In testimony before the Employee Benefits Security Administration, Karen Prange, Executive Director and Assistant General Counsel for J.P. Morgan Chase and Co., said rather than determining whether a person is “impartial” or has “adverse” interests, the proposed regulations will better serve plan sponsors and participants by requiring objective, written disclosures from service providers regardless of whether or not they will be acting in a fiduciary capacity. To enable plan sponsors and participants to continue receiving valuable services from providers, Prange said, the various limitations described in the proposed regulations should be expanded or clarified to clearly exclude non-discretionary administrative services and to clearly distinguish between the provision of information versus advice.
Prange also noted that J.P. Morgan believes existing standards governing plan distribution education and guidance are sufficient, and need not be modified in the final regulations.
According to Prange’s testimony, as currently drafted, the sales exception would apply to service providers whose interests are “adverse” to the interests of the plan or its participants and who are not attempting to provide “impartial” advice. J.P. Morgan believes that the “adverse” and “impartial” standards are too vague. It proposes that the applicability of the sales exception should turn on whether the service provider and plan sponsor understand that the “advice” is being provided in a sales context. Such an understanding could be imparted through a written disclaimer that the service provider is acting in a non-fiduciary capacity.
Prange also noted that recordkeepers are frequently asked by plan sponsors to develop “proposed” investment fund menus during the sales process. These proposed menus are sometimes used to create a uniform basis upon which the fees of various recordkeepers may be compared. She suggested the DoL should clarify in the final regulations that developing such proposed fund menus does not constitute investment advice that gives rise to fiduciary status.
Prange said J.P. Morgan believes the written disclosure standard for application of the “platform” exception is generally appropriate, but suggests that the DoL expand this exception to apply to any objective data that a service provider supplies to the plan sponsor for the purpose of monitoring a plan’s existing investment funds for all types of plans, as long as the provider does not make a specific investment recommendation based on the data. Narrowly interpreting this exception could deny plan sponsors and fiduciaries valuable tools for monitoring plan investments, Prange contended.
In addition, J.P. Morgan suggests the DoL clarify in the final regulations that all non-discretionary analytic and reporting services do not constitute “investment advice.” Lack of such clarity may lead service providers to discontinue providing valuable non-discretionary analytic and reporting services to plan sponsors, Prange said.
J.P. Morgan believes the proposed regulations should make clear that service providers, such as trustees and custodians, reporting valuations of hard-to-value plan assets, such as real estate, hedge funds, private equity or derivatives, are not providing “investment advice” under the Employee Retirement Income Security Act (ERISA).Prange urged the Department to revise the regulations to ensure that the standards for determining whether a service provider is a “fiduciary” are clear and objective to enable service providers to determine, in advance, whether or not their activities are fiduciary in nature and to design and implement their business model based upon whether they intend for their activities to be “fiduciary” activities and to avoid potential litigation due to uncertainty. “The scope and generality of the proposed regulations will cause functions that were previously considered ministerial to become fiduciary functions, forcing service providers to consider the offering of the services and related fees to address the increase in risk and oversight requirements,” she said.