[Federal Register Volume 71, Number 232 (Monday, December 4, 2006)]
[Notices]
[Pages 70427-70429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-20401]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration


Prohibited Transaction Exemption for Provision of Investment 
Advice to Individual Retirement and Similar Plans

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Request for information.

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SUMMARY: Section 601 of the Pension Protection Act of 2006 (the PPA) 
(Pub. L. 109-280) amended section 408 of the Employee Retirement 
Security Act of 1974 (ERISA) and section 4975 of the Internal Revenue 
Code of 1986 (the Code) to add an exemption from certain prohibited 
transactions restrictions of ERISA and from certain taxes imposed by 
the Code for the provision of ``investment advice'' to participants and 
beneficiaries of covered employee benefit plans, and certain related 
transactions, if the investment advice is provided under an ``eligible 
investment advice arrangement.'' The exemption conditions relief upon 
satisfaction of a number of requirements more fully described in the 
statutory provisions. In particular, to be covered, the investment 
advice must be provided under an eligible investment advice arrangement 
that uses a computer model, which meets the requirements of the 
exemption. The purpose of this document is to solicit information from 
the public concerning the feasibility of the application of computer 
model investment advice programs for Individual Retirement Accounts and 
similar types of plans (hereinafter, IRAs).\1\ The PPA directs the 
Secretary of Labor, in consultation with the Secretary of the Treasury, 
to determine, based on the information received from the solicitation, 
whether there is any computer model investment advice program which may 
be utilized to provide investment advice to IRA beneficiaries.\2\
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    \1\ See PPA section 601(b)(3)(A)(i). These plans are: (A) An 
individual retirement account described in section 408(a) of the 
Code; (B) an individual retirement annuity described in section 
408(b) of the Code; (C) an Archer MSA described in section 220(d)of 
the Code; (D) a health savings account described in section 223(d) 
of the Code; (E) a Coverdell education savings account described in 
Code section 530; or (F) a trust, plan, account, or annuity which, 
at any time, has been determined by the Secretary of Treasury to be 
described in any preceding subparagraph of this paragraph [i.e., (A) 
through (E) above].
    \2\ Under Presidential Reorganization Plan No. 4 of 1978, 
effective December 31, 1978 [5 U.S.C. App. at 214 2000 ed.)], the 
authority of the Secretary of the Treasury to issue interpretations 
regarding section 4975 of the Code has been transferred, with 
certain exceptions not here relevant, to the Secretary of Labor and 
the Secretary of the Treasury is bound by the interpretations of the 
Secretary of Labor pursuant to such authority.

DATES: Written or electronic responses should be submitted to the 
Department of Labor on or before January 30, 2007.
    Responses: To facilitate the receipt and processing of responses, 
EBSA encourages interested persons to submit their responses 
electronically by e-mail to [email protected], or by using the Federal 
eRulemaking portal at www.regulations.gov (follow instructions for 
submission of comments). Persons submitting responses electronically 
are encouraged not to submit paper copies. Persons interested in 
submitting written responses on paper should send or deliver their 
responses (preferably, at least three copies) to the Office of 
Exemption Determinations, Employee Benefits Security Administration, 
Room N-5700, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210, Attention: IRA Investment Advice RFI. All written 
responses will be available to the public, without charge, online at 
www.regulations.gov and www.dol.gov/ebsa, and at the Public Disclosure 
Room, N-1513, Employee Benefits Security Administration, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210.

FOR FURTHER INFORMATION CONTACT: Christopher Motta or Brian Buyniski, 
Office of Exemption Determinations, Employee Benefits Security 
Administration, Room N-5700, U.S. Department of Labor, Washington, DC 
20210, telephone (202) 693-8540. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

    As a general matter, the provision of investment advice by a plan 
fiduciary as defined under section 3(21)(A) of ERISA to the plan would 
give rise to prohibited self-dealing under section 406(b)(1) of ERISA 
and section 4975(c)(1)(E) of the Internal Revenue Code of 1986 (the 
Code) if the fiduciary has an interest in the outcome of the advice 
which may affect its best judgment as a fiduciary (e.g., the fiduciary 
or its affiliate receives additional fees from investment options with 
respect to which advice is given).\3\ Section 601(a) of the Pension 
Protection Act of 2006 (PPA) amended ERISA by adding new sections 
408(b)(14) and 408(g). Section 408(b)(14) of ERISA provides conditional 
exemptive relief from the prohibitions of ERISA section 406 for certain 
transactions in connection with the provision of investment advice (as 
described by ERISA section 3(21)(A)(ii)) to a participant or 
beneficiary of an individual account plan, if the requirements of new 
section 408(g) are met.\4\
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    \3\ See ERISA section 406(b)(1) and Code section 4975(c)(1)(E).
    \4\ ERISA Section 3(21)(A)(ii) defines a ``fiduciary'' as 
including a person who renders investment advice for a fee or other 
compensation, direct or indirect, with respect to any moneys or 
other property of the plan.
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    Section 601(b) of the PPA similarly amended the Code by adding new 
Code sections 4975(d)(17) and 4975(f)(8). Section 4975(d)(17) of the 
Code provides conditional exemptive relief from the prohibitions 
described in section 4975(c) for certain transactions in connection 
with the provision of investment advice (as described in Code

