[Federal Register Volume 74, Number 12 (Wednesday, January 21, 2009)]
[Rules and Regulations]
[Pages 3822-3853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-710]



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Part III





Department of Labor





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 Employee Benefits Security Administration



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29 CFR Part 2550



Investment Advice--Participants and Beneficiaries; Final Rule

  Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / 
Rules and Regulations  

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB13


 Investment Advice--Participants and Beneficiaries

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Final rule.

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SUMMARY: This document contains final rules under the Employee 
Retirement Income Security Act, and parallel provisions in the Internal 
Revenue Code of 1986, relating to the provision of investment advice by 
a fiduciary adviser to participants and beneficiaries in participant-
directed individual account plans, such as 401(k) plans, and 
beneficiaries of individual retirement accounts (and certain similar 
plans). These rules affect sponsors, fiduciaries, participants and 
beneficiaries of participant-directed individual account plans, as well 
as providers of investment and investment advice-related services to 
such plans.

DATES: These final rules are effective on March 23, 2009.

FOR FURTHER INFORMATION CONTACT: Fred Wong, Office of Regulations and 
Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

A. Background

    Section 3(21)(A)(ii) of the Employee Retirement Income Security Act 
of 1974 (ERISA) and section 4975(e)(3)(B) of the Internal Revenue Code 
of 1986 (Code) include within the definition of ``fiduciary'' a person 
that renders investment advice for a fee or other compensation, direct 
or indirect, with respect to any moneys or other property of a plan, or 
has any authority or responsibility to do so.\1\ The prohibited 
transaction provisions of ERISA and the Code prohibit an investment 
advice fiduciary from using the authority, control or responsibility 
that makes it a fiduciary to cause itself, or a party in which it has 
an interest that may affect its best judgment as a fiduciary, to 
receive additional fees. As a result, in the absence of a statutory or 
administrative exemption, fiduciaries are prohibited from rendering 
investment advice to plan participants regarding investments that 
result in the payment of additional advisory and other fees to the 
fiduciaries or their affiliates. Section 4975 of the Code applies 
similarly to the rendering of investment advice by a fiduciary to an 
individual retirement account (IRA) beneficiary.
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    \1\ See also 29 CFR 2510.3-21(c) and 26 CFR 54.4975-9(c).
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    With the growth of participant-directed individual account plans, 
there has been an increasing recognition of the importance of 
investment advice to participants and beneficiaries in such plans. Over 
the past several years, the Department of Labor (Department) has issued 
various forms of guidance concerning when a person would be a fiduciary 
by reason of rendering investment advice and when the provision of 
investment advice might result in prohibited transactions.\2\ Most 
recently, Congress and the Administration, responding to the need to 
afford participants and beneficiaries greater access to professional 
investment advice, amended the prohibited transaction provisions of 
ERISA and the Code, as part of the Pension Protection Act of 2006 
(PPA),\3\ to permit a broader array of investment advice providers to 
offer their services to participants and beneficiaries responsible for 
investment of assets in their individual accounts and, accordingly, for 
the adequacy of their retirement savings.
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    \2\ See Interpretative Bulletin relating to participant 
investment education, 29 CFR 2509.96-1 (Interpretive Bulletin 96-1); 
Advisory Opinion (AO) 2005-10A (May 11, 2005); AO 2001-09A (December 
14, 2001); and AO 97-15A (May 22, 1997).
    \3\ Public Law 109-280, 120 Stat. 780 (Aug. 17, 2006).
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    Specifically, section 601 of the PPA added a statutory exemption 
under sections 408(b)(14) and 408(g) of ERISA. Parallel provisions were 
added to the Code at sections 4975(d)(17) and 4975(f)(8).\4\ Section 
408(b)(14) sets forth the investment advice-related transactions that 
will be exempt from the prohibitions of section 406 if the requirements 
of section 408(g) are met. The transactions described in section 
408(b)(14) are: The provision of investment advice to the participant 
or beneficiary with respect to a security or other property available 
as an investment under the plan; the acquisition, holding or sale of a 
security or other property available as an investment under the plan 
pursuant to the investment advice; and the direct or indirect receipt 
of compensation by a fiduciary adviser or affiliate in connection with 
the provision of investment advice or the acquisition, holding or sale 
of a security or other property available as an investment under the 
plan pursuant to the investment advice.
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    \4\ Under Reorganization Plan No. 4 of 1978 (43 FR 47713, Oct. 
17, 1978), 5 U.S.C. App. 1, 92 Stat. 3790, the authority of the 
Secretary of the Treasury to issue rulings under section 4975 of the 
Code has been transferred, with certain exceptions not here 
relevant, to the Secretary of Labor. Therefore, the references in 
this notice to specific sections of ERISA should be taken as 
referring also to the corresponding sections of the Code.
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    On December 4, 2006, the Department published a Request for 
Information (RFI) in the Federal Register soliciting information to 
assist the Department in the development of regulations under sections 
408(b)(14) and 408(g).\5\ Specifically, the Department invited 
interested persons to address the qualifications for the ``eligible 
investment expert'' that is required to certify that computer models 
used in connection with the statutory exemption meet the requirements 
of the statutory exemption. The Department also invited interested 
persons to provide information to assist the Department in developing 
procedures to be followed in certifying that a computer model meets the 
requirements of the statutory exemption. The Department also invited 
suggestions for a model disclosure form for purposes of the statutory 
exemption. In response to the RFI, the Department received 24 letters 
addressing a variety of issues presented by the statutory exemption. 
These comments were taken into account in developing the proposed 
regulations described below.
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    \5\ 71 FR 70429. The Department, on the same date, also 
published an RFI in the Federal Register soliciting information to 
assist the Department in determining, as required by PPA section 
601(b)(3), the feasibility of using computer models in connection 
with individual retirement accounts. 72 FR 70427.
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    On February 2, 2007, the Department issued Field Assistance 
Bulletin 2007-01 addressing certain issues presented by the new 
statutory exemption. This Bulletin affirmed that the enactment of 
sections 408(b)(14) and 408(g) did not invalidate or otherwise affect 
prior guidance of the Department relating to investment advice and that 
such guidance continues to represent the views of the Department.\6\ 
The Bulletin

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also confirmed the applicability of the principles set forth in section 
408(g)(10) [Exemption for plan sponsor and certain other fiduciaries] 
to plan sponsors and fiduciaries who offered investment advice 
arrangements with respect to which relief under the statutory exemption 
is not required. Finally, the Bulletin addressed the scope of the fee-
leveling requirement for purposes of an eligible investment advice 
arrangement described in section 408(g)(2)(A)(i).
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    \6\ In this regard, the Department cited the following: August 
3, 2006 Floor Statement of Senate Health, Education, Labor and 
Pensions Committee Chairman Enzi (who chaired the Conference 
Committee drafting legislation forming the basis of H.R. 4) 
regarding investment advice to participants in which he states, ``It 
was the goal and objective of the Members of the Conference to keep 
this advisory opinion [AO 2001-09A, SunAmerica Advisory Opinion] 
intact as well as other pre-existing advisory opinions granted by 
the Department. This legislation does not alter the current or 
future status of the plans and their many participants operating 
under these advisory opinions. Rather, the legislation builds upon 
these advisory opinions and provides alternative means for providing 
investment advice which is protective of the interests of plan 
participants and IRA owners.'' 152 Cong. Rec. S8,752 (daily ed. Aug. 
3, 2006) (statement of Sen. Enzi).
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    On August 22, 2008, the Department published in the Federal 
Register proposed regulations that would, upon adoption, implement the 
provisions of the statutory exemption for the provision of investment 
advice to participants and beneficiaries under sections 408(b)(14) and 
408(g) of the Act and the parallel provisions in the Code (73 FR 
49896). On the same date, the Department also published a proposed 
class exemption that, upon adoption, would establish alternative 
conditions for granting prohibited transaction relief in connection 
with the provision of investment advice, and thereby promote the broad 
availability of investment advice to both participants and 
beneficiaries in individual account plans and beneficiaries with 
individual retirement accounts (73 FR 49924). In response to these 
proposals, the Department received forty-three comment letters.
    On October 21, 2008, the Department held a public hearing at which 
interested members of the public were afforded an additional 
opportunity to present their views on the proposals. Eight 
organizations testified at the hearing.
    Set forth below is an overview of the final rules and an overview 
of the major comments received on the proposed rules and class 
exemption.

