Ronald Reagan was referred to years ago as “the Teflon President” because voters never seemed to hold him responsible for his administration’s missteps. A significant decision on fiduciary status has just been issued by the Court of Appeals for the 5th Circuit. Tiblier v. Dlabal which created what I call the “Teflon Fiduciary.”
Why is this Important?
This decision deserves lots of attention because it provides a blueprint for investment advisers to avoid responsibility for self-dealing and bad advice. The decision also constitutes a persuasive argument why the U.S. Department of Labor needs to continue its controversial efforts to update its regulations on when giving investment advice makes a person a fiduciary.
What Actually Happened?
In the view of the appellate court, the facts were so straightforward that summary judgment in favor of the adviser – without a trial on the facts – was warranted . A careful reader of the decision may well disagree.
Dlabal was a doctor and former colleague of Tiblier.
Dlabal was licensed as a broker and investment adviser to act in affiliation with a firm, but could not act individually.
In affiliation with the now-defunct CACH Capital Management, Dlabal advised Tiblier regarding his medical practice’s plan investments. He recommended an investment in bonds issued by a risky start-up company and received a $2500 share of the broker’s commission in lieu of a fee when the plans invested.
The issuer stopped paying interest on the bonds, and Tiblier sued Dlabal for numerous fiduciary breaches. (Under ERISA, a fiduciary may be personally liable for losses caused by fiduciary breaches.)
The appellate court found that although Dlabal recommended this investment, he was not a fiduciary because he had no discretion over plan investments and had disclosed his compensation and the risks of the investment to the fiduciaries who authorized it. Further, he declined a fee in favor of a share of the broker’s commission on the trades, so the court found that he did not receive a “fee” from the plan for his advice.
The DOL Supports Plaintiffs.
The Department of Labor filed an amicus brief in this case arguing that the district court was applying liability standards under the securities laws – which look to whether adequate disclosure of the risks was made – instead of those under ERISA. The Department of Labor also reminded the appellate court that ERISA contemplates that there can be co-fiduciaries and even if the company fiduciaries made a bad decision, and should have read the offering materials more carefully, that did not mean that the adviser was off the hook.
What is Wrong with this Picture?
Dlabal seems to have been functioning as a fiduciary as defined in ERISA, although the appellate court did not reach the issue of whether his advice was based on the particular needs of the plans.
Section 3(21) of ERISA and related regulations provide that giving investment advice, such as making recommendations regarding the investment of plan assets for direct or indirect compensation makes an adviser a fiduciary, provided that the advice is given on a regular basis pursuant to an understanding that it will form a primary basis for plan investment decisions and is based on the particular needs of the plan. (Emphasis added)
The appellate decision adds a requirement of discretion or control, and a second requirement that compensation have been paid by the plans, even though these requirements appear nowhere in the ERISA authority. It is clear that Dlabal was compensated for his advice regarding plan assets, albeit indirectly, in the common understanding of that term. It should not matter that the adviser elected to forego a direct fee in favor of a different method of compensation. In a sense, Dlabal was in “constructive receipt” of the fee.
Company Fiduciaries Beware.
There are lessons here for company fiduciaries who want advisers who take responsibility for their advice and understand the fiduciary duties of prudence and loyalty.
First, make sure that you hire advisers who are experienced in dealing with ERISA plans and competent in their purported field of expertise and not simply people that you know already.
Second, hire only advisers who will acknowledge in writing that they are providing advice to you as an ERISA fiduciary, which subjects them to the highest standards of conduct. Otherwise, you run the risk that they will run in the other direction and maintain that they are not fiduciaries if their bad advice results in losses. Dlabal even had the audacity to try to get the plaintiffs to pay his attorney’s fees, but even the district court drew the line at that!