Investment Advice
Rev. 04/16/10; E-mail Alert 2010-6

On February 26, 2010 the DOL issued new proposed rules regarding individualized investment advice within participant-directed individual account plans and to IRAs and similar accounts.  The DOL had released final regulations on January 21, 2009, but implementation was delayed until the incoming administration could review them. Those regulations and the associated prohibited transaction exemption (PTE) were withdrawn in November 2009 due to concerns over a class exemption which could have opened up the possibility of self-dealing by investment advisers.  The 2010 proposed regulations are limited to the implementation of the Pension Protection Act statutory exemption relating to investment advice.

The proposed rules allow two methods for fiduciary advisers to provide advice under “eligible investment advice arrangements”:

1. By use of a computer model that meets specific requirements and provides unbiased advice.  The program will need to be certified in advance by an independent investment expert.
2. Fee leveling: Compensation or commissions earned by a fiduciary adviser may not vary based on the investments selected by a participant.

In addition to ensuring the computer model is certified prior to its use; a process must also be established for the selection of the investment expert who certifies the program.  An independent auditor will be required to perform an annual audit of the plan’s investment advice arrangements.

Fiduciary advisers will be required to provide participants or beneficiaries with a disclosure statement which will include, among other things, the fees the adviser is to receive.  The DOL will be providing a model Fiduciary Adviser Disclosure Form to assist fiduciary advisers with satisfying the new disclosure rules.

The proposed regulations contain clarifying language to address concerns (received in comment letters) with the provisions of the final rule that interpret the statutory exemption's fee-leveling requirement. They observed that the final rule would permit the receipt of varying fees by an affiliate of a fiduciary adviser, and that this would permit an affiliate of a fiduciary adviser to establish economic incentives for either the fiduciary adviser, or individuals providing investment advice on its behalf, to recommend investments that pay varying fees to the affiliate. Thus, the final rule would not adequately protect participants and beneficiaries from advice influenced by the affiliates' interests.

In the new proposal proposed rules the DOL is emphasizing that, as was stated in Field Assistance Bulletin 2007-1, the receipt by a fiduciary adviser of any payment from any party (including an affiliate of the fiduciary adviser), or used for the benefit of such fiduciary adviser, that is based, in whole or part, on investments selected by participants or beneficiaries would be inconsistent with the fee-leveling requirement of the statutory exemption. Clarification is also   provided in that this limitation applies both to an entity that is retained to render advice, and to any employee, agent, or registered representative of such an entity. Thus, even though an affiliate of a fiduciary adviser may receive fees that vary depending on investment options selected, any provision of financial or economic incentives by an affiliate (or any other party) to a fiduciary adviser or any individual employed by such fiduciary adviser (e.g., an employee providing advice on its behalf or an individual responsible for supervising such an employee) to favor certain investments would be impermissible. Proposed Rule paragraph (b)(3)(i)(D) of Sec. 2550.408g-1.

Following is a DOL overview of some of the requirements in the Proposed Investment Advice Program:

"Several other requirements also must be satisfied, including disclosure of fees the adviser is to receive. The regulation contains some key safeguards and conditions, including:

• Requiring that a plan fiduciary (independent of the investment adviser or its affiliates) select the computer model or fee leveling investment advice arrangement.

• Imposing recordkeeping requirements for investment advisers relying on the exemption for computer model or fee leveling advice arrangements.

• 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 fee-leveling requirements do not permit investment advisers (including its employees) to receive compensation from affiliates on the basis of their recommendations.

• Establishing an annual audit of investment advice arrangements, including the requirement that the auditor be independent from the investment advice provider.

• Requiring disclosures by advisers to plan participants."

To learn more, call 973-492-1880 or e-mail info@mhco.com.