Department of Labor by cuiliqing

VIEWS: 3 PAGES: 33

									                                                                                                                                  Wednesday,
                                                                                                                                  January 21, 2009




                                                                                                                                  Part III

                                                                                                                                  Department of Labor
                                                                                                                                  Employee Benefits Security
                                                                                                                                  Administration

                                                                                                                                  29 CFR Part 2550
                                                                                                                                  Investment Advice—Participants and
                                                                                                                                  Beneficiaries; Final Rule
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                                            3822             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            DEPARTMENT OF LABOR                                     payment of additional advisory and                         indirect receipt of compensation by a
                                                                                                    other fees to the fiduciaries or their                     fiduciary adviser or affiliate in
                                            Employee Benefits Security                              affiliates. Section 4975 of the Code                       connection with the provision of
                                            Administration                                          applies similarly to the rendering of                      investment advice or the acquisition,
                                                                                                    investment advice by a fiduciary to an                     holding or sale of a security or other
                                            29 CFR Part 2550                                        individual retirement account (IRA)                        property available as an investment
                                            RIN 1210–AB13                                           beneficiary.                                               under the plan pursuant to the
                                                                                                       With the growth of participant-                         investment advice.
                                            Investment Advice—Participants and                      directed individual account plans, there                      On December 4, 2006, the Department
                                            Beneficiaries                                           has been an increasing recognition of                      published a Request for Information
                                                                                                    the importance of investment advice to                     (RFI) in the Federal Register soliciting
                                            AGENCY: Employee Benefits Security                      participants and beneficiaries in such                     information to assist the Department in
                                            Administration, Labor.                                  plans. Over the past several years, the                    the development of regulations under
                                            ACTION: Final rule.                                     Department of Labor (Department) has                       sections 408(b)(14) and 408(g).5
                                                                                                    issued various forms of guidance                           Specifically, the Department invited
                                            SUMMARY: This document contains final
                                                                                                    concerning when a person would be a                        interested persons to address the
                                            rules under the Employee Retirement
                                                                                                    fiduciary by reason of rendering                           qualifications for the ‘‘eligible
                                            Income Security Act, and parallel
                                                                                                    investment advice and when the                             investment expert’’ that is required to
                                            provisions in the Internal Revenue Code
                                                                                                    provision of investment advice might                       certify that computer models used in
                                            of 1986, relating to the provision of                   result in prohibited transactions.2 Most
                                            investment advice by a fiduciary adviser                                                                           connection with the statutory
                                                                                                    recently, Congress and the                                 exemption meet the requirements of the
                                            to participants and beneficiaries in                    Administration, responding to the need
                                            participant-directed individual account                                                                            statutory exemption. The Department
                                                                                                    to afford participants and beneficiaries                   also invited interested persons to
                                            plans, such as 401(k) plans, and                        greater access to professional
                                            beneficiaries of individual retirement                                                                             provide information to assist the
                                                                                                    investment advice, amended the                             Department in developing procedures to
                                            accounts (and certain similar plans).                   prohibited transaction provisions of
                                            These rules affect sponsors, fiduciaries,                                                                          be followed in certifying that a
                                                                                                    ERISA and the Code, as part of the                         computer model meets the requirements
                                            participants and beneficiaries of                       Pension Protection Act of 2006 (PPA),3
                                            participant-directed individual account                                                                            of the statutory exemption. The
                                                                                                    to permit a broader array of investment                    Department also invited suggestions for
                                            plans, as well as providers of                          advice providers to offer their services
                                            investment and investment advice-                                                                                  a model disclosure form for purposes of
                                                                                                    to participants and beneficiaries                          the statutory exemption. In response to
                                            related services to such plans.                         responsible for investment of assets in                    the RFI, the Department received 24
                                            DATES: These final rules are effective on               their individual accounts and,                             letters addressing a variety of issues
                                            March 23, 2009.                                         accordingly, for the adequacy of their                     presented by the statutory exemption.
                                            FOR FURTHER INFORMATION CONTACT: Fred                   retirement savings.                                        These comments were taken into
                                            Wong, Office of Regulations and                            Specifically, section 601 of the PPA                    account in developing the proposed
                                            Interpretations, Employee Benefits                      added a statutory exemption under                          regulations described below.
                                            Security Administration, (202) 693–                     sections 408(b)(14) and 408(g) of ERISA.                      On February 2, 2007, the Department
                                            8500. This is not a toll-free number.                   Parallel provisions were added to the                      issued Field Assistance Bulletin 2007–
                                            SUPPLEMENTARY INFORMATION:                              Code at sections 4975(d)(17) and                           01 addressing certain issues presented
                                                                                                    4975(f)(8).4 Section 408(b)(14) sets forth                 by the new statutory exemption. This
                                            A. Background                                           the investment advice-related                              Bulletin affirmed that the enactment of
                                               Section 3(21)(A)(ii) of the Employee                 transactions that will be exempt from                      sections 408(b)(14) and 408(g) did not
                                            Retirement Income Security Act of 1974                  the prohibitions of section 406 if the                     invalidate or otherwise affect prior
                                            (ERISA) and section 4975(e)(3)(B) of the                requirements of section 408(g) are met.                    guidance of the Department relating to
                                            Internal Revenue Code of 1986 (Code)                    The transactions described in section                      investment advice and that such
                                            include within the definition of                        408(b)(14) are: The provision of                           guidance continues to represent the
                                            ‘‘fiduciary’’ a person that renders                     investment advice to the participant or                    views of the Department.6 The Bulletin
                                            investment advice for a fee or other                    beneficiary with respect to a security or
                                            compensation, direct or indirect, with                  other property available as an                               5 71 FR 70429. The Department, on the same date,

                                            respect to any moneys or other property                 investment under the plan; the                             also published an RFI in the Federal Register
                                            of a plan, or has any authority or                      acquisition, holding or sale of a security                 soliciting information to assist the Department in
                                                                                                    or other property available as an                          determining, as required by PPA section 601(b)(3),
                                            responsibility to do so.1 The prohibited                                                                           the feasibility of using computer models in
                                            transaction provisions of ERISA and the                 investment under the plan pursuant to                      connection with individual retirement accounts. 72
                                            Code prohibit an investment advice                      the investment advice; and the direct or                   FR 70427.
                                            fiduciary from using the authority,                                                                                  6 In this regard, the Department cited the

                                            control or responsibility that makes it a                  2 See Interpretative Bulletin relating to participant   following: August 3, 2006 Floor Statement of Senate
                                                                                                    investment education, 29 CFR 2509.96–1                     Health, Education, Labor and Pensions Committee
                                            fiduciary to cause itself, or a party in                (Interpretive Bulletin 96–1); Advisory Opinion (AO)        Chairman Enzi (who chaired the Conference
                                            which it has an interest that may affect                2005–10A (May 11, 2005); AO 2001–09A (December             Committee drafting legislation forming the basis of
                                            its best judgment as a fiduciary, to                    14, 2001); and AO 97–15A (May 22, 1997).                   H.R. 4) regarding investment advice to participants
                                            receive additional fees. As a result, in                   3 Public Law 109–280, 120 Stat. 780 (Aug. 17,           in which he states, ‘‘It was the goal and objective
                                                                                                    2006).                                                     of the Members of the Conference to keep this
                                            the absence of a statutory or                              4 Under Reorganization Plan No. 4 of 1978 (43 FR        advisory opinion [AO 2001–09A, SunAmerica
                                            administrative exemption, fiduciaries                   47713, Oct. 17, 1978), 5 U.S.C. App. 1, 92 Stat.           Advisory Opinion] intact as well as other pre-
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                                            are prohibited from rendering                           3790, the authority of the Secretary of the Treasury       existing advisory opinions granted by the
                                            investment advice to plan participants                  to issue rulings under section 4975 of the Code has        Department. This legislation does not alter the
                                                                                                    been transferred, with certain exceptions not here         current or future status of the plans and their many
                                            regarding investments that result in the                relevant, to the Secretary of Labor. Therefore, the        participants operating under these advisory
                                                                                                    references in this notice to specific sections of          opinions. Rather, the legislation builds upon these
                                              1 See also 29 CFR 2510.3–21(c) and 26 CFR             ERISA should be taken as referring also to the             advisory opinions and provides alternative means
                                            54.4975–9(c).                                           corresponding sections of the Code.                        for providing investment advice which is protective



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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                                   3823

                                            also confirmed the applicability of the                 merger of the two proposals, as well as                provide or otherwise make available any
                                            principles set forth in section 408(g)(10)              other changes. The provisions                          investment advice to a participant or
                                            [Exemption for plan sponsor and certain                 applicable to the statutory exemption                  beneficiary. Paragraph (a)(3) provides
                                            other fiduciaries] to plan sponsors and                 are set forth in paragraph (b) of the final            that nothing contained in those same
                                            fiduciaries who offered investment                      rule and the provisions applicable to the              provisions of ERISA and the Code, the
                                            advice arrangements with respect to                     class exemption are set forth at                       regulation or the class exemption
                                            which relief under the statutory                        paragraph (d) of the final rule. In                    invalidates or otherwise affects prior
                                            exemption is not required. Finally, the                 addition to the structural changes, the                regulations, exemptions, interpretive or
                                            Bulletin addressed the scope of the fee-                final rule, while retaining the general                other guidance issued by the
                                            leveling requirement for purposes of an                 requirements and substance of the                      Department pertaining to the provision
                                            eligible investment advice arrangement                  proposals, reflects a number of                        of investment advice and the
                                            described in section 408(g)(2)(A)(i).                   clarifying changes made in response to                 circumstances under which such advice
                                               On August 22, 2008, the Department                   suggestions and concerns from                          may or may not constitute a prohibited
                                            published in the Federal Register                       commenters on the proposals. These                     transaction under section 406 of ERISA
                                            proposed regulations that would, upon                   suggestions and concerns are discussed                 or section 4975 of the Code.7
                                            adoption, implement the provisions of                   below.                                                    One commenter requested
                                            the statutory exemption for the                            Paragraph (a)(1) of the final rule                  confirmation that the provision of
                                            provision of investment advice to                       describes the general scope of the final               investment advice pursuant to the final
                                            participants and beneficiaries under                    rule, referencing both the statutory                   rule will not affect the relief accorded
                                            sections 408(b)(14) and 408(g) of the Act               exemption under sections 408(b)(14)                    plan fiduciaries under section 404(c) of
                                            and the parallel provisions in the Code                 and 408(g)(1) of ERISA and sections                    the Act. It is the view of the Department
                                            (73 FR 49896). On the same date, the                    4975(d)(17) and 4975(f)(8) of the Code                 that there is nothing in the Act, Code,
                                            Department also published a proposed                    for certain transactions in connection                 or this final rule that, in connection
                                            class exemption that, upon adoption,                    with the provision of investment advice,               with the offering or provision of
                                            would establish alternative conditions                  as set forth in paragraph (b) of the final             investment advice, would itself affect
                                            for granting prohibited transaction relief              rule, and the class exemption, issued                  the availability of relief to plan sponsors
                                            in connection with the provision of                     pursuant to the Department’s authority                 or other fiduciaries of the plan (with the
                                            investment advice, and thereby promote                  under section 408(a) of ERISA and                      exception of the fiduciary advisers)
                                            the broad availability of investment                    section 4975(c)(2) of the Code, for                    otherwise available under section
                                            advice to both participants and                         certain transactions not otherwise                     404(c). The Department notes that, as
                                            beneficiaries in individual account                     covered by the statutory exemption. In                 explained in Field Assistance Bulletin
                                            plans and beneficiaries with individual                 response to the concerns of some                       2007–1, a plan sponsor or other
                                            retirement accounts (73 FR 49924). In                   commenters that the conditions of the                  fiduciary that prudently selects and
                                            response to these proposals, the                        final rule might be construed as being                 monitors an investment advice provider
                                            Department received forty-three                         applicable to all investment advice                    will not be liable for the advice
                                            comment letters.                                        arrangements, without regard to                        furnished by such provider to the plan’s
                                               On October 21, 2008, the Department                  whether the provision of advice                        participants and beneficiaries, whether
                                            held a public hearing at which                          pursuant to such arrangements involves                 or not that advice is provided pursuant
                                            interested members of the public were                   prohibited transactions, paragraph (a)(1)              to the statutory exemption under section
                                            afforded an additional opportunity to                   makes clear that the requirements and                  408(b)(14).8 It is the view of the
                                            present their views on the proposals.                   conditions of the final rule apply solely              Department that section 404(c) and the
                                            Eight organizations testified at the                    for the relief described in the final rule             Department’s regulations thereunder do
                                            hearing.                                                and, accordingly, that no inferences                   not limit the liability of fiduciary
                                               Set forth below is an overview of the                should be drawn with respect to the                    advisers that, pursuant to the
                                            final rules and an overview of the major                requirements applicable to the provision               exemptions contained in the final rule,
                                            comments received on the proposed                       of investment advice not addressed by                  specifically assume and acknowledge
                                            rules and class exemption.                              the rule.                                              fiduciary responsibility for the
                                                                                                       Commenters also requested that the                  provision of investment advice, within
                                            B. Overview of Final § 2550.408g–1 and
                                                                                                    final rule make clear that nothing in the              the meaning of section 3(21)(A)(ii) and
                                            Public Comments
                                                                                                    rule establishes an obligation on the part             the regulations issued thereunder, and
                                            1. General                                              of plans or plan sponsors to provide                   related transactions; advice that clearly
                                               As noted above, the Department                       investment advice. Other commenters                    is intended to serve as the primary basis
                                            published both a proposed regulation                    requested that the Department reaffirm                 for investment decisions by plan
                                            and a proposed class exemption                          its view that neither the statutory                    participants and beneficiaries. Section
                                            pertaining to the furnishing of                         exemption under section 408(g)(1) nor                  404(c) provides relief for acts which are
                                            investment advice to participants and                   the regulations issued thereunder                      the direct and necessary result of a
                                            beneficiaries. In an effort to facilitate               invalidate or otherwise affect prior                   participant’s or beneficiary’s exercise of
                                            both use of and reference to the relief                 guidance concerning the circumstances                  control. The investment advice (and
                                            afforded by the statutory exemption and                 under which the provision of                           related transactions) covered by the
                                            the class exemption, the Department has                 investment advice would not constitute                 exemption and furnished to participants
                                            included both within a single final rule,               a prohibited transaction. The                          and beneficiaries would not, in the
                                            discussed below. In this regard, a                      Department addressed these concerns in                 Department’s view, be the direct and
                                            number of paragraph, subparagraph and                   paragraphs (a)(2) and (a)(3),                          necessary result of a participant’s or
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                                            other reference changes are reflected in                respectively. Paragraph (a)(2) provides
                                            the final rule to accommodate the                       that nothing contained in ERISA section                  7 See Field Assistance Bulletin 2007–1 (Feb. 2,

                                                                                                    408(g)(1), Code section 4975(f)(8), the                2007).
                                                                                                                                                             8 See section 408(g)(10) and Field Assistance

                                            of the interests of plan participants and IRA
                                                                                                    regulation or the class exemption                      Bulletin 2007–1 for a discussion of a fiduciary’s
                                            owners.’’ 152 Cong. Rec. S8,752 (daily ed. Aug. 3,      imposes an obligation on a plan                        duty to prudently select and monitor investment
                                            2006) (statement of Sen. Enzi).                         fiduciary or any other party to offer,                 advisers.



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                                            3824             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            beneficiary’s exercise of control and,                  408(g)(1) are satisfied, are specifically              theories that take into account historic
                                            accordingly, the fiduciary adviser would                limited to certain transactions that                   returns of different asset classes over
                                            not be relieved of liability for such                   involve the provision of investment                    defined periods of time, noting that
                                            advice. See examples at paragraphs                      advice to a participant or beneficiary of              additional considerations are not
                                            (f)(8) and (f)(9) of § 2550.404c–1.                     a plan. The scope of both the regulation               precluded from being taking into
                                                                                                    and the related class exemption,                       account.
                                            2. Statutory Exemption                                  therefore, were limited to these                          One commenter recommended that
                                            a. General                                              transactions. While advice provided to                 the investment advice also take into
                                                                                                    plan fiduciaries such as plan sponsors                 account investment management and
                                               Paragraph (b) of the final rule
                                                                                                    may well be similar in many respects to                other fees attendant to the
                                            specifically addresses the statutory
                                                                                                    advice provided to participants and                    recommended investment(s). The
                                            exemption and applicable conditions set
                                                                                                    beneficiaries, the Department does not                 Department agrees that the fees and
                                            forth in section 408(g)(1) of the Act. Like
                                                                                                    believe it would be appropriate, as part               expenses attendant to an investment are
                                            the proposal, these provisions generally                                                                       an important consideration and should
                                                                                                    of this final rule, without further notice
                                            track the requirements under section                                                                           be factored into individualized
                                                                                                    and comment, to extend relief to
                                            408(g)(1) that must be satisfied in order                                                                      recommendations. Given the
                                                                                                    transactions involving investment
                                            for the investment advice-related                                                                              Department’s various regulatory
                                                                                                    advice provided to plan sponsors.
                                            transactions described in section                                                                              initiatives directed toward enhancing
                                                                                                    Accordingly, the Department has not
                                            408(b)(14) to be exempt from the                                                                               the consideration of investment-related
                                                                                                    adopted this suggestion.
                                            prohibitions of section 406.                               One commenter requested that the                    fees and expenses by plan fiduciaries
                                               Paragraph (b)(1) provides that for                   Department confirm that advice to a                    and plan participants and beneficiaries,9
                                            purposes of the relief afforded for                     participant or beneficiary concerning                  the Department believes that it is
                                            transactions described in section                       the selection of an investment manager                 reasonable to expect fiduciary advisers,
                                            408(b)(14) (and section 4975(d)(17) of                  to manage some or all of the                           as well as their computer models, to
                                            the Code) the investment advice must be                 participant’s or beneficiary’s assets                  take such fees and expenses into
                                            provided by a fiduciary adviser under                   constitutes the provision of investment                account in providing investment advice
                                            an ‘‘eligible investment advice                         advice within the meaning of section                   to the plan participants and
                                            arrangement.’’ The transactions                         3(21)(A)(ii) of ERISA for purposes of the              beneficiaries. The Department,
                                            described in section 408(b)(14) include                 statutory exemption and the class                      therefore, has added a new provision, at
                                            the provision of investment advice to a                 exemption. It has long been the view of                paragraph (b)(3)(i)(B), requiring
                                            participant or beneficiary with respect                 the Department that the act of making                  arrangements that utilize fee-leveling to
                                            to a security or other property available               individualized recommendations of                      take into account investment
                                            as an investment under the plan; the                    particular investment managers to plan                 management and other fees and
                                            acquisition, holding or sale of a security              fiduciaries may constitute the provision               expenses attendant to the recommended
                                            or other property available as an                       of investment advice within the                        investments. Similar changes appear in
                                            investment under the plan pursuant to                   meaning of section 3(21)(A). The                       paragraph (b)(4)(i)(B) for arrangements
                                            the advice; and the direct or indirect                  fiduciary nature of that advice does not,              that use computer models, and
                                            receipt of fees or other compensation by                in the Department’s view, change                       paragraph (d)(6)(i)(B), applicable to
                                            the fiduciary adviser or an affiliate in                merely because the advice is being given               arrangements for providing advice
                                            connection with the provision of the                    to a plan participant or beneficiary.                  under the class exemption.
                                            advice or in connection with the                        Accordingly, it is the view of the                        Paragraph (b)(3)(i)(C) of the final rule
                                            acquisition, holding or sale of the                     Department that the recommending of                    requires that arrangements utilizing fee-
                                            security or other property.                             investment managers to participants and                leveling must take into account certain
                                               With regard to the scope of relief, one              beneficiaries may constitute the                       personal information furnished by a
                                            commenter requested that the                            provision of investment advice for                     participant or beneficiary. In the
                                            Department clarify that transactions                    purposes of both the statutory and class               proposal, this information related to age,
                                            covered by the regulation and the class                 exemption contained in this final rule.                life expectancy, retirement age, risk
                                            exemption include extensions of credit                     Paragraph (b)(2) provides that, for                 tolerance, other assets or sources of
                                            and similar transactions necessary to the               purposes of section 408(g)(1) of the Act               income and investment preferences. The
                                            execution and settlement of trades of                   and 4975(f)(8) of the Code, an ‘‘eligible              Department received a number of
                                            securities. It is the view of the                       investment advice arrangement’’ is an                  comments on this provision. Many of
                                            Department that transactions in                         arrangement that meets the                             the commenters requested clarification
                                            connection with the provision of                        requirements of paragraph (b)(3),                      that the delineated factors were not
                                            investment advice described in section                  applicable to arrangements that use fee-               mandatory, some of the commenters
                                            3(21)(A)(ii) of ERISA include, for                      leveling, or paragraph (b)(4), applicable              noting that the fiduciary adviser may
                                            purposes of the statutory exemption and                 to arrangements that use computer                      not have the information, participants
                                            class exemption, otherwise permissible                  models, or both.                                       may not be willing to give the
                                            transactions necessary for the efficient                                                                       information or the information they
                                            execution and settlement of trades of                   b. Arrangements using fee-leveling                     furnish may be incomplete. Other
                                            securities, such as extensions of credit                   Paragraph (b)(3) sets forth the                     commenters recommended that the
                                            in connection with settlements.                         requirements applicable to investment
                                               One commenter requested that the                     advice arrangements that use fee-                         9 See ‘‘Fiduciary Requirements for Disclosure in

                                            relief afforded by the regulation and                   leveling under the statutory exemption.                Participant-Directed Individual Account Plans,’’ 73
                                                                                                                                                           FR 43013 (July 23, 2008) (proposed rule);
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                                            class exemption be extended to                          Paragraph (b)(3)(i) delineates the                     ‘‘Reasonable Contract or Arrangement under
                                            investment advice provided to plan                      specific requirements that must be met.                Section 408(b)(2)—Fee Disclosure; Proposed Rule,’’
                                            sponsors generally. The Department                      In this regard, paragraph (b)(3)(i)(A) of              73 FR 70987 (Dec. 13, 2007); and Notice of adoption
                                            notes that the transactions described in                the final rule, like the proposal, requires            of revisions to annual return/report forms, 72 FR
                                                                                                                                                           64731, 64788–794, 64824–28 (Nov. 16, 2007) (form
                                            408(b)(14), with respect to which relief                that any investment advice must be                     and instructions for the Schedule C (From 5500),
                                            is given if the requirements of section                 based on generally accepted investment                 ‘‘Service Provider Information’’).



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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                              3825

                                            information focus on ‘‘time horizons’’                  advice on behalf of a fiduciary adviser                and 408(g).10 The Department
                                            rather than life expectancy or retirement               cannot vary depending on the basis of                  concluded that, for purposes of section
                                            age, noting the use of ‘‘time horizons’’                any investment option selected by a                    408(g)(2)(A)(i), Congress could not have
                                            by the Financial Industry Regulatory                    participant or beneficiary. Paragraph                  intended for the requirement that fees
                                            Authority (FINRA) in its guidance on                    (b)(3)(i)(E) provides that any fees                    not vary depending on the basis of any
                                            determining the suitability of a                        (including any commission or other                     investment options selected to extend to
                                            recommendation.                                         compensation) received by the fiduciary                affiliates of the fiduciary adviser, unless,
                                               For purposes of the final rule, the                  adviser for investment advice or with                  of course, the affiliate is also a provider
                                            Department retained the factors                         respect to the sale, holding, or                       of investment advice to a plan. This
                                            delineated in the statute, section                      acquisition of any security or other                   position continues to reflect the
                                            408(g)(3)(B)(ii) of ERISA, as examples of               property for purposes of investment of                 Department’s legal analysis of section
                                            the information investment advice                       plan assets may not vary depending on                  408(g)(2)(A)(i) and, therefore, is
                                            should be capable of taking into                        the basis of any investment option                     reflected in the fee-leveling provisions
                                            account. The Department also has                        selected by a participant or beneficiary.              of the final regulation.
                                            included in the final rule, as an                          While a number of commenters                           With regard to those commenters
                                            additional factor, information pertaining               supported the Department’s application                 concerned about potential conflicts of
                                            to the participant’s or beneficiary’s                   of the fee-leveling requirement, some                  interest influencing the investment
                                            current investments in designated                       commenters objected to the                             advice recommendations, the
                                            investment options. The Department                      Department’s implementation of the                     Department believes that, while there
                                            believes that these factors are so                      statutory provision, arguing that                      may always be a few individuals who,
                                            fundamental to meaningful investment                    Congress, in an effort to eliminate the                without regard to limitations imposed
                                            advice, the Department is applying the                  potential for conflicts of interest,                   by law, abuse their position of trust as
                                            personal information requirement to all                 intended the fee-leveling requirement to               fiduciaries, the safeguards established
                                            advice provided under the statutory                     encompass not only the fiduciary                       by the regulation, as well as the class
                                            exemption and class exemption.                          adviser but also affiliates of the                     exemption, will, in the Department’s
                                            However, the Department notes that the                  fiduciary adviser. The Department                      view, remove many of the incentives
                                            information is only required to be taken                disagrees with this interpretation of the              and create strong deterrents for abusive
                                            into account to the extent that a                       section 408(g)(2)(A)(i). Shortly after                 behavior. In this regard, we note that, in
                                            participant or beneficiary actually                     enactment of the PPA, the Department                   addition to the specific fee-leveling
                                            provides such information. There is no                  issued Field Assistance Bulletin 2007–                 limitations, fiduciary advisers utilizing
                                            obligation, therefore, for a fiduciary                  1 (February 2, 2007) setting forth its                 investment advice arrangements that
                                            adviser to factor in personal information               legal analysis of the fee-leveling                     employ fee-leveling must comply with
                                            that it does not have or that the                       requirements in section 408(g)(2)(A)(i)                the requirements of paragraphs (b)(5)
                                            participant or beneficiary fails or refuses             of the Act.                                            [authorization by plan fiduciary], (b)(6)
                                            to provide. Rather, the fiduciary adviser                  In that Bulletin, the Department noted              [annual audits], (b)(7) [advance and
                                            is merely required to request the                       that it is clear from section                          annual disclosure], (b)(8) [other
                                            personal information described in the                   408(g)(2)(A)(i) that only the fees or other            conditions], and (e) [maintenance of
                                            final rule, and utilize such information                compensation of the fiduciary adviser                  records] of the final rule, each of which
                                            only to the extent furnished. The                       may not vary. The Department                           is discussed in more detail below.
                                            Department has modified the text of the                 explained that, in contrast to other                      A number of commenters had
                                            final rule to provide this clarification.               provisions of section 408(b)(14) and                   questions or requested clarification of
                                            The Department also has modified the                    section 408(g), section 408(g)(2)(A)(i)                the fee-leveling requirements applicable
                                            language of the final rule to reference                 references only the fiduciary adviser,                 to employees, agents, or registered
                                            ‘‘time horizons,’’ and by parenthetical                 not the fiduciary adviser or an affiliate.             representatives that provide advice on
                                            citation to life expectancy and                         Inasmuch as a person, pursuant to                      behalf of a fiduciary adviser, now set
                                            retirement age as examples of such time                 section 408(g)(11)(A), can be a fiduciary              forth in paragraph (b)(3)(i)(D) of the
                                            horizons. Similar changes are reflected                 adviser only if that person is a fiduciary             final rule. One commenter asked for
                                            in paragraph (b)(4)(i)(C), for                          of the plan by virtue of providing                     examples of things of value that an
                                            arrangements utilizing computer                         investment advice, an affiliate of a                   employee, agent or representative might
                                            models, and paragraph (d)(6)(i)(C),                     registered investment adviser, a bank or               receive, directly or indirectly, that
                                            applicable to arrangements for                          similar financial institution, an                      would violate the rule. Paragraph
                                            providing advice under the class                        insurance company, or a registered                     (b)(3)(i)(D), like the proposal, delineates
                                            exemption.                                              broker dealer will be subject to the                   a number of types of compensation that,
                                               Paragraphs (b)(3)(i)(D) and (E) of the               varying fee limitation only if that                    if varied based on investment options
                                            final rule set forth the limitations on                 affiliate is providing investment advice               selected by a participant or beneficiary,
                                            fees and compensation at the employee,                  to plan participants and beneficiaries.                would violate the rule, namely salary,
                                            agent and registered representative level               The Department further explained that,                 bonuses, awards, commissions, or other
                                            and the fiduciary adviser level,                        consistent with earlier guidance in this               things of value. Things of value would
                                            respectively, applicable to arrangements                area, if the fees and compensation                     include trips, gifts and other things that
                                            utilizing fee-leveling under the statutory              received by an affiliate of a fiduciary                while having a value, are not given in
                                            exemption. These limitations are                        that provides investment advice do not                 the form of cash.
                                            unchanged from the proposal. Paragraph                  vary or are offset against those received                 A number of commenters requested
                                            (b)(3)(i)(D) provides that any fees or                  by the fiduciary for the provision of                  confirmation that bonus programs based
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                                            other compensation (including salary,                   investment advice, no prohibited                       on the overall profitability of the
                                            bonuses, awards, promotions,                            transaction would result solely by                     fiduciary adviser or its affiliate, or a
                                            commissions or other things of value)                   reason of providing investment advice                  designated business unit within the
                                            received, directly or indirectly, by any                and thus there would be no need for a                  adviser’s business would not violate the
                                            employee, agent or registered                           prohibited transaction exemption, such
                                            representative that provides investment                 as provided under sections 408(b)(14)                    10 See   AO 97–15A and AO 2005–10A.



