a fee, which remains an important element of the rule, includes any kind of fee, whether paid directly or indirectly (through commissions, payments from affiliates, or otherwise).
• Finally, the regulations expressly preserve the important carve out for “investment education” (generally described in 29 CFR 2509.96-1). Therefore, the provision of plan information, general financial and investment information, asset allocation models, and interactive materials will not be considered investment advice.

The DOL expects that these new rules will discourage harmful conflicts of interest, improve service value, and enhance the agency’s ability to redress abuses and enforce fiduciary requirements efficiently. The comment period for the proposed regulations ends January 20, 2011.