Investment representative who did not exercise authority over failed plan investment was not ERISA fiduciary

A registered investment advisor representative who recommended the investment of plan assets in a risky start-up venture that eventually failed was not subject to suit as a fiduciary under ERISA, according to U.S. Court of Appeals in New Orleans (CA-5). The registered representative did not actually exercise discretionary authority with respect to the transaction at issue, the court stressed.

A cardiology practice retained a licensed broker/registered investment advisor affiliated with a capital management firm (CACH Capital Management, LLC) to provide investment advice for the cash balance and 401(k) plans maintained by the practice. An investment agreement between the parties designated CACH as the investment “Advisor” and the broker as the “Registered Representative.” The agreement granted CACH limited discretionary authority over the plans’ investments, but did not expressly provide the registered representative with the similar authority.

Pursuant to recommendations by CACH and the registered representative, plan trustees (the owners of the practice) invested $100,000 of plan funds in the corporate bonds of an oil and gas start-up company. The bonds were to pay 12% interest on the plans’ investment. The registered representative received a commission of $2,500 for the investment, which was not paid by the plans, but by a third party broker/dealer.

The oil and gas company subsequently stopped making interest payments on the bonds and the plan trustees brought suit in a federal trial court in Texas, alleging ERISA violations. The court granted summary judgment to the registered representative (the remaining defendant), ruling that he had provided the trustees with written disclosures revealing the risks inherent in the investment.

On appeal, the trustees argued that the disclosures were insufficient to overcome ERISA’s fiduciary requirements. The appeals court, in affirming the trial court, alternatively focused on whether the registered representative was a fiduciary under ERISA with respect to the investment in the oil and gas company.

Structuring its analysis around the three-part test of ERISA §3(21)(A), the court initially determined that the registered representative did not exercise authority or control over the challenged investment. The plan trustees, the court noted, did not relinquish their independent discretion in approving the investment of plan funds. The registered representative made investment recommendations, but influencing trust investment decisions, the court advised, does not constitute effective control over plan assets.

The trustees maintained that the registered representative was empowered with authority or control over plan assets. The court dismissed this charge, ruling that the investment agreement did not expressly provide the registered representative with discretionary authority over the assets of the plans. The court primarily stressed, however, that whether the registered representative possessed discretionary authority was irrelevant, as he did not actually exercise such authority with respect to the disputed transaction, as required by ERISA §3(21)(A)(i).
Finally, the court concluded that the registered representative was not a fiduciary under ERISA §3(21)(A)(ii) because it received a commission and not a fee in connection with the transaction, or under ERISA §3(21)(A)(iii), as it had no discretionary authority or responsibility in the administration of the plans.

Source: Tiblier v. Dlabal (CA-5).