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                                            3826             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            fee-leveling requirement. The                           fiduciary adviser or that may generate                    Paragraph (b)(4)(i)(F)(1) of the final
                                            application of the fee-leveling is                      greater income for the fiduciary adviser               rule, like the proposal, requires that a
                                            intended to be very broad in order to                   or those with a material affiliation or                computer model take into account all
                                            ensure that objectivity of the investment               material contractual relationship with                 ‘‘designated investment options’’
                                            advice recommendations to plan                          the fiduciary adviser (paragraph                       available under the plan without giving
                                            participants and beneficiaries is not                   (b)(4)(i)(E)).                                         inappropriate weight to any investment
                                            compromised by the advice provider’s                       As with the proposal, the language of               option.12 The term ‘‘designated
                                            own financial interest in the outcome.                  the final rule makes clear that a                      investment option’’ is defined in
                                            Accordingly, almost every form of                       computer model would not fail to meet                  paragraph (c)(1) of the final rule to mean
                                            remuneration that takes into account the                the requirements of paragraph                          any investment option designated by the
                                            investments selected by participants                    (b)(4)(i)(E) merely because the only                   plan into which participants and
                                            and beneficiaries would likely violate                  investment options offered under the                   beneficiaries may direct the investment
                                            the fee-leveling requirement of the final               plan are options offered by the fiduciary              of assets held in, or contributed to, their
                                            rule. On the other hand, it is                          adviser or a person with a material                    individual accounts. The term
                                            conceivable that a compensation or                      affiliation or material contractual                    ‘‘designated investment option’’ does
                                            bonus arrangement that is based on the                  relationship with the fiduciary adviser.               not include ‘‘brokerage windows,’’ ‘‘self-
                                            overall profitability of an organization                The language also makes clear that a                   directed brokerage accounts,’’ or similar
                                            may be permissible to the extent that it                computer model cannot be designed and                  plan arrangements that enable
                                            can be established that the individual                  operated to inappropriately favor those                participants and beneficiaries to select
                                            account plan and IRA investment advice                  investment options that generate the                   investments beyond those designated by
                                            and investment option components                        most income for the fiduciary adviser or               the plan.
                                            were excluded from, or constituted a                    a person with a material affiliation or                   Paragraph (b)(4)(i)(F)(2)(i) also, like
                                            negligible portion of, the calculation of               material contractual relationship with                 the proposal, provides that a computer
                                            the organization’s profitability. The                   the fiduciary adviser. The final rule                  model shall not be treated as failing to
                                            Department believes, however, that                      defines a ‘‘material affiliation’’ and                 take all designated investment options
                                            whether any particular salary, bonus,                   ‘‘material contractual relationship’’ at               into account merely because it does not
                                            awards, promotions or commissions                       paragraphs (c)(6) and (c)(7),                          take into account an investment option
                                            program meets or fails this fee-leveling                respectively.                                          that constitutes an investment primarily
                                            requirement ultimately depends on the                      One commenter requested                             in qualifying employer securities. While
                                            details of the program. In this regard,                 clarification that the provisions of                   most of the commenters on the proposal
                                            the Department notes that the details of                paragraph (b)(4)(i)(E) would not be                    supported the exclusion of qualifying
                                            such programs will be the subject of                    violated where an IRA beneficiary                      employer securities, some commenters
                                            both a review and a report by an                        requests investment advice with the                    requested clarification as to whether the
                                            independent auditor as a condition for                  understanding that the computer model                  computer model nonetheless had to
                                            relief under the statutory and class                    will be providing only hold or sell                    factor in the holding of such
                                            exemption.                                              recommendations with respect to                        investments by a participant or
                                                                                                    investment options not offered through                 beneficiary, without regard to buy, sell
                                            c. Arrangements Using Computer                          the IRA. While the Department believes                 or hold recommendations.
                                            Models                                                  that computer models should, with few                     It is the view of the Department that,
                                               As with the general requirements for                 exceptions, be required to model all                   absent a specific request from the
                                            arrangements using fee-leveling, and                    investment options available under a                   participant or beneficiary to exclude
                                            like the proposal in most respects, the                 plan or through an IRA, the Department                 such assets from the modeled
                                            final rule requires that arrangements                   does not believe that it is reasonable to              investment advice, a computer model
                                            utilizing computer models satisfy                       expect that all computer models be                     must take into account the fact that the
                                            certain basic requirements.11 These                     capable of modeling the universe of                    participant or beneficiary has such an
                                            requirements include the application of                 investment options, rather than just                   investment when giving advice with
                                            generally accepted investment theories                  those investment alternatives designated               respect to the participant’s or
                                            (paragraph (b)(4)(i)(A)), the                           as available investments through the                   beneficiaries remaining assets or
                                            consideration of investment                             plan or IRA. Accordingly, it is the view               investments. If, on the other hand, a
                                            management and other fees and                           of the Department that a computer                      participant or beneficiary elects not to
                                            expenses attendant to recommended                       model would not fail to meet the                       have such investments factored into the
                                            investments (paragraph (b)(4)(i)(B)), and               requirements of paragraph (b)(4)(i)(E)                 modeled advice or does not provide
                                            the utilization of certain participant-                 merely because it limits buy                           such information and the computer
                                            provided information (paragraph                         recommendations only to those                          model does not have such information,
                                            (b)(4)(i)(C)). The changes to these                     investment options that can be bought                  the model would not be required to take
                                            requirements were discussed in                          through the plan or IRA, even if the                   such assets into account in providing a
                                            connection with the fee-leveling                        model is capable of modeling hold and                  recommendation. This approach, in the
                                            provisions of the regulation.                           sell recommendations with respect to                   Department’s view, is consistent with
                                               Other conditions imposed on                          investments not available through the                  the requirement set forth in paragraph
                                            computer models require that such                       plan or IRA, provided, of course, that                 (b)(4)(i)(C) of the final rule that
                                            models utilize objective criteria to                    the plan participant or beneficiary or                 computer models take into account
                                            provide asset allocation portfolios                     IRA beneficiary is fully informed of the               other assets and investment preferences
                                            (paragraph (b)(4)(i)(D)) and avoid                      model’s limitations in advance of the                  of the participant or beneficiary. One
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                                            recommendations that inappropriately                    recommendations, thereby enabling the                  commenter requested that the exclusion
                                            favor investments options offered by the                recipient of advice to assess the                      for qualifying employer securities be
                                                                                                    usefulness of the recommendations.                     expanded to apply to other single asset
                                              11 In general, these requirements track the           This view would also extend to the                     funds, such as funds invested in stock
                                            requirements set forth in section 408(g)(3)(B) of the   requirements of the class exemption at
                                            Act.                                                    paragraph (d)(3).                                        12 See   section 408(g)(3)(B)(v) of the Act.



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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                          3827

                                            of prior employers or a spin-off                        participant may allocate a portion of his              (b)(4)(i), discussed above. If the model is
                                            company. The commenter did not                          or her assets toward the purchase of an                modified in a manner that may affect its
                                            indicate other types of single asset                    annuitized retirement benefit and those                ability to meet the requirements of
                                            funds, or the extent to which they are                  allocated assets are no longer available               paragraph (b)(4)(i), the fiduciary adviser,
                                            offered as designated investment                        for investment at the time of the advice,              prior to utilization of the modified
                                            options under plans. The Department                     the participant or beneficiary has, in                 model, must obtain a new certification.
                                            does not believe it has sufficient                      effect, decided to treat those assets as no            The required certification must be made
                                            information at this time to extend                      longer available for investment and,                   by an ‘‘eligible investment expert,’’
                                            similar treatment to any such                           accordingly, such assets should not, in                within the meaning of paragraph
                                            investments.                                            the view of the Department, be required                (b)(4)(iii) and must be made in
                                               Other commenters requested that                      to be modeled for purposes of buy, hold                accordance with the requirements of
                                            computer models not be required to                      or sell recommendations. On the other                  paragraph (b)(4)(iv).
                                            include, among other things, options                    hand, when such options are available                     Paragraph (b)(4)(iii) of the final rule,
                                            from predecessor plans (referred to as                  to participants and beneficiaries, the                 like the proposal, defines an ‘‘eligible
                                            ‘‘legacy options’’), managed accounts,                  Department believes that participants                  investment expert’’ to mean a person
                                            target date funds, and in-plan annuity                  and beneficiaries receiving modeled                    that, through employees or otherwise,
                                            options, which they described as                        recommendations should at the same                     has the appropriate technical training or
                                            annuity purchase programs that serve as                 time be furnished a general description                experience and proficiency to analyze,
                                            both accumulation and distribution                      of these options and how they operate.                 determine and certify, in a manner
                                            options. With respect to legacy options,                This disclosure will assure that                       consistent with paragraph (b)(4)(iv),
                                            it is the view of the Department that to                participants and beneficiaries have                    whether a computer model meets the
                                            the extent participants continue to have                information concerning all of their                    requirements of paragraph (b)(4)(i);
                                            an ability to further invest in such                    investment choices, not merely those                   except that the term eligible investment
                                            options, the options must be included                   that can be modeled by a computer.                     expert does not include any person that
                                            within the computer model. If, on the                   This treatment is set forth in paragraphs              has any material affiliation or material
                                            other hand, participants are merely                     (b)(4)(i)(F)(2)(ii) and (iii).                         contractual relationship with the
                                            permitted to hold and sell investments                     Thus, under paragraph                               fiduciary adviser, with a person with a
                                            in such options, it is the view of the                  (b)(4)(i)(F)(2)(ii) of the final rule, a               material affiliation or material
                                            Department that, as discussed above                     computer model will not fail to meet the               contractual relationship with the
                                            with respect to qualifying employer                     requirements of the regulation merely                  fiduciary adviser, or with any employee,
                                            securities, unless a participant                        because it does not make                               agent, or registered representative of the
                                            specifically elects to not have such                    recommendations relating to the                        foregoing.
                                            investments taken into account, the                     acquisition, holding or sale of an                        One commenter requested that the
                                            model should take into account that the                 investment fund, product or service that               Department provide examples of
                                            participant holds such assets. Similar to               allocates the invested assets of a                     adequate credentials for an ‘‘eligible
                                            the above, a computer model would not,                  participant or beneficiary to achieve                  investment expert.’’ The Department
                                            in the view of the Department, fail to                  varying degrees of long-term                           continues to believe that it is very
                                            meet the requirements of paragraph                      appreciation and capital preservation                  difficult to define a specific set of
                                            (b)(4)(i)(F)(1) merely because it limits                through equity and fixed income                        academic or other credentials that
                                            buy recommendations only to those                       exposures, based on a defined time                     would serve to define the appropriate
                                            investment options that can be bought                   horizon (such as retirement age or life                expertise and experience for an eligible
                                            through the plan, even though the                       expectancy) or level of risk of the                    investment expert. Unfortunately, for
                                            model is capable of modeling hold and                   participant or beneficiary (e.g., life                 the same reason it is difficult to define
                                            sell recommendations with respect to                    cycle-type funds).                                     specific credentials for an eligible
                                            other investments.                                         Similarly, paragraph (b)(4)(i)(F)(2)(iii)           investment expert, it is difficult to
                                               A few commenters noted that certain                  provides that a computer model will not                provide examples of the one or a set of
                                            types of investment options, such as                    fail merely because it does not make                   credentials that in every case would
                                            managed accounts, life cycle-type funds,                recommendations with respect to an                     qualify an individual to make the
                                            and funds that are designed to manage                   annuity option with respect to which a                 required certifications. The Department
                                            assets taking into account a particular                 participant or beneficiary may allocate                also is concerned that, even if an
                                            risk level for the participant, rely on an              assets toward the purchase of a stream                 example were possible, such an
                                            investment manager to maintain the                      of retirement income payments                          example may encourage unnecessary
                                            asset allocation appropriate to its                     guaranteed by an insurance company.                    and inappropriate reliance on the
                                            particular fund, product or service and,                   As noted above, however, the                        example as a person considered by the
                                            therefore, that it serves no purpose to                 foregoing exceptions from the modeling                 Department to possess the necessary
                                            have such investments included in                       requirement apply only if participants                 qualifications. For this reason, the
                                            another unrelated overlaying asset                      and beneficiaries are provided,                        Department has not provided any
                                            allocation analysis. The Department                     contemporaneous with the provision of                  examples of credentials for eligible
                                            agrees that where an investment fund,                   investment advice generated by the                     investment experts.
                                            product or service is itself designed to                computer model, information                               One commenter inquired whether the
                                            maintain a particular asset allocation                  explaining the funds, products or                      eligible investment expert is required to
                                            taking into account the time horizons                   services, or in the case of an annuity,                be bonded for purposes of section 412
                                            (retirement age, life expectancy) or risk               the option.                                            of ERISA. In the view of the
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                                            level of a participant, such fund should                   Paragraph (b)(4)(ii) of the final rule,             Department, an eligible investment
                                            not be required to be included in the                   like the proposal, requires that, prior to             expert, in performing the computer
                                            computer modeled investment advice.                     utilization of the computer model, the                 model certification described in the
                                            Similarly, the Department believes that                 fiduciary adviser must obtain a written                final rule, would neither be acting as a
                                            where, in connection with an in-plan                    certification that the computer model                  fiduciary under ERISA, nor be
                                            annuity option, with respect to which a                 meets the requirements of paragraph                    ‘‘handling’’ plan assets such that the


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                                            3828             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            bonding requirements would be                           computer model meets the requirements                  compensation or other consideration
                                            applicable to the eligible investment                   of paragraph (b)(4)(i). Finally the                    (other than reimbursement of direct
                                            expert.                                                 certification must be signed by the                    expenses properly and actually incurred
                                               One commenter requested                              eligible investment expert. The                        in the performance of such services) the
                                            confirmation that a fiduciary adviser’s                 Department received no comments on                     provision of such services does not, in
                                            selection and payment of an eligible                    this provision and, accordingly, has                   and of itself, constitute an act described
                                            investment expert is not itself a per se                adopted the provision as proposed.                     in section 406(b) of the Act.13
                                            prohibited transaction. It is the view of                                                                         One commenter requested a
                                            the Department that, given the structure                d. Authorization by a Plan Fiduciary
                                                                                                                                                           clarification that, for purposes of the
                                            of the statutory exemption under section                   Paragraph (b)(5) of the final rule,                 authorization provision, a plan sponsor-
                                            408(g)(1) and the expectation that a                    consistent with section 408(g)(4) of                   fiduciary would not be treated as the
                                            fiduciary adviser will obtain a                         ERISA, the proposed rule and proposed                  person providing a designated
                                            certification from an eligible investment               class exemption, provides that the                     investment option under the plan with
                                            expert, the selection and payment of the                arrangement pursuant to which                          respect to an option that is designed to
                                            fiduciary adviser is not a per se conflict,             investment advice is provided to                       invest in qualifying employer securities.
                                            provided that the eligible investment                   participants and beneficiaries must be                 The Department did not intend, nor
                                            expert has neither a material affiliation               expressly authorized by a plan fiduciary               does it believe Congress intended, to
                                            or material contractual relationship with               (or, in the case of an IRA, the IRA                    exclude employer-plan fiduciaries from
                                            the fiduciary adviser. Moreover, the                    beneficiary) other than: The person                    authorizing investment advice
                                            Department has made clear that the                      offering the arrangement; any person                   arrangements solely because the plan for
                                            selection of an eligible investment                     providing designated investment                        which the arrangement is being
                                            expert is a fiduciary act governed by                   options under the plan; or any affiliate               authorized offers participants the
                                            section 404(a)(1) of the Act. See                       of either. The final rule, like the                    opportunity to invest in qualifying
                                            paragraph (b)(4)(v). Similarly, the                     proposals, further provides that, for                  employer securities. The Department
                                            selection and payment of an auditor to                  purposes of such authorization, an IRA                 has added a provision to both the
                                            conduct the audit required under the                    beneficiary will not be treated as an                  regulation and class exemption for
                                            statutory exemption or class exemption                  affiliate of a person solely by reason of              purposes of such clarification (see
                                            would not constitute a per se conflict of               being an employee of such person,                      paragraphs (b)(5)(iii) and (d)(5)(iii),
                                            interest. As noted in the preamble to the               thereby enabling employees of a                        respectively, of the final rule).
                                            proposal, while the rule gives latitude to              fiduciary adviser to take advantage of
                                                                                                                                                              One commenter asked for a
                                            a fiduciary adviser in selecting an                     investment advice arrangements offered
                                                                                                                                                           clarification as to whether an
                                            eligible investment expert to certify a                 by their employer under the exemption.
                                                                                                       A number of commenters requested                    authorizing plan fiduciary can rely on
                                            computer model, as the party seeking                                                                           the representations of a fiduciary
                                            prohibited transaction relief under the                 that the authorizing language of both the
                                                                                                    statutory exemption and class                          adviser with respect to whether a
                                            exemption, the fiduciary adviser has the                                                                       computer model meets the requirements
                                            burden of demonstrating that all                        exemption be modified to permit a
                                                                                                    fiduciary adviser to provide investment                of the regulation. Plan fiduciaries have
                                            applicable requirements of the                                                                                 an obligation to prudently select, and
                                            exemption are satisfied with respect to                 advice for the adviser’s own plan. The
                                                                                                    Department does not believe it is                      periodically review that selection,
                                            its arrangement.                                                                                               fiduciary advisers.14 In connection with
                                               Paragraph (b)(4)(iv) of the final rule               necessary or appropriate to limit a
                                                                                                    fiduciary adviser’s employee’s choice of               an otherwise prudent and reasonable
                                            provides that a certification by an
                                                                                                    investment advice providers to only                    selection and review process, the
                                            eligible investment expert shall be in
                                            writing and contain the following: An                   competitors of the fiduciary adviser.                  Department believes that an authorizing
                                            identification of the methodology or                    Accordingly, the Department has                        plan fiduciary, in the absence of any
                                            methodologies applied in determining                    modified the authorization provisions of               information to the contrary, may rely on
                                            whether the computer model meets the                    the final regulation and class exemption               the representations of a fiduciary
                                            requirements of paragraph (b)(4)(i) of                  to permit a fiduciary adviser to provide               adviser regarding the fiduciary adviser’s
                                            the final rule; an explanation of how the               advice to its own employees (or                        compliance with the requirements of
                                            applied methodology or methodologies                    employees of an affiliate) pursuant to an              this rule.
                                            demonstrated that the computer model                    arrangement under the final rule,                      e. Annual Audit
                                            met the requirements of paragraph                       provided that the fiduciary adviser or
                                                                                                    affiliate offers the same arrangement to                  Paragraph (b)(6) of the final rule sets
                                            (b)(4)(i); and a description of any
                                            limitations that were imposed by any                    participants and beneficiaries of                      forth the annual audit requirements for
                                            person on the eligible investment                       unaffiliated plans in the ordinary course              the statutory exemption.15 Paragraph
                                            expert’s selection or application of                    of its business. (See paragraphs (b)(5)(ii)            (b)(6)(i), like the proposal, provides that
                                            methodologies for determining whether                   and (d)(5)(ii) of the final rule). The                 the fiduciary adviser shall, at least
                                            the computer model meets the                            Department notes, however, that neither                annually, engage an independent
                                            requirements of paragraph (b)(4)(i). In                 the statutory exemption nor the class                  auditor, who has appropriate technical
                                            addition the certification is required to               exemption provides relief for the                      training or experience and proficiency,
                                            contain a representation that the                       selection of the fiduciary adviser or the              and so represents in writing to the
                                            methodology or methodologies were                       arrangement pursuant to which advice                   fiduciary adviser, to conduct an audit of
                                            applied by a person or persons with the                 will be provided. Accordingly, plan                    the investment advice arrangements for
                                            educational background, technical                       fiduciaries must nonetheless be prudent                compliance with the requirements of the
                                                                                                                                                           regulation and, within 60 days
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                                            training or experience necessary to                     in their selection and may not, in
                                            analyze and determine whether the                       contravention of section 406(b), use                     13 See 29 CFR 2550.408b–2(e)(3).
                                            computer model meets the requirements                   their position to benefit themselves. In                 14 See discussion in Field Assistance Bulletin
                                            of paragraph (b)(4)(i); and a statement                 this regard, the Department has                        2007–01.
                                            certifying that the eligible investment                 indicated that if a fiduciary provides                   15 The audit provisions are set forth in section

                                            expert has determined that the                          services to a plan without the receipt of              408(g)(6) of ERISA.



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                                                               Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                         3829

                                            following completion of the audit, to                     adviser submit the report to the                       exemption would not be required to be
                                            issue a written report to the fiduciary                   Department within 30 days following                    completed until the end of 2009.
                                            adviser and, except with respect to an                    receipt of the report from the auditor.                Inasmuch as the audit and other
                                            arrangement with an IRA, to each                          This report will enable the Department                 provisions of the regulation relating to
                                            fiduciary who authorized the use of the                   to monitor compliance with the                         the statutory exemption closely track
                                            investment advice arrangement, setting                    statutory or class exemption.                          the provisions of the statutory
                                            forth the specific findings of the auditor                   For purposes of paragraph (b)(6), an                exemption, the Department is not
                                            regarding compliance of the                               auditor is considered independent if it                persuaded that there is a basis for
                                            arrangement with the requirements of                      does not have a material affiliation or                deferring the completion of any
                                            the regulation.                                           material contractual relationship with                 otherwise required annual audit until
                                               Given the significant number of                        the person offering the investment                     the end of 2009. However, for purposes
                                            reports that an auditor would be                          advice arrangement to the plan or any                  of any audits required to be completed
                                            required to send if the written report                    designated investment options under                    prior to the effective date of the final
                                            was required to be furnished to all IRA                   the plan. See paragraph (b)(6)(iii). The               rule, the auditor may take into account
                                            beneficiaries, the Department framed an                   terms ‘‘material affiliation’’ and                     good faith compliance with the statute
                                            alternative requirement for investment                    ‘‘material contractual relationship’’ are              in the absence of regulatory guidance.
                                            advice arrangements with IRAs. This                       defined in paragraphs (c)(6) and (7) of                   One commenter requested that the
                                            alternative is set forth in paragraph                     the final rule, respectively.                          Department should lessen the burden on
                                            (b)(6)(ii) of the final rule. The final rule,                With regard to the scope of the audit,              small advisers by modifying the audit
                                            like the proposal, provides that, with                    paragraph (b)(6)(iv) of the final rule                 requirement by, for example, requiring
                                            respect to an arrangement with an IRA,                    provides that the auditor shall review                 an audit only every three years, rather
                                            the fiduciary adviser shall, within 30                    sufficient relevant information to                     than annually. It is the view of the
                                            days following receipt of the report from                 formulate an opinion as to whether the                 Department that the audit requirements
                                            the auditor, furnish a copy of the report                 investment advice arrangements, and                    of both the statutory and class
                                            to the IRA beneficiary or make such                       the advice provided pursuant thereto,                  exemption are critical protections for
                                            report available on its Web site,                         offered by the fiduciary adviser during                participants and beneficiaries in
                                            provided that such beneficiaries are                      the audit period were in compliance                    investment advice arrangements with
                                            provided information, along with other                    with the regulation. Paragraph (b)(6)(iv)              respect to which there is a possibility
                                            required disclosures (see paragraph                       further provides that it is not intended               that an adviser may act in its own self-
                                            (b)(7) of the final rule), concerning the                 to preclude an auditor from using                      interest rather than the interest of the
                                            purpose of the report, and how and                        information obtained by sampling, as                   plan’s participants and beneficiaries. No
                                            where to locate the report applicable to                  reasonably determined appropriate by                   information or data has been furnished
                                            their account. With respect to making                     the auditor, investment advice                         to the Department that would support a
                                            the report available on a Web site, the                   arrangements, and the advice pursuant                  finding that this risk to participants and
                                            Department believes that this alternative                 thereto, during the audit period. The                  beneficiaries is any less from small
                                            to furnishing reports to IRA                              final rule, like the proposal, does not                advisers than large adviser. Thus, the
                                            beneficiaries satisfies the requirement of                require an audit of every investment                   Department has no basis on which to
                                            section 104(d)(1) of the Electronic                       advice arrangement at the plan or                      determine what, if any, special relief
                                            Signatures in Global and National                         fiduciary adviser-level or of all the                  should be afforded small advisers. The
                                            Commerce Act (E–SIGN) 16 that any                         advice that is provided under the                      final rule, therefore, contains no special
                                            exemption from the consumer consent                       exemption. In general, the final rule                  provisions for small advisers.
                                            requirements of section 101(c) of                         appropriately leaves to the auditor the                   Another commenter suggested that
                                            E–SIGN must be necessary to eliminate                     determination as to the appropriate                    rather than furnishing copies of the
                                            a substantial burden on electronic                        scope of its review and the extent to                  audit report to authorizing fiduciaries
                                            commerce and will not increase the                        which it can rely on representative                    and IRA beneficiaries, fiduciary advisers
                                            material risk of harm to consumers. The                   samples for determining compliance                     should be required to inform the parties
                                            Department solicited comments on this                     with the exemption.                                    of the availability of the reports and
                                            finding in the proposal, and received no                     While the audit provisions contained                furnish such reports only in response to
                                            comments in response.                                     in the final rule are, with respect to both            requests. The Department did not adopt
                                               Obtaining consent from each IRA                        the statutory exemption and the class                  this suggestion. The Department
                                            holder or participant before publication                  exemption, identical to the proposed                   believes that, as with the audit, the
                                            on the Web site would be a tremendous                     audit requirements, the final rule does                reports of the auditor are important and
                                            burden on the plan or IRA provider.                       contain new provisions making clear                    should be furnished to each authorizing
                                            This element, along with the broad                        that, like the selection of an eligible                plan fiduciary. On the other hand, the
                                            availability of internet access and the                   investment expert to certify a computer                Department recognizes that, in the case
                                            lack of any direct consequences to any                    model, the selection of the required                   of IRAs, furnishing a report to every IRA
                                            particular participant for a failure to                   auditor, for purposes of both the                      beneficiary may be unduly burdensome
                                            review the audit for the participants and                 statutory exemption and the class                      and expensive, and, accordingly,
                                            beneficiaries, supports these findings.                   exemption, is a fiduciary act governed                 provided a special rule that permits the
                                               Paragraph (b)(6)(ii) of the final rule                 by section 404(a)(1) of ERISA. See                     making available of the report on the
                                            also provides, like the proposal, that,                   paragraphs (b)(6)(v) and (d)(9)(v) of the              fiduciary adviser’s Web site.
                                            when the report of the auditor identifies                 final rule.                                               One commenter requested that
                                            noncompliance with the requirements                          A number of commenters raised                       fiduciary advisers have an additional 30
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                                            of the regulation, the fiduciary adviser                  issues or requested clarifications                     days to furnish the audit report to the
                                            must send a copy of the report to the                     regarding various aspects of the audit                 authorizing plan fiduciaries. Another
                                            Department. The final rule, like the                      requirements.                                          commenter requested that the final rule
                                            proposal, requires that the fiduciary                        One commenter requested that the                    provide 60 days for the furnishing of
                                                                                                      Department establish that the first                    IRA-related audit reports. The
                                              16 15   U.S.C. 7004(d)(1) (2000).                       annual audit required by the statutory                 Department did not adopt these