[[Page 70428]]

section 4975(e)(3)(B)) \5\ to a participant or beneficiary of a plan, 
if the requirements of section 4975(f)(8) are met.
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    \5\ Code Section 4975(e)(3)(B) defines a ``fiduciary'' as 
including any person who renders investment advice for a fee or 
other compensation, direct or indirect, with respect to any moneys 
or other property of the plan.
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    Under section 4975(f)(8) of the Code, the investment advice must be 
provided by a fiduciary adviser pursuant to an ``eligible investment 
advice arrangement.'' The term ``eligible investment advice 
arrangement'' is defined in section 4975(f)(8)(B) to mean an 
arrangement which either: (1) Provides that any fees (including any 
commission or other compensation) received by the fiduciary adviser for 
investment advice or with respect to the sale, holding, or acquisition 
of any security or other property for purposes of investment of plan 
assets do not vary depending on the basis or any investment option 
selected, or (2) uses a computer model under an investment advice 
program meeting the requirements of section 4975(f)(8)(C) in connection 
with the provision of investment advice by a fiduciary adviser to a 
participant and beneficiary, and with respect to which the requirements 
of subparagraphs (D), (E), (F), (G), (H) and (I) of section (f)(8) are 
met.
    Under section 4975(f)(8)(C) of the Code, the computer model 
utilized by an investment advice program must: (1) Apply generally 
accepted investment theories that take into account the historic 
returns of different asset classes over defined periods of time; (2) 
utilize relevant information about the participant, which may include 
age, life expectancy, retirement age, risk tolerance, other assets or 
sources of income, and preferences as to certain types of investments; 
(3) utilize prescribed objective criteria to provide asset allocation 
portfolios comprised of investment options available under the plan; 
(4) operate in a manner that is not biased in favor of investments 
offered by the fiduciary adviser or a person with a material 
affiliation or contractual relationship with the fiduciary adviser; and 
(5) take into account all investment options under the plan in 
specifying how a participant's account balance should be invested and 
not be inappropriately weighted with respect to any investment option.
    The PPA restricts the use, under the exemption, of a computer model 
investment advice program to provide investment advice to an IRA (or 
similar plan (hereinafter, an IRA)) beneficiary.\6\ In this regard, 
section 601(b)(3)(C)(i)(I) of the PPA provides that a computer model 
investment advice program will not apply to an IRA unless and until the 
Secretary of Labor determines under section 601(b)(3)(B)or (D) of the 
PPA that there is a computer model investment advice program described 
in section 601(b)(3)(B) of the PPA. Section 601(b)(3)(A) requires that 
the Secretary of Labor, in consultation with the Secretary of the 
Treasury, solicit information as to the feasibility of the application 
of computer model investment programs for IRAs.\7\
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    \6\ This restriction does not affect the application of the 
exemption to an eligible investment advice arrangement that 
satisfies Code section 4975(f)(8)(B)(i)(I) (describing arrangement 
under which fees do not vary). Further, there is no comparable 
limitation with respect to sections 408(b)(14) and 408(g) of ERISA. 
In this regard, the Department notes that IRAs are generally not 
subject to the provisions of Title I of ERISA. See 29 CFR Sec. 
2510.3-2(d).
    \7\ In addition to soliciting information from the public in 
general, section 601(b)(3)(A)(i) of the PPA directs the Secretary of 
Labor to solicit information regarding the feasibility of the 
application of computer model investment advice programs from: (1) 
the ``top 50 trustees'' of IRAs and similar plans, determined on the 
basis of assets held by such trustees; and (2) other persons 
offering computer model investment advice programs based on non-
proprietary products.
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    Section 601(b)(3)(B) requires that the Secretary of Labor, in 
consultation with the Secretary of the Treasury, determine, based upon 
the information received from the solicitation, whether there is any 
computer model investment advice program which may be utilized to 
provide investment advice for IRA beneficiaries. Among other things, 
such computer model investment advice program for IRA beneficiaries 
must: (1) Utilize relevant information about the beneficiary, which may 
include age, life expectancy, retirement age, risk tolerance, other 
assets or sources of income, and preferences as to certain types of 
investments; (2) take into account the full range of investments, 
including equities and bonds, in determining the options for the 
investment portfolios of the beneficiary; and (3) allow the 
beneficiary, in directing the investment, sufficient flexibility in 
obtaining advice to evaluate and select investment options.\8\
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    \8\ See PPA section 601(b)(3)(B)(i)-(iii).
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    Upon completion of its determination, the Secretary of Labor shall 
report the results of such determination to the Committee on Ways and 
Means and the Committee on Education and the Workforce of the House of 
Representatives and the Committee on Finance and the Committee on 
Health, Education, Labor, and Pensions of the Senate no later than 
December 31, 2007.

