April 12, 2011 

[Additional Signatories Added on April 15, 2011] 

Via Email to: e-ORI@dol.gov 

Office of Regulations and Interpretations 

Employee Benefits Security Administration (EBSA) 

200 Constitution Avenue NW, Room N-5655 

Washington DC 20210 

Re: Public Hearings on Definition of ‘Fiduciary’ 

This comment letter is sent in response to issues raised during the March public hearings on 

proposed changes in the rules governing when a person or firm who advises an ERISA pension 

plan is considered to be a ‘fiduciary.’ It is submitted on behalf of participants in the Fiduciary 

Duty Working Group of the Network for Sustainable Financial Markets (NSFM). NSFM is an 

international, non-partisan and non-profit organization comprised of financial market 

professionals, practitioners and academics. We seek to focus research and debate on issues 

relating to financial market stability and health of the economy, including retirement security and 

pension fund sustainability.*

 

We strongly support EBSA’s initiative to update the definition of ‘fiduciary’ in light of 

fundamental changes in the market environment since the original ERISA rules were written 

thirty-five years ago. In that regard, we submit the following comments. 

Investment Consultants and Advisors Exercise Effective Controlling Influence

Many NSFM participants have worked with pension governing boards. Given complexity of 

most investment issues now faced by governing fiduciaries and the protection from fiduciary 

liability afforded by following advice of third party experts, we have seen advisors and 

consultants exercise a de facto controlling influence over decisions of pension governing boards. 

The January 2011 Government Accountability Office (GAO) Report, 401(k) Plans: Improved 

Regulation Could Better Protect Participants from Conflicts of Interest, cites interviews with 

industry experts who also advised that pension sponsors rely heavily on service providers who 

structure their engagements so as to be exempt from the current EBSA fiduciary definition. 

                                                           

* Additional information on NSFM, including previous public consultation comments that were incorporated into the 

OECD's Guidelines for Pension Fund Governance, is available at www.sustainablefinancialmarkets.net.
In addition to the evidence of controlling influence described above, behavioral dynamics 

associated with an advisory or consulting relationship virtually guarantee that expert advice will 

strongly influence decisions made by a governing fiduciary. This is likely to occur regardless of 

any contract disclaimers, the temporary nature of the advisory relationship or other legal fictions 

adopted to avoid fiduciary responsibility. Duke University behavioral economics professor 

Daniel Ariely gives an enlightening description of factors which influence financial decisions in 

his book, Predictably Irrational: The Hidden Forces that Shape our Decisions. Among the 

behavioral tendencies likely to be at work in the pension fund advisory relationship is 

‘anchoring,’ whereby advice from an outside expert serves as a reference point that anchors 

discussion and decision making. 

We recommend that the EBSA take real world behavioral dynamics into consideration when 

conducting its rulemaking. Investment consultants and advisors that exert de facto influence 

over fiduciary decisions should be treated as fiduciaries. 

ERISA's Duty of Loyalty was Intended to Cover Investment Consultants and Advisors 

Growing complexity of the markets, expanded reliance on investment advisors and consultants, 

and the increased influence of service providers have made an updated definition of fiduciary 

responsibility more important than ever. Increased delegation by trustees and other changes in 

the pension industry since the 1970s have effectively diluted protections afforded to pension 

participants by the duty of loyalty. The EBSA's proposed rule would ensure that application of 

the duty of loyalty catches up with recent trends toward greater delegation to and reliance on 

investment consultants and advisors. We believe that any added costs associated with the rule 

would be more than offset by reduced risk and additional returns from improved reliability of 

investment advice. 

The duty of loyalty was intended to set a high bar. ERISA fiduciary standards are based on trust 

law and incorporate its strict approach toward the duty of loyalty. Comments to the Restatement 

of Trusts, Second, §78 explain that “the policy of the trust law is to prefer (as a matter of default 

law) to remove altogether the occasions of temptation rather than to monitor fiduciary behavior 

and attempt to uncover and punish abuses . . . The inherent subjectivity and impracticability of 

second-guessing a trustee’s application of business judgment or exercise of fiduciary discretion 

are aggravated by the opportunities and relative ease of concealing misconduct . . . efforts to 

prevent or detect actual improprieties can be expected to be inefficient if not ineffective.” 