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                                            3830             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            suggestions. The Department notes,                      regard, commenters requested                           contractual relationship with the
                                            however, that the 60-day period                         clarification that the permissible                     fiduciary adviser or any person offering
                                            referenced in paragraphs (b)(6)(i)(B) and               sampling of audits would be conducted                  designated investment options.
                                            (d)(9)(i)(B) of the final rule is the period            at the fiduciary adviser level and not the                One commenter requested
                                            following completion of the audit                       plan level, such that a sampling of each               clarification that independence would
                                            during which the auditor is required to                 plan’s or IRA’s transactions would not                 not be lost merely because the auditor
                                            furnish its report to the fiduciary                     have to be audited. One commenter                      performs other services for the fiduciary
                                            adviser and, with the exception of an                   requested clarification as to whether the              adviser or its affiliates, such as
                                            arrangement with an IRA, to each                        audit could be performed by a review of                performing audits or certifying
                                            authorizing fiduciary. The exception for                the audits conducted by the fiduciary                  computer models, as an eligible
                                            arrangements with IRAs serves to                        adviser’s own personnel. As discussed                  investment expert. In defining the term
                                            relieve the auditor from furnishing                     above, the audit provisions of the final               ‘‘material contractual relationship,’’ the
                                            reports to the authorizing IRA                          rule require that the auditor review                   Department contemplated that there
                                            beneficiaries. Paragraphs (b)(6)(ii)(A)                 sufficient information to formulate an                 may be instances in which an auditor
                                            and (d)(9)(ii)(A) of the final rule,                    opinion as to whether the investment                   might be performing other services for a
                                            applicable to arrangements with IRAs,                   advice arrangements, and the advice                    fiduciary adviser or affiliates. While one
                                            place the obligation to furnish the                     provided pursuant thereto, are in                      commenter recommended that the
                                            auditor’s report on the fiduciary adviser               compliance with the final rule. In the                 definition of material contractual
                                            and, in that regard, require that the                   case of the class exemption, the auditor               relationship be revised to preclude
                                            fiduciary adviser furnish the report or                 is further required to review compliance               receipt of any compensation, the
                                            make it available on its Web site within                with the fiduciary adviser’s policies and              Department believes that the 10% test
                                            30 days following receipt of the report                 procedures, adopted in accordance with                 set forth in paragraph (c)(7) of the final
                                            from the auditor. The Department did                    paragraph (d)(7), designed to assure                   rule, defining ‘‘material contractual
                                            not receive any information or data that                compliance with the exemption’s                        relationship,’’ is sufficient to minimize
                                            would indicate that the aforementioned                  requirements. Accordingly, the precise                 any influence on the part of the
                                            time frames afforded the auditor and the                nature and scope of the audit, as well as              fiduciary adviser that would serve to
                                            fiduciary adviser are inadequate.                       how it is conducted, is to be determined               compromise the independence of the
                                               With regard to the qualifications of an              by the auditor. The Department does                    auditor. Accordingly, the Department
                                            auditor, one commenter recommended                      note, however, that nothing in these                   has not changed the final rule in this
                                            that the auditor should be treated as a                 provisions precludes the auditor from                  regard.
                                            fiduciary. Other commenters requested                   using sampling, as determined
                                            clarification that the audit is not                                                                               A number of commenters expressed
                                                                                                    reasonably appropriate by the auditor,
                                            required to be conducted by an                                                                                 concern about the requirement, now at
                                                                                                    of investment advice arrangements and
                                            accountant or a lawyer. Another                                                                                paragraphs (b)(6)(ii)(B) and (d)(9)(ii)(B)
                                                                                                    investment advice.
                                            commenter requested clarification as to                    While the Department believes that                  of the final rule, that, in the case of
                                            the credentials necessary to conduct an                 internal audits conducted by the                       arrangements involving IRAs, the
                                            audit. As with the requirements for an                  personnel of a fiduciary adviser are                   fiduciary adviser must send a copy of
                                            ‘‘eligible investment expert,’’ the                     important to reducing the risks of                     the auditor’s report to the Department if
                                            Department does not believe that there                  noncompliance with the conditions of                   that report identifies instances of
                                            is necessarily one set of credentials,                  the final rule, the Department does not                noncompliance. Some commenters
                                            such as certified public accountant,                    believe that it would be appropriate for               recommended that reports only be
                                            auditor, or lawyer, that is required or,                an auditor to limit, in any way, the                   required to be filed with the Department
                                            conversely, by themselves qualifies an                  scope of its audit based on such audits.               when there is ‘‘material’’
                                            individual to conduct the required                      Moreover, in the view of the                           noncompliance, other commenters
                                            audits. In addition to any licenses,                    Department, the fiduciary adviser has a                recommended that fiduciary advisers be
                                            certifications or other evidence of                     fiduciary duty in selecting and                        afforded a period within which to self-
                                            professional or technical training, a                   monitoring an auditor to ensure that the               correct prior to the reporting of
                                            fiduciary adviser will want to consider                 required audits are complete and fully                 noncompliance. As explained in the
                                            the relevance of that training to the                   independent of any audits conducted                    preamble to the proposal, this filing
                                            required audit, as well as the individual               internally by personnel of the fiduciary               requirement will enable the Department
                                            or organization’s experience and                        adviser. The Department notes,                         to monitor compliance with the
                                            proficiency in conducting similar types                 however, that there is nothing in the                  exemptions in those instances where
                                            of audits. In this regard, it is the view               final rule that would preclude the                     there is no authorizing ERISA plan
                                            of the Department that the selection of                 independent auditor from working with                  fiduciary to carry out that function.
                                            an auditor is a fiduciary act and,                      the fiduciary adviser to establish                     While the Department recognizes that
                                            therefore, must be carried out in a                     policies and procedures designed to                    not every instance of noncompliance
                                            manner consistent with the prudence                     enhance or ensure compliance with the                  would, itself, affect the quality of the
                                            requirements of section 404(a)(1), taking               requirements of the statutory or class                 advice provided, the Department also
                                            into account the nature and scope of the                exemption, provided that                               believes that, given the overall
                                            audit and the expertise and experience                  determinations of compliance with the                  significance of the audit as a protection
                                            necessary to conduct such an audit. The                 statutory and class exemption can be                   for participants and beneficiaries, all
                                            Department also notes that, in its view,                made without regard to such services.                  reports that identify noncompliance in
                                            the performance of an audit under the                      Some commenters asked for a                         this area should be furnished to the
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                                            final rule would not, by itself, cause an               clarification of the ‘‘independence’’                  Department for review, thereby, leaving
                                            auditor to be a fiduciary under ERISA.                  requirements applicable to the auditor.                to the Department the opportunity to
                                               A number of comments requested                       Paragraphs (b)(6)(iii) and (d)(9)(iii) of              evaluate the significance of the
                                            clarification of the scope of the audit, as             the final rule provide that an auditor is              noncompliance, the function that an
                                            now set forth in paragraphs (b)(6)(iv)                  considered independent if it does not                  authorizing plan fiduciary would carry
                                            and (d)(9)(iv) of the final rule. In this               have a material affiliation or material                out for its plan. Accordingly, the


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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                          3831

                                            Department is adopting the filing                       an investment primarily in qualifying                  argued that the annual disclosures
                                            requirement as proposed.                                employer securities; that the adviser is               should be required only when there are
                                                                                                    acting as a fiduciary of the plan in                   material changes to the information
                                            f. Disclosure
                                                                                                    connection with the provision of the                   furnished in advance of the advice.
                                               The disclosure provisions are set forth              advice; and that a recipient of the advice             Other commenters recommended that
                                            in paragraph (b)(7) of the final rule as                may separately arrange for the provision               required notifications be furnished
                                            they relate to the statutory exemption                  of advice by another adviser that could                quarterly. The Department did not adopt
                                            and paragraph (d)(8) as they relate to the              have no material affiliation with and                  these recommendations. The
                                            class exemption. In general, the                        receive no fees or other compensation in               Department believes that the statutory
                                            disclosure requirements for both the                    connection with the security or other                  disclosure framework, reflected in both
                                            statutory and class exemption are                       property.                                              the proposal and final rule, strikes the
                                            identical,17 and the provisions of the                     Paragraphs (b)(7)(ii)(A) and                        appropriate balance in terms of ensuring
                                            final rule, like the proposal, track the                (d)(8)(ii)(A) of the final rule require that           participants and beneficiaries have the
                                            requirements set forth in section                       the notification furnished to                          information to assess the potential for
                                            408(g)(6) of ERISA.                                     participants and beneficiaries must be                 conflicts of interest and compensation
                                               The final rule, at paragraphs (b)(7)(i)              written in a clear and conspicuous                     of the fiduciary adviser. In this regard,
                                            and (d)(8)(i), generally requires that the              manner and in a manner calculated to                   the final rule, like the proposal, requires
                                            fiduciary adviser provide to participants               be understood by the average plan                      notifications to be furnished in advance
                                            and beneficiaries, prior to the initial                 participant and must be sufficiently                   of the advice, and annually thereafter,
                                            provision of investment advice with                     accurate and comprehensive to                          except that material changes to such
                                            regard to any security or other property                reasonably apprise such participants                   information are required to be furnished
                                            offered as an investment option, a                      and beneficiaries of the information                   at a time reasonably contemporaneous
                                            written notification describing: The role               required to be provided in the                         with the change in the information.
                                            of any party that has a material                        notification.                                             Commenters also raised issues
                                            affiliation or material contractual                        Paragraphs (b)(7)(ii)(B) and                        concerning the content of the required
                                            relationship with the fiduciary adviser                 (d)(8)(ii)(B) of the final rule reference              notifications. One commenter
                                            in the development of, in the case of the               the availability of a model disclosure                 recommended that the Department
                                            statutory exemption, the investment                     form in the appendix to the final rule.                clarify that the required disclosure of
                                            advice program or, in the case of the                   As with the proposals, the model                       fees and compensation was not limited
                                            class exemption, if applicable, the                     disclosure form may be used for                        to designated investment options, but
                                            computer model or materials described                   purposes of satisfying the requirements                included fees and compensation
                                            in paragraph (d)(3)(i) or (ii) of the final             set forth in paragraphs (b)(7)(i)(C) and               received in connection with
                                            rule, and in the selection of investment                (d)(8)(i), as well as the requirements of              investments made through open
                                            options available under the plan; the                   paragraphs (b)(7)(ii)(A) and (d)(8)(ii)(A)             brokerage windows and directed
                                            past performance and historical rates of                of the final rule. The final rule, like the            brokerage accounts. The disclosure
                                            return of the designated investment                     proposals, makes clear, however, that                  obligation set forth in paragraph
                                            options available under the plan, to the                the use of the model disclosure form is                (b)(7)(i)(C)(2) of the final rule is very
                                            extent that such information is not                     not mandatory. In response to several                  broad and includes any fees and other
                                            otherwise provided; all fees or other                   comments addressing the general                        compensation that the fiduciary adviser
                                            compensation relating to the advice that                readability of the model form, the                     or affiliate might receive in connection
                                            the fiduciary adviser or any affiliate                  Department has made minor changes to                   with the sale, acquisition, or holding of
                                            thereof is to receive (including                        the form’s organization and language.                  any security or other property pursuant
                                            compensation provided by any third                         Other commenters also made specific                 to the investment advice. There is
                                            party) in connection with the provision                 suggestions regarding the content of the               nothing in this provision which limits
                                            of the advice or in connection with the                 model disclosure form. Four                            or is intended to limit the required
                                            sale, acquisition, or holding of the                    commenters made suggestions relating                   disclosures to compensation and fees in
                                            security or other property pursuant to                  to the disclosure of fiduciary adviser                 connection with designated investment
                                            such advice; and any material affiliation               cross-selling practices, such as fees                  options. It is clear, therefore, that any
                                            or material contractual relationship of                 received by an adviser in connection                   compensation and fees to be received in
                                            the fiduciary adviser or affiliates thereof             with rollovers to IRAs. As discussed                   connection with investments through an
                                            in the security or other property.                      below, given the potential for abuse in                open brokerage window or directed
                                               The notification to participants and                 this area, the text of the final rule has              brokerage account must be included in
                                            beneficiaries also is required to explain:              been modified to require the disclosure                the required disclosures.
                                            The manner, and under what                              of all fees or other compensation that a                  Some commenters suggested that the
                                            circumstances, any participant or                       fiduciary adviser or any affiliate might               required disclosure be required to
                                            beneficiary information provided under                  receive in connection with any rollover                contain information pertaining to
                                            the arrangement will be used or                         or other distribution of plan assets or                compensation and fees in connection
                                            disclosed; the types of services provided               the investment of distributed assets.                  with rollovers or other distributions or
                                            by the fiduciary adviser in connection                  Language has been added to the model                   the investment of assets in connection
                                            with the provision of investment advice                 form to reflect this disclosure                        with a rollover or other distribution.
                                            by the fiduciary adviser, including, with               requirement.                                           Given the potential for abuse in this
                                            respect to an arrangement utilizing a                      Commenters presented a number of                    area, the Department agrees that such
                                            computer model, any limitations on the                  issues concerning the timing and                       information should be furnished to
                                            ability of the model to take into account
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                                                                                                    content of the proposed disclosure                     participants and beneficiaries. In this
                                                                                                    requirements. With regard to the timing                regard, the final rule contains a specific
                                              17 See paragraph (d)(8)(i)(C) that incorporates in
                                                                                                    of the required disclosures, some                      provision that serves to require the
                                            the class exemption compliance with the disclosure
                                            requirements under the statutory exemption
                                                                                                    commenters suggested that the                          disclosure of all fees or other
                                            provisions as set forth in paragraphs (b)(7)(i)(A)      notifications be provided whenever                     compensation that a fiduciary adviser or
                                            through (E), (G) and (H).                               advice is rendered; other commenters                   any affiliate might receive in connection


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                                            3832              Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            with any rollover or other distribution                   in selecting and periodically reviewing                guidance, its current rule, at 29 CFR
                                            of plan assets or the investment of                       the adviser, may need to understand the                2520.104b–1(c), is a safe harbor and,
                                            distributed assets in any security or                     extent to which such recommendations                   accordingly, represents merely one
                                            other property pursuant to the                            will be made.                                          permissible means by which documents
                                            investment advice. See paragraph                             A commenter also suggested that the                 under title I of ERISA may be furnished
                                            (b)(7)(i)(C)(3) of the final rule, and                    Department require disclosure of                       to participants and beneficiaries
                                            paragraph (d)(8)(i)(C) of the final rule,                 information about the profitability of                 electronically. Nothing in that rule,
                                            which applies several disclosures                         various plan investment options to the                 therefore, forecloses other means by
                                            required for the statutory exemption to                   fiduciary adviser. In addressing the                   which documents may, consistent with
                                            the class exemption.                                      need for disclosure regarding plan                     ERISA and the E–SIGN Act, be
                                               With regard to the practice of ‘‘cross-                investments being recommended by a                     furnished to participants and
                                            selling,’’ i.e., using existing clients, plan             fiduciary adviser under the statutory                  beneficiaries electronically.
                                            participants and beneficiaries in this                    exemption, Congress appears to have                       Paragraphs (b)(7)(iv) and (d)(8)(iv) of
                                            case, to market additional services or                    concluded that the interests of                        the final rule set forth miscellaneous
                                            products, the Department notes that,                      participants and beneficiaries would be                recordkeeping and furnishing
                                            while advising a participant or                           adequately protected, in the context of                responsibilities of the fiduciary adviser
                                            beneficiary to take an otherwise                          the exemption’s other conditions, by                   under the statutory and class
                                            permissible plan distribution would not                   information on all fees or other                       exemption. Specifically, these
                                            normally constitute ‘‘investment                          compensation that the fiduciary adviser                paragraphs require that, at all times
                                            advice’’ within the meaning of 29 CFR                     or any affiliate is to receive. The                    during the provision of advisory
                                            2510.3–21(c), the Department has taken                    conditions of the exemption, in general,               services to the participant or beneficiary
                                            a different position with respect to such                 focus on fees and compensation                         pursuant to the arrangement, the
                                            activities when the person making such                    received in connection with                            fiduciary adviser must: maintain the
                                            recommendations is already a plan                         investments recommended rather than                    information required to be disclosed to
                                            fiduciary, as would be the case with a                    profitability of those investments.                    participants and beneficiaries in
                                            fiduciary adviser.18 When a person is                     Disclosures with respect to profitability              accurate form; provide, without charge,
                                            already acting in a fiduciary capacity                    of investments options may require                     accurate, up-to-date disclosures to the
                                            with respect to the plan, the Department                  significantly more information and                     recipient of the advice no less
                                            has indicated that recommendations                        effort to prepare than disclosures of fees             frequently than annually; provide,
                                            relating to the taking of a distribution or               and compensation, without adding                       without charge, accurate information to
                                            the investment of amounts withdrawn                       significant benefits. The Department                   the recipient of the advice upon request
                                            from the plan would constitute the                        does not believe it would be                           of the recipient; and provide, without
                                            exercise of discretionary authority                       appropriate, as part of this final rule,               charge, to the recipient of the advice any
                                            respecting management of the plan and,                    without further notice and comment, to                 material change to the required
                                            therefore must be undertaken prudently                    include such a disclosure obligation.                  information at a time reasonably
                                            and solely in the interest of the                         Accordingly, the Department has not                    contemporaneous to the change in
                                            participant or beneficiary, consistent                    adopted this suggestion.                               information. These provisions are being
                                            with section 404(a)(1). The Department                       A number of commenters requested                    adopted in the final rule without
                                            further notes that if, for example, a                     that the Department confirm that to the                substantive change from the proposal.
                                            fiduciary exercises control over plan                     extent that the required disclosures are
                                                                                                      contained in disclosure materials                      g. Other Conditions
                                            assets to cause a participant or
                                            beneficiary to take a distribution and                    required to be prepared under securities                  Paragraphs (b)(8) and (d)(10) of the
                                            then to invest the proceeds in an IRA                     and other laws, such materials may be                  final rule, like the proposals,
                                            account managed by the fiduciary, the                     used for purposes of the exemptions. It                incorporate a series of miscellaneous,
                                            fiduciary may be using plan assets in his                 is the view of the Department that                     although important, conditions set forth
                                            or her own interest, in violation of                      nothing in the final rule forecloses the               in section 408(g)(7) of ERISA. These
                                            ERISA section 406(b)(1). The prohibited                   use of other materials for making the                  requirements are as follows: the
                                            transaction relief offered by the                         disclosures required by the final rule, so             fiduciary adviser must provide
                                            statutory and class exemption, which                      long as the understandability and clarity              appropriate disclosure, in connection
                                            apply to transactions related to the                      of the disclosures is not compromised                  with the sale, acquisition, or holding of
                                            provision of investment advice to plan                    by virtue of their inclusion in such other             the security or other property, in
                                            participants or beneficiaries, would not                  materials and the requirements of                      accordance with all applicable
                                            cover such a violation. Moreover, the                     paragraphs (b)(7)(ii)(A) and (d)(8)(ii)(A)             securities laws; any sale, acquisition, or
                                            Department is unable to conclude that                     are satisfied.                                         holding of a security or other property
                                            the mere disclosure of fees or other                         The proposed regulation and class                   occurs solely at the direction of the
                                            compensation received in connection                       exemption provided that the required                   recipient of the advice; the
                                            with such a distribution and                              notifications may, in accordance with                  compensation received by the fiduciary
                                            investment, by itself, would be                           29 CFR 2520.104b–1, be furnished in                    adviser and affiliates thereof in
                                            sufficient to avoid a violation of section                either written or electronic form.                     connection with the sale, acquisition, or
                                            406(b)(1). Because a fiduciary adviser,                   Several commenters requested that the                  holding of the security or other property
                                            in making recommendations related to                      Department provide greater flexibility                 is reasonable; and the terms of the sale,
                                            the taking of a distribution or the                       for notices by electronic means, noting                acquisition, or holding of the security or
                                            investment of amounts so withdrawn                        that the safe harbor for electronic                    other property are at least as favorable
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                                            from the plan, may violate ERISA                          distributions, at § 2520.104b–1(c), is not             to the plan as an arm’s length
                                            section 404(a)(1) and/or 406(b)(1),                       workable. The Department currently is                  transaction would be.
                                            authorizing plan fiduciaries, in carrying                 reviewing its rules relating to the use of                The Department received a number of
                                            out their duties under section 404(a)(1)                  electronic media for disclosures under                 comments requesting clarification of the
                                                                                                      title I of ERISA. The Department notes                 requirement that sales, acquisitions, or
                                              18 See   AO 2005–23A (Dec. 7, 2005).                    that, pending the issuance of further                  the holding of securities or other


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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                                 3833

                                            property occurs solely at the direction of              (c)(4) defines the terms ‘‘individual                  limited to amounts paid pursuant to
                                            the recipient of the advice. In particular,             retirement account’’ or ‘‘IRA’’ for                    contracts or arrangements that have
                                            commenters requested that the                           purposes of the final rule. Paragraph                  been reduced to writing, the Department
                                            Department confirm that the ‘‘solely at                 (c)(5) defines the term ‘‘affiliate.’’ And,            has deleted the word ‘‘written’’ from the
                                            the direction’’ requirement is not                      paragraphs (c)(6) and (c)(7) define the                definition contained in paragraph (c)(7).
                                            violated solely by virtue of a participant              terms ‘‘material affiliation’’ and
                                                                                                                                                           4. Class exemption
                                            or beneficiary providing advance                        ‘‘material contractual relationship,’’
                                            authorization for a fiduciary adviser to                respectively. Lastly, paragraph (c)(8)                    A number of the issues pertaining to
                                            periodically take steps to rebalance the                defines the term ‘‘control.’’ With the                 the conditions applicable to the class
                                            portfolio of the participant or                         exception of a clarification in the                    exemption were raised and addressed in
                                            beneficiary. One commenter requested                    definition of ‘‘material contractual                   the above discussion of the rules
                                            clarification that the ‘‘solely at the                  relationship’’ in paragraph (c)(7), the                implementing the statutory exemption.
                                            direction’’ requirement would not be                    definitions were adopted without                       The following overview, therefore, will
                                            violated where, pursuant to an                          change from the proposals.                             focus on those provisions and
                                            agreement with the participant or                          One commenter requested that the                    comments unique to the class
                                            beneficiary, investment advice                          Department clarify that the term                       exemption and not previously
                                            recommendations will be acted upon by                   ‘‘agent’’, as that term is used in the                 addressed.
                                            the fiduciary adviser unless the                        definition of ‘‘fiduciary adviser’’ (see               a. Authority and Findings
                                            participant or beneficiary objects with                 paragraph (c)(2)(i)(F) of the final rule), is
                                            the allotted period of time, typically 30               not limited to insurance agents. Another                  A number of commenters questioned
                                            days.                                                   commenter requested that the                           the Department’s authority to grant the
                                               In general, it is the view of the                    Department clarify that ‘‘agents’’ must                proposed class exemption arguing, in
                                            Department that a pre-authorization for                 be registered under the Investment                     effect, that the proposed class
                                            a fiduciary adviser to maintain a                       Advisers Act of 1940, unless otherwise                 exemption is inconsistent with
                                            particular asset allocation structure for a             exempt from registration. It is the view               Congressional intent, suggesting that
                                            participant’s portfolio by periodic                     of the Department that the term ‘‘agent’’              enactment of the statutory exemption
                                            rebalancing of investments would not                    as used in the fiduciary adviser                       for investment advice precluded or
                                            violate the ‘‘solely at the direction’’                 definition is not limited to insurance                 otherwise limited the Department’s
                                            requirements of the final rule, provided                agents or necessarily those registered                 authority to grant an administrative
                                            that such maintenance does not involve                  under the Investment Advisers Act, but                 exemption under section 408(a). The
                                            the exercise of discretion on the part of               rather encompasses persons acting on                   Department has carefully considered
                                            the fiduciary adviser, that is, when a                  behalf of a fiduciary adviser, applying                this issue and in so considering has
                                            participant is informed of and approves,                agency law principles. The Department                  been unable to find anything in ERISA,
                                            at the time of the authorization, the                   notes that the definition, consistent with             the PPA, the Technical Explanation of
                                            specific circumstances under which a                    the statutory definition, requires that                the PPA prepared by the staff of the
                                            rebalancing of his or her portfolio will                any such agent satisfy the requirements                Joint Committee on Taxation,19 or the
                                            take place and the particular                           of applicable insurance, banking and                   case law that would serve to limit or
                                            investments that will be utilized for                   securities laws relating to the provision              otherwise restrict the Department’s
                                            such rebalancing. If, on the other hand,                of advice.                                             ability to grant, in accordance with its
                                            the particular investments that might be                   One commenter recommended a                         authority in section 408(a), an
                                            utilized for purposes of rebalancing a                  separate provision for investment                      administrative exemption relating to the
                                            participant’s account are not known and                 adviser representatives. It was not clear              provision of investment advice.
                                            the fiduciary adviser is given the                      how such a separate definition would                      In fact, the Department has very broad
                                            discretion to select the required                       substantively change the application of                authority under section 408(a) to grant
                                            investments, it is the view of the                      the fiduciary adviser definition, at                   conditional or unconditional
                                            Department that the participant must be                 paragraph (c)(2); accordingly, the                     exemptions for any fiduciary or
                                            afforded advance notice of the fiduciary                Department did not adopt this                          transaction or class of fiduciaries or
                                            adviser’s intended investments and a                    suggestion.                                            transactions, from all or part of the
                                            reasonable opportunity, at least 30 days,                  One comment recommended that the                    restrictions imposed by sections 406
                                            to object to the investments in order to                Department adopt the definition of                     and 407(a), provided that the Secretary
                                            comply with the ‘‘solely at the                         ‘‘affiliate’’ as set forth in 29 CFR 2510.3–           finds that such exemption is
                                            direction’’ requirements of the final                   21, rather than the definition contained               administratively feasible, in the
                                            rule. With respect to a recommendation                  in the proposed rule. Section                          interests of the plan and its participants
                                            involving a different asset allocation                  408(g)(11)(C) of ERISA provides that an                and beneficiaries, and protective of the
                                            structure, the Department believes that                 ‘‘affiliate’’ of another entity means an               rights of participants and beneficiaries.
                                            the participant or beneficiary must make                affiliated person of the entity as defined                The Department views the class
                                            an affirmative direction for its                        in section 2(a)(3) of the Investment                   exemption as necessary to provide more
                                            implementation.                                         Company Act of 1940. The Department,                   comprehensive relief for fiduciary
                                                                                                    therefore, adopted, as discussed in the                investment advice and to address
                                            3. Definitions                                          preamble to the proposal, the                          certain aspects of the statutory
                                               Paragraph (c) sets forth definitions                 Investment Company Act definition for                  exemption that were unclear or that did
                                            applicable to both the statutory                        purposes of both the proposal and this                 not extend relief to certain
                                            exemption and class exemption                           final rule, not the definition set forth in            arrangements. For example, the flush
                                                                                                                                                           language in section 408(g)(3)(D) of
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                                            contained in the final rule. Paragraph                  § 2510.3–21.
                                            (c)(1) defines the term ‘‘designated                       Finally, in order to clarify that the
                                                                                                                                                             19 Technical Explanation of H.R. 5, The ‘‘Pension
                                            investment option.’’ Paragraph (c)(2)                   10% gross revenue test, applied for
                                                                                                                                                           Protection Act of 2006’’, as passed by the House on
                                            defines the term ‘‘fiduciary adviser.’’                 purposes of determining whether                        July 28, 2006, and as considered by the Senate on
                                            Paragraph (c)(3) defines the term                       persons have a ‘‘material contractual                  August 3, 2006, prepared by the Staff of the Joint
                                            ‘‘registered representative.’’ Paragraph                relationship’’ under the final rule, is not            Committee on Taxation, August 3, 2006, JCX 38–06.



