Alert March 29, 2012

Federal District Court Holds That Investment Advice to a Plan Assets Fund May Make Advisor a Fiduciary to Plans Invested in the Fund

In a case involving losses arising from investments with Bernard Madoff, the U.S. District Court for the Southern District of New York recently held that a firm that advised an ERISA plan assets fund to invest with Madoff could, by reason of that advice, be considered an ERISA fiduciary with respect to each ERISA plan holding an interest in that fund. In re: Beacon Associates Litigation, 09 Civ. 777 (LBS) (S.D.N.Y. March 14, 2012).

In Beacon, certain union pension plans (the “Plans”) purchased interests in an investment fund (the “Fund”) that was considered to hold “plan assets” under the Department of Labor’s plan assets regulation, 29 C.F.R § 2510.3-101 (the “Plan Assets Regulation”). The Fund invested its assets with investment managers selected by the entity that operated the Fund (the “Operator”). The Fund invested over $350 million with Madoff, all of which was lost when Madoff’s Ponzi scheme was uncovered in 2008. Alleging violations of ERISA’s fiduciary rules, the Plans filed a class action complaint against a number of defendants, including the Operator and a firm that provided research and advice to the Operator regarding the Fund’s investment managers (the “Advisor”). (This case also includes a number of non-ERISA claims brought against the Operator and other defendants by the Plans and certain individuals who had invested in the Fund.)

After surviving a motion to dismiss and engaging in discovery, the Plans moved for class certification. The Advisor opposed the motion, arguing (among other things) that the class should not be certified because the Plans could not prove an essential element of their ERISA claims against the Advisor – that the Advisor had acted as an ERISA fiduciary with respect to the Plans and other members of the putative class (that is, other ERISA plans that had invested in the Fund).

The Plans asserted that the Advisor was a fiduciary under Section 3(21)(A)(ii) of ERISA, which confers fiduciary status on a person to the extent that he renders investment advice to a plan for a fee. The Advisor countered that, under the DOL regulation explaining Section 3(21)(A)(ii), a person can be an ERISA fiduciary based on the provision of advice only when he “render(s) individualized investment advice to the plan based on the particular needs of the plan.”  See 29 C.F.R § 2510.3-21(c) (the “Advice Regulation”). The Advisor argued that it had provided advice to the Fund itself – not to the Plans invested in the Fund – and that advice could not be “individualized” within the meaning of the Advice Regulation with respect to a pooled vehicle like the Fund and with respect to the Plans that invested in the Fund. The Advisor asserted that a finding of an obligation to provide individualized advice to both the Fund and each Plan would result in a conflict of duties since the Advisor could not provide advice for the exclusive benefit of the Fund as a whole while at the same time providing advice to the Fund that would have to be tailored to the particular needs of each Plan investing in the Fund.

The court rejected this argument, concluding that the Advisor’s advice to the Fund could make it a fiduciary with regard to each of the Plans that invested in the Fund. In the court’s view, this situation did not raise the type of conflict cited by the Advisor, because when plans invest in pooled funds they pursue certain common investment goals, meaning that (to the extent of the plans’ investments in the fund) the interests of the plans are necessarily aligned with those of the fund. In addition, the court noted that the Plan Assets Regulation indicates that a person who provides fiduciary investment advice to a pooled fund that holds ERISA plan assets is a fiduciary with respect to the plans invested in that fund. Reading the relevant statutory and regulatory provisions together, the court reasoned that “individualized advice with respect to the needs of a pooled investment fund should be considered individualized advice with respect to the plans that invest in it” for purposes of the Advice Regulation. Consequently, the court concluded that the issue of the Advisor’s fiduciary status did not preclude certification of the class.