[House Report 114-511]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-511
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AFFORDABLE RETIREMENT ADVICE PROTECTION ACT
_______
April 20, 2016.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Kline, from the Committee on Education and the Workforce, submitted
the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4293]
[Including cost estimate of the Congressional Budget Office]
The Committee on Education and the Workforce, to whom was
referred the bill (H.R. 4293) to amend the Employee Retirement
Income Security Act of 1974 to ensure that retirement investors
receive advice in their best interests, and for other purposes,
having considered the same, report favorably thereon with an
amendment and recommend that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Affordable Retirement Advice
Protection Act''.
SEC. 2. PURPOSE.
The purpose of this Act is to provide that advisors who--
(1) provide advice that is impermissible under the prohibited
transaction provisions under section 406 of the Employee
Retirement Income Security Act of 1974, or
(2) breach the best interest standard for the provision of
investment advice,
are subject to liability under the Employee Retirement Income Security
Act of 1974.
SEC. 3. RULES RELATING TO THE PROVISION OF INVESTMENT ADVICE.
(a) Amendments to the Employee Retirement Income Security Act of
1974.--
(1) Definition of investment advice.--Section 3(21) of the
Employee Retirement Income Security Act of 1974 (29 U.S.C.
1002(21)) is amended by adding at the end the following:
``(C)(i) For purposes of clause (ii) of subparagraph (A), the term
`investment advice' means a recommendation that--
``(I) relates to--
``(aa) the advisability of acquiring, holding,
disposing, or exchanging any moneys or other property
of a plan by the plan, plan participants, or plan
beneficiaries, including any recommendation whether to
take a distribution of benefits from such plan or any
recommendation relating to the investment of any moneys
or other property of such plan to be distributed from
such plan;
``(bb) the management of moneys or other property of
such plan, including recommendations relating to the
management of moneys or other property to be
distributed from such plan; or
``(cc) the advisability of retaining or ceasing to
retain a person who would receive a fee or other
compensation for providing any of the types of advice
described in this subclause; and
``(II) is rendered pursuant to--
``(aa) a written acknowledgment of the obligation of
the advisor to comply with section 404 with respect to
the provision of such recommendation; or
``(bb) a mutual agreement, arrangement, or
understanding, which may include limitations on scope,
timing, and responsibility to provide ongoing
monitoring or advice services, between the person
making such recommendation and the plan that such
recommendation is individualized to the plan and such
plan intends to materially rely on such recommendation
in making investment or management decisions with
respect to any moneys or other property of such plan.
``(ii) For purposes of clause (i)(II)(bb), any disclaimer of a mutual
agreement, arrangement, or understanding shall only state the
following: `This information is not individualized to you, and you are
not intended to materially rely on this information in making
investment or management decisions.'. Such disclaimer shall not be
effective unless such disclaimer is in writing and is communicated in a
clear and prominent manner and an objective person would reasonably
conclude that, based on all the facts and circumstances, there was not
a mutual agreement, arrangement, or understanding.
``(iii) For purposes of clause (i)(II)(bb), information shall not be
considered to be a recommendation made pursuant to a mutual agreement,
arrangement, or understanding, and such information shall contain the
disclaimer required by clause (ii), if--
``(I) it is provided in conjunction with full and fair
disclosure in writing to a plan, plan participant, or
beneficiary that the person providing the information is doing
so in its marketing or sales capacity, including any
information regarding the terms and conditions of the
engagement of the person providing the information, and that
the person is not intending to provide investment advice within
the meaning of this subparagraph or to otherwise act within and
under the obligations of the best interest standard as
described in this subparagraph;
``(II) the person providing the information is a counterparty
or service provider to the plan in connection with any
transaction based on the information (including a service
arrangement, sale, purchase, loan, bilateral contract, swap (as
defined in section 1a of the Commodity Exchange Act (7 U.S.C.
1a)), or security-based swap (as defined in section 3(a) of the
Securities Exchange Act (15 U.S.C. 78c(a)))), but only if--
``(aa) the plan is represented, in connection with
such transaction, by a plan fiduciary that is
independent of the person providing the information,
and, except in the case of a swap or security-based
swap, independent of the plan sponsor; and
``(bb) prior to such transaction, the independent
plan fiduciary represents in writing to the person
providing the information that it is aware that the
person has a financial interest in the transaction and
that it has determined that the person is not intending
to provide investment advice within the meaning of this
subparagraph or to otherwise act as a fiduciary to the
plan subject to section 404;
``(III) the person providing the information is an employee
of any sponsoring employer or employee organization who
provides the information to the plan for no fee or other
compensation other than the employee's normal compensation;
``(IV) the person providing the information discloses in
writing to the plan fiduciary that the person is not
undertaking to provide investment advice as a fiduciary to the
plan subject to section 404 and the information consists solely
of--
``(aa) making available to the plan, without regard
to the individualized needs of the plan, securities or
other property through a platform or similar mechanism
from which a plan fiduciary may select or monitor
investment alternatives, including qualified default
investment alternatives, into which plan participants
or beneficiaries may direct the investment of assets
held in, or contributed to, their individual accounts;
or
``(bb) in connection with a platform or similar
mechanism described in item (aa)--
``(AA) identifying investment alternatives
that meet objective criteria specified by the
plan, such as criteria concerning expense
ratios, fund sizes, types of asset, or credit
quality; or
``(BB) providing objective financial data and
comparisons with independent benchmarks to the
plan;
``(V) the information consists solely of valuation
information; or
``(VI) the information consists solely of--
``(aa) information described in Department of Labor
Interpretive Bulletin 96-1 (29 C.F.R. 2509.96-1, as in
effect on January 1, 2015), regardless of whether such
education is provided to a plan or plan fiduciary or a
participant or beneficiary;
``(bb) information provided to participants or
beneficiaries regarding the factors to consider in
deciding whether to elect to receive a distribution
from a plan or an individual retirement plan (as
defined in section 7701(a)(37) of the Internal Revenue
Code of 1986) and whether to roll over such
distribution to a plan or an individual retirement plan
(as defined in section 7701(a)(37) of the Internal
Revenue Code of 1986), so long as any examples of
different distribution alternatives are accompanied by
all material facts and assumptions on which the
examples are based; or
``(cc) any additional information treated as
education by the Secretary.''.
(2) Exemption relating to investment advice.--Section 408(b)
of the Employee Retirement Income Security Act of 1974 is
amended by adding at the end the following:
``(21)(A) Any transaction, including a contract for service,
between a person providing investment advice described in
section 3(21)(A)(ii) and the advice recipient in connection
with such investment advice, and any transaction consisting of
the provision of such investment advice, if the following
conditions are satisfied:
``(i) No more than reasonable compensation is paid
(as determined under section 408(b)(2)) for such
investment advice.
``(ii) If the investment advice is based on a limited
range of investment options (which may consist, in
whole or in part, of proprietary products), such
limitations shall be clearly disclosed to the advice
recipient prior to any transaction based on the
investment advice in the form of a notice that only
states the following: `This recommendation is based on
a limited range of investment options, and the same or
similar investments may be available at a different
cost (greater or lesser) from other sources.'.
``(iii) If the investment advice may result in
variable compensation to the person providing the
investment advice (or any affiliate of such person),
the receipt of such compensation shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice. For
purposes of this subparagraph, clear disclosure of
variable compensation shall include, in a manner
calculated to be understood by the average individual,
each of the following:
``(I) A notice that states only the
following: `This recommendation may result in
varying amounts of fees or other compensation
to the person providing the recommendation (or
its affiliate), and the same or similar
investments may be available at a different
cost (greater or lesser) from other sources.'.
Any regulations or administrative guidance
implementing this subclause may not require
this notice to be updated more than annually.
``(II) A description of any fee or other
compensation that is directly or indirectly
payable to the person (or its affiliate) by the
advice recipient with respect to such
transaction (expressed as an amount, formula,
percentage of assets, per capita charge, or
estimate or range of such compensation).
``(III) A description of the types and ranges
of any compensation that may be directly or
indirectly payable to the person (or its
affiliate) by any third party in connection
with such transaction (expressed as an amount,
formula, percentage of assets, per capita
charge, or estimate or range of such
compensation).
``(IV) Upon request of the advice recipient,
a disclosure of the specific amounts of
compensation described in clause (iii) that the
person will receive in connection with the
particular transaction (expressed as an amount,
formula, percentage of assets, per capita
charge, or estimate of such compensation).
``(B) No recommendation will fail to satisfy the conditions
described in clauses (i) through (iii) of subparagraph (A)
solely because the person, acting in good faith and with
reasonable diligence, makes an error or omission in disclosing
the information specified in such clauses, provided that the
person discloses the correct information to the advice
recipient as soon as practicable, but not later than 30 days
from the date on which the person knows of such error or
omission.
``(C) Any notice provided pursuant to a requirement under
clause (ii) or clause (iii)(I) of subparagraph (A) shall have
no effect on any other notice otherwise required without regard
to this title, and shall be provided in addition to, and not in
lieu of, any other such notice.
``(D) For purposes of this paragraph, the term `affiliate'
has the meaning given in subsection (g)(11)(B).''.
(b) Effective Date.--
(1) Modification of certain rules, and rules and
administrative positions promulgated before enactment but not
effective on january 1, 2015, prohibited.--The Department of
Labor is prohibited from amending any rules or administrative
positions promulgated under, or applicable for purposes of,
section 3(21) of the Employee Retirement Income Security Act of
1974 (including Department of Labor Interpretive Bulletin 96-1
(29 C.F.R. 2509.96-1) and Department of Labor Advisory Opinion
2005-23A), and no such rule or administrative position
promulgated by the Department of Labor prior to the date of the
enactment of this Act but not effective on January 1, 2015, may
become effective unless a bill or joint resolution referred to
in paragraph (3) is enacted as described in such paragraph not
later than 60 days after the date of the enactment of this Act.
(2) General effective date of amendments.--Except as provided
in paragraph (3), the amendments made by subsection (a) of this
section shall take effect on the 61st day after the date of the
enactment of this Act and shall apply with respect to
information provided or recommendations made on or after 2
years after the date of the enactment of this Act.
(3) Exception.--If a bill or joint resolution is enacted
prior to the 61st day after the date of the enactment of this
Act that specifically approves any rules or administrative
positions promulgated under, or applicable for purposes of,
section 3(21) of the Employee Retirement Income Security Act of
1974 that are not in effect on January 1, 2015, the amendments
made by subsection (a) of this section shall not take effect.
(c) Grandfathered Transactions and Services.--The amendments made by
subsection (a) shall not apply to any service or transaction rendered,
entered into, or for which a person has been compensated prior to the
date on which the amendments made by subsection (a) of this Act become
effective under subsection (b)(2).
(d) Transition.--If the amendments made by subsection (a) of this
section take effect, then nothing in this section shall be construed to
prohibit the issuance of guidance to carry out such amendments so long
as such guidance is necessary to implement such amendments. Until such
time as regulations or other guidance are issued to carry out such
amendments, a plan or a fiduciary shall be treated as meeting the
requirements of such amendments if the plan or fiduciary, as the case
may be, complies with a reasonable good faith interpretation of such
amendments.
Purpose
H.R. 4293, the Affordable Retirement Advice Protection Act
(ARAPA), prohibits the Department of Labor (DOL or department)
from implementing its proposed regulation* amending the
regulatory definition of ``fiduciary''\1\ under the Employee
Retirement Income Security Act of 1974 (ERISA)\2\ and the
Internal Revenue Code of 1986 (Code),\3\ unless Congress
affirmatively approves the final rule. Instead, the bill
updates current law to ensure that all financial professionals
providing personalized advice about investments, distributions,
or the use of other fiduciaries are legally required to act in
the best interest of their customers. However, unlike the DOL
proposed regulation, ARAPA ensures low- and medium-income
savers and small businesses have continued access to affordable
retirement advice.
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*The Committee ordered this bill reported to the House of
Representatives on February 2, 2016, and this report reflects the
Committee's views on that date. In the intervening time, the Department
of Labor has published a final regulatory package that changed certain
aspects of the previously proposed rule and exemptions discussed
herein. See, e.g., Definition of the Term ``Fiduciary''; Conflict of
Interest Rule-Retirement Investment Advice, 81 Fed. Reg. 20945 (Apr. 8,
2016). Despite these revisions, the Committee continues to have serious
concerns the final regulation will reduce access to affordable
retirement advice. Press Release, H. Comm. on Educ. and the Workforce,
Committee Leaders Respond to Labor Department's Final Fiduciary Rule
(Apr. 6, 2016), http://edworkforce.house.gov/news/
documentsingle.aspx?DocumentID=400576.
\1\Definition of the Term ``Fiduciary''; Conflict of Interest Rule-
Retirement Investment Advice, 80 Fed. Reg. 21928 (Apr. 20, 2015).
\2\29 U.S.C. Sec. 1001 et seq. ERISA section citations will be used
throughout.
\3\26 U.S.C. Sec. 1 et seq. [hereinafter the Code].
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Committee Action
112TH CONGRESS
Full Committee hearing reviewing Policies and Priorities at the U.S.
Department of Labor
On February 16, 2011, the Committee on Education and the
Workforce (Committee) held a hearing entitled ``Policies and
Priorities at the U.S. Department of Labor'' to examine, among
other things, DOL's Employee Benefits Security Administration's
(EBSA) October 2010 proposed regulation significantly expanding
the definition of ``fiduciary'' under ERISA and the Code. The
Honorable Hilda L. Solis, then-Secretary of the U.S. Department
of Labor, was the sole witness. During the hearing,
Representatives Judy Biggert (R-IL) and Carolyn McCarthy (D-NY)
expressed concerns regarding DOL's proposed rule, specifically
in regard to the department's lack of coordination with the
Securities and Exchange Commission.\4\
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\4\Policies and Priorities at the U.S. Department of Labor: Hearing
Before the H. Comm. on Educ. and the Workforce, 112th Cong. 15, 38
(Feb. 16, 2011).
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Subcommittee hearing Assessing the Impact of the Labor Department's
Proposal on Workers and Retirees
On July 26, 2011, the Subcommittee on Health, Employment,
Labor, and Pensions (HELP) held a hearing entitled ``Redefining
Fiduciary': Assessing the Impact of the Labor Department's
Proposal on Workers and Retirees'' to examine the consequences
of EBSA's 2010 proposed rule. Witnesses included the Honorable
Phyllis Borzi, Assistant Secretary of Labor, Employee Benefits
Security Administration, Washington, D.C.; Mr. Kenneth Bentsen,
Executive Vice President, Securities Industry and Financial
Markets Association, Washington, D.C.; Mr. Kent Mason, Partner,
Davis & Harman LLP, Washington, D.C.; Mr. Donald Myers,
Partner, Morgan, Lewis & Bockius LLP, Washington, D.C.; Mr.
Norman Stein, Professor, Earle Mack School of Law, Drexel
University, Philadelphia, Pennsylvania; and Mr. Jeffrey
Tarbell, Director, Houlihan Lokey, San Francisco, California.
Full Committee hearing Reviewing the President's Fiscal Year 2013
Budget Proposal for the Department of Labor
On March 21, 2012, the Committee held a hearing entitled
``Reviewing the President's Fiscal Year 2013 Budget Proposal
for the Department of Labor.'' Then-Secretary Solis was the
sole witness. During the hearing, Representatives of both
parties thanked Secretary Solis for withdrawing the 2010
proposed fiduciary rule and inquired as to what criteria would
be considered in a subsequent regulatory proposal.\5\
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\5\Reviewing the President's Fiscal Year 2013 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 112th Cong. (Mar. 21, 2012).
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113TH CONGRESS
Full Committee hearing Reviewing the President's Fiscal Year 2015
Budget Proposal for the Department of Labor
On March 26, 2014, the Committee held a hearing entitled
``Reviewing the President's Fiscal Year 2015 Budget Proposal
for the Department of Labor.'' The Honorable Thomas E. Perez,
Secretary of the U.S. Department of Labor, was the sole
witness. During this hearing, Committee on Education and the
Workforce Chairman John Kline reiterated bipartisan concerns
regarding DOL's ongoing fiduciary rulemaking. Addressing the
consequences of the department's proposed rule, Chairman Kline
urged Secretary Perez to keep in mind ``what the impact will be
on important advice that people, particularly low-income
people, might need.''\6\
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\6\Reviewing the President's Fiscal Year 2015 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 113th Cong. 86 (Mar. 26, 2014) (closing statement of Rep.
John Kline, Chairman, H. Comm. on Educ. and the Workforce).
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114TH CONGRESS
Full Committee hearing reviewing the President's Fiscal Year 2016
Budget Proposal for the Department of Labor
On March 18, 2015, the Committee held a hearing entitled
``Reviewing the President's Fiscal Year 2016 Budget Proposal
for the Department of Labor.'' Secretary Perez was the sole
witness. During the hearing, Representative Frederica Wilson
(D-FL) warned that a new proposed fiduciary rule should not
``impact the availability of affordable investment advice.''\7\
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\7\Reviewing the President's Fiscal Year 2016 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 114th Cong. (Mar. 18, 2015) (statement of Rep. Frederica S.
Wilson, Member, H. Comm. on Educ. and the Workforce).
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Subcommittee hearing examining Restricting Access to Financial Advice:
Evaluating the Costs and Consequences for Working Families and
Retirees
On June 17, 2015, the HELP Subcommittee held a hearing
entitled ``Restricting Access to Financial Advice: Evaluating
the Costs and Consequences for Working Families and Retirees'''
to examine the new DOL Notice of Proposed Rulemaking (NPRM)
amending the regulatory definition of ``fiduciary'' under
ERISA. Witnesses before the Subcommittee included Secretary
Perez; Mr. Jack Haley, Executive Vice President, Fidelity
Investments, Boston, Massachusetts; Mr. Dean Harman, CFP,
Managing Director, Harman Wealth Management, The Woodlands,
Texas; Mr. Dennis Kelleher, President and CEO, Better Markets,
Washington, D.C.; Mr. Kent Mason, Partner, Davis & Harman LLP,
Washington, D.C.; and Dr. Brian Reid, Ph.D., Chief Economist,
Investment Company Institute, Washington, D.C. During the
hearing, Dr. Reid testified opposing DOL's reproposed fiduciary
rule, saying, ``[A]ny policy that impairs retirement savers''
ability to get the help that they need will significantly harm
the prospects of millions of workers. Unfortunately, the DOL
proposal will do just that.''\8\ Additionally, Jack Haley of
Fidelity Investments testified in support of a ``best-interest
fiduciary standard crafted in a way that allows workers choice
and access to the services they need and desire.''\9\
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\8\Restricting Access to Financial Advice: Evaluating the Costs and
Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. (Jun. 17, 2015) (oral testimony of
Dr. Brian Reid, Ph.D., Chief Economist, Investment Company Institute).
\9\Restricting Access to Financial Advice: Evaluating the Costs and
Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. (Jun. 17, 2015) (oral testimony of
Mr. Jack Haley, Executive Vice President, Fidelity Investments).
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Subcommittee hearing examining the Principles for Ensuring Retirement
Advice Serves the Best Interests of Working Families and
Retirees
On December 2, 2015, the HELP Subcommittee held a hearing
entitled ``Principles for Ensuring Retirement Advice Serves the
Best Interests of Working Families and Retirees''' to further
examine the DOL NPRM amending the regulatory definition of
``fiduciary'' under ERISA. Notably, the Subcommittee considered
the potential negative effects of the NPRM on small businesses
and low- and middle-income families. Witnesses before the
Subcommittee included the Honorable Bradford (Brad) Campbell,
Counsel, Drinker Biddle & Reath LLP, Washington, D.C.; Ms.
Rachel A. Doba, President, DB Engineering, LLC, Indianapolis,
Indiana; Mr. Jules O. Gaudreau, Jr. ChFC, CIC, President, The
Gaudreau Group, Inc., Wilbraham, Massachusetts; and Ms. Marilyn
Mohrman-Gillis, Esq., Managing Director, Public Policy &
Communications, Certified Financial Planner Board of Standards,
Washington, D.C. During the hearing,\10\ witnesses praised the
bipartisan principles outlined by Representatives Phil Roe (R-
TN), Richard Neal (D-MA), Peter Roskam (R-IL), and Michelle
Lujan Grisham (D-NM) for a legislative solution to help
strengthen retirement security.
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\10\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. (Dec. 2, 2015).
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H.R. 4293, Affordable Retirement Advice Protection Act, introduced
On December 18, 2015, Representative Phil Roe (R-TN),
Chairman of the HELP Subcommittee, introduced the Affordable
Retirement Advice Protection Act (H.R. 4293),\11\ with five
cosponsors.\12\ Recognizing the threat of DOL's proposed rule,
Representative Roe introduced the bipartisan bill to protect
consumers and preserve access to affordable financial advice
for low- and middle-income families. The legislation amends
ERISA to require retirement advisors act in their clients' best
interest, and prohibits DOL from implementing its flawed
proposal unless Congress affirmatively approves the final rule.
