Prohibited Transaction Exemption for Provision of Investment
Advice to Individual Retirement and Similar Plans
[12/04/2006]
Volume 71, Number 232, Page 70427-70429
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Prohibited Transaction Exemption for Provision of Investment
Advice to Individual Retirement and Similar Plans
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Request for information.
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SUMMARY: Section 601 of the Pension Protection Act of 2006 (the PPA)
(Pub. L. 109-280) amended section 408 of the Employee Retirement
Security Act of 1974 (ERISA) and section 4975 of the Internal Revenue
Code of 1986 (the Code) to add an exemption from certain prohibited
transactions restrictions of ERISA and from certain taxes imposed by
the Code for the provision of ``investment advice'' to participants and
beneficiaries of covered employee benefit plans, and certain related
transactions, if the investment advice is provided under an ``eligible
investment advice arrangement.'' The exemption conditions relief upon
satisfaction of a number of requirements more fully described in the
statutory provisions. In particular, to be covered, the investment
advice must be provided under an eligible investment advice arrangement
that uses a computer model, which meets the requirements of the
exemption. The purpose of this document is to solicit information from
the public concerning the feasibility of the application of computer
model investment advice programs for Individual Retirement Accounts and
similar types of plans (hereinafter, IRAs).\1\ The PPA directs the
Secretary of Labor, in consultation with the Secretary of the Treasury,
to determine, based on the information received from the solicitation,
whether there is any computer model investment advice program which may
be utilized to provide investment advice to IRA beneficiaries.\2\
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\1\ See PPA section 601(b)(3)(A)(i). These plans are: (A) An
individual retirement account described in section 408(a) of the
Code; (B) an individual retirement annuity described in section
408(b) of the Code; (C) an Archer MSA described in section 220(d)of
the Code; (D) a health savings account described in section 223(d)
of the Code; (E) a Coverdell education savings account described in
Code section 530; or (F) a trust, plan, account, or annuity which,
at any time, has been determined by the Secretary of Treasury to be
described in any preceding subparagraph of this paragraph [i.e., (A)
through (E) above].
\2\ Under Presidential Reorganization Plan No. 4 of 1978,
effective December 31, 1978 [5 U.S.C. App. at 214 2000 ed.)], the
authority of the Secretary of the Treasury to issue interpretations
regarding section 4975 of the Code has been transferred, with
certain exceptions not here relevant, to the Secretary of Labor and
the Secretary of the Treasury is bound by the interpretations of the
Secretary of Labor pursuant to such authority.
DATES: Written or electronic responses should be submitted to the
Department of Labor on or before January 30, 2007.
Responses: To facilitate the receipt and processing of responses,
EBSA encourages interested persons to submit their responses
electronically by e-mail to e-OED@dol.gov, or by using the Federal
eRulemaking portal at http://www.regulations.gov (follow instructions for
submission of comments). Persons submitting responses electronically
are encouraged not to submit paper copies. Persons interested in
submitting written responses on paper should send or deliver their
responses (preferably, at least three copies) to the Office of
Exemption Determinations, Employee Benefits Security Administration,
Room N-5700, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210, Attention: IRA Investment Advice RFI. All written
responses will be available to the public, without charge, online at
http://www.regulations.gov and www.dol.gov/ebsa, and at the Public Disclosure
Room, N-1513, Employee Benefits Security Administration, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210.
FOR FURTHER INFORMATION CONTACT: Christopher Motta or Brian Buyniski,
Office of Exemption Determinations, Employee Benefits Security
Administration, Room N-5700, U.S. Department of Labor, Washington, DC
20210, telephone (202) 693-8540. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
A. Background
As a general matter, the provision of investment advice by a plan
fiduciary as defined under section 3(21)(A) of ERISA to the plan would
give rise to prohibited self-dealing under section 406(b)(1) of ERISA
and section 4975(c)(1)(E) of the Internal Revenue Code of 1986 (the
Code) if the fiduciary has an interest in the outcome of the advice
which may affect its best judgment as a fiduciary (e.g., the fiduciary
or its affiliate receives additional fees from investment options with
respect to which advice is given).\3\ Section 601(a) of the Pension
Protection Act of 2006 (PPA) amended ERISA by adding new sections
408(b)(14) and 408(g). Section 408(b)(14) of ERISA provides conditional
exemptive relief from the prohibitions of ERISA section 406 for certain
transactions in connection with the provision of investment advice (as
described by ERISA section 3(21)(A)(ii)) to a participant or
beneficiary of an individual account plan, if the requirements of new
section 408(g) are met.\4\
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\3\ See ERISA section 406(b)(1) and Code section 4975(c)(1)(E).
