DOL Unveils Investment Advice Final Rule Implementing PPA Statutory Exemption

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By Kristen Ricaurte-Knebel

The Department of Labor's Employee Benefits Security Administration final rule on investment advice, published in the Oct. 25 Federal Register (76 Fed. Reg. 66,136), will increase plan participants' and beneficiaries' access to “affordable, quality investment advice” and strengthen their retirement security, the department said.

The final rule (RIN 1210-AB35) implements a statutory prohibited transaction exemption under Employee Retirement Income Security Act Sections 408(b)(14) and 408(g) and under tax code Section 4975, which were added by the Pension Protection Act.

The exemption permits advisers to receive fees from the investment providers of products that are recommended to plan participants, according to a DOL fact sheet about the new final rule. However, the rule includes “safeguards and conditions” aimed at preventing skewed investment advice toward investments that pay higher fees to advisers, Phyllis C. Borzi, assistant secretary of labor for EBSA, said in an Oct. 24 conference call with reporters.

It is estimated that increased use of investment advice as a result of the final regulation “will reduce investment mistakes by between $7 billion and $18 billion annually … thereby producing a net financial benefit between $5 billion and $13 billion,” she said.

‘Safeguards and Conditions.'

To qualify for the statutory exemption under the final rule, an investment adviser can receive fees from investments they recommend to participants if they are compensated on a “level-fee” basis, meaning fees that do not vary based on which investments plan participants choose.

Advisers may also qualify for the exemption if they provide investment advice based on a computer model certified as unbiased, DOL said.

The final regulation also instructs advisers on how to adhere to other conditions in the statutory exemption, such as complying with recordkeeping requirements for advisers using the exemption and a requirement that the plan fiduciary authorizes the investment advice arrangement, the department said.

“There are some additional conditions that apply to both types of these arrangements including full disclosure of the advisor's fee and an annual audit of the arrangement to make sure it complies with the regulation,” Borzi said.

Earlier Final Rule Withdrawn.

DOL initially proposed an investment advice rule in 2008, with a final rule published in 2009 “at the tail end of the Bush administration,” Borzi said.

However, the department was concerned that a class exemption included in the final rule would result in conflicts of interest among advisers.

This led to the department withdrawing the earlier final rule in November 2009 (27 HRR 1266, 11/30/09).

In its withdrawal, the department said at that time it would propose “a revised rule limited to the application of the statutory exemption relating to investment advice.”

In part, the previous rules were withdrawn because “there were a lot of people who were concerned that they weren't adequately protective and inconsistent with the statute itself, with ERISA itself, and the statutory exemption that was included in the PPA,” Borzi said.

DOL re-proposed the investment advice rule on Feb. 26, 2010, not including the class exemption provision (28 HRR 237, 3/8/10).

With the final rule, DOL tried to “fashion a clear and workable regulation for investment advice providers that's also consistent and faithful to the intent and the objective of the statutory exemption,” Borzi said.

By Kristen Ricaurte-Knebel

Text of the rule may be accessed at . A fact sheet on the rule may be accessed at .