DOL FAB 2007-1
Investment Advice
Rev. 02/09/07, E-mail Alert 2007-2

The DOL just issued FAB 2007-1 to provide guidance on the Pension Protection Act (PPA) exemption for investment advice for qualified plan participants.

PPA Section 601 added Section 408(b)(14) to ERISA and Section 4975(d)(17) to the Code. Section 408(b)(14) applies to the provision of investment advice under an “eligible investment advice arrangement“, (EIAA) as defined in paragraph (2) of section 408(g), to participants and beneficiaries of a defined contribution plan that permits them to direct the investment of their accounts in the plan. If the conditions of Section 408(g) are met, Section 408(b)(14) exempts from the prohibited transaction rules the provision of investment advice, the investment transaction entered into pursuant to the advice, and the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate in connection with the provision of advice or the transaction pursuant to the advice.

The prohibited transaction provisions of ERISA and the Internal Revenue Code (Code) prohibit an investment advice fiduciary from using the authority, control or responsibility which makes it a fiduciary to cause itself, or a party in which it has an interest (that may affect its best judgment as a fiduciary) to receive additional fees.

This provision does not exempt a plan sponsor or a plan fiduciary from fiduciary responsibility under ERISA for the prudent selection and periodic review of the selected fiduciary adviser. The provision does make clear, however, that plan sponsors and other persons who are fiduciaries do not have a duty under ERISA to monitor the specific investment advice given by a fiduciary adviser to any particular participant receiving the advice.

• that persons who develop or market computer models described in Section 408(g)(3) or who market investment advice programs using such models are fiduciaries, and
  
• requires advisers to expressly acknowledge their fiduciary status, Sections 408(b)(14) and 408(g).
  

Otherwise PPA does not alter ERISA's framework for determining fiduciary status or recast otherwise permissible forms of investment advice as prohibited.

The DOL states that the new provisions do not invalidate or otherwise affect prior DOL guidance relating to investment advice. For example:

• Interpretive Bulletin 96-1 (29 CFR § 2509.96-1), in which the Department identified categories of investment-related information and materials that do not constitute investment advice;
  
• Advisory Opinion Nos. 97-15A and 2005-10A, in which the Department explained that a fiduciary investment adviser could provide investment advice with respect to investment funds that pay it or an affiliate additional fees without engaging in a prohibited transaction if those fees are offset against fees that the plan otherwise is obligated to pay to the fiduciary; and
  
• Advisory Opinion 2001-09A in which the Department concluded that the provision of fiduciary investment advice, under circumstances where the advice provided by the fiduciary with respect to investment funds that pay additional fees to the fiduciary is the result of the application of methodologies developed, maintained and overseen by a party independent of the fiduciary, would not result in prohibited transactions.

2. To what extent are the standards for selecting and monitoring a fiduciary adviser described in Section 408(g)(10) different from the standards applicable to plan fiduciaries who offer an investment advice program with respect to which relief under the statutory exemption for investment advice (Section 408(b)(14)) is not required?

The same fiduciary duties and responsibilities apply to the selection and monitoring of an investment adviser for participants and beneficiaries in a participant directed individual account plan, regardless of whether the program of investment advice services is one to which the statutory exemption applies -- with the exception of certain requirements in subparagraph (A)(i) – (iii) of Section 408(g)(10).

A fiduciary shall still have the duty to select and review the investment advice provider prudently. This principle is consistent with the Department's guidance provided in Interpretive Bulletin 96-1 regarding the provision of investment advice generally. See 29 CFR § 2509.96-1(e). Accordingly, it is the view of the Department that a plan sponsor or other fiduciary will not fail to meet the requirements of Part 4 of Title I of ERISA solely by reason of offering a program of investment advice services to participants or beneficiaries that is not an “eligible investment advice arrangement.”

Plan fiduciaries have a duty to prudently select and periodically monitor the advisory program. Fiduciaries have no duty to monitor the specific investment advice given by the fiduciary adviser to any particular recipient of advice. Thus, it is the view of the Department that a plan sponsor or other fiduciary that prudently selects and monitors an investment advice provider will not be liable for the advice furnished by such provider to the plan's participants and beneficiaries, whether or not that advice is provided pursuant to the statutory exemption under Section 408(b)(14).

