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."
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
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
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
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.
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!
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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