B. Overview of Final Sec.  2550.408g-1 and Public Comments

1. General

    As noted above, the Department published both a proposed regulation 
and a proposed class exemption pertaining to the furnishing of 
investment advice to participants and beneficiaries. In an effort to 
facilitate both use of and reference to the relief afforded by the 
statutory exemption and the class exemption, the Department has 
included both within a single final rule, discussed below. In this 
regard, a number of paragraph, subparagraph and other reference changes 
are reflected in the final rule to accommodate the merger of the two 
proposals, as well as other changes. The provisions applicable to the 
statutory exemption are set forth in paragraph (b) of the final rule 
and the provisions applicable to the class exemption are set forth at 
paragraph (d) of the final rule. In addition to the structural changes, 
the final rule, while retaining the general requirements and substance 
of the proposals, reflects a number of clarifying changes made in 
response to suggestions and concerns from commenters on the proposals. 
These suggestions and concerns are discussed below.
    Paragraph (a)(1) of the final rule describes the general scope of 
the final rule, referencing both the statutory exemption under sections 
408(b)(14) and 408(g)(1) of ERISA and sections 4975(d)(17) and 
4975(f)(8) of the Code for certain transactions in connection with the 
provision of investment advice, as set forth in paragraph (b) of the 
final rule, and the class exemption, issued pursuant to the 
Department's authority under section 408(a) of ERISA and section 
4975(c)(2) of the Code, for certain transactions not otherwise covered 
by the statutory exemption. In response to the concerns of some 
commenters that the conditions of the final rule might be construed as 
being applicable to all investment advice arrangements, without regard 
to whether the provision of advice pursuant to such arrangements 
involves prohibited transactions, paragraph (a)(1) makes clear that the 
requirements and conditions of the final rule apply solely for the 
relief described in the final rule and, accordingly, that no inferences 
should be drawn with respect to the requirements applicable to the 
provision of investment advice not addressed by the rule.
    Commenters also requested that the final rule make clear that 
nothing in the rule establishes an obligation on the part of plans or 
plan sponsors to provide investment advice. Other commenters requested 
that the Department reaffirm its view that neither the statutory 
exemption under section 408(g)(1) nor the regulations issued thereunder 
invalidate or otherwise affect prior guidance concerning the 
circumstances under which the provision of investment advice would not 
constitute a prohibited transaction. The Department addressed these 
concerns in paragraphs (a)(2) and (a)(3), respectively. Paragraph 
(a)(2) provides that nothing contained in ERISA section 408(g)(1), Code 
section 4975(f)(8), the regulation or the class exemption imposes an 
obligation on a plan fiduciary or any other party to offer, provide or 
otherwise make available any investment advice to a participant or 
beneficiary. Paragraph (a)(3) provides that nothing contained in those 
same provisions of ERISA and the Code, the regulation or the class 
exemption invalidates or otherwise affects prior regulations, 
exemptions, interpretive or other guidance issued by the Department 
pertaining to the provision of investment advice and the circumstances 
under which such advice may or may not constitute a prohibited 
transaction under section 406 of ERISA or section 4975 of the Code.\7\
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    \7\ See Field Assistance Bulletin 2007-1 (Feb. 2, 2007).
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    One commenter requested confirmation that the provision of 
investment advice pursuant to the final rule will not affect the relief 
accorded plan fiduciaries under section 404(c) of the Act. It is the 
view of the Department that there is nothing in the Act, Code, or this 
final rule that, in connection with the offering or provision of 
investment advice, would itself affect the availability of relief to 
plan sponsors or other fiduciaries of the plan (with the exception of 
the fiduciary advisers) otherwise available under section 404(c). The 
Department notes that, as explained in Field Assistance Bulletin 2007-
1, a plan sponsor or other fiduciary that prudently selects and 
monitors an investment advice provider will not be liable for the 
advice furnished by such provider to the plan's participants and 
beneficiaries, whether or not that advice is provided pursuant to the 
statutory exemption under section 408(b)(14).\8\ It is the view of the 
Department that section 404(c) and the Department's regulations 
thereunder do not limit the liability of fiduciary advisers that, 
pursuant to the exemptions contained in the final rule, specifically 
assume and acknowledge fiduciary responsibility for the provision of 
investment advice, within the meaning of section 3(21)(A)(ii) and the 
regulations issued thereunder, and related transactions; advice that 
clearly is intended to serve as the primary basis for investment 
decisions by plan participants and beneficiaries. Section 404(c) 
provides relief for acts which are the direct and necessary result of a 
participant's or beneficiary's exercise of control. The investment 
advice (and related transactions) covered by the exemption and 
furnished to participants and beneficiaries would not, in the 
Department's view, be the direct and necessary result of a 
participant's or

[[Page 3824]]

beneficiary's exercise of control and, accordingly, the fiduciary 
adviser would not be relieved of liability for such advice. See 
examples at paragraphs (f)(8) and (f)(9) of Sec.  2550.404c-1.
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    \8\ See section 408(g)(10) and Field Assistance Bulletin 2007-1 
for a discussion of a fiduciary's duty to prudently select and 
monitor investment advisers.
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2. Statutory Exemption

a. General
    Paragraph (b) of the final rule specifically addresses the 
statutory exemption and applicable conditions set forth in section 
408(g)(1) of the Act. Like the proposal, these provisions generally 
track the requirements under section 408(g)(1) that must be satisfied 
in order for the investment advice-related transactions described in 
section 408(b)(14) to be exempt from the prohibitions of section 406.
    Paragraph (b)(1) provides that for purposes of the relief afforded 
for transactions described in section 408(b)(14) (and section 
4975(d)(17) of the Code) the investment advice must be provided by a 
fiduciary adviser under an ``eligible investment advice arrangement.'' 
The transactions described in section 408(b)(14) include the provision 
of investment advice to a participant or beneficiary with respect to a 
security or other property available as an investment under the plan; 
the acquisition, holding or sale of a security or other property 
available as an investment under the plan pursuant to the advice; and 
the direct or indirect receipt of fees or other compensation by the 
fiduciary adviser or an affiliate in connection with the provision of 
the advice or in connection with the acquisition, holding or sale of 
the security or other property.
    With regard to the scope of relief, one commenter requested that 
the Department clarify that transactions covered by the regulation and 
the class exemption include extensions of credit and similar 
transactions necessary to the execution and settlement of trades of 
securities. It is the view of the Department that transactions in 
connection with the provision of investment advice described in section 
3(21)(A)(ii) of ERISA include, for purposes of the statutory exemption 
and class exemption, otherwise permissible transactions necessary for 
the efficient execution and settlement of trades of securities, such as 
extensions of credit in connection with settlements.
    One commenter requested that the relief afforded by the regulation 
and class exemption be extended to investment advice provided to plan 
sponsors generally. The Department notes that the transactions 
described in 408(b)(14), with respect to which relief is given if the 
requirements of section 408(g)(1) are satisfied, are specifically 
limited to certain transactions that involve the provision of 
investment advice to a participant or beneficiary of a plan. The scope 
of both the regulation and the related class exemption, therefore, were 
limited to these transactions. While advice provided to plan 
fiduciaries such as plan sponsors may well be similar in many respects 
to advice provided to participants and beneficiaries, the Department 
does not believe it would be appropriate, as part of this final rule, 
without further notice and comment, to extend relief to transactions 
involving investment advice provided to plan sponsors. Accordingly, the 
Department has not adopted this suggestion.
    One commenter requested that the Department confirm that advice to 
a participant or beneficiary concerning the selection of an investment 
manager to manage some or all of the participant's or beneficiary's 
assets constitutes the provision of investment advice within the 
meaning of section 3(21)(A)(ii) of ERISA for purposes of the statutory 
exemption and the class exemption. It has long been the view of the 
Department that the act of making individualized recommendations of 
particular investment managers to plan fiduciaries may constitute the 
provision of investment advice within the meaning of section 3(21)(A). 
The fiduciary nature of that advice does not, in the Department's view, 
change merely because the advice is being given to a plan participant 
or beneficiary. Accordingly, it is the view of the Department that the 
recommending of investment managers to participants and beneficiaries 
may constitute the provision of investment advice for purposes of both 
the statutory and class exemption contained in this final rule.
    Paragraph (b)(2) provides that, for purposes of section 408(g)(1) 
of the Act and 4975(f)(8) of the Code, an ``eligible investment advice 
arrangement'' is an arrangement that meets the requirements of 
paragraph (b)(3), applicable to arrangements that use fee-leveling, or 
paragraph (b)(4), applicable to arrangements that use computer models, 
or both.
b. Arrangements using fee-leveling
    Paragraph (b)(3) sets forth the requirements applicable to 
investment advice arrangements that use fee-leveling under the 
statutory exemption. Paragraph (b)(3)(i) delineates the specific 
requirements that must be met. In this regard, paragraph (b)(3)(i)(A) 
of the final rule, like the proposal, requires that any investment 
advice must be based on generally accepted investment theories that 
take into account historic returns of different asset classes over 
defined periods of time, noting that additional considerations are not 
precluded from being taking into account.
    One commenter recommended that the investment advice also take into 
account investment management and other fees attendant to the 
recommended investment(s). The Department agrees that the fees and 
expenses attendant to an investment are an important consideration and 
should be factored into individualized recommendations. Given the 
Department's various regulatory initiatives directed toward enhancing 
the consideration of investment-related fees and expenses by plan 
fiduciaries and plan participants and beneficiaries,\9\ the Department 
believes that it is reasonable to expect fiduciary advisers, as well as 
their computer models, to take such fees and expenses into account in 
providing investment advice to the plan participants and beneficiaries. 
The Department, therefore, has added a new provision, at paragraph 
(b)(3)(i)(B), requiring arrangements that utilize fee-leveling to take 
into account investment management and other fees and expenses 
attendant to the recommended investments. Similar changes appear in 
paragraph (b)(4)(i)(B) for arrangements that use computer models, and 
paragraph (d)(6)(i)(B), applicable to arrangements for providing advice 
under the class exemption.
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    \9\ See ``Fiduciary Requirements for Disclosure in Participant-
Directed Individual Account Plans,'' 73 FR 43013 (July 23, 2008) 
(proposed rule); ``Reasonable Contract or Arrangement under Section 
408(b)(2)--Fee Disclosure; Proposed Rule,'' 73 FR 70987 (Dec. 13, 
2007); and Notice of adoption of revisions to annual return/report 
forms, 72 FR 64731, 64788-794, 64824-28 (Nov. 16, 2007) (form and 
instructions for the Schedule C (From 5500), ``Service Provider 
Information'').
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    Paragraph (b)(3)(i)(C) of the final rule requires that arrangements 
utilizing fee-leveling must take into account certain personal 
information furnished by a participant or beneficiary. In the proposal, 
this information related to age, life expectancy, retirement age, risk 
tolerance, other assets or sources of income and investment 
preferences. The Department received a number of comments on this 
provision. Many of the commenters requested clarification that the 
delineated factors were not mandatory, some of the commenters noting 
that the fiduciary adviser may not have the information, participants 
may not be willing to give the information or the information they 
furnish may be incomplete. Other commenters recommended that the

