Definition of the Term “Fiduciary” (RIN 1210-AB32)

February 3, 2011

VIA EMAIL (e-ORI@dol.gov)

Mr. Fred Wong
Office of Regulations and Interpretations
Employee Benefits Security Administration
Attn: Definition of Fiduciary Proposed Rule
Room N-5655
Department of Labor
200 Constitution Avenue NW
Washington, DC 20210

Re: Definition of the Term “Fiduciary” (RIN 1210-AB32)


Dear Mr. Wong:

This comment letter by the Association for Advanced Life Underwriting (AALU) is in response to your request for written comments on the proposed rule amending the definition of the term “fiduciary” issued on October 22, 2010 (Department of Labor RIN 1210-AB32).

AALU is a national trade association representing over 2,000 life insurance agents and professionals who are primarily engaged in sales of life insurance used as part of estate, charitable, retirement and deferred compensation and employment benefit services. AALU members facilitate responsible retirement saving through the use of life insurance products for thousands of Americans. Many AALU members specialize in supplementing a variety of qualified retirement plans, such as defined benefit and defined contribution plans, with life insurance benefits and other lifetime income producing products. AALU feels strongly about maintaining the ability of life insurance and annuity products to help provide a stable and sustainable retirement for millions of Americans.

Overview

On October 22, 2010, the Department of Labor (“DOL”) issued proposed regulations that would significantly modify the definition of the term “fiduciary” for purposes of the Employee Retirement Income Security Act of 1974 (“ERISA”). The DOL cited a number of reasons for proposing a new definition at this time, including, but not limited to, that the current definition was promulgated in 1975 and since that time the retirement plan community and the financial marketplace have changed significantly, as well as concerns that there are persons providing advice, recommendations and other information who are currently outside of the definition of a fiduciary, but who significantly influence the decisions of plan fiduciaries and may have conflicts of interest that the plan fiduciaries may not be aware of. For these reasons, the DOL indicated that it believes there is a need to re-examine the types of advisory relationships that should give rise to fiduciary status under ERISA.

Comments

AALU understands and appreciates the DOL’s objectives of updating the definition of fiduciary to reflect the current market and to better protect plan participants and beneficiaries from conflicts of interest and self-dealing. However, AALU has the following concerns regarding the rule as proposed:

Modification of the Current Five-Part Test 

Under the current regulation, in the case of an adviser who does not have discretionary management authority over plan assets, the adviser is considered a fiduciary only if, for a direct or indirect fee or other compensation, the adviser satisfies each of the conditions in the following “five-part test.” The adviser –

  • renders advice as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing or selling securities or other property,
  • on a regular basis,
  • pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary that,
  • the advice will serve as a primary basis for investment decisions with respect to plan assets, and that
  • the advice will be individualized based on the particular needs of the

The proposed regulations make three significant changes to this five-part test. First, the new test would no longer require the advice to be provided on a regular basis. Any advice that would otherwise satisfy the new test, even if provided with respect to a single transaction, would fall within the new definition. Second, the proposed regulations eliminate the reference to a “mutual” agreement, arrangement or understanding, suggesting that if only a plan fiduciary or participant had the requisite understanding, the advice would fall within the new definition.

Third, the advice would no longer have to serve as a “primary basis” for an investment decision. Instead, under the new standard, there would only have to be an understanding that the advice “may be considered in connection with making” an investment decision.

These proposed changes to the five-part test would significantly expand the type of “advisers” who would be considered ERISA fiduciaries. AALU is particularly concerned with the second two changes – namely, the elimination of mutuality in the parties understanding of the arrangement and the lowering of the primary basis standard to a simple consideration standard.

A person should not be an ERISA fiduciary unless the applicable parties have the same understanding or the person providing the advice should reasonably have had such an understanding under the circumstances. At the very minimum, a reasonableness standard should be added with respect to both the adviser’s and the plan fiduciary’s understandings of the arrangement.

In addition, the lowering of the primary basis standard to a simple consideration standard establishes too low of a standard. The parties should have to reasonably understand that any advice would (as opposed to may) be taken into account in a material manner by the plan fiduciary in making investment decisions. A “may be considered” standard is too low and would have a chilling effect on advisers’ willingness to provide general information to plan fiduciaries and participants.