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                                            3834             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            ERISA specifically permits participants                 and beneficiaries because of the                         In general, the class exemption is
                                            to request individualized advice after                  conditions contained in the exemption                  intended to complement the adoption of
                                            receipt of computer model-based advice,                 intended to mitigate conflicts of interest             regulations implementing the statutory
                                            but does not indicate whether any                       that might otherwise affect the quality of             exemption by furthering the availability
                                            prohibited transaction relief would                     investment advice. As noted above, the                 of individualized investment advice to
                                            apply. In addition, although the                        conditions of the class exemption build                both participants and beneficiaries in
                                            Department concluded that computer                      on the protections Congress determined                 participant-directed individual account
                                            model-based advice was feasible for                     to be administratively feasible, in the                plans and IRA beneficiaries under
                                            IRAs to the extent that the advice takes                interest of plans and their participants               circumstances not clearly encompassed
                                            into account generally recognized asset                 and beneficiaries, and protective of the               by the statutory exemption or
                                            classes, some IRAs do not limit                         rights of those participants and                       implementing regulations, as described
                                            investment choices in this fashion. The                 beneficiaries for purposes of the                      below.
                                            class exemption therefore provides                      statutory exemption set forth in section               c. Scope of Exemption
                                            substitute relief for advisers that may                 408(g). The specifics of these conditions
                                            not be able to take full advantage of                   are discussed below, if not previously                    Paragraph (d)(1) of the final rule sets
                                            computer model-based advice as to                       addressed in connection with the                       forth the scope of the class exemption.
                                            some IRAs.                                              statutory exemption provisions.                        Specifically paragraph (d)(1)(i) provides
                                               Taking into account the intent of the                                                                       that, with respect to the provision of
                                            Congress and the administration to                      b. General                                             advice to participants and beneficiaries
                                            dramatically expand the availability of                    The final class exemption, like the                 of individual account plans, the
                                            affordable, quality investment advice for               statutory exemption described in                       restrictions of sections 406(a) and 406(b)
                                            millions of America’s workers                           paragraph (b) of the final rule, provides              of ERISA and the sanctions resulting
                                            participating in participant-directed                   relief from otherwise prohibited                       from the application of section 4975 of
                                            individual account plans and IRAs, the                                                                         the Code, by reason of section
                                                                                                    transactions relating to the provision of
                                            Department concluded that the best                                                                             4975(c)(1)(A) through (F) of the Code,
                                                                                                    investment advice to a plan participant
                                            approach to addressing the ambiguities                                                                         shall not apply to the provision of
                                                                                                    or beneficiary or IRA beneficiary; the
                                            and issues presented by the PPA and                                                                            investment advice described in section
                                                                                                    acquisition, holding or sale of a security
                                            statutory exemption was to exercise its                                                                        3(21)(A)(ii) of the Act by a fiduciary
                                                                                                    or other property pursuant to the
                                            authority under section 408(a) of ERISA,                                                                       adviser to a participant or beneficiary of
                                                                                                    investment advice; and the direct or
                                            building on the carefully crafted                                                                              an individual account plan that permits
                                                                                                    indirect receipt of compensation by a
                                            safeguards of the statutory exemption                                                                          such participant or beneficiary to direct
                                                                                                    fiduciary adviser or affiliate in
                                            established by the Congress, safeguards                                                                        the investment of their individual
                                                                                                    connection with the provision of
                                            that the Congress itself determined to be                                                                      accounts; the acquisition, holding, or
                                                                                                    investment advice or the acquisition,                  sale of a security or other property
                                            administratively feasible, in the                       holding or sale of a security or other
                                            interests of the plan and its participants                                                                     pursuant to the investment advice; and,
                                                                                                    property pursuant to the investment                    except as otherwise provided in the
                                            and beneficiaries, and protective of the
                                                                                                    advice.                                                exemption, the direct or indirect receipt
                                            rights of participants and beneficiaries.
                                               A few commenters questioned                             Unlike the statutory exemption,                     of fees or other compensation by the
                                            whether the Department could make the                   however, the final class exemption, like               fiduciary adviser (or any employee,
                                            findings required by section 408(a) with                the proposed class exemption, provides                 agent, registered representative or
                                            respect to the class exemption. As noted                relief for investment advice provided to               affiliate thereof) in connection with the
                                            above, section 408(a) conditions                        individuals following the furnishing of                provision of the advice or in connection
                                            exemptive relief on a finding by the                    recommendations generated by a                         with an acquisition, holding, or sale of
                                            Department that the exemption is                        computer model or, in instances where                  a security or other property pursuant to
                                            administratively feasible, in the                       computer modeling under the statutory                  the investment advice. Paragraph
                                            interests of the plan and its participants              exemption is not feasible, the furnishing              (d)(1)(ii) of the final rule provides the
                                            and beneficiaries, and protective of the                of investment education material. As                   same relief with respect to the sanctions
                                            rights of participants and beneficiaries.               explained in the preamble to the                       resulting from the application of section
                                            With regard to the class exemption                      proposal, the computer generated advice                4975 of the Code, by reason of section
                                            contained in this document, the                         recommendations and investment                         4975(c)(1)(A) through (F) of the Code,
                                            Department finds that the exemption is                  education materials are intended to                    for investment advice to beneficiaries of
                                            administratively feasible with respect to               provide individual account plan                        IRAs.
                                            both compliance by fiduciary advisers                   participants and beneficiaries and IRA
                                                                                                    beneficiaries with a context for                       d. Conditions for Relief
                                            electing to provide investment advice to
                                            participants and beneficiaries and                      assessing and evaluating the                              Paragraph (d)(2) of the final rule
                                            enforcement by the Department. The                      individualized investment advice                       provides that the relief described in
                                            Department finds that the exemption is                  contemplated by the class exemption.                   paragraph (d)(1) is available if a
                                            in the interest of plans and their                      Also, unlike the statutory exemption,                  fiduciary adviser provides advice in
                                            participants and beneficiaries because                  the final class exemption, like the                    accordance with paragraph (d)(3),
                                            the availability of the exemption will                  proposal, applies the fee-leveling limits              relating to the use of computer models
                                            significantly expand the opportunities                  solely to the compensation received by                 and investment education materials, or
                                            for millions of participants and                        the employee, agent or registered                      paragraph (d)(4), relating to the use of
                                            beneficiaries in participant-directed                   representative providing the advice on                 fee-level arrangements, or both. In
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                                            individual account plans and IRAs to                    behalf of the fiduciary adviser, as                    addition the fiduciary adviser must
                                            obtain affordable, quality investment                   distinguished from compensation                        satisfy the conditions described in
                                            advice that might otherwise not be                      received by the fiduciary adviser on                   paragraphs: (d)(5), requiring
                                            available to them. The Department                       whose behalf the employee, agent or                    authorization by a plan fiduciary or IRA
                                            further finds that the exemption is                     registered representative is providing                 beneficiary; (d)(6), relating to the basis
                                            protective of the rights of participants                such advice.                                           for advice; (d)(7), requiring policies and


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                                            procedures; (d)(8), requiring disclosure                   One commenter suggested that, given                 restrictions on a beneficiary’s
                                            of specified information; (d)(9),                       the other safeguards contained in the                  investment choices. However, with
                                            requiring an annual audit; and (d)(10),                 exemption, the requirement for                         regard to plans that offer participants
                                            specifying other miscellaneous                          computer modeled advice in advance of                  and beneficiaries both designated
                                            conditions. With the exception of                       individualized advice should be                        investment options and a brokerage
                                            paragraph (d)(7), relating to the                       eliminated, noting that the computer                   window or similar arrangement, the
                                            adoption of policies and procedures, the                modeled advice will only confuse                       Department believes participants and
                                            aforementioned requirements are                         participants and limit the advisers. The               beneficiaries electing to utilize such
                                            modeled after, and were discussed in                    Department disagrees. The Department                   arrangements would, in addition to
                                            conjunction with, the conditions of the                 continues to believe that the furnishing               investment education materials, also
                                            statutory exemption and, accordingly,                   of computer modeled investment                         benefit from receiving computer
                                            will not again be described or reviewed                 recommendations is an important                        modeled investment recommendations
                                            in this section.                                        protection and tool for participants in                with respect to the plan’s designated
                                                                                                    assessing and evaluating the                           investment options in advance of being
                                            e. Post-computer Model—Investment
                                                                                                    individualized recommendations of the                  provided individualized investment
                                            Education Advice
                                                                                                    fiduciary adviser. The computer                        advice. As with those participants and
                                               Paragraph (d)(3) of the final rule, like             modeled advice provides participants                   beneficiaries whose investment options,
                                            the provision of the proposed class                     and beneficiaries a means by which they                either by plan design or choice, are
                                            exemption, requires that, in advance of                 can assess and question, in advance of                 limited to designated investment
                                            a participant or beneficiary being                      an investment decision, the extent to                  options, the Department believes that
                                            provided individualized investment                      which the recommendations of the                       computer modeled investment
                                            advice, the participant or beneficiary                  fiduciary adviser deviate from modeled                 recommendations will help participants
                                            must be furnished investment                            advice. For this reason, the Department                and beneficiaries considering the use of
                                            recommendations generated by either a                   did not adopt the commenter’s                          a brokerage window or similar
                                            computer model that meets the                           suggestion.                                            arrangement assess the investment
                                            requirements of the statutory exemption                    One commenter recommended that                      choices available through both the
                                            or a computer model developed by a                      post-model/education advice be subject                 brokerage window and the plan, as well
                                            person independent of the fiduciary                     to a fee-leveling requirement. The                     as the individualized investment
                                            adviser. The proposal contained an                      Department did not adopt this                          recommendations and strategies of the
                                            exception to the general computer                       suggestion. First, the Department                      fiduciary adviser. The exception
                                            modeling requirement for IRAs with                      believes that the class exemption                      contained in the final class exemption,
                                            respect to which types or number of                     contains sufficient safeguards without a               at paragraph (d)(3)(ii)(A) of the final
                                            investment choices reasonably                           fee-leveling requirement to protect                    rule, reflects this position.
                                            precludes the use of a computer model                   participants and beneficiaries against                    Specifically, paragraph (d)(3)(ii)(A)
                                            that meets certain requirements of the                  biased, inappropriate investment                       provides that, in the case of a plan that
                                            regulations under the statutory                         advice. Second, given such safeguards,                 offers a ‘‘brokerage window’’, ‘‘self-
                                            exemption.                                              the Department does not believe it is                  directed brokerage account’’ or similar
                                               The Department received a number of                  appropriate to favor one business model                arrangement that enables participants
                                            comments on this condition of the                       for providing investment advice over                   and beneficiaries to select investments
                                            proposal. One commenter requested that                  another business model, i.e., those                    beyond those designated by the plan, if
                                            the Department clarify whether a                        fiduciary advisers that use fee-leveling               any, before providing investment advice
                                            fiduciary adviser providing                             over those that do not, particularly                   with respect to any investment utilizing
                                            individualized advice to a participant                  when doing so may only serve to limit                  such arrangement, the participant or
                                            can utilize the recommendations                         the availability of investment advice to               beneficiary shall be furnished the
                                            generated by the computer model of                      participants and beneficiaries.                        investment education material
                                            another fiduciary adviser. For example,                    Several commenters argued that the                  described in paragraph (d)(3)(ii)(B) and,
                                            according to this commenter, a plan                     exception from the class exemption’s                   if the plan offers designated investment
                                            recordkeeper might offer participants                   computer modeling requirement that                     options, the participant or beneficiary
                                            access to a proprietary computer model                  was provided to certain IRAs (i.e.,                    also shall be furnished the
                                            that complies with the statutory                        where the types or number of                           recommendations generated by a
                                            exemption, and the plan sponsor might                   investment choices reasonably                          computer model, as required by
                                            also provide access through a second                    precludes use of computer model                        paragraph (d)(3)(i), with regard to such
                                            advice provider. The commenter asked                    meeting the requirements of the                        options.
                                            whether the second advice provider                      statutory exemption) be extended to                       Some commenters, while supporting
                                            could, for purposes of the class                        brokerage windows and similar                          the exception from computer modeling
                                            exemption, rely on the computer model                   arrangements with respect to which the                 for IRAs, requested that the Department
                                            advice furnished to a participant by the                computer modeling of investment                        provide further guidance concerning
                                            plan recordkeeper. The Department                       recommendations is not feasible and                    when the types or number of investment
                                            does not believe one fiduciary adviser                  that, without such an exception, plan                  choices would reasonably preclude the
                                            would necessarily be precluded from                     participants and beneficiaries utilizing               use of a computer model to generate
                                            using another fiduciary adviser’s                       such windows or accounts may not have                  investment recommendations. The
                                            computer modeled recommendations                        access to the investment advice they                   Department believes that there are a
                                            for a particular participant, provided                  need. The Department is persuaded that                 variety of factors that may serve to
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                                            that the requirements of exemption for                  brokerage windows and similar                          reasonably preclude use of a computer
                                            both the computer model and                             arrangements that permit participants to               model for generating recommendations
                                            individualized advice are otherwise                     invest beyond a plan’s designated                      with respect to the investments
                                            satisfied and the individualized advice                 investment options present the same                    available under an IRA, including the
                                            is reasonably contemporaneous with the                  computer modeling difficulties that are                number of investment options offered,
                                            computer modeled advice.                                encountered by IRAs that impose few                    the type of investment options (such as


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                                            3836             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            investments in individual securities),                  that conclusion to the participant or                  provision of any investment advice
                                            and the relative costs of developing and                beneficiary. The proposal further                      covered by the class exemption, the
                                            maintaining such computer models and                    required that the advice provider                      fiduciary adviser must conclude that the
                                            benefits of offering such model-                        document the basis of any advice given                 advice to be provided is prudent and in
                                            generated advice services to IRA                        to the participant or beneficiary within               the best interest of the participant or
                                            beneficiaries. The Department believes                  30 days following the provision of the                 beneficiary, and explain to the
                                            this will be an evolving, rather than                   advice.                                                participant or beneficiary the basis for
                                            static, standard. As computer modeling                     One commenter objected to the                       the conclusion, including, if applicable,
                                            of investment advice develops, the                      requirement that the furnished advice                  why and how the advice deviates from
                                            Department anticipates that the                         be documented, arguing that the                        or relates to the computer modeled
                                            feasibility of developing models to take                advisers are required to comply with                   recommendations or investment
                                            into account a wider variety of                         both ERISA prudence standards and                      education materials furnished in
                                            investment choices also will change.                    FINRA suitability standards and that the               satisfaction of paragraph (d)(3)(i) or (ii),
                                            The Department has retained the IRA                     documentation requirement does not                     and why the advice includes an
                                            exception without change from the                       add any additional protection. Another                 option(s) with higher fees than other
                                            proposal. See paragraph (d)(3)(ii)(B) of                commenter argued that such                             options in the same asset class(es)
                                            the final rule.                                         explanations were not sufficiently                     available under the plan. Further under
                                               The investment education material                    protective of participants and                         paragraph (d)(6)(ii), not later than 30
                                            required to be furnished under the final                beneficiaries. The Department disagrees                days following such explanation, the
                                            rule is identical to that described in the              with these comments. One of the many                   employee, agent or registered
                                            proposal. Specifically, paragraph                       protections encompassed in the class                   representative providing the advice on
                                            (d)(3)(ii)(B) of the final rule requires that           exemption is the audit requirement. The                behalf of the fiduciary adviser must
                                            participants and beneficiaries be                       Department expects that a critical part                document the explanation. The final
                                            furnished with material, such as graphs,                of the audit will involve a review of the              rule, like the proposal, also requires this
                                            pie charts, case studies, worksheets, or                explanations required to be documented                 documentation to be retained in
                                            interactive software or similar programs,               by the fiduciary adviser. Without such                 accordance with the record retention
                                            that reflect or produce asset allocation                documentation, auditors would have no                  requirements of paragraph (e) of the
                                            models taking into account the age (or                  basis for assessing compliance with a                  final rule. See paragraph (d)(6)(ii)(C) of
                                            time horizon) and risk profile of the                   number of the conditions of the class                  the final rule.
                                            beneficiary, to the extent known. As                    exemption, including those set forth in
                                            with the proposal, the final rule makes                 paragraphs (d)(3)(ii)(A) and (B) and                   f. Use of Fee-Leveling
                                            clear that nothing precludes the                        (d)(6) of the final rule.                                 Paragraph (d)(4) of the final rule
                                            furnishing of material, in addition to the                 One comment misconstrued the                        addresses the fee-leveling requirement
                                            foregoing, reflecting asset allocation                  requirement, reading the proposal as not               of the class exemption. As proposed, the
                                            portfolios of hypothetical individuals                  requiring the fiduciary adviser to                     class exemption applied the fee-leveling
                                            with different time horizons and risk                   provide an explanation regarding                       requirement only to the individuals who
                                            profiles.                                               investments that might generate higher                 provide the investment advice on behalf
                                               Also like the proposal, the final rule               fees until 30 days after the provision of              of the fiduciary adviser, namely,
                                            also requires that: (A) Models must be                  the advice. Under the proposal, the                    employees, agents, and registered
                                            based on generally accepted investment                  explanation was required to be provided                representatives. This is in contrast to the
                                            theories that take into account the                     in advance of the advice, but that                     fee-leveling requirement under the
                                            historic returns of different asset classes             explanation was not required to be                     statutory exemption, as described above
                                            (e.g., equities, bonds, or cash) over                   documented for the fiduciary adviser’s                 with respect to paragraph (b) of the final
                                            defined periods of time; (B) such models                records, as well as for the required                   rule, which applied the fee-leveling
                                            must operate in a manner that is not                    audit, until 30 days after the provision               requirement at both the entity (fiduciary
                                            biased in favor of investments offered by               of the advice. The Department believes                 adviser)-level and the individual
                                            the fiduciary adviser or a person with a                that it may not always be practical for                (employee, agent, registered
                                            material affiliation or material                        a fiduciary adviser to document the                    representative)-level. In this regard, the
                                            contractual relationship with the                       advice they provide contemporaneously                  Department was persuaded that the
                                            fiduciary adviser; and (C) all material                 with the provision of that advice and,                 additional safeguards provided for in
                                            facts and assumptions on which such                     therefore, provided a limited period                   the class exemption were sufficient to
                                            models are based (e.g., retirement ages,                within which such advice must be                       permit the application of the fee-
                                            life expectancies, income levels,                       documented.                                            leveling requirement at the individual-
                                            financial resources, replacement income                    In an effort to address both ambiguity              level, rather than fiduciary adviser-
                                            ratios, inflation rates, and rates of                   and confusion with respect to the                      entity level, without compromising the
                                            return) accompany the models.                           aforementioned requirement, the                        availability of informed, unbiased, and
                                               The proposal further required that the               Department has combined and                            objective investment advice for
                                            provided individualized, rather than                    simplified the requirement for purposes                participants and beneficiaries. As
                                            computer modeled, investment advice                     of the final class exemption. Further,                 explained in the discussion relating to
                                            (post-model/investment education                        because the Department believes that                   the fee-leveling provisions of the
                                            advice) not recommend investment                        this requirement, in its revised form,                 statutory exemption, some commenters
                                            options that may generate for the                       would offer additional protections to                  objected to the limited scope of the fee-
                                            fiduciary adviser, or certain other                     participants and beneficiaries without                 leveling requirement and other
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                                            persons, greater income than other                      being unnecessarily burdensome on                      commenters requested that the breadth
                                            options of the same asset class, unless                 fiduciary advisers, the Department is                  of the fee-leveling requirement be
                                            the fiduciary adviser prudently                         making it a general requirement of the                 narrowed. The Department continues to
                                            concludes that the recommendation is                    final class exemption. In this regard,                 believe it reached the appropriate
                                            in the best interest of the participant or              paragraph (d)(6)(ii) of the final rule                 balance of protections and flexibility in
                                            beneficiary and explains the basis for                  provides that, in connection with the                  the proposal and, accordingly is


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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                          3837

                                            adopting the fee-leveling framework of                  with the provision of investment advice                the applicable conditions of the final
                                            the proposed class exemption without                    to an individual participant or                        rule, the relief described in paragraph
                                            modification in the final rule.                         beneficiary with respect to which the                  (b) or (d) shall not apply to any
                                                                                                    conditions of the exemption have not                   transaction in connection with the
                                            g. Policies and Procedures
                                                                                                    been satisfied. The proposal also                      provision of investment advice provided
                                               The proposed exemption contained a                   indicated that, in the case of a pattern               by the fiduciary adviser during the
                                            requirement that the fiduciary adviser                  or practice of noncompliance with any                  period over which the pattern or
                                            adopt and follow written policies and                   of the conditions, the exemption would                 practice extended.
                                            procedures that are designed to assure                  not apply to any transaction in                           With respect to what the Department
                                            compliance with the conditions of the                   connection with the provision of                       might view as a ‘‘pattern or practice’’ of
                                            exemption. As explained in the                          investment advice provided by the                      noncompliance with the exemptions,
                                            preamble to the proposal, the                           fiduciary adviser during the period over               the Department believes that it is
                                            Department believes that the                            which the pattern or practice extended.                important to identify both individual
                                            maintenance of such policies and                           Several commenters objected to the                  violations and patterns of such
                                            procedures will help ensure compliance                  ‘‘pattern or practice’’ provision, arguing             violations. Isolated, unrelated, or
                                            with the exemption, as well as support                  that because non-compliant advice is                   accidental occurrences would not
                                            a finding that, for purposes of section                 already subject to an excise tax under                 themselves constitute a pattern or
                                            408(a)(1), the exemption is                             the Code, extending the penalty to all                 practice. However, intentional, regular,
                                            administratively feasible. The                          advice provided during a period,                       deliberate practices involving more than
                                            Department has not changed its view in                  without regard to it being compliant                   isolated events or individuals, or
                                            this regard and, in the absence of any                  advice, is unnecessary and punitive.                   institutionalized practices will almost
                                            comments objecting to this provision of                 Commenters also argued that the                        always constitute a pattern or practice.
                                            the proposal, is adopting this                          concept of a ‘‘pattern or practice’’ was               In determining whether a pattern or
                                            requirement without change in the final                 unclear. Some commenters suggested                     practice exists, the Department will
                                            rule. See paragraph (d)(7). The                         the penalty should be prospective only,                consider whether the noncompliance
                                            Department also notes that the auditor                  while others argued there should be a de               appears to be part of either written or
                                            engaged to conduct an audit pursuant to                 minimus rule or period for correcting                  unwritten policies or established
                                            paragraph (d)(9) of the final rule,                     such noncompliance before losing the                   practices, whether there is evidence of
                                            discussed earlier, is required, as part of              relief of the exemption for compliant                  similar noncompliance with respect to
                                            that audit, to review a fiduciary                       advice. On the other side, one                         more than one plan or arrangement, and
                                            adviser’s compliance with its policies                  commenter argued that increased                        whether the noncompliance is within a
                                            and procedures.                                         penalties for noncompliance would                      fiduciary adviser’s control.
                                                                                                    make the exemption more protective.
                                            5. Retention of Records                                    The Department believes that one of                 7. Effective Date
                                               Both the proposed regulation                         the most significant deterrents to                        The Department proposed that the
                                            implementing the statutory exemption                    noncompliance with the conditions of                   regulation would be effective 60 days
                                            and the proposed class exemption had                    the statutory and class exemption is the               after the date of publication of the final
                                            record retention requirements, with                     potentially significant excise taxes                   rule and that the class exemption would
                                            respect to which there were no                          applicable to transactions that fail to                be effective 90 days after the date of
                                            comments. Paragraph (e) of the final                    satisfy the conditions of the exemptions.              publication of the final exemption. One
                                            rule sets forth the record retention                    The Department believes that the                       commenter suggested that the 60 day
                                            requirements now applicable to both                     ‘‘pattern or practice’’ provision creates              effective date would not constitute
                                            investment advice arrangements relying                  additional incentives on the part of                   sufficient time to comply with the final
                                            on the statutory exemption, as set forth                fiduciary advisers taking advantage of                 rule. One commenter suggested that the
                                            in paragraph (b), and investment advice                 the exemptive relief to be vigilant in                 final rule should be effective no earlier
                                            provided pursuant to the class                          designing and following policies,                      than the later of July 1, 2009, or 180
                                            exemption, as set forth in paragraph (d),               procedures and practices that will                     days after publication of the final rule.
                                            of the final rule. Paragraph (e) provides               assure compliance. The Department,                     Another commenter requested that rule
                                            that the fiduciary adviser must                         therefore, has retained this provision in              be made effective upon publication.
                                            maintain, for a period of not less than                 the final rule. Unlike the proposal,                      Given the importance of investment
                                            6 years after the provision of investment               however, the provision now applies to                  advice to participants and beneficiaries
                                            advice under the section any records                    both relief under the statutory                        generally and given that the exemptions
                                            necessary for determining whether the                   exemption and the class exemption. As                  contained in this final rule will expand
                                            applicable requirements of the final rule               revised, paragraph (f) of the final rule               the opportunity for participant and
                                            have been met, noting that a transaction                provides that: (1) The relief from the                 beneficiaries to obtain affordable,
                                            prohibited under section 406 of ERISA                   prohibited transaction provisions of                   quality investment advice, the
                                            shall not be considered to have occurred                section 406 of ERISA and the sanctions                 Department believes that the final rule
                                            solely because the records are lost or                  resulting from the application of section              should be effective on the earliest
                                            destroyed prior to the end of the 6-year                4975 of the Code described in                          possible date. Accordingly, the final
                                            period due to circumstances beyond the                  paragraphs (b) and (d) of the final rule               rule contained in this document will be
                                            control of the fiduciary adviser.                       shall not apply to any transaction                     effective 60 days after the date of
                                                                                                    described in such paragraphs in                        publication in the Federal Register and
                                            6. Noncompliance                                        connection with the provision of                       will apply to transactions described in
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                                               The proposed class exemption                         investment advice to an individual                     paragraphs (b) and (d) of the final rule
                                            specifically addressed the effects of                   participant or beneficiary with respect                occurring on or after that date.
                                            noncompliance with the exemption. In                    to which the applicable conditions of
                                            this regard, the proposal explained that                the final rule have not been satisfied;                8. General Information
                                            the class exemption would not apply to                  and (2), in the case of a pattern or                      The attention of interested persons is
                                            any covered transaction in connection                   practice of noncompliance with any of                  directed to the following:


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                                            3838             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                               (1) The fact that a transaction is the               exemption for investment advice, the                   beneficiaries in participant-directed
                                            subject of an exemption under section                   Department also proposed a rule,                       defined contribution plans and
                                            408(a) of the Act and section 4975(c)(2)                § 2550.408g–2, governing the                           beneficiaries of individual retirement
                                            of the Code does not relieve a fiduciary                requirements for electing to be treated as             accounts (IRAs) (collectively hereafter,
                                            or other party in interest or disqualified              a fiduciary and fiduciary adviser by                   ‘‘participants’’) have made investment
                                            person from other provisions of the Act                 reason of developing or marketing a                    mistakes. The Department anticipates
                                            and the Code, including any prohibited                  computer model or an investment                        that full implementation of the PPA
                                            transaction provisions to which the                     advice program used in an eligible                     under this final regulation, together
                                            exemption does not apply and the                        investment advice arrangement. Section                 with this class exemption (hereafter, the
                                            general fiduciary responsibility                        2550.408g–2 sets forth requirements that               ‘‘final rule’’), by extending quality,
                                            provisions of section 404 of the Act.                   must be satisfied in order for one such                expert investment advice to a greater
                                            Section 404 requires, among other                       fiduciary adviser to elect to be treated as            number of participants will improve
                                            things, that a fiduciary discharge its                  a fiduciary under such an eligible                     investment decisions and results. This
                                            duties with respect to the plan                         investment advice arrangement. See                     improvement in investment results
                                            prudently and solely in the interests of                paragraph (a) of § 2550.408g–2.                        reflects reductions in investment errors,
                                            the plan’s participants and beneficiaries.                 Paragraph (b)(1) of § 2550.408g–2                   including poor trading strategies and
                                            A transaction’s qualification for an                    provides that, if an election meets the                inadequate diversification. The
                                            exemption also does not affect the                      requirements of paragraph (b)(2) of the                Department further anticipates that the
                                            requirement of section 401(a) of the                    proposal, then the person identified in                increased investment advice resulting
                                            Code that the plan must operate for the                 the election shall be the sole fiduciary               from the final rule also will reduce
                                            exclusive benefit of the employees of                   adviser treated as a fiduciary by reason               participants’ investment related
                                            the employer maintaining the plan and                   of developing or marketing a computer                  expenses, further improving their
                                            their beneficiaries;                                    model, or marketing an investment                      overall investment results, and will
                                               (2) The exemptions contained herein                  advice program, used in an eligible                    improve the welfare of participants by
                                            are supplemental to, and not in                         investment advice arrangement.                         better aligning participant investments
                                            derogation of, any other provisions of                  Paragraph (b)(2) requires that the                     and their risk tolerances.
                                            the Act and the Code, including                         election be in writing and that the                       The provisions of the final rule are
                                            statutory or administrative exemptions                  writing: identify the arrangement, and                 designed to promote the availability of
                                            and transitional rules; and                             person offering the arrangement, with                  affordable, quality investment advice.
                                               (3) In accordance with section 408(a)                respect to which the election is to be
                                            of ERISA and section 4975(c)(2) of the                                                                         2. Public Comments
                                                                                                    effective; and identify the person who is
                                            Code, and based on the entire record,                                                                             The Department received several
                                                                                                    the fiduciary adviser, the person who
                                            the Department finds that, as discussed                                                                        comments on the regulatory impact
                                                                                                    develops the computer model or
                                            above, the class exemption contained in                                                                        analysis of the proposals. The following
                                                                                                    markets the computer model or
                                            this document is administratively                                                                              is a summary of the major comments
                                                                                                    investment advice program with respect
                                            feasible, in the interests of the plan(s)                                                                      and the Department’s response thereto.
                                                                                                    to the arrangement, and the person who
                                            and IRAs and of its participants and                    elects to be treated as the only fiduciary,            a. Trading Strategies
                                            beneficiaries, and protective of the                    and fiduciary adviser, by reason of
                                            rights of the participants and                                                                                    A number of commenters objected to
                                                                                                    developing such computer model or                      the Department’s contention that
                                            beneficiaries of the plan and IRAs.                     marketing such computer model or                       participants’ active attempts to ‘‘time
                                            C. Overview of Final § 2550.408g–2                      investment advice program. Paragraph                   the market’’ constitute inferior trading
                                               Section 408(g)(11)(A) of ERISA                       (b)(2) of § 2550.408g–2 also requires that             strategies that result in losses.
                                            provides that, with respect to an                       the election be signed by the person                   According to these commenters, the
                                            arrangement that relies on use of a                     acknowledging that it elects to be                     term ‘‘market timing’’ ‘‘no longer
                                            computer model to qualify as an                         treated as the only fiduciary and                      defines investment strategies providing
                                            ‘‘eligible investment advice                            fiduciary adviser; that a copy of the                  investors with enhanced risk-adjusted
                                            arrangement’’ under the statutory                       election be furnished to the plan                      returns’’ and professionals are proficient
                                            exemption, a person who develops the                    fiduciary who authorized use of the                    in actively managing clients’ portfolios.
                                            computer model, or markets the                          arrangement; and that the writing be                   The commenters further asserted that
                                            investment advice program or computer                   retained in accordance with the record                 the Department should not favor one
                                            model, shall be treated as a fiduciary of               retention requirements of § 2550.408g–                 investment strategy over another.
                                            a plan by reason of the provision of                    1(e).                                                     The Department continues to believe
                                            investment advice referred to in ERISA                     The Department received no                          that automatic rebalancing is likely to be
                                            section 3(21)(A)(ii) to the plan                        substantive comments on this regulation                superior on average to participants’ own
                                            participant or beneficiary, and shall be                and, therefore, is adopting the                        efforts (without benefit of expert advice)
                                            treated as a ‘‘fiduciary adviser’’ for                  regulation substantially as proposed.                  to time the market (meaning to
                                            purposes of ERISA sections 408(b)(14)                   This regulation, like § 2550.408g–1, will              reallocate assets in anticipation of future
                                            and 408(g), except that the Secretary of                be effective 60 days after the date of                 market movements). However, this says
                                            Labor may prescribe rules under which                   publication of the final rule in the                   nothing about the relative merits of
                                            only one fiduciary adviser may elect to                 Federal Register.                                      active professional account
                                            be treated as a fiduciary with respect to               D. Regulatory Impact Analysis                          management. The Department is
                                            the plan. Section 4975(f)(8)(J)(i) of the                                                                      unaware of any studies that measure the
                                                                                                    1. Summary
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                                            Code contains a parallel provision to                                                                          performance of managed accounts
                                            ERISA section 408(g)(11)(A) that applies                   In the regulatory impact analysis                   relative to that of target date funds or
                                            for purposes of Code sections                           (RIA) for the proposed regulation and                  other automatic rebalancing
                                            4975(d)(17) and 4975(f)(8).                             class exemption (hereafter, ‘‘the                      arrangements, and proffers no view as to
                                               In conjunction with the proposed                     proposals’’), the Department noted that,               whether one strategy is superior to
                                            regulation implementing the statutory                   historically, many participants and                    another.


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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                                3839

                                            b. Permissible Arrangements                             exclusive reliance on level fees would                 Department can be confident that advice
                                               The Department included in its                       not—particularly sales of adviser                      arrangements operating pursuant to the
                                            analysis of the proposals a table                       consultations (as distinct from computer               proposals will satisfy the applicable
                                            summarizing how compensation of                         models alone) to small account holders.                conditions because advisers are
                                            fiduciary advisers can vary in advice                   Therefore, the Department continues to                 scrupulous about compliance, the
                                            arrangements operating under the                        believe that some advisers with such                   commenters said. Some of these
                                            following three scenarios: Absent any                   alternative sources of compensation for                commenters suggested that some of the
                                            exemptive relief, pursuant to the PPA                   investment advice services will be more                conditions were more stringent than
                                            statutory exemption, and pursuant to                    inclined than independent advisers to                  necessary and should be relaxed. For
                                            the proposed class exemption. As                        market such services to some                           example, some commenters objected to
                                            requested in comments, the Department                   participant market segments. Finally,                  the proposed condition denying
                                            advises that the table was not intended                 the Department notes that active                       exemptive relief to all transactions
                                            to exhaustively list all permissible                    marketing could target plan sponsors as                under an arrangement where there is a
                                            advice arrangements. Some                               well as plan participants and IRA                      pattern or practice of failures to satisfy
                                            arrangements might operate pursuant to                  beneficiaries.                                         applicable conditions. Relief should be
                                            other exemptive relief. Participants and                                                                       denied only to particular transactions
                                                                                                    e. Audit Requirement
                                            plans continue to have the option of                                                                           for which conditions were not satisfied,
                                                                                                       In response to comments, the                        the commenters said. Some commenters
                                            obtaining advice under arrangements
                                                                                                    Department notes that its assumption                   argued that the proposals’ limits on
                                            that were permitted prior to enactment
                                                                                                    that audits would be outsourced to an                  compensation that can be paid under
                                            of the PPA and promulgation of this
                                                                                                    independent legal professional was                     level fee arrangements should be
                                            final rule. Furthermore, the Department
                                                                                                    intended only as a proxy to estimate the               relaxed to permit certain types of
                                            does not favor any particular
                                                                                                    cost of compliance with the audit                      performance based rewards, bonuses
                                            permissible arrangement over any other.
                                                                                                    requirement. In fact, as discussed earlier             and promotions.
                                            c. Preferences for Computer Models v.                   in the preamble, the Department is not                    Also as noted earlier in this preamble,
                                            Contact With Advisers                                   persuaded that there is necessarily one                other commenters questioned the
                                               In response to commenters, the                       set of credentials, such as experience as              Department’s assumption that advice
                                            Department is modifying its assertion                   certified public account or auditor or                 arrangements operating pursuant to the
                                            that some participants are dissatisfied                 lawyer, that, in and of itself, qualifies an           proposals would be as effective as
                                            with advice from computer models.                       individual or organization to conduct                  arrangements operating without need
                                            Rather, the cited authorities indicate                  the audits required by the statutory and               for exemptive relief, predicting that the
                                            that plan sponsors rate arrangements                    class exemptions. Likewise, the                        former will too often be tainted by
                                            that include contact with advisers as                   Department’s assumptions regarding the                 attendant conflicts. Most of these
                                            more effective than those that rely                     sample of transactions to be audited                   commenters expressed deepest concern
                                            exclusively on computer models, and                     were adopted for purposes of cost                      with the proposed class exemption,
                                            provide some evidence that more                         estimation and should not be construed                 arguing that the fiduciary adviser and
                                            participants make use of the former than                as guidance as to how sampling should                  the person providing the advice may be
                                            the latter.                                             be conducted. Having said that, the                    conflicted. Some commenters also
                                                                                                    assumptions are consistent with                        expressed concern with the proposed
                                            d. Revenue Sources and Active                           compliant sampling at the level of the                 regulation’s interpretation of the
                                            Marketing                                               financial institution acting as the                    statutory exemption, arguing that the
                                               In its analysis of the proposals the                 fiduciary adviser.                                     fiduciary advisers’ affiliates may be
                                            Department suggested that advisers with                 f. Advice Quality                                      conflicted. These commenters
                                            revenue sources other than level 20 fees                                                                       maintained that the proposals’
                                            paid directly by participants, plans or                    The Department’s RIA of the
                                                                                                                                                           conditions are not sufficiently
                                            sponsors might market their advisory                    proposals devoted considerable
                                                                                                                                                           protective. Persons providing advice on
                                            services more actively to certain                       attention to the question of whether
                                                                                                                                                           behalf of fiduciary adviser entities
                                            participant market segments than                        adviser conflicts might taint advice. As
                                                                                                                                                           cannot be fully insulated from conflicts
                                            independent advisers do. Some                           detailed there, there is evidence to
                                                                                                                                                           affecting the entities or their affiliates,
                                            commenters disputed this suggestion.                    suggest that conflicted advisers
                                                                                                                                                           the commenters said, and the proposals’
                                            These commenters pointed out that                       sometimes reap profit at investors’
                                                                                                                                                           procedural safeguards, including
                                            independent advisers may receive                        expense. The proposals’ conditions
                                                                                                                                                           disclosure and independent audits,
                                            alternative revenue sources such as                     were intended to prevent conflicts from
                                                                                                                                                           together with available enforcement
                                            revenue sharing and may not rely                        tainting advice. Accordingly, the RIA
                                                                                                                                                           mechanisms, are not sufficient to ensure
                                            exclusively on level fees, and                          assumed that advice arrangements
                                                                                                                                                           compliance with the proposals’
                                            emphasized that plan sponsors mediate                   operating pursuant to the proposals
                                                                                                                                                           substantive conditions, such as
                                            adviser efforts to market to participants.              would be as effective as arrangements
                                                                                                                                                           unbiasedness and adherence to
                                               First, the Department clarifies that in              operating without need for exemptive
                                                                                                                                                           investment theories. Some commenters
                                            this context ‘‘independence’’ was meant                 relief, notwithstanding the conflicts that
                                                                                                                                                           cautioned that investors are vulnerable
                                            to reference exclusive reliance on level                are attendant to the former.
                                                                                                       As noted earlier in this preamble,                  to manipulation.
                                            fees rather than a lack of affiliation.                                                                           The Department continues to believe,
                                            Second, the Department notes that other                 some commenters maintained that the
                                                                                                                                                           as it did in connection with the
                                            commenters strongly suggested that                      proposals’ conditions, together with the
                                                                                                                                                           proposals, that, in the absence of
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                                            alternative sources of compensation for                 threat of substantial excise tax penalties
                                                                                                                                                           adequate protections, an adviser’s
                                            investment advisory services may                        for noncompliance, are sufficiently
                                                                                                                                                           conflicts may result in biased advice.21
                                            facilitate sales of such services where                 protective and that consequently advice
                                                                                                    provided pursuant to the proposals will                  21 Since promulgating the proposals the
                                              20 ‘‘Level’’in this context means invariant with      be of high quality and reflect the                     Department has considered additional evidence
                                            respect to associated investment decisions.             participants’ best interests. The                                                              Continued




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                                            3840             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            However, the Department also believes                   decisions. Imperfect information, search                expenses paid by DC plan participants
                                            that the safeguards included in this final              costs and behavioral biases can                         can differ from those paid by retail
                                            rule, together with associated                          compromise purchasing decisions, and                    investors. Any evidence of higher than
                                            enforcement mechanisms including the                    the Department has considered whether                   necessary expenses in the retail sector
                                            potentially significant excise taxes 22 for             participants’ purchases of investment                   might suggest similar circumstances in
                                            noncompliance and for patterns and                      products and services might be so                       DC plans, but would not demonstrate it.
                                            practice of noncompliance, effectively                  compromised.                                            Third, the Department reviewed
                                            minimize the possibility that fiduciary                    In its RIA of the proposals, the                     available research literature in light of
                                            advisers will act on their conflicts.                   Department estimated that fees and                      the commenters, and refined its analysis
                                            Provisions expected to deter                            expenses paid by unadvised                              and conclusions accordingly, as
                                            noncompliance include the annual                        participants are higher than necessary                  summarized immediately below.
                                            audit requirement, disclosure of                        by 11.3 basis points on average. Some                      (i) Expense sensitivity—Surveys and
                                            noncompliant activities identified in the               commenters on the proposals, as well as                 studies strongly suggest gaps in
                                            course of an audit to authorizing plan                  some commenters on the Department’s                     awareness of and sensitivity to
                                            fiduciaries and, in the case of IRAs, to                proposed regulation governing                           expenses.24 Other studies consider
                                            the Department, and the pattern or                      disclosure to participant-directed                      whether investors with different levels
                                            practice provision.                                     defined contribution (DC) plan                          of sophistication make different
                                               Because the conditions and                           participants,23 disputed this estimate.                 decisions about fees. If more
                                            enforcement mechanisms constitute                       The commenters pointed to evidence                      sophisticated investors are more
                                            adequate safeguards, the Department                     that the pricing of investment products                 sensitive to fees, less sophisticated ones
                                            believes that any impact of conflicts on                and related services is competitive and                 might be paying more than would be
                                            advice provided pursuant to the                         efficient, and contended that there is no               optimal. Alternatively, they might be
                                            statutory and class exemptions will be                  credible evidence to the contrary.                      paying more in order to obtain
                                            minimal. The Department stands by its                      The commenters raised several                        sophisticated help. Much literature
                                            assumption that advice arrangements                     specific challenges to the Department’s                 suggests a negative relationship between
                                            operating pursuant to the final rule will               analysis. First, they contended that the                sophistication and expenses paid,25 but
                                            be as effective as arrangements                         Department’s estimate relies                            some does not.26 Overall this literature
                                            operating without need for exemptive                    inappropriately on dispersion in mutual                 leaves open the question of whether
                                            relief.                                                 fund expenses as evidence that such                     investment prices are sometimes
                                                                                                    expenses are sometimes higher than                      inefficiently high, but suggests that even
                                            g. Effect on Expenses                                   necessary and as a basis for estimating                 if prices are efficient investors may
                                               Two distinct types of inefficiency can               the degree to which this is so.                         make poor purchasing decisions. The
                                            result in higher than optimal consumer                  Dispersion in expenses reflects                         Department believes that many
                                            expenditures for a particular type of                   differences among the investment                        individual investors, including both DC
                                            good. The first is prices that are higher               products or the services bundled with                   plan participants and IRA beneficiaries,
                                            than would be efficient. Efficient                      them, the commenters said, and
                                            markets require vigorous competition.                   therefore such dispersion is consistent                    24 See e.g., James J. Choi et al., Why Does the Law
                                            Sellers with market power can                           with competitive, efficient pricing.                    of One Price Fail? An Experiment on Index Mutual
                                            command inefficiently high prices,                      Second, the commenters argued that the                  Funds, National Bureau of Economic Research
                                            thereby capturing consumer surplus and                  analysis draws incorrect inferences                     Working Paper W12261 (May 2006); Jeff Dominitz
                                                                                                                                                            et al., How Do Mutual Funds Fees Affect Investor
                                            imposing a ‘‘dead weight loss’’ of                      about fees and expenses in DC plans.                    Choices? Evidence from Survey Experiments (May
                                            welfare on society. Efficient markets                   The analysis overlooks the role of DC                   2008) (unpublished, on file with the Department)
                                            also require perfect information and                    plan fiduciaries in choosing reasonably                 (Dominitz); and John Turner & Sophie Korczyk,
                                            rational, utility maximizing consumers.                 priced investments and relies too much                  Pension Participant Knowledge About Plan Fees,
                                                                                                                                                            AARP Pub ID: DD–105 (Nov. 2004). Commenters
                                            Imperfect information, search costs and                 on research that examined retail rather                 pointed out that net flows are concentrated in
                                            consumers’ behavioral biases likewise                   than DC plan experience, they said.                     mutual funds with low expenses. However it is
                                            can allow some sellers to command                       Third, the commenters highlighted what                  unclear whether this reflects investor fee sensitivity
                                            inefficiently high prices. The                          they say are technical flaws in some of                 or brand name recognition and successful
                                                                                                                                                            marketing by large, established funds whose low
                                            Department accordingly has considered                   the research that the Department had                    fees are attributable to economies of scale.
                                            whether such conditions might exist in                  cited as supporting the conclusion that                                    ¨
                                                                                                                                                               25 Sebastian Muller & Martin Weber, Financial

                                            the market for investment products and                  fees and expenses are sometimes higher                  Literacy and Mutual Fund Investments: Who Buys
                                            services bought by or on behalf of                      than necessary, and they took issue with                Actively Managed Funds?, Social Science Research
                                            participants.                                           the Department’s interpretation of some                 Network Abstract 1093305 (Feb. 14, 2008) found
                                                                                                                                                            that more financially literate investors pay lower
                                               The second type of inefficiency is                   of the research.                                        front-end loads but similar management fees, and
                                            suboptimal consumer choices among                          In response to these commenters, the                 suggest that investors who know about management
                                            available products. Even if goods are                   Department undertook to refine and                      fees appear not to care about them. Dominitz finds
                                            priced competitively, welfare will be                   strengthen its analysis. First, the                     that financially literate individuals are better able
                                                                                                                                                            to estimate fees, and better estimates are associated
                                            lost if consumers make poor purchasing                  Department agrees that the RIA of the                   with more optimal investment choices. Brad M.
                                                                                                    proposals relied too heavily on mere                    Barber et al., Out of Sight, Out of Mind, The Effects
                                            suggesting that adviser conflicts can taint advice.     dispersion of fees and expenses as a                    of Expenses on Mutual Fund Flows, Journal of
                                            See, e.g., U.S. SEC, Protecting Senior Investors:       basis for estimating whether and to what                Business, Volume 79, Number 6, 2095–2119 (2005)
                                            Report of Examinations of Securities Firms                                                                      found that repeat investors are more sensitive to
                                            Providing ‘‘Free Lunch’’ Sales Seminar (Sept. 2007).
                                                                                                    degree they might be higher than                        load fees than expense ratios, but commenters point
                                              22 Under Code section 4975, fiduciaries               necessary. The estimate that they are on                out that this finding may be an artifact of industry
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                                            participating in prohibited transactions may be         average 11.3 basis points higher than                   load setting practices.
                                            subject to an excise tax of 15 percent of the amount    necessary lacks adequate basis and                         26 Mark Grinblatt et al., Are Mutual Fund Fees

                                            involved for each year in the taxable period, in        should be disregarded. Second, the                      Competitive? What IQ-Related Behavior Tells Us,
                                            addition to which an excise tax of 100 percent of                                                               Social Science Research Network Abstract 1087120
                                            the amount involved may be added depending on           Department agrees that fees and                         (Nov. 2007) found that investors with different IQs
                                            whether the prohibited transactions are timely                                                                  pay similar fees, which ‘‘suggests that fees are set
                                            corrected.                                                23 See   73 FR 43013 (July 23, 2008).                 competitively.’’



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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                                       3841

                                            historically have not factored expenses                 together suggests that a substantial
                                            optimally into their investment choices.                portion of expense dispersion is                             Ralph Bluethgen et al., Financial Advice and
                                               (ii) Sector differences—Some studies                                                                           Individual Investors’ Portfolios, Social Science
                                                                                                    attributable to distribution expenses,                    Research Network Abstract 968197 (Mar. 2008),
                                            lend insight to the question of whether                 including compensation of                                 found that advisers (who are mostly compensated
                                            investment prices are efficient by                      intermediaries and advertising.29 It casts                by commission) improve diversification and
                                            comparing prices paid or performance                    doubt on whether such expenses are                        allocation across classes while increasing fees and
                                            in different market segments.27 The                     duly offset by observable financial                       turnover. They said these findings are consistent
                                                                                                                                                              with ‘‘honest advice.’’
                                            Department believes that taken together,                benefits. Most studies are consistent                        Mercer Bullard et al., Investor Timing and Fund
                                            this literature suggests that there are                 with the possibility that such expenses                   Distribution Channels, Social Science Research
                                            unexplained differences in prices and                   are at least partly offset by unobserved                  Network Abstract 1070545 (Dec. 2007), found that
                                            performance across sectors but fails to                 benefits such as reduced search costs                     investors who transact through conflicted advisers
                                            demonstrate conclusively whether such                                                                             incur timing underperformance.
                                                                                                    and other support for novice and
                                            differences are systematically                                                                                       Susan Christoffersen et al., The Economics of
                                                                                                    unsophisticated investors, but most are                   Mutual-Fund Brokerage: Evidence from the Cross
                                            attributable to inefficiently high                      also consistent with the possibility that                 Section of Investment Channels, Science Research
                                            investment prices.                                      some expenses are not so offset and that                  Network Abstract 687522 (Dec. 2005), identified
                                               (iii) Market power—At least one study                investors, especially unsophisticated                     some financial benefits reaped by investors who
                                            suggests that mutual funds may wield                    ones, sometimes pay inefficiently high                    pay to invest through intermediaries.
                                            market power to mark up prices to                                                                                    Sean Collins, Fees and Expenses of Mutual
                                                                                                    prices.30 The authors of some studies                     Funds, 2006, Investment Company Institute
                                            inefficient levels.28                                   expressly interpreted their failure to                    Research Fundamentals, Volume 16, Number 2
                                               (iv) What expenses buy—A number of                   identify offsetting financial benefits as                 (June 2007), reported that mutual fund fees and
                                            studies considered the degree to which                  evidence that prices are inefficiently                    expenses are declining.
                                            expense dispersion is a function of                     high. Some suggested that conflicted                         Sean Collins, Are S&P 500 Index Mutual Funds
                                            product features and bundled services,                  intermediaries may serve their own and
                                                                                                                                                              Commodities?, Investment Company Institute
                                            and if it is, whether that dispersion is                                                                          Perspective, Volume 11, Number 3 (Aug. 2005),
                                                                                                    fund managers’ interests, thereby                         argued that S&P 500 index funds are not uniform
                                            justified by differences in observable                  generating inefficiently high profits for                 commodities. For example, they are distributed in
                                            attendant financial benefits such as                                                                              different ways. He found that 91 percent of the
                                                                                                    either or both. Others disagreed,
                                            performance. Some of this literature also                                                                         variation in these funds’ expense ratios can be
                                                                                                    believing that investors efficiently                      explained by a combination of fund asset size,
                                            considered the degree to which
                                                                                                    derive a combination of financial and                     investor account size, fee waivers and separate fees,
                                            investors choose investments where
                                                                                                    intangible benefits for their expense                     and investor advice that is bundled into expense
                                            expenses are so justified. In the                                                                                 ratios. He argued that these funds competitively
                                                                                                    dollars.31
                                            Department’s view this literature taken                                                                           pass economies of scale along to investors, and
                                                                                                                                                              reported that assets and flows are concentrated in
                                                                                                       29 The literature also attributed much expense
                                              27 John  P. Freeman & Stewart L. Brown, Mutual                                                                  low-cost funds.
                                                                                                    dispersion to differences in the cost of managing
                                            Fund Advisory Fees: The Cost of Conflicts of                                                                         Henrik Cronqvist, Advertising and Portfolio
                                                                                                    different types of funds. For example, active equity
                                            Interest, The Journal of Corporate Law, Volume 26,                                                                Choice, Social Science Research Network Abstract
                                                                                                    management is more expensive than passive and
                                            609–673 (Spring 2001), found that the price paid by                                                               920693 (July 26, 2006), found that fund advertising
                                                                                                    management of foreign or small cap equity funds is
                                            mutual funds for equity fund management is higher                                                                 steered investors toward ‘‘portfolios with higher
                                                                                                    more expensive than management of large cap
                                            than that paid by pension funds. Based on this and                                                                fees, more risk, more active management, more ‘hot’
                                                                                                    domestic equity funds. Investors therefore might
                                            other evidence they argue that mutual fund fees are                                                               sectors, and more home bias.’’ He suggested that
                                                                                                    optimally diversify across funds with different
                                            often excessive. John C. Coates & R. Glenn Hubbard,                                                               ‘‘with the use of advertising, funds can differentiate
                                                                                                    levels of investment management expense. Some
                                            Competition in the Mutual Fund Industry: Evidence                                                                 themselves and therefore charge investors higher
                                                                                                    studies questioned whether active management
                                            and Implications for Policy, Social Science                                                                       fees than the lowest-cost supplier in the industry.’’
                                                                                                    delivers observable financial benefits
                                            Research Network Abstract 1005426 (Aug. 2007),                                                                       Daniel N. Deli, Mutual Fund Advisory Contracts:
                                                                                                    commensurate to the associate expense. For
                                            challenged Freeman and Brown’s methods and                                                                        An Empirical Investigation, The Journal of Finance,
                                                                                                    example, Kenneth R. French, The Cost of Active
                                            conclusions, arguing that these differences in prices                                                             Volume 57, Number 1, 109–133 (Feb. 2002), found
                                                                                                    Investing, Social Science Research Network
                                            are attributable to differences in services for which                                                             that differences in investment advisers’ marginal
                                                                                                    Abstract 1105775 (Apr. 2008), found that investors
                                            Freeman and Brown did not account. They offer                                                                     compensation reflected differences in their
                                                                                                    spend 0.67 percent of aggregate U.S. stock market
                                            evidence that fees are competitive. Alicia H.                                                                     marginal product, difficulty in measuring adviser
                                                                                                    value each year searching for superior return, and
                                            Munnell et al., Investment Returns: Defined                                                                       performance, control environments, and scale
                                                                                                    characterized this as society’s cost of price
                                            Benefits vs. 401(k) Plans, Center for Retirement                                                                  economies. Based on this finding, he suggested that
                                                                                                    discovery.
                                            Research Issue Brief Number 52 (Sept. 2006), found                                                                investment prices are efficient and recommended
                                                                                                       30 Both of these hypotheses are also consistent
                                            higher returns in defined benefit (DB) plans than in                                                              caution in any regulatory effort to influence such
                                            DC plans and offered that ‘‘part of the explanation     with literature finding a negative link between
                                                                                                    sophistication and expenses.                              prices.
                                            may rest with higher fees’’ that are paid by DC plan
                                            participants. Rob Bauer & Rik G.P. Frehen, The             31 The following is a sampling of findings and            Edwin J. Elton et al., Are Investors Rational?
                                            Performance of U.S. Pension Funds, Social Science       interpretations reported in various studies that the      Choices Among Index Funds, The Journal of
                                            Research Network Abstract 965388 (Jan. 2008),           Department reviewed. The Department observes              Finance, Volume 59, Number 1, 261–288 (Feb.
                                            found that DC and DB plans both perform close to        that some of these studies have been published in         2004), found that flows into high-expense (and
                                            benchmarks while mutual funds underperform, and         peer-reviewed journals, while others have not.            therefore predictably low performance) S&P 500
                                            point to hidden costs in mutual funds as the most       Some are working papers subject to later revision.        index mutual funds were higher than would be
                                            likely reason. Diane Del Guercio & Paula A. Tkac,       Some research is visibly supported by industry or         expected in an efficient market. They concluded
                                            The Determinants of the Flow of Funds of Managed        other interests, and some may be independent. Very        that, because investors are not perfectly informed
                                            Portfolios: Mutual Funds vs. Pension Funds, The         little of this research separately examines DC plan       and rational, inferior products can prosper.
                                            Journal of Financial and Quantitative Analysis,         investing. Nearly all of it examines mutual fund          Commenters, however, contended that, because the
                                            Volume 37, Number 4, 523–557 (Dec. 2002), found         markets to the exclusion of certain competing             authors scaled flows by fund size and smaller funds
                                            that ‘‘in contrast to mutual fund investors, pension    insurance company or bank products. Some of it            have higher expenses, these findings exaggerated
                                            clients punish poorly performing managers by            examines foreign experience. The Department               the degree to which flows are directed to high-
                                            withdrawing assets under management and do not          believes it must be cautious in drawing inferences        expense funds.
                                            flock disproportionately to recent winners.’’           from this research as to whether investment prices                                               ´
                                                                                                                                                                 Javier Gil-Bazo & Pablo Ruiz-Verdu, Yet Another
                                               28 Guo Ying Luo, Mutual Fund Fee-Setting,            paid by participants are efficient.                       Puzzle? Relation Between Price and Performance in
                                            Market Structure and Mark-Ups, Economica,                  Daniel B. Bergstresser et al., Assessing the Costs     the Mutual Fund Industry, Social Science Research
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                                            Volume 69, Number 274, 245–271 (May 2002),              and Benefits of Brokers in the Mutual Fund                Network Abstract 947448 (March 2007), found that
                                            exploited differences in market concentration           Industry, Social Science Research Network Abstract        ‘‘funds with worse before-fee performance charge
                                            across different narrow mutual funds categories,        616981 (Sept. 2007), found that investors who pay         higher fees.’’ They hypothesized that lower-
                                            and found that mark-ups average 30 percent of fees      to purchase funds via intermediaries realize inferior     performing funds lose sophisticated investors to
                                            across all categories of no load funds and more than    returns, and said this result is consistent with either   higher performing funds, then are left with
                                            70 percent across load funds (assuming a 5-year         intangible benefits for investors or inefficiently high   relatively unsophisticated investors who are not as
                                            holding period).                                        prices due to conflicts.                                  responsive to price.
                                                                                                                                                                                                          Continued



