The Employee Benefits Security Administration (the “EBSA”) has now issued a regulation on the statutory exemption, found in sections 408(b)(14) and 408(g) of ERISA and sections 4975(d)(17) and 4975(f)(8) of the Internal Revenue Code (the “Code”), which allows fiduciaries to provide investment advice to plan participants. A Fact Sheet issued by the EBSA says the following on this regulation.
By way of Background
• ERISA and the Code generally prohibit fiduciary investment advisers from receiving compensation from the investment vehicles that they recommend to plan participants and IRA owners. This protects participants in 401(k) plans and IRAs from conflicts of interest, but sometimes can limit their access to quality professional investment advice.
• The Pension Protection Act of 2006 amended ERISA and the Code to create a new statutory exemption from the prohibited transaction rules to expand the availability of fiduciary investment advice to participants in 401(k)-type plans and IRAs. It allows fiduciary advisers to receive fees from investment providers whose products are recommended to participants, but subject to safeguards and conditions preventing investment advisers from slanting their advice for their own financial benefit.
Overview of the Final Investment Advice Regulation
The statutory exemption allows fiduciary investment advisers to receive compensation from investment vehicles they recommend if either: (1) the investment advice they provide is based on a computer model certified as unbiased and as applying generally accepted investment theories, or (2) the adviser is compensated on a “level-fee” basis (i.e., fees do not vary based on investments selected by the participant).The final regulation provides detailed guidance to advisers on compliance with these conditions.
The regulation also shows advisers how to comply with other conditions and safeguards in the statutory exemption, including:
–requiring that a plan fiduciary (independent of the investment adviser or its affiliates) authorize the advice arrangement.
–imposing recordkeeping requirements for investment advisers relying on the exemption.
–requiring that computer models must be certified in advance as unbiased and meeting the exemption’s requirements by an independent expert.
–establishing qualifications and a selection process for the investment expert who must perform the above certification.
–clarifying that the level-fee requirement does not permit investment advisers (including their employees) to receive compensation from any party (including affiliates) that vary on the basis of the investments participants select.
–establishing an annual audit of both computer model and level-fee advice arrangements, including the requirement that the auditor be independent from the investment advice provider.
–requiring disclosures by advisers to plan participants.
The regulation does not affect the applicability of the EBSA’s prior guidance on the application of the prohibited transaction rules and existing prohibited transaction exemptions to investment advice arrangements. For example, the guidance contained in Advisory Opinion Nos. 2011-08A, 2005-10A (Country Trust Bank), 2001-09A (SunAmerica Retirement Markets) and 1997-15A (Frost National Bank) continue to apply.
Effective and Applicability Dates
The regulation will become effective on December 27, 2011, and will be applicable to transactions occurring on or after that date.