Sellers’ Exception

The proposed regulations provide an exception for those who buy and sell securities and other property, provided the person providing the advice or recommendation can demonstrate that the recipient knows or, under the circumstances, reasonably should know that: (i) the person is providing the advice or making the recommendation in its capacity as a purchaser or seller of a security or other property (or as an agent of a purchaser or seller), (ii) the person’s interests are adverse to the interests of the plan or its participants or beneficiaries, and (iii) the person is not undertaking to provide impartial investment advice (the “sellers’ exception”). With respect to a particular transaction, this exception is available to any person, including any plan fiduciary, other than a person who has acknowledged or represented his fiduciary status with regard to the transaction. It is important to note that, under the proposed rule, the burden of proof is on the person making the recommendation or providing the advice to prove what the recipient knows or reasonably should know about the nature of the arrangement (e.g., the person is a seller whose interests are adverse).

The requirement that a seller demonstrate that its customer knows or reasonably should know that the seller’s interests are “adverse” to the customer’s interests and that the advice is not intended to be impartial is too harsh of a standard and it is not necessary to address the DOL’s concerns about plan fiduciaries not understanding potential conflicts of interest. Rather, the DOL’s concerns can be addressed by requiring the seller to demonstrate that the seller has disclosed the role in which he or she was acting, and that the buyer knows or reasonably should have known that the seller was not an ERISA fiduciary with respect to the transaction and that the seller was not acting solely in the interests of the participants or for the exclusive purpose of providing benefits to the participants.

Advice Regarding Plan Distributions

In Advisory Opinion (“Adv. Op.”) 2005-23A, the DOL took the position that a recommendation to a plan participant to take an otherwise permissible plan distribution does not constitute investment advice within the meaning of ERISA Reg. § 2510.3-21(c). Additionally, because distribution proceeds are no longer considered plan assets, any recommendations regarding the investment of such proceeds is not considered investment advice for purposes of determining fiduciary status.

Although the DOL has not proposed a rule modifying its position in Adv. Op. 2005-23A, in the preamble to the proposed regulations, the DOL explained that it is considering whether and to what extent the final regulation should define the provision of investment advice to encompass recommendations related to taking a plan distribution. The DOL indicated that it is considering this issue because of concerns that plan participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests. Specifically, the DOL is seeking information on other laws that apply to the provision of these types of recommendations, whether and how those laws safeguard the interests of plan participants, and the costs and benefits associated with extending the final regulation to these types of recommendations.

It is AALU’s view that, at this time, the DOL should not modify its current position that advice regarding plan distributions is not investment advice within the meaning of ERISA Reg. § 2510.3-21(c). A key fact considered in Adv. Op. 2005-23A should continue to guide the DOL’s approach to this issue—that distribution proceeds are no longer considered plan assets.

Distribution is the natural termination of DOL oversight, where extensive oversight, requirements and consumer protections of other regulatory organizations take over. If there is any final responsibility of the DOL in this area it should be limited to disclosures that should be provided by plan fiduciaries about any potential risks or adverse consequences that should be considered by participants before proceeding with a plan distribution.

AALU members and many of the other professionals that are providing advice to plan participants regarding plan distributrions are already subject to various layers of federal and state regulation designed to protect consumers. Imposing additional, costly, and overlapping regulations through ERISA would not necessarily lead to greater protection for plans and their participants.

To provide additional background on the nature of business conducted by AALU members, please note that AALU members are engaged primarily in sales of life insurance and annuities used as a part of estate, charitable, retirement, deferred compensation and employee benefit plans. Some members sell life insurance primarily to business clients to finance and secure employee benefits. However, many members work primarily with individuals who often retain attorneys, accountants and other professionals to assist in developing products and services for their long-term life insurance protection and retirement needs.

In addition, other than associate members who are non-sales professionals such as attorneys, accountants and actuaries, all AALU members are licensed insurance producers. Many are registered representatives of an SEC/FINRA-registered broker-dealer, and many also are associated persons of an SEC-registered investment adviser. Many AALU members own insurance agencies. Some of these agencies own or are affiliated with registered broker-dealers or investment advisers. Thus, AALU members are subject to state insurance laws of each state in which they operate. Those who sell registered products are, in addition, subject to SEC, FINRA and state securities regulation. Those who operate or are associated persons of registered investment advisers are subject to SEC regulation of investment advisers.