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                                            3842                  Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                               In light of this literature and public                                products and services whose marginal                                      anticipate improved returns on their
                                            commenters, the Department believes                                      cost exceed the associated marginal                                       investments. Thus, the Department
                                            that the available research provides an                                  benefit to them.32                                                        remains confident that these actions
                                            insufficient basis to confidently                                          The Department expects these actions                                    will yield positive net benefits though
                                            determine whether or to what degree                                      to reduce such investment errors,                                         we are uncertain of the magnitude. The
                                            participants pay inefficiently high                                      improving participant and societal                                        Department believes that the approach
                                            investment prices. Market conditions                                     welfare. However, the Department has                                      used in the analysis for the proposed
                                            that may lead to inefficiently high                                      no basis on which to quantify such                                        rule could reflect the long-term effects
                                            prices—namely imperfect information,                                     errors or improvements.                                                   of these actions and can be viewed as a
                                            search costs and investor behavioral                                                                                                               reasonable upper bound. The
                                            biases—certainly exist in the retail IRA                                 3. Impact Assessment
                                                                                                                                                                                               Department’s assumptions are
                                            market and likely exist to some degree                                     Although the Department anticipates                                     summarized in Tables 1, 2, and 3.
                                            in particular segments of the DC plan                                    that these actions will increase the
                                            market. The Department believes there                                    availability of investment advice to DC
                                            is a strong possibility that at least some                               plan participants and the use of advice
                                                                                                                                                                                                TABLE 1—AVAILABILITY OF ADVICE TO
                                            participants, especially IRA                                             by IRA beneficiaries, the Department is                                          DC PLAN PARTICIPANTS
                                            beneficiaries, pay inefficiently high                                    uncertain how changing market
                                                                                                                                                                                                                         Any advice
                                            investment prices. If so, the Department                                 conditions might affect the incidence                                       Policy context          (computer      Live adviser
                                            would expect these actions to reduce                                     and magnitude of investment errors, as                                                                or live)
                                            that inefficiency. This would increase                                   well as the availability, use, and effect
                                            participants’ welfare by transferring                                    of investment advice. Recent                                              Pre-PPA ............            40%              20%
                                            surplus from producers of investment                                     developments in financial markets and                                     PPA ...................           50               25
                                            products and services to them and by                                     in the market for financial products and                                  Class exemption                   60               35
                                            reducing dead weight loss. The                                           services underscore this uncertainty.
                                                                                                                                                                                                Note: There are approximately 66 million
                                            Department additionally believes that                                    However, given that the costs of this                                     DC participants.
                                            even where investment prices are                                         regulation are due to the cost of
                                            efficient, participants often make bad                                   providing (or paying for) investment
                                            investment decisions with respect to                                     advice, it will be incurred only to the
                                            expenses—that is, they buy investment                                    extent that participants seek advice and

                                                                                                                            TABLE 2—NUMBER OF ENTITIES
                                                                                                                                                                                                                 Pre PPA       PPA            CE

                                            DC:
                                                   Plans offering (000s) ....................................................................................................................................      209.46      261.82         314.19
                                                   Participants offered (MM) .............................................................................................................................          26.44       33.05          39.66
                                                   Participants using (MM) ................................................................................................................................          6.61        8.26          10.25
                                            IRA:
                                                   IRAs using (MM) ...........................................................................................................................................       16.81      25.47          33.97


                                               John A. Haslem et al., Performance and                                Research Network Abstract 880463 (Jan. 2006),                             faster.’’ Investors’ fee sensitivity was not symmetric,
                                            Characteristics of Actively Managed Retail Equity                        found that load funds charge higher 12b-1 and                             however.
                                            Mutual Funds with Diverse Expense Ratios,                                management fees. They attributed this to abusive                             Edward Tower & Wei Zheng, Ranking Mutual
                                            Financial Services Review, Volume 17, Number 1,                          market segmentation that extracted excessive fees                         Fund Families: Minimum Expenses and Maximum
                                            49–68 (2008), found that funds with lower expenses                       from unsophisticated investors.                                           Loads as Markers for Moral Turpitude, Social
                                            have superior returns. John A. Haslem et al.,                               Giuliano Iannotta & Marco Navone, Search Costs                         Science Research Network Abstract 1265103 (Sept.
                                            Identification and Performance of Equity Mutual                          and Mutual Fund Fee Dispersion, Social Science                            2008), found a negative relationship between
                                            Funds with High Management Fees and Expense                              Research Network Abstract 1231843 (Aug. 2008),                            expense ratios and gross performance. The Division
                                            Ratios, Journal of Investing, Volume 16, Number 2                        analyzed the effect of search costs on mutual fund                        of Investment Management: Report on Mutual Fund
                                            (2007), found that certain performance measures                          fees with data on broad U.S. domestic equity funds.                       Fees and Expenses, U.S. Securities and Exchange
                                            vary negatively with fees and, on that basis,                            They estimated the portion of the expense ratio that                      Commission (Dec. 2000), at http://www.sec.gov/
                                            suggested that mutual funds do not compete                               was not justified by the quality of service provided,                     news/studies/feestudy.htm, described mutual fund
                                            strongly on price and that expenses are too high.                        by the cost structure of the investment company, or
                                                                                                                                                                                               fees and expenses and identified major factors that
                                               Sarah Holden & Michael Hadley, The Economics                          by the specificities of the clientele served by the
                                                                                                                                                                                               influenced fee levels but did not assess whether
                                            of Providing 401(k) Plans: Services, Fees and                            fund and found that its dispersion was lower for
                                                                                                                                                                                               prices were efficient.
                                            Expenses 2006, Investment Company Institute                              highly visible funds and for funds that invested
                                            Research Fundamentals, Volume 16, Number 4                               heavily in marketing. In the case of the U.S. mutual                         Xinge Zhao, The Role of Brokers and Financial
                                            (Sept. 2007), reported that 401(k) mutual fund                           fund market, they argued, the dispersion of this                          Advisors Behind Investment Into Load Funds,
                                            investors tended to pay lower than average                               residual demonstrated the extent to which some                            China Europe International Business School
                                            expenses and that 401(k) assets were concentrated                        firms can charge a ‘‘non-marginal’’ (that is higher                       Working Paper (Dec. 2005), at http://
                                            in low-cost funds.                                                       than competitive) price.                                                  www.ceibs.edu/faculty/zxinge/brokerrole-zhao.pdf,
                                               Ali Hortacsu & Chad Syverson, Product                                    Marc M. Kramer, The Influence of Financial                             found that funds with higher loads received higher
                                            Differentiation, Search Costs, and Competition in                        Advice on Individual Investor Portfolio                                   flows, and suggested that conflicted intermediaries
                                            the Mutual Fund Industry: A Case Study of S&P 500                        Performance, Social Science Research Network                              enriched themselves at investors’ expense.
                                            Index Funds, Quarterly Journal of Economics, 403                         Abstract 1144702 (Mar. 2008), found that advised                             32 It is possible that the converse could sometimes

                                            (May 2004), documented dispersion in S&P 500                             investors took less risk and thereby reaped lower                         occur: participants might fail to buy efficiently
                                            Index Fund expense ratios, and reported that low-                        returns. Risk-adjusted performance was similar.                           priced products and services whose marginal cost
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                                            cost funds had a dominant, but falling, market                           Adjusting further for investor characteristics,                           lags the associated marginal benefit to them. In that
                                            share. They concluded that an influx of novice                           advised investors performed slightly worse.                               case advice, by correcting this error, might lead to
                                            investors who must defray search costs explained                            Erik R. Sirri & Peter Tufano, Costly Search and                        higher expenses, but would still improve welfare.
                                            dispersion in expenses and flows to high-expense                         Mutual Fund Flows, The Journal of Finance,                                Because research suggests that participants are
                                            funds.                                                                   Volume 53, Number 5, 1589–1622 (Oct. 1998),                               insensitive to fees rather than excessively sensitive
                                               Todd Houge & Jay W. Wellman, The Use and                              found that investors were ‘‘fee sensitive in that                         to them, the Department believes that this converse
                                            Abuse of Mutual Fund Expenses, Social Science                            lower-fee funds and funds that reduce fees grow                           situation is likely to be rare.



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                                                                   Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                                                                      3843

                                                                                                  TABLE 3—USE OF ADVICE BY DC PLAN AND IRA PARTICIPANTS
                                                                                                                                             Share of participants                                           Dollars advised ($ trillions)
                                                                                                                                                   advised

                                                                             Policy context                                                           DC plans
                                                                                                                                                                                             IRA              DC plans           IRAs        Combined
                                                                                                                                            Where                  Overall
                                                                                                                                            offered

                                            Pre-PPA ...........................................................................                     25%                    10%                     33%              $0.30           $1.40         $1.70
                                            PPA ..................................................................................                    25                     13                      50              0.30            2.10          2.50
                                            Class exemption ..............................................................                            26                     16                      67              0.40            2.80          3.20
                                               Note: There are approximately 66 million DC participants and approximately 51 million IRA beneficiaries.


                                              As in its RIA of the proposals, the                                        some advice. Advice arrangements                                             together with this class exemption, to
                                            Department assumes here that advised                                         operating without need for exemptive                                         reduce investment errors to the benefit
                                            participants make investment errors at                                       relief, pursuant to the PPA statutory                                        of participants. The Department’s
                                            one-half the rate of unadvised                                               exemption, and pursuant to the class                                         estimates of investment errors and
                                            participants. The remaining errors                                           exemption are equally effective on                                           reductions from investment advice are
                                            reflect participant failures to follow                                       average, the Department assumes.                                             summarized in Table 4.
                                            advice, together with possible flaws in                                        The Department expects the PPA as
                                                                                                                         implemented by this regulation,
                                                                                             TABLE 4—LONG TERM INVESTMENT ERRORS AND IMPACT OF ADVICE
                                                                                                                                               [$ billions, annual]

                                                                                                                                                                                                                                Errors eliminated by
                                                                                                                                                                                                              Remaining                advice
                                                                                                                Policy context                                                                                  errors
                                                                                                                                                                                                                             Incremental     Cumulative

                                            No advice .................................................................................................................................................              $115               $0             $0
                                            Pre-PPA advice only ................................................................................................................................                      101               14             14
                                            PPA ..........................................................................................................................................................             95                7             20
                                            Class exemption ......................................................................................................................................                     88                7             27



                                              In the RIA of the proposals, the                                           arrangements under the class                                                 about $610 million were added to the
                                            Department estimated costs of                                                exemption. As the requirement to                                             costs of the class exemption, leading to
                                            $1.8 billion for advice arrangements                                         document and keep records on the basis                                       a new estimate of $2.9 billion. The
                                            operating under the PPA statutory                                            of advice provided under the class                                           current cost estimates are summarized
                                            exemption and $2.3 billion for advice                                        exemption was broadened, costs of                                            in Table 5.

                                                                                                                                    TABLE 5—COST OF ADVICE
                                                                                                                                                                                                                                               Class
                                                                                                                                                                                                               Pre-PPA           PPA         exemption

                                            Incremental
                                                 Advice cost ($ billions) .....................................................................................................................                     $3.80           $1.80         $2.90
                                            Advice cost rate (bps, average) ..............................................................................................................                             23              23            37
                                            Cumulative (combined with policies to the left)
                                                 Advice cost ($ billions) .....................................................................................................................                     $3.80           $5.60         $8.50
                                                 Advice cost rate (bps, average) .......................................................................................................                               23              23            26



                                            4. Alternatives                                                              furthest reaching commenters,                                                incremental revisions to the proposals.
                                                                                                                         expressing concern that conflicts                                            The Department’s decisions whether to
                                               In formulating this final rule, the                                       permitted under the proposals would                                          adopt these suggestions are discussed
                                            Department considered several                                                taint advice, suggested that the                                             earlier in this preamble.
                                            alternative approaches, which it                                             Department should either withdraw the
                                            detailed in its RIA of the proposals. The                                                                                                                 5. Uncertainty
                                                                                                                         proposals or modify them to require
                                            Department in these final actions did                                                                                                                        As previously stated, the Department
                                                                                                                         stricter and/or broader fee leveling. As
                                            not adopt any of the alternatives                                                                                                                         is uncertain how changing market
                                                                                                                         detailed above, the Department believes
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                                            discussed in its RIA of the proposals,                                                                                                                    conditions might affect the incidence
                                            having received no sufficiently                                              these actions’ conditions are sufficiently                                   and magnitude of investment errors, as
                                            persuasive comments suggesting that it                                       protective to safeguard the quality of                                       well as the availability, use, and effect
                                            should. Some public commenters on the                                        advice. Accordingly, the Department                                          of investment advice. Recent
                                            proposals suggested alternatives the                                         did not pursue these alternatives. Other                                     developments in financial markets and
                                            Department had not yet considered. The                                       commenters suggested more                                                    in the market for financial products and


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                                            3844                 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            services underscore this uncertainty. On                                experience underlying the Department’s                               The Department also remains
                                            one hand, falling account balances                                      estimates reflect a variety of historical                         confident that these actions, by relaxing
                                            might reduce the magnitude of both                                      market contexts and conditions.                                   rules governing arrangements under
                                            investment errors and potential gains                                   However, given the uncertainty, we now                            which advice can be delivered, will
                                            from corrective advice. On the other                                    present the estimate as a plausible                               promote wider use of advice. However,
                                            hand, volatility and losses in financial                                upper bound for the possible effects.                             the Department is uncertain to what
                                            markets might amplify these, and might                                    Regardless, the Department remains                              extent advice will reach participants
                                            increase plan sponsors’ propensity to                                   highly confident in its conclusion                                and to what extent advice that does
                                            make advice available and participants’                                 expressed in its RIA of the proposals                             reach them will reduce errors. To
                                            propensity to seek and follow advice. At                                that investment errors are common and                             illustrate that uncertainty, the
                                            the same time, restructuring and                                        often large, producing large avoidable                            Department conducted sensitivity tests
                                            consolidation among suppliers of                                        losses (including foregone earnings) in                           of how its estimates of the reduction in
                                            financial products and services might                                   the long run for participants. It likewise                        investment errors attributable to the
                                            alter the cost and availability of advice.                              remains confident that participants can                           PPA and this class exemption would
                                            The Department intends its quantitative                                 reduce errors substantially by obtaining                          change in response to alternative
                                            estimates to reflect the long-term effects                              and following good advice. Public                                 assumptions regarding the availability,
                                            that will encompass a variety of market                                 comments on the proposals reinforce                               use, and quality of advice. Table 6
                                            circumstances. The literature and                                       these conclusions.                                                summarizes the results of these tests.

                                                                                      TABLE 6—UNCERTAINTY IN ESTIMATE OF INVESTMENT ERROR REDUCTION
                                                                                                                                         [$ billions annually]

                                                                                                                                                                                              Impact of
                                                                                                                                                                              Impact of                       Impact of all   Remaining
                                                                                                    Scenarios                                                                                   class
                                                                                                                                                                                PPA                             advice          errors
                                                                                                                                                                                              exemption

                                            Advice eliminates:
                                                 75% of errors ............................................................................................................         $10                 $10            $43          $80
                                                 50% of errors ............................................................................................................           7                   7             27           88
                                                 25% of errors ............................................................................................................           3                   3             13           96
                                            After PPA/class exemption, advice reaches:
                                                 15%/21% of DC and 60%/80% of IRA .....................................................................                               11                 8              33           82
                                                 13%/16% of DC and 50%/67% of IRA .....................................................................                                7                 7              27           88
                                                 11%/13% of DC and 40%/50% of IRA .....................................................................                                3                 4              20           95



                                               The Department remains uncertain                                     fiduciary advisers to adapt their                                 market impacts of changes in investor
                                            whether the magnitude and incidence of                                  business practices to the applicable                              behavior and related macroeconomic
                                            investment errors and the potential for                                 conditions. They might also include                               effects.
                                            correction of such errors in the context                                transaction costs associated with initial                            However, given that the costs of this
                                            of IRAs might differ from that in the                                   implementation of investment                                      regulation are due to the cost of
                                            context of ERISA-covered DC plans. If a                                 recommendations by newly advised                                  providing (or paying for) investment
                                            DC plan’s menu of investment options                                    participants. The Department’s concern
                                                                                                                                                                                      advice, it will be incurred only to the
                                            is efficient then the incidence and/or                                  over this uncertainty is modest because
                                            magnitude of errors might be smaller                                                                                                      extent that participants seek advice and
                                                                                                                    commenters on the proposals emphasize
                                            than in the IRA context. If it is                                                                                                         anticipate improved returns on their
                                                                                                                    the industry’s willingness to comply
                                            inefficient then errors might be more                                   with these actions’ conditions and the                            investments. Thus, the Department
                                            numerous and/or larger, but the                                         benefits to investors of implementing                             remains confident that these actions
                                            potential for correcting them might be                                  sound recommendations.                                            will yield positive net benefits though
                                            constrained. Commenters that address                                                                                                      we are uncertain of the magnitude.
                                                                                                                       Another source of uncertainty
                                            this issue mostly suggest that menus are                                involves potential indirect downstream                            E. Executive Order 12866
                                            efficient.                                                              effects of this final rule. Investment
                                               The Department remains uncertain                                     advice may sometimes come packaged                                   Under Executive Order 12866, the
                                            about the mix of advice and other                                       with broader financial advice, which                              Department must determine whether a
                                            support arrangements that will compose                                  may include advice on how much to                                 regulatory action is significant and
                                            the market, and about the relative                                      contribute to a DC plan. The Department                           therefore subject to the requirements of
                                            effectiveness of alternative investment                                 has no basis to estimate the incidence of                         the Executive Order and review by the
                                            advice arrangements or other means of                                   such broad advice or its effects, but                             Office of Management and Budget
                                            supporting participants’ investment                                     notes that those effects could be large.                          (OMB). This action, comprising this
                                            decisions. As discussed above,                                          The opening of large new markets to a                             final rule, is economically significant
                                            comments on these questions are mixed                                   variety of investment advice                                      under section 3(f)(1) of the Executive
                                            and provide no basis for the Department                                 arrangements to which they were                                   Order because it is likely to have an
                                            to revise its baseline assumption that all                              heretofore closed may affect the                                  effect on the economy of $100 million
                                            arrangements will be equally effective.
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                                                                                                                    evolution of investment advice products                           or more in any one year. Accordingly,
                                               The Department is uncertain about                                    and services and related technologies                             the Department undertook the foregoing
                                            the potential magnitude of any                                          and their distribution channels and                               analysis of the action’s impact. On that
                                            transitional costs associated with this                                 respective market shares. Other possible                          basis the Department believes that the
                                            final rule. These might include costs                                   indirect effects that the Department                              action’s benefits justify its costs.
                                            associated with efforts of prospective                                  lacks bases to estimate include financial


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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                                   3845

                                            F. Regulatory Flexibility Act                           impact on a substantial number of small                an information collection request (ICR)
                                                                                                    entities.                                              to OMB in accordance with 44 U.S.C.
                                               In the notice of proposed rulemaking,                                                                       3507(d), contemporaneously with the
                                            the Department certified that the                       G. Congressional Review Act
                                                                                                                                                           publication of the NPRM, for OMB’s
                                            proposed regulation, if adopted, would                     This final rule is subject to the                   review. No public comments were
                                            not have a significant economic impact                  Congressional Review Act provisions of                 received that specifically addressed the
                                            on a substantial number of small                        the Small Business Regulatory                          paperwork burden analysis of the
                                            entities. For purposes of the analysis,                 Enforcement Fairness Act of 1996 (5                    information collections.
                                            the Department proposed to continue its                 U.S.C. 801 et seq.) and will be                           The Department submitted an ICR to
                                            usual practice of considering a small                   transmitted to the Congress and the                    OMB for its request of a new
                                            entity to be an employee benefit plan                   Comptroller General for review.                        information collection. OMB approved
                                            with fewer than 100 participants. The                                                                          the ICR on January 9, 2009, under OMB
                                            Department consulted with the Small                     H. Unfunded Mandates Reform Act
                                                                                                                                                           Control Number 1210–0134, which will
                                            Business Administration Office of                         For purposes of the Unfunded                         expire on January 31, 2012.
                                            Advocacy concerning use of this                         Mandates Reform Act of 1995 (Pub. L.                      In order to use the statutory
                                            participant count standard for                          104–4), as well as Executive Order                     exemption and/or the class exemption
                                            Regulatory Flexibility Act purposes and                 12875, the final rule does not include                 to provide investment advice to
                                            requested public commenters on this                     any federal mandate that will result in                participants and beneficiaries in
                                            issue. The Department did not receive                   expenditures by state, local, or tribal                participant-directed DC plans and
                                            any comments that address its use of the                governments in the aggregate of more                   beneficiaries of IRAs (collectively
                                            participant count standard and                          than $100 million, adjusted for                        hereafter, ‘‘participants’’), investment
                                            continues to consider a small entity to                 inflation, or increase expenditures by                 advisory firms are required to make
                                            be an employee benefit plan with fewer                  the private sector of more than $100                   disclosures to participants and hire an
                                            than 100 participants.                                  million, adjusted for inflation.                       independent auditor to conduct a
                                               The Department received a comment                                                                           compliance audit and issue an audit
                                                                                                    I. Federalism Statement
                                            from a small investment advisory firm                                                                          report every year. Investment advice
                                            that provides investment management                        Executive Order 13132 (August 4,                    firms following the conditions of the
                                            services to IRA beneficiaries. The                      1999) outlines fundamental principles                  exemption based on disclosure of
                                            commenter expressed concern that it                     of federalism and requires the                         computer model-generated investment
                                            will incur substantial cost to comply                   adherence to specific criteria by federal              advice are required to obtain
                                            with the PPA’s statutory exemption in                   agencies in the process of their                       certification of the model from an
                                            order to continue providing investment                  formulation and implementation of                      eligible investment expert. The class
                                            advisory services for its IRA clients. The              policies that have substantial direct                  exemption conditions its relief on
                                            Department observes, however, that                      effects on the States, the relationship                establishing written policies and
                                            investment advice arrangements that                     between the national government and                    procedures, and both exemptions
                                            were permissible before enactment of                    the States, or on the distribution of                  impose recordkeeping requirements.
                                            the PPA remain permissible without                      power and responsibilities among the                   These paperwork requirements are
                                            respect to whether they satisfy the                     various levels of government. This final               designed to safeguard the interests of
                                            conditions of the PPA’s statutory                       rule does not have federalism                          participants in connection with
                                            exemption. Therefore the Department                     implications because it has no                         investment advice covered by the
                                            does not detect in this comment                         substantial direct effect on the States, on            exemptions.
                                            evidence of a substantial impact on a                   the relationship between the national                     The calculation of the estimated hour
                                            small entity.                                           government and the States, or on the                   and cost burden of the ICRs under the
                                                                                                    distribution of power and                              statutory and class exemption were
                                               Another commenter stated that small                  responsibilities among the various                     discussed in detail in the NPRM and are
                                            plan sponsors will bear an additional                   levels of government. Section 514 of                   summarized below.33
                                            fiduciary burden under the statutory                    ERISA provides, with certain exceptions
                                            exemption, because it allows them to                                                                           1. Final Statutory Exemption Hour and
                                                                                                    specifically enumerated, that the                      Cost Burden
                                            enter into investment advice                            provisions of Titles I and IV of ERISA
                                            arrangements with conflicted fiduciary                  supersede any and all laws of the States                  The Department estimates that the
                                            advisers. Therefore, the commenter                      as they relate to any employee benefit                 third-party disclosures, computer model
                                            opined, the Department should have                      plan covered under ERISA. The                          certification, and audit requirements for
                                            completed an Initial Regulatory                         requirements implemented in the rule
                                            Flexibility Analysis when proposing the                 do not alter the fundamental provisions
                                                                                                                                                              33 Changes made to the disclosure requirements

                                            regulation. The Department notes,                                                                              in the final rule are specifically identified below.
                                                                                                    of the statute with respect to employee                In addition to the disclosure requirements
                                            however, that the permissibility of such                benefit plans, and as such would have                  contained in the NPRM, the final statutory and class
                                            arrangements is established by statute                  no implications for the States or the                  exemption provide that, if a computer model does
                                            and not by this implementing                            relationship or distribution of power                  not make recommendations with respect to
                                            regulation. The Department also notes                                                                          investment options that constitute certain
                                                                                                    between the national government and                    investment funds, products, or services, the
                                            that small plan sponsors remain free to                 the States.                                            fiduciary adviser must provide the participant or
                                            enter into advice arrangements that are                                                                        beneficiary with information explaining such funds,
                                            free from conflicts. Therefore the                      J. Paperwork Reduction Act                             products, or services when the investment advice
                                            Department does not detect in this                                                                             generated by the computer model is presented. For
                                                                                                       In accordance with the requirements                 purposes of this analysis, the Department assumes
                                            comment evidence of a substantial
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                                                                                                    of the Paperwork Reduction Act of 1995                 that this information is readily available to the
                                            impact on a significant number of small                 (PRA) (44 U.S.C. 3506(c)(2)), the notice               fiduciary advisor and will not necessarily have to
                                            entities.                                               of proposed rulemaking (NPRM)                          be given to the participant in paper form. Therefore,
                                                                                                                                                           no additional paperwork burden was added. The
                                               In light of the foregoing, the                       solicited commenters on the                            numbers presented also reflect a very minor update
                                            Department hereby certifies that the                    information collections included                       of the number of DC plan participants utilizing
                                            final rule will not have a significant                  therein. The Department also submitted                 advice.