[[Page 3825]]

information focus on ``time horizons'' rather than life expectancy or 
retirement age, noting the use of ``time horizons'' by the Financial 
Industry Regulatory Authority (FINRA) in its guidance on determining 
the suitability of a recommendation.
    For purposes of the final rule, the Department retained the factors 
delineated in the statute, section 408(g)(3)(B)(ii) of ERISA, as 
examples of the information investment advice should be capable of 
taking into account. The Department also has included in the final 
rule, as an additional factor, information pertaining to the 
participant's or beneficiary's current investments in designated 
investment options. The Department believes that these factors are so 
fundamental to meaningful investment advice, the Department is applying 
the personal information requirement to all advice provided under the 
statutory exemption and class exemption. However, the Department notes 
that the information is only required to be taken into account to the 
extent that a participant or beneficiary actually provides such 
information. There is no obligation, therefore, for a fiduciary adviser 
to factor in personal information that it does not have or that the 
participant or beneficiary fails or refuses to provide. Rather, the 
fiduciary adviser is merely required to request the personal 
information described in the final rule, and utilize such information 
only to the extent furnished. The Department has modified the text of 
the final rule to provide this clarification. The Department also has 
modified the language of the final rule to reference ``time horizons,'' 
and by parenthetical citation to life expectancy and retirement age as 
examples of such time horizons. Similar changes are reflected in 
paragraph (b)(4)(i)(C), for arrangements utilizing computer models, and 
paragraph (d)(6)(i)(C), applicable to arrangements for providing advice 
under the class exemption.
    Paragraphs (b)(3)(i)(D) and (E) of the final rule set forth the 
limitations on fees and compensation at the employee, agent and 
registered representative level and the fiduciary adviser level, 
respectively, applicable to arrangements utilizing fee-leveling under 
the statutory exemption. These limitations are unchanged from the 
proposal. Paragraph (b)(3)(i)(D) provides that any fees or other 
compensation (including salary, bonuses, awards, promotions, 
commissions or other things of value) received, directly or indirectly, 
by any employee, agent or registered representative that provides 
investment advice on behalf of a fiduciary adviser cannot vary 
depending on the basis of any investment option selected by a 
participant or beneficiary. Paragraph (b)(3)(i)(E) 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 may not vary depending on the basis of any 
investment option selected by a participant or beneficiary.
    While a number of commenters supported the Department's application 
of the fee-leveling requirement, some commenters objected to the 
Department's implementation of the statutory provision, arguing that 
Congress, in an effort to eliminate the potential for conflicts of 
interest, intended the fee-leveling requirement to encompass not only 
the fiduciary adviser but also affiliates of the fiduciary adviser. The 
Department disagrees with this interpretation of the section 
408(g)(2)(A)(i). Shortly after enactment of the PPA, the Department 
issued Field Assistance Bulletin 2007-1 (February 2, 2007) setting 
forth its legal analysis of the fee-leveling requirements in section 
408(g)(2)(A)(i) of the Act.
    In that Bulletin, the Department noted that it is clear from 
section 408(g)(2)(A)(i) that only the fees or other compensation of the 
fiduciary adviser may not vary. The Department explained that, in 
contrast to other provisions of section 408(b)(14) and section 408(g), 
section 408(g)(2)(A)(i) references only the fiduciary adviser, not the 
fiduciary adviser or an affiliate. Inasmuch as a person, pursuant to 
section 408(g)(11)(A), can be a fiduciary adviser only if that person 
is a fiduciary of the plan by virtue of providing investment advice, an 
affiliate of a registered investment adviser, a bank or similar 
financial institution, an insurance company, or a registered broker 
dealer will be subject to the varying fee limitation only if that 
affiliate is providing investment advice to plan participants and 
beneficiaries. The Department further explained that, consistent with 
earlier guidance in this area, if the fees and compensation received by 
an affiliate of a fiduciary that provides investment advice do not vary 
or are offset against those received by the fiduciary for the provision 
of investment advice, no prohibited transaction would result solely by 
reason of providing investment advice and thus there would be no need 
for a prohibited transaction exemption, such as provided under sections 
408(b)(14) and 408(g).\10\ The Department concluded that, for purposes 
of section 408(g)(2)(A)(i), Congress could not have intended for the 
requirement that fees not vary depending on the basis of any investment 
options selected to extend to affiliates of the fiduciary adviser, 
unless, of course, the affiliate is also a provider of investment 
advice to a plan. This position continues to reflect the Department's 
legal analysis of section 408(g)(2)(A)(i) and, therefore, is reflected 
in the fee-leveling provisions of the final regulation.
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    \10\ See AO 97-15A and AO 2005-10A.
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    With regard to those commenters concerned about potential conflicts 
of interest influencing the investment advice recommendations, the 
Department believes that, while there may always be a few individuals 
who, without regard to limitations imposed by law, abuse their position 
of trust as fiduciaries, the safeguards established by the regulation, 
as well as the class exemption, will, in the Department's view, remove 
many of the incentives and create strong deterrents for abusive 
behavior. In this regard, we note that, in addition to the specific 
fee-leveling limitations, fiduciary advisers utilizing investment 
advice arrangements that employ fee-leveling must comply with the 
requirements of paragraphs (b)(5) [authorization by plan fiduciary], 
(b)(6) [annual audits], (b)(7) [advance and annual disclosure], (b)(8) 
[other conditions], and (e) [maintenance of records] of the final rule, 
each of which is discussed in more detail below.
    A number of commenters had questions or requested clarification of 
the fee-leveling requirements applicable to employees, agents, or 
registered representatives that provide advice on behalf of a fiduciary 
adviser, now set forth in paragraph (b)(3)(i)(D) of the final rule. One 
commenter asked for examples of things of value that an employee, agent 
or representative might receive, directly or indirectly, that would 
violate the rule. Paragraph (b)(3)(i)(D), like the proposal, delineates 
a number of types of compensation that, if varied based on investment 
options selected by a participant or beneficiary, would violate the 
rule, namely salary, bonuses, awards, commissions, or other things of 
value. Things of value would include trips, gifts and other things that 
while having a value, are not given in the form of cash.
    A number of commenters requested confirmation that bonus programs 
based on the overall profitability of the fiduciary adviser or its 
affiliate, or a designated business unit within the adviser's business 
would not violate the

[[Page 3826]]

