|
|
|
May 11, 2005
|
Printer Friendly
Version
2005-11A
ERISA Sec. 406(b) and 408(b)(2)
|
|
Chris Hastings
Financial Network
200 South 6th Street
Brainerd, MN 56401
|
|
Dear: Mr. Hastings:
|
|
This is in response to your request for an advisory
opinion under the Employee Retirement Income Security Act (ERISA). In
particular, you request an opinion that you would not engage in a
transaction prohibited by section 406 of ERISA by becoming the “servicing
representative” to the MidMinnesota Federal Credit Union 401(k) Plan (the
Plan) and receiving compensation for the services you would provide to the
Plan.(1)
|
|
You represent that you are an independent
contractor/registered representative of Financial Network Investment
Corporation (FNIC), a broker-dealer. Pursuant to a contractual agreement
between FNIC and the MidMinnesota Federal Credit Union (Credit Union), FNIC,
through you, operates on the premises of the Credit Union to offer
securities and insurance products for sale to members of the Credit Union.
You further represent that you are not an employee of the Credit Union,
receive no compensation from the Credit Union, and are not a participant in
the Plan. Under the agreement, the Credit Union receives a portion of the
commissions that you generate on the sale of securities and/or insurance
products to Credit Union members.
|
|
The Plan is a participant-directed individual account
plan that is intended to comply with the requirements of section 404(c)(1)
of ERISA and the regulation thereunder, 29 CFR § 2550.404c-1. The Credit
Union, operating through an executive committee, determines what investment
options to make available to participants of the Plan for the investment of
assets in their individual accounts.
|
|
You propose to enter into an agreement with the Plan
under which you would be the servicing representative for the Plan. You
represent that you will provide no investment management or investment
advisory services to the Plan or its participants. Your sole role will be to
act as the registered representative of FNIC, in which capacity you will
execute trades in mutual funds and insurance products at the direction of
Plan participants. You would receive compensation for services provided to
the Plan. To ensure that the Credit Union will not receive any portion of
the commissions generated by the sale of securities and/or insurance
products to the Plan, you represent that you will establish a separate
representative number for the Plan, under which all Plan transactions will
be executed.
|
|
Under section 3(21)(A) of ERISA, a person is a fiduciary
with respect to a plan to the extent (i) he exercises any discretionary
authority or discretionary control respecting management of such plan or
exercises any authority or control respecting management or disposition of
its assets, (ii) he renders investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other
property of such plan, or has any authority or responsibility to do so, or
(iii) he has any discretionary authority or discretionary responsibility in
the administration of such plan.
|
|
Regulation 29 C.F.R. 2510-3.21(c) defines “investment
advice” as that term is used in section 3(21). Under that regulation, a
person will be deemed to be rendering investment advice if such person
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 and such person either directly or
indirectly has discretionary authority or control, whether or not pursuant
to agreement, arrangement or understanding, with respect to purchasing or
selling securities or other property for the plan; or renders any such
advice on a regular basis to the plan pursuant to a mutual agreement,
arrangement or understanding, written or otherwise, between such person and
the plan or a fiduciary with respect to the plan, that such services will
serve as a primary basis for investment decisions with respect to plan
assets, and that such person will render individualized investment advice to
the plan based on the particular needs of the plan regarding such matters
as, among other things, investment policies or strategy, overall portfolio
composition, or diversification of plan investments. In addition, in
Interpretive Bulletin 96-1, the Department clarifies that providing
information defined as “investment education” in the Bulletin will not
be considered “investment advice” that would give rise to fiduciary
status and potential liability under ERISA for investment decisions of plan
participants and beneficiaries.(2)
|
|
Under section 3(14)(B) of ERISA, a person who provides
services to a plan is a party in interest with respect to that plan.