\4\ ERISA Section 3(21)(A)(ii) defines a ``fiduciary'' as
including a person who renders investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or
other property of the plan.
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Section 601(b) of the PPA similarly amended the Code by adding new
Code sections 4975(d)(17) and 4975(f)(8). Section 4975(d)(17) of the
Code provides conditional exemptive relief from the prohibitions
described in section 4975(c) for certain transactions in connection
with the provision of investment advice (as described in Code
[[Page 70428]]
section 4975(e)(3)(B)) \5\ to a participant or beneficiary of a plan,
if the requirements of section 4975(f)(8) are met.
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\5\ Code Section 4975(e)(3)(B) defines a ``fiduciary'' as
including any person who renders investment advice for a fee or
other compensation, direct or indirect, with respect to any moneys
or other property of the plan.
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Under section 4975(f)(8) of the Code, the investment advice must be
provided by a fiduciary adviser pursuant to an ``eligible investment
advice arrangement.'' The term ``eligible investment advice
arrangement'' is defined in section 4975(f)(8)(B) to mean an
arrangement which either: (1) Provides that any fees (including any
commission or other compensation) received by the fiduciary adviser for
investment advice or with respect to the sale, holding, or acquisition
of any security or other property for purposes of investment of plan
assets do not vary depending on the basis or any investment option
selected, or (2) uses a computer model under an investment advice
program meeting the requirements of section 4975(f)(8)(C) in connection
with the provision of investment advice by a fiduciary adviser to a
participant and beneficiary, and with respect to which the requirements
of subparagraphs (D), (E), (F), (G), (H) and (I) of section (f)(8) are
met.
Under section 4975(f)(8)(C) of the Code, the computer model
utilized by an investment advice program must: (1) Apply generally
accepted investment theories that take into account the historic
returns of different asset classes over defined periods of time; (2)
utilize relevant information about the participant, which may include
age, life expectancy, retirement age, risk tolerance, other assets or
sources of income, and preferences as to certain types of investments;
(3) utilize prescribed objective criteria to provide asset allocation
portfolios comprised of investment options available under the plan;
(4) operate in a manner that is not biased in favor of investments
offered by the fiduciary adviser or a person with a material
affiliation or contractual relationship with the fiduciary adviser; and
(5) take into account all investment options under the plan in
specifying how a participant's account balance should be invested and
not be inappropriately weighted with respect to any investment option.
The PPA restricts the use, under the exemption, of a computer model
investment advice program to provide investment advice to an IRA (or
similar plan (hereinafter, an IRA)) beneficiary.\6\ In this regard,
section 601(b)(3)(C)(i)(I) of the PPA provides that a computer model
investment advice program will not apply to an IRA unless and until the
Secretary of Labor determines under section 601(b)(3)(B)or (D) of the
PPA that there is a computer model investment advice program described
in section 601(b)(3)(B) of the PPA. Section 601(b)(3)(A) requires that
the Secretary of Labor, in consultation with the Secretary of the
Treasury, solicit information as to the feasibility of the application
of computer model investment programs for IRAs.\7\
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\6\ This restriction does not affect the application of the
exemption to an eligible investment advice arrangement that
satisfies Code section 4975(f)(8)(B)(i)(I) (describing arrangement
under which fees do not vary). Further, there is no comparable
limitation with respect to sections 408(b)(14) and 408(g) of ERISA.
In this regard, the Department notes that IRAs are generally not
subject to the provisions of Title I of ERISA. See 29 CFR Sec.
2510.3-2(d).
\7\ In addition to soliciting information from the public in
general, section 601(b)(3)(A)(i) of the PPA directs the Secretary of
Labor to solicit information regarding the feasibility of the
application of computer model investment advice programs from: (1)
the ``top 50 trustees'' of IRAs and similar plans, determined on the
basis of assets held by such trustees; and (2) other persons
offering computer model investment advice programs based on non-
proprietary products.
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Section 601(b)(3)(B) requires that the Secretary of Labor, in
consultation with the Secretary of the Treasury, determine, based upon
the information received from the solicitation, whether there is any
computer model investment advice program which may be utilized to
provide investment advice for IRA beneficiaries. Among other things,
such computer model investment advice program for IRA beneficiaries
must: (1) Utilize relevant information about the beneficiary, which may
include age, life expectancy, retirement age, risk tolerance, other
assets or sources of income, and preferences as to certain types of
investments; (2) take into account the full range of investments,
including equities and bonds, in determining the options for the
investment portfolios of the beneficiary; and (3) allow the
beneficiary, in directing the investment, sufficient flexibility in
obtaining advice to evaluate and select investment options.\8\
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\8\ See PPA section 601(b)(3)(B)(i)-(iii).