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\11\H.R. 4293, 114th Cong. (2015).
\12\Original co-sponsors of H.R. 4293 include Representatives
Richard Neal (D-MA), Peter Roskam (R-IL), John Larson (D-CT), Earl L.
``Buddy'' Carter (R-GA), and David Scott (D-GA).
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Committee passes H.R. 4293, Affordable Retirement Advice Protection Act
On February 2, 2016, the Committee on Education and the
Workforce considered H.R. 4293, the Affordable Retirement
Advice Protection Act.\13\ Representative Roe offered an
amendment in the nature of a substitute, making technical
changes to the introduced bill. The Committee voted to adopt
the amendment in the nature of a substitute by voice vote. One
additional amendment was offered but was voted down by voice
vote. The Committee favorably reported H.R. 4293, as amended,
to the House of Representatives by a vote of 22-14.
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\13\H.R. 4293, Affordable Retirement Advice Protection Act: Markup
Before the H. Comm. on Educ. and the Workforce, 114th Cong. (Feb. 2,
2016).
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Background
PRESENT LAW
Pension plans and fiduciary requirements under ERISA
ERISA, generally administered by the Secretary of Labor
(Secretary), applies various requirements with respect to
employee pension benefit plans (pension plans).\14\ A pension
plan may be a defined contribution plan (also referred to as an
``individual account plan'') or a defined benefit plan.
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\14\ERISA applies also to employee welfare benefit plans. ERISA
generally does not apply to church plans or plans of governmental
employers.
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Under a defined contribution plan, benefits are based on an
individual account for each participant, to which are allocated
contributions, earnings, and losses.\15\ Defined contribution
plans commonly allow participants to direct the investment of
their accounts, usually by choosing among investment options
offered under the plan. Under a defined benefit plan, benefits
are determined under a plan formula, and benefits under a
defined benefit plan are funded by the general assets of the
trust established under the plan, which are invested by plan
fiduciaries; individual accounts are not maintained for
employees participating in the plan.\16\
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\15\Defined contribution plan (or individual account plan) is
defined at ERISA section 3(34).
\16\As defined in ERISA section 3(35), a defined benefit plan
generally is any plan that is not a defined contribution plan.
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ERISA requires a fiduciary of a plan to discharge his
duties with respect to the plan solely in the interest of the
participants and beneficiaries, for the exclusive purpose of
providing benefits to participants and their beneficiaries and
defraying reasonable expenses of administering the plan, and
with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like
aims.\17\ With respect to plan assets, ERISA requires a
fiduciary to diversify the investments of the plan so as to
minimize the risk of large losses unless under the
circumstances it is clearly prudent not to do so.
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\17\ERISA Sec. 404(a)(1). ERISA section 402(a)(1) requires a plan
to be established pursuant to a written instrument that provides for
one or more named fiduciaries who jointly or severally have authority
to control and manage the operation and administration of the plan. For
this purpose, the term ``named fiduciary'' means a fiduciary who is
named in the plan instrument, or who, pursuant to a procedure specified
in the plan, is identified as a fiduciary by a person who is an
employer or employee organization with respect to the plan or by an
employer and an employee organization acting jointly.
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A plan fiduciary that breaches any of the fiduciary
responsibilities, obligations, or duties imposed by ERISA
(including the prohibited transaction rules discussed below) is
personally liable to make good to the plan any losses to the
plan resulting from such breach and to restore to the plan any
profits the fiduciary has made through the use of plan
assets.\18\ A plan fiduciary may be liable also for a breach of
responsibility by another fiduciary (a ``co-fiduciary'') in
certain circumstances, for example, if the fiduciary's failure
to fulfill his own fiduciary duties enabled the co-fiduciary to
commit the breach.\19\ Certain fiduciary violations may result
in the imposition of civil penalties.\20\
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\18\ERISA Sec. 409. Under ERISA section 502(a)(2), an action for a
breach of fiduciary responsibility may be brought by DOL, a plan
participant or beneficiary, or another fiduciary.
\19\ERISA Sec. 405.
\20\ERISA Sec. 502(i) and (l).
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ERISA provides a special rule in the case of a defined
contribution plan that permits participants to exercise control
over the assets in their individual accounts (often referred to
as ``participant-directed investments'').\21\ Under the special
rule, if a participant exercises control over the assets in his
or her account, the participant is not deemed to be a fiduciary
by reason of such exercise, and no person who is otherwise a
fiduciary is liable for any loss, or by reason of any breach,
that results from the participant's exercise of control.
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\21\ERISA Sec. 404(c), implemented by regulations at 29 C.F.R. sec.
2550.404c-1. 29 C.F.R. sec. 2550.404c-5 provides rules for qualified
default investment alternatives (QDIAs) if a participant does not
select any investment options.
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General prohibited transaction rules
ERISA prohibits a plan fiduciary from causing the plan to
engage in any of certain transactions (``prohibited
transactions'') between the plan and a party in interest if the
fiduciary knows or should know that the transaction is a
prohibited transaction.\22\ Prohibited transactions include the
following, whether direct or indirect, between a plan and a
party in interest: (1) the sale or exchange or leasing of
property, (2) the lending of money or other extension of
credit, (3) the furnishing of goods, services, or facilities,
(4) the transfer to, or use by or for the benefit of, a party
in interest, of any assets of the plan, or (5) an acquisition,
on behalf of the plan, of any employer security or employer
real property in violation of ERISA restrictions.\23\ In
addition, these rules prohibit a fiduciary that has authority
or discretion to control or manage the assets of a plan to
permit the plan to hold any employer security or employer real
property if the fiduciary knows or should know that holding the
security or real property violates ERISA restrictions. These
rules also provide that a fiduciary with respect to a plan must
not (1) deal with the assets of the plan in his own interest or
for his own account, (2) in his individual or in any other
capacity, act in any transaction involving the plan on behalf
of a party (or represent a party) whose interests are adverse
to the interests of the plan or the interests of its
participants or beneficiaries, or (3) receive 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.
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\22\ERISA Sec. 406.
\23\ERISA sec. 407 restricts the acquisition or holding of employer
securities and employer real property by a plan.
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For purposes of ERISA, a party in interest includes any
fiduciary (including, but not limited to, any administrator,
officer, trustee, or custodian), counsel, or employee of the
plan; a person providing services to the plan; an employer, any
of whose employees are covered by the plan; an employee
organization, any of whose members are covered by the plan; and
certain owners, relatives, employees, officers, directors, and
related entities.\24\ In general, a person is a fiduciary with
respect to a plan to the extent he (1) exercises any
discretionary authority or discretionary control respecting
management of the plan or exercises any authority or control
respecting management or disposition of plan assets, (2)
renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other
property of such plan, or has any authority or responsibility
to do so, or (3) has any discretionary authority or
discretionary responsibility in the administration of the
plan.\25\
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\24\ERISA Sec. 3(14).
\25\ERISA Sec. 3(21). Fiduciary also includes a person designated
by a named fiduciary to carry out fiduciary responsibilities (other
than trustee responsibilities) under the plan.
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Certain transactions are statutorily exempt from prohibited
transaction treatment, for example, certain loans to plan
participants and arrangements with a party in interest for
legal, accounting or other services necessary for the
establishment or operation of a plan if no more than reasonable
compensation is paid for the services.\26\ In addition, an
administrative exemption may be granted, on either an
individual or class basis, subject to a finding that the
exemption is administratively feasible, in the interests of the
plan and of its participants and beneficiaries, and protective
of the rights of participants and beneficiaries of the
plan.\27\
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\26\ERISA Sec. 408(b).
\27\ERISA Sec. 408(a).
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Rules relating to investment advice
Fiduciary status
As described above, a fiduciary includes 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, or has any authority or responsibility to
do so.
Existing DOL regulations, issued in 1975, provide that a
person is deemed to be rendering ``investment advice'' to an
employee benefit plan for this purpose only if he--
renders advice to the plan as to the value of
securities or other property or makes recommendation as
to the advisability of investing in, purchasing, or
selling securities or other property; and
either directly or indirectly (for example,
through or together with any affiliate) (1) has
discretionary authority or control, whether or not
pursuant to agreement, arrangement, or understanding,
with respect to purchasing or selling securities or
other property for the plan, or (2) renders any advice
as described above on a regular basis to the plan
pursuant to a mutual agreement, arrangement, or
understanding, written or otherwise, between the person
and the plan or a fiduciary with respect to the plan,
that the person's services will serve as a primary
basis for investment decisions with respect to plan
assets, and that the person will render individualized
investment advice to the plan based on the particular
needs of the plan regarding matters such as, among
other things, investment policies or strategy, overall
portfolio composition, or diversification of plan
investments.\28\
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\28\29 C.F.R. Sec. 2510.3-21(c). Under Sec. 102 of Reorganization
Plan No. 4 of 1978, 43 Fed. Reg. 47713 (Oct. 17, 1978), with certain
exceptions, the Secretary of the Treasury's authority with respect to
regulations, rulings, opinions, and exemptions under the prohibited
transaction provisions of the Code was transferred to the Secretary of
Labor. As a result, DOL regulations and other guidance relating to
prohibited transactions, including the grant of exemptions, apply for
Code purposes, as well as for ERISA purposes.
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The regulations further provide that a person who is a
fiduciary with respect to a plan by reason of rendering
investment advice (as described above) for a fee or other
compensation, direct or indirect, with respect to any moneys or
other property of the plan, or having any authority or
responsibility to do so, is not deemed to be a fiduciary
regarding any assets of the plan with respect to which the
person does not have any discretionary authority, discretionary
control, or discretionary responsibility, does not exercise any
authority or control, does not render investment advice (as
described above) for a fee or other compensation, and does not
have any authority or responsibility to render such investment
advice. However, this rule does not exempt the person from
ERISA liability attributable to a breach of responsibility by a
co-fiduciary or exclude the person from the definition of the
term ``party in interest'' based on providing services to the
plan with respect to any assets of the plan.
In addition to the regulations, other guidance issued by
DOL in 1996 (Interpretive Bulletin 96-1) provides that the
furnishing of mere investment education to a participant or
beneficiary in a participant-directed individual account plan
does not constitute the rendering of investment advice.\29\ For
this purpose, investment education includes the following
categories of information and materials: plan information,
general financial and investment information, asset allocation
models, and interactive investment materials. Interpretive
Bulletin 96-1 more fully describes these categories and notes
that the information and materials merely represent examples of
the type that may be furnished to participants and
beneficiaries without such information and materials
constituting investment advice, and that there may be many
other examples of information, materials, and educational
services, which if furnished to participants and beneficiaries,
would not constitute investment advice. Accordingly,
Interpretive Bulletin 96-1 provides that no inferences should
be drawn from the description of the four categories with
respect to whether the furnishing of any information,
materials, or educational services not described therein may
constitute investment advice.
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\29\29 C.F.R. Sec. 2905.96-1. This treatment applies irrespective
of who provides the information (for example, the plan sponsor,
fiduciary or service provider), the frequency with which the
information is shared, the form in which the information and materials
are provided (for example, on an individual or group basis, in writing
or orally, or via video or computer software), or whether an identified
category of information and materials is furnished alone or in
combination with other identified categories of information and
materials.
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Statutory exemptions relating to investment advice
If certain requirements are met, specific transactions
relating to investment advice are exempt from prohibited
transaction treatment if the advice is provided by a fiduciary
advisor through an eligible investment advice arrangement.\30\
The exemptions apply to (1) the provision of investment advice
to a plan participant or beneficiary with respect to a security
or other property available as an investment under the plan,
(2) an investment transaction (that is, a sale, acquisition, or
holding of a security or other property) pursuant to the
advice, and (3) the direct or indirect receipt of fees or other
compensation in connection with the provision of the advice or
an investment transaction pursuant to the advice.
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\30\ERISA Sec. 408(b)(14) and (g), enacted by section 601 of the
Pension Protection Act of 2006, Pub. L. No. 109-280.
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For purposes of the exemptions, an eligible investment
advice arrangement is generally an arrangement that either (1)
provides that any fees (including any commission or
compensation) received by the fiduciary advisor for investment
advice or with respect to an investment transaction with
respect to plan assets do not vary depending on the basis of
any investment option selected (sometimes referred to as ``fee-
leveling''), or (2) uses a computer model under an investment
advice program that meets specified requirements in connection
with the provision of investment advice to a participant or
beneficiary.\31\ The arrangement must be expressly authorized
by a plan fiduciary other than (1) the person offering the
investment advice program, (2) any person providing investment
options under the plan, or (3) any affiliate of (1) or (2).\32\
In addition, the fiduciary advisor must provide disclosures
applicable under securities laws; any investment transaction
must occur solely at the direction of the investment advice
recipient; the compensation received by the fiduciary advisor
and affiliates in connection with the investment transaction
must be reasonable; and the terms of the investment transaction
must be at least as favorable to the plan as an arm's length
transaction would be.
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\31\Various requirements with respect to notices and disclosure,
recordkeeping and audits must also be met.
\32\Affiliate for this purpose means an affiliated person as
defined under section 2(a)(3) of the Investment Company Act of 1940, 15
U.S.C. Sec. 80a-2(a)(3).
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DOL'S 2015 PROPOSED REGULATIONS AND ``BIC'' EXEMPTION
On April 20, 2015, DOL proposed regulations that would
replace the current regulations relating to investment advice
with a new standard as to whether a person is a fiduciary based
on rendering investment advice, generally to be applicable
eight months after final regulations are published.\33\ Under
the proposed regulations, a person is a fiduciary based on
rendering investment advice if the person--
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\33\Definition of the Term ``Fiduciary,'' 80 Fed. Reg. at 21928.
The proposed regulations would apply for purposes of ERISA and the
prohibited transaction rules of the Code. DOL had previously proposed a
regulation similarly expanding fiduciary liability. Definition of the
Term ``Fiduciary,'' 75 Fed. Reg. 65263 (Oct. 15, 2010) [hereinafter
2010 Proposal]. That proposal was withdrawn due to bipartisan
opposition.
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provides to a plan, a plan fiduciary, an
IRA,\34\ or an IRA owner certain types of
recommendations or statements (as described below) that
constitute investment advice with respect to plan or
IRA assets in exchange for a fee or other compensation,
and
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\34\IRA is defined in the proposed guidance to include HSAs, Archer
MSAs, and Coverdell ESAs, as well as IRAs. In Part IV.E of the preamble
to the proposed regulations, DOL requests comments as to whether it is
appropriate to cover individual accounts other than IRAs and treat them
in a manner similar to IRAs. Definition of the Term ``Fiduciary,'' 80
Fed. Reg. at 21947.
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either directly or indirectly (such as through
an affiliate) (1) represents or acknowledges that it is
acting as a fiduciary with respect to the investment
advice or (2) renders the advice pursuant to a written
or verbal agreement, arrangement, or understanding that
the advice is individualized to, or that the advice is
specifically directed to, the advice recipient for
consideration in making investment or management
decisions with respect to securities or other property
of the plan or IRA.
Under the proposed regulations, investment advice
includes--
a recommendation as to the advisability of
acquiring, holding, disposing of, or exchanging
securities or other property, including a
recommendation to take a distribution of benefits or a
recommendation as to the investment of securities or
other property to be rolled over or otherwise
distributed from the plan or IRA;\35\
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\35\DOL Advisory Opinion 2005-23A (Dec. 7, 2005) addresses the
question of whether a recommendation that a participant in a pension
plan roll over his or her account balance to an IRA to take advantage
of investment options not available under the plan constitutes
investment advice with respect to plan assets. The advisory opinion
expresses the view that, with respect to a person who is not otherwise
a plan fiduciary, merely advising a plan participant to take an
otherwise permissible plan distribution, even when the advice is
combined with a recommendation as to how the distribution should be
invested, does not constitute investment advice within the meaning of
the existing DOL investment advice regulations defining when a person
is a fiduciary by virtue of providing investment advice with respect to
employee benefit plan assets. The advisory opinion provides that DOL
does not view a recommendation to take a distribution as advice or a
recommendation concerning a particular investment (that is, purchasing
or selling securities or other property) as contemplated by the
regulations and that any investment recommendation regarding the
proceeds of a distribution would be advice with respect to funds that
are no longer plan assets. Part IV.A(1) of the preamble to the proposed
regulations notes that the proposed regulations, if finalized, would
supersede Advisory Opinion 2005-23A. Definition of the Term
``Fiduciary,'' 80 Fed. Reg. at 21939.
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a recommendation as to the management of
securities or other property, including recommendations
as to the management of securities or other property to
be rolled over or otherwise distributed from the plan
or IRA;
an appraisal, fairness opinion, or similar
statement, whether verbal or written, concerning the
value of securities or other property if provided in
connection with a specific transaction or transactions
involving the acquisition, disposition, or exchange of
such securities or other property by the plan or IRA;
and
a recommendation of a person who is also
going to receive a fee or other compensation for
providing any of the types of advice described above.
Subject to specified requirements for each exception, the
proposed regulations provide exceptions (referred to as ``carve
outs''') for (1) certain counterparties in transactions with an
employee benefit plan (referred to as the ``seller's carve
out''); (2) swap and security-based swap transactions with an
employee benefit plan; (3) employees of an employee benefit
plan sponsor; (4) platform providers to employee benefit plans;
(5) persons providing selection and monitoring assistance to
employee benefit plans; (6) financial reports and valuations
(including to an IRA or IRA owner); and (7) investment
education (including to an IRA or IRA owner), under standards
somewhat different from the standards in the existing DOL
guidance. However, an exception does not apply if the person
represents or acknowledges that it is acting as a fiduciary
with respect to the advice. In conjunction with the proposed
regulations, DOL proposed new prohibited transaction class
exemptions, including a ``best interest contract'' (or BIC)
exemption,\36\ as well as proposing changes to various existing
class exemptions.
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\36\Proposed Best Interest Contract Exemption, 80 Fed. Reg. 21960
(Apr. 20, 2015). This class exemption is proposed to become applicable
at the same time as the 2015 proposed fiduciary regulations, eight
months after publication of final regulations.
---------------------------------------------------------------------------
The proposed BIC class exemption generally applies to
compensation received by an investment advisor or related party
in connection with a transaction (that is, a purchase, sale, or
holding of assets) resulting from investment advice provided to
``retirement investors,'' meaning plan participants or
beneficiaries who direct the investment of the assets in their
accounts, IRA owners who make investment decisions with respect
to their IRAs, and a plan sponsor (or employee, officer, or
director thereof) of a plan with fewer than 100 participants
where the plan does not provide for participant-directed
investments and the plan sponsor acts as a fiduciary who has
authority to make plan investment decisions. Only advice in the
best interest of the saver under the proposed regulation
qualifies for the exemption.\37\
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\37\The preamble to the proposed exemption states, ``Under this
standard, the Adviser and Financial Institution must put the interests
of the Retirement Investor ahead of the financial interests of the
Adviser, Financial Institution or their Affiliates, Related Entities or
any other party.'' Proposed Best Interest Contract Exemption, 80 Fed.
Reg. at 21970.
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Assets subject to the proposed BIC class exemption include
the following: bank deposits; certificates of deposit (CDs);
shares or interests in mutual funds; bank collective funds;
insurance company separate accounts; exchange-traded REITs
(Real Estate Investment Trusts); exchange-traded funds;
corporate bonds offered pursuant to a registration statement
under the Securities Act of 1933; agency debt securities and
U.S. Treasury Securities; insurance and annuity contracts;
guaranteed investment contracts; and exchange-traded equity
securities.
The proposed BIC class exemption requires that, before
making any recommendations on investment transactions, the
advisor and financial institution enter into a written contract
with the retirement investor as follows:
The contract affirmatively states that the
advisor and financial institution are fiduciaries under
ERISA, the Code, or both, with respect to any
investment recommendation to the retirement investor;
Under the contract, the advisor and
financial institution specifically agree to adhere to
certain impartial conduct standards, which include
providing investment advice that is in the best
interest of the retirement investor, not recommending
investment in an asset if they (or affiliates) will
receive more than reasonable compensation in relation
to the total services they provide to the retirement
investor with respect to the investment, and not
providing any statements about an asset, fees, material
conflict of interest, and any other matter related to
the retirement investor's investment decision that are
misleading;
Under the contract, the advisor and
financial institution provide certain warranties and
make certain disclosures related to fees and conflicts
of interest; and
The contract must not have exculpatory
provisions disclaiming or otherwise limiting liability
of the advisor or financial institution for a violation
of the contract's terms, or a provision under which a
plan, IRA, or retirement investor waives or qualifies
its right to bring or participate in a class action or
other representative action in court in a dispute with
the advisor or financial institution.\38\
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\38\As described in DOL's background discussion of the proposed
exemption, the contract terms to which advisors and financial
institutions must agree in order to qualify for the proposed BIC class
exemption potentially create a cause of action that may be used by
retirement investors to enforce these contract terms. Proposed Best
Interest Contract Exemption, 80 Fed. Reg. at 21972, 21973.
