The Employee Benefits Security Administration (EBSA) recently published new proposed regulations intended to implement provisions of the Pension Protection Act of 2006 (PPA) that create a new statutory exemption from the prohibited transaction rules for the purpose of expanding the availability of investment advice to participants in certain plans like 401(k) plans and individual retirement accounts (IRAs). An earlier final regulation, and a related class exemption, pertaining to these PPA provisions were published in January 2009 and then withdrawn in November 2009.
The new proposed regulation allows investment advice to be given under the statutory exemption in two ways — through the use of a computer model certified as unbiased, or through an adviser compensated on a “level-fee” basis (i.e., fees do not vary based on investments selected by the participant). The new proposed regulation contains key safeguards and conditions, including:
A requirement that a plan fiduciary (independent of the investment adviser or its affiliates) select the computer model or fee leveling investment advice arrangement
- Mandatory recordkeeping requirements for investment advisers relying on the exemption for computer model or fee-leveling advice arrangements
- A requirement that computer models must be certified in advance as unbiased and meeting the exemption’s requirements by an independent expert
- The establishment of qualifications and a selection process for the investment expert who must perform the above certification
- A clarification that the fee-leveling requirements do not permit investment advisers (including its employees) to receive compensation from affiliates on the basis of their recommendations
- Mandatory annual audits of investment advice arrangements, including the requirement that the auditor be independent from the investment advice provider
- Required disclosures by advisers to plan participants
The new proposed regulation in many respects is very similar to the withdrawn regulation. The new regulation, however, does not include the class exemption available under the withdrawn regulation that would have allowed advisers to provide follow-up investment advice to plan participants who received advice based on computer modeling — concerns were raised about the potential for adviser self-dealing, which resulted in the withdrawal of the first set of regulations.
The regulations will be effective 60 days after they are published as final regulations in the Federal Register.