Many AALU members have served the same individual clients and their families for decades. Their customers are of primary importance to AALU members and, for that reason, they work closely with them to understand their needs and objectives in connection with the insurance investment products the members are authorized to sell, within the framework of their contracts with carriers and other obligations under all of the laws and regulations to which the members are subject.

AALU, in our August 30, 2010 comment letter1 to the Securities and Exchange Commission regarding the Commission’s request for information to inform their study regarding the obligations of brokers, dealers, and investment advisers, commented extensively on the existing legal and regulatory standards applied to life insurance agents who are engaged in the sale of variable life insurance products to retail customers and who provide personalized investment advice about securities to those customers. AALU’s submission to the SEC rigorously detailed AALU members’ obligations under state insurance laws and to carriers by whom they are appointed to transact with retail and other customers, as well as their requirements under a multitude of applicable federal and state securities laws and regulations enforced by FINRA, the SEC, and states securities regulators. A copy of AALU’s August 30 submission to the SEC is enclosed as an attachment to this letter to the DOL.

AALU’s commentary and analysis of the existing legal and regulatory requirements of AALU members demonstrates that brokers, dealers, registered investment advisers, life insurance agents and many of the other persons who advise plan participants with respect to plan distributions are already subject to comprehensive federal and state regulation and supervision, and therefore, additional federal regulatory requirements with respect to advice regarding plan distributions is not necessary to protect plan participants.

Summary 

In summary, AALU requests that the DOL consider the following comments before taking any further action on its proposed regulation expanding the definition of fiduciary.

1. Modifications to Current Five-Part Test

Two of the proposed changes to the current five-part test should be modified before the regulations are finalized.

First, the elimination of mutuality in the parties understanding of the arrangement should be modified to provide that a person would not be an ERISA fiduciary unless the applicable parties have the same understanding or the person providing the advice should reasonably have had such an understanding under the circumstances. At the very minimum, a reasonableness standard should be added with respect to both the adviser’s and the plan fiduciary’s understandings of the arrangement.

Second, the lowering of the primary basis standard to a simple consideration standard should be modified to require the parties to have a reasonable understanding that any advice would (as opposed to may) be taken into account in a material manner by the plan fiduciary in making investment decisions.

2. Sellers’ Exception 

The requirement that a seller demonstrate that its customer knows or reasonably should know that the seller’s interests are “adverse” to the customer’s interests and that the advice is not intended to be impartial is an overly harsh standard and should be replaced with a requirement that the seller demonstrate, through appropriate disclosure of his or her role and professional responsibilities, that the buyer knows or reasonably should know that the seller was not an ERISA fiduciary with respect to the transaction and that the seller was not acting solely in the interests of the participants or for the exclusive purpose of providing benefits to the participants.

3. Advice Regarding Plan Distributions

At this time, the DOL should not modify its current position that advice regarding plan distributions is not investment advice because AALU members and many of the other professionals providing advice to plan participants regarding plan distributions are already subject to various layers of rigorous federal and state regulation designed to protect consumers2. Imposing additional, costly, and overlapping regulation through ERISA and the additional costs of complying would not necessarily lead to greater protection for plans and their participants.

AALU appreciates the opportunity to provide comments in response to the DOL’s proposed regulations and would welcome an opportunity to provide additional comments in the future as the DOL further considers this important matter.

If you have any questions regarding our comments, please contact Anthony Raglani at 202-742-4589.

 

Sincerely,

David J. Stertzer
Chief Executive Officer
AALU


Notes

1 See AALU Comment Letter from David J. Stertzer, Chief Executive Officer of AALU, to Elizabeth Murphy, “Re: Request for Comment to Inform Study Regarding Obligations of Brokers, Dealers, and Investment Advisers (Release No. 34-62677; IA – 3058; File No. 4-606),” August 30, 2010 (AALU Letter), available at http://www.sec.gov/comments/4-606/4606-2631.pdf. The AALU Letter is included as an attachment in this submission to the Department.

2 See Id.

 

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