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                                            3846             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            the final statutory exemption will                        Type of Review: New collection                       Stat. 780, 972, and sec. 102, Reorganization
                                            require approximately 4.0 million                       (Request for new OMB Control                           Plan No. 4 of 1978, 3 CFR, 1978 Comp. p.
                                            burden hours with an equivalent cost of                 Number).                                               332, effective Dec. 31, 1978, 44 FR 1065 (Jan.
                                            approximately $416.8 million and a cost                   Agency: Employee Benefits Security                   3, 1978), and 3 CFR, 1978 Comp. 332. Sec.
                                                                                                                                                           2550.408g–1 also issued under sec. 102,
                                            burden of approximately $579.4 million                  Administration, Department of Labor.
                                                                                                                                                           Reorganization Plan No. 4 of 1978, 3 CFR,
                                            in the first year. In each subsequent year                Titles: (1) Proposed Class Exemption                 1978 Comp. p. 332, effective Dec. 31, 1978,
                                            the total labor burden hours are                        for the Provision of Investment Advice                 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978
                                            estimated to be approximately 2.1                       to Participants and Beneficiaries of Self-             Comp. 332. Sec. 2550.408g–2 also issued
                                            million hours with an equivalent cost of                Directed Individual Account Plans and                  under 29 U.S.C. 1108(g) and sec. 102,
                                            approximately $215.6 million and the                    IRAs, and (2) Proposed Investment                      Reorganization Plan No. 4 of 1978, 3 CFR,
                                            cost burden is estimated at                             Advice Regulation.                                     1978 Comp. p. 332, effective Dec. 31, 1978,
                                            approximately $430.1 million per year.                    OMB Control Number: 1210–NEW.                        44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978
                                                                                                      Affected Public: Business or other for-              Comp. 332. Sec. 2550.412–1 also issued
                                            2. Final Class Exemption Hour and Cost                  profit.                                                under 29 U.S.C. 1112.
                                            Burden                                                    Estimated Number of Respondents:                     ■ 2. Add § 2550.408g–1 to read as
                                               The Department estimates that the                    16,000.                                                follows:
                                            third-party disclosures, the written                      Estimated Number of Annual
                                            policies and procedures, and the                        Responses: 20,789,000.                                 § 2550.408g–1 Investment advice—
                                            recordkeeping and audit requirements                      Frequency of Response: Initially,                    participants and beneficiaries.
                                            for the final class exemption will                      Annually, Upon Request, when a                           (a) In general. (1) This section
                                            require a total of approximately 12.1                   material change.                                       provides relief from the prohibitions of
                                            million burden hours with an                              Estimated Total Annual Burden                        section 406 of the Employee Retirement
                                            equivalent cost of approximately $991.3                 Hours: 16,126,000 hours in the first                   Income Security Act of 1974, as
                                            million and a total cost burden of                      year; 13,504,000 hours in each                         amended (ERISA or the Act), and
                                            approximately $63.2 million in the first                subsequent year.                                       section 4975 of the Internal Revenue
                                            year. In each subsequent year, the total                  Estimated Total Annual Burden Cost:                  Code of 1986, as amended (the Code),
                                            burden hours are estimated at                           $642,552,000 for the first year;                       for certain transactions in connection
                                            approximately 11.4 million hours with                   $493,253,000 for each subsequent year.                 with the provision of investment advice
                                            an equivalent cost of approximately                     List of Subjects in 29 CFR Part 2550                   to participants and beneficiaries. This
                                            $905.6 million and a total cost burden                                                                         section, at paragraph (b), implements
                                            of approximately $63.2 million per year.                  Employee benefit plans, Exemptions,
                                                                                                    Fiduciaries, Investments, Pensions,                    the statutory exemption set forth at
                                               These numbers include an additional                                                                         sections 408(b)(14) and 408(g)(1) of
                                            7.7 million burden hours ($610 million                  Prohibited transactions, Reporting and
                                                                                                    recordkeeping requirements, and                        ERISA and sections 4975(d)(17) and
                                            in equivalent costs) in all years due to                                                                       4975(f)(8) of the Code. This section, at
                                            the extension in the final class                        Securities.
                                                                                                                                                           paragraph (d), prescribes, pursuant to
                                            exemption of the requirement that                       ■ For the reasons set forth in the
                                                                                                                                                           section 408(a) of ERISA and section
                                            fiduciary advisers in arrangements using                preamble, the Department amends                        4975(c)(2) of the Code, a class
                                            fee-leveling conclude that the provided                 Chapter XXV, subchapter F, part 2550 of                exemption for certain transactions not
                                            advice is in the best interest of the                   Title 29 of the Code of Federal                        otherwise covered by the statutory
                                            participant or beneficiary, explain the                 Regulations as follows:                                exemption. The requirements and
                                            basis of this conclusion, document the                  SUBCHAPTER F—FIDUCIARY                                 conditions set forth in this section apply
                                            explanation within 30 days, and retain                  RESPONSIBILITY UNDER THE EMPLOYEE                      solely for the relief described in
                                            the documentation. Under the proposed                   RETIREMENT INCOME SECURITY ACT OF                      paragraphs (b) and (d) of this section
                                            class exemption, this requirement only                  1974                                                   and, accordingly, no inferences should
                                            applied to arrangements involving post-                                                                        be drawn with respect to requirements
                                            computer model or post-investment                       PART 2550—RULES AND
                                                                                                                                                           applicable to the provision of
                                            education investment advice.                            REGULATIONS FOR FIDUCIARY
                                                                                                                                                           investment advice not addressed by this
                                                                                                    RESPONSIBILITY
                                            3. Overall Exemption Hour and Cost                                                                             section.
                                            Burden                                                  ■  1. The authority citation for part 2550               (2) Nothing contained in ERISA
                                               The Department estimates that the                    is revised to read as follows:                         section 408(g)(1), Code section
                                            third-party disclosures, the computer                      Authority: 29 U.S.C. 1135; and Secretary of         4975(f)(8), this regulation or the class
                                            model certification, the written policies               Labor’s Order No. 1–2003, 68 FR 5374 (Feb.             exemption contained herein imposes an
                                            and procedures, and the recordkeeping                   3, 2003). Sec. 2550.401b–1 also issued under           obligation on a plan fiduciary or any
                                            and audit requirements for the statutory                sec. 102, Reorganization Plan No. 4 of 1978,           other party to offer, provide or
                                                                                                    43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978               otherwise make available any
                                            and class exemptions require                            Comp. 332, effective Dec. 31, 1978, 44 FR
                                            approximately 16.1 million burden                                                                              investment advice to a participant or
                                                                                                    1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332.
                                            hours with an equivalent cost of                        Sec. 2550.401c–1 also issued under 29 U.S.C.
                                                                                                                                                           beneficiary.
                                            approximately $1.41 billion and a cost                  1101. Sections 2550.404c–1 and 2550.404c–                (3) Nothing contained in ERISA
                                            burden of approximately $642.6 million                  5 also issued under 29 U.S.C. 1104. Sec.               section 408(g)(1), Code section
                                            in the first year. The labor burden hours               2550.407c–3 also issued under 29 U.S.C.                4975(f)(8), this regulation or the class
                                            in each subsequent year are                             1107. Sec. 2550.404a–2 also issued under 26            exemption contained herein invalidates
                                            approximately 13.5 million hours with                   U.S.C. 401 note (sec. 657, Pub. L. 107–16, 115         or otherwise affects prior regulations,
                                                                                                    Stat. 38). Sec. 2550.408b–1 also issued under
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                                            an equivalent cost of approximately                                                                            exemptions, interpretive or other
                                                                                                    29 U.S.C. 1108(b)(1) and sec. 102,
                                            $1.12 billion and the cost burden in                    Reorganization Plan No. 4 of 1978, 3 CFR,
                                                                                                                                                           guidance issued by the Department of
                                            each subsequent year is approximately                   1978 Comp. p. 332, effective Dec. 31, 1978,            Labor pertaining to the provision of
                                            $493.3 million per year. These                          44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978             investment advice and the
                                            paperwork burden estimates are                          Comp. 332. Sec. 2550.408b–19 also issued               circumstances under which such advice
                                            summarized as follows:                                  under sec. 611, Public Law 109–280, 120                may or may not constitute a prohibited


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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                           3847

                                            transaction under section 406 of ERISA                  fiduciary adviser does not vary                        investment options, if any, available
                                            or section 4975 of the Code.                            depending on the basis of any                          under the plan; or
                                               (b) Statutory exemption. (1) General.                investment option selected by a                           (2) Inappropriately favor investment
                                            Sections 408(b)(14) and 408(g)(1) of                    participant or beneficiary;                            options that may generate greater
                                            ERISA provide an exemption from the                        (E) Any fees (including any                         income for the fiduciary adviser or a
                                            prohibitions of section 406 of ERISA for                commission or other compensation)                      person with a material affiliation or
                                            transactions described in section                       received by the fiduciary adviser for                  material contractual relationship with
                                            408(b)(14) of ERISA in connection with                  investment advice or with respect to the               the fiduciary adviser; and
                                            the provision of investment advice to a                 sale, holding, or acquisition of any                      (F)(1) Except as provided in clause (2)
                                            participant or a beneficiary if the                     security or other property for purposes                of this paragraph (F), take into account
                                            investment advice is provided by a                      of investment of plan assets do not vary               all designated investment options,
                                            fiduciary adviser under an ‘‘eligible                   depending on the basis of any                          within the meaning of paragraph (c)(1)
                                            investment advice arrangement.’’                        investment option selected by a                        of this section, available under the plan
                                            Sections 4975(d)(17) and (f)(8) of the                  participant or beneficiary; and                        without giving inappropriate weight to
                                            Code contain parallel provisions to                        (ii) The requirements of paragraphs                 any investment option.
                                            ERISA sections 408(b)(14) and (g)(1).                   (b)(5), (6), (7), and (8) and paragraph (e)               (2) A computer model shall not be
                                               (2) Eligible investment advice. For                  of this section are met.                               treated as failing to meet the
                                            purposes of section 408(g)(1) of ERISA                     (4) Arrangements that use computer                  requirements of this paragraph merely
                                            and section 4975(f)(8) of the Code, an                                                                         because it does not make
                                                                                                    models. For purposes of this section, an
                                            ‘‘eligible investment advice                                                                                   recommendations relating to the
                                                                                                    arrangement is an eligible investment
                                            arrangement’’ means an arrangement                                                                             acquisition, holding or sale of an
                                                                                                    advice arrangement if the only
                                            that meets either the requirements of                                                                          investment option that:
                                                                                                    investment advice provided under the                      (i) Constitutes an investment
                                            paragraph (b)(3) of this section or                     arrangement is advice that is generated
                                            paragraph (b)(4) of this section, or both.                                                                     primarily in qualifying employer
                                                                                                    by a computer model described in                       securities;
                                               (3) Arrangements that use fee-
                                                                                                    paragraphs (b)(4)(i) and (ii) of this                     (ii) Constitutes an investment fund,
                                            leveling. For purposes of this section, an
                                                                                                    section under an investment advice                     product or service that allocates the
                                            arrangement is an eligible investment
                                                                                                    program and with respect to which the                  invested assets of a participant or
                                            advice arrangement if—
                                               (i)(A) Any investment advice is based                requirements of paragraphs (b)(5), (6),                beneficiary to achieve varying degrees of
                                            on generally accepted investment                        (7), and (8) and paragraph (e) are met.                long-term appreciation and capital
                                            theories that take into account the                        (i) A computer model shall be                       preservation through equity and fixed
                                            historic returns of different asset classes             designed and operated to—                              income exposures, based on a defined
                                            over defined periods of time, although                     (A) Apply generally accepted                        time horizon (such as retirement age or
                                            nothing herein shall preclude any                       investment theories that take into                     life expectancy) or level of risk of the
                                            investment advice from being based on                   account the historic returns of different              participant or beneficiary, provided
                                            generally accepted investment theories                  asset classes over defined periods of                  that, contemporaneous with the
                                            that take into account additional                       time, although nothing herein shall                    provision of investment advice
                                            considerations;                                         preclude a computer model from                         generated by the computer model, the
                                               (B) Any investment advice takes into                 applying generally accepted investment                 participant or beneficiary is also
                                            account investment management and                       theories that take into account                        furnished a general description of such
                                            other fees and expenses attendant to the                additional considerations;                             funds, products or services and how
                                            recommended investments;                                   (B) Take into account investment                    they operate; or
                                               (C) Any investment advice takes into                 management and other fees and                             (iii) Constitutes an annuity option
                                            account, to the extent furnished by a                   expenses attendant to the recommended                  with respect to which a participant or
                                            plan, participant or beneficiary,                       investments;                                           beneficiary may allocate assets toward
                                            information relating to age, time                          (C) Request from a participant or                   the purchase of a stream of retirement
                                            horizons (e.g., life expectancy,                        beneficiary and, to the extent furnished,              income payments guaranteed by an
                                            retirement age), risk tolerance, current                utilize information relating to age, time              insurance company, provided that,
                                            investments in designated investment                    horizons (e.g., life expectancy,                       contemporaneous with the provision of
                                            options, other assets or sources of                     retirement age), risk tolerance, current               investment advice generated by the
                                            income, and investment preferences of                   investments in designated investment                   computer model, the participant or
                                            the participant or beneficiary. A                       options, other assets or sources of                    beneficiary is also furnished a general
                                            fiduciary adviser shall request such                    income, and investment preferences;                    description of such options and how
                                            information, but nothing in this                        provided, however, that nothing herein                 they operate.
                                            paragraph (b)(3)(i)(C) shall require that               shall preclude a computer model from                      (ii) Prior to utilization of the computer
                                            any investment advice take into account                 requesting and taking into account                     model, the fiduciary adviser shall obtain
                                            information requested, but not                          additional information that a plan or a                a written certification, meeting the
                                            furnished by a participant or                           participant or beneficiary may provide;                requirements of paragraph (b)(4)(iv) of
                                            beneficiary, nor preclude requesting and                   (D) Utilize appropriate objective                   this section, from an eligible investment
                                            taking into account additional                          criteria to provide asset allocation                   expert, within the meaning of paragraph
                                            information that a plan or participant or               portfolios comprised of investment                     (b)(4)(iii) of this section, that the
                                            beneficiary may provide;                                options available under the plan;                      computer model meets the requirements
                                               (D) Any fees or other compensation                      (E) Avoid investment                                of paragraph (b)(4)(i) of this section. If,
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                                            (including salary, bonuses, awards,                     recommendations that:                                  following certification, a computer
                                            promotions, commissions or other                           (1) Inappropriately favor investment                model is modified in a manner that may
                                            things of value) received, directly or                  options offered by the fiduciary adviser               affect its ability to meet the
                                            indirectly, by any employee, agent or                   or a person with a material affiliation or             requirements of paragraph (b)(4)(i), the
                                            registered representative that provides                 material contractual relationship with                 fiduciary adviser shall, prior to
                                            investment advice on behalf of a                        the fiduciary adviser over other                       utilization of the modified model,


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                                            3848             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            obtain a new certification from an                      participants and beneficiaries pursuant                information required to be disclosed
                                            eligible investment expert that the                     to this section must be expressly                      pursuant to paragraph (b)(7) of this
                                            computer model, as modified, meets the                  authorized by a plan fiduciary (or, in the             section, concerning the purpose of the
                                            requirements of paragraph (b)(4)(i).                    case of an Individual Retirement                       report, and how and where to locate the
                                               (iii) The term ‘‘eligible investment                 Account (IRA), the IRA beneficiary)                    report applicable to their account; and
                                            expert’’ means a person that, through                   other than: The person offering the                       (B) In the event that the report of the
                                            employees or otherwise, has the                         arrangement; any person providing                      auditor identifies noncompliance with
                                            appropriate technical training or                       designated investment options under                    the requirements of this section, within
                                            experience and proficiency to analyze,                  the plan; or any affiliate of either.                  30 days following receipt of the report
                                            determine and certify, in a manner                      Provided, however, that for purposes of                from the auditor, shall send a copy of
                                            consistent with paragraph (b)(4)(iv) of                 the preceding, in the case of an IRA, an               the report to the Department of Labor at
                                            this section, whether a computer model                  IRA beneficiary will not be treated as an              the following address: Investment
                                            meets the requirements of paragraph                     affiliate of a person solely by reason of              Advice Exemption Notification—
                                            (b)(4)(i) of this section; except that the              being an employee of such person.                      Statutory, U.S. Department of Labor,
                                            term ‘‘eligible investment expert’’ does                   (ii) In the case of an arrangement                  Employee Benefits Security
                                            not include any person that has any                     pursuant to which investment advice is                 Administration, Room N–1513, 200
                                            material affiliation or material                        provided to participants and                           Constitution Ave., NW., Washington,
                                            contractual relationship with the                       beneficiaries of a plan sponsored by the               DC 20210.
                                            fiduciary adviser, with a person with a                 person offering the arrangement or a                      (iii) For purposes of this paragraph
                                            material affiliation or material                        plan sponsored by an affiliate of such                 (b)(6), an auditor is considered
                                            contractual relationship with the                       person, the authorization described in                 independent if it does not have a
                                            fiduciary adviser, or with any employee,                paragraph (b)(5)(i) may be provided by                 material affiliation or material
                                            agent, or registered representative of the              the plan sponsor of such plan, provided                contractual relationship with the person
                                            foregoing.                                              that the person or affiliate offers the                offering the investment advice
                                               (iv) A certification by an eligible                  same arrangement to participants and                   arrangement to the plan or with any
                                            investment expert shall—                                beneficiaries of unaffiliated plans in the             designated investment options under
                                               (A) Be in writing;                                   ordinary course of its business.                       the plan.
                                               (B) Contain—                                            (iii) For purposes of the authorization
                                                                                                                                                              (iv) For purposes of this paragraph
                                               (1) An identification of the                         described in paragraph (b)(5)(i), a plan
                                                                                                                                                           (b)(6), the auditor shall review sufficient
                                            methodology or methodologies applied                    sponsor shall not be treated as a person
                                                                                                                                                           relevant information to formulate an
                                            in determining whether the computer                     providing a designated investment
                                                                                                                                                           opinion as to whether the investment
                                            model meets the requirements of                         option under the plan merely because
                                                                                                                                                           advice arrangements, and the advice
                                            paragraph (b)(4)(i) of this section;                    one of the designated investment
                                                                                                                                                           provided pursuant thereto, offered by
                                               (2) An explanation of how the applied                options of the plan is an option that
                                                                                                                                                           the fiduciary adviser during the audit
                                            methodology or methodologies                            permits investment in securities of the
                                                                                                                                                           period were in compliance with this
                                            demonstrated that the computer model                    plan sponsor or an affiliate.
                                                                                                       (6) Annual audit. (i) The fiduciary                 section. Nothing in this paragraph shall
                                            met the requirements of paragraph
                                                                                                    adviser shall, at least annually, engage               preclude an auditor from using
                                            (b)(4)(i) of this section;
                                               (3) A description of any limitations                 an independent auditor, who has                        information obtained by sampling, as
                                            that were imposed by any person on the                  appropriate technical training or                      reasonably determined appropriate by
                                            eligible investment expert’s selection or               experience and proficiency, and so                     the auditor, investment advice
                                            application of methodologies for                        represents in writing to the fiduciary                 arrangements, and the advice pursuant
                                            determining whether the computer                        adviser, to:                                           thereto, during the audit period.
                                            model meets the requirements of                            (A) Conduct an audit of the                            (v) The selection of an auditor for
                                            paragraph (b)(4)(i) of this section;                    investment advice arrangements for                     purposes of this paragraph (b)(6) is a
                                               (4) A representation that the                        compliance with the requirements of                    fiduciary act governed by section
                                            methodology or methodologies were                       this section; and                                      404(a)(1) of ERISA.
                                            applied by a person or persons with the                    (B) Within 60 days following                           (7) Disclosure. (i) The fiduciary
                                            educational background, technical                       completion of the audit, issue a written               adviser must provide, without charge, to
                                            training or experience necessary to                     report to the fiduciary adviser and,                   a participant or a beneficiary before the
                                            analyze and determine whether the                       except with respect to an arrangement                  initial provision of investment advice
                                            computer model meets the requirements                   with an IRA, to each fiduciary who                     with regard to any security or other
                                            of paragraph (b)(4)(i); and                             authorized the use of the investment                   property offered as an investment
                                               (5) A statement certifying that the                  advice arrangement, in accordance with                 option, a written notification of:
                                            eligible investment expert has                          paragraph (b)(5) of this section, setting                 (A) The role of any party that has a
                                            determined that the computer model                      forth the specific findings of the auditor             material affiliation or material
                                            meets the requirements of paragraph                     regarding compliance of the                            contractual relationship with the
                                            (b)(4)(i) of this section; and                          arrangement with the requirements of                   fiduciary adviser in the development of
                                               (C) Be signed by the eligible                        this section.                                          the investment advice program, and in
                                            investment expert.                                         (ii) With respect to an arrangement                 the selection of investment options
                                               (v) The selection of an eligible                     with an IRA, the fiduciary adviser:                    available under the plan;
                                            investment expert as required by this                      (A) Within 30 days following receipt                   (B) The past performance and
                                            section is a fiduciary act governed by                  of the report from the auditor, as                     historical rates of return of the
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                                            section 404(a)(1) of ERISA.                             described in paragraph (b)(6)(i)(B) of                 designated investment options available
                                               (5) Arrangement must be authorized                   this section, shall furnish a copy of the              under the plan, to the extent that such
                                            by a plan fiduciary. (i) Except as                      report to the IRA beneficiary or make                  information is not otherwise provided;
                                            provided in paragraph (b)(5)(ii), the                   such report available on its Web site,                    (C) All fees or other compensation
                                            arrangement pursuant to which                           provided that such beneficiaries are                   that the fiduciary adviser or any affiliate
                                            investment advice is provided to                        provided information, with the                         thereof is to receive (including


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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                         3849

                                            compensation provided by any third                      fiduciary adviser shall, at all times                  or under the laws of the State in which
                                            party) in connection with—                              during the provision of advisory                       the fiduciary maintains its principal
                                               (1) The provision of the advice;                     services to the participant or beneficiary             office and place of business,
                                               (2) The sale, acquisition, or holding of             pursuant to the arrangement,—                             (B) A bank or similar financial
                                            any security or other property pursuant                     (A) Maintain accurate, up-to-date                  institution referred to in section
                                            to such advice; or                                      information in a form that is consistent               408(b)(4) of ERISA or a savings
                                               (3) Any rollover or other distribution               with paragraph (b)(7)(ii) of this section,             association (as defined in section 3(b)(1)
                                            of plan assets or the investment of                         (B) Provide, without charge, accurate,             of the Federal Deposit Insurance Act (12
                                            distributed assets in any security or                   up-to-date information to the recipient                U.S.C. 1813(b)(1)), but only if the advice
                                            other property pursuant to such advice;                 of the advice no less frequently than                  is provided through a trust department
                                               (D) Any material affiliation or                      annually,                                              of the bank or similar financial
                                            material contractual relationship of the                    (C) Provide, without charge, accurate              institution or savings association which
                                            fiduciary adviser or affiliates thereof in              information to the recipient of the                    is subject to periodic examination and
                                            the security or other property;                         advice upon request of the recipient,                  review by Federal or State banking
                                               (E) The manner, and under what                       and                                                    authorities,
                                            circumstances, any participant or                           (D) Provide, without charge, to the                   (C) An insurance company qualified
                                            beneficiary information provided under                  recipient of the advice any material                   to do business under the laws of a State,
                                            the arrangement will be used or                         change to the information described in                    (D) A person registered as a broker or
                                            disclosed;                                              paragraph (b)(7)(i) at a time reasonably               dealer under the Securities Exchange
                                               (F) The types of services provided by                contemporaneous to the change in                       Act of 1934 (15 U.S.C. 78a et seq.),
                                            the fiduciary adviser in connection with                information.                                              (E) An affiliate of a person described
                                            the provision of investment advice by                       (8) Other Conditions. The                          in any of clauses (A) through (D), or
                                            the fiduciary adviser, including, with                  requirements of this paragraph are met                    (F) An employee, agent, or registered
                                            respect to a computer model                             if-                                                    representative of a person described in
                                            arrangement referred to in paragraph                        (i) The fiduciary adviser provides                 paragraphs (c)(2)(i)(A) through (E) of
                                            (b)(4) of this section, any limitations on              appropriate disclosure, in connection                  this section who satisfies the
                                            the ability of a computer model to take                 with the sale, acquisition, or holding of              requirements of applicable insurance,
                                            into account an investment primarily in                 the security or other property, in                     banking, and securities laws relating to
                                            qualifying employer securities;                         accordance with all applicable                         the provision of advice.
                                               (G) The adviser is acting as a fiduciary             securities laws,                                          (ii) Except as provided under 29 CFR
                                            of the plan in connection with the                          (ii) Any sale, acquisition, or holding             2550.408g–2, a fiduciary adviser
                                            provision of the advice; and                            of a security or other property occurs                 includes any person who develops the
                                               (H) That a recipient of the advice may               solely at the direction of the recipient of            computer model, or markets the
                                            separately arrange for the provision of                 the advice,                                            computer model or investment advice
                                            advice by another adviser that could                        (iii) The compensation received by                 program, utilized in satisfaction of
                                            have no material affiliation with and                   the fiduciary adviser and affiliates                   paragraph (b)(4) of this section.
                                            receive no fees or other compensation in                thereof in connection with the sale,                      (3) A ‘‘registered representative’’ of
                                            connection with the security or other                   acquisition, or holding of the security or             another entity means a person described
                                            property.                                               other property is reasonable, and                      in section 3(a)(18) of the Securities
                                               (ii)(A) The notification required under                  (iv) The terms of the sale, acquisition,           Exchange Act of 1934 (15 U.S.C.
                                            paragraph (b)(7)(i) of this section must                or holding of the security or other                    78c(a)(18)) (substituting the entity for
                                            be written in a clear and conspicuous                   property are at least as favorable to the              the broker or dealer referred to in such
                                            manner and in a manner calculated to                    plan as an arm’s length transaction                    section) or a person described in section
                                            be understood by the average plan                       would be.                                              202(a)(17) of the Investment Advisers
                                            participant and must be sufficiently                        (c) Definitions. For purposes of this              Act of 1940 (15 U.S.C. 80b-2(a)(17))
                                            accurate and comprehensive to                           section:                                               (substituting the entity for the
                                            reasonably apprise such participants                        (1) The term ‘‘designated investment               investment adviser referred to in such
                                            and beneficiaries of the information                    option’’ means any investment option                   section).
                                            required to be provided in the                          designated by the plan into which                         (4) ‘‘Individual Retirement Account’’
                                            notification.                                           participants and beneficiaries may                     or ‘‘IRA’’ means—
                                                                                                                                                              (i) An individual retirement account
                                               (B) The appendix to this section                     direct the investment of assets held in,
                                                                                                                                                           described in section 408(a) of the Code;
                                            contains a model disclosure form that                   or contributed to, their individual
                                                                                                                                                              (ii) An individual retirement annuity
                                            may be used to provide notification of                  accounts. The term ‘‘designated                        described in section 408(b) of the Code;
                                            the information described in paragraph                  investment option’’ shall not include                     (iii) An Archer MSA described in
                                            (b)(7)(i)(C) of this section. Use of the                ‘‘brokerage windows,’’ ‘‘self-directed                 section 220(d) of the Code;
                                            model form is not mandatory. However,                   brokerage accounts,’’ or similar plan                     (iv) A health savings account
                                            use of an appropriately completed                       arrangements that enable participants                  described in section 223(d) of the Code;
                                            model disclosure form will be deemed                    and beneficiaries to select investments                   (v) A Coverdell education savings
                                            to satisfy the requirements of paragraphs               beyond those designated by the plan.                   account described in section 530 of the
                                            (b)(7)(i) and (ii) of this section with                     (2)(i) The term ‘‘fiduciary adviser’’              Code; or
                                            respect to such information.                            means, with respect to a plan, a person                   (vi) A trust, plan, account, or annuity
                                               (iii) The notification required under                who is a fiduciary of the plan by reason               which, at any time, has been determined
                                            paragraph (b)(7)(i) of this section may,                of the provision of investment advice                  by the Secretary of the Treasury to be
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                                            in accordance with 29 CFR 2520.104b-                    referred to in section 3(21)(A)(ii) of                 described in any of paragraphs (c)(4)(i)
                                            1, be provided in written or electronic                 ERISA by the person to the participant                 through (v) of this section.
                                            form.                                                   or beneficiary of the plan and who is—                    (5) An ‘‘affiliate’’ of another person
                                               (iv) With respect to the information                     (A) Registered as an investment                    means—
                                            required to be disclosed pursuant to                    adviser under the Investment Advisers                     (i) Any person directly or indirectly
                                            paragraph (b)(7)(i) of this section, the                Act of 1940 (15 U.S.C. 80b–1 et seq. )                 owning, controlling, or holding with


