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Employee Benefits Security Administration

EBSA Federal Register Notice

Prohibited Transaction Exemption for Provision of Investment Advice to Participants in Individual Account Plans [12/04/2006]

[PDF Version]

Volume 71, Number 232, Page 70429-70431

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

RIN 1210-AB13

 
Prohibited Transaction Exemption for Provision of Investment 
Advice to Participants in Individual Account Plans

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Request for information.

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SUMMARY: Section 601 of the Pension Protection Act of 2006 (the PPA) 
(Pub. L. 109-280) amended section 408 of the Employee Retirement Income 
Security Act of 1974 (ERISA) and section 4975 of the Internal Revenue 
Code (the Code) to add a prohibited transaction exemption for the 
provision of investment advice to participants and beneficiaries of 
individual account plans that permit the direction of assets in their 
accounts, and for certain related transactions, if the investment 
advice is provided under an ``eligible investment advice arrangement,'' 
as defined in the statute. The purpose of this notice is to request 
information from the public relating to the requirements in the new 
provisions that a computer model which serves as the basis for an 
eligible investment advice arrangement be certified as meeting specific 
criteria, and that information regarding certain fees and compensation 
be provided to participants and beneficiaries.

DATES: Written or electronic responses should be submitted to the 
Department of Labor on or before January 30, 2007.
    Responses: To facilitate the receipt and processing of responses, 
EBSA encourages interested persons to submit their responses 
electronically by e-mail to e-ORI@dol.gov, or by using the Federal 
eRulemaking portal at http://www.regulations.gov (follow instructions for 

submission of comments). Persons submitting responses electronically 
are encouraged not to submit paper copies. Persons interested in 
submitting written responses on paper should send or deliver their 
responses (preferably, at least three copies) to the Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution 
Avenue, NW., Washington, DC 20210, Attention: 401(k) Plan Investment 
Advice RFI. All written responses will be available to the public, 
without charge, online at http://www.regulations.gov and www.dol.gov/ebsa, and 

at the Public Disclosure Room, N-1513, Employee Benefits Security 
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Katherine D. Lewis or Ruel B. Pile, 
Office of Regulations and Interpretations, Employee Benefits Security 
Administration, Room N-5669, U.S. Department of Labor, Washington, DC 
20210, telephone (202) 693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

A. Background

In General

    The prohibited transaction provisions in section 406 of the 
Employee Retirement Income Security Act of 1974 (ERISA) prohibit 
various types of transactions between a plan and persons who are 
parties in interest (as defined in ERISA section 3(14)) with respect to 
the plan, and also prohibit, among other things, a plan fiduciary (as 
defined in ERISA section 3(21)(A)) from dealing with assets of the plan 
in his own interest or for his own account, or receiving any 
consideration for his own personal account from any party dealing with 
the plan in connection with a transaction involving the assets of the 
plan.\1\
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    \1\ The Internal Revenue Code (Code) contains similar prohibited 
transaction provisions in section 4975(c).
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    Section 601(a) of the Pension Protection Act of 2006 (PPA) (P.L. 
109-280) amended ERISA by adding new sections 408(b)(14) and 408(g). 
Section 408(b)(14) of ERISA provides conditional exemptive relief from 
ERISA section 406 for certain transactions in connection with the 
provision of investment advice (as described in ERISA section 
3(21)(A)(ii)) if the requirements of new section 408(g) of ERISA are 
met. Under section 408(g), subsection (b)(14) applies if the investment 
advice provided by a ``fiduciary adviser'' is provided under an 
``eligible investment advice arrangement.'' \2\ Persons who may act as

[[Page 70430]]

fiduciary advisers, as defined in section 408(g)(11)(A), include, but 
are not limited to, investment advisers registered under the Investment 
Advisers Act of 1940, certain banks and similar financial institutions, 
insurance companies qualified to do business under the laws of a State, 
and brokers or dealers registered under the Securities Exchange Act of 
1934.
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    \2\ Section 601(b) of the PPA similarly amended section 4975 of 
the Code by adding new section 4975(d)(17) and (f)(8), to provide 
conditional exemptive relief from the prohibitions described in Code 
section 4975(c) for certain transactions in connection with the 
provision of investment advice (as described in Code section 
4975(e)(3)(B)). Under Presidential Reorganization Plan No. 4 of 
1978, effective December 31, 1978 [5 U.S.C. App. at 214 (2000 ed.)], 
the authority of the Secretary of the Treasury to issue 
interpretations regarding section 4975 of the Code has been 
transferred, with certain exceptions not here relevant, to the 
Secretary of Labor and the Secretary of the Treasury is bound by the 
interpretations of the Secretary of Labor pursuant to such 
authority. The references in this document to specific provisions of 
ERISA sections 408(b)(14) and (g) should be taken as referring also 
to the corresponding provisions in Code sections 4975(d)(17) and 
(f)(8).
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    The term ``eligible investment advice arrangement'' is defined in 
ERISA section 408(g)(2) to mean an arrangement which either (i) 
provides that any fees (including any commission or other compensation) 
received by the fiduciary adviser for investment advice or with respect 
to the sale, holding, or acquisition of any security or other property 
for purposes of investment of plan assets do not vary depending on the 
basis of any investment option selected, or (ii) uses a computer model 
under an investment advice program meeting the requirements of section 
408(g)(3) in connection with the provision of investment advice by a 
fiduciary adviser to a participant or beneficiary, and with respect to 
which the requirements in section 408(g)(4) through (9)--which includes 
a requirement pertaining to the disclosure of certain fees--are 
satisfied.