|
|
Section 406(a) of ERISA prohibits various types of
transactions between a plan and persons who are parties in interest with
respect to the plan. In particular, section 406(a)(1)(C) prohibits a
fiduciary from engaging in a transaction if the fiduciary knows or should
know that the transaction is a direct or indirect furnishing of goods,
services, or facilities between the plan and a party in interest. Section
406(b) of ERISA prohibits a fiduciary with respect to a plan from dealing
with assets of the plan in his own interest or for his own account, acting
on behalf of or representing a party dealing with the plan in a transaction
involving the assets of the plan, or receiving any consideration for his own
personal account from any party dealing with the plan in connection with a
transaction involving the assets of the plan.Section 408(b)(2) of ERISA
exempts from the prohibitions of section 406(a) any contract or reasonable
arrangement with a party in interest, including a fiduciary, for office
space, or legal, accounting or other services necessary for the
establishment or operation of the plan, if no more than reasonable
compensation is paid therefore. Regulations issued by the Department clarify
the terms "necessary service" (29 CFR §2550.408b-2(b)),
"reasonable contract or arrangement" (29 CFR §2550.408b-2(c)) and
"reasonable compensation" (29 CFR §2550.408b-2(d) and
2550.408c-2) as used in section 408(b)(2). As a general matter, whether the
requirements of that section are met in each case involves questions which
are inherently factual in nature. Pursuant to section 5.01 of ERISA
Procedure 76-1, the Department ordinarily does not issue opinions on such
matters.
|
|
With respect to the prohibitions contained in section
406(b), the regulation under section 408(b)(2) of ERISA (29 CFR
§2550.408b-2(a)) states that section 408(b)(2) of ERISA does not contain an
exemption for an act described in section 406(b) even if such act occurs in
connection with a provision of services that is exempt under section
408(b)(2).
|
|
As explained in regulation 29 CFR §2550.408b-2(e)(1),
the prohibitions of section 406(b) are imposed upon fiduciaries to deter
them from exercising the authority, control, or responsibility that makes
them fiduciaries when they have interests that may conflict with the
interests of the plans for which they act. Thus, a fiduciary may not use the
authority, control, or responsibility that makes him a fiduciary to cause a
plan to pay an additional fee to such fiduciary, or to a person in which he
has an interest that may affect the exercise of his best judgment as a
fiduciary, to provide a service. However, regulation 29 CFR
§2550.408b-2(e)(2) provides that a fiduciary does not engage in an act
described in section 406(b)(1) of ERISA if the fiduciary does not use any of
the authority, control, or responsibility that makes him a fiduciary to
cause a plan to pay additional fees for a service furnished by such
fiduciary or to pay a fee for a service furnished by a person in which the
fiduciary has an interest that may affect the exercise of his judgment as a
fiduciary.
|
|
Accordingly, it is the opinion of the Department that
your provision of trade execution services to Plan participants would be
exempt from the prohibitions of section 406(a) of ERISA if all the terms and
conditions of section 408(b)(2) are satisfied.
|
|
You represent that you will merely execute trades in
mutual funds and insurance products at the direction of Plan participants,
and will not provide investment management or investment advisory services
to the Plan or its participants. Based on these representations, it is the
opinion of the Department that you will not become a fiduciary of the Plan
solely as a result of executing trades at the direction of Plan
participants. We note, however, that if, in the course of your relationship
with the Plan and its participants, you provide investment advice to the
Plan or any of its participants, you may become a fiduciary.(3)
|
|
This letter constitutes an advisory opinion under ERISA
Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this
letter is issued subject to the provisions of the procedure, including
section 10 relating to the effect of advisory opinions.
|
|
Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
|
|
|
|
|
-
Under Reorganization Plan No. 4 of
1978 (43 FR 47713, October 17, 1978), the authority of the Secretary of
the Treasury to issue rulings under section 4975 of the Internal Revenue
Code (the Code) has been transferred, with certain exceptions not here
relevant, to the Secretary of Labor. Therefore, the references in this
letter to specific sections of ERISA should be taken as referring also
to the corresponding sections of the Code.
-
29 CFR § 2509.96-1(b)(1) and (d)
-
Section 404(c)(1) of ERISA and 29 CFR
§ 2550.404c-1 provide generally that, with respect to an individual
account plan that permits a participant or beneficiary to exercise
control over the assets in her account, if a participant or beneficiary
exercises control over the assets in her account, such participant or
beneficiary shall not be deemed to be a fiduciary by reason of such
exercise, and no person who otherwise is a fiduciary shall be liable for
any loss, or by reason of any breach, that is the direct and necessary
result of the participant’s or beneficiary’s exercise of control. As
explained in paragraph (d)(2)(iii) of the regulation, the individual
investment decisions of an investment manager who is designated by a
participant or beneficiary are not the direct and necessary results of
the designation. Accordingly, if the designated investment manager
causes losses to the participant or beneficiary’s account by reason of
imprudent investment decisions, the investment manager would not be
relieved of liability by section 404(c)(1).
|
| |
|