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Summary of H.R. 4293
The bill specifies that its purpose is to provide that
advisors who (1) provide advice that is impermissible under the
prohibited transaction provisions of ERISA or (2) breach the
best interest standard for the provision of investment advice
are subject to liability under ERISA.
The bill amends the statutory definition of fiduciary by
adding a definition of investment advice. In addition, subject
to specified requirements, the bill adds a new statutory
prohibited transaction exemption for any transaction, including
a contract for service, between a person providing investment
advice and the advice recipient in connection with the
investment advice, and any transaction consisting of the
provision of the investment advice.
DEFINITION OF INVESTMENT ADVICE
General rule
As defined under the bill, investment advice includes
certain recommendations rendered under certain conditions.
Specifically, the recommendations that may be investment advice
(if rendered under the conditions described below) are those
that relate to the following:
the advisability of acquiring, holding,
disposing, or exchanging any moneys or other property
of a plan by the plan, plan participants, or plan
beneficiaries, including any recommendation whether to
take a distribution of benefits from the plan or any
recommendation relating to the investment of any moneys
or other property of the plan to be distributed from
the plan;
the management of moneys or other property
of the plan, including recommendations relating to the
management of moneys or other property to be
distributed from the plan; or
the advisability of retaining or ceasing to
retain a person who would receive a fee or other
compensation for providing any of these types of
advice.\39\
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\39\Because a rollover always occurs in connection with a
distribution, recommendations relating to moneys or other property to
be distributed from a plan include recommendations relating to
rollovers of such moneys or other property.
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In order for a recommendation to be investment advice, it
must be rendered pursuant to either of the following:
a written acknowledgment that the person is
a fiduciary with respect to the provision of the
recommendation; or
a mutual agreement, arrangement, or
understanding, which may include limitations as to the
scope, timing, and responsibility to provide ongoing
monitoring or advice services, between the person
making the recommendation and the plan that the
recommendation is individualized to the plan and the
plan intends to materially rely on the recommendation
in making investment or management decisions with
respect to any moneys or other property of the plan.
Disclaimer of a mutual agreement, arrangement, or understanding
Under the bill, any disclaimer of a mutual agreement,
arrangement, or understanding with respect to a recommendation
must only state the following: ``This information is not
individualized to you, and you are not intended to materially
rely on this information in making investment or management
decisions.'' Further, this disclaimer is not effective unless
it is in writing and is communicated in a clear and prominent
manner, and an objective person would reasonably conclude that,
based on all the facts and circumstances, there was not a
mutual agreement, arrangement, or understanding.
Information not treated as investment advice
Under the bill, information provided in the circumstances
described below is not treated as a recommendation made
pursuant to a mutual agreement, arrangement, or understanding
for purposes of the definition of investment advice. The
information in these circumstances shall contain the disclaimer
described above.
1. The information is provided in conjunction with full and
fair disclosure in writing to a plan, plan participant, or
beneficiary that the person providing the information is doing
so in its marketing or sales capacity, including any
information regarding the terms and conditions of the
engagement of the person providing the information, and that
the person is not intending to provide investment advice (as
defined under the bill) or to otherwise act as a fiduciary to
the plan or to act under the obligations of the best interest
standard.
2. The person providing the information is a counterparty
or service provider to the plan in connection with any
transaction based on the information (including a service
arrangement, sale, purchase, loan, bilateral contract,
swap,\40\ or security-based swap\41\). In addition, the plan is
represented, in connection with the transaction, by a plan
fiduciary that is independent of the person providing the
information, and, except in the case of a swap or security-
based swap, independent of the plan sponsor. Further, prior to
the transaction, the independent plan fiduciary represents in
writing to the person providing the information that it is
aware that the person has a financial interest in the
transaction and that it has determined that the person is not
intending to provide investment advice (as defined under the
bill) or to otherwise act as a fiduciary to the plan.
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\40\A swap for this purpose is defined in section 1a of the
Commodity Exchange Act, 7 U.S.C. Sec. 1a.
\41\A security-based swap for this purpose is defined in section
3(a) of the Securities Exchange Act, 15 U.S.C. Sec. 78c(a).
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3. The person providing the information is an employee of
any sponsoring employer or employee organization who provides
the information to the plan for no fee or other compensation
other than the employee's normal compensation.
4. The person providing the information discloses in
writing to the plan fiduciary that the person is not
undertaking to provide investment advice as a fiduciary. In
addition, the information provided consists solely of--
making available to the plan, without regard
to the individualized needs of the plan, securities or
other property through a platform or similar mechanism
from which a plan fiduciary may select or monitor
investment alternatives, including qualified default
investment alternatives, into which plan participants
or beneficiaries may direct the investment of assets
held in, or contributed to, their individual accounts,
or
in connection with a platform or similar
mechanism described above, either (1) identifying
investment alternatives that meet objective criteria
specified by the plan, such as criteria concerning
expense ratios, fund sizes, types of asset, or credit
quality, or (2) providing objective financial data and
comparisons with independent benchmarks to the plan.
5. The information consists solely of valuation
information.
6. The information consists solely of the following:
information described in DOL Interpretive
Bulletin 96-1 as in effect on January 1, 2015,
regardless of whether the education is provided to a
plan or plan fiduciary or a participant or beneficiary,
information provided to participants or
beneficiaries regarding the factors to consider in
deciding whether to elect to receive a distribution
from a plan or an IRA and whether to roll over the
distribution to a plan or an IRA, so long as any
examples of different distribution alternatives are
accompanied by all material facts and assumptions on
which the examples are based, or
any additional information treated as
education by the Secretary.
EXEMPTION
The bill provides a prohibited transaction exemption for
any transaction, including a contract for service, between a
person (referred to herein as the ``investment advisor'')
providing investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other
property of the plan, and the advice recipient in connection
with the investment advice, as well as any transaction
consisting of the provision of the investment advice.
The exemption applies if the following conditions are
met:\42\
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\42\Like all fiduciary acts, transactions covered by the exemption
are also subject to the general fiduciary standard under ERISA.
---------------------------------------------------------------------------
1. No more than reasonable compensation is paid for the
investment advice.\43\
---------------------------------------------------------------------------
\43\Reasonable compensation for this purpose is determined as under
the present-law prohibited transaction exemption under ERISA section
408(b)(2) for an arrangement with a disqualified person for services
necessary for the establishment or operation of a plan if no more than
reasonable compensation is paid therefor.
---------------------------------------------------------------------------
2. If the investment advice is based on a limited range of
investment options, which may consist, in whole or in part, of
proprietary products, the limitations must be clearly disclosed
to the advice recipient before any transaction based on the
investment advice in the form of a notice that states only the
following: ``This recommendation is based on a limited range of
investment options, and the same or similar investments may be
available at a different cost (greater or lesser) from other
sources.''
3. If the investment advice may result in variable
compensation to the investment advisor (or any affiliate\44\
thereof), the receipt of the compensation must be clearly
disclosed to the advice recipient before any transaction based
on the investment advice. For this purpose, clear disclosure of
variable compensation, must include, in a manner calculated to
be understood by the average individual, each of the following:
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\44\Under the bill, affiliate is defined as under the present-law
exemption relating to investment advice, that is, an affiliated person
as defined under section 2(a)(3) of the Investment Company Act of 1940.
15 U.S.C. Sec. 80a-2(a)(3).
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A notice that states only the following:
``This recommendation may result in varying amounts of
fees or other compensation to the person providing the
recommendation (or its affiliate), and the same or
similar investments may be available at a different
cost (greater or lesser) from other sources.''\45\
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\45\Any regulations or other administrative guidance implementing
this requirement may not require this notice to be updated more
frequently than annually.
---------------------------------------------------------------------------
A description of any fee or other
compensation that is directly or indirectly payable to
the investment advisor (or its affiliate) by the advice
recipient with respect to the transaction (expressed as
an amount, formula, percentage of assets, per capita
charge, or estimate or range of the compensation).
A description of the types and ranges of any
compensation that may be directly or indirectly payable
to the investment advisor (or its affiliate) by any
third party in connection with the transaction
(expressed as an amount, formula, percentage of assets,
per capita charge, or estimate or range of the
compensation).
On request of the advice recipient, a
disclosure of the specific amounts of compensation that
the investment advisor will receive in connection with
the particular transaction (expressed as an amount,
formula, percentage of assets, per capita charge, or
estimate of the compensation).
A notice with respect to limitations on the range of
investment options on which investment advice is based or with
respect to variable compensation shall have no effect on any
other notice otherwise required without regard to ERISA and
shall be provided in addition to, and not in lieu of, any other
such notice.
Under the bill, a recommendation will not fail to satisfy
the conditions for the exemption solely because the person,
acting in good faith and with reasonable diligence, makes an
error or omission in disclosing the information specified above
if the person discloses the correct information to the advice
recipient as soon as practicable, but not later than 30 days
from the date on which the person knows of the error or
omission.
EFFECTIVE DATE
The amendments made by the bill generally are effective on
the 61st day after the date of enactment of the bill and apply
with respect to information provided or recommendations made on
or after two years after the date of enactment. However, if,
before the 61st day after the date of enactment, a bill or
joint resolution is enacted that specifically approves any
rules or administrative positions that are promulgated under,
or applicable for purposes of, the ERISA statutory definition
of fiduciary and are not in effect on January 1, 2015, the
amendments made by the bill will not take effect. In addition,
the amendments made by the bill do not apply to any service or
transaction rendered, entered into, or for which a person has
been compensated before the date on which the amendments
generally become effective.
DOL is prohibited from amending any rules or administrative
positions promulgated under, or applicable for purposes of, the
ERISA statutory definition of fiduciary (including DOL
Interpretive Bulletin 96-1 and Advisory Opinion 2005-23A), and
no rule or administrative position promulgated by DOL before
the date of enactment of the bill but not effective on January
1, 2015, may become effective unless a bill or joint resolution
as described above is enacted not later than 60 days after the
date of enactment of the bill. If the amendments made by the
bill take effect, nothing in the bill is to be construed to
prohibit the issuance of guidance to carry out the amendments
so long as the guidance is necessary to implement the
amendments. Until the time when regulations or other guidance
are issued to carry out the amendments, a plan or a fiduciary
will be treated as meeting the requirements of the amendments
if the plan or fiduciary, as applicable, complies with a
reasonable good faith interpretation of the amendments.
Committee Views
DOL'S ABANDONED 2010 PROPOSAL
The Obama administration has long argued the regulatory
definition of an ``investment advice'' fiduciary is
insufficiently restrictive.\46\ To address this concern, in
2010, EBSA issued a complicated proposed regulation expanding
the definition of ``fiduciary.''\47\ On September 19, 2011, in
the face of bipartisan opposition from the Committee and others
in Congress related to access to advice and cost, EBSA withdrew
its original proposal and announced it would repropose a
revised rulemaking.\48\
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\46\See Council of Economic Advisors, The Effects of Conflicted
Investment Advice on Retirement Saving, (Feb. 2015) http://
www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf.
[hereinafter CEA Report].
\47\2010 Proposal, 75 Fed. Reg. at 65263.
\48\See Press Release, Dept. of Labor, U.S. Labor Department's EBSA
to re-propose rule on definition of a fiduciary (Sept. 19, 2011),
http://www.dol.gov/ebsa/newsroom/2011/11-1382-NAT.html.
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CONCERNS WITH DOL'S 2015 PROPOSAL
DOL's April 2015 Notice of Proposed Rulemaking
At a February 2015 speech at AARP, President Obama
announced his intention to go forward with this rulemaking.\49\
In this speech and subsequent public statements, the
administration rebranded the proposed regulation as a consumer
protection against ``backdoor payments and hidden fees''
generated by structural conflicts of interest in the retirement
advice industry. After review by the Office of Management and
Budget (OMB), DOL released its new notice of proposed
rulemaking (the 2015 NPRM) in April 2015.\50\ The new proposal
was preceded by a Council of Economic Advisors report arguing
that ``conflicted advice'' costs Americans $17 billion
annually.\51\ This figure assumes that IRA investors were duped
into rolling over 401(k) funds into high cost mutual funds by
advisors and brokers and, as a result, pay on average 1 percent
more annually. These assumptions have come under intense
scrutiny from analysts who argue IRA holders actually pay only
0.16 percent more and that these fees are justifiable due to a
higher level of service.\52\
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\49\Press Release, White House Office of the Press Secretary,
Remarks by the President at the AARP (Feb. 23, 2015), http://
www.whitehouse.gov/the-press-office/2015/02/23/remarks-president-aarp.
\50\Definition of the Term ``Fiduciary,'' 80 Fed. Reg. 21928.
\51\CEA Report, supra note 46, at 2.
\52\Letter from David M. Abbey, Deputy Gen. Counsel, Retirement
Policy, Inv. Co. Inst. and Brian Reid, Chief Economist, Investment
Company Inst., to the Hon. Howard Shelanski, Admin., Office of Info.
and Reg. Aff., OMB (Apr. 7, 2015), http://www.ici.org/pdf/
15_ici_omb_data.pdf.
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Proposed exemptions
In addition to the NPRM itself, DOL's proposed regulatory
package also includes six prohibited transaction exemptions--
some new and a few revisions of existing exemptions. The most
notable is the BIC exemption. DOL claims this exemption will
provide a framework permitting newly-minted fiduciaries to
continue to receive commissions and other payments that would
otherwise be prohibited by ERISA. However, to qualify for the
exemption, an investment advisor would need to enter into a
contract (before any investment recommendation is made)
acknowledging fiduciary status and agree to abide by certain
requirements. While advisors should work in the best interest
of their clients, this requirement is unworkable because
potential clients would be required to sign this contract
before the advisory relationship actually begins.\53\
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\53\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 8 (Jun. 17, 2015) (written
testimony of Jack Haley, Exec. Vice President, Fidelity Invs.).
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Summary of key concerns
Based on overwhelming testimony from a diverse group of
stakeholders, the Committee has concluded the DOL proposal
would disrupt advisory relationships, contains a multitude of
technical shortcomings, and would bring about a number of
unacceptable consequences. There are three general criticisms:
(1) if finalized, the proposal would restrict access to
affordable financial advice for lower- and middle-income
Americans; (2) if finalized, the proposal would make it harder
for employers (especially small businesses) to set up
retirement plans; and (3) DOL's rushed and uncoordinated
process resulted in an unworkable proposal. DOL received
comment letters from stakeholders and Congress reflecting these
concerns.
Restricted access to advice
The proposed regulation will have the net effect of locking
lower- and middle-income investors out of the advice
market.\54\ Advisors should have a legal duty to act in the
``best interests'' of their clients; however, ``fiduciary''
status would result in the legal prohibition of most
transactions because of how the advisor is compensated.\55\ At
a HELP Subcommittee hearing in June 2015, Mr. Kent Mason,
Partner of Davis and Harman LLP, testified to this effect:
---------------------------------------------------------------------------
\54\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 5 (Jun. 17, 2015) (written
testimony of Kent Mason, Partner, Davis & Harman LLP).
\55\Id. at 3-4.
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The framework set up by the DOL could work
conceptually, but in its current form, it would, like
the original 2010 proposal, cut off the option for low
and middle-income individuals and small businesses to
receive personalized investment assistance, even if
that assistance is in the best interest of the
recipient.\56\
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\56\Id. at 5.
DOL claims its goal is not to eliminate commission-based
accounts,\57\ but it failed to adequately rectify this gaping
inadequacy in the proposal. For example, the BIC exemption--the
main exemption that would be used--is too complex and
ultimately unusable.\58\ Specifically, while the BIC exemption
permits advisors to continue to receive commissions, there are
several onerous disclosure and information-gathering
requirements that will increase costs, which will be passed on
to investors or make continued advice to small- and mid-size
accounts unaffordable and thereby unavailable.\59\ At the same
hearing, Mr. Dean Harman, CFP, Managing Director at Harman
Wealth Management, stated:
---------------------------------------------------------------------------
\57\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 5 (Jun. 17, 2015) (written
testimony of The Hon. Thomas E. Perez, U.S. Sec'y, Dept. of Labor).
\58\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 10 (Jun. 17, 2015) (written
testimony of Dean Harman, CFP, Managing Dir., Harman Wealth
Management).
\59\Id. at 14.
The DOL has created a new exemption, [the BIC
exemption or BICE] Unfortunately, BICE has missed the
mark and, as currently proposed, would lead to the same
unwanted consequence as the 2010 proposalby hugely
increasing the burdens on financial advisors and
financial institutions.\60\
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\60\Id. at 15.
Even more troubling, an advisor and client would need to
have a signed contract prior to any meaningful conversation. At
the same hearing, Mr. Jack Haley, Executive Vice President of
Fidelity Investments, summarized the consequences of this
---------------------------------------------------------------------------
proposed rule:
Today, we are able to help these workers by
discussing potential product and service offerings with
them. The proposed DOL exemption would require a signed
contract before a conversation could even occur. And
since our customers speak to different phone reps each
time they call, the rule would require each of our
customers to have a signed contact with each of our
phone reps in order to get answers to these basic
questions. For Fidelity, requiring nearing 25 million
customers to sign contracts before we can continue to
service them would be a significant impediment to
ongoing engagement with them, potentially suppressing
their savings levels and retirement security.\61\
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\61\Haley, supra note 53, at 8.
The exemption imposes burdensome new disclosure and data
collection requirements on investment advisors.\62\ However,
the exemption would only cover recommendations with respect to
limited categories of investments; fiduciaries could not
recommend real estate, securities futures, or some non-publicly
traded securities, limiting investor options.\63\ The exemption
also requires reporting and prediction of all direct and
indirect compensation for recommended investments, costs for
competing alternative products, and cost projections at one-,
five-, and ten-year intervals.\64\
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\62\Proposed Best Interest Contract Exemption, 80 Fed. Reg. at
21987.
\63\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. 5 (Dec. 2, 2015) (written testimony of Jules
Gaudreau, Jr., ChFC, CIC, President, The Gaudreau Group, Inc.).
\64\Proposed Best Interest Contract Exemption, 80 Fed. Reg. at
21985.
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The Committee has heard extensive witness testimony from
advisors and other experts explaining why these requirements
are unworkable. For example, at a June 17, 2015, HELP
Subcommittee hearing, Dr. Brian Reid, Ph.D. Chief Economist,
Investment Company Institute, testified:
The Best Interest Contact Exemption is prohibitively
costly, in addition to being convoluted and unworkable.
Brokers subject to the Exemption's many new
limitations, burdens, and costs, as well as increased
exposure liability, are not likely to work for less
compensation, as the DOL presumes.\65\
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\65\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 4 (Jun. 17, 2015) (written
testimony of Dr. Brian Reid, Ph.D., Chief Economist, Inv. Co. Inst.).
---------------------------------------------------------------------------
At the same hearing, Mr. Mason asserted:
Under the DOL proposal, financial institutions would
be prohibited from providing any specific assistance to
individuals seeking help with the rollover and
distribution process. This is the case in large part
because any financial institution providing IRA
services would have a conflict of interest with respect
to advice regarding the rollover decision, thus
creating a prohibited transaction. Most read the BIC
exemption in the re-proposal as not covering this type
of assistance, thus rendering the assistance
categorically prohibited. Others read the BIC exemption
as technically applicable to this assistance, but
effectively unavailable because of the exemption's
unworkable conditions. Either interpretation denies
assistance to many in need of help in navigating the
retirement savings options that exist after termination
of employment. Among many unfortunate consequences,
this would cause a drastic curtailment of call center,
brokerage, and other assistance to those terminating
employment, leading to greatly increased leakage of
assets from the retirement system.\66\
---------------------------------------------------------------------------
\66\Mason, supra note 54, at 8.
Mr. Jules Gaudreau, Jr. ChFC, CIC, President of The
Gaudreau Group, Inc., at a December 2, 2015, HELP Subcommittee
---------------------------------------------------------------------------
hearing echoed these concerns:
It is, therefore, important to make sure that U.S.
retirement savings and tax policies encourage
individuals to take personal responsibility for the
need to save to protect their financial futures. It is
also important to be sure that the rules in place to
protect these savers and savings do not so burden the
mechanisms for saving that the rules themselves become
a barrier to achieving the goal of post-retirement
financial security.\67\
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\67\Gaudreau, supra note 63, at 3.
