Advisable Advice Regulations


Some of us think that one of the bigger problems out there is the extent to which what may be some of the most important investment assets out there, retirement assets, are managed by participants and beneficiaries who are uneducated as to investment matters and who, as a practical matter, do not have access to professional investment advice. We are no longer in a defined-benefit world with specified benefits, or even in a defined-contribution world where accounts are managed by professionals. We are, for better or for worse, in the "401(k)"/participant-directed world.

Against this backdrop, the DOL has now reproposed the investment-advice regulations under the fee-leveling and computer-model exemptions added by the PPA. The reproposal drops the previously adopted (and withdrawn) fee-leveling class exemption that, with the imposition of additional conditions, would have gone beyond the statutory exemption.

The history here, with a focus on the fee-leveling exemption, is that (i) after much consideration, the PPA added the exemption, (ii) the DOL came out with an FAB carefully considering, among other things, the precise scope of the parties covered by the basic leveling requirement, (iii) regulations were proposed which would have implemented the fee-leveling exemption consistently with the FAB, together with a proposed class exemption that, with additional conditions, would have gone beyond the FAB, (iv) at the time of the change in presidential administrations, the regulations were finalized, with the proposed class exemption being folded in as a separate provision of the final regulations, and (v) with a fair amount of - ahem - color, there was adverse Congressional reaction to the final regulations, see prior post, resulting in hearings and ultimately the withdrawal of the final regulations, see prior post. There is even proposed legislation that would essentially require that advice be all-but-entirely provided by outsiders, and that is devoid of any attempt to craft safeguards or otherwise strike a balance that would allow some of the largest and most capable financial institutions in the world to provide the advice, often without additional charge.

It now turns out that the DOL's prior careful and balanced work on the statutory exemption was essentially preserved in full.* So what this all was about, in the end, was the withdrawal of the additional class exemption? Really?!** Indeed, Rep. George Miller, who spearheaded much of the resistance to the final regulations and unleashed much of the colorful rhetoric, has now expressed his satisfaction with the current proposed rule, saying that it would help provide investment advice that is best for an individual's retirement, “not the investment adviser's commission." (BNA Pension & Benefits Daily (3/1/10).) Um, . . . OK.

I would have thought there was a less circuitous and less electrified route to the adoption of the base regulations along with the withdrawal of the supplemental class exemption. Regardless, if the result is that we get implementation of what is arguably an extremely critical tool in furtherance of the provision of needed advice to a wide range of participants and beneficiaries that do not presently have access to this advice, then so be it. I don't mean to minimize the importance that some placed on the adoption of the supplemental class exemption, but, particularly given the politics and rhetoric surrounding the situation, it may be quite fortunate that at least the basic statutory exemption has, so far, been respected and preserved. It's been an interesting process and quite a ride, but maybe, just maybe, the result will be that large regulated financial institutions, if they're willing to abide by the conditions in the statute as implemented by the regulations, can find a way to get much-needed advice out to 401(k) participants and beneficiaries.

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* The DOL did add the following clarification: "[E]ven though an affiliate of a fiduciary adviser may receive fees that vary depending on investment options selected, any provision of financial or economic incentives by an affiliate (or any other party) to a fiduciary adviser or any individual employed by such fiduciary adviser (e.g., an employee providing advice on its behalf or an individual responsible for supervising such an employee) to favor certain investments would be impermissible."

** . . . with apologies to Mr. Meyers and Ms. Poehler of Saturday Night Live.