Definition of Fiduciary

The DOL Promulgates the Final Fiduciary Regulation

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By Joseph A. Garofolo

On April 8, 2016, the Department of Labor promulgated a final regulation regarding ERISA’s definition of fiduciary.  The final regulation becomes applicable on April 10, 2017, and is available here.  

There were a number of changes between the proposed regulation published on April 20, 2015 and the final regulation.  The Department provided a chart summarizing changes made in response to the following issues raised in connection with the proposed regulation: the distinction between education and investment advice, the applicability of the regulation to health and welfare arrangements and appraisals, whether “hire me” recommendations are subject to ERISA’s fiduciary standards, the applicability of the Best Interest Contract Exemption (the “BICE”) (a class prohibited transaction exemption) to small plans and all asset classes, disclosure requirements under the BICE, the applicability of the contract requirement to ERISA plans and arrangements not subject to ERISA (including individual retirement accounts “IRAs”), the application of the regulation to call centers, web disclosure and data retention requirements, recommendations relating to proprietary products, lifetime income products, and level fee arrangements, fee-based account conversions, bias toward products with low fees, grandfather relief, and concerns regarding regulation implementation.  The Department’s chart is available here.

Finally,  on April 8, 2016, the Department promulgated the following exemptions relating to prohibited transactions under ERISA and the Internal Revenue Code of 1986, as amended: i) the BICE (the Best Interest Contract Exemption); ii) Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs; iii) Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks; iv) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers; Amendment to and Partial Revocation of PTE 75-1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks; v)
Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1; and vi) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters.  These documents can be accessed here.

While the retirement plan community continues to analyze the final regulation and its related exemptions, it is safe to say that many investment advisers and participants will be affected by the significant changes made to the Department’s interpretation of “investment advice” as that phrase is used in ERISA § 3(21)(A)(ii).  

Montanile May Be a Mixed Result for Plans and Participants

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By Joseph A. Garofolo

At first glance, the Supreme Court’s recent decision interpreting “appropriate equitable relief” as used in ERISA § 502(a)(3) is a victory for health plan participants.  But upon closer scrutiny, Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 2016 U.S. LEXIS 843 (2016), is a mixed result for participants and plans.

The plan at issue paid $121,044.02 in medical expenses for a participant who was injured in a car accident caused by a drunk driver.  The participant subsequently settled his claim against the drunk driver for $500,000.  The plan contained a subrogation clause that provided the following: “[A]ny amounts [that a participant] recover[s] from another party by award, judgment, settlement or otherwise . . . will promptly be applied first to reimburse the Plan in full for benefits advanced by the Plan . . . and without reduction for attorneys’ fees, costs, expenses or damages claimed by the covered person.”  Id. at *7 (internal quotations omitted).   The plan further stated that “[a]mounts that have been recovered by a [participant] from another party are assets of the Plan . . . and are not distributable to any person or entity without the Plan’s written release of its subrogation interest.”  Id. at *6-*7.

After the participant and the plan could not reach agreement regarding the plan’s entitlement to the funds recovered by the participant, the participant’s attorney distributed $240,000 (the amount remaining after payment of attorney’s fees and costs).  The participant subsequently spent some or all of the $240,000 and the board of trustees asserted a claim under ERISA § 502(a)(3) against the participant to enforce the plan’s subrogation provision.

The Supreme Court reversed the Eleventh Circuit—which had reasoned that the board of trustees could enforce the subrogation provision—and held that “when a participant dissipates the whole settlement on nontraceable items, the fiduciary cannot bring a suit to attach the participant’s general assets under § 502(a)(3) because the suit is not one for ‘appropriate equitable relief.’” Id. at *6.  As it had in previous decisions, the Court looked to “standard equity treatises.”  Id. at *14.  The Court explained the following:

[The standard equity treatises] make clear that a plaintiff could ordinarily enforce an equitable lien only against specifically identified funds that remain in the defendant’s possession or against traceable items that the defendant purchased with the funds (e.g., identifiable property like a car). A defendant’s expenditure of the entire identifiable fund on nontraceable items (like food or travel) destroys an equitable lien.

Id.

While the facts of Montanile are sympathetic to the participant, in other instances, the Court’s reliance on standard equity treatises will likely continue to create impediments for participants seeking to obtain relief against nonfiduciaries pursuant to ERISA § 502(a)(3).  In her dissent, Justice Ginsburg referred to the Court’s holding as “bizarre” and reiterated her opinion expressed in another dissent that “the Court [has] erred profoundly . . . by reading the work product of a Congress sitting in 1974 as unravel[ling] forty years of fusion of law and equity, solely by employing the benign sounding word ‘equitable’ when authorizing ‘appropriate equitable relief.’”  Id. at *25 (some internal quotations omitted).  Notably, in her concurrence in Aetna Health Inc. v. Davila, 542 U.S. 200, 223-24 (2004), Justice Ginsburg accurately interpreted the scope of relief available against fiduciaries under ERISA § 502(a)(3) years before the Supreme Court confirmed such interpretation in CIGNA Corp. v. Amara, 563 U.S. 421 (2011).  It remains to be seen whether the Court will come around to her interpretation of ERISA § 502(a)(3) as it pertains to nonfiduciaries.

Moreover, in addition to bringing suit under ERISA § 502(a)(3) before a participant dissipates funds potentially subject to subrogation, a trustee may be able to recover funds from a participant under the theory that such funds constitute plan assets when the participant receives the funds.  The Eleventh Circuit has applied a documentary test when determining whether particular funds constitute plan assets.  See ITPE Pension Fund v. Hall, 334 F.3d 1011, 1013 (11th Cir. 2003).  The language of the plan in Montanile appears to support an argument that the participant was handling plan assets.  The theory would be that the participant is exercising authority or control over the management or disposition of plan assets and is, therefore, a fiduciary within the meaning of ERISA § 3(21)(A)(i).  A suit could then be asserted against the participant/fiduciary on behalf of the plan pursuant to ERISA § 502(a)(2).