B. Issues Under Consideration

Feasibility of Computer Model Investment Advice

    The Department is interested in comments regarding the feasibility 
of applying computer model investment advice programs for IRAs. The 
information received from the solicitation will assist the Department 
in making its required determination of feasibility under section 
601(b)(3)(B) of the PPA.\9\ A list of issues with respect to which 
comments are requested is included below. Responses on other issues 
pertinent to the Department's determination are also invited.
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    \9\ The Department notes that any determination made by the 
Department under section 601(b)(3)(B) of the PPA regarding the 
feasibility of the application of computer model investment advice 
programs for IRAs will not have any affect on existing individual or 
class exemptions that may provide relief for the provision of 
investment advice to IRA beneficiaries. In this regard, see 
Prohibited Transaction Class Exemption 84-24 (49 FR 13208 (Apr. 3, 
1984), as corrected at 49 FR 24819 (June 15, 1984), and amended at 
71 FR 5887 (Feb. 3, 2006)).
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Request for Information

    1. Are there computer model investment advice programs for the 
current year and preceding year that are, or may be, utilized to 
provide investment advice to beneficiaries of plans described in 
section 4975(e)(1)(B)-(F) (and so much of subparagraph (G) as relates 
to such subparagraphs) (hereinafter ``IRA'') of the Code which:
    (a) Apply generally accepted investment theories that take into 
account the historic returns of different asset classes over defined 
periods of time;
    (b) Utilize relevant information about the beneficiary, which may 
include age, life expectancy, retirement age, risk tolerance, other 
assets or sources of income, and preferences as to certain types of 
investments;
    (c) Operate in a manner that is not biased in favor of investments 
offered by the fiduciary adviser or a person with a material 
affiliation or contractual relationship with the fiduciary adviser;
    (d) Take into account the full range of investments, including 
equities and bonds, in determining the options for the investment 
portfolios of the beneficiary; and
    (e) Allow the beneficiary, in directing the investment, sufficient 
flexibility in obtaining advice to evaluate and select investment 
options.
    2. If currently available computer models do not satisfy all of the 
criteria described above, which criteria are presently not considered 
by such

[[Page 70429]]

computer models? Would it be possible to develop a model that satisfies 
all of the specified criteria? Which criteria would pose difficulties 
to developers and why?
    3. If there are any currently available computer model investment 
advice programs meeting the criteria described in Question 1 that may 
be utilized for providing investment advice to IRA beneficiaries, 
please provide a complete description of such programs and the extent 
to which they are available to IRA beneficiaries.
    4. With respect to any programs described in response to Question 
3, do any of such programs permit the IRA beneficiary to invest IRA 
assets in virtually any investment? If not, what are the difficulties, 
if any, in creating such a model?
    5. If computer model investment advice programs are not currently 
available to IRA beneficiaries that permit the investment of IRA assets 
in virtually any investment, are there computer model investment advice 
programs currently available to IRA beneficiaries that, by design or 
operation, limit the investments modeled by the computer program to a 
subset of the investment universe? If so, who is responsible for the 
development of such investment limitations and how are the limitations 
developed? Is there any flexibility on the part of an IRA beneficiary 
to modify the computer model to take into account his or her 
preferences? Are such computer model investment advice programs 
available to the beneficiaries of IRAs that are not maintained by the 
persons offering such programs?
    6. If you offer a computer model investment advice program based on 
nonproprietary investment products, do you make the program available 
to investment accounts maintained by you on behalf of IRA 
beneficiaries?
    7. What are the investment options considered by computer 
investment advice programs? What information on such options is needed? 
How is the information obtained and made part of the programs? Is the 
information publicly available or available to IRA beneficiaries?
    8. How should the Department or a third party evaluate a computer 
model investment advice program to determine whether a program 
satisfies the criteria described in Question 1 or any other similar 
criteria established to evaluate such programs?
    9. How do computer model investment advice programs present advice 
to IRA beneficiaries? How do such programs allow beneficiaries to 
refine, amend or override provided advice?

    Signed at Washington, DC, this 28th day of November 2006.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. E6-20401 Filed 12-1-06; 8:45 am]
BILLING CODE 4510-29-P