The Department believes that fiduciaries selecting advisory programs are subject to the same fiduciary duty to prudently select and monitor investment advisers regardless of whether the advice arrangement was established under the Section 408(b)(14) exemption. Like fiduciaries offering exempted advice arrangements, fiduciaries offering programs of investment advice services with respect to which exemptive relief is not required have no duty to monitor the specific investment advice given by the investment advice provider to any particular recipient of the advice.

Prudent fiduciary process for selecting a service provider
The process also must avoid self dealing, conflicts of interest or other improper influence. A fiduciary should engage in an objective process to elicit information necessary to assess:

• the provider's qualifications,
  
• quality of services offered, and
  
• reasonableness of fees charged for the service.
  

The responsible fiduciary will take into account:

• the experience and qualifications of the investment adviser, including the adviser's registration in accordance with applicable federal and/or state securities law,
  
• the willingness of the adviser to assume fiduciary status and responsibility under ERISA with respect to the advice provided to participants, and
  
• the extent to which advice to be furnished to participants and beneficiaries will be based upon generally accepted investment theories.
  

Monitoring investment advisers
Fiduciaries will periodically review and consider, among other things:

• the extent to which there have been any changes in the information that served as the basis for the initial selection of the investment adviser, including whether the adviser continues to meet applicable federal and state securities law requirements,
  
• whether the advice being furnished to participants and beneficiaries was based upon generally accepted investment theories.
  
• whether the investment advice provider is complying with the contractual provisions of the engagement;
  
• utilization of the investment advice services by the participants in relation to the cost of the services to the plan; and
  
• participant comments and complaints about the quality of the furnished advice.
  With regard to comments and complaints, we note that to the extent that a complaint or complaints raise questions concerning the quality of advice being provided to participants, a fiduciary may have to review the specific advice at issue with the investment adviser.

Expensing the cost to the plan
As has been permitted in the past, 408(g)(10) makes clear that plan assets can be used to pay reasonable expenses for providing investment advice to participants and beneficiaries, provided that the service provider rendering investment advice is selected and monitored prudently. Consistent with this guidance, fiduciaries selecting programs of investment advice services with respect to which exemptive relief is not required may use plan assets to pay reasonable expenses in providing investment advice (and/or investment education) to plan participants and beneficiaries.

An EIAA 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.

The term “fiduciary adviser” is defined to mean a person who is a fiduciary of the plan by reason of providing investment advice and who is a registered investment adviser, a bank or similar financial institution, an insurance company, or a registered broker dealer; an affiliate of such registered investment adviser, bank, insurance company, or broker dealer; or an employee, agent or registered representative of any such entity.

A person can be a fiduciary adviser only if that person is a fiduciary of the plan by virtue of providing investment advice. An affiliate of a registered investment adviser, a bank or similar financial institution, an insurance company, or a registered broker dealer will be subject to the varying fee limitation only if that affiliate is providing investment advice to plan participants and beneficiaries.

The DOL view is that Congress did not intend for the requirement that fees not vary depending on the basis of any investment options selected to extend beyond the fiduciary advisor to affiliates of the fiduciary adviser, unless, of course, the affiliate is also a provider of investment advice to a plan.

PPA permits employees, agents, or registered representatives of fiduciary advisers to qualify as fiduciary advisers if they satisfy the requirements of applicable insurance, banking, and securities laws relating to the provision of the advice. As with affiliates, such an individual must also provide investment advice in his or her capacity as employee, agent, or registered representative. It is the view of the Department that when an individual acts as an employee, agent or registered representative on behalf of an entity engaged to provide investment advice to a plan, that individual, as well as the entity, must be treated as the fiduciary adviser. In such instances, therefore, both the individual and the entity would be treated as fiduciary advisers.

A party seeking to avail itself of a statutory or administrative exemption from the prohibited transaction provisions bears the burden of establishing compliance with the conditions of the exemption. With regard to the exemptive relief accorded an “eligible investment advice arrangement”, the Department expects that parties offering investment advisory services will maintain, and be able to demonstrate compliance with, policies and procedures designed to ensure that fees and compensation paid to fiduciary advisers, at both the entity and individual level, do not vary on the basis of any investment option selected. Moreover, it is anticipated that compliance with such policies and procedures will be reviewed as part of the annual audit required by Section 408(g)(5)(A) and addressed in the report referred to in Section 408(g)(5)(B).

Questions concerning the information contained in this Bulletin may be directed to the Division of Fiduciary Interpretations, Office of Regulations and Interpretations, 202.693.8510.

For McKay Hochman's article on the PPA exemption, click here.