There is also concern that the disclosure requirements will
overwhelm investors with the volume of fine print, resulting in
confusion or functional non-disclosure.\68\ Cumulatively, these
burdensome requirements will serve to discourage savings,
ultimately harming low- and middle-income savers. Finally,
fiduciaries of employee benefit plans would continue to be
subject to the DOL enforcement regime, while aggrieved private
parties could sue IRA fiduciaries under state contract law,
empowering the plaintiffs' bar.\69\
---------------------------------------------------------------------------
\68\Id. at 4.
\69\Proposed Best Interest Contract Exemption, 80 Fed. Reg. at
21985; Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. 7 (Dec. 2, 2015) (written testimony of the
Hon. Bradford Campbell, Counsel, Drinker Biddle & Reath LLP).
---------------------------------------------------------------------------
Fewer employer-provided retirement plans
Small business owners provide nearly half a trillion
dollars in retirement savings for 9 million households.\70\
Employers are very concerned that the new rule makes it much
harder, or perhaps impossible, for small businesses to set up
retirement plans and for plan participants to receive advice.
During the June 17, 2015, HELP Subcommittee hearing, Dr. Brian
Reid, Ph.D., Chief Economist, Investment Company Institute,
warned:
---------------------------------------------------------------------------
\70\U.S. Chamber of Commerce, Locked Out of Retirement: The Threat
to Small Business Retirement Savings (Jun. 9, 2015), http://
www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/US-Chamber-
Locked-Out-of-Retirement-White-Paper.pdf.
Research shows that investors with access to advice
have more diversified portfolios and take on more
appropriate levels of risk than those who do not
receive advice or information. Indeed, in its
justification of an earlier rule change, the DOL said
that retirement investors who do not receive investment
advice are twice as likely to make poor investment
choices as those who do receive that advice. The
benefits of advice--and, conversely, the harm of losing
access to advice--are significant.\71\
---------------------------------------------------------------------------
\71\Reid, supra note 65, at 6.
At the same hearing, Mr. Jack Haley, Executive Vice
---------------------------------------------------------------------------
President of Fidelity Investments, concurred:
Under the DOL proposal, access to affordable
financial help will be effectively prohibited--even
when it is the in investor's best interest. Small
businesses and lower- and middle-income investors will
be harmed the most. . . . The proposed DOL rule
specifically prohibits service providers from assisting
small businesses. The result would have a devastating
impact on retirement coverage and savings for millions
of workers employed by small businesses across the
country.\72\
---------------------------------------------------------------------------
\72\Haley, supra note 53, at 3, 6.
Additionally, DOL's proposed rule holds large and small
businesses to different standards, with greater restrictions
and additional burdens placed on small businesses. At a
December 2, 2015, HELP Subcommittee hearing, Ms. Rachel Doba,
President of DB Engineering, LLC, voiced concerns about the
effects of the more stringent rules in DOL's proposal on her
---------------------------------------------------------------------------
small business and employees:
DOL seems to believe that small business owners, such
as me, are not as sophisticated as large businesses,
and therefore, need additional protections. The
validity of this rationale is based on faulty
assumptions, and does not justify discriminatory
treatment. When I work with my financial advisor, I am
aware that he is providing a service for a fee and
selling a product. I would not be able to run a
successful business if I were not able to understand
when I am involved in a sales discussion--particularly,
if it follows a basic disclosure that an advisor is
selling a proprietary financial product, that the
advisor is paid to see the product, and the advisor is
not providing fiduciary advice. . . . The assumption
that small plans, participants and IRA owners cannot
understand the difference between sales and advice does
not match my real world experience. The Department can
protect participants, IRA owners, and small plans with
the same kind of disclosures that it requires of large
plans under the large plan carve out, but without
eliminating their right to choose the services and
products that best fit their needs.\73\
---------------------------------------------------------------------------
\73\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. 5 (Dec. 2, 2015) (written testimony of
Rachel Doba, President, DB Engineering, LLC).
At the same hearing, the Honorable Brad Campbell, Counsel,
Drinker Biddle & Reath LLP, and former U.S. Assistant Secretary
of Labor for Employee Benefits, also warned about the potential
detrimental effects of DOL's proposal on small businesses,
saying, ``Small plans and small-account IRA owners may be most
in need of basic investment advice, but they would be least
likely to be served by the Proposal due to the increased
compliance costs and increased legal liability risks it
unnecessarily creates.''\74\
---------------------------------------------------------------------------
\74\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. 5 (Dec. 2, 2015) (written testimony of the
Hon. Bradford Campbell, Counsel, Drinker Biddle & Reath LLP).
---------------------------------------------------------------------------
Because of the complicated new requirements, institutions
providing retirement plans would be prohibited from offering
assistance to small business plan sponsors in selecting
investment options to offer their employees. While public
policy should encourage employers to help workers save for
retirement, it is counterproductive for DOL to refuse to
provide an exemption for advice provided to small businesses.
Even worse, the DOL proposal actually will drive up costs
for small businesses, while shielding larger businesses from
the same costs. The proposal requires that advisors to plans
with fewer than 100 participants or less than $100 million in
plan assets assume fiduciary status, with the attendant burdens
and costs passed onto the small business.\75\ However, larger
plans do not have this requirement. To continue to provide
services to small businesses, advisors will either need to
increase fees or qualify for an exemption. Ms. Rachel Doba,
provided further testimony to this effect at the December 2,
2015, HELP Subcommittee hearing:
\75\Definition of the Term ``Fiduciary,'' 80 Fed. Reg. at 12957.
Because advisors to small businesses are not carved
out of the fiduciary definition, they must change their
fee arrangements, or qualify for a special rule called
an ``exemption'' in order to provide services on the
same terms [as] before. . . . There are certain
exceptions to these new rules, called ``prohibited
transaction exemptions,'' but as DOL has proposed the
new rules, the exemptions generally won't help
financial advisors who are working with small
businesses to set up plans.\76\
---------------------------------------------------------------------------
\76\Doba, supra note 73, at 6.
However, while these exemptions apply for IRAs, it is not
clear that the exemption will apply for other tax-preferred
vehicles frequently used by small businesses.\77\ Echoing
similar concerns, the National Federation of Independent
Business sent a letter to DOL noting its concern that advisors
will no longer provide advice to small businesses that
establish retirement plans because the proposed regulation
could prohibit (or make cost-prohibitive) the arrangements
currently prevalent.\78\ Additionally, the Small Business
Administration's Office of Advocacy submitted a comment letter
to the Department warning, ``the proposed rule would likely
increase the [advisors'] costs and burdens associated with
serving smaller plans . . . [and] could limit financial
advisors' ability to offer savings and investment advice to
clients . . . ultimately lead[ing] advisors to stop providing
retirement services to small businesses.''\79\
---------------------------------------------------------------------------
\77\Sec. 102 of Reorganization Plan No. 4 of 1978, 43 Fed. Reg.
47713.
\78\Letter from Amanda Austin, Vice President, Public Policy, Nat'l
Fed'n of Indep. Bus. to the Emp. Benefits Sec. Admin. (May 5, 2015),
http://www.dol.gov/ebsa/pdf/1210-AB32-2-00039.pdf.
\79\Comment letter from the Small Bus. Admin's Office of Advocacy
5, 6 (Jul. 17, 2015),
http://www.dol.gov/ebsa/pdf/1210-AB32-2-00403.pdf.
---------------------------------------------------------------------------
Procedural concerns
DOL's process in developing the rule and considering
industry comments has been called into question. Through
oversight inquiries and a request for an extended comment
period, the Committee examined the process that led to the
proposal.
The Committee also has procedural concerns with the
proposed rule. According to some estimates, the average OMB
review for DOL proposals is nearly 120 days.\80\ However, the
2015 NPRM was only in the OMB formal review process for less
than half the average time (only 50 days). This shorter
timeframe indicates the administration has not adequately
considered stakeholder concerns. At the HELP Subcommittee's
June 17, 2015, hearing, Mr. Kent Mason explained DOL's
defective process:
\80\Meagan Leonhardt, DOL Fiduciary Rule Released Publicly (Apr.
13, 2015), http://wealthmanagement.com/industry/dol-fiduciary-rule-
released-publicly.
OMB's 50-day review of the re-proposal was
startlingly brief:
The review period was almost a month shorter
than the next shortest review period for any
significant retirement regulatory proposal in the last
10 years.
It was less than half the average review
period of other significant retirement regulatory
proposals in the last 10 years (which was 109 days).
Equally startling is that the review period
after OMB received significant public input was
actually just a few days. For example, a critical
meeting to discuss new information was held on April 9,
2015, and the DOL proposal was issued on April 14,
2015, a mere five days later.\81\
---------------------------------------------------------------------------
\81\Mason, supra note 54, at 11.
Additionally, the proposed rule provided the public less
time to review and offer feedback than the department's 2010
proposal (90 days versus 104 days respectively). A number of
letters requesting an extension of the comment period were
circulated, including a letter from Education and the Workforce
Committee Republicans.\82\ Finally, the 2015 NPRM provides for
an eight-month transition period between final approval and the
effective date of the new rules. According to stakeholders,
eight months is insufficient to overhaul business operations
and data collection systems necessary to comply with the
requirements of both the 2015 NPRM and the primary exemption--
the BIC exemption.\83\
---------------------------------------------------------------------------
\82\Letter from the Hon. John Kline, Chairman, H. Comm. on Educ.
and the Workforce, et al to the Hon. Thomas E. Perez, Sec'y, Dep't of
Labor (May 29, 2015), http://edworkforce.house.gov/uploadedfiles/05-29-
15-dol-fiduciary_comment_extension.pdf.; See also, e.g., Letter from
the Hon. Frederica S. Wilson, et al to the Hon. Thomas Perez, Sec'y,
Dep't of Labor (May 6, 2015), http://wealthmanagement.com/site-files/
wealthmanagement.com/files/uploads/2015/02/
Fiduciary%20Rule%20Letter%20to%20Secretary%20Perez.pdf (Letter from 18
House Democrats.)
\83\Mason, supra note 54, at 10.
---------------------------------------------------------------------------
Congressional comment letters
The 2015 NPRM received thousands of comments, including
numerous letters from Members of Congress.\84\ Notably, 46
House Democrats signed a letter led by HELP Subcommittee
Ranking Member Polis (D-CO) calling for publication of the
revised rule prior to finalizing, as well as a supplemental
comment period.\85\ Another letter, signed by 96 House
Democrats, expressed concerns that the current proposal could
reduce access to investment advice for both small businesses
and low- and middle-income individuals.\86\ In all, over half
of House Democrats have signed letters questioning the DOL's
proposal.
---------------------------------------------------------------------------
\84\Comments received through September 24, 2015, are published on
EBSA's website,
http://www.dol.gov/ebsa/regs/cmt-1210-AB32-2.html.
\85\See, e.g., Letter from the Hon. Jared Polis, et al to the Hon.
Thomas E. Perez, Sec'y, Dep't of Labor (Oct. 30, 2015), http://
df2d4c59ccf47b6bc124-2951e9520e07371
e6076e0c8af900fc2.r54.cf5.rackcdn.com/wp-content/uploads/Secretary-
Perez-Fiduciary-Comment-Period-Letter-10-30-15.pdf.
\86\Letter from the Hon. Gwen Moore, et al to the Hon. Thomas E.
Perez, Sec'y, Dep't of Labor (Sept. 24, 2015) (on file with the
Committee).
---------------------------------------------------------------------------
On July 21, 2015, every Republican member of the Committee
on Education and the Workforce signed a comment letter calling
for the proposal to be withdrawn, highlighting testimony from a
hearing held by the HELP Subcommittee on June 17, 2015.\87\
This comment letter also explained the Committee's longstanding
interest in pursuing a responsible best interest standard.
---------------------------------------------------------------------------
\87\Letter from the Hon. John Kline, Chairman, H. Comm. on Educ.
and the Workforce, et al to the Hon. Thomas E. Perez, Sec'y, Dep't of
Labor (July 21, 2015), http://edworkforce.house.gov/uploadedfiles/7-21-
15-dol_fiduciary_rule.pdf.
---------------------------------------------------------------------------
H.R. 4293 AND H.R. 4294: BIPARTISAN BILLS ENHANCING RETIREMENT SECURITY
After the HELP Subcommittee's June 17, 2015, hearing,\88\ a
number of other committees examined the rule, including the
House Committee on Financial Services\89\ and the House
Committee on Ways and Means.\90\ On November 5, 2015, HELP
Subcommittee Chairman Roe led a group of bipartisan lawmakers
in announcing their intention to introduce a substantive
alternative to the DOL's proposed fiduciary regulation.\91\
Subsequently, two complementary bills were introduced on
December 18, 2015. H.R. 4293 (ARAPA) amends ERISA, while H.R.
4294 (SAVERS Act) adds similar provisions in the Code. The
technical provisions of this legislation were described supra.
---------------------------------------------------------------------------
\88\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. (Jun. 17, 2015).
\89\Preserving Retirement Security and Investment Choices for All
Americans: Joint Hearing Before the Subcomms. on Oversight and
Investigations and Capital Markets and Government Sponsored Enterprises
of the H. Comm. on Financial Services, 114th Cong. (Sept. 10, 2015).
\90\Hearing on the Department of Labor's Proposed Fiduciary Rule:
Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways and
Means, 114th Cong. (Sept. 30, 2015).
\91\Press Release, H. Comm. on Educ. and the Workforce, Bipartisan
House Members Outline Legislative Principles to Ensure Retirement
Advisors Protect Clients' Best Interests (Nov. 5, 2015), http://
edworkforce.house.gov/news/documentsingle.aspx?DocumentID=399747.
---------------------------------------------------------------------------
The legislation reflects the sponsors' shared commitment to
preserving access to affordable retirement advice for workers,
retirees, and small business owners. More specifically, the
legislation embodies the following principles:
Promoting families and individuals saving for a
financially-secure retirement is an essential public policy
good.
Retirement advisors must serve in their clients'
best interests and must be required to do so.
Retirement advisors must deliver clear, simple,
and relevant disclosure of material conflicts, including
compensation received and all investment fees to individuals
saving for retirement.
Public policies must protect access to investment
advice and education for low- and middle-income workers and
retirees.
Public policies should never deny individuals the
financial information they need to make informed decisions.
Investor choice and consumer access to all
investment services--such as proprietary products, commission-
based sales, and guaranteed lifetime income--should be
preserved in a way that does not pick winners and losers.
Small business owners should have access to the
financial advice and products they need to establish and
maintain retirement plans and help workers save for retirement.
At their core, the bipartisan legislative proposals achieve
DOL's stated goal of ensuring that retirement advisors act in
their clients' best interests. However, unlike the DOL's
proposal, the bills effectively balance this higher standard
with the need to protect access to affordable retirement advice
for low- and middle-income workers and retirees.
Conclusion
H.R. 4293, the Affordable Retirement Advice Protection Act,
enhances retirement security without the pitfalls of the recent
DOL proposed regulation amending the regulatory definition of
``fiduciary'' in ERISA. The bill prohibits DOL from
implementing its proposed regulation without affirmative
Congressional approval. The bill also updates current law to
ensure that all financial professionals providing personalized
advice about investments, distributions, or the use of other
fiduciaries are legally required to act in the best interest of
their customers. However, unlike the DOL proposed regulation,
the bill ensures individual and small businesses have continued
access to affordable retirement advice.
Section-by-Section
The following is a section-by-section analysis of the
Amendment in the Nature of a Substitute offered by Rep. Roe and
reported favorably by the Committee.
Section 1. Provides the short title is the ``Affordable
Retirement Advice Protection Act.''
Section 2. Describes the purpose of the Act to provide that
financial advisors that violate the prohibited transaction
rules under the Employee Retirement Income Security Act of 1974
ERISA or breach the best interest standard for the provision of
investment advice are subject to liability under ERISA.
Section 3. Amends the definition of ``investment advice''
under ERISA; exempts certain transactions from ERISA
prohibitions; prescribes effective dates and transition rules.
Explanation of Amendments
The amendments, including the amendment in the nature of a
substitute, are explained in the body of this report.
Application of Law to the Legislative Branch
Section 102(b)(3) of Public Law 104-1 requires a
description of the application of this bill to the legislative
branch. H.R. 4293, the Affordable Retirement Advice Protection
Act (ARAPA), prohibits the Department of Labor (DOL or
department) from implementing its proposed regulation amending
the regulatory definition of ``fiduciary'' under the Employee
Retirement Income Security Act of 1974 (ERISA) and the Internal
Revenue Code of 1986 (Code), unless Congress affirmatively
approves the final rule. Instead, the bill updates current law
to ensure that all financial professionals providing
personalized advice about investments, distributions, or the
use of other fiduciaries are legally required to act in the
best interest of their customers. However, unlike the DOL
proposed regulation, ARAPA ensures low- and medium-income
savers and small businesses have continued access to affordable
retirement advice.
Unfunded Mandate Statement
Section 423 of the Congressional Budget and Impoundment
Control Act (as amended by Section 101(a)(2) of the Unfunded
Mandates Reform Act, P.L. 104-4) requires a statement of
whether the provisions of the reported bill include unfunded
mandates. This issue is addressed in the CBO letter.
Earmark Statement
H.R. 4293 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of House Rule XXI.
Roll Call Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee Report to include for
each record vote on a motion to report the measure or matter
and on any amendments offered to the measure or matter the
total number of votes for and against and the names of the
Members voting for and against.
Statement of General Performance Goals and Objectives
In accordance with clause (3)(c) of House Rule XIII, the
goals of H.R. 4293 are to reduce the federal footprint and
restore local control of education, while empowering parents
and education leaders to hold schools accountable for
effectively teaching students.
Duplication of Federal Programs
No provision of H.R. 4293 establishes or reauthorizes a
program of the Federal Government known to be duplicative of
another Federal program, a program that was included in any
report from the Government Accountability Office to Congress
pursuant to section 21 of Public Law 111-139, or a program
related to a program identified in the most recent Catalog of
Federal Domestic Assistance.
Disclosure of Directed Rule Makings
The committee estimates that enacting H.R. 4293 does not
specifically direct the completion of any specific rule makings
within the meaning of 5 U.S.C. 551.
Statement of Oversight Findings and Recommendations of the Committee
In compliance with clause 3(c)(1) of rule XIII and clause
2(b)(1) of rule X of the Rules of the House of Representatives,
the committee's oversight findings and recommendations are
reflected in the body of this report.
New Budget Authority and CBO Cost Estimate
With respect to the requirements of clause 3(c)(2) of rule
XIII of the Rules of the House of Representatives and section
308(a) of the Congressional Budget Act of 1974 and with respect
to requirements of clause 3(c)(3) of rule XIII of the Rules of
the House of Representatives and section 402 of the
Congressional Budget Act of 1974, the committee has received
the following estimate for H.R. 4293 from the Director of the
Congressional Budget Office:
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 20, 2016.
Hon. John Kline,
Chairman, Committee on Education and the Workforce,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4293, the
Affordable Retirement Advice Protection Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Noah
Meyerson.
Sincerely,
Keith Hall.
Enclosure.
H.R. 4293--Affordable Retirement Advice Protection Act
H.R. 4293, the Affordable Retirement Advice Protection Act,
would amend portions of the Employee Retirement Income Security
Act of 1974 (ERISA) that prohibit self-dealing transactions by
fiduciaries of employer-sponsored retirement plans. The bill
would add a definition of investment advice to ERISA. The bill
also would add a new statutory exemption related to investment
advice that a fiduciary can provide to those plans, plan
participants, or beneficiaries. Among other provisions, H.R.
4293 would change requirements regarding disclosure of
potential compensation accruing to the fiduciary or an
affiliate.
On April 6, 2016, the Department of Labor issued new
regulations relating to investment advice within pension and
retirement plans; those regulations are sometimes referred to
as the ``fiduciary rule.'' H.R. 4293 would prevent those or any
similar regulations from becoming effective unless a bill or
joint resolution approving them was passed within 60 days of
enactment of H.R. 4293.
CBO and the staff of the Joint Committee on Taxation (JCT)
estimate that the bill would have a negligible effect on
revenues over the 2017-2026 period. Enacting the bill would not
affect direct spending. Because enacting H.R. 4293 would affect
revenues, pay-as-you-go procedures apply.
CBO and JCT estimate that enacting H.R. 4293 would not
increase net direct spending or on-budget deficits in any of
the four consecutive 10-year periods beginning in 2027.
H.R. 4293 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would impose no costs on state, local, or tribal governments.
