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Who Does the DOL's Conflict of Interest Rule Apply To?

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, 12/01/2016

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.

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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.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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