Furthermore, the legislative history of ERISA makes it clear that the Secretary of Labor is only 

authorized to waive protections from practices and relationships that present "potential threats to 

the security and preservation” of pension funds if the waiver is “consistent with the purposes of 

the Act and determined to be in the interests of pension plan participants.” (See Senate Report 

on P.L. 93-406 in 3 U.S. Cong. & Adm. News, at page 4868.) Given the real world experience 

cited by the GAO and our observations described above, we question whether the existing 

definition of ‘fiduciary’ still serves Congress’ intent. Although some advisors and consultants 

still have business models built on outdated views of the duty of loyalty contained in the current 

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rule, the EBSA is required to protect the interests of pension plan participants over the interests 

of service providers. 

We support EBSA's proposal to extend the definition of ‘fiduciary’ to implement ERISA’s 

intent that pension participants and beneficiaries be strictly protected from conflicting 

business pressures on investment advisors and consultants. Since it may take some time for 

pension industry business models to readjust, a deferred effective date might be set. 

Alternatively, the EBSA might consider adopting an approach that shifts the burden of proof 

to the defendant once EBSA (or a private litigant) has made a prima facie showing of a breach 

of fiduciary duty by a third party expert, where the alleged breach grew out of improper advice 

provided by an investment advisor or consultant that disclaims it was acting as a fiduciary. 

We appreciate the opportunity to provide views of individual NSFM participants and commend 

the EBSA for updating its rules on this important issue. 

Sincerely, 

Co-Chairs of the Network for Sustainable Financial Markets Fiduciary Duty Working Group 

Ann Byrne, Chief Executive Officer, Australian Council of Superannuation Investors 

Frank Jan de Graaf, Professor of International Business, Hanze University of Applied Sciences 

Keith Johnson, Retired Chief Legal Officer, State of Wisconsin Investment Board 

Prof. Cynthia Williams, University of Illinois College of Law 

The following Network for Sustainable Financial Markets participants join in this submission:†

 

Keith Ambachtsheer, International Centre for Pension Management, Rotman School of 

Management, University of Toronto 

Peter Chapman, Executive Director, Shareholder Association for Research and Education

Greg Chipman, Managing Director, CJC Global; Director, Responsible Investment Association 

Australasia; Co-Chair, NSFM Wealth Management Working Group 

Gordon L Clark, FBA DSc, Halford Mackinder Professor of Geography, Oxford University 

Centre for the Environment 

Dr. Andrew M. Clearfield, Former Director of International Corporate Governance, TIAA-CREF 

Stephen Davis, Senior Fellow, Millstein Center for Corporate Governance and Performance, 

Yale School of Management 

John Fullerton, Founder and President, Capital Institute 

                                                           

†

 Participants are signing as individuals and not on behalf of any organization. Affiliations are provided for 

identification purposes only. Information on the Network for Sustainable Financial Markets and its participants is 

available at www.sustainablefinancialmarkets.net.

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James P. Hawley, Ph.D., Professor and Director, Elfenworks Center for the Study of Fiduciary 

Capitalism, School of Economics and Business, Saint Mary's College of California 

Catherine Howarth, Chief Executive, FairPensions 

Adam M. Kanzer, Managing Director & General Counsel, Domini Social Investments 

Sean Kidney, Chair, The Climate Bond Initiative 

Maxime Le Floc'h, Responsible Investment Analyst 

Steve Lydenberg, Founding Director, Initiative for Responsible Investment, Harvard University 

James McRitchie, Publisher, CorpGov.net (Corporate Governance) 

 

Michael Musuraca, Former New York City Pension Funds Trustee 

Steve Podmore, Founder & CEO, Transform Capital Management, Ltd. 

Dr. Janis Sarra, Faculty of Law, University of British Columbia 

Charles Scanlon, Participant, Network for Sustainable Financial Markets 

Raj Thamotheram, Responsible Investment Specialist; Board President, Network for Sustainable 

Financial Markets 

Matteo Tonello, Research Director, Corporate Leadership, The Conference Board 

Stephen Viederman, Former President, Jessie Smith Noyes Foundation; Finance Committee 

Member, Christopher Reynolds Foundation 

Prof. Ed Waitzer, Janislowsky Dimma Mooney Chair in Corporate Governance, Schulich School 

of Business and Osgoode Hall Law School, York University, Toronto 

David Wood, Director, Initiative for Responsible Investment, Harvard University