A proposed EBSA rule doesn't appear to be much better than the current rule in helping rein in the bad conduct it's aimed at curbing.
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This month's column is a continuation of last month's column, which concerned a new rule proposed by the Employee Benefits Security Administration (EBSA). That rule would revamp the EBSA's current 35-year-old five-part rule (set forth in relevant part in last month's column) that defines "investment advice" given by investment advisors to their retirement plan clients. Under the current rule, an investment advisor is deemed to be a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA), but only when all five parts of the rule are satisfied for any given instance of advice.
The effect of the EBSA's proposed rule is to change what constitutes "investment advice" under ERISA section 3(21)(A)(ii) ("...a person is a fiduciary with respect to a plan to the extent ... (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.") (my emphasis). That, in turn, will change the definition of a "fiduciary" thereunder so that (purportedly) the fiduciary moniker can be pinned on a greater number of advisors.
In proposing to jettison the current five-part rule, the EBSA would replace it with a new rule that defines a "fiduciary" as anyone who provides "investment advice," which is defined as either (1) "recommendations on investing in, purchasing, holding, or selling securities;" or (2) "recommendations as to the management of securities or other property."
If either kind of advice is present, then the individual must also meet one of the following conditions to be considered a fiduciary providing investment advice: (a) the individual represents to a plan, participant or beneficiary that it is acting as an ERISA fiduciary; or (b) it is already an ERISA fiduciary to the plan by virtue of having any control over the management or disposition of plan assets (under ERISA section 3(21)(A)(i)) or by having discretionary authority over the administration of the plan (under ERISA section 3(21)(A)(iii); or (c) it is an investment advisor (RIA) under the Investment Advisers Act of 1940; or (d) it provides the advice pursuant to an agreement or understanding that the advice may be considered in connection with investment or management decisions with respect to retirement plan assets and will be individualized to the needs of the plan.
The Road to Hell Is Paved with Good Intentions
It is said that the current rule has allowed certain service providers over the years to offer advice without being subject to ERISA's fiduciary standards. That is true enough, and certainly the all-important motivation to change the current rule. The problem is that the proposed rule doesn't appear to be much better than the current rule in helping rein in the bad conduct it's aimed at curbing.
Suppose that a broker provides either one of the two proposed types of investment advice. But if (1) the broker represents that it isn't an ERISA fiduciary, (2) the broker isn't an ERISA fiduciary under either ERISA sections 3(21)(A)(i) or 3(21)(A)(iii), (3) the broker isn't an RIA, and (4) the broker doesn't provide individualized advice that's understood to be in connection with investment or management decisions with respect to plan assets, then it won't be considered as providing ERISA-defined "investment advice" and therefore won't be an ERISA-defined "fiduciary."
Given the preceding set of suppositions, it would appear that the broker couldn't do any business with a retirement plan. But appearances, as is said, can often be deceiving. In fact, the broker could continue on its merry way and offer retirement plans the same kind of "help" (i.e., recommendations on investing in, purchasing, holding, or selling securities; or recommendations as to the management of securities or other property) that the proposed rule was designed to eliminate, or at least mitigate.
This possibility is brought to brokers courtesy of an exemption to the proposed rule known as the seller's exemption (a second exemption is the platform provider's exemption). Here's a way of looking at the effect of this exemption: It's so gaping that every Sherman tank in General George Patton's Third Army could rumble through it without a scratch. Another way: The exemption essentially swallows the proposed rule. To wit, suppose that a broker provides either one of the two proposed types of advice: All it would need to then do would be to drive its tank through the seller's exemption, which recognizes that certain activities should not result in fiduciary status. One such activity would be the broker representing itself not to be an ERISA fiduciary, and also making it clear to the plan that it was acting for a purchaser/seller on the opposite side of the transaction from the plan rather than providing impartial advice to the plan.