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[Link to PDF version, provided by BenefitsLink.com: https://benefitslink.com/DOL/E6-20402.pdf]
[Federal Register: December 4, 2006 (Volume 71, Number 232)]
[Notices]
[Page 70429-70431]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04de06-83]

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

RIN 1210-AB13


Prohibited Transaction Exemption for Provision of Investment
Advice to Participants in Individual Account Plans

AGENCY: Employee Benefits Security Administration, Department of 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 Income
Security Act of 1974 (ERISA) and section 4975 of the Internal Revenue
Code (the Code) to add a prohibited transaction exemption for the
provision of investment advice to participants and beneficiaries of
individual account plans that permit the direction of assets in their
accounts, and for certain related transactions, if the investment
advice is provided under an ``eligible investment advice arrangement,''
as defined in the statute. The purpose of this notice is to request
information from the public relating to the requirements in the new
provisions that a computer model which serves as the basis for an
eligible investment advice arrangement be certified as meeting specific
criteria, and that information regarding certain fees and compensation
be provided to participants and beneficiaries.

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-ORI@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
Regulations and Interpretations, Employee Benefits Security
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution
Avenue, NW., Washington, DC 20210, Attention: 401(k) Plan 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: Katherine D. Lewis or Ruel B. Pile,
Office of Regulations and Interpretations, Employee Benefits Security
Administration, Room N-5669, U.S. Department of Labor, Washington, DC
20210, telephone (202) 693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

In General

    The prohibited transaction provisions in section 406 of the
Employee Retirement Income Security Act of 1974 (ERISA) prohibit
various types of transactions between a plan and persons who are
parties in interest (as defined in ERISA section 3(14)) with respect to
the plan, and also prohibit, among other things, a plan fiduciary (as
defined in ERISA section 3(21)(A)) from dealing with assets of the plan
in his own interest or for his own account, or receiving any
consideration for his own personal account from any party dealing with
the plan in connection with a transaction involving the assets of the
plan.\1\
---------------------------------------------------------------------------

    \1\ The Internal Revenue Code (Code) contains similar prohibited
transaction provisions in section 4975(c).
---------------------------------------------------------------------------

    Section 601(a) of the Pension Protection Act of 2006 (PPA) (P.L.
109-280) amended ERISA by adding new sections 408(b)(14) and 408(g).
Section 408(b)(14) of ERISA provides conditional exemptive relief from
ERISA section 406 for certain transactions in connection with the
provision of investment advice (as described in ERISA section
3(21)(A)(ii)) if the requirements of new section 408(g) of ERISA are
met. Under section 408(g), subsection (b)(14) applies if the investment
advice provided by a ``fiduciary adviser'' is provided under an
``eligible investment advice arrangement.'' \2\ Persons who may act as

[[Page 70430]]

fiduciary advisers, as defined in section 408(g)(11)(A), include, but
are not limited to, investment advisers registered under the Investment
Advisers Act of 1940, certain banks and similar financial institutions,
insurance companies qualified to do business under the laws of a State,
and brokers or dealers registered under the Securities Exchange Act of
1934.
---------------------------------------------------------------------------

    \2\ Section 601(b) of the PPA similarly amended section 4975 of
the Code by adding new section 4975(d)(17) and (f)(8), to provide
conditional exemptive relief from the prohibitions described in Code
section 4975(c) for certain transactions in connection with the
provision of investment advice (as described in Code section
4975(e)(3)(B)). 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. The references in this document to specific provisions of
ERISA sections 408(b)(14) and (g) should be taken as referring also
to the corresponding provisions in Code sections 4975(d)(17) and
(f)(8).
---------------------------------------------------------------------------

    The term ``eligible investment advice arrangement'' is defined in
ERISA section 408(g)(2) to mean an arrangement which either (i)
provides that any fees (including any commission or other compensation)
received by the fiduciary adviser for investment advice or with respect
to the sale, holding, or acquisition of any security or other property
for purposes of investment of plan assets do not vary depending on the
basis of any investment option selected, or (ii) uses a computer model
under an investment advice program meeting the requirements of section
408(g)(3) in connection with the provision of investment advice by a
fiduciary adviser to a participant or beneficiary, and with respect to
which the requirements in section 408(g)(4) through (9)--which includes
a requirement pertaining to the disclosure of certain fees--are
satisfied.