fee-leveling requirement. The application of the fee-leveling is 
intended to be very broad in order to ensure that objectivity of the 
investment advice recommendations to plan participants and 
beneficiaries is not compromised by the advice provider's own financial 
interest in the outcome. Accordingly, almost every form of remuneration 
that takes into account the investments selected by participants and 
beneficiaries would likely violate the fee-leveling requirement of the 
final rule. On the other hand, it is conceivable that a compensation or 
bonus arrangement that is based on the overall profitability of an 
organization may be permissible to the extent that it can be 
established that the individual account plan and IRA investment advice 
and investment option components were excluded from, or constituted a 
negligible portion of, the calculation of the organization's 
profitability. The Department believes, however, that whether any 
particular salary, bonus, awards, promotions or commissions program 
meets or fails this fee-leveling requirement ultimately depends on the 
details of the program. In this regard, the Department notes that the 
details of such programs will be the subject of both a review and a 
report by an independent auditor as a condition for relief under the 
statutory and class exemption.
c. Arrangements Using Computer Models
    As with the general requirements for arrangements using fee-
leveling, and like the proposal in most respects, the final rule 
requires that arrangements utilizing computer models satisfy certain 
basic requirements.\11\ These requirements include the application of 
generally accepted investment theories (paragraph (b)(4)(i)(A)), the 
consideration of investment management and other fees and expenses 
attendant to recommended investments (paragraph (b)(4)(i)(B)), and the 
utilization of certain participant-provided information (paragraph 
(b)(4)(i)(C)). The changes to these requirements were discussed in 
connection with the fee-leveling provisions of the regulation.
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    \11\ In general, these requirements track the requirements set 
forth in section 408(g)(3)(B) of the Act.
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    Other conditions imposed on computer models require that such 
models utilize objective criteria to provide asset allocation 
portfolios (paragraph (b)(4)(i)(D)) and avoid recommendations that 
inappropriately favor investments options offered by the fiduciary 
adviser or that may generate greater income for the fiduciary adviser 
or those with a material affiliation or material contractual 
relationship with the fiduciary adviser (paragraph (b)(4)(i)(E)).
    As with the proposal, the language of the final rule makes clear 
that a computer model would not fail to meet the requirements of 
paragraph (b)(4)(i)(E) merely because the only investment options 
offered under the plan are options offered by the fiduciary adviser or 
a person with a material affiliation or material contractual 
relationship with the fiduciary adviser. The language also makes clear 
that a computer model cannot be designed and operated to 
inappropriately favor those investment options that generate the most 
income for the fiduciary adviser or a person with a material 
affiliation or material contractual relationship with the fiduciary 
adviser. The final rule defines a ``material affiliation'' and 
``material contractual relationship'' at paragraphs (c)(6) and (c)(7), 
respectively.
    One commenter requested clarification that the provisions of 
paragraph (b)(4)(i)(E) would not be violated where an IRA beneficiary 
requests investment advice with the understanding that the computer 
model will be providing only hold or sell recommendations with respect 
to investment options not offered through the IRA. While the Department 
believes that computer models should, with few exceptions, be required 
to model all investment options available under a plan or through an 
IRA, the Department does not believe that it is reasonable to expect 
that all computer models be capable of modeling the universe of 
investment options, rather than just those investment alternatives 
designated as available investments through the plan or IRA. 
Accordingly, it is the view of the Department that a computer model 
would not fail to meet the requirements of paragraph (b)(4)(i)(E) 
merely because it limits buy recommendations only to those investment 
options that can be bought through the plan or IRA, even if the model 
is capable of modeling hold and sell recommendations with respect to 
investments not available through the plan or IRA, provided, of course, 
that the plan participant or beneficiary or IRA beneficiary is fully 
informed of the model's limitations in advance of the recommendations, 
thereby enabling the recipient of advice to assess the usefulness of 
the recommendations. This view would also extend to the requirements of 
the class exemption at paragraph (d)(3).
    Paragraph (b)(4)(i)(F)(1) of the final rule, like the proposal, 
requires that a computer model take into account all ``designated 
investment options'' available under the plan without giving 
inappropriate weight to any investment option.\12\ The term 
``designated investment option'' is defined in paragraph (c)(1) of the 
final rule to mean any investment option designated by the plan into 
which participants and beneficiaries may direct the investment of 
assets held in, or contributed to, their individual accounts. The term 
``designated investment option'' does not include ``brokerage 
windows,'' ``self-directed brokerage accounts,'' or similar plan 
arrangements that enable participants and beneficiaries to select 
investments beyond those designated by the plan.
---------------------------------------------------------------------------

    \12\ See section 408(g)(3)(B)(v) of the Act.
---------------------------------------------------------------------------

    Paragraph (b)(4)(i)(F)(2)(i) also, like the proposal, provides that 
a computer model shall not be treated as failing to take all designated 
investment options into account merely because it does not take into 
account an investment option that constitutes an investment primarily 
in qualifying employer securities. While most of the commenters on the 
proposal supported the exclusion of qualifying employer securities, 
some commenters requested clarification as to whether the computer 
model nonetheless had to factor in the holding of such investments by a 
participant or beneficiary, without regard to buy, sell or hold 
recommendations.
    It is the view of the Department that, absent a specific request 
from the participant or beneficiary to exclude such assets from the 
modeled investment advice, a computer model must take into account the 
fact that the participant or beneficiary has such an investment when 
giving advice with respect to the participant's or beneficiaries 
remaining assets or investments. If, on the other hand, a participant 
or beneficiary elects not to have such investments factored into the 
modeled advice or does not provide such information and the computer 
model does not have such information, the model would not be required 
to take such assets into account in providing a recommendation. This 
approach, in the Department's view, is consistent with the requirement 
set forth in paragraph (b)(4)(i)(C) of the final rule that computer 
models take into account other assets and investment preferences of the 
participant or beneficiary. One commenter requested that the exclusion 
for qualifying employer securities be expanded to apply to other single 
asset funds, such as funds invested in stock

[[Page 3827]]

of prior employers or a spin-off company. The commenter did not 
indicate other types of single asset funds, or the extent to which they 
are offered as designated investment options under plans. The 
Department does not believe it has sufficient information at this time 
to extend similar treatment to any such investments.
    Other commenters requested that computer models not be required to 
include, among other things, options from predecessor plans (referred 
to as ``legacy options''), managed accounts, target date funds, and in-
plan annuity options, which they described as annuity purchase programs 
that serve as both accumulation and distribution options. With respect 
to legacy options, it is the view of the Department that to the extent 
participants continue to have an ability to further invest in such 
options, the options must be included within the computer model. If, on 
the other hand, participants are merely permitted to hold and sell 
investments in such options, it is the view of the Department that, as 
discussed above with respect to qualifying employer securities, unless 
a participant specifically elects to not have such investments taken 
into account, the model should take into account that the participant 
holds such assets. Similar to the above, a computer model would not, in 
the view of the Department, fail to meet the requirements of paragraph 
(b)(4)(i)(F)(1) merely because it limits buy recommendations only to 
those investment options that can be bought through the plan, even 
though the model is capable of modeling hold and sell recommendations 
with respect to other investments.
    A few commenters noted that certain types of investment options, 
such as managed accounts, life cycle-type funds, and funds that are 
designed to manage assets taking into account a particular risk level 
for the participant, rely on an investment manager to maintain the 
asset allocation appropriate to its particular fund, product or service 
and, therefore, that it serves no purpose to have such investments 
included in another unrelated overlaying asset allocation analysis. The 
Department agrees that where an investment fund, product or service is 
itself designed to maintain a particular asset allocation taking into 
account the time horizons (retirement age, life expectancy) or risk 
level of a participant, such fund should not be required to be included 
in the computer modeled investment advice. Similarly, the Department 
believes that where, in connection with an in-plan annuity option, with 
respect to which a participant may allocate a portion of his or her 
assets toward the purchase of an annuitized retirement benefit and 
those allocated assets are no longer available for investment at the 
time of the advice, the participant or beneficiary has, in effect, 
decided to treat those assets as no longer available for investment 
and, accordingly, such assets should not, in the view of the 
Department, be required to be modeled for purposes of buy, hold or sell 
recommendations. On the other hand, when such options are available to 
participants and beneficiaries, the Department believes that 
participants and beneficiaries receiving modeled recommendations should 
at the same time be furnished a general description of these options 
and how they operate. This disclosure will assure that participants and 
beneficiaries have information concerning all of their investment 
choices, not merely those that can be modeled by a computer. This 
treatment is set forth in paragraphs (b)(4)(i)(F)(2)(ii) and (iii).
    Thus, under paragraph (b)(4)(i)(F)(2)(ii) of the final rule, a 
computer model will not fail to meet the requirements of the regulation 
merely because it does not make recommendations relating to the 
acquisition, holding or sale of an investment fund, product or service 
that allocates the invested assets of a participant or beneficiary to 
achieve varying degrees of long-term appreciation and capital 
preservation through equity and fixed income exposures, based on a 
defined time horizon (such as retirement age or life expectancy) or 
level of risk of the participant or beneficiary (e.g., life cycle-type 
funds).
    Similarly, paragraph (b)(4)(i)(F)(2)(iii) provides that a computer 
model will not fail merely because it does not make recommendations 
with respect to an annuity option with respect to which a participant 
or beneficiary may allocate assets toward the purchase of a stream of 
retirement income payments guaranteed by an insurance company.
    As noted above, however, the foregoing exceptions from the modeling 
requirement apply only if participants and beneficiaries are provided, 
contemporaneous with the provision of investment advice generated by 
the computer model, information explaining the funds, products or 
services, or in the case of an annuity, the option.
    Paragraph (b)(4)(ii) of the final rule, like the proposal, requires 
that, prior to utilization of the computer model, the fiduciary adviser 
must obtain a written certification that the computer model meets the 
requirements of paragraph (b)(4)(i), discussed above. If the model is 
modified in a manner that may affect its ability to meet the 
requirements of paragraph (b)(4)(i), the fiduciary adviser, prior to 
utilization of the modified model, must obtain a new certification. The 
required certification must be made by an ``eligible investment 
expert,'' within the meaning of paragraph (b)(4)(iii) and must be made 
in accordance with the requirements of paragraph (b)(4)(iv).
    Paragraph (b)(4)(iii) of the final rule, like the proposal, defines 
an ``eligible investment expert'' to mean a person that, through 
employees or otherwise, has the appropriate technical training or 
experience and proficiency to analyze, determine and certify, in a 
manner consistent with paragraph (b)(4)(iv), whether a computer model 
meets the requirements of paragraph (b)(4)(i); except that the term 
eligible investment expert does not include any person that has any 
material affiliation or material contractual relationship with the 
fiduciary adviser, with a person with a material affiliation or 
material contractual relationship with the fiduciary adviser, or with 
any employee, agent, or registered representative of the foregoing.
    One commenter requested that the Department provide examples of 
adequate credentials for an ``eligible investment expert.'' The 
Department continues to believe that it is very difficult to define a 
specific set of academic or other credentials that would serve to 
define the appropriate expertise and experience for an eligible 
investment expert. Unfortunately, for the same reason it is difficult 
to define specific credentials for an eligible investment expert, it is 
difficult to provide examples of the one or a set of credentials that 
in every case would qualify an individual to make the required 
certifications. The Department also is concerned that, even if an 
example were possible, such an example may encourage unnecessary and 
inappropriate reliance on the example as a person considered by the 
Department to possess the necessary qualifications. For this reason, 
the Department has not provided any examples of credentials for 
eligible investment experts.
    One commenter inquired whether the eligible investment expert is 
required to be bonded for purposes of section 412 of ERISA. In the view 
of the Department, an eligible investment expert, in performing the 
computer model certification described in the final rule, would neither 
be acting as a fiduciary under ERISA, nor be ``handling'' plan assets 
such that the