On February 10, 2016, CBO transmitted a cost estimate of
H.R. 4294, the Strengthening Access to Valuable Education and
Retirement Support Act of 2015, as ordered reported by the
House Committee on Ways and Means on February 3, 2016. On April
20, 2016, CBO transmitted a cost estimate of H.R. 4294, the
Strengthening Access to Valuable Education and Retirement
Support Act of 2015, as ordered reported by the House Committee
on Education and the Workforce on February 2, 2016. Both
versions of H.R. 4294 would amend the Internal Revenue Code in
a manner consistent with the way that H.R. 4293 would amend
ERISA. All three versions of the legislation would have a
negligible effect on revenues.
The CBO staff contact for this estimate is Noah Meyerson.
The estimate was approved by H. Samuel Papenfuss, Deputy
Assistant Director for Budget Analysis.
Committee Cost Estimate
Clause 3(d)(1) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison of the
costs that would be incurred in carrying out H.R. 4293.
However, clause 3(d)(2)(B) of that rule provides that this
requirement does not apply when the committee has included in
its report a timely submitted cost estimate of the bill
prepared by the Director of the Congressional Budget Office
under section 402 of the Congressional Budget Act.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
* * * * * * *
TITLE I--PROTECTION OF EMPLOYEE BENEFIT RIGHTS
Subtitle A--General Provisions
* * * * * * *
DEFINITIONS
Sec. 3. For purposes of this title:
(1) The terms ``employee welfare benefit plan'' and ``welfare
plan'' mean any plan, fund, or program which was heretofore or
is hereafter established or maintained by an employer or by an
employee organization, or by both, to the extent that such
plan, fund, or program was established or is maintained for the
purpose of providing for its participants or their
beneficiaries, through the purchase of insurance or otherwise,
(A) medical, surgical, or hospital care or benefits, or
benefits in the event of sickness, accident, disability, death
or unemployment, or vacation benefits, apprenticeship or other
training programs, or day care centers, scholarship funds, or
prepaid legal services, or (B) any benefit described in section
302(c) of the Labor Management Relations Act, 1947 (other than
pensions on retirement or death, and insurance to provide such
pensions).
(2)(A) Except as provided in subparagraph (B), the terms
``employee pension benefit plan'' and ``pension plan'' mean any
plan, fund, or program which was heretofore or is hereafter
established or maintained by an employer or by an employee
organization, or by both, to the extent that by its express
terms or as a result of surrounding circumstances such plan,
fund, or program--
(i) provides retirement income to employees, or
(ii) results in a deferral of income by employees for
periods extending to the termination of covered
employment or beyond,
regardless of the method of calculating the contributions made
to the plan, the method of calculating the benefits under the
plan or the method of distributing benefits from the plan. A
distribution from a plan, fund, or program shall not be treated
as made in a form other than retirement income or as a
distribution prior to termination of covered employment solely
because such distribution is made to an employee who has
attained age 62 and who is not separated from employment at the
time of such distribution.
(B) The Secretary may by regulation prescribe rules
consistent with the standards and purposes of this Act
providing one or more exempt categories under which--
(i) severance pay arrangements, and
(ii) supplemental retirement income payments, under
which the pension benefits of retirees or their
beneficiaries are supplemented to take into account
some portion or all of the increases in the cost of
living (as determined by the Secretary of Labor) since
retirement,
shall, for purposes of this title, be treated as welfare plans
rather than pension plans. In the case of any arrangement or
payment a principal effect of which is the evasion of the
standards or purposes of this Act applicable to pension plans,
such arrangement or payment shall be treated as a pension plan.
An applicable voluntary early retirement incentive plan (as
defined in section 457(e)(11)(D)(ii) of the Internal Revenue
Code of 1986) making payments or supplements described in
section 457(e)(11)(D)(i) of such Code, and an applicable
employment retention plan (as defined in section 457(f)(4)(C)
of such Code) making payments of benefits described in section
457(f)(4)(A) of such Code, shall, for purposes of this title,
be treated as a welfare plan (and not a pension plan) with
respect to such payments and supplements.
(3) The term ``employee benefit plan'' or ``plan'' means an
employee welfare benefit plan or an employee pension benefit
plan or a plan which is both an employee welfare benefit plan
and an employee pension benefit plan.
(4) The term ``employee organization'' means any labor union
or any organization of any kind, or any agency or employee
representation committee, association, group, or plan, in which
employees participate and which exists for the purpose, in
whole or in part, of dealing with employers concerning an
employee benefit plan, or other matters incidental to
employment relationships; or any employees' beneficiary
association organized for the purpose in whole or in part, of
establishing such a plan.
(5) The term ``employer'' means any person acting directly as
an employer, or indirectly in the interest of an employer, in
relation to an employee benefit plan; and includes a group or
association of employers acting for an employer in such
capacity.
(6) The term ``employee'' means any individual employed by an
employer.
(7) The term ``participant'' means any employee or former
employee of an employer, or any member or former member of an
employee organization, who is or may become eligible to receive
a benefit of any type from an employee benefit plan which
covers employees of such employer or members of such
organization, or whose beneficiaries may be eligible to receive
any such benefit.
(8) The term ``beneficiary'' means a person designated by a
participant, or by the terms of an employee benefit plan, who
is or may become entitled to a benefit thereunder.
(9) The term ``person'' means an individual, partnership,
joint venture, corporation, mutual company, joint-stock
company, trust, estate, unincorporated organization,
association, or employee organization.
(10) The term ``State'' includes any State of the United
States, the District of Columbia, Puerto Rico, the Virgin
Islands, American Samoa, Guam, Wake Island, and the Canal Zone.
The term ``United States'' when used in the geographic sense
means the States and the Outer Continental Shelf lands defined
in the Outer Continental Shelf Lands Act (43 U.S.C. 1331-1343).
(11) The term ``commerce'' means trade, traffic, commerce,
transportation, or communication between any State and any
place outside thereof.
(12) The term ``industry or activity affecting commerce''
means any activity, business, or industry in commerce or in
which a labor dispute would hinder or obstruct commerce or the
free flow of commerce, and includes any activity or industry
``affecting commerce'' within the meaning of the Labor
Management Relations Act, 1947, or the Railway Labor Act.
(13) The term ``Secretary'' means the Secretary of Labor.
(14) The term ``party in interest'' means, as to an employee
benefit plan--
(A) any fiduciary (including, but not limited to, any
administrator, officer, trustee, or custodian),
counsel, or employee of such employee benefit plan;
(B) a person providing services to such plan;
(C) an employer any of whose employees are covered by
such plan;
(D) an employee organization any of whose members are
covered by such plan;
(E) an owner, direct or indirect, of 50 percent or
more of--
(i) the combined voting power of all classes
of stock entitled to vote or the total value of
shares of all classes of stock of a
corporation,
(ii) the capital interest or the profits
interest of a partnership, or
(iii) the beneficial interest of a trust or
unincorporated enterprise,
which is an employer or an employee organization
described in subparagraph (C) or (D);
(F) a relative (as defined in paragraph (15)) of any
individual described in subparagraph (A), (B), (C), or
(E);
(G) a corporation, partnership, or trust or estate of
which (or in which) 50 percent or more of--
(i) the combined voting power of all classes
of stock entitled to vote or the total value of
shares of all classes of stock of such
corporation,
(ii) the capital interest or profits interest
of such partnership, or
(iii) the beneficial interest of such trust
or estate,
is owned directly or indirectly, or held by persons
described in subparagraph (A), (B), (C), (D), or (E);
(H) an employee, officer, director (or an individual
having powers or responsibilities similar to those of
officers or directors), or a 10 percent or more
shareholder directly or indirectly, of a person
described in subparagraph (B), (C), (D), (E), or (G),
or of the employee benefit plan; or
(I) a 10 percent or more (directly or indirectly in
capital or profits) partner or joint venturer of a
person described in subparagraph (B), (C), (D), (E), or
(G).
The Secretary, after consultation and coordination with the
Secretary of the Treasury, may by regulation prescribe a
percentage lower than 50 percent for subparagraph (E) and (G)
and lower than 10 percent for subparagraph (H) or (I). The
Secretary may prescribe regulations for determining the
ownership (direct or indirect) of profits and beneficial
interests, and the manner in which indirect stockholdings are
taken into account. Any person who is a party in interest with
respect to a plan to which a trust described in section
501(c)(22) of the Internal Revenue Code of 1986 is permitted to
make payments under section 4223 shall be treated as a party in
interest with respect to such trust.
(15) The term ``relative'' means a spouse, ancestor, lineal
descendant, or spouse of a lineal descendant.
(16)(A) The term ``administrator'' means--
(i) the person specifically so designated by the
terms of the instrument under which the plan is
operated;
(ii) if an administrator is not so designated, the
plan sponsor; or
(iii) in the case of a plan for which an
administrator is not designated and a plan sponsor
cannot be identified, such other person as the
Secretary may by regulation prescribe.
(B) The term ``plan sponsor'' means (i) the employer in the
case of an employee benefit plan established or maintained by a
single employer, (ii) the employee organization in the case of
a plan established or maintained by an employee organization,
or (iii) in the case of a plan established or maintained by two
or more employers or jointly by one or more employers and one
or more employee organizations, the association, committee,
joint board of trustees, or other similar group of
representatives of the parties who establish or maintain the
plan.
(17) The term ``separate account'' means an account
established or maintained by an insurance company under which
income, gains, and losses, whether or not realized, from assets
allocated to such account, are, in accordance with the
applicable contract, credited to or charged against such
account without regard to other income, gains, or losses of the
insurance company.
(18) The term ``adequate consideration'' when used in part 4
of subtitle B means (A) in the case of a security for which
there is a generally recognized market, either (i) the price of
the security prevailing on a national securities exchange which
is registered under section 6 of the Securities Exchange Act of
1934, or (ii) if the security is not traded on such a national
securities exchange, a price not less favorable to the plan
than the offering price for the security as established by the
current bid and asked prices quoted by persons independent of
the issuer and of any party in interest; and (B) in the case of
an asset other than a security for which there is a generally
recognized market, the fair market value of the asset as
determined in good faith by the trustee or named fiduciary
pursuant to the terms of the plan and in accordance with
regulations promulgated by the Secretary.
(19) The term ``nonforfeitable'' when used with respect to a
pension benefit or right means a claim obtained by a
participant or his beneficiary to that part of an immediate or
deferred benefit under a pension plan which arises from the
participant's service, which is unconditional, and which is
legally enforceable against the plan. For purposes of this
paragraph, a right to an accrued benefit derived from employer
contributions shall not be treated as forfeitable merely
because the plan contains a provision described in section
203(a)(3).
(20) The term ``security'' has the same meaning as such term
has under section 2(1) of the Securities Act of 1933 (15 U.S.C.
77b(1)).
(21)(A) Except as otherwise provided in subparagraph (B), a
person is a fiduciary with respect to a plan to the extent (i)
he exercises any discretionary authority or discretionary
control respecting management of such plan or exercises any
authority or control respecting management or disposition of
its assets, (ii) he renders investment advice for a fee or
other compensation, direct or indirect, with respect to any
moneys or other property of such plan, or has any authority or
responsibility to do so, or (iii) he has any discretionary
authority or discretionary responsibility in the administration
of such plan. Such term includes any person designated under
section 405(c)(1)(B).
(B) If any money or other property of an employee benefit
plan is invested in securities issued by an investment company
registered under the Investment Company Act of 1940, such
investment shall not by itself cause such investment company or
such investment company's investment adviser or principal
underwriter to be deemed to be a fiduciary or a party in
interest as those terms are defined in this title, except
insofar as such investment company or its investment adviser or
principal underwriter acts in connection with an employee
benefit plan covering employees of the investment company, the
investment adviser, or its principal underwriter. Nothing
contained in this subparagraph shall limit the duties imposed
on such investment company, investment adviser, or principal
underwriter by any other law.
(C)(i) For purposes of clause (ii) of subparagraph (A), the
term ``investment advice'' means a recommendation that--
(I) relates to--
(aa) the advisability of acquiring, holding,
disposing, or exchanging any moneys or other
property of a plan by the plan, plan
participants, or plan beneficiaries, including
any recommendation whether to take a
distribution of benefits from such plan or any
recommendation relating to the investment of
any moneys or other property of such plan to be
distributed from such plan;
(bb) the management of moneys or other
property of such plan, including
recommendations relating to the management of
moneys or other property to be distributed from
such plan; or
(cc) the advisability of retaining or ceasing
to retain a person who would receive a fee or
other compensation for providing any of the
types of advice described in this subclause;
and
(II) is rendered pursuant to--
(aa) a written acknowledgment of the
obligation of the advisor to comply with
section 404 with respect to the provision of
such recommendation; or
(bb) a mutual agreement, arrangement, or
understanding, which may include limitations on
scope, timing, and responsibility to provide
ongoing monitoring or advice services, between
the person making such recommendation and the
plan that such recommendation is individualized
to the plan and such plan intends to materially
rely on such recommendation in making
investment or management decisions with respect
to any moneys or other property of such plan.
(ii) For purposes of clause (i)(II)(bb), any disclaimer of a
mutual agreement, arrangement, or understanding shall only
state the following: ``This information is not individualized
to you, and you are not intended to materially rely on this
information in making investment or management decisions.''.
Such disclaimer shall not be effective unless such disclaimer
is in writing and is communicated in a clear and prominent
manner and an objective person would reasonably conclude that,
based on all the facts and circumstances, there was not a
mutual agreement, arrangement, or understanding.
(iii) For purposes of clause (i)(II)(bb), information shall
not be considered to be a recommendation made pursuant to a
mutual agreement, arrangement, or understanding, and such
information shall contain the disclaimer required by clause
(ii), if--
(I) it is provided in conjunction with full and fair
disclosure in writing to a plan, plan participant, or
beneficiary that the person providing the information
is doing so in its marketing or sales capacity,
including any information regarding the terms and
conditions of the engagement of the person providing
the information, and that the person is not intending
to provide investment advice within the meaning of this
subparagraph or to otherwise act within and under the
obligations of the best interest standard as described
in this subparagraph;
(II) the person providing the information is a
counterparty or service provider to the plan in
connection with any transaction based on the
information (including a service arrangement, sale,
purchase, loan, bilateral contract, swap (as defined in
section 1a of the Commodity Exchange Act (7 U.S.C.
1a)), or security-based swap (as defined in section
3(a) of the Securities Exchange Act (15 U.S.C.
78c(a)))), but only if--
(aa) the plan is represented, in connection
with such transaction, by a plan fiduciary that
is independent of the person providing the
information, and, except in the case of a swap
or security-based swap, independent of the plan
sponsor; and
(bb) prior to such transaction, the
independent plan fiduciary represents in
writing to the person providing the information
that it is aware that the person has a
financial interest in the transaction and that
it has determined that the person is not
intending to provide investment advice within
the meaning of this subparagraph or to
otherwise act as a fiduciary to the plan
subject to section 404;
(III) the person providing the information is an
employee of any sponsoring employer or employee
organization who provides the information to the plan
for no fee or other compensation other than the
employee's normal compensation;
(IV) the person providing the information discloses
in writing to the plan fiduciary that the person is not
undertaking to provide investment advice as a fiduciary
to the plan subject to section 404 and the information
consists solely of--
(aa) making available to the plan, without
regard to the individualized needs of the plan,
securities or other property through a platform
or similar mechanism from which a plan
fiduciary may select or monitor investment
alternatives, including qualified default
investment alternatives, into which plan
participants or beneficiaries may direct the
investment of assets held in, or contributed
to, their individual accounts; or
(bb) in connection with a platform or similar
mechanism described in item (aa)--
(AA) identifying investment
alternatives that meet objective
criteria specified by the plan, such as
criteria concerning expense ratios,
fund sizes, types of asset, or credit
quality; or
(BB) providing objective financial
data and comparisons with independent
benchmarks to the plan;
(V) the information consists solely of valuation
information; or
(VI) the information consists solely of--
(aa) information described in Department of
Labor Interpretive Bulletin 96-1 (29 C.F.R.
2509.96-1, as in effect on January 1, 2015),
regardless of whether such education is
provided to a plan or plan fiduciary or a
participant or beneficiary;
(bb) information provided to participants or
beneficiaries regarding the factors to consider
in deciding whether to elect to receive a
distribution from a plan or an individual
retirement plan (as defined in section
7701(a)(37) of the Internal Revenue Code of
1986) and whether to roll over such
distribution to a plan or an individual
retirement plan (as defined in section
7701(a)(37) of the Internal Revenue Code of
1986), so long as any examples of different
distribution alternatives are accompanied by
all material facts and assumptions on which the
examples are based; or
(cc) any additional information treated as
education by the Secretary.
(22) The term ``normal retirement benefit'' means the greater
of the early retirement benefit under the plan, or the benefit
under the plan commencing at normal retirement age. The normal
retirement benefit shall be determined without regard to--
(A) medical benefits, and
(B) disability benefits not in excess of the
qualified disability benefit.
For purposes of this paragraph, a qualified disability benefit
is a disability benefit provided by a plan which does not
exceed the benefit which would be provided for the participant
if he separated from the service at normal retirement age. For
purposes of this paragraph, the early retirement benefit under
a plan shall be determined without regard to any benefit under
the plan which the Secretary of the Treasury finds to be a
benefit described in section 204(b)(1)(G).
(23) The term ``accrued benefit'' means--
(A) in the case of a defined benefit plan, the
individual's accrued benefit determined under the plan
and, except as provided in section 204(c)(3), expressed
in the form of an annual benefit commencing at normal
retirement age, or
(B) in the case of a plan which is an individual
account plan, the balance of the individual's account.
The accrued benefit of an employee shall not be less than the
amount determined under section 204(c)(2)(B) with respect to
the employee's accumulated contribution.
(24) The term ``normal retirement age'' means the earlier
of--
(A) the time a plan participant attains normal
retirement age under the plan, or
(B) the later of--
(i) the time a plan participant attains age
65, or
(ii) the 5th anniversary of the time a plan
participant commenced participation in the
plan.
(25) The term ``vested liabilities'' means the present value
of the immediate or deferred benefits available at normal
retirement age for participants and their beneficiaries which
are nonforfeitable.
(26) The term ``current value'' means fair market value where
available and otherwise the fair value as determined in good
faith by a trustee or a named fiduciary (as defined in section
402(a)(2)) pursuant to the terms of the plan and in accordance
with regulations of the Secretary, assuming an orderly
liquidation at the time of such determination.
(27) The term ``present value'', with respect to a liability,
means the value adjusted to reflect anticipated events. Such
adjustments shall conform to such regulations as the Secretary
of the Treasury may prescribe.
(28) The term ``normal service cost'' or ``normal cost''
means the annual cost of future pension benefits and
administrative expenses assigned, under an actuarial cost
method, to years subsequent to a particular valuation date of a
pension plan. The Secretary of the Treasury may prescribe
regulations to carry out this paragraph.
(29) The term ``accrued liability'' means the excess of the
present value, as of a particular valuation date of a pension
plan, of the projected future benefit costs and administrative
expenses for all plan participants and beneficiaries over the
present value of future contributions for the normal cost of
all applicable plan participants and beneficiaries. The
Secretary of the Treasury may prescribe regulations to carry
out this paragraph.
(30) The term ``unfunded accrued liability'' means the excess
of the accrued liability, under an actuarial cost method which
so provides, over the present value of the assets of a pension
plan. The Secretary of the Treasury may prescribe regulations
to carry out this paragraph.
(31) The term ``advance funding actuarial cost method'' or
``actuarial cost method'' means a recognized actuarial
technique utilized for establishing the amount and incidence of
the annual actuarial cost of pension plan benefits and
expenses. Acceptable actuarial cost methods shall include the
accrued benefit cost method (unit credit method), the entry age
normal cost method, the individual level premium cost method,
the aggregate cost method, the attained age normal cost method,
and the frozen initial liability cost method. The terminal
funding cost method and the current funding (pay-as-you-go)
cost method are not acceptable actuarial cost methods. The
Secretary of the Treasury shall issue regulations to further
define acceptable actuarial cost methods.
(32) The term ``governmental plan'' means a plan established
or maintained for its employees by the Government of the United
States, by the government of any State or political subdivision
thereof, or by any agency or instrumentality of any of the
foregoing. The term ``governmental plan'' also includes any
plan to which the Railroad Retirement Act of 1935 or 1937
applies, and which is financed by contributions required under
that Act and any plan of an international organization which is
exempt from taxation under the provisions of the International
Organizations Immunities Act (59 Stat. 669). The term
``governmental plan'' includes a plan which is established and
maintained by an Indian tribal government (as defined in
section 7701(a)(40) of the Internal Revenue Code of 1986), a
subdivision of an Indian tribal government (determined in
accordance with section 7871(d) of such Code), or an agency or
instrumentality of either, and all of the participants of which
are employees of such entity substantially all of whose
services as such an employee are in the performance of
essential governmental functions but not in the performance of
commercial activities (whether or not an essential government
function)
(33)(A) The term ``church plan'' means a plan established and
maintained (to the extent required in clause (ii) of
subparagraph (B)) for its employees (or their beneficiaries) by
a church or by a convention or association of churches which is
exempt from tax under section 501 of the Internal Revenue Code
of 1986.