Computer Model

    In order for an investment advice program using a computer model to
meet the requirements of section 408(g)(3), the program must satisfy
subparagraphs (B), (C) and (D) thereof. Section 408(g)(3)(B) requires,
in particular, that the investment advice provided under the investment
advice program must be provided pursuant to a computer model that:
    (i) Applies generally accepted investment theories that take into
account the historic returns of different asset classes over defined
periods of time,
    (ii) utilizes 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,
    (iii) utilizes prescribed objective criteria to provide asset
allocation portfolios comprised of investment options available under
the plan,
    (iv) operates 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
    (v) takes into account all investment options under the plan in
specifying how a participant's account balance should be invested and
is not inappropriately weighted with respect to any investment option.
    Under section 408(g)(3)(C), an ``eligible investment expert'' must
certify, prior to the utilization of the computer model and in
accordance with rules prescribed by the Secretary of Labor (Secretary),
that the computer model meets the requirements described in section
408(b)(3)(B). Additionally, if, as determined under regulations
prescribed by the Secretary, there are material modifications to the
computer model, a certification must be obtained with respect to the
computer model as modified. In relevant part, section 408(g)(3)(C)
defines ``eligible investment expert'' to mean any person which meets
such requirements as the Secretary may provide, and does not bear any
material affiliation or contractual relationship with certain persons.

Disclosure of Fee-Related Information

    Regardless of whether an arrangement provides for non-varying fees
(section 408(g)(2)(A)(i)) or uses a computer model under an investment
advice program (section 408(g)(2)(A)(ii)), the arrangement also must
satisfy section 408(g)(4) through (9) in order to qualify as an
``eligible investment advice arrangement.'' In particular, section
408(g)(6) requires that a fiduciary adviser provide to participants and
beneficiaries written notification of ``all fees or other compensation
relating to the advice that the fiduciary adviser or any affiliate
thereof is to receive (including compensation provided by any third
party) in connection with the provision of the advice or in connection
with the sale, acquisition, or holding of the security or other
property.'' ERISA section 408(g)(6)(A)(iii). Section 408(g)(8)(A)
requires that this notification be written in a clear and conspicuous
manner and in a manner calculated to be understood by the average plan
participant and be sufficiently accurate and comprehensive to
reasonably apprise participants and beneficiaries of the information
required to be provided in the notification. For the disclosure of fees
and compensation described in section 408(g)(6)(A)(iii), section
408(g)(8)(B) directs the Secretary to issue a model form which meets
the section 408(g)(8)(A) standards.

B. Issues Under Consideration

    The ERISA section 408(g)(3)(C) computer model certification
requirements provide for regulatory guidance in three areas. First,
section 408(g)(3)(C)(i) requires that an ``eligible investment expert''
must certify, in accordance with rules prescribed by the Secretary,
that a computer model meets the criteria set forth in section
408(g)(3)(B). Second, under section 408(g)(3)(C)(ii), the Secretary may
prescribe regulations which provide guidance regarding ``material
modifications'' to a computer model that also require certification.
Third, under section 408(g)(3)(C)(iii), the Secretary may establish
requirements that a person must satisfy in order to qualify as an
``eligible investment expert.'' The Department is interested in
comments that would assist in the development of regulatory guidance
and in the assessment of economic costs and benefits in these three
areas.
    Additionally, ERISA section 408(g)(8)(B) directs the Secretary to
issue a model form for the disclosure of fees and other compensation
required by section 408(g)(6)(A)(iii) that meets the standards for
presentation of information prescribed in section 408(g)(8)(A). The
Department is interested in comments that would assist in the
development of a model form for this purpose and in the assessment of
the economic costs and benefits of a model form for this purpose.
    Commenters may provide information with respect to either or both
sets of issues. A list of some of the issues with respect to which
comments are requested is included below. Other information pertinent
to the Department's consideration of the issues described above is also
invited.

