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Guest Article

Deloitte logo

(From the August 1, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Witnessess Urge DOL to Re-Propose ERISA "Fiduciary" Regulations


Citing the expectation that numerous changes will be made from the proposed regulations, the need for contemporaneous exemptive relief to be issued, and the lack of an adequate cost analysis of the proposed changes, witnesses at a July 26 hearing before the House Education & Workforce Subcommittee on Health, Employment, Labor & Pensions urged that the Department of Labor repropose—instead of release as final—regulations that will change the definition of an ERISA "fiduciary."

In October 2010, the Department of Labor issued proposed regulations to expand the scope of persons who will be considered to be a fiduciary under ERISA because they provide "investment advice for a fee." The proposal adds to the acts that will constitute "investment advice" the providing of appraisals and fairness opinions, and providing recommendations regarding the management of securities or other property. The new definition of fiduciary would include:

  • Appraisal and Fairness Opinions—Persons who receive a fee for providing an appraisal or fairness opinion regarding assets in an individual account plan for which there is no generally recognized market (e.g., certain ESOP appraisers).
  • "Casual" Individual Investment Advice—Persons who receive a fee, directly or indirectly, for providing individualized investment advice or recommendations, even where the advice or recommendation is not provided on a regular basis and the parties do not intend for the advice to serve as the primary basis for plan investment decisions. (However, a person who provides "investment education" as currently allowed under Labor regulations would not become a fiduciary under the new definition.)

In their testimony before the Subcommittee, witnesses cited both procedural and substantive concerns with the proposal. From a procedural view, the key sticking points appeared to be:

  • Inadequate Cost Study—Witnesses contended that the proposed rule lacks the necessary cost benefit analysis—particularly with regard to the impact on IRA owners—mandated under Executive Order 12866, which requires that the benefits of a regulation justify its costs.
  • Contemporaneous Exemptive Relief Needed—While the Labor Department stated it intends to issue further guidance (and perhaps additional class exemptions) to carve out relief for certain transactions that will be affected by the new definition of "fiduciary," witnesses testified that this relief should be contemporaneous with the change in the definition and be proposed for public comment in conjunction with a re-proposal of the regulation.
  • Likelihood of Significant Changes—Almost 300 comments were submitted on the proposed regulation which, according to at least one witness, indicates there will likely be significant changes from the proposal. This underscores the need for re-proposed regulations to be issued, according to the witness, so the public has an opportunity to review the Department's response and make further comments on the changes.
  • SEC Fiduciary Standards—Witnesses observed that the Securities and Exchange Commission (SEC) is expected this fall to propose a uniform fiduciary standard of conduct for brokers and advisors pursuant to the Dodd-Frank Act, which the Assistant Secretary of Labor for the Employee Benefits Security Administration acknowledged will be important for the Department to harmonize with the new definition of ERISA fiduciary. Witnesses asserted that, pending the SEC's formulation of its rule, it makes more sense for the Labor Department to re-propose rather than finalize its new definition.

Beyond the procedural call for a re-proposal of the regulations, the testimony focused on three key substantive concerns:

  • Dodd-Frank Act—A swap dealer who deals with an ERISA plan may be considered an ERISA fiduciary as a result of regulations that are being formulated under the "business conduct standards" of the Dodd-Frank Act by the SEC and the Commodity Futures Trading Commission (CFTC). The Assistant Secretary testified that the Department plans to harmonize its fiduciary regulation with the SEC's and CFTC's proposed business conduct standards for swap dealers. One witness called for the Department of Labor to include in its ERISA fiduciary regulations an explicit provision stating that no action required by reason of the Dodd-Frank Act business conduct standards will make a swap dealer or major swap participant an ERISA fiduciary.
  • "Casual Discussion" Fiduciary—Testimony included support for tightening the current ERISA fiduciary definition, under which advice about investments is not considered to be "investment advice" merely because, for example, the advice was only given once, or because the adviser disavows any understanding that the advice would serve as a primary basis for the investment decision. However, at least one witness advocated changes to the part of the proposal that could turn casual discussions about investments into fiduciary advice. The Assistant Secretary testified that the proposal was not intended to force brokers to eliminate commission-based fee arrangements, or to convert all brokerage IRAs to advisory accounts, and that the Department is considering issuing interpretive guidance as well as additional exemptions to make that clear.
  • ESOP Valuations and Fairness Opinions—The proposed rule would make ESOP valuation and fairness opinion providers into ERISA fiduciaries, reversing the position long held by the Department (i.e., since a 1976 Department advisory opinion which advised that a person who conducts a valuation of privately-held stock held by an ESOP is not functioning as an ERISA fiduciary). Testimony pointed out that the new proposal is in direct conflict with the Uniform Standards of Professional Appraisal Practice and with Code § 401(a)(28), which require that such activities be performed without bias and by an independent appraiser, respectively. As one expert testified, it would be impossible for a valuation provider to give an impartial opinion of the value of privately-held securities and be a fiduciary as required by the proposed regulation, since a fiduciary's duty to act "solely in the interest of the participants and beneficiaries" would contradict the provider's ability to act impartially.

The testimony is available on the Subcommittee's website. The Labor Department also has a webpage devoted to the new definition of ERISA fiduciary. The Department's recent regulatory agenda sets November 2011 as the release date for the final regulations.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2011, Deloitte.


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