Computer Model

    In order for an investment advice program using a computer model to 
meet the requirements of section 408(g)(3), the program must satisfy 
subparagraphs (B), (C) and (D) thereof. Section 408(g)(3)(B) requires, 
in particular, that the investment advice provided under the investment 
advice program must be provided pursuant to a computer model that:
    (i) Applies generally accepted investment theories that take into 
account the historic returns of different asset classes over defined 
periods of time,
    (ii) utilizes relevant information about the participant, which may 
include age, life expectancy, retirement age, risk tolerance, other 
assets or sources of income, and preferences as to certain types of 
investments,
    (iii) utilizes prescribed objective criteria to provide asset 
allocation portfolios comprised of investment options available under 
the plan,
    (iv) operates in a manner that is not biased in favor of 
investments offered by the fiduciary adviser or a person with a 
material affiliation or contractual relationship with the fiduciary 
adviser, and
    (v) takes into account all investment options under the plan in 
specifying how a participant's account balance should be invested and 
is not inappropriately weighted with respect to any investment option.
    Under section 408(g)(3)(C), an ``eligible investment expert'' must 
certify, prior to the utilization of the computer model and in 
accordance with rules prescribed by the Secretary of Labor (Secretary), 
that the computer model meets the requirements described in section 
408(b)(3)(B). Additionally, if, as determined under regulations 
prescribed by the Secretary, there are material modifications to the 
computer model, a certification must be obtained with respect to the 
computer model as modified. In relevant part, section 408(g)(3)(C) 
defines ``eligible investment expert'' to mean any person which meets 
such requirements as the Secretary may provide, and does not bear any 
material affiliation or contractual relationship with certain persons.

Disclosure of Fee-Related Information

    Regardless of whether an arrangement provides for non-varying fees 
(section 408(g)(2)(A)(i)) or uses a computer model under an investment 
advice program (section 408(g)(2)(A)(ii)), the arrangement also must 
satisfy section 408(g)(4) through (9) in order to qualify as an 
``eligible investment advice arrangement.'' In particular, section 
408(g)(6) requires that a fiduciary adviser provide to participants and 
beneficiaries written notification of ``all fees or other compensation 
relating to the advice that the fiduciary adviser or any affiliate 
thereof is to receive (including compensation provided by any third 
party) in connection with the provision of the advice or in connection 
with the sale, acquisition, or holding of the security or other 
property.'' ERISA section 408(g)(6)(A)(iii). Section 408(g)(8)(A) 
requires that this notification be written in a clear and conspicuous 
manner and in a manner calculated to be understood by the average plan 
participant and be sufficiently accurate and comprehensive to 
reasonably apprise participants and beneficiaries of the information 
required to be provided in the notification. For the disclosure of fees 
and compensation described in section 408(g)(6)(A)(iii), section 
408(g)(8)(B) directs the Secretary to issue a model form which meets 
the section 408(g)(8)(A) standards.

B. Issues Under Consideration

    The ERISA section 408(g)(3)(C) computer model certification 
requirements provide for regulatory guidance in three areas. First, 
section 408(g)(3)(C)(i) requires that an ``eligible investment expert'' 
must certify, in accordance with rules prescribed by the Secretary, 
that a computer model meets the criteria set forth in section 
408(g)(3)(B). Second, under section 408(g)(3)(C)(ii), the Secretary may 
prescribe regulations which provide guidance regarding ``material 
modifications'' to a computer model that also require certification. 
Third, under section 408(g)(3)(C)(iii), the Secretary may establish 
requirements that a person must satisfy in order to qualify as an 
``eligible investment expert.'' The Department is interested in 
comments that would assist in the development of regulatory guidance 
and in the assessment of economic costs and benefits in these three 
areas.
    Additionally, ERISA section 408(g)(8)(B) directs the Secretary to 
issue a model form for the disclosure of fees and other compensation 
required by section 408(g)(6)(A)(iii) that meets the standards for 
presentation of information prescribed in section 408(g)(8)(A). The 
Department is interested in comments that would assist in the 
development of a model form for this purpose and in the assessment of 
the economic costs and benefits of a model form for this purpose.
    Commenters may provide information with respect to either or both 
sets of issues. A list of some of the issues with respect to which 
comments are requested is included below. Other information pertinent 
to the Department's consideration of the issues described above is also 
invited.