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Upon completion of its determination, the Secretary of Labor shall
report the results of such determination to the Committee on Ways and
Means and the Committee on Education and the Workforce of the House of
Representatives and the Committee on Finance and the Committee on
Health, Education, Labor, and Pensions of the Senate no later than
December 31, 2007.
B. Issues Under Consideration
Feasibility of Computer Model Investment Advice
The Department is interested in comments regarding the feasibility
of applying computer model investment advice programs for IRAs. The
information received from the solicitation will assist the Department
in making its required determination of feasibility under section
601(b)(3)(B) of the PPA.\9\ A list of issues with respect to which
comments are requested is included below. Responses on other issues
pertinent to the Department's determination are also invited.
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\9\ The Department notes that any determination made by the
Department under section 601(b)(3)(B) of the PPA regarding the
feasibility of the application of computer model investment advice
programs for IRAs will not have any affect on existing individual or
class exemptions that may provide relief for the provision of
investment advice to IRA beneficiaries. In this regard, see
Prohibited Transaction Class Exemption 84-24 (49 FR 13208 (Apr. 3,
1984), as corrected at 49 FR 24819 (June 15, 1984), and amended at
71 FR 5887 (Feb. 3, 2006)).
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Request for Information
1. Are there computer model investment advice programs for the
current year and preceding year that are, or may be, utilized to
provide investment advice to beneficiaries of plans described in
section 4975(e)(1)(B)-(F) (and so much of subparagraph (G) as relates
to such subparagraphs) (hereinafter ``IRA'') of the Code which:
(a) Apply generally accepted investment theories that take into
account the historic returns of different asset classes over defined
periods of time;
(b) Utilize relevant information about the beneficiary, which may
include age, life expectancy, retirement age, risk tolerance, other
assets or sources of income, and preferences as to certain types of
investments;
(c) Operate in a manner that is not biased in favor of investments
offered by the fiduciary adviser or a person with a material
affiliation or contractual relationship with the fiduciary adviser;
(d) Take into account the full range of investments, including
equities and bonds, in determining the options for the investment
portfolios of the beneficiary; and
(e) Allow the beneficiary, in directing the investment, sufficient
flexibility in obtaining advice to evaluate and select investment
options.
2. If currently available computer models do not satisfy all of the
criteria described above, which criteria are presently not considered
by such
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computer models? Would it be possible to develop a model that satisfies
all of the specified criteria? Which criteria would pose difficulties
to developers and why?
3. If there are any currently available computer model investment
advice programs meeting the criteria described in Question 1 that may
be utilized for providing investment advice to IRA beneficiaries,
please provide a complete description of such programs and the extent
to which they are available to IRA beneficiaries.
4. With respect to any programs described in response to Question
3, do any of such programs permit the IRA beneficiary to invest IRA
assets in virtually any investment? If not, what are the difficulties,
if any, in creating such a model?
5. If computer model investment advice programs are not currently
available to IRA beneficiaries that permit the investment of IRA assets
in virtually any investment, are there computer model investment advice
programs currently available to IRA beneficiaries that, by design or
operation, limit the investments modeled by the computer program to a
subset of the investment universe? If so, who is responsible for the
development of such investment limitations and how are the limitations
developed? Is there any flexibility on the part of an IRA beneficiary
to modify the computer model to take into account his or her
preferences? Are such computer model investment advice programs
available to the beneficiaries of IRAs that are not maintained by the
persons offering such programs?
6. If you offer a computer model investment advice program based on
nonproprietary investment products, do you make the program available
to investment accounts maintained by you on behalf of IRA
beneficiaries?
7. What are the investment options considered by computer
investment advice programs? What information on such options is needed?
How is the information obtained and made part of the programs? Is the
information publicly available or available to IRA beneficiaries?
8. How should the Department or a third party evaluate a computer
model investment advice program to determine whether a program
satisfies the criteria described in Question 1 or any other similar
criteria established to evaluate such programs?
9. How do computer model investment advice programs present advice
to IRA beneficiaries? How do such programs allow beneficiaries to
refine, amend or override provided advice?
Signed at Washington, DC, this 28th day of November 2006.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. E6-20401 Filed 12-1-06; 8:45 am]
BILLING CODE 4510-29-P
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