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                                            3850             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            power to vote, 5 percent or more of the                     (B) The acquisition, holding, or sale of           determined appropriate solely by the
                                            outstanding voting securities of such                   a security or other property pursuant to               independent person, without influence
                                            other person;                                           the investment advice; and                             from the fiduciary adviser (or any of the
                                               (ii) Any person 5 percent or more of                     (C) except as otherwise provided in                adviser’s affiliates); for purposes of this
                                            whose outstanding voting securities are                 this exemption, the direct or indirect                 paragraph (d)(3)(i), a person is
                                            directly or indirectly owned, controlled,               receipt of fees or other compensation by               ‘‘independent’’ of another person if it is
                                            or held with power to vote, by such                     the fiduciary adviser (or any employee,                not an affiliate of the other person, and
                                            other person;                                           agent, registered representative or                    does not have a material affiliation or
                                               (iii) Any person directly or indirectly              affiliate thereof) in connection with the              material contractual relationship with
                                            controlling, controlled by, or under                    provision of the advice or in connection               the other person.
                                            common control with, such other                         with an acquisition, holding, or sale of                  (ii)(A) In the case of a plan that offers
                                            person; and                                             a security or other property pursuant to               a ‘‘brokerage window,’’ ‘‘self-directed
                                               (iv) Any officer, director, partner,                 the investment advice, provided that the               brokerage account’’ or similar
                                            copartner, or employee of such other                    conditions set forth in paragraph (d)(2)               arrangement that enables participants
                                            person.                                                 are met;                                               and beneficiaries to select investments
                                               (6)(i) A person with a ‘‘material                        (ii) The sanctions resulting from the              beyond those designated by the plan, if
                                            affiliation’’ with another person                       application of section 4975 of the Code,               any, before providing investment advice
                                            means—                                                  by reason of section 4975(c)(1)(A)                     with respect to any investment utilizing
                                               (A) Any affiliate of the other person;               through (F) of the Code, shall not apply               such arrangement, the participant or
                                               (B) Any person directly or indirectly                to:                                                    beneficiary shall be furnished the
                                            owning, controlling, or holding, 5                          (A) The provision of investment                    material described in paragraph
                                            percent or more of the interests of such                advice described in section                            (d)(3)(ii)(B) and, if the plan offers
                                            other person; and                                       4975(e)(3)(B) of the Code by a fiduciary               designated investment options, the
                                               (C) Any person 5 percent or more of                  adviser to a beneficiary of an IRA that                participant or beneficiary also shall be
                                            whose interests are directly or indirectly              permits such beneficiary to direct the                 furnished the recommendations
                                            owned, controlled, or held, by such                     investment of the assets of his or her                 described in paragraph (d)(3)(i ) with
                                            other person.                                           IRA;                                                   regard to such options.
                                               (ii) For purposes of paragraph (c)(6)(i)                 (B) The acquisition, holding, or sale of              (B) In the case of an IRA with respect
                                            of this section, ‘‘interest’’ means with                a security or other property pursuant to               to which the types or number of
                                            respect to an entity—                                   the investment advice; and                             investment choices reasonably
                                               (A) The combined voting power of all                     (C) Except as otherwise provided in                precludes the use of a computer model
                                            classes of stock entitled to vote or the                this exemption, the direct or indirect                 meeting the requirements of section
                                            total value of the shares of all classes of             receipt of fees or other compensation by               408(g)(3)(B) of ERISA to generate
                                            stock of the entity if the entity is a                  the fiduciary adviser (or any employee,                recommendations, before providing
                                            corporation;                                            agent, registered representative or                    other investment advice covered by this
                                               (B) The capital interest or the profits              affiliate thereof) in connection with the              exemption, the participant or
                                            interest of the entity if the entity is a               provision of the advice or in connection               beneficiary shall be furnished with
                                            partnership; or                                         with an acquisition, holding, or sale of               material, such as graphs, pie charts, case
                                               (C) The beneficial interest of the                   a security or other property pursuant to               studies, worksheets, or interactive
                                            entity if the entity is a trust or                      the investment advice, provided that the               software or similar programs, that reflect
                                            unincorporated enterprise.                              conditions set forth in paragraph (d)(2)               or produce asset allocation models
                                               (7) Persons have a ‘‘material                        of this section are met.                               taking into account the age (or time
                                            contractual relationship’’ if payments                      (2) Conditions. The relief described in            horizon) and risk profile of the
                                            made by one person to the other person                  paragraph (d)(1) shall be available if the             beneficiary, to the extent known.
                                            pursuant to contracts or agreements                     fiduciary adviser—                                     Nothing shall preclude the furnishing of
                                            between the persons exceed 10 percent                       (i) Provides investment advice in                  material, in addition to the foregoing,
                                            of the gross revenue, on an annual basis,               accordance with paragraphs (d)(3) or (4),              reflecting asset allocation portfolios of
                                            of such other person.                                   or both; and                                           hypothetical individuals with different
                                               (8) ‘‘Control’’ means the power to                       (ii) Satisfies the requirements of                 time horizons and risk profiles. For
                                            exercise a controlling influence over the               paragraphs (d)(5) through (10).                        purposes of any materials provided
                                            management or policies of a person                          (3) Use of computer model or                       pursuant to this paragraph (d)(3)(ii):
                                            other than an individual.                               investment education. The requirements                    (1) Models must be based on generally
                                               (d) Class exemption. (1) General.                    of this paragraph (d)(3) will be satisfied             accepted investment theories that take
                                            Pursuant to section 408(a) of the Act                   if:                                                    into account the historic returns of
                                            and section 4975(c)(2) of the Code—                         (i) Except as provided in paragraph                different asset classes (e.g., equities,
                                               (i) The restrictions of sections 406(a)              (d)(3)(ii), before providing other                     bonds, or cash) over defined periods of
                                            and 406(b) of the Act and the sanctions                 investment advice covered by this                      time;
                                            resulting from the application of section               exemption, the participant or                             (2) Such models must operate in a
                                            4975 of the Code, by reason of section                  beneficiary shall be furnished with                    manner that is not biased in favor of
                                            4975(c)(1)(A) through (F) of the Code,                  investment recommendations generated                   investments offered by the fiduciary
                                            shall not apply to:                                     by a computer model that—                              adviser or a person with a material
                                               (A) The provision of investment                          (A) Meets the requirements of                      affiliation or material contractual
                                            advice described in section 3(21)(A)(ii)                paragraphs (b)(4)(i) and (ii); or                      relationship with the fiduciary adviser;
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                                            of the Act by a fiduciary adviser to a                      (B) Meets the requirements of                      and
                                            participant or beneficiary of an                        paragraph (b)(4)(i) and was designed                      (3) All material facts and assumptions
                                            individual account plan that permits                    and is maintained by a person                          on which such models are based (e.g.,
                                            such participant or beneficiary to direct               independent of the fiduciary adviser                   retirement ages, life expectancies,
                                            the investment of their individual                      (and any of the adviser’s affiliates) and              income levels, financial resources,
                                            accounts;                                               utilizes methodologies and parameters                  replacement income ratios, inflation


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                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                           3851

                                            rates, and rates of return) accompany                   herein shall preclude any investment                   fiduciary adviser in the development of
                                            the models.                                             advice from being based on generally                   the computer model described in
                                               (iii) The fiduciary adviser shall retain             accepted investment theories that take                 paragraph (d)(3)(i) of this section or, if
                                            the information furnished pursuant to                   into account additional considerations;                applicable, the materials described in
                                            paragraph (d)(3)(i) or (ii) in accordance                  (B) Takes into account investment                   paragraph (d)(3)(ii) of this section, and,
                                            with paragraph (e) of this section.                     management and other fees and                          to the extent applicable, in the selection
                                               (4) Use of fee-leveling. Any fees or                 expenses attendant to the recommended                  of investment options available under
                                            other compensation (including salary,                   investments; and                                       the plan;
                                            bonuses, awards, promotions,                               (C) Takes into account, to the extent                  (B) The types of services provided by
                                            commissions or any other thing of                       furnished by a plan, participant or                    the fiduciary adviser in connection with
                                            value) received, directly or indirectly,                beneficiary, information relating to age,              the provision of investment advice by
                                            by an employee, agent or registered                     time horizons (e.g., life expectancy,                  the fiduciary adviser, including, with
                                            representative providing advice on                      retirement age), risk tolerance, current               respect to a computer model
                                            behalf of the fiduciary adviser pursuant                investments in designated investment                   arrangement referred to in paragraph
                                            to this exemption (as distinguished from                options, other assets or sources of                    (d)(3)(i) of this section, any limitations
                                            any compensation received by the                        income, and investment preferences of                  on the ability of a computer model to
                                            fiduciary adviser on whose behalf the                   the participant or beneficiary. A                      take into account an investment
                                            employee, agent or registered                           fiduciary adviser shall request such                   primarily in qualifying employer
                                            representative is providing such advice)                information, but nothing in this                       securities; and
                                            do not vary depending on the basis of                   paragraph (d)(6)(i)(C) shall require that                 (C) The information described in
                                            any investment option selected by a                     any investment advice take into account                paragraphs (b)(7)(i)(B) through (E), (G)
                                            participant or beneficiary.                             information requested, but not                         and (H);
                                               (5) Authorized by a plan fiduciary or                furnished by a participant or                             (ii)(A) Such notification must be
                                            IRA beneficiary. (i) Except as provided                 beneficiary, nor preclude requesting and               written in a clear and conspicuous
                                            in paragraph (d)(5)(ii), the arrangement                taking into account additional                         manner and in a manner calculated to
                                            pursuant to which investment advice is                  information that a plan or participant or              be understood by the average plan
                                            provided to participants and                            beneficiary may provide.                               participant and shall be sufficiently
                                            beneficiaries is expressly authorized in                   (ii) In connection with the provision               accurate and comprehensive to
                                            advance by a plan fiduciary (or, in the                 of the investment advice—                              reasonably apprise such participants
                                            case of an IRA, the IRA beneficiary)                       (A) The fiduciary adviser concludes                 and beneficiaries of the information
                                            other than: The person offering the                     that the advice to be provided is                      required to be disclosed;
                                            investment advice arrangement; any                      prudent and in the best interest of the
                                            person providing designated investment                                                                            (B) The appendix to this section
                                                                                                    participant or beneficiary, and explains               contains a model disclosure form that
                                            options under the plan; or any affiliate                to the participant or beneficiary—
                                            of either. Provided, however, that for                                                                         may be used to provide the notification
                                                                                                       (1) The basis for the conclusion,                   of information described in paragraph
                                            purposes of the preceding, in the case of                  (2) If applicable, why the advice
                                            an IRA, an IRA beneficiary will not be                                                                         (b)(7)(i)(C). Use of the model disclosure
                                                                                                    includes an option(s) with higher fees
                                            treated as an affiliate of a person solely                                                                     form is not mandatory. However, use of
                                                                                                    than other options in the same asset
                                            by reason of being an employee of such                                                                         an appropriately completed model
                                                                                                    class(es) available under the plan, and
                                            person.                                                    (3) If applicable, in the case of                   disclosure form will be deemed to
                                               (ii) In the case of an arrangement                   investment advice provided pursuant to                 satisfy the requirements of paragraphs
                                            pursuant to which investment advice is                  paragraph (d)(3)(i) or (ii), how the                   (d)(8)(i)(C) and (d)(8)(ii)(A) with respect
                                            provided to participants and                            advice deviates from or relates to the                 to such information.
                                            beneficiaries of a plan sponsored by the                information provided pursuant to such                     (iii) Such notification may, in
                                            person offering the arrangement or a                    paragraphs;                                            accordance with 29 CFR 2520.104b–1,
                                            plan sponsored by an affiliate of such                     (B) Not later than 30 days following                be provided in written or electronic
                                            person, the authorization described in                  the explanation described in paragraph                 form.
                                            paragraph (d)(5)(i) may be provided by                  (d)(6)(ii)(A), the employee, agent, or                    (iv) With respect to the information
                                            the plan sponsor of such plan, provided                 registered representative providing the                required to be disclosed pursuant to
                                            that the person or affiliate offers the                 advice on behalf of the fiduciary adviser              paragraph (d)(8)(i) of this section, the
                                            same arrangement to participants and                    shall document such explanation; and                   fiduciary adviser shall, at all times
                                            beneficiaries of unaffiliated plans in the                 (C) The fiduciary adviser retains the               during the provision of advisory
                                            ordinary course of its business.                        documentation developed pursuant to                    services to the participant or beneficiary
                                               (iii) For purposes of the authorization              paragraph (d)(6)(ii)(B) in accordance                  pursuant to the arrangement—
                                            described in paragraph (d)(5)(i), a plan                with paragraph (e) of this section.                       (A) Maintain accurate, up-to-date
                                            sponsor shall not be treated as a person                   (7) Policies and procedures. The                    information in a form that is consistent
                                            providing a designated investment                       fiduciary adviser adopts and follows                   with paragraph (d)(8)(ii) of this section,
                                            option under the plan merely because                    written policies and procedures that are                  (B) Provide, without charge, accurate,
                                            one of the designated investment                        designed to assure compliance with the                 up-to-date information to the recipient
                                            options of the plan is an option that                   conditions of this exemption.                          of the advice no less frequently than
                                            permits investment in securities of the                    (8) Disclosure. (i) The fiduciary                   annually,
                                            plan sponsor or an affiliate.                           adviser provides, without charge, to the                  (C) Provide, without charge, accurate
                                               (6) Basis for advice. (i) The                        participant or beneficiary before the                  information to the recipient of the
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                                            investment advice—                                      initial provision of investment advice                 advice upon request of the recipient,
                                               (A) Is based on generally accepted                   under the class exemption, written                     and
                                            investment theories that take into                      notification of:                                          (D) Provide, without charge, to the
                                            account the historic returns of different                  (A) The role of any party that has a                recipient of the advice any material
                                            asset classes over defined periods of                   material affiliation or material                       change to the information described in
                                            time; provided, however, that nothing                   contractual relationship with the                      paragraph (d)(8)(i) at a time reasonably


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                                            3852             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations

                                            contemporaneous to the change in                        arrangements, and the advice provided                  Adviser] and how it is compensated for the
                                            information.                                            pursuant thereto, offered by the                       investment advice provided to you. You
                                              (9) Annual audit. (i) The fiduciary                   fiduciary adviser during the audit                     should carefully consider this information in
                                            adviser shall, at least annually, engage                period were in compliance with the                     your evaluation of that advice.
                                                                                                                                                             [enter name of Fiduciary Adviser] has been
                                            an independent auditor, who has                         policies and procedures of paragraph                   selected to provide investment advisory
                                            appropriate technical training or                       (d)(7) of this section and the                         services for the [enter name of Plan]. [enter
                                            experience and proficiency and so                       requirements of this paragraph (d);                    name of Fiduciary Adviser] will be providing
                                            represents in writing to the fiduciary                  provided, however, that nothing in this                these services as a fiduciary under the
                                            adviser, to:                                            subparagraph shall preclude an auditor                 Employee Retirement Income Security Act
                                              (A) Conduct an audit for compliance                   from using information obtained by                     (ERISA). [enter name of Fiduciary Adviser],
                                            with the policies and procedures of                     sampling, as reasonably determined                     therefore, must act prudently and with only
                                            paragraph (d)(7) of this section and the                appropriate by the auditor, investment                 your interest in mind when providing you
                                            requirements of paragraph (d) of this                   advice arrangements, and the advice                    recommendations on how to invest your
                                            section; and                                                                                                   retirement assets.
                                                                                                    pursuant thereto, during the audit
                                              (B) Within 60 days following the                      period.                                                Compensation of the Fiduciary Adviser and
                                            completion of the audit, issue a written                   (v) The selection of an auditor for                 Related Parties
                                            report to the fiduciary adviser, and,                   purposes of this paragraph (d)(9) is a                    [enter name of Fiduciary Adviser] (is/is
                                            except with respect to an arrangement                   fiduciary act governed by section                      not) compensated by the plan for the advice
                                            with an IRA, to each fiduciary who                      404(a)(1) of ERISA.                                    it provides. (if compensated by the plan,
                                            authorized the arrangement, in                             (10) Other. The requirements of                     explain what and how compensation is
                                            accordance with paragraph (d)(5),                       paragraph (b)(8), relating to other                    charged (e.g., asset-based fee, flat fee, per
                                            setting forth the specific findings of the              conditions, and paragraph (e), relating                advice)). (If applicable, [enter name of
                                            auditor regarding compliance of the                     to retention of records, of this section               Fiduciary Adviser] is not compensated on the
                                            arrangement with the policies and                                                                              basis of the investment(s) selected by you.)
                                                                                                    are met.
                                                                                                                                                              Affiliates of [enter name of Fiduciary
                                            procedures of paragraph (d)(7) and the                     (e) Retention of records. The fiduciary
                                                                                                                                                           Adviser] (if applicable enter, and other
                                            requirements of paragraph (d) of this                   adviser must maintain, for a period of                 parties with whom [enter name of Fiduciary
                                            section.                                                not less than 6 years after the provision              Adviser] is related or has a material financial
                                              (ii) With respect to an arrangement                   of investment advice under this section                relationship) also will be providing services
                                            with an IRA, the fiduciary adviser:                     any records necessary for determining                  for which they will be compensated. These
                                              (A) Within 30 days following receipt                  whether the applicable requirements of                 services include: [enter description of
                                            of the report from the auditor, shall                   this section have been met. A                          services, e.g., investment management,
                                            furnish a copy of the report to the IRA                 transaction prohibited under section                   transfer agent, custodial, and shareholder
                                            beneficiary or make such report                         406 of ERISA shall not be considered to                services for some/all the investment funds
                                            available on its Web site, provided that                                                                       available under the plan.]
                                                                                                    have occurred solely because the
                                                                                                                                                              When [enter name of Fiduciary Adviser]
                                            such beneficiaries are provided                         records are lost or destroyed prior to the             recommends that you invest your assets in an
                                            information, with the information                       end of the 6-year period due to                        investment fund of its own or one of its
                                            required to be disclosed pursuant to                    circumstances beyond the control of the                affiliates and you follow that advice, [enter
                                            paragraph (d)(8) of this section,                       fiduciary adviser.                                     name of Fiduciary Adviser] or that affiliate
                                            concerning the purpose of the report,                      (f) Noncompliance. (1) The relief from              will receive compensation from the
                                            and how and where to locate the report                  the prohibited transaction provisions of               investment fund based on the amount you
                                            applicable to their account; and                        section 406 of ERISA and the sanctions                 invest. The amounts that will be paid by you
                                              (B) In the event that the report of the               resulting from the application of section              will vary depending on the particular fund in
                                            auditor identifies noncompliance with                   4975 of the Code described in                          which you invest your assets and may range
                                            the policies and procedures required by                                                                        from l% to l%. Specific information
                                                                                                    paragraphs (b) and (d) of this section
                                                                                                                                                           concerning the fees and other charges of each
                                            paragraph (d)(7) or the conditions of                   shall not apply to any transaction                     investment fund is available from [enter
                                            paragraph (d) of this section, within 30                described in such paragraphs in                        source, such as: your plan administrator,
                                            days following receipt of the report from               connection with the provision of                       investment fund provider (possibly with
                                            the auditor, sends a copy of the report                 investment advice to an individual                     Internet Web site address)]. This information
                                            to the Department of Labor at the                       participant or beneficiary with respect                should be reviewed carefully before you
                                            following address: Investment Advice                    to which the applicable conditions of                  make an investment decision.
                                            Notification—Class Exemption, U.S.                      this section have not been satisfied.                     (if applicable enter, [enter name of
                                            Department of Labor, Employee Benefits                     (2) In the case of a pattern or practice            Fiduciary Adviser] or affiliates of [enter name
                                            Security Administration, Room N–1513,                   of noncompliance with any of the                       of Fiduciary Adviser] also receive
                                                                                                                                                           compensation from non-affiliated investment
                                            200 Constitution Ave., NW.,                             applicable conditions of this section, the             funds as a result investments you make as a
                                            Washington, DC 20210.                                   relief described in paragraph (b) or (d)               result of recommendations of [enter name of
                                              (iii) For purposes of paragraph                       shall not apply to any transaction in                  Fiduciary Adviser]. The amount of this
                                            (d)(9)(i), an auditor is considered                     connection with the provision of                       compensation also may vary depending on
                                            independent if it does not have a                       investment advice provided by the                      the particular fund in which you invest. This
                                            material affiliation or material                        fiduciary adviser during the period over               compensation may range from l% to l%.
                                            contractual relationship with the person                which the pattern or practice extended.                Specific information concerning the fees and
                                            offering the investment advice                             (g) Applicability date. This section                other charges of each investment fund is
                                            arrangement to the plan or IRA or any                   shall apply to transactions described in               available from [enter source, such as: your
                                            designated investment options under                     paragraphs (b) and (d) of this section                 plan administrator, investment fund provider
                                                                                                                                                           (possibly with Internet Web site address)].
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                                            the plan or IRA.                                        occurring on or after March 23, 2009.                  This information should be reviewed
                                              (iv) For purposes of the audit                                                                               carefully before you make an investment
                                            described in paragraph (d)(9)(i), the                   Appendix to § 2550.408g–1
                                                                                                                                                           decision.
                                            auditor shall review sufficient relevant                Fiduciary Adviser Disclosure                              (if applicable enter, In addition to the
                                            information to formulate an opinion as                    This document contains important                     above, [enter name of Fiduciary Adviser] or
                                            to whether the investment advice                        information about [enter name of Fiduciary             affiliates of [enter name of Fiduciary Adviser]



                                       VerDate Nov<24>2008   19:29 Jan 16, 2009   Jkt 217001   PO 00000   Frm 00032   Fmt 4701   Sfmt 4700   E:\FR\FM\21JAR3.SGM   21JAR3
                                                             Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations                                            3853

                                            also receive other fees or compensation, such           how your investment in the option will                 of Code sections 4975(d)(17) and
                                            as commissions, in connection with the sale,            perform in the future; your investment in              4975(f)(8). This section sets forth
                                            acquisition or holding of investments                   these options could lose money.                        requirements that must be satisfied in
                                            selected by you as a result of
                                            recommendations of [enter name of Fiduciary             Parties Participating in Development of                order for one such fiduciary adviser to
                                            Adviser]. These amounts are: [enter                     Advice Program or Selection of Investment              elect to be treated as a fiduciary with
                                            description of all other fees or compensation           Options                                                respect to a plan under an eligible
                                            to be received in connection with sale,                   Name, and describe role of, affiliates or            investment advice arrangement.
                                            acquisition or holding of investments]. This            other parties with whom the fiduciary                     (b)(1) If an election meets the
                                            information should be reviewed carefully                adviser has a material affiliation or
                                                                                                    contractual relationship that participated in
                                                                                                                                                           requirements in paragraph (b)(2) of this
                                            before you make an investment decision.
                                               (if applicable enter, When [enter name of            the development of the investment advice               section, then the person identified in
                                            Fiduciary Adviser] recommends that you                  program (if this is an arrangement that uses           the election shall be the sole fiduciary
                                            take a rollover or other distribution of assets         computer models) or the selection of                   adviser treated as a fiduciary by reason
                                            from the plan, or recommends how those                  investment options available under the plan.           of developing or marketing the
                                            assets should subsequently be invested,                                                                        computer model, or marketing the
                                                                                                    Use of Personal Information
                                            [enter name of Fiduciary Adviser] or affiliates                                                                investment advice program, used in an
                                            of [enter name of Fiduciary Adviser] will                  Include a brief explanation of the
                                                                                                    following—
                                                                                                                                                           eligible investment advice arrangement.
                                            receive additional fees or compensation.
                                            These amounts are: [enter description of all               What personal information will be                      (2) An election satisfies the
                                            other fees or compensation to be received in            collected;                                             requirements of this subparagraph with
                                            connection with any rollover or other                      How the information will be used;                   respect to an eligible investment advice
                                            distribution of plan assets or the investment              Parties with whom information will be               arrangement if the election is in writing
                                            of distributed assets]. This information                shared;                                                and such writing—
                                            should be reviewed carefully before you                    How the information will be protected; and
                                            make a decision to take a distribution.                    When and how notice of the Fiduciary                   (i) Identifies the investment advice
                                                                                                    Adviser’s privacy statement will be available          arrangement, and the person offering the
                                            Consider Impact of Compensation on Advice               to participants and beneficiaries.                     arrangement, with respect to which the
                                               The fees and other compensation that                    Should you have any questions about                 election is to be effective;
                                            [enter name of Fiduciary Adviser] and its               [enter name of Fiduciary Adviser] or the
                                            affiliates receive on account of assets in              information contained in this document, you               (ii) Identifies a person who—
                                            [enter name of Fiduciary Adviser] (enter if             may contact [enter name of contact person for             (A) Is described in any of 29 CFR
                                            applicable, and non-[enter name of Fiduciary            fiduciary adviser, telephone number,                   2550.408g–1(c)(2)(i)(A) through (E);
                                            Adviser]) investment funds are a significant            address].                                                 (B) Develops the computer model, or
                                            source of revenue for the [enter name of                ■ 3. Add § 2550.408g–2 to read as                      markets the computer model or
                                            Fiduciary Adviser] and its affiliates. You              follows:
                                            should carefully consider the impact of any                                                                    investment advice program, utilized in
                                            such fees and compensation in your                      § 2550.408g–2 Investment advice—                       satisfaction of 29 CFR 2550.408g–1(b)(4)
                                            evaluation of the investment advice that                fiduciary election.                                    with respect to the arrangement, and
                                            [enter name of Fiduciary Adviser] provides to              (a) General. Section 408(g)(11)(A) of                  (C) Acknowledges that it elects to be
                                            you. In this regard, you may arrange for the                                                                   treated as the only fiduciary, and
                                                                                                    the Employee Retirement Income
                                            provision of advice by another adviser that
                                                                                                    Security Act, as amended (ERISA),                      fiduciary adviser, by reason of
                                            may have not material affiliation with or
                                            receive compensation in connection with the             provides that a person who develops a                  developing such computer model, or
                                            investment funds or products offered under              computer model or who markets a                        marketing such computer model or
                                            the plan. This type of advice is/is not                 computer model or investment advice                    investment advice program;
                                            available through your plan.                            program used in an ‘‘eligible investment                  (iii) Is signed by the person identified
                                            Investment Returns                                      advice arrangement’’ shall be treated as               in paragraph (b)(2)(ii) of this section;
                                                                                                    a fiduciary of a plan by reason of the                    (iv) Is furnished to the fiduciary who
                                              While understanding investment-related
                                                                                                    provision of investment advice referred                authorized the arrangement, in
                                            fees and expenses is important in making
                                            informed investment decisions, it is also               to in ERISA section 3(21)(A)(ii) to the                accordance with 29 CFR 2550.408g–
                                            important to consider additional information            plan participant or beneficiary, and                   1(b)(5); and
                                            about your investment options, such as                  shall be treated as a ‘‘fiduciary adviser’’
                                                                                                    for purposes of ERISA sections                            (v) Is maintained in accordance with
                                            performance, investment strategies and risks.
                                            Specific information related to the past                408(b)(14) and 408(g), except that the                 29 CFR 2550.408g–1(e).
                                            performance and historical rates of return of           Secretary of Labor may prescribe rules                   Signed at Washington, DC, this 9th day of
                                            the investment options available under the              under which only one fiduciary adviser                 January, 2009.
                                            plan (has/has not) been provided to you by              may elect to be treated as a fiduciary                 Bradford P. Campbell,
                                            [enter source, such as: your plan
                                            administrator, investment fund provider]. (If
                                                                                                    with respect to the plan. Section                      Assistant Secretary, Employee Benefits
                                                                                                    4975(f)(8)(J)(i) of the Internal Revenue               Security Administration, Department of
                                            applicable enter. If not provided to you, the
                                                                                                    Code, as amended (the Code), contains                  Labor.
                                            information is attached to this document.)
                                              For options with returns that vary over               a parallel provision to ERISA section                  [FR Doc. E9–710 Filed 1–16–09; 8:45 am]
                                            time, past performance does not guarantee               408(g)(11)(A) that applies for purposes                BILLING CODE 4510–29–P
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