Request for Information

Computer Model Certification
    1. What procedures and information would be necessary and adequate 
to determine whether a computer model used in connection with an 
investment advice program satisfies the criteria described in ERISA 
section 408(g)(3)(B)? For example, would it be necessary to examine 
underlying computer programs/algorithms, computer software/hardware, or 
input data

[[Page 70431]]

including investment-specific information; would it be possible to make 
a determination based on the results of applying the investment advice 
program to a sample set of the input data? (Commenters are requested to 
explain by reference to each of the five computer model characteristics 
described in section 408(g)(3)(B), summarized above.)
    2. What types (e.g., technological, financial, other) and levels 
(e.g., educational, professional experience, professional 
certification) of expertise would be required to determine whether a 
computer model used in connection with an investment advice program 
satisfies the criteria described in ERISA section 408(g)(3)(B)? 
(Commenters are requested to explain by reference to each of the five 
computer model characteristics described in section 408(g)(3)(B), 
summarized above.)
    3. With respect to currently-available computer models or programs 
for providing investment advice to plan participants or beneficiaries 
in the form of asset allocation portfolios comprised of plan investment 
options: \3\
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    \3\ Commenters are reminded that, as described above, materials 
submitted in response to this request will be publicly available.
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    a. What is the process for designing, developing and implementing 
the computer model/program? What parties are involved, and what are 
their roles? What hardware and software technologies are used to 
construct computer model investment advice programs? What direct 
economic costs are associated with the process for designing, 
developing and implementing the computer model/program?
    b. What types of modifications are made to the computer model/
program after use has begun? Why and how often are the modifications 
made (e.g., changes in methodology, technology, economy, marketplace, 
or plan), and how do the modifications affect the investment advice 
provided? What parties are involved in the modification process, and 
what are their roles? What direct economic costs may be associated with 
the modifications?
    c. What economic costs and benefits are associated with the use of 
the computer model/program for providing investment advice, including 
changes in investment performance and in retirement wealth due to the 
provision of such advice? What are the indirect costs and benefits, 
such as impact on markets for financial services, including investment 
advice services, and impact on financial markets, including demand for 
and pricing of securities?
    4. Would the responses to 3.a., 3.b., or 3.c. differ in the case of 
a computer model/investment advice program intended to satisfy the 
requirements of ERISA section 408(g)(3)(B)?
    5. With respect to the Department's development of regulatory 
guidance, what special considerations, if any, should be made for small 
businesses or other small entities? Are there unique costs and benefits 
for small businesses or other small entities?
Model Form for Disclosure of Fees and Other Compensation
    1. In general, what types of information relating to fees received 
by fiduciary advisers and their affiliates would be helpful to 
participants and beneficiaries in making their investment decisions?
    2. What types of fees and compensation (including those provided by 
third parties) would be encompassed by ERISA section 408(g)(6)(A)(iii)? 
In relevant part, this provision refers to ``all fees or other 
compensation relating to the advice that the fiduciary adviser or any 
affiliate thereof is to receive (including compensation provided by any 
third party) in connection with the provision of the advice or in 
connection with the sale, acquisition, or holding of the security or 
other property.''
    3. What challenges might be encountered in assembling and/or 
presenting the information on fees and compensation described in 
section 408(g)(6)(A)(iii) in a manner that is clear and understandable 
by the average plan participant? Are there any suggestions as to how 
these challenges can be addressed by the Department?
    4. Is there a form or format for presenting information on fees and 
compensation described in section 408(g)(6)(A)(iii) (e.g., narrative, 
chart, combination of both) that might be particularly suitable in 
giving participants a clear and understandable description of the fees 
and compensation received by a fiduciary adviser or its affiliates? Is 
there an optimal time frame, relative to when the advice is provided, 
for providing this information to participants and beneficiaries? What 
impact, if any, will the receipt of a model form have on investment 
decisions made by participants and beneficiaries?
    5. Persons that may qualify as ``fiduciary advisers'' are invited 
to provide forms that they currently use, or might use, to provide the 
kinds of fee and compensation information described above. As described 
in ERISA section 408(g)(11)(A), ``fiduciary advisers'' may include 
investment advisers registered under the Investment Advisers Act of 
1940, certain banks and similar financial institutions, insurance 
companies qualified to do business under the laws of a State, and 
brokers or dealers registered under the Securities Exchange Act of 
1934. Commenters are reminded that submissions are made solely for the 
purpose of assisting the Department. Accordingly, no inferences should 
be drawn as to whether the forms submitted meet the standards for 
presentation described in ERISA section 408(g)(8)(A).

    Signed at Washington, DC, this 28th day of November, 2006.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. E6-20402 Filed 12-1-06; 8:45 am]

BILLING CODE 4510-29-P