[[Page 3828]]

bonding requirements would be applicable to the eligible investment 
expert.
    One commenter requested confirmation that a fiduciary adviser's 
selection and payment of an eligible investment expert is not itself a 
per se prohibited transaction. It is the view of the Department that, 
given the structure of the statutory exemption under section 408(g)(1) 
and the expectation that a fiduciary adviser will obtain a 
certification from an eligible investment expert, the selection and 
payment of the fiduciary adviser is not a per se conflict, provided 
that the eligible investment expert has neither a material affiliation 
or material contractual relationship with the fiduciary adviser. 
Moreover, the Department has made clear that the selection of an 
eligible investment expert is a fiduciary act governed by section 
404(a)(1) of the Act. See paragraph (b)(4)(v). Similarly, the selection 
and payment of an auditor to conduct the audit required under the 
statutory exemption or class exemption would not constitute a per se 
conflict of interest. As noted in the preamble to the proposal, while 
the rule gives latitude to a fiduciary adviser in selecting an eligible 
investment expert to certify a computer model, as the party seeking 
prohibited transaction relief under the exemption, the fiduciary 
adviser has the burden of demonstrating that all applicable 
requirements of the exemption are satisfied with respect to its 
arrangement.
    Paragraph (b)(4)(iv) of the final rule provides that a 
certification by an eligible investment expert shall be in writing and 
contain the following: An identification of the methodology or 
methodologies applied in determining whether the computer model meets 
the requirements of paragraph (b)(4)(i) of the final rule; an 
explanation of how the applied methodology or methodologies 
demonstrated that the computer model met the requirements of paragraph 
(b)(4)(i); and a description of any limitations that were imposed by 
any person on the eligible investment expert's selection or application 
of methodologies for determining whether the computer model meets the 
requirements of paragraph (b)(4)(i). In addition the certification is 
required to contain a representation that the methodology or 
methodologies were applied by a person or persons with the educational 
background, technical training or experience necessary to analyze and 
determine whether the computer model meets the requirements of 
paragraph (b)(4)(i); and a statement certifying that the eligible 
investment expert has determined that the computer model meets the 
requirements of paragraph (b)(4)(i). Finally the certification must be 
signed by the eligible investment expert. The Department received no 
comments on this provision and, accordingly, has adopted the provision 
as proposed.
d. Authorization by a Plan Fiduciary
    Paragraph (b)(5) of the final rule, consistent with section 
408(g)(4) of ERISA, the proposed rule and proposed class exemption, 
provides that the arrangement pursuant to which investment advice is 
provided to participants and beneficiaries must be expressly authorized 
by a plan fiduciary (or, in the case of an IRA, the IRA beneficiary) 
other than: The person offering the arrangement; any person providing 
designated investment options under the plan; or any affiliate of 
either. The final rule, like the proposals, further provides that, for 
purposes of such authorization, an IRA beneficiary will not be treated 
as an affiliate of a person solely by reason of being an employee of 
such person, thereby enabling employees of a fiduciary adviser to take 
advantage of investment advice arrangements offered by their employer 
under the exemption.
    A number of commenters requested that the authorizing language of 
both the statutory exemption and class exemption be modified to permit 
a fiduciary adviser to provide investment advice for the adviser's own 
plan. The Department does not believe it is necessary or appropriate to 
limit a fiduciary adviser's employee's choice of investment advice 
providers to only competitors of the fiduciary adviser. Accordingly, 
the Department has modified the authorization provisions of the final 
regulation and class exemption to permit a fiduciary adviser to provide 
advice to its own employees (or employees of an affiliate) pursuant to 
an arrangement under the final rule, provided that the fiduciary 
adviser or affiliate offers the same arrangement to participants and 
beneficiaries of unaffiliated plans in the ordinary course of its 
business. (See paragraphs (b)(5)(ii) and (d)(5)(ii) of the final rule). 
The Department notes, however, that neither the statutory exemption nor 
the class exemption provides relief for the selection of the fiduciary 
adviser or the arrangement pursuant to which advice will be provided. 
Accordingly, plan fiduciaries must nonetheless be prudent in their 
selection and may not, in contravention of section 406(b), use their 
position to benefit themselves. In this regard, the Department has 
indicated that if a fiduciary provides services to a plan without the 
receipt of compensation or other consideration (other than 
reimbursement of direct expenses properly and actually incurred in the 
performance of such services) the provision of such services does not, 
in and of itself, constitute an act described in section 406(b) of the 
Act.\13\
---------------------------------------------------------------------------

    \13\ See 29 CFR 2550.408b-2(e)(3).
---------------------------------------------------------------------------

    One commenter requested a clarification that, for purposes of the 
authorization provision, a plan sponsor-fiduciary would not be treated 
as the person providing a designated investment option under the plan 
with respect to an option that is designed to invest in qualifying 
employer securities. The Department did not intend, nor does it believe 
Congress intended, to exclude employer-plan fiduciaries from 
authorizing investment advice arrangements solely because the plan for 
which the arrangement is being authorized offers participants the 
opportunity to invest in qualifying employer securities. The Department 
has added a provision to both the regulation and class exemption for 
purposes of such clarification (see paragraphs (b)(5)(iii) and 
(d)(5)(iii), respectively, of the final rule).
    One commenter asked for a clarification as to whether an 
authorizing plan fiduciary can rely on the representations of a 
fiduciary adviser with respect to whether a computer model meets the 
requirements of the regulation. Plan fiduciaries have an obligation to 
prudently select, and periodically review that selection, fiduciary 
advisers.\14\ In connection with an otherwise prudent and reasonable 
selection and review process, the Department believes that an 
authorizing plan fiduciary, in the absence of any information to the 
contrary, may rely on the representations of a fiduciary adviser 
regarding the fiduciary adviser's compliance with the requirements of 
this rule.
---------------------------------------------------------------------------

    \14\ See discussion in Field Assistance Bulletin 2007-01.
---------------------------------------------------------------------------

e. Annual Audit
    Paragraph (b)(6) of the final rule sets forth the annual audit 
requirements for the statutory exemption.\15\ Paragraph (b)(6)(i), like 
the proposal, provides that the fiduciary adviser shall, at least 
annually, engage an independent auditor, who has appropriate technical 
training or experience and proficiency, and so represents in writing to 
the fiduciary adviser, to conduct an audit of the investment advice 
arrangements for compliance with the requirements of the regulation 
and, within 60 days

[[Page 3829]]

following completion of the audit, to issue a written report to the 
fiduciary adviser and, except with respect to an arrangement with an 
IRA, to each fiduciary who authorized the use of the investment advice 
arrangement, setting forth the specific findings of the auditor 
regarding compliance of the arrangement with the requirements of the 
regulation.
---------------------------------------------------------------------------

    \15\ The audit provisions are set forth in section 408(g)(6) of 
ERISA.
---------------------------------------------------------------------------

    Given the significant number of reports that an auditor would be 
required to send if the written report was required to be furnished to 
all IRA beneficiaries, the Department framed an alternative requirement 
for investment advice arrangements with IRAs. This alternative is set 
forth in paragraph (b)(6)(ii) of the final rule. The final rule, like 
the proposal, provides that, with respect to an arrangement with an 
IRA, the fiduciary adviser shall, within 30 days following receipt of 
the report from the auditor, furnish a copy of the report to the IRA 
beneficiary or make such report available on its Web site, provided 
that such beneficiaries are provided information, along with other 
required disclosures (see paragraph (b)(7) of the final rule), 
concerning the purpose of the report, and how and where to locate the 
report applicable to their account. With respect to making the report 
available on a Web site, the Department believes that this alternative 
to furnishing reports to IRA beneficiaries satisfies the requirement of 
section 104(d)(1) of the Electronic Signatures in Global and National 
Commerce Act (E-SIGN) \16\ that any exemption from the consumer consent 
requirements of section 101(c) of E-SIGN must be necessary to eliminate 
a substantial burden on electronic commerce and will not increase the 
material risk of harm to consumers. The Department solicited comments 
on this finding in the proposal, and received no comments in response.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 7004(d)(1) (2000).
---------------------------------------------------------------------------