Request for Information

Computer Model Certification
    1. What procedures and information would be necessary and adequate
to determine whether a computer model used in connection with an
investment advice program satisfies the criteria described in ERISA
section 408(g)(3)(B)? For example, would it be necessary to examine
underlying computer programs/algorithms, computer software/hardware, or
input data

[[Page 70431]]

including investment-specific information; would it be possible to make
a determination based on the results of applying the investment advice
program to a sample set of the input data? (Commenters are requested to
explain by reference to each of the five computer model characteristics
described in section 408(g)(3)(B), summarized above.)
    2. What types (e.g., technological, financial, other) and levels
(e.g., educational, professional experience, professional
certification) of expertise would be required to determine whether a
computer model used in connection with an investment advice program
satisfies the criteria described in ERISA section 408(g)(3)(B)?
(Commenters are requested to explain by reference to each of the five
computer model characteristics described in section 408(g)(3)(B),
summarized above.)
    3. With respect to currently-available computer models or programs
for providing investment advice to plan participants or beneficiaries
in the form of asset allocation portfolios comprised of plan investment
options: \3\
---------------------------------------------------------------------------

    \3\ Commenters are reminded that, as described above, materials
submitted in response to this request will be publicly available.
---------------------------------------------------------------------------

    a. What is the process for designing, developing and implementing
the computer model/program? What parties are involved, and what are
their roles? What hardware and software technologies are used to
construct computer model investment advice programs? What direct
economic costs are associated with the process for designing,
developing and implementing the computer model/program?
    b. What types of modifications are made to the computer model/
program after use has begun? Why and how often are the modifications
made (e.g., changes in methodology, technology, economy, marketplace,
or plan), and how do the modifications affect the investment advice
provided? What parties are involved in the modification process, and
what are their roles? What direct economic costs may be associated with
the modifications?
    c. What economic costs and benefits are associated with the use of
the computer model/program for providing investment advice, including
changes in investment performance and in retirement wealth due to the
provision of such advice? What are the indirect costs and benefits,
such as impact on markets for financial services, including investment
advice services, and impact on financial markets, including demand for
and pricing of securities?
    4. Would the responses to 3.a., 3.b., or 3.c. differ in the case of
a computer model/investment advice program intended to satisfy the
requirements of ERISA section 408(g)(3)(B)?
    5. With respect to the Department's development of regulatory
guidance, what special considerations, if any, should be made for small
businesses or other small entities? Are there unique costs and benefits
for small businesses or other small entities?
Model Form for Disclosure of Fees and Other Compensation
    1. In general, what types of information relating to fees received
by fiduciary advisers and their affiliates would be helpful to
participants and beneficiaries in making their investment decisions?
    2. What types of fees and compensation (including those provided by
third parties) would be encompassed by ERISA section 408(g)(6)(A)(iii)?
In relevant part, this provision refers to ``all fees or other
compensation relating to the advice that the fiduciary adviser or any
affiliate thereof is to receive (including compensation provided by any
third party) in connection with the provision of the advice or in
connection with the sale, acquisition, or holding of the security or
other property.''
    3. What challenges might be encountered in assembling and/or
presenting the information on fees and compensation described in
section 408(g)(6)(A)(iii) in a manner that is clear and understandable
by the average plan participant? Are there any suggestions as to how
these challenges can be addressed by the Department?
    4. Is there a form or format for presenting information on fees and
compensation described in section 408(g)(6)(A)(iii) (e.g., narrative,
chart, combination of both) that might be particularly suitable in
giving participants a clear and understandable description of the fees
and compensation received by a fiduciary adviser or its affiliates? Is
there an optimal time frame, relative to when the advice is provided,
for providing this information to participants and beneficiaries? What
impact, if any, will the receipt of a model form have on investment
decisions made by participants and beneficiaries?
    5. Persons that may qualify as ``fiduciary advisers'' are invited
to provide forms that they currently use, or might use, to provide the
kinds of fee and compensation information described above. As described
in ERISA section 408(g)(11)(A), ``fiduciary advisers'' may include
investment advisers registered under the Investment Advisers Act of
1940, certain banks and similar financial institutions, insurance
companies qualified to do business under the laws of a State, and
brokers or dealers registered under the Securities Exchange Act of
1934. Commenters are reminded that submissions are made solely for the
purpose of assisting the Department. Accordingly, no inferences should
be drawn as to whether the forms submitted meet the standards for
presentation described in ERISA section 408(g)(8)(A).

    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. E6-20402 Filed 12-1-06; 8:45 am]

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