(B) The term ``church plan'' does not include a plan--
(i) which is established and maintained primarily for
the benefit of employees (or their beneficiaries) of
such church or convention or association of churches
who are employed in connection with one or more
unrelated trades or businesses (within the meaning of
section 513 of the Internal Revenue Code of 1986), or
(ii) if less than substantially all of the
individuals included in the plan are individuals
described in subparagraph (A) or in clause (ii) of
subparagraph (C) (or their beneficiaries).
(C) For purposes of this paragraph--
(i) A plan established and maintained for its
employees (or their beneficiaries) by a church or by a
convention or association of churches includes a plan
maintained by an organization, whether a civil law
corporation or otherwise, the principal purpose or
function of which is the administration or funding of a
plan or program for the provision of retirement
benefits or welfare benefits, or both, for the
employees of a church or a convention or association of
churches, if such organization is controlled by or
associated with a church or a convention or association
of churches.
(ii) The term employee of a church or a convention or
association of churches includes--
(I) a duly ordained, commissioned, or
licensed minister of a church in the exercise
of his ministry, regardless of the source of
his compensation;
(II) an employee of an organization, whether
a civil law corporation or otherwise, which is
exempt from tax under section 501 of the
Internal Revenue Code of 1986 and which is
controlled by or associated with a church or a
convention or association of churches; and
(III) an individual described in clause (v).
(iii) A church or a convention or association of
churches which is exempt from tax under section 501 of
the Internal Revenue Code of 1986 shall be deemed the
employer of any individual included as an employee
under clause (ii).
(iv) An organization, whether a civil law corporation
or otherwise, is associated with a church or a
convention or association of churches if it shares
common religious bonds and convictions with that church
or convention or association of churches.
(v) If an employee who is included in a church plan
separates from the service of a church or a convention
or association of churches or an organization, whether
a civil law corporation or otherwise, which is exempt
from tax under section 501 of the Internal Revenue Code
of 1986 and which is controlled by or associated with a
church or a convention or association of churches, the
church plan shall not fail to meet the requirements of
this paragraph merely because the plan--
(I) retains the employee's accrued benefit or
account for the payment of benefits to the
employee or his beneficiaries pursuant to the
terms of the plan; or
(II) receives contributions on the employee's
behalf after the employee's separation from
such service, but only for a period of 5 years
after such separation, unless the employee is
disabled (within the meaning of the disability
provisions of the church plan or, if there are
no such provisions in the church plan, within
the meaning of section 72(m)(7) of the Internal
Revenue Code of 1986) at the time of such
separation from service.
(D)(i) If a plan established and maintained for its employees
(or their beneficiaries) by a church or by a convention or
association of churches which is exempt from tax under section
501 of the Internal Revenue Code of 1986 fails to meet one or
more of the requirements of this paragraph and corrects its
failure to meet such requirements within the correction period,
the plan shall be deemed to meet the requirements of this
paragraph for the year in which the correction was made and for
all prior years.
(ii) If a correction is not made within the correction
period, the plan shall be deemed not to meet the requirements
of this paragraph beginning with the date on which the earliest
failure to meet one or more of such requirements occurred.
(iii) For purposes of this subparagraph, the term
``correction period'' means--
(I) the period ending 270 days after the date of
mailing by the Secretary of the Treasury of a notice of
default with respect to the plan's failure to meet one
or more of the requirements of this paragraph; or
(II) any period set by a court of competent
jurisdiction after a final determination that the plan
fails to meet such requirements, or, if the court does
not specify such period, any reasonable period
determined by the Secretary of the Treasury on the
basis of all the facts and circumstances, but in any
event not less than 270 days after the determination
has become final; or
(III) any additional period which the Secretary of
the Treasury determines is reasonable or necessary for
the correction of the default,
whichever has the latest ending date.
(34) The term ``individual account plan'' or ``defined
contribution plan'' means a pension plan which provides for an
individual account for each participant and for benefits based
solely upon the amount contributed to the participant's
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be
allocated to such participant's account.
(35) The term ``defined benefit plan'' means a pension plan
other than an individual account plan; except that a pension
plan which is not an individual account plan and which provides
a benefit derived from employer contributions which is based
partly on the balance of the separate account of a
participant--
(A) for the purposes of section 202, shall be treated
as an individual account plan, and
(B) for the purposes of paragraph (23) of this
section and section 204, shall be treated as an
individual account plan to the extent benefits are
based upon the separate account of a participant and as
a defined benefit plan with respect to the remaining
portion of benefits under the plan.
(36) The term ``excess benefit plan'' means a plan maintained
by an employer solely for the purpose of providing benefits for
certain employees in excess of the limitations on contributions
and benefits imposed by section 415 of the Internal Revenue
Code of 1986 on plans to which that section applies, without
regard to whether the plan is funded. To the extent that a
separable part of a plan (as determined by the Secretary of
Labor) maintained by an employer is maintained for such
purpose, that part shall be treated as a separate plan which is
an excess benefit plan.
(37)(A) The term ``multiemployer plan'' means a plan--
(i) to which more than one employer is required to
contribute,
(ii) which is maintained pursuant to one or more
collective bargaining agreements between one or more
employee organizations and more than one employer, and
(iii) which satisfies such other requirements as the
Secretary may prescribe by regulation.
(B) For purposes of this paragraph, all trades or businesses
(whether or not incorporated) which are under common control
within the meaning of section 4001(b)(1) are considered a
single employer.
(C) Notwithstanding subparagraph (A), a plan is a
multiemployer plan on and after its termination date if the
plan was a multiemployer plan under this paragraph for the plan
year preceding its termination date.
(D) For purposes of this title, notwithstanding the preceding
provisions of this paragraph, for any plan year which began
before the date of the enactment of the Multiemployer Pension
Plan Amendments Act of 1980, the term ``multiemployer plan''
means a plan described in section 3(37) of this Act as in
effect immediately before such date.
(E) Within one year after the date of the enactment of the
Multiemployer Pension Plan Amendments Act of 1980, a
multiemployer plan may irrevocably elect, pursuant to
procedures established by the corporation and subject to the
provisions of sections 4403(b) and (c), that the plan shall not
be treated as a multiemployer plan for all purposes under this
Act or the Internal Revenue Code of 1954 if for each of the
last 3 plan years ending prior to the effective date of the
Multiemployer Pension Plan Amendments Act of 1980--
(i) the plan was not a multiemployer plan because the
plan was not a plan described in section 3(37)(A)(iii)
of this Act and section 414(f)(1)(C) of the Internal
Revenue Code of 1954 (as such provisions were in effect
on the day before the date of the enactment of the
Multiemployer Pension Plan Amendments Act of 1980 );
and
(ii) the plan had been identified as a plan that was
not a multiemployer plan in substantially all its
filings with the corporation, the Secretary of Labor
and the Secretary of the Treasury.
(F)(i) For purposes of this title a qualified football
coaches plan--
(I) shall be treated as a multiemployer plan to the
extent not inconsistent with the purposes of this
subparagraph; and
(II) notwithstanding section 401(k)(4)(B) of the
Internal Revenue Code of 1986, may include a qualified
cash and deferred arrangement.
(ii) For purposes of this subparagraph, the term ``qualified
football coaches plan'' means any defined contribution plan
which is established and maintained by an organization--
(I) which is described in section 501(c) of such
Code;
(II) the membership of which consists entirely of
individuals who primarily coach football as full-time
employees of 4-year colleges or universities described
in section 170(b)(1)(A)(ii) of such Code; and
(III) which was in existence on September 18, 1986.
(G)(i) Within 1 year after the enactment of the
Pension Protection Act of 2006--
(I) an election under subparagraph (E) may be
revoked, pursuant to procedures prescribed by
the Pension Benefit Guaranty Corporation, if,
for each of the 3 plan years prior to the date
of the enactment of that Act, the plan would
have been a multiemployer plan but for the
election under subparagraph (E), and
(II) a plan that meets the criteria in
clauses (i) and (ii) of subparagraph (A) of
this paragraph or that is described in clause
(vi) may, pursuant to procedures prescribed by
the Pension Benefit Guaranty Corporation, elect
to be a multiemployer plan, if--
(aa) for each of the 3 plan years
immediately preceding the first plan
year for which the election under this
paragraph is effective with respect to
the plan, the plan has met those
criteria or is so described,
(bb) substantially all of the plan's
employer contributions for each of
those plan years were made or required
to be made by organizations that were
exempt from tax under section 501 of
the Internal Revenue Code of 1986, and
(cc) the plan was established prior
to September 2, 1974.
(ii) An election under this subparagraph shall be
effective for all purposes under this Act and under the
Internal Revenue Code of 1986, starting with any plan
year beginning on or after January 1, 1999, and ending
before January 1, 2008, as designated by the plan in
the election made under clause (i)(II).
(iii) Once made, an election under this subparagraph
shall be irrevocable, except that a plan described in
clause (i)(II) shall cease to be a multiemployer plan
as of the plan year beginning immediately after the
first plan year for which the majority of its employer
contributions were made or required to be made by
organizations that were not exempt from tax under
section 501 of the Internal Revenue Code of 1986.
(iv) The fact that a plan makes an election under
clause (i)(II) does not imply that the plan was not a
multiemployer plan prior to the date of the election or
would not be a multiemployer plan without regard to the
election.
(v)(I) No later than 30 days before an election is
made under this subparagraph, the plan administrator
shall provide notice of the pending election to each
plan participant and beneficiary, each labor
organization representing such participants or
beneficiaries, and each employer that has an obligation
to contribute to the plan, describing the principal
differences between the guarantee programs under title
IV and the benefit restrictions under this title for
single employer and multiemployer plans, along with
such other information as the plan administrator
chooses to include.
(II) Within 180 days after the date of enactment of
the Pension Protection Act of 2006, the Secretary shall
prescribe a model notice under this clause.
(III) A plan administrator's failure to provide the
notice required under this subparagraph shall be
treated for purposes of section 502(c)(2) as a failure
or refusal by the plan administrator to file the annual
report required to be filed with the Secretary under
section 101(b)(1).
(vi) A plan is described in this clause if it is a
plan sponsored by an organization which is described in
section 501(c)(5) of the Internal Revenue Code of 1986
and exempt from tax under section 501(a) of such Code
and which was established in Chicago, Illinois, on
August 12, 1881.
(vii) For purposes of this Act and the Internal Revenue Code
of 1986, a plan making an election under this subparagraph
shall be treated as maintained pursuant to a collective
bargaining agreement if a collective bargaining agreement,
expressly or otherwise, provides for or permits employer
contributions to the plan by one or more employers that are
signatory to such agreement, or participation in the plan by
one or more employees of an employer that is signatory to such
agreement, regardless of whether the plan was created,
established, or maintained for such employees by virtue of
another document that is not a collective bargaining agreement.
(38) The term ``investment manager'' means any fiduciary
(other than a trustee or named fiduciary, as defined in section
402(a)(2))--
(A) who has the power to manage, acquire, or dispose
of any asset of a plan;
(B) who (i) is registered as an investment adviser
under the Investment Advisers Act of 1940; (ii) is not
registered as an investment adviser under such Act by
reason of paragraph (1) of section 203A(a) of such Act,
is registered as an investment adviser under the laws
of the State (referred to in such paragraph (1)) in
which it maintains its principal office and place of
business, and, at the time the fiduciary last filed the
registration form most recently filed by the fiduciary
with such State in order to maintain the fiduciary's
registration under the laws of such State, also filed a
copy of such form with the Secretary; (iii) is a bank,
as defined in that Act; or (iv) is an insurance company
qualified to perform services described in subparagraph
(A) under the laws of more than one State; and
(C) has acknowledged in writing that he is a
fiduciary with respect to the plan.
(39) The terms ``plan year'' and ``fiscal year of the plan''
mean, with respect to a plan, the calendar, policy, or fiscal
year on which the records of the plan are kept.
(40)(A) The term ``multiple employer welfare arrangement''
means an employee welfare benefit plan, or any other
arrangement (other than an employee welfare benefit plan),
which is established or maintained for the purpose of offering
or providing any benefit described in paragraph (1) to the
employees of two or more employers (including one or more self-
employed individuals), or to their beneficiaries, except that
such term does not include any such plan or other arrangement
which is established or maintained--
(i) under or pursuant to one or more agreements which
the Secretary finds to be collective bargaining
agreements,
(ii) by a rural electric cooperative, or
(iii) by a rural telephone cooperative association.
(B) For purposes of this paragraph--
(i) two or more trades or businesses, whether or not
incorporated, shall be deemed a single employer if such
trades or businesses are within the same control group,
(ii) the term ``control group'' means a group of
trades or businesses under common control,
(iii) the determination of whether a trade or
business is under ``common control'' with another trade
or business shall be determined under regulations of
the Secretary applying principles similar to the
principles applied in determining whether employees of
two or more trades or businesses are treated as
employed by a single employer under section 4001(b),
except that, for purposes of this paragraph, common
control shall not be based on an interest of less than
25 percent,
(iv) the term ``rural electric cooperative'' means--
(I) any organization which is exempt from tax
under section 501(a) of the Internal Revenue
Code of 1986 and which is engaged primarily in
providing electric service on a mutual or
cooperative basis, and
(II) any organization described in paragraph
(4) or (6) of section 501(c) of the Internal
Revenue Code of 1986 which is exempt from tax
under section 501(a) of such Code and at least
80 percent of the members of which are
organizations described in subclause (I), and
(v) the term ``rural telephone cooperative
association'' means an organization described in
paragraph (4) or (6) of section 501(c) of the Internal
Revenue Code of 1986 which is exempt from tax under
section 501(a) of such Code and at least 80 percent of
the members of which are organizations engaged
primarily in providing telephone service to rural areas
of the United States on a mutual, cooperative, or other
basis.
(41) Single-employer plan.--The term ``single-employer plan''
means an employee benefit plan other than a multiemployer plan.
(41) The term ``single-employer plan'' means a plan which is
not a multiemployer plan.
(42) the term ``plan assets'' means plan assets as defined by
such regulations as the Secretary may prescribe, except that
under such regulations the assets of any entity shall not be
treated as plan assets if, immediately after the most recent
acquisition of any equity interest in the entity, less than 25
percent of the total value of each class of equity interest in
the entity is held by benefit plan investors. For purposes of
determinations pursuant to this paragraph, the value of any
equity interest held by a person (other than such a benefit
plan investor) who has discretionary authority or control with
respect to the assets of the entity or any person who provides
investment advice for a fee (direct or indirect) with respect
to such assets, or any affiliate of such a person, shall be
disregarded for purposes of calculating the 25 percent
threshold. An entity shall be considered to hold plan assets
only to the extent of the percentage of the equity interest
held by benefit plan investors. For purposes of this paragraph,
the term ``benefit plan investor'' means an employee benefit
plan subject to part 4, any plan to which section 4975 of the
Internal Revenue Code of 1986 applies, and any entity whose
underlying assets include plan assets by reason of a plan's
investment in such entity.
* * * * * * *
Subtitle B--Regulatory Provisions
* * * * * * *
Part 4--Fiduciary Responsibility
* * * * * * *
EXEMPTIONS FROM PROHIBITED TRANSACTIONS
Sec. 408. (a) The Secretary shall establish an exemption
procedure for purposes of this subsection. Pursuant to such
procedure, he may grant a conditional or unconditional
exemption of any fiduciary or transaction, or class of
fiduciaries or transactions, from all or part of the
restrictions imposed by sections 406 and 407(a). Action under
this subsection may be taken only after consultation and
coordination with the Secretary of the Treasury. An exemption
granted under this section shall not relieve a fiduciary from
any other applicable provision of this Act. The Secretary may
not grant an exemption under this subsection unless he finds
that such exemption is--
(1) administratively feasible,
(2) in the interests of the plan and of its
participants and beneficiaries, and
(3) protective of the rights of participants and
beneficiaries of such plan.
Before granting an exemption under this subsection from section
406(a) or 407(a), the Secretary shall publish notice in the
Federal Register of the pendency of the exemption, shall
require that adequate notice be given to interested persons,
and shall afford interested persons opportunity to present
views. The Secretary may not grant an exemption under this
subsection from section 406(b) unless he affords an opportunity
for a hearing and makes a determination on the record with
respect to the findings required by paragraphs (1), (2), and
(3) of this subsection.
(b) The prohibitions provided in section 406 shall not apply
to any of the following transactions:
(1) Any loans made by the plan to parties in interest
who are participants or beneficiaries of the plan if
such loans (A) are available to all such participants
and beneficiaries on a reasonably equivalent basis, (B)
are not made available to highly compensated employees
(within the meaning of section 414(q) of the Internal
Revenue Code of 1986) in an amount greater than the
amount made available to other employees, (C) are made
in accordance with specific provisions regarding such
loans set forth in the plan, (D) bear a reasonable rate
of interest, and (E) are adequately secured. A loan
made by a plan shall not fail to meet the requirements
of the preceding sentence by reason of a loan repayment
suspension described under section 414(u)(4) of the
Internal Revenue Code of 1986.
(2) Contracting or making reasonable arrangements
with a party in interest for office space, or legal,
accounting, or other services necessary for the
establishment or operation of the plan, if no more than
reasonable compensation is paid therefor.
(3) A loan to an employee stock ownership plan (as
defined in section 407(d)(6)), if--
(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and
(B) such loan is at an interest rate which is
not in excess of a reasonable rate.
If the plan gives collateral to a party in interest for
such loan, such collateral may consist only of
qualifying employer securities (as defined in section
407(d)(5)).
(4) The investment of all or part of a plan's assets
in deposits which bear a reasonable interest rate in a
bank or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such
bank or other institution and employees of
affiliates of such bank or other institution,
or
(B) such investment is expressly authorized
by a provision of the plan or by a fiduciary
(other than such bank or institution or
affiliate thereof) who is expressly empowered
by the plan to so instruct the trustee with
respect to such investment.
(5) Any contract for life insurance, health
insurance, or annuities with one or more insurers which
are qualified to do business in a State, if the plan
pays no more than adequate consideration, and if each
such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a party in interest which is wholly owned
(directly or indirectly) by the employer
maintaining the plan, or by any person which is
a party in interest with respect to the plan,
but only if the total premiums and annuity
considerations written by such insurers for
life insurance, health insurance, or annuities
for all plans (and their employers) with
respect to which such insurers are parties in
interest (not including premiums or annuity
considerations written by the employer
maintaining the plan) do not exceed 5 percent
of the total premiums and annuity
considerations written for all lines of
insurance in that year by such insurers (not
including premiums or annuity considerations
written by the employer maintaining the plan).
(6) The providing of any ancillary service by a bank
or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan, and if--
(A) such bank or similar financial
institution has adopted adequate internal
safeguards which assure that the providing of
such ancillary service is consistent with sound
banking and financial practice, as determined
by Federal or State supervisory authority, and
(B) the extent to which such ancillary
service is provided is subject to specific
guidelines issued by such bank or similar
financial institution (as determined by the
Secretary after consultation with Federal and
State supervisory authority), and adherence to
such guidelines would reasonably preclude such
bank or similar financial institution from
providing such ancillary service (i) in an
excessive or unreasonable manner, and (ii) in a
manner that would be inconsistent with the best
interests of participants and beneficiaries of
employee benefit plans.
Such ancillary services shall not be provided at more
than reasonable compensation.
(7) The exercise of a privilege to convert
securities, to the extent provided in regulations of
the Secretary, but only if the plan receives no less
than adequate consideration pursuant to such
conversion.
(8) Any transaction between a plan and (i) a common
or collective trust fund or pooled investment fund
maintained by a party in interest which is a bank or
trust company supervised by a State or Federal agency
or (ii) a pooled investment fund of an insurance
company qualified to do business in a State, if--
(A) the transaction is a sale or purchase of
an interest in the fund,
(B) the bank, trust company, or insurance
company receives not more than reasonable
compensation, and
(C) such transaction is expressly permitted
by the instrument under which the plan is
maintained, or by a fiduciary (other than the
bank, trust company, or insurance company, or
an affiliate thereof) who has authority to
manage and control the assets of the plan.
(9) The making by a fiduciary of a distribution of
the assets of the plan in accordance with the terms of
the plan if such assets are distributed in the same
manner as provided under section 4044 of this Act
(relating to allocation of assets).
(10) Any transaction required or permitted under part
1 of subtitle E of title IV.
(11) A merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231.
