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.
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