Outside voices and views for advisers

Fiduciary liability defenses for advisers under ERISA

Advisers need to be aware of all possible defenses available to them for alleged breach of fiduciary duty

Sep 12, 2017 @ 1:11 pm

By Marcia S. Wagner

If an investment adviser makes a recommendation to a retirement plan sponsor or investment manager, who then follows that recommendation and later challenges it as a breach of fiduciary duty, there are several types of defenses available to the adviser.

A standard defense, for example, says the prudence of an investment is determined at the time an investment is made, rather than in hindsight.

But less common defenses are important to know, too. Advisers need to be aware of all possible defenses available to them, even those that might not be recognized under the Employee Retirement Income Security Act of 1974.

Here's one lesser-used adviser argument: "I made the recommendation but the investment committee did not need to follow it, so it is not my fault."

Putting this in terms of ERISA, the initial question is: What is the meaning of the phrase "resulting from"? ERISA Section 409 provides that a fiduciary who breaches his or her duties, responsibilities or obligations is personally liable for any losses to the plan "resulting from" such breach; however, the phrase "resulting from" is not defined.

Unfortunately, there is little case law on how strong the causal connection must be, and the case law that does exist is inconclusive. The "resulting from" issue can be expressed in two ways: "but for" the investment adviser's recommendation, the loss would not have occurred; or that the investment adviser's recommendation was the "proximate cause of the loss," which is the standard, and more favorable to the investment adviser.

(More: 10 big settlements in 401(k) excessive-fee lawsuits)

A related possible defense is "superseding cause," which, if it could be applied, "operates to cut off the liability of an admittedly negligent defendant." The adviser would be asserting: "Had the person who acted after me not breached his or her fiduciary duty, none of the alleged losses would have occurred, so it is not my fault."

However, only two reported cases have addressed the possible application of this doctrine in the ERISA context, and in neither case did the court squarely decide whether it was applicable in that context.

Further, in the typical case involving an investment adviser, the "superseding cause" defense would be difficult to establish, because one of the factors that a court would likely take into account is whether the intervention brings about a harm different in kind from that which would otherwise have resulted from the adviser's negligence.

(More: Attorney Jerry Schlichter opens up about 403(b), 401(k) suits)

The next line of defense might be: "If we are both at fault, and I am found liable, the other guy should pay up as well." This is referred to, technically, as "contribution."

However, there is a split of authority between the Circuit Courts of Appeal, as to whether contribution is an available remedy under ERISA. Some courts believe that traditional trust-law remedies should be retained under ERISA (which would benefit investment advisers); other circuits believe that the objective of ERISA was to benefit plan participants, not fiduciaries, and that Congress specifically didn't provide such a remedy for fiduciaries under ERISA.

The Supreme Court requested the views of the solicitor general on this issue, who recommended in May 2017 that the Supreme Court resolve the clear conflict among the circuits.

If an adviser is working in a jurisdiction in which the right to contribution is recognized, it should seek to take advantage of it.

(More: Appointing and monitoring a 401(k) investment manager under ERISA)

Finally, if an adviser is the party from whom contribution is being requested, his defense might be: "Perhaps I am somewhat to blame, but the responsibility should rest with the other entity because it was primarily his or her fault."

The difficulty for the investment adviser seeking to invoke this doctrine is the same as that existing with respect to the "superseding cause" defense: Based upon the factors that a court would generally consider, it is a difficult defense to establish.

The bottom line is: Sometimes it may be necessary to think outside the box to eliminate any damages for an adviser who may have breached his or her fiduciary duty under ERISA.

Marcia S. Wagner, managing and founding partner of The Wagner Law Group, specializes in ERISA and employee benefits.


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