The Pension Protection Act of 2006 contains provisions under which a fiduciary advisor may, for a fee, provide investment advice to a participant in a defined contribution plan who may direct the investment of his or her own plan accounts. On January 21, 2009, the Department of Labor (the “DOL”) issued final regulations to implement these provisions. The regulations were to become effective as of March 23, 2009. However, encouraged by the Obama administration, a number of members of Congress, various consumer advocacy groups and several financial industry insiders, the DOL proposed, then officially decided, to postpone the effective date of these regulations until May 22, 2009 for further consideration (the official notice of postponement is here). One major concern is that the regulations allow a fiduciary advisor to recommend investments in which the fiduciary advisor itself had an interest-because the advisor issued the investment or would manage it in the participant’s plan accounts- giving rise to so called “conflicted investment advice”.
In response to this concern, and apparently believing that this concern would not be properly taken care of in the regulations, Congressman Robert Andrews introduced, on April 22, 2009, the Conflicted Investment Advice Prohibition Act of 2009 (H.R. 1988)(“CIAPA”). The CIAPA would amend ERISA, so that, in the case of a defined contribution plan under which the participants may direct the investment of their own plan accounts, an employer cannot hire any person to provide financial advice to participants, unless that person is an “independent investment advisor”, and the rules allowing a person to furnish investment advice to a participant for a fee will be satisfied only if that person is an independent investment advisor.
Under CIAPA, a person is an “independent investment advisor” if:
— that person is a fiduciary by reason of providing investment advice, and provides the advice pursuant to a written arrangement with the plan in question that meets various statutory requirements;
–that person is either (1) registered as an investment adviser, (2) a bank or similar financial entity, or a savings association, which furnishes advice through a trust department that is subject to examination by Federal or State banking authorities, or (3) a registered representative as defined in the statute;
–that person (or any affiliate of that person) does not provide or manage any of the assets in which the plan account in question has invested; and
–the fees or other compensation received by that person (or any of its affiliates) either (1) are not paid by any other person (or by an affiliate of any other person) who markets, sells, manages or provides any of the assets in which the plan account in question has invested, or (2) do not vary depending on the basis of any investment option selected by the participant receiving the advice and are calculated on a flat-dollar basis, a flat percentage of total plan assets or a per-participant basis.
A person can also qualify as an independent investment advisor under CIAPA by providing advice pursuant to a computer model which meets various statutory rules.
It is not clear whether or to what extent Congress will actually enact CIAPA. However, it is clear that the controversy over the investment advice regulations-including the need for the investment advisor to be independent-will continue. The text of CIAPA is here.