US Department of Labor to Expand Definition of 'Fiduciary'

(October 21, 2010) — The US Department of Labor’s Employee Benefits Security Administration has proposed an expansion of whom the agency would consider a fiduciary to include consultants that provide advice to retirement plans on proxy voting and the hiring of investment managers, more broadly defining the term as a person who provides investment advice to plans for a fee or other compensation.

The regulation, which has been reviewed by the Office of Management and Budget, has not been updated since the Employee Retirement Income Security Act (ERISA) first went into effect during the Ford administration. The proposed rule stipulates that broker-dealers who make securities recommendations to retirement plans would be subject to fiduciary requirements, thus giving a broader and clearer understanding of when providing such advice is subject to ERISA fiduciary standards, according to a statement released today by the DoP.

“The proposal amends a 35-year-old rule that may inappropriately limit the types of investment advice relationships that give rise to fiduciary duties on the part of the investment advisor,” the DoP stated, adding that the proposed rule takes into account major changes in both the financial industry and the expectations of plan officials and participants who receive investment advice.

The statement concludes that the proposed rule would define certain advisers as fiduciaries even if they do not provide advice on a “regular basis.” Sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice related services to such plans and accounts would all be impacted by the rule upon adaptation.

“The proposal will ensure that plans receive advice based on reliable information that protects the interests of plan participants and beneficiaries,” said Phyllis C. Borzi, assistant secretary of labor for EBSA, in a statement. “We believe that this proposal more closely reflects the statutory language of ERISA and the realities of the current investment marketplace, and therefore will ensure those who provide investment advice are held accountable as fiduciaries under the law.”