The Employee Benefits Security Administration (the “EBSA”) has made available on its website a Fact Sheet which discusses the proposed regulation the Department of Labor is publishing to implement certain provisions of the Pension Protection Act of 2006 (the “PPA”). These provisions created a new statutory exemption from the prohibited transaction rules for giving investment advice to participants in 401(k)-type plans and individual retirement accounts (IRAs). An earlier final regulation, and a related class exemption, pertaining to these provisions were withdrawn in November, 2009 in response to concerns about the adequacy of the class exemption’s conditions to mitigate the potential for investment adviser self-dealing.
The Fact Sheet says the following about the new proposed regulations:
• The proposed rules are limited to the implementation of the PPA statutory exemption relating to investment advice.
• The proposed regulation allows investment advice to be given under the statutory exemption in two ways. One is through the use of a computer model certified as unbiased. The other way is through an adviser compensated on a “level-fee” basis (i.e., fees do not vary based on investments selected by the participant).
• Several other requirements must also be satisfied, including disclosure of fees the adviser is to receive. The regulation contains some key safeguards and conditions, including:
o Requiring that a plan fiduciary (independent of the adviser or its affiliates) select the computer model or fee leveling investment advice arrangement.
o Imposing recordkeeping requirements for advisers relying on the exemption for computer model or fee leveling advice arrangements.
o Requiring that computer models must be certified in advance as unbiased and meeting the exemption’s requirements by an independent expert.
o Establishing qualifications and a selection process for the expert who must perform the above certification.
o Clarifying that the fee-leveling requirements do not permit advisers (including its employees) to receive compensation from affiliates on the basis of their recommendations.
o Establishing an annual audit of investment advice arrangements, including the requirement that the auditor be independent from the adviser.
o Requiring disclosures by advisers to plan participants.
The proposed regulation may be found here, and is scheduled to be published in the Federal Register on March 2, 2010.