September 28, 2011
Practice Groups:
Investment
Management
ERISA Fiduciary
DOL to “Repropose” Controversial
Regulation Changing the Definitions of
Fiduciary and Investment Advice under
ERISA
On September 19, 2011, the U.S. Department of Labor (“DOL”) announced that it would revise and
repropose its controversial proposal to redefine “investment advice” under ERISA and the prohibited
transaction provisions of the Internal Revenue Code (“Code”) (see our 2010 Alert “DOL Expands
Definition of Fiduciary and Investment Advice.”
The DOL’s proposal would have radically changed an existing DOL regulation that sets out a longstanding and widely accepted method of determining when a person is providing investment advice
for purposes of the definition of “fiduciary” under ERISA. As we noted in our prior Alert, the DOL’s
proposed regulation would likely have caused many financial institutions and other service providers,
such as appraisers and other valuation firms and broker-dealers (“financial service providers”), to
become ERISA fiduciaries and, as such, become subject to the fiduciary duties, prohibited transaction
rules, and potential fiduciary liability imposed by ERISA. We also noted that the DOL’s proposal
would have changed the definition of “fiduciary” for purposes of the prohibited transaction provisions
of section 4975 of the Code, affecting service providers to individual retirement accounts and certain
other plans not subject to ERISA.
The DOL’s proposal was controversial and subject to severe criticism, particularly from financial
service providers. The criticism was comprehensive, and asserted, among other things, that the
DOL’s proposal was unnecessary or overly broad, that it could subject sales activity to fiduciary
standards, that it should not apply to IRAs, that it would adversely affect the ability of plans and
service providers to rely on existing ERISA exemptions and that the DOL’s economic analysis was
flawed. Despite this criticism, the DOL repeatedly insisted that it would go ahead with its proposal.
Ultimately, however, even persons sympathetic to the DOL’s efforts became convinced that the DOL
should revise its proposal.
Perhaps most notably, Rep. Barney Frank (D-Mass.), ranking member of the House Financial Services
Committee, wrote to DOL Secretary Hilda Solis on September 15, 2011, to “strongly urge” the DOL
to withdraw and repropose the regulation in coordination with the SEC and CFTC. Frank noted that
although ERISA rules may need to be updated, “it is important to do this in a way that does not have
adverse effects on the choices available to consumers, municipalities, and pension plans, among
others.”
In announcing its intention to repropose the rule, the DOL noted that it anticipates revising provisions
of the proposal including clarifying both the scope of the rule and its application to appraisals and
arm’s-length commercial transactions, such as swap transactions. The DOL also stated that it would
address concerns about how the regulation would apply to existing fee structures and DOL
exemptions, suggesting that the DOL might issue new exemptions in connection with its reproposal.
The DOL said that it expects to repropose the regulation in early 2012.
DOL to “Repropose” Controversial Regulation Changing
the Definitions of Fiduciary and Investment Advice under
ERISA
Please contact any member of the ERISA Fiduciary Group listed below if you have further questions.
ERISA Fiduciary Group:
Catherine S. Bardsley
catherine.bardsley@klgates.com
+1.202.778.9289
Mark J. Duggan
mark.duggan@klgates.com
+1.617.261.3156
John J. Nestico
john.nestico@klgates.com
+1.704.331.7529
David E. Pickle
david.pickle@klgates.com
+1.202.778.9887
William A. Schmidt
william.schmidt@klgates.com
+1.202.778.9373
William P. Wade
william.wade@klgates.com
+1.310.552.5071
Kristina M. Zanotti
kristina.zanotti@klgates.com
+1.202.778.9171
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