(12) The sale by a plan to a party in interest on or
after December 18, 1987, of any stock, if--
(A) the requirements of paragraphs (1) and
(2) of subsection (e) are met with respect to
such stock,
(B) on the later of the date on which the
stock was acquired by the plan, or January 1,
1975, such stock constituted a qualifying
employer security (as defined in section
407(d)(5) as then in effect), and
(C) such stock does not constitute a
qualifying employer security (as defined in
section 407(d)(5) as in effect at the time of
the sale).
(13) Any transfer made before January 1, 2026, of
excess pension assets from a defined benefit plan to a
retiree health account in a qualified transfer
permitted under section 420 of the Internal Revenue
Code of 1986 (as in effect on the date of the enactment
of the Surface Transportation and Veterans Health Care
Choice Improvement Act of 2015).
(14) Any transaction in connection with the provision
of investment advice described in section 3(21)(A)(ii)
to a participant or beneficiary of an individual
account plan that permits such participant or
beneficiary to direct the investment of assets in their
individual account, if--
(A) the transaction is--
(i) the provision of the investment
advice to the participant or
beneficiary of the plan with respect to
a security or other property available
as an investment under the plan,
(ii) the acquisition, holding, or
sale of a security or other property
available as an investment under the
plan pursuant to the investment advice,
or
(iii) the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser or an affiliate
thereof (or any employee, agent, or
registered representative of the
fiduciary adviser or affiliate) in
connection with the provision of the
advice or in connection with an
acquisition, holding, or sale of a
security or other property available as
an investment under the plan pursuant
to the investment advice; and
(B) the requirements of subsection (g) are
met.
(15)(A) Any transaction involving the purchase or
sale of securities, or other property (as determined by
the Secretary), between a plan and a party in interest
(other than a fiduciary described in section 3(21)(A))
with respect to a plan if--
(i) the transaction involves a block trade,
(ii) at the time of the transaction, the
interest of the plan (together with the
interests of any other plans maintained by the
same plan sponsor), does not exceed 10 percent
of the aggregate size of the block trade,
(iii) the terms of the transaction, including
the price, are at least as favorable to the
plan as an arm's length transaction, and
(iv) the compensation associated with the
purchase and sale is not greater than the
compensation associated with an arm's length
transaction with an unrelated party.
(B) For purposes of this paragraph, the term ``block
trade'' means any trade of at least 10,000 shares or
with a market value of at least $200,000 which will be
allocated across two or more unrelated client accounts
of a fiduciary.
(16) Any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary), between a plan and a party in interest if--
(A) the transaction is executed through an
electronic communication network, alternative
trading system, or similar execution system or
trading venue subject to regulation and
oversight by--
(i) the applicable Federal regulating
entity, or
(ii) such foreign regulatory entity
as the Secretary may determine by
regulation,
(B) either--
(i) the transaction is effected
pursuant to rules designed to match
purchases and sales at the best price
available through the execution system
in accordance with applicable rules of
the Securities and Exchange Commission
or other relevant governmental
authority, or
(ii) neither the execution system nor
the parties to the transaction take
into account the identity of the
parties in the execution of trades,
(C) the price and compensation associated
with the purchase and sale are not greater than
the price and compensation associated with an
arm's length transaction with an unrelated
party,
(D) if the party in interest has an ownership
interest in the system or venue described in
subparagraph (A), the system or venue has been
authorized by the plan sponsor or other
independent fiduciary for transactions
described in this paragraph, and
(E) not less than 30 days prior to the
initial transaction described in this paragraph
executed through any system or venue described
in subparagraph (A), a plan fiduciary is
provided written or electronic notice of the
execution of such transaction through such
system or venue.
(17)(A) Transactions described in subparagraphs (A),
(B), and (D) of section 406(a)(1) between a plan and a
person that is a party in interest other than a
fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the
investment of the plan assets involved in the
transaction or renders investment advice (within the
meaning of section 3(21)(A)(ii)) with respect to those
assets, solely by reason of providing services to the
plan or solely by reason of a relationship to such a
service provider described in subparagraph (F), (G),
(H), or (I) of section 3(14), or both, but only if in
connection with such transaction the plan receives no
less, nor pays no more, than adequate consideration.
(B) For purposes of this paragraph, the term
``adequate consideration'' means--
(i) in the case of a security for which there
is a generally recognized market--
(I) the price of the security
prevailing on a national securities
exchange which is registered under
section 6 of the Securities Exchange
Act of 1934, taking into account
factors such as the size of the
transaction and marketability of the
security, or
(II) if the security is not traded on
such a national securities exchange, a
price not less favorable to the plan
than the offering price for the
security as established by the current
bid and asked prices quoted by persons
independent of the issuer and of the
party in interest, taking into account
factors such as the size of the
transaction and marketability of the
security, and
(ii) in the case of an asset other than a
security for which there is a generally
recognized market, the fair market value of the
asset as determined in good faith by a
fiduciary or fiduciaries in accordance with
regulations prescribed by the Secretary.
(18) Foreign exchange transactions.--Any foreign
exchange transactions, between a bank or broker-dealer
(or any affiliate of either), and a plan (as defined in
section 3(3)) with respect to which such bank or
broker-dealer (or affiliate) is a trustee, custodian,
fiduciary, or other party in interest, if--
(A) the transaction is in connection with the
purchase, holding, or sale of securities or
other investment assets (other than a foreign
exchange transaction unrelated to any other
investment in securities or other investment
assets),
(B) at the time the foreign exchange
transaction is entered into, the terms of the
transaction are not less favorable to the plan
than the terms generally available in
comparable arm's length foreign exchange
transactions between unrelated parties, or the
terms afforded by the bank or broker-dealer (or
any affiliate of either) in comparable arm's-
length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or
broker-dealer (or affiliate) for a particular
foreign exchange transaction does not deviate
by more than 3 percent from the interbank bid
and asked rates for transactions of comparable
size and maturity at the time of the
transaction as displayed on an independent
service that reports rates of exchange in the
foreign currency market for such currency, and
(D) the bank or broker-dealer (or any
affiliate of either) does not have investment
discretion, or provide investment advice, with
respect to the transaction.
(19) Cross trading.--Any transaction described in
sections 406(a)(1)(A) and 406(b)(2) involving the
purchase and sale of a security between a plan and any
other account managed by the same investment manager,
if--
(A) the transaction is a purchase or sale,
for no consideration other than cash payment
against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the
independent current market price of the
security (within the meaning of section
270.17a-7(b) of title 17, Code of Federal
Regulations),
(C) no brokerage commission, fee (except for
customary transfer fees, the fact of which is
disclosed pursuant to subparagraph (D)), or
other remuneration is paid in connection with
the transaction,
(D) a fiduciary (other than the investment
manager engaging in the cross-trades or any
affiliate) for each plan participating in the
transaction authorizes in advance of any cross-
trades (in a document that is separate from any
other written agreement of the parties) the
investment manager to engage in cross trades at
the investment manager's discretion, after such
fiduciary has received disclosure regarding the
conditions under which cross trades may take
place (but only if such disclosure is separate
from any other agreement or disclosure
involving the asset management relationship),
including the written policies and procedures
of the investment manager described in
subparagraph (H),
(E) each plan participating in the
transaction has assets of at least
$100,000,000, except that if the assets of a
plan are invested in a master trust containing
the assets of plans maintained by employers in
the same controlled group (as defined in
section 407(d)(7)), the master trust has assets
of at least $100,000,000,
(F) the investment manager provides to the
plan fiduciary who authorized cross trading
under subparagraph (D) a quarterly report
detailing all cross trades executed by the
investment manager in which the plan
participated during such quarter, including the
following information, as applicable: (i) the
identity of each security bought or sold; (ii)
the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv)
trade price and the method used to establish
the trade price,
(G) the investment manager does not base its
fee schedule on the plan's consent to cross
trading, and no other service (other than the
investment opportunities and cost savings
available through a cross trade) is conditioned
on the plan's consent to cross trading,
(H) the investment manager has adopted, and
cross-trades are effected in accordance with,
written cross-trading policies and procedures
that are fair and equitable to all accounts
participating in the cross-trading program, and
that include a description of the manager's
pricing policies and procedures, and the
manager's policies and procedures for
allocating cross trades in an objective manner
among accounts participating in the cross-
trading program, and
(I) the investment manager has designated an
individual responsible for periodically
reviewing such purchases and sales to ensure
compliance with the written policies and
procedures described in subparagraph (H), and
following such review, the individual shall
issue an annual written report no later than 90
days following the period to which it relates
signed under penalty of perjury to the plan
fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed
during the course of the review, the level of
compliance, and any specific instances of non-
compliance.
The written report under subparagraph (I) shall also
notify the plan fiduciary of the plan's right to
terminate participation in the investment manager's
cross-trading program at any time.
(20)(A) Except as provided in subparagraphs (B) and
(C), a transaction described in section 406(a) in
connection with the acquisition, holding, or
disposition of any security or commodity, if the
transaction is corrected before the end of the
correction period.
(B) Subparagraph (A) does not apply to any
transaction between a plan and a plan sponsor or its
affiliates that involves the acquisition or sale of an
employer security (as defined in section 407(d)(1)) or
the acquisition, sale, or lease of employer real
property (as defined in section 407(d)(2)).
(C) In the case of any fiduciary or other party in
interest (or any other person knowingly participating
in such transaction), subparagraph (A) does not apply
to any transaction if, at the time the transaction
occurs, such fiduciary or party in interest (or other
person) knew (or reasonably should have known) that the
transaction would (without regard to this paragraph)
constitute a violation of section 406(a).
(D) For purposes of this paragraph, the term
``correction period'' means, in connection with a
fiduciary or party in interest (or other person
knowingly participating in the transaction), the 14-day
period beginning on the date on which such fiduciary or
party in interest (or other person) discovers, or
reasonably should have discovered, that the transaction
would (without regard to this paragraph) constitute a
violation of section 406(a).
(E) For purposes of this paragraph--
(i) The term ``security'' has the meaning
given such term by section 475(c)(2) of the
Internal Revenue Code of 1986 (without regard
to subparagraph (F)(iii) and the last sentence
thereof).
(ii) The term ``commodity'' has the meaning
given such term by section 475(e)(2) of such
Code (without regard to subparagraph (D)(iii)
thereof).
(iii) The term ``correct'' means, with
respect to a transaction--
(I) to undo the transaction to the
extent possible and in any case to make
good to the plan or affected account
any losses resulting from the
transaction, and
(II) to restore to the plan or
affected account any profits made
through the use of assets of the plan.
(21)(A) Any transaction, including a contract for
service, between a person providing investment advice
described in section 3(21)(A)(ii) and the advice
recipient in connection with such investment advice,
and any transaction consisting of the provision of such
investment advice, if the following conditions are
satisfied:
(i) No more than reasonable compensation is
paid (as determined under section 408(b)(2))
for such investment advice.
(ii) If the investment advice is based on a
limited range of investment options (which may
consist, in whole or in part, of proprietary
products), such limitations shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice in
the form of a notice that only states the
following: ``This recommendation is based on a
limited range of investment options, and the
same or similar investments may be available at
a different cost (greater or lesser) from other
sources.''.
(iii) If the investment advice may result in
variable compensation to the person providing
the investment advice (or any affiliate of such
person), the receipt of such compensation shall
be clearly disclosed to the advice recipient
prior to any transaction based on the
investment advice. For purposes of this
subparagraph, clear disclosure of variable
compensation shall include, in a manner
calculated to be understood by the average
individual, each of the following:
(I) A notice that states only the
following: ``This recommendation may
result in varying amounts of fees or
other compensation to the person
providing the recommendation (or its
affiliate), and the same or similar
investments may be available at a
different cost (greater or lesser) from
other sources.''. Any regulations or
administrative guidance implementing
this subclause may not require this
notice to be updated more than
annually.
(II) A description of any fee or
other compensation that is directly or
indirectly payable to the person (or
its affiliate) by the advice recipient
with respect to such transaction
(expressed as an amount, formula,
percentage of assets, per capita
charge, or estimate or range of such
compensation).
(III) A description of the types and
ranges of any compensation that may be
directly or indirectly payable to the
person (or its affiliate) by any third
party in connection with such
transaction (expressed as an amount,
formula, percentage of assets, per
capita charge, or estimate or range of
such compensation).
(IV) Upon request of the advice
recipient, a disclosure of the specific
amounts of compensation described in
clause (iii) that the person will
receive in connection with the
particular transaction (expressed as an
amount, formula, percentage of assets,
per capita charge, or estimate of such
compensation).
(B) No recommendation will fail to satisfy the
conditions described in clauses (i) through (iii) of
subparagraph (A) solely because the person, acting in
good faith and with reasonable diligence, makes an
error or omission in disclosing the information
specified in such clauses, provided that the person
discloses the correct information to the advice
recipient as soon as practicable, but not later than 30
days from the date on which the person knows of such
error or omission.
(C) Any notice provided pursuant to a requirement
under clause (ii) or clause (iii)(I) of subparagraph
(A) shall have no effect on any other notice otherwise
required without regard to this title, and shall be
provided in addition to, and not in lieu of, any other
such notice.
(D) For purposes of this paragraph, the term
``affiliate'' has the meaning given in subsection
(g)(11)(B).
(c) Nothing in section 406 shall be construed to prohibit any
fiduciary from--
(1) receiving any benefit to which he may be entitled
as a participant or beneficiary in the plan, so long as
the benefit is computed and paid on a basis which is
consistent with the terms of the plan as applied to all
other participants and beneficiaries;
(2) receiving any reasonable compensation for
services rendered, or for the reimbursement of expenses
properly and actually incurred, in the performance of
his duties with the plan; except that no person so
serving who already receives full time pay from an
employer or an association of employers, whose
employees are participants in the plan, or from an
employee organization whose members are participants in
such plan shall receive compensation from such plan,
except for reimbursement of expenses properly and
actually incurred; or
(3) serving as a fiduciary in addition to being an
officer, employee, agent, or other representative of a
party in interest.
(d)(1) Section 407(b) and subsections (b), (c), and (e) of
this section shall not apply to a transaction in which a plan
directly or indirectly--
(A) lends any part of the corpus or income of the
plan to,
(B) pays any compensation for personal services
rendered to the plan to, or
(C) acquires for the plan any property from, or sells
any property to,
any person who is with respect to the plan an owner-employee
(as defined in section 401(c)(3) of the Internal Revenue Code
of 1986), a member of the family (as defined in section
267(c)(4) of such Code) of any such owner-employee, or any
corporation in which any such owner-employee owns, directly or
indirectly, 50 percent or more of the total combined voting
power of all classes of stock entitled to vote or 50 percent or
more of the total value of shares of all classes of stock of
the corporation.
(2)(A) For purposes of paragraph (1), the following shall be
treated as owner-employees:
(i) A shareholder-employee.
(ii) A participant or beneficiary of an individual
retirement plan (as defined in section 7701(a)(37) of
the Internal Revenue Code of 1986).
(iii) An employer or association of employees which
establishes such an individual retirement plan under
section 408(c) of such Code.
(B) Paragraph (1)(C) shall not apply to a transaction which
consists of a sale of employer securities to an employee stock
ownership plan (as defined in section 407(d)(6)) by a
shareholder-employee, a member of the family (as defined in
section 267(c)(4) of such Code) of any such owner-employee, or
a corporation in which such a shareholder-employee owns stock
representing a 50 percent or greater interest described in
paragraph (1).
(C) For purposes of paragraph (1)(A), the term ``owner-
employee'' shall only include a person described in clause (ii)
or (iii) of subparagraph (A).
(3) For purposes of paragraph (2), the term ``shareholder-
employee'' means an employee or officer of an S corporation (as
defined in section 1361(a)(1) of such Code) who owns (or is
considered as owning within the meaning of section 318(a)(1) of
such Code) more than 5 percent of the outstanding stock of the
corporation on any day during the taxable year of such
corporation.
(e) Sections 406 and 407 shall not apply to the acquisition
or sale by a plan of qualifying employer securities (as defined
in section 407(d)(5)) or acquisition, sale or lease by a plan
of qualifying employer real property (as defined in section
407(d)(4))--
(1) if such acquisition, sale, or lease is for
adequate consideration (or in the case of a marketable
obligation, at a price not less favorable to the plan
than the price determined under section 407(e)(1)),
(2) if no commission is charged with respect thereto,
and
(3) if--
(A) the plan is an eligible individual
account plan (as defined in section 407(d)(3)),
or
(B) in the case of an acquisition or lease of
qualifying employer real property by a plan
which is not an eligible individual account
plan, or of an acquisition of qualifying
employer securities by such a plan, the lease
or acquisition is not prohibited by section
407(a).
(f) Section 406(b)(2) shall not apply to any merger or
transfer described in subsection (b)(11).
(g) Provision of Investment Advice to Participant and
Beneficiaries.--
(1) In general.--The prohibitions provided in section
406 shall not apply to transactions described in
subsection (b)(14) if the investment advice provided by
a fiduciary adviser is provided under an eligible
investment advice arrangement.
(2) Eligible investment advice arrangement.--For
purposes of this subsection, the term ``eligible
investment advice arrangement'' means an arrangement--
(A) 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 paragraph (3) in
connection with the provision of
investment advice by a fiduciary
adviser to a participant or
beneficiary, and
(B) with respect to which the requirements of
paragraph (4), (5), (6), (7), (8), and (9) are
met.
(3) Investment advice program using computer model.--
(A) In general.--An investment advice program
meets the requirements of this paragraph if the
requirements of subparagraphs (B), (C), and (D)
are met.
(B) Computer model.--The requirements of this
subparagraph are met if the investment advice
provided under the investment advice program is
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.
(C) Certification.--
(i) In general.--The requirements of
this subparagraph are met with respect
to any investment advice program if an
eligible investment expert certifies,
prior to the utilization of the
computer model and in accordance with
rules prescribed by the Secretary, that
the computer model meets the
requirements of subparagraph (B).
(ii) Renewal of certifications.--If,
as determined under regulations
prescribed by the Secretary, there are
material modifications to a computer
model, the requirements of this
subparagraph are met only if a
certification described in clause (i)
is obtained with respect to the
computer model as so modified.
(iii) Eligible investment expert.--
The term ``eligible investment expert''
means any person--
(I) which meets such
requirements as the Secretary
may provide, and
(II) does not bear any
material affiliation or
contractual relationship with
any investment adviser or a
related person thereof (or any
employee, agent, or registered
representative of the
investment adviser or related
person).
(D) Exclusivity of recommendation.--The
requirements of this subparagraph are met with
respect to any investment advice program if--
(i) the only investment advice
provided under the program is the
advice generated by the computer model
described in subparagraph (B), and
(ii) any transaction described in
subsection (b)(14)(A)(ii) occurs solely
at the direction of the participant or
beneficiary.
Nothing in the preceding sentence shall
preclude the participant or beneficiary from
requesting investment advice other than that
described in subparagraph (A), but only if such
request has not been solicited by any person
connected with carrying out the arrangement.
(4) Express authorization by separate fiduciary.--The
requirements of this paragraph are met with respect to
an arrangement if the arrangement is expressly
authorized by a plan fiduciary other than the person
offering the investment advice program, any person
providing investment options under the plan, or any
affiliate of either.
(5) Annual audit.--The requirements of this paragraph
are met if an independent auditor, who has appropriate
technical training or experience and proficiency and so
represents in writing--
(A) conducts an annual audit of the
arrangement for compliance with the
requirements of this subsection, and
(B) following completion of the annual audit,
issues a written report to the fiduciary who
authorized use of the arrangement which
presents its specific findings regarding
compliance of the arrangement with the
requirements of this subsection.
For purposes of this paragraph, an auditor is
considered independent if it is not related to the
person offering the arrangement to the plan and is not
related to any person providing investment options
under the plan.
(6) Disclosure.--The requirements of this paragraph
are met if--
(A) the fiduciary adviser provides to a
participant or a beneficiary before the initial
provision of the investment advice with regard
to any security or other property offered as an
investment option, a written notification
(which may consist of notification by means of
electronic communication)--
(i) of the role of any party that has
a material affiliation or contractual
relationship with the fiduciary adviser
in the development of the investment
advice program and in the selection of
investment options available under the
plan,
(ii) of the past performance and
historical rates of return of the
investment options available under the
plan,
(iii) 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,
(iv) of any material affiliation or
contractual relationship of the
fiduciary adviser or affiliates thereof
in the security or other property,
(v) the manner, and under what
circumstances, any participant or
beneficiary information provided under
the arrangement will be used or
disclosed,
(vi) of the types of services
provided by the fiduciary adviser in
connection with the provision of
investment advice by the fiduciary
adviser,
(vii) that the adviser is acting as a
fiduciary of the plan in connection
with the provision of the advice, and
(viii) that a recipient of the advice
may separately arrange for the
provision of advice by another adviser,
that could have no material affiliation
with and receive no fees or other
compensation in connection with the
security or other property, and
(B) at all times during the provision of
advisory services to the participant or
beneficiary, the fiduciary adviser--
(i) maintains the information
described in subparagraph (A) in
accurate form and in the manner
described in paragraph (8),
(ii) provides, without charge,
accurate information to the recipient
of the advice no less frequently than
annually,
(iii) provides, without charge,
accurate information to the recipient
of the advice upon request of the
recipient, and
(iv) provides, without charge,
accurate information to the recipient
of the advice concerning any material
change to the information required to
be provided to the recipient of the
advice at a time reasonably
contemporaneous to the change in
information.
