Three elements must be present in order for the Rule to apply to an advisor communicating with a plan participant or an IRA owner.
W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.
This month's column constitutes Part 3 of my series on understanding the Conflict of Interest Rule (Rule), which was promulgated by the U.S. Department of Labor (DOL) on April 8. To--hopefully--help gain a better understanding of this very long, quite complicated Rule, let's first have a look at what I call "Fiduciary Central" of the Employee Retirement Income Security Act of 1974 (ERISA).
Fiduciary Central of ERISA
ERISA section 3(21)--Fiduciary Central of ERISA--defines the three "kinds" of fiduciaries to plans:
The first kind (pursuant to ERISA section 3(21)(A)(i)) is a fiduciary that exercises any discretionary authority or discretionary control with respect to management of a plan, or exercises any authority or control with respect to management or disposition of its assets.
This kind of plan fiduciary can be thought of as a discretionary decision-maker. An example of this kind of 3(21) fiduciary is an ERISA section 3(38) investment manager that is appointed by a plan sponsor (or a named fiduciary of the plan) to take on sole responsibility (and any associated liabilities) to select, monitor, and (if necessary) replace all (or some) of a plan's investment options.
The second kind of fiduciary (pursuant to ERISA section 3(21)(A)(ii)) is one that renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of a plan, or has any authority or responsibility to do so.
This kind of fiduciary can be thought of as a non-discretionary advice-giver. Although it is a 3(21) plan fiduciary, it has no legal power or ability--that is, no legal discretion--to make decisions concerning a plan. That discretion (and any associated liabilities) typically remains lodged with the plan sponsor.