Saxon Angle | Published in September 2016

The Independent Fiduciary Exception

Are concerns about the exclusion a red herring?

By Stephen M. Saxon | September 2016

PS-Portrait-Article-Saxon_JCiardiello.jpgArt by Joe CiardielloAs those who read this column are aware, the Department of Labor (DOL) published a new fiduciary rule in April that expands the types of activities that make a person a fiduciary under the Employee Retirement Income Security Act (ERISA), by providing investment advice for a fee. Although the fiduciary rule is targeted primarily at providers of retirement plan products and services, plan sponsors and fiduciaries are implicated by the rule as well. Through the so-called “independent fiduciary exception,” certain sales conversations between investment providers and independent plan fiduciaries do not result in fiduciary status to the provider. We have heard that some plan sponsors have been advised not to make representations required by the exception. We think that concerns about the risks of making such representations are vastly overblown.
The independent fiduciary exception allows recordkeepers and other plan service providers to give investment advice to an independent plan fiduciary for the purchase or sale of investments if certain requirements are met.

One condition of the exception requires that the independent fiduciary be a bank, insurer, registered investment adviser (RIA), broker/dealer (B/D) or any independent plan fiduciary that holds or has under its management or control, total assets of at least $50 million. Importantly, the advice provider will be required to obtain certain representations and warranties from plan sponsors or other “independent fiduciaries” when engaging in investment conversations with the independent plan fiduciary. These representations will include the following:
1) That the plan sponsor or fiduciary of the plan is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies;
2) That the plan sponsor or fiduciary understands it is not receiving independent investment advice;
3) That the person is a fiduciary to the plan; and
4) The seller does not receive a fee or other compensation directly from the plan, plan fiduciary, plan participant or beneficiary, individual retirement account (IRA), or IRA owner for the provision of investment advice (as opposed to other services) in connection with the transaction.
The purpose of the independent fiduciary exception is to allow investment-related conversations with an independent plan fiduciary to avoid fiduciary status. In particular, the DOL sought to keep from imposing fiduciary obligations on routine sales activities where the plan fiduciary was a sophisticated investor and where neither side assumes that the service provider acts as an impartial adviser to the plan.
As noted, we understand there are some who are concerned about making the representations and warranties under the independent fiduciary exception. We think these concerns are a red herring. Plan fiduciaries should not be nervous about making representations that are true and where the fiduciary is fully capable of making them.
The specific representation that, we understand, gives some plan fiduciaries pause is the one saying the fiduciary of the plan is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. The representations that will be sought under the independent fiduciary exception merely require confirmation from the plan fiduciary that it is fit to serve as prudent expert as the law requires under Section 404 of ERISA. It seems odd to us that some law firms would advise their plan sponsor clients to avoid making such representations where such avoidance would essentially constitute an admission that the fiduciaries are incapable of making sound decisions.
Ultimately, we think it makes much more sense for plan sponsors to work with investment providers if they can make the requested representations. Otherwise, many of the products and services that plan fiduciaries use in their plans will simply be unavailable.
Another option for those plan fiduciaries that are concerned about making the requested representations is to have the sales conversation directed toward the plan’s investment consultant or adviser who is an RIA, B/D, insurance carrier or bank. Thus, rather than missing out on investment products and services that could be quite valuable, the plan fiduciary could, in this way, help the service provider satisfy the independent fiduciary exception.

Stephen Saxon is a partner with Groom Law Group, Chartered, headquartered in Washington, D.C. George Sepsakos, an associate in Groom’s fiduciary responsibility group, contributed to this article.