Risk & Compliance

Fiduciary Proposal Puts CFOs’ Liability in Question

The Department of Labor is revisiting a proposal that would change the definition of &spamp;ldquo;fiduciary.&spamp;rdquo;
Joseph S. AdamsJanuary 19, 2012

A U.S. Department of Labor proposal that critics worried would increase costs for participants of corporate retirement plans might have actually reduced the personal liability of some CFOs. A reproposed version of the rule, expected to be unveiled this year, will change the definition of “fiduciary” for retirement plans and other employee plans governed by the Employee Retirement Income Security Act.

The change is critical because people or entities serving as ERISA fiduciaries, including CFOs, are subject to the “highest duty known to the law.” They are required to act prudently and in the best interests of plan participants or else risk being subject to personal liability.

ERISA currently defines a plan fiduciary as anyone who gives investment advice for a fee or other compensation with respect to any moneys or other property of a plan, or has any authority or responsibility to do so. In 1975 the DoL issued a five-part regulatory test for “investment advice” and defined the term narrowly. Among the key elements of the test were requirements that the advice be given on a “regular basis” and pursuant to a mutual understanding that the advice would be the “primary basis” for the investment decision.

When the DoL initially proposed to update the rules last fall, the department sought to address the significant changes in the retirement-plan universe that have occurred during the past three decades, in terms of both more-complex investment products and the relentless shift from defined-benefit plans to defined-contribution plans, such as 401(k) plans where investment advice is increasingly important. In addition, the DoL wished to provide some protection to IRA holders, where no plan fiduciary protects the IRA investments.

The DoL’s proposed rule would remove the “regular basis” and “primary basis” requirements, thereby expanding the scope of individuals and entities subject to ERISA’s heightened duties applicable to fiduciaries. However, the DoL’s proposal generated significant feedback through several hundred written public comments (including many from members of Congress), two days of open hearings, and more than three dozen individual meetings with interested parties. One particularly sensitive issue was the DoL’s attempt to apply the new rule to IRAs.

As a result of the controversy, the DoL announced last September that it will repropose its rule on the definition of a fiduciary and coordinate its efforts with the Securities and Exchange Commission and the Commodities Futures Trading Commission. The DoL said its decision was partly due to requests for more input. It also came during a time when government agencies were more sensitive to rulemaking criticism. An executive order issued by President Obama last year mandated that agencies revisit regulations that may have unjustified costs and burdens. Moreover, a federal court struck down an SEC rule last year on proxy access based on insufficient economic analysis.

The DoL’s new proposed rule is expected to be issued early this year. Although the department recently reiterated its intent to repropose the rule, the timing remains uncertain given the election year. The DoL stated it would clarify that “fiduciary advice is limited to individualized advice directed to specific parties, responding to concerns about the application of the regulation to routine appraisals and clarifying the limits of the rule’s application to arm’s length commercial transactions, such as swap transactions.” The DoL also promised to address concerns about the impact of the new regulation on the current fee practices of brokers and advisers, and to clarify the continued applicability of exemptions that have long been in existence that allow brokers to receive commissions in connection with mutual funds, stocks, and insurance products.

More pertinent to CFOs is whether their level of liability will change. Some commentators to the original proposal worried that the changes would increase the costs borne by plan participants. In fact, the proposal might have reduced the liability of CFOs who serve as fiduciaries of their company’s 401(k) or other ERISA retirement plans. Specifically, if consultants providing outside investment advice were required to be treated as fiduciaries, held to a higher fiduciary standard, and required to disclose to the CFO any potential conflicts of interest they had in selecting funds, this could have made the CFO’s job easier.

For now, CFOs serving as fiduciaries will need to ferret out this information themselves. One easy way to do that is to require that any consultant providing investment advice to the plan fiduciaries specifically acknowledge (in writing) that the consultant agrees to be treated as a fiduciary under ERISA. CFOs with fiduciary responsibility may want to consider implementing that change now. (On a separate note, many CFOs of public companies with retirement plans holding company stock have stepped down from fiduciary committees in light of potential conflicts among securities laws, ERISA, and related “stock drop” litigation.)

Joseph S. Adams is a partner in the Chicago office of McDermott Will & Emery LLP. His practice focuses on employee benefits and executive compensation.