In Tiblier, Fifth Circuit Holds Investment Advisor Was Not a Fiduciary With Respect to Investment that Resulted in Plan Losses

by Goodwin
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In Tiblier v. Dlabal, No. 13-50344 (5th Cir. Feb. 28, 2014), the U.S. Court of Appeals for the Fifth Circuit ruled that an investment advisor for a plan could not be held liable under ERISA for losses the plan incurred from an investment, where the advisor did not act in a fiduciary capacity with respect to that investment.

Background

In Tiblier, trustees of an ERISA plan entered into a management agreement with an investment firm, CACH Capital Management, LLC (“CACH”), and its registered representative, Paul Dlabal (“Dlabal”).  The agreement granted CACH limited discretionary authority over the plan’s investments, and disclosed that Dlabal could be acting as a broker or dealer in connection with those investments.  CACH and Dlabal proposed several investments for the plan, some of which the trustees rejected.  One investment recommended by Dlabal to which the trustees agreed was the plan’s purchase of bonds issued by an energy company.  That investment resulted in Dlabal’s receipt of a commission.

After the energy company encountered financial difficulties and stopped paying interest on the bonds, the trustees brought suit in federal district court, asserting (among other things) that CACH and Dlabal had breached ERISA fiduciary duties in connection with the plan’s investment in the bonds.  Before suit was filed, CACH had become defunct, leaving Dlabal as the only defendant.  The district court granted Dlabal’s motion for summary judgment, ruling with respect to the ERISA claims that Dlabal could not be subject to fiduciary liability because he had provided the trustees with written disclosures describing the risks posed by investment in the energy company bonds.  The trustees appealed.

Appeals Court Decision

Before the Fifth Circuit, the trustees (supported by the Department of Labor, as amicus) argued that “Dlabal’s disclosures were insufficient to overcome ERISA’s strict fiduciary duties.”  However, the Court of Appeals determined that it did not need to address this “difficult question,” because it concluded that Dlabal did not act as an ERISA fiduciary with respect to the plan’s investment in the energy company bonds.  The court emphasized that the trustees could not prevail on their ERISA claims merely by demonstrating that Dlabal acted in “a general fiduciary capacity,” but instead were required to show that he had acted as a fiduciary “with regard to the specific transaction about which they complain.”  The court reviewed the functions set forth in the three clauses of ERISA’s definition of “fiduciary,” see 29 U.S.C. § 1002(21)(A), and found that Dlabal had not acted in that capacity with regard to the plan’s purchase of the bonds.

The first clause of ERISA’s fiduciary definition provides that a person is a fiduciary to the extent he “exercises” authority or control regarding management of a plan or its assets.  The Fifth Circuit concluded that Dlabal did not act as a fiduciary under this clause with respect to the bond purchase because the trustees “acknowledged that they, rather than Dlabal, made the ultimate decision” to buy the bonds.  The fact that the management agreement may have granted authority to Dlabal over plan assets in general was irrelevant, the court held, “because it is undisputed that Dlabal did not exercise that authority with respect to the only transaction at issue in this case.”

Under the second clause of ERISA’s fiduciary definition, a person is a fiduciary to the extent he renders investment advice to the plan for a fee or other compensation.  In this regard, the court noted that, while Dlabal did recommend that the plan purchase the bonds, the only compensation he received specifically in connection with that investment was a commission received from a third party.  The Fifth Circuit concluded that, under its precedent, see American Federation of Unions Local 102 Health and Welfare Fund v. Equitable Life Assurance Society, 841 F.2d 658 (5th Cir, 1988), a payment from a third party is not a “fee or other compensation” within the meaning of the second clause of ERISA fiduciary definition.  Therefore, the court found that Dlabal did not act as a fiduciary under that clause with respect to the bond purchase.

Lastly, the court noted that Dlabal could not have been acting as a fiduciary under the third clause of ERISA’s fiduciary definition – relating to plan administration – because it was undisputed that he played no part in the administration of the plan.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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