(7) Other conditions.--The requirements of this
paragraph are met if--
(A) the fiduciary adviser provides
appropriate disclosure, in connection with the
sale, acquisition, or holding of the security
or other property, in accordance with all
applicable securities laws,
(B) the sale, acquisition, or holding occurs
solely at the direction of the recipient of the
advice,
(C) the compensation received by the
fiduciary adviser and affiliates thereof in
connection with the sale, acquisition, or
holding of the security or other property is
reasonable, and
(D) the terms of the sale, acquisition, or
holding of the security or other property are
at least as favorable to the plan as an arm's
length transaction would be.
(8) Standards for presentation of information.--
(A) In general.--The requirements of this
paragraph are met if the notification required
to be provided to participants and
beneficiaries under paragraph (6)(A) is written
in a clear and conspicuous manner and in a
manner calculated to be understood by the
average plan participant and is sufficiently
accurate and comprehensive to reasonably
apprise such participants and beneficiaries of
the information required to be provided in the
notification.
(B) Model form for disclosure of fees and
other compensation.--The Secretary shall issue
a model form for the disclosure of fees and
other compensation required in paragraph
(6)(A)(iii) which meets the requirements of
subparagraph (A).
(9) Maintenance for 6 years of evidence of
compliance.--The requirements of this paragraph are met
if a fiduciary adviser who has provided advice referred
to in paragraph (1) maintains, for a period of not less
than 6 years after the provision of the advice, any
records necessary for determining whether the
requirements of the preceding provisions of this
subsection and of subsection (b)(14) have been met. A
transaction prohibited under section 406 shall not be
considered to have occurred solely because the records
are lost or destroyed prior to the end of the 6-year
period due to circumstances beyond the control of the
fiduciary adviser.
(10) Exemption for plan sponsor and certain other
fiduciaries.--
(A) In general.--Subject to subparagraph (B),
a plan sponsor or other person who is a
fiduciary (other than a fiduciary adviser)
shall not be treated as failing to meet the
requirements of this part solely by reason of
the provision of investment advice referred to
in section 3(21)(A)(ii) (or solely by reason of
contracting for or otherwise arranging for the
provision of the advice), if--
(i) the advice is provided by a
fiduciary adviser pursuant to an
eligible investment advice arrangement
between the plan sponsor or other
fiduciary and the fiduciary adviser for
the provision by the fiduciary adviser
of investment advice referred to in
such section,
(ii) the terms of the eligible
investment advice arrangement require
compliance by the fiduciary adviser
with the requirements of this
subsection, and
(iii) the terms of the eligible
investment advice arrangement include a
written acknowledgment by the fiduciary
adviser that the fiduciary adviser is a
fiduciary of the plan with respect to
the provision of the advice.
(B) Continued duty of prudent selection of
adviser and periodic review.--Nothing in
subparagraph (A) shall be construed to exempt a
plan sponsor or other person who is a fiduciary
from any requirement of this part for the
prudent selection and periodic review of a
fiduciary adviser with whom the plan sponsor or
other person enters into an eligible investment
advice arrangement for the provision of
investment advice referred to in section
3(21)(A)(ii). The plan sponsor or other person
who is a fiduciary has no duty under this part
to monitor the specific investment advice given
by the fiduciary adviser to any particular
recipient of the advice.
(C) Availability of plan assets for payment
for advice.--Nothing in this part shall be
construed to preclude the use of plan assets to
pay for reasonable expenses in providing
investment advice referred to in section
3(21)(A)(ii).
(11) Definitions.--For purposes of this subsection
and subsection (b)(14)--
(A) Fiduciary adviser.--The term ``fiduciary
adviser'' means, with respect to a plan, a
person who is a fiduciary of the plan by reason
of the provision of investment advice referred
to in section 3(21)(A)(ii) by the person to a
participant or beneficiary of the plan and who
is--
(i) registered as an investment
adviser under the Investment Advisers
Act of 1940 (15 U.S.C. 80b-1 et seq.)
or under the laws of the State in which
the fiduciary maintains its principal
office and place of business,
(ii) a bank or similar financial
institution referred to in subsection
(b)(4) or a savings association (as
defined in section 3(b)(1) of the
Federal Deposit Insurance Act (12
U.S.C. 1813(b)(1)), but only if the
advice is provided through a trust
department of the bank or similar
financial institution or savings
association which is subject to
periodic examination and review by
Federal or State banking authorities,
(iii) an insurance company qualified
to do business under the laws of a
State,
(iv) a person registered as a broker
or dealer under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.),
(v) an affiliate of a person
described in any of clauses (i) through
(iv), or
(vi) an employee, agent, or
registered representative of a person
described in clauses (i) through (v)
who satisfies the requirements of
applicable insurance, banking, and
securities laws relating to the
provision of the advice.
For purposes of this part, a person who
develops the computer model described in
paragraph (3)(B) or markets the investment
advice program or computer model shall be
treated as a person who is a fiduciary of the
plan by reason of the provision of investment
advice referred to in section 3(21)(A)(ii) to a
participant or beneficiary and shall be treated
as a fiduciary adviser for purposes of this
subsection and subsection (b)(14), except that
the Secretary may prescribe rules under which
only 1 fiduciary adviser may elect to be
treated as a fiduciary with respect to the
plan.
(B) Affiliate.--The term ``affiliate'' of
another entity means an affiliated person of
the entity (as defined in section 2(a)(3) of
the Investment Company Act of 1940 (15 U.S.C.
80a-2(a)(3))).
(C) Registered representative.--The term
``registered representative'' of another entity
means a person described in section 3(a)(18) of
the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity for the
broker or dealer referred to in such section)
or a person described in section 202(a)(17) of
the Investment Advisers Act of 1940 (15 U.S.C.
80b-2(a)(17)) (substituting the entity for the
investment adviser referred to in such
section).
* * * * * * *
MINORITY VIEWS
After decades of hard work, many middle-class Americans
seek out financial advice on how to invest their retirement
nest egg. This is one of the biggest financial decisions they
will make in their lives. When making it, they often rely on
the financial advice they are given and implicitly trust that
it is in their best interest. Unfortunately, that's not always
the case. Loopholes in a decades-old regulation allow
unscrupulous advisors to provide ``conflicted advice'' and put
their financial interests ahead of their retirement clients'.
Conflicted advice costs retirement plan participants $17
billion in losses every year and could result in a loss of
almost a quarter of an individual's savings over a 35-year
period.\1\ Rather than taking steps to fix this problem, H.R.
4293 perpetuates this unacceptable status quo.
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\1\Council of Economic Advisors, The Effects of Conflicted
Investment Advice on Retirement Savings 17-18 (Feb. 2015); available
at: https://www.whitehouse.gov/sites/default/files/docs/
cea_coi_report_final.pdf.
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H.R. 4293 also includes an unnecessary, constitutionally-
suspect procedural mechanism that prohibits the Department of
Labor's (DOL's) final conflict of interest rule from taking
effect unless it is approved by Congress within 60 days. This
``affirmative approval'' process is similar to the one
enumerated in the Regulations from the Executive in Need of
Scrutiny (REINS) Act. The REINS Act is a central component of
the Republican-led Congress's hyper-partisan, anti-regulatory
agenda. The Coalition for Sensible Safeguards (CSS), an
alliance of over 150 labor, scientific, research, good
government, faith, community, health, environment, and public
interest groups, urged opposition to H.R. 4293 and another
bill, H.R. 4294, which is nearly identical to H.R. 4293. In
crafting a so-called alternative to the DOL's conflict of
interest rule, House Republicans decided to advance two
companion bills: H.R. 4293 amends the Employee Retirement
Income Security Act (ERISA; P.L. 93-406), which governs
retirement plans of private employers. H.R. 4294 amends the
Internal Revenue Code (IRC), which governs tax-favored
retirement savings such as Individual Retirement Accounts
(IRAs). The core provisions of both bills are nearly identical,
and the Education and Workforce Committee considered H.R. 4293
and H.R. 4294 during the same mark-up.
Many groups, including CSS, registered their opposition to
both bills. CSS cited H.R. 4293 and H.R. 4294's procedural
requirement as a ``threat to our democratic process.''\2\ In
its opposition letter, the CSS said using ``a REINS-like
mechanism to overturn this particular rule is unprecedented.
These bills' passage will only embolden radical members of both
chambers to attempt this scheme to derail other rules,
potentially jeopardizing crucial public health and safety and
environmental protections.''\3\
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\2\Coalition for Sensible Safeguards, ``Mark-up on H.R. 4293, the
Affordable Retirement Advice Protection Act and H.R. 4294,
Strengthening Access to Valuable Education and Retirement Support
Act,'' (Feb. 2016); available at: http://www.sensiblesafeguards.org/wp-
content/uploads/CSS-letter-on-H.R.-4293-4294-.pdf
\3\ Id.
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In addition to the CSS, a diverse stakeholder coalition
weighed in against H.R. 4293. That coalition includes: AARP,
AFL-CIO, Alliance for Retired Americans, American Federation of
State, County, and Municipal Employees (AFSCME), Association of
University Centers on Disabilities, Better Markets, Center for
Economic Justice, Center for Global Policy Solutions, Center
for Responsible Lending, The Committee for the Fiduciary
Standard, Consumer Action, Consumer Federation of America,
Consumers Union, Demos, Financial Planning Coalition,
International Association of Machinists and Aerospace Workers,
International Association of Sheet Metal, Air, Rail, and
Transportation Workers, International Brotherhood of Electrical
Workers, Leadership Conference on Civil and Human Rights, Main
Street Alliance, NAACP, National Active and Retired Federal
Employees Association (NARFE), National Committee to Preserve
Social Security and Medicare, National Consumers League,
National Council of La Raza, Pension Rights Center, Public
Citizen, Public Investors Arbitration Bar Association, Service
Employees International Union (SEIU), and U.S. PIRG.
H.R. 4293 ENABLES UNSCRUPULOUS ADVISORS TO CONTINUE TO EVADE FIDUCIARY
OBLIGATIONS AND PUT THEIR FINANCIAL INTERESTS AHEAD OF THEIR CLIENTS'
Enacted in 1974, ERISA describes the circumstances when a
person has a fiduciary obligation for rendering investment
advice.\4\ The DOL issued regulations in 1975 that further
defined such circumstances using a five-part test. Under the
regulations, to be held to ERISA's fiduciary standard with
respect to providing investment advice, an individual must: (1)
make recommendations on investing in, purchasing or selling
securities or other property, or give advice as to their value
(2) on a regular basis (3) pursuant to a mutual understanding
that the advice (4) will serve as a primary basis for
investment decisions, and (5) will be individualized to the
particular needs of the plan.\5\ Unless each of the five
elements of this test is satisfied for each time advice is
given, then an investment advisor is not treated as a
fiduciary.
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\4\29 U.S.C. 1002(21).
\5\29 C.F.R. 2510.3-21(c), 40 Fed. Reg. 50843 (Oct. 1975);
available at: http://www.gpo.gov/fdsys/pkg/CFR-2011-title29-vol9/pdf/
CFR-2011-title29-vol9-sec2510-3-21.pdf.
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This five-part test has not kept pace with the changed
retirement savings and planning landscape, and loopholes have
emerged that can be exploited. For instance, an unscrupulous
advisor providing individualized investment advice to a
retirement client about rolling over assets from an employer-
sponsored retirement plan--such as a 401(k)--to an IRA does not
have to abide by a fiduciary obligation. Neither does an
advisor who provides retirement savings advice on a one-time
basis. As a result of this deficient five-part test, certain
advisors are able to provide substandard advice and steer
retirement clients toward financial products with sky-high fees
that are not in their clients' best interest. Such products may
enrich the advisor yet insidiously erode the savings of workers
and retirees. To get away with this, so-called advisors can
insert boilerplate disclaimers in the fine print. As Secretary
Perez has correctly noted, ``the corrosive power of fine print
and buried fees can eat away like a chronic illness at a
person's savings.''\6\
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\6\Testimony of Secretary of Labor Thomas E. Perez before the
Health, Employment, Labor, and Pensions (HELP) Subcommittee of the
Education and Workforce Committee (June 2015); available at: http://
www.dol.gov/newsroom/congress/20150617_Perez.
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Recognizing that the existing regulation is broken and in
desperate need of reform, the DOL undertook a rulemaking effort
to revise the definition of who is a fiduciary under the
Employee Retirement Income Security Act (ERISA) as a result of
giving investment advice. H.R. 4293 represents a deeply flawed
response to the DOL's conflict of interest rulemaking effort.
Rather than closing loopholes in the existing regulation that
enable unscrupulous advisors to offer substandard retirement
savings advice to middle-class Americans, the bill codifies
them.
Specifically, to qualify as a fiduciary under the
provisions of H.R. 4293, investment advice must be rendered for
a fee pursuant to 1) ``written acknowledgement'' of the
fiduciary obligation; or 2) ``a mutual agreement, arrangement,
or understanding'' that it is ``individualized'' to the client
and the client ``intends to materially rely'' on the advice.
However, under H.R. 4293, financial advisors would be able
to continue to avoid their fiduciary obligations just by
providing a written disclaimer that says the following:
This information is not individualized to you, and
there is no intent for you to materially rely on this
information in making investment and management
decisions.
This language mirrors the kind of boilerplate disclaimer
currently used by certain firms and advisors to avoid fiduciary
obligations. While Committee Democrats believe disclosures and
disclaimers are no substitute for a meaningful, enforceable
fiduciary standard, there is also research to suggest that, on
their own, disclosures and disclaimers can be ineffective and
even detrimental to clients:
According to an industry association study, ``two-
thirds of Americans with defined contribution (DC) plans or
IRAs admit to spending less than five minutes examining their
retirement plan disclosures--one in five say they rarely or
never read the disclosure paperwork at all.''\7\
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\7\Life Insurance Management Research Association (LIMRA), ``Many
Americans Don't Fully Read Retirement Plan Disclosures; Few Know What
Fees they Pay,'' (August 2012); available at: http://www.limra.com/
Posts/PR/News _ Releases/LIMRA_Study_Many_Americans_
Don_t_Fully _Read_Retirement_Plan_Disclosures;_Few_Know_What_Fees
_They_Pay.aspx.
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Disclosures often fail to make clients aware of
the nature of their advisors' conflicts, let alone understand
the potential implications of such conflicts.\8\
---------------------------------------------------------------------------
\8\Department of Labor, ``Fiduciary Investment Advice, Regulatory
Impact Analysis,'' (April 2015); available at: http://www.dol.gov/ebsa/
pdf/conflictsofinterestria.pdf.
---------------------------------------------------------------------------
Disclosure of advisor conflicts can backfire since
clients can interpret disclosure of advisor conflicts as a sign
of honesty.\9\ In this case, disclosure may even be harmful to
workers and retirees seeking to invest their savings because
they could potentially create an illusion of fiduciary
protection.
---------------------------------------------------------------------------
\9\ Id.
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Committee Democrats believe H.R. 4293 includes two other
incredibly broad and ill-advised exemptions from fiduciary
responsibilities. According to the Financial Planning
Coalition, ``firms and advisors will be allowed to provide an
unlimited amount of advice to their clients, as long as they
provide disclosure in writing that they are only providing the
advice in a marketing or sales capacity' . . . In addition, the
bills allow for advisors to escape fiduciary duty by claiming
they made a good-faith' error in their disclosure to their
clients.''\10\
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\10\Financial Planning Coalition, ``H.R. 4293 and H.R. 4294 Would
Reduce Protections for Retirement Investors,'' (Jan. 2016); available
at: https://filemanager.capwiz.com/filemanager/file-mgr/cfp/
2016_01_29_HR_4294_and_4293_Would_Reduce_Protection_for_Retirement_Inves
tors.pdf.
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H.R. 4293 ESTABLISHES AN UNNECESSARY, CONSTITUTIONALLY-SUSPECT PROCESS
TO ENABLE THE REPUBLICAN-LED CONGRESS TO ASSERT VETO POWER OVER THE DOL
RULE
H.R. 4293 requires that Congress affirmatively approve the
DOL's final ``conflict of interest'' rule within 60 days after
the bill's enactment. If a bill or joint resolution is not
approved within 60 days, then H.R. 4293's provisions shall take
effect. The bill's ``affirmative approval'' requirement is akin
to the one specified in the REINS Act (H.R. 427). In July 2015,
the REINS Act was brought to the House floor for a vote. The
bill passed on a near party-line vote. Only 2 House Democrats
supported it.
Committee Democrats believe the bill's ``affirmative
approval'' mechanism is not necessary. Under the Congressional
Review Act (CRA), which was enacted as part of then-Speaker
Gingrich and House Republicans' so-called Contract with
America, Congress already possesses the authority to review and
nullify a rule. According to the Government Accountability
Office (GAO), the CRA ``gives Congress an opportunity to review
most rules before they take effect and to disapprove those
found to be too burdensome, excessive, inappropriate,
duplicative, or otherwise objectionable.''\11\
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\11\United States Government Accountability Office, Testimony
Before the Subcommittee on Commercial and Administrative Law, House
Committee on Judiciary, ``Perspectives of Years of Congressional Review
Act Implementation,'' (March 2006); available at: http://www.gao.gov/
new.items/d06601t.pdf.
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Additionally, Committee Democrats share the concerns that
have been raised about the potential constitutionality of the
bill's ``affirmative approval'' mechanism. After the
Immigration and Naturalization Service (INS) suspended a
particular deportation, the agency was overruled by the U.S.
House of Representatives under certain provisions of the
Immigration and Nationality Act. In INS v. Chadha, the Supreme
Court found this House veto to be unconstitutional because
Congress was taking a legislative action, which had to be
passed by both houses of Congress and presented to the
President for approval in order to satisfy the bicameralism and
presentment clauses of the U.S. Constitution.\12\
---------------------------------------------------------------------------
\12\INS v. Chadha, 462 U.S. 919 (1983).
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The ``affirmative approval'' mechanism in H.R. 4293 may run
afoul of the Court's decision in Chadha, as either the House or
Senate--acting alone--could reject or not act upon the bill or
joint resolution. Such an outcome may raise similar ``one House
legislative veto'' concerns that the Court ruled to be
unconstitutional in Chadha.
DEMOCRATIC MOTION AND AMENDMENT
Ranking Member Scott offered a motion to indefinitely
postpone the mark-up, asserting it was premature for the
Committee to consider H.R. 4293 and H.R. 4294 prior to the
DOL's finalization of the conflict of interest rule. The motion
failed on a voice vote.
Congresswoman Bonamici offered a substitute amendment to
H.R. 4293 to require the Congressional Budget Office (CBO) to
certify to Congress that the bills will prevent investment
advisors from putting their financial interests ahead of their
clients'. The amendment failed on a voice vote.
ROLL CALL VOTES ON FINAL PASSAGE
H.R. 4293 was reported by straight party-line votes of 22
ayes and 14 nays. No Democratic Committee Members voted in
favor of the bills.
CONCLUSION
Committee Democrats remain committed to responsible
solutions that help workers earn and collectively bargain for
decent wages, achieve a better balance between work and family
life, end workplace discrimination, and retire with security
and dignity. H.R. 4293 is not among these solutions.
Instead of reserving judgment on the DOL's final conflict
of interest rulemaking, the Majority rushed to mark-up these
deeply flawed, constitutionally-questionable bills. Committee
Democrats believe that we can do better. Workers and retirement
savers deserve better. They deserve fiduciary protections when
investing their hard-earned retirement savings; and,
regrettably, that's not what H.R. 4293 delivers.
For the reasons stated above, among others, Committee
Democrats unanimously opposed H.R. 4293 when the Committee on
Education and the Workforce considered them on February 2,
2016. We urge the full House of Representatives to do the same.
Robert C. ``Bobby'' Scott,
Ranking Member.
Joe Courtney.
Frederica S. Wilson.
Mark Pocan.
Raul M. Grijalva.
Mark DeSaulnier.
Susan A. Davis.
Jared Polis.
Alma S. Adams.
Marcia L. Fudge.
Mark Takano.
Hakeem S. Jeffries.
Suzanne Bonamici.
Ruben Hinojosa.
[all]