The Department of Labor today published in the Federal Register its final regulation on the provision of investment advice to plan participants and beneficiaries in individual account plans and IRAs. The regulation implements the statutory prohibited transaction exemption that was enacted as part of the Pension Protection Act that expands the availability of investment advice to plan participants and IRA holders. The final rule is effective on December 27, 2011.
The final regulation requires that no fiduciary adviser (including any employee, agent, or registered representative) that provides investment advice receive from any party (including an affiliate of the fiduciary adviser), directly or indirectly, any fee or other compensation (including commissions, salary, bonuses, awards, promotions, or other things of value) that varies depending on the basis of a participant's or beneficiary's selection of a particular investment option. The Department noted, however, that whether any particular salary, bonus, award, promotion or commission program meets or fails the fee-leveling requirement depends on the details of the program. The details of such a program will be the subject of both a review and a report by an independent auditor as a condition for relief under the regulation.
In addition to the above requirement, a plan fiduciary that is independent of the fiduciary adviser or its affiliates must authorize the advice arrangement. The fiduciary adviser must also provide certain disclosure to the plan participants and beneficiaries and to the authorizing fiduciary. Annual audits of both the level-fee and computer model arrangements and maintenance of records requirements are also required by the regulation.
The final regulation permits investment advice that relies on the use of computer models. A fiduciary adviser who relies on a computer model must be able to demonstrate that the computer model is designed and operated to apply generally-accepted investment theories. The computer model must be certified in advance as unbiased and meeting the other requirements in the regulation. The computer model must take into account the historic risks and returns of different asset classes over defined periods of time but can also take into account additional considerations. The computer model must also factor into its analysis investment management and other fees and expenses relating to the recommended investments. The regulation also sets forth the qualification requirements for the investment expert who will certify the computer model