Commentary: ERISA's Fiduciary Standard Is Applied to Broker-Dealers
Traders Magazine Online News, November 9, 2010
Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the SEC to adopt rules that would impose the fiduciary standards of the Investment Advisers Act of 1940 on broker-dealers that provide personalized advice to retail customers. Although Chairperson Schapiro has expressed her support for adopting this standard, the SEC has not yet promulgated any such proposal. To be fair, the SEC has a lot on its plate right now.
Stephen J. Nelson
Meanwhile, the Department of Labor--DOL--which was not affected by Dodd-Frank, moved the issue to center stage on October 21 by proposing to amend its 1975 regulation defining when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act--ERISA. The DOL's regulations also affect Individual Retirement Accounts--IRAs--even though IRAs are not generally subject to DOL oversight, because the Department of Treasury applies DOL's ERISA interpretations to the substantially identical fiduciary duty rules contained in the Internal Revenue Code, which are applicable to IRAs.
The primary change would categorize a broker-dealer as a fiduciary any time it provides advice to an ERISA plan and receives a fee, directly or indirectly, for the advice. Broker-dealers do nothing for free; advice is generally provided in order to obtain an order.
The prior rule required fiduciary status only when the advice-giving was provided on a regular basis on the understanding that it would serve as the primary basis for the plan's investment decisions. Broker-dealers generally could avoid the application of the rule by arguing that they only rendered advice from time to time and that their advice wasn't the primary basis for the plan's investments. The new rule, by contrast, will be very difficult for broker-dealers to avoid if they provide investment advice to ERISA plans or to customers with IRA accounts. It is worth noting that the proposed rule does not distinguish the advice rendered to retail accounts from that given to institutions managing pension plans. In either case, the account can claim that the broker-dealer has fiduciary liability for the advice it renders.
Some broker-dealer business with ERISA plans may fall under an exemption. A transaction would be exempt if the broker-dealer makes clear to another fiduciary for the plan that it is acting as an agent for someone else in selling securities to the plan; or if the broker-dealer is selling securities on a principal basis to the plan, and therefore is not acting as a fiduciary to the plan, and discloses this role to another plan fiduciary. Keeping registered representatives within this exemption will cause compliance officers to reach for their Pepcid bottles.
Fiduciary duties under ERISA present a much heavier burden that the fiduciary responsibilities imposed on investment advisers under the Investment Advisers Act. Entire volumes have been devoted to the complexities of fiduciary duty. Here, we will describe one illustrative example.
Both ERISA and the Investment Advisers Act prohibit their respective fiduciaries from buying or selling property from their own account to the ERISA plan or IRA.
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