As covered in our LawFlash published earlier today, the US Department of Labor has released the first of three waves of frequently asked questions regarding the fiduciary rule.

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On July 1, 2016, the US Department of Labor (DOL) published an interim final rule (Interim Rule) in the Federal Register adjusting for inflation the amount of certain civil monetary penalties imposed under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and assessed and enforced by the Employee Benefits Security Administration. The adjusted penalties became effective on August 1, 2016.


The DOL was required to publish the Interim Rule by the Federal Civil Monetary Penalties Inflation Adjustment Act of 2015 (2015 Inflation Adjustment Act) that was signed into law on November 2, 2015 as part of the Bipartisan Budget Act of 2015.

The 2015 Inflation Adjustment Act directed US federal agencies to adjust their civil monetary penalties for specified amounts or maximum amounts based on the statutorily prescribed formula. The 2015 Inflation Adjustment Act requires an initial “catch-up” adjustment and subsequent annual adjustments.

The ERISA “Plan Asset” rule is complex, and the world of sophisticated financial instruments makes its application even more challenging. A good example of this involves a master feeder hedge fund arrangement involved in international investment. Such an arrangement  may experience unexpected complications when “hardwiring” its feeder funds for ERISA purposes if the feeder funds issue classes denominated in US currency, but the base currency of the master and/or feeder funds is a non-US currency. 

The “look-through rule” under the US Department of Labor’s (DOL’s) Code of Federal Regulations §2510.3-101 (the DOL Regulations) provides that, unless an exception applies, the assets of a “Benefit Plan Investor” (as defined under Section 3(42) of ERISA and the DOL Regulations as modified by Section 3(42) of ERISA) (together, the “Plan Asset Rule”) that acquires an equity interest in another entity, such as a hedge fund, are treated as including both the equity interest itself and an undivided interest in each of the underlying assets of that entity. This potentially poses significant prohibited transaction and other ERISA fiduciary issues that must be addressed. 

The decision by British voters in a June 23, 2016 referendum to leave the European Union has significantly affected both the equity and debt segments of international financial markets. As with other market dislocations, the decision has also affected US tax-qualified plans, since they invest in those markets as a source of funding and use corporate bond rates for a variety of derivative purposes. The effects differ, however, between defined benefit (DB) and defined contribution (DC) plans.

Potential Effects of Brexit on DB Plans

In the case of DB plans, Brexit potentially has implications for funding levels, lump sum payments, Pension Benefit Guaranty Corporation (PBGC) premiums, and financial accounting results—all of which are the responsibility of the plan sponsor (rather than participants).

The US Department of Labor (DOL) recently proposed revisions to Form 5500 (Annual Return/Report for Employee Benefit Plan), the related schedules, and the rules that govern the forms. In general, these changes would first apply for the 2019 plan year, although certain changes may be implemented earlier. Comments on the changes are due October 4, 2016.

This has been a big year for ERISA preemption cases. Section 514 of ERISA boldly states that unless one of the statutory exceptions apply—none of which are relevant here—that Titles I and IV of ERISA supersede “any and all State laws insofar as they . . . relate to any employee benefit plan” covered by ERISA (29 U.S.C. §1144(a)). While the “relate to” standard suggests an expansive scope to ERISA preemption, federal litigation has narrowed that scope materially. Conflicts between the states’ desire to implement legislative agendas that impact ERISA plans and ERISA’s broad preemption language will continue to generate controversies for the judiciary.

Earlier this year, in Gobeille v. Liberty Mutual, the US Supreme Court held that ERISA preempted a Vermont law requiring ERISA-covered plans to report certain claims data to the state (which is addressed in our March 7 post). After Gobeille was decided (and as discussed in our March 10 post), the Supreme Court remanded to the US Court of Appeals for the Sixth Circuit the case that is the subject of today’s post, Self-Insurance Institute of America v. Rick Snyder, to be reconsidered in light of Gobeille.

According to the US Court of Appeals for the Second Circuit, strict compliance with the US Department of Labor (DOL) claims and appeals regulations is necessary to preserve a deferential standard of review for a plan administrator's determination. Under the Second Circuit's recent ruling in Halo v. Yale Health Plan, except for inadvertent and harmless errors, a failure to be in strict compliance with the regulations will allow a court to conduct a de novo review of a claim.


Every ERISA plan must have "reasonable" administrative procedures for addressing benefit claims and appeals. If the plan administrator fails to establish reasonable claims and appeals procedures, or if it fails to follow those procedures, a claimant can bring a claim for benefits directly to court for de novo consideration without deference to any decision that may have been made during the plan's flawed claims and appeals procedure.

By contrast, if reasonable claims and appeals procedures are established and followed, the claimant must exhaust those procedures before heading to court, the court's review generally will be limited to the information developed during the administrative proceedings, and the court typically will give deference to the decisions made by the plan administrator during the claims and appeals process (if the plan has language conferring discretion on the administrator). This means that a decision reached through the claims and appeals procedures likely will be reversed only if the decision was "arbitrary and capricious."

The Second Circuit’s Decision in Halo

When considering a challenge to a denied claim, courts historically have analyzed whether the process and communications were in "substantial compliance" with the DOL regulations. In a sharp departure from this standard, the Second Circuit rejected the "substantial compliance" doctrine as "flatly inconsistent" with the current DOL claims and appeals regulations. Instead, the court held, "when denying a claim for benefits, a plan's failure to comply with the Department of Labor's claims-procedure regulation . . . will result in that claim being reviewed de novo" unless the plan administrator can show that (i) the plan has established procedures that comply with the regulations, and (ii) the failure to comply with those procedures was inadvertent and harmless.1

Morgan Lewis partners Amy Pocino Kelly and Julie Stapel recently sat down with Robert Capone, Head of Defined Contribution and Sub Advisory at AQR Capital Management LLC, to discuss fiduciary due diligence considerations for defined contribution plans when including alternative asset classes. Their questions and answers are detailed in the attached article titled “Fiduciary Considerations for Adding Liquid Alternative Investment Strategies to DC Plans and Target Date Funds.”

Today, the US Department of Labor (DOL) released its final regulation “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule—Investment Advice.” The final rule includes many changes and clarifications intended to address concerns raised about the proposal, but issues remain. Read our LawFlash, which provides a brief summary of certain key changes between the proposed rule and the final rule: Final DOL Fiduciary Rule—First Impressions.