Accordingly, there may be more than meets the eye with regard to issues implicated by Montanile.

 

 

 

 

 

 

 

 

 

 

 

 

Designation of a Named Fiduciary

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By Joseph A. Garofolo

ERISA §§ 402(a)(1) and (2) require a plan to designate, or provide a procedure for designating, one or more named fiduciaries “who jointly or severally shall have authority to control and manage the operation and administration of the plan.”  The designation of a named fiduciary or fiduciaries can become important in 401(k) plan fiduciary breach and other ERISA litigation because it effectively forecloses the person or persons so designated from arguing that they are not fiduciaries with attendant duties.

But how specific does the designation of a named fiduciary have to be?

Fortunately, the Department of Labor provided early interpretive guidance, now codified in 29 C.F.R. § 2509.75-5, relating to this issue.  This guidance, issued in 1975, answers three basic questions relating to the designation of named fiduciaries.

First, the Department indicated yes in response to the question of whether the designation of a committee by position or by individual satisfies the requirements of ERISA § 402(a).

Second, with regard to a collectively bargained plan, the Department explained that ERISA § 402(a) is satisfied if a “joint board is clearly identified as the entity which has authority to control and manage the operation and administration of the plan.”  29 C.F.R. § 2509.75-5, FR-2.  The Department continued that each member of the joint board would be a named fiduciary under such a situation.

And, third, the Department confirmed that a plan may name a corporation/plan sponsor as the named fiduciary.  The Department indicated that the plan instrument designating the corporation “should provide for designation by the corporation of specified individuals or other persons to carry out specified fiduciary responsibilities under the plan, in accordance with section 405(c)(1)(B) of the Act.”  29 C.F.R. § 2509.75-5, FR-3.

Early Department of Labor interpretative guidance is often a good place to start when seeking clarification regarding fundamental fiduciary responsibilities.   

 

 

 

Latest Developments Regarding the Proposed Fiduciary Regulation

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By Joseph A. Garofolo

March has already delivered several noteworthy developments regarding the proposed fiduciary rule.  By way of background, the Department of Labor sent a proposed rule regarding the definition of fiduciary to the Office of Management and Budget (“OMB”) on February 23, 2015.  Although the proposed rule has not been made public yet, the Department provided a glimpse of what it might look like in frequently asked questions available on the Department’s website.  For example, the Department indicates that it is seeking “a balanced approach that . . . ensures that [investment] advisers provide advice in their client’s best interest, and also minimizes any potential disruptions to all the good advice in the market.”  Further, the Department states that the proposed rule “will not prohibit common compensation practices, such as commissions and revenue sharing[,]” and will include proposed exemptions to restrictions under ERISA and the Internal Revenue Code (the “Code”).  Review by OMB is a first step and will be followed by the notice-and-comment process under the Administrative Procedure Act.

As to the new developments, first, nine Republican members of the U.S. Senate Committee on Health, Education, Labor, and Pensions signed a March 10, 2015 letter to the OMB Director generally expressing concern that the proposed rule will be similar to the 2010 proposed rule that was withdrawn by the Department in 2011.  The letter requests that OMB consider 11 specific concerns of the Senators.  Most of the concerns revolve around perceived failures of the Department to coordinate with the Securities and Exchange Commission (“SEC”) and other agencies and the possibility that the proposed rule could increase the cost of investment-related services or reduce the availability of such services to ERISA plans and individual retirement accounts (“IRAs”).  The letter is available here.

Second, Secretary of Labor Thomas Perez was questioned about the proposed fiduciary rule during a March 17, 2015 budget hearing before the U.S. House of Representatives Committee on Appropriations Subcommittee on Labor, Health and Human Services, Education and Related Agencies.  Republican Hal Rogers, the Chairman of the Committee on Appropriations, asked Secretary Perez “how ERISA gives DOL jurisdiction over an individual’s relationship with a personal investment advisor.”  In response, Secretary Perez briefly explained the roles of the Department and the SEC and referenced a letter that he had sent the previous day responding to an inquiry from the Chairman of the House Committee on Education and the Workforce.  Secretary Perez also stated that “the law gives DOL the authority to define a fiduciary under the tax laws in the same way as the ERISA definition.”  He further indicated that he has been involved in eight or nine meetings with SEC Chairwoman Mary Jo White relating to the proposed fiduciary rule.  A video of the hearing currently is available here (the dialogue between Chairman Rogers and Secretary Perez starts at approximately 1:21:52).

The discussion during the budget hearing highlights the potential scope of the proposed fiduciary rule and the impact that it could have not only on 401(k) and other employer-sponsored plans, but also IRAs.  The 2010 proposed regulation would have amended the definition of fiduciary for purposes of ERISA and the excise tax on prohibited transactions under Code § 4975.  Code § 4975 applies to IRAs and contains a definition of fiduciary parallel to the one found in ERISA § 3(21)(A).

Finally, several sources, including PLANSPONSOR and the American Retirement Association, are reporting that on March 17, 2015, Chairwoman White stated that the SEC will “implement a uniform fiduciary duty for broker-dealers and investment advisors where the standard is to act in the best interest of the investor.”

While the extent of further interaction between the Department of Labor and the SEC and the ultimate fate of the proposed fiduciary rule remain uncertain, it appears quite likely that the discourse surrounding the proposed rule will continue to be politically charged.