    Obtaining consent from each IRA holder or participant before 
publication on the Web site would be a tremendous burden on the plan or 
IRA provider. This element, along with the broad availability of 
internet access and the lack of any direct consequences to any 
particular participant for a failure to review the audit for the 
participants and beneficiaries, supports these findings.
    Paragraph (b)(6)(ii) of the final rule also provides, like the 
proposal, that, when the report of the auditor identifies noncompliance 
with the requirements of the regulation, the fiduciary adviser must 
send a copy of the report to the Department. The final rule, like the 
proposal, requires that the fiduciary adviser submit the report to the 
Department within 30 days following receipt of the report from the 
auditor. This report will enable the Department to monitor compliance 
with the statutory or class exemption.
    For purposes of paragraph (b)(6), an auditor is considered 
independent if it does not have a material affiliation or material 
contractual relationship with the person offering the investment advice 
arrangement to the plan or any designated investment options under the 
plan. See paragraph (b)(6)(iii). The terms ``material affiliation'' and 
``material contractual relationship'' are defined in paragraphs (c)(6) 
and (7) of the final rule, respectively.
    With regard to the scope of the audit, paragraph (b)(6)(iv) of the 
final rule provides that the auditor shall review sufficient relevant 
information to formulate an opinion as to whether the investment advice 
arrangements, and the advice provided pursuant thereto, offered by the 
fiduciary adviser during the audit period were in compliance with the 
regulation. Paragraph (b)(6)(iv) further provides that it is not 
intended to preclude an auditor from using information obtained by 
sampling, as reasonably determined appropriate by the auditor, 
investment advice arrangements, and the advice pursuant thereto, during 
the audit period. The final rule, like the proposal, does not require 
an audit of every investment advice arrangement at the plan or 
fiduciary adviser-level or of all the advice that is provided under the 
exemption. In general, the final rule appropriately leaves to the 
auditor the determination as to the appropriate scope of its review and 
the extent to which it can rely on representative samples for 
determining compliance with the exemption.
    While the audit provisions contained in the final rule are, with 
respect to both the statutory exemption and the class exemption, 
identical to the proposed audit requirements, the final rule does 
contain new provisions making clear that, like the selection of an 
eligible investment expert to certify a computer model, the selection 
of the required auditor, for purposes of both the statutory exemption 
and the class exemption, is a fiduciary act governed by section 
404(a)(1) of ERISA. See paragraphs (b)(6)(v) and (d)(9)(v) of the final 
rule.
    A number of commenters raised issues or requested clarifications 
regarding various aspects of the audit requirements.
    One commenter requested that the Department establish that the 
first annual audit required by the statutory exemption would not be 
required to be completed until the end of 2009. Inasmuch as the audit 
and other provisions of the regulation relating to the statutory 
exemption closely track the provisions of the statutory exemption, the 
Department is not persuaded that there is a basis for deferring the 
completion of any otherwise required annual audit until the end of 
2009. However, for purposes of any audits required to be completed 
prior to the effective date of the final rule, the auditor may take 
into account good faith compliance with the statute in the absence of 
regulatory guidance.
    One commenter requested that the Department should lessen the 
burden on small advisers by modifying the audit requirement by, for 
example, requiring an audit only every three years, rather than 
annually. It is the view of the Department that the audit requirements 
of both the statutory and class exemption are critical protections for 
participants and beneficiaries in investment advice arrangements with 
respect to which there is a possibility that an adviser may act in its 
own self-interest rather than the interest of the plan's participants 
and beneficiaries. No information or data has been furnished to the 
Department that would support a finding that this risk to participants 
and beneficiaries is any less from small advisers than large adviser. 
Thus, the Department has no basis on which to determine what, if any, 
special relief should be afforded small advisers. The final rule, 
therefore, contains no special provisions for small advisers.
    Another commenter suggested that rather than furnishing copies of 
the audit report to authorizing fiduciaries and IRA beneficiaries, 
fiduciary advisers should be required to inform the parties of the 
availability of the reports and furnish such reports only in response 
to requests. The Department did not adopt this suggestion. The 
Department believes that, as with the audit, the reports of the auditor 
are important and should be furnished to each authorizing plan 
fiduciary. On the other hand, the Department recognizes that, in the 
case of IRAs, furnishing a report to every IRA beneficiary may be 
unduly burdensome and expensive, and, accordingly, provided a special 
rule that permits the making available of the report on the fiduciary 
adviser's Web site.
    One commenter requested that fiduciary advisers have an additional 
30 days to furnish the audit report to the authorizing plan 
fiduciaries. Another commenter requested that the final rule provide 60 
days for the furnishing of IRA-related audit reports. The Department 
did not adopt these

[[Page 3830]]

suggestions. The Department notes, however, that the 60-day period 
referenced in paragraphs (b)(6)(i)(B) and (d)(9)(i)(B) of the final 
rule is the period following completion of the audit during which the 
auditor is required to furnish its report to the fiduciary adviser and, 
with the exception of an arrangement with an IRA, to each authorizing 
fiduciary. The exception for arrangements with IRAs serves to relieve 
the auditor from furnishing reports to the authorizing IRA 
beneficiaries. Paragraphs (b)(6)(ii)(A) and (d)(9)(ii)(A) of the final 
rule, applicable to arrangements with IRAs, place the obligation to 
furnish the auditor's report on the fiduciary adviser and, in that 
regard, require that the fiduciary adviser furnish the report or make 
it available on its Web site within 30 days following receipt of the 
report from the auditor. The Department did not receive any information 
or data that would indicate that the aforementioned time frames 
afforded the auditor and the fiduciary adviser are inadequate.
    With regard to the qualifications of an auditor, one commenter 
recommended that the auditor should be treated as a fiduciary. Other 
commenters requested clarification that the audit is not required to be 
conducted by an accountant or a lawyer. Another commenter requested 
clarification as to the credentials necessary to conduct an audit. As 
with the requirements for an ``eligible investment expert,'' the 
Department does not believe that there is necessarily one set of 
credentials, such as certified public accountant, auditor, or lawyer, 
that is required or, conversely, by themselves qualifies an individual 
to conduct the required audits. In addition to any licenses, 
certifications or other evidence of professional or technical training, 
a fiduciary adviser will want to consider the relevance of that 
training to the required audit, as well as the individual or 
organization's experience and proficiency in conducting similar types 
of audits. In this regard, it is the view of the Department that the 
selection of an auditor is a fiduciary act and, therefore, must be 
carried out in a manner consistent with the prudence requirements of 
section 404(a)(1), taking into account the nature and scope of the 
audit and the expertise and experience necessary to conduct such an 
audit. The Department also notes that, in its view, the performance of 
an audit under the final rule would not, by itself, cause an auditor to 
be a fiduciary under ERISA.
    A number of comments requested clarification of the scope of the 
audit, as now set forth in paragraphs (b)(6)(iv) and (d)(9)(iv) of the 
final rule. In this regard, commenters requested clarification that the 
permissible sampling of audits would be conducted at the fiduciary 
adviser level and not the plan level, such that a sampling of each 
plan's or IRA's transactions would not have to be audited. One 
commenter requested clarification as to whether the audit could be 
performed by a review of the audits conducted by the fiduciary 
adviser's own personnel. As discussed above, the audit provisions of 
the final rule require that the auditor review sufficient information 
to formulate an opinion as to whether the investment advice 
arrangements, and the advice provided pursuant thereto, are in 
compliance with the final rule. In the case of the class exemption, the 
auditor is further required to review compliance with the fiduciary 
adviser's policies and procedures, adopted in accordance with paragraph 
(d)(7), designed to assure compliance with the exemption's 
requirements. Accordingly, the precise nature and scope of the audit, 
as well as how it is conducted, is to be determined by the auditor. The 
Department does note, however, that nothing in these provisions 
precludes the auditor from using sampling, as determined reasonably 
appropriate by the auditor, of investment advice arrangements and 
investment advice.
    While the Department believes that internal audits conducted by the 
personnel of a fiduciary adviser are important to reducing the risks of 
noncompliance with the conditions of the final rule, the Department 
does not believe that it would be appropriate for an auditor to limit, 
in any way, the scope of its audit based on such audits. Moreover, in 
the view of the Department, the fiduciary adviser has a fiduciary duty 
in selecting and monitoring an auditor to ensure that the required 
audits are complete and fully independent of any audits conducted 
internally by personnel of the fiduciary adviser. The Department notes, 
however, that there is nothing in the final rule that would preclude 
the independent auditor from working with the fiduciary adviser to 
establish policies and procedures designed to enhance or ensure 
compliance with the requirements of the statutory or class exemption, 
provided that determinations of compliance with the statutory and class 
exemption can be made without regard to such services.
    Some commenters asked for a clarification of the ``independence'' 
requirements applicable to the auditor. Paragraphs (b)(6)(iii) and 
(d)(9)(iii) of the final rule provide that an auditor is considered 
independent if it does not have a material affiliation or material 
contractual relationship with the fiduciary adviser or any person 
offering designated investment options.
    One commenter requested clarification that independence would not 
be lost merely because the auditor performs other services for the 
fiduciary adviser or its affiliates, such as performing audits or 
certifying computer models, as an eligible investment expert. In 
defining the term ``material contractual relationship,'' the Department 
contemplated that there may be instances in which an auditor might be 
performing other services for a fiduciary adviser or affiliates. While 
one commenter recommended that the definition of material contractual 
relationship be revised to preclude receipt of any compensation, the 
Department believes that the 10% test set forth in paragraph (c)(7) of 
the final rule, defining ``material contractual relationship,'' is 
sufficient to minimize any influence on the part of the fiduciary 
adviser that would serve to compromise the independence of the auditor. 
Accordingly, the Department has not changed the final rule in this 
regard.
    A number of commenters expressed concern about the requirement, now 
at paragraphs (b)(6)(ii)(B) and (d)(9)(ii)(B) of the final rule, that, 
in the case of arrangements involving IRAs, the fiduciary adviser must 
send a copy of the auditor's report to the Department if that report 
identifies instances of noncompliance. Some commenters recommended that 
reports only be required to be filed with the Department when there is 
``material'' noncompliance, other commenters recommended that fiduciary 
advisers be afforded a period within which to self-correct prior to the 
reporting of noncompliance. As explained in the preamble to the 
proposal, this filing requirement will enable the Department to monitor 
compliance with the exemptions in those instances where there is no 
authorizing ERISA plan fiduciary to carry out that function. While the 
Department recognizes that not every instance of noncompliance would, 
itself, affect the quality of the advice provided, the Department also 
believes that, given the overall significance of the audit as a 
protection for participants and beneficiaries, all reports that 
identify noncompliance in this area should be furnished to the 
Department for review, thereby, leaving to the Department the 
opportunity to evaluate the significance of the noncompliance, the 
function that an authorizing plan fiduciary would carry out for its 
plan. Accordingly, the

[[Page 3831]]

Department is adopting the filing requirement as proposed.
f. Disclosure
    The disclosure provisions are set forth in paragraph (b)(7) of the 
final rule as they relate to the statutory exemption and paragraph 
(d)(8) as they relate to the class exemption. In general, the 
disclosure requirements for both the statutory and class exemption are 
identical,\17\ and the provisions of the final rule, like the proposal, 
track the requirements set forth in section 408(g)(6) of ERISA.
---------------------------------------------------------------------------

    \17\ See paragraph (d)(8)(i)(C) that incorporates in the class 
exemption compliance with the disclosure requirements under the 
statutory exemption provisions as set forth in paragraphs 
(b)(7)(i)(A) through (E), (G) and (H).
---------------------------------------------------------------------------

    The final rule, at paragraphs (b)(7)(i) and (d)(8)(i), generally 
requires that the fiduciary adviser provide to participants and 
beneficiaries, prior to the initial provision of investment advice with 
regard to any security or other property offered as an investment 
option, a written notification describing: The role of any party that 
has a material affiliation or material contractual relationship with 
the fiduciary adviser in the development of, in the case of the 
statutory exemption, the investment advice program or, in the case of 
the class exemption, if applicable, the computer model or materials 
described in paragraph (d)(3)(i) or (ii) of the final rule, and in the 
selection of investment options available under the plan; the past 
performance and historical rates of return of the designated investment 
options available under the plan, to the extent that such information 
is not otherwise provided; 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 
pursuant to such advice; and any material affiliation or material 
contractual relationship of the fiduciary adviser or affiliates thereof 
in the security or other property.
    The notification to participants and beneficiaries also is required 
to explain: The manner, and under what circumstances, any participant 
or beneficiary information provided under the arrangement will be used 
or disclosed; the types of services provided by the fiduciary adviser 
in connection with the provision of investment advice by the fiduciary 
adviser, including, with respect to an arrangement utilizing a computer 
model, any limitations on the ability of the model to take into account 
an investment primarily in qualifying employer securities; that the 
adviser is acting as a fiduciary of the plan in connection with the 
provision of the advice; and 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.
    Paragraphs (b)(7)(ii)(A) and (d)(8)(ii)(A) of the final rule 
require that the notification furnished to participants and 
beneficiaries must be written in a clear and conspicuous manner and in 
a manner calculated to be understood by the average plan participant 
and must be sufficiently accurate and comprehensive to reasonably 
apprise such participants and beneficiaries of the information required 
to be provided in the notification.
    Paragraphs (b)(7)(ii)(B) and (d)(8)(ii)(B) of the final rule 
reference the availability of a model disclosure form in the appendix 
to the final rule. As with the proposals, the model disclosure form may 
be used for purposes of satisfying the requirements set forth in 
paragraphs (b)(7)(i)(C) and (d)(8)(i), as well as the requirements of 
paragraphs (b)(7)(ii)(A) and (d)(8)(ii)(A) of the final rule. The final 
rule, like the proposals, makes clear, however, that the use of the 
model disclosure form is not mandatory. In response to several comments 
addressing the general readability of the model form, the Department 
has made minor changes to the form's organization and language.
    Other commenters also made specific suggestions regarding the 
content of the model disclosure form. Four commenters made suggestions 
relating to the disclosure of fiduciary adviser cross-selling 
practices, such as fees received by an adviser in connection with 
rollovers to IRAs. As discussed below, given the potential for abuse in 
this area, the text of the final rule has been modified to require the 
disclosure of all fees or other compensation that a fiduciary adviser 
or any affiliate might receive in connection with any rollover or other 
distribution of plan assets or the investment of distributed assets. 
Language has been added to the model form to reflect this disclosure 
requirement.
    Commenters presented a number of issues concerning the timing and 
content of the proposed disclosure requirements. With regard to the 
timing of the required disclosures, some commenters suggested that the 
notifications be provided whenever advice is rendered; other commenters 
argued that the annual disclosures should be required only when there 
are material changes to the information furnished in advance of the 
advice. Other commenters recommended that required notifications be 
furnished quarterly. The Department did not adopt these 
recommendations. The Department believes that the statutory disclosure 
framework, reflected in both the proposal and final rule, strikes the 
appropriate balance in terms of ensuring participants and beneficiaries 
have the information to assess the potential for conflicts of interest 
and compensation of the fiduciary adviser. In this regard, the final 
rule, like the proposal, requires notifications to be furnished in 
advance of the advice, and annually thereafter, except that material 
changes to such information are required to be furnished at a time 
reasonably contemporaneous with the change in the information.
    Commenters also raised issues concerning the content of the 
required notifications. One commenter recommended that the Department 
clarify that the required disclosure of fees and compensation was not 
limited to designated investment options, but included fees and 
compensation received in connection with investments made through open 
brokerage windows and directed brokerage accounts. The disclosure 
obligation set forth in paragraph (b)(7)(i)(C)(2) of the final rule is 
very broad and includes any fees and other compensation that the 
fiduciary adviser or affiliate might receive in connection with the 
sale, acquisition, or holding of any security or other property 
pursuant to the investment advice. There is nothing in this provision 
which limits or is intended to limit the required disclosures to 
compensation and fees in connection with designated investment options. 
It is clear, therefore, that any compensation and fees to be received 
in connection with investments through an open brokerage window or 
directed brokerage account must be included in the required 
disclosures.
    Some commenters suggested that the required disclosure be required 
to contain information pertaining to compensation and fees in 
connection with rollovers or other distributions or the investment of 
assets in connection with a rollover or other distribution. Given the 
potential for abuse in this area, the Department agrees that such 
information should be furnished to participants and beneficiaries. In 
this regard, the final rule contains a specific provision that serves 
to require the disclosure of all fees or other compensation that a 
fiduciary adviser or any affiliate might receive in connection

[[Page 3832]]

with any rollover or other distribution of plan assets or the 
investment of distributed assets in any security or other property 
pursuant to the investment advice. See paragraph (b)(7)(i)(C)(3) of the 
final rule, and paragraph (d)(8)(i)(C) of the final rule, which applies 
several disclosures required for the statutory exemption to the class 
exemption.
    With regard to the practice of ``cross-selling,'' i.e., using 
existing clients, plan participants and beneficiaries in this case, to 
market additional services or products, the Department notes that, 
while advising a participant or beneficiary to take an otherwise 
permissible plan distribution would not normally constitute 
``investment advice'' within the meaning of 29 CFR 2510.3-21(c), the 
Department has taken a different position with respect to such 
activities when the person making such recommendations is already a 
plan fiduciary, as would be the case with a fiduciary adviser.\18\ When 
a person is already acting in a fiduciary capacity with respect to the 
plan, the Department has indicated that recommendations relating to the 
taking of a distribution or the investment of amounts withdrawn from 
the plan would constitute the exercise of discretionary authority 
respecting management of the plan and, therefore must be undertaken 
prudently and solely in the interest of the participant or beneficiary, 
consistent with section 404(a)(1). The Department further notes that 
if, for example, a fiduciary exercises control over plan assets to 
cause a participant or beneficiary to take a distribution and then to 
invest the proceeds in an IRA account managed by the fiduciary, the 
fiduciary may be using plan assets in his or her own interest, in 
violation of ERISA section 406(b)(1). The prohibited transaction relief 
offered by the statutory and class exemption, which apply to 
transactions related to the provision of investment advice to plan 
participants or beneficiaries, would not cover such a violation. 
Moreover, the Department is unable to conclude that the mere disclosure 
of fees or other compensation received in connection with such a 
distribution and investment, by itself, would be sufficient to avoid a 
violation of section 406(b)(1). Because a fiduciary adviser, in making 
recommendations related to the taking of a distribution or the 
investment of amounts so withdrawn from the plan, may violate ERISA 
section 404(a)(1) and/or 406(b)(1), authorizing plan fiduciaries, in 
carrying out their duties under section 404(a)(1) in selecting and 
periodically reviewing the adviser, may need to understand the extent 
to which such recommendations will be made.
---------------------------------------------------------------------------

    \18\ See AO 2005-23A (Dec. 7, 2005).
---------------------------------------------------------------------------

    A commenter also suggested that the Department require disclosure 
of information about the profitability of various plan investment 
options to the fiduciary adviser. In addressing the need for disclosure 
regarding plan investments being recommended by a fiduciary adviser 
under the statutory exemption, Congress appears to have concluded that 
the interests of participants and beneficiaries would be adequately 
protected, in the context of the exemption's other conditions, by 
information on all fees or other compensation that the fiduciary 
adviser or any affiliate is to receive. The conditions of the 
exemption, in general, focus on fees and compensation received in 
connection with investments recommended rather than profitability of 
those investments. Disclosures with respect to profitability of 
investments options may require significantly more information and 
effort to prepare than disclosures of fees and compensation, without 
adding significant benefits. The Department does not believe it would 
be appropriate, as part of this final rule, without further notice and 
comment, to include such a disclosure obligation. Accordingly, the 
Department has not adopted this suggestion.
    A number of commenters requested that the Department confirm that 
to the extent that the required disclosures are contained in disclosure 
materials required to be prepared under securities and other laws, such 
materials may be used for purposes of the exemptions. It is the view of 
the Department that nothing in the final rule forecloses the use of 
other materials for making the disclosures required by the final rule, 
so long as the understandability and clarity of the disclosures is not 
compromised by virtue of their inclusion in such other materials and 
the requirements of paragraphs (b)(7)(ii)(A) and (d)(8)(ii)(A) are 
satisfied.
    The proposed regulation and class exemption provided that the 
required notifications may, in accordance with 29 CFR 2520.104b-1, be 
furnished in either written or electronic form. Several commenters 
requested that the Department provide greater flexibility for notices 
by electronic means, noting that the safe harbor for electronic 
distributions, at Sec.  2520.104b-1(c), is not workable. The Department 
currently is reviewing its rules relating to the use of electronic 
media for disclosures under title I of ERISA. The Department notes 
that, pending the issuance of further guidance, its current rule, at 29 
CFR 2520.104b-1(c), is a safe harbor and, accordingly, represents 
merely one permissible means by which documents under title I of ERISA 
may be furnished to participants and beneficiaries electronically. 
Nothing in that rule, therefore, forecloses other means by which 
documents may, consistent with ERISA and the E-SIGN Act, be furnished 
to participants and beneficiaries electronically.
    Paragraphs (b)(7)(iv) and (d)(8)(iv) of the final rule set forth 
miscellaneous recordkeeping and furnishing responsibilities of the 
fiduciary adviser under the statutory and class exemption. 
Specifically, these paragraphs require that, at all times during the 
provision of advisory services to the participant or beneficiary 
pursuant to the arrangement, the fiduciary adviser must: maintain the 
information required to be disclosed to participants and beneficiaries 
in accurate form; provide, without charge, accurate, up-to-date 
disclosures to the recipient of the advice no less frequently than 
annually; provide, without charge, accurate information to the 
recipient of the advice upon request of the recipient; and provide, 
without charge, to the recipient of the advice any material change to 
the required information at a time reasonably contemporaneous to the 
change in information. These provisions are being adopted in the final 
rule without substantive change from the proposal.
g. Other Conditions
    Paragraphs (b)(8) and (d)(10) of the final rule, like the 
proposals, incorporate a series of miscellaneous, although important, 
conditions set forth in section 408(g)(7) of ERISA. These requirements 
are as follows: the fiduciary adviser must provide appropriate 
disclosure, in connection with the sale, acquisition, or holding of the 
security or other property, in accordance with all applicable 
securities laws; any sale, acquisition, or holding of a security or 
other property occurs solely at the direction of the recipient of the 
advice; 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 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.
    The Department received a number of comments requesting 
clarification of the requirement that sales, acquisitions, or the 
holding of securities or other

[[Page 3833]]

property occurs solely at the direction of the recipient of the advice. 
In particular, commenters requested that the Department confirm that 
the ``solely at the direction'' requirement is not violated solely by 
virtue of a participant or beneficiary providing advance authorization 
for a fiduciary adviser to periodically take steps to rebalance the 
portfolio of the participant or beneficiary. One commenter requested 
clarification that the ``solely at the direction'' requirement would 
not be violated where, pursuant to an agreement with the participant or 
beneficiary, investment advice recommendations will be acted upon by 
the fiduciary adviser unless the participant or beneficiary objects 
with the allotted period of time, typically 30 days.
    In general, it is the view of the Department that a pre-
authorization for a fiduciary adviser to maintain a particular asset 
allocation structure for a participant's portfolio by periodic 
rebalancing of investments would not violate the ``solely at the 
direction'' requirements of the final rule, provided that such 
maintenance does not involve the exercise of discretion on the part of 
the fiduciary adviser, that is, when a participant is informed of and 
approves, at the time of the authorization, the specific circumstances 
under which a rebalancing of his or her portfolio will take place and 
the particular investments that will be utilized for such rebalancing. 
If, on the other hand, the particular investments that might be 
utilized for purposes of rebalancing a participant's account are not 
known and the fiduciary adviser is given the discretion to select the 
required investments, it is the view of the Department that the 
participant must be afforded advance notice of the fiduciary adviser's 
intended investments and a reasonable opportunity, at least 30 days, to 
object to the investments in order to comply with the ``solely at the 
direction'' requirements of the final rule. With respect to a 
recommendation involving a different asset allocation structure, the 
Department believes that the participant or beneficiary must make an 
affirmative direction for its implementation.

3. Definitions

    Paragraph (c) sets forth definitions applicable to both the 
statutory exemption and class exemption contained in the final rule. 
Paragraph (c)(1) defines the term ``designated investment option.'' 
Paragraph (c)(2) defines the term ``fiduciary adviser.'' Paragraph 
(c)(3) defines the term ``registered representative.'' Paragraph (c)(4) 
defines the terms ``individual retirement account'' or ``IRA'' for 
purposes of the final rule. Paragraph (c)(5) defines the term 
``affiliate.'' And, paragraphs (c)(6) and (c)(7) define the terms 
``material affiliation'' and ``material contractual relationship,'' 
respectively. Lastly, paragraph (c)(8) defines the term ``control.'' 
With the exception of a clarification in the definition of ``material 
contractual relationship'' in paragraph (c)(7), the definitions were 
adopted without change from the proposals.
    One commenter requested that the Department clarify that the term 
``agent'', as that term is used in the definition of ``fiduciary 
adviser'' (see paragraph (c)(2)(i)(F) of the final rule), is not 
limited to insurance agents. Another commenter requested that the 
Department clarify that ``agents'' must be registered under the 
Investment Advisers Act of 1940, unless otherwise exempt from 
registration. It is the view of the Department that the term ``agent'' 
as used in the fiduciary adviser definition is not limited to insurance 
agents or necessarily those registered under the Investment Advisers 
Act, but rather encompasses persons acting on behalf of a fiduciary 
adviser, applying agency law principles. The Department notes that the 
definition, consistent with the statutory definition, requires that any 
such agent satisfy the requirements of applicable insurance, banking 
and securities laws relating to the provision of advice.
    One commenter recommended a separate provision for investment 
adviser representatives. It was not clear how such a separate 
definition would substantively change the application of the fiduciary 
adviser definition, at paragraph (c)(2); accordingly, the Department 
did not adopt this suggestion.
    One comment recommended that the Department adopt the definition of 
``affiliate'' as set forth in 29 CFR 2510.3-21, rather than the 
definition contained in the proposed rule. Section 408(g)(11)(C) of 
ERISA provides that an ``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. The Department, therefore, adopted, as 
discussed in the preamble to the proposal, the Investment Company Act 
definition for purposes of both the proposal and this final rule, not 
the definition set forth in Sec.  2510.3-21.
    Finally, in order to clarify that the 10% gross revenue test, 
applied for purposes of determining whether persons have a ``material 
contractual relationship'' under the final rule, is not limited to 
amounts paid pursuant to contracts or arrangements that have been 
reduced to writing, the Department has deleted the word ``written'' 
from the definition contained in paragraph (c)(7).

4. Class exemption

    A number of the issues pertaining to the conditions applicable to 
the class exemption were raised and addressed in the above discussion 
of the rules implementing the statutory exemption. The following 
overview, therefore, will focus on those provisions and comments unique 
to the class exemption and not previously addressed.
a. Authority and Findings
    A number of commenters questioned the Department's authority to 
grant the proposed class exemption arguing, in effect, that the 
proposed class exemption is inconsistent with Congressional intent, 
suggesting that enactment of the statutory exemption for investment 
advice precluded or otherwise limited the Department's authority to 
grant an administrative exemption under section 408(a). The Department 
has carefully considered this issue and in so considering has been 
unable to find anything in ERISA, the PPA, the Technical Explanation of 
the PPA prepared by the staff of the Joint Committee on Taxation,\19\ 
or the case law that would serve to limit or otherwise restrict the 
Department's ability to grant, in accordance with its authority in 
section 408(a), an administrative exemption relating to the provision 
of investment advice.
---------------------------------------------------------------------------

    \19\ Technical Explanation of H.R. 5, The ``Pension Protection 
Act of 2006'', as passed by the House on July 28, 2006, and as 
considered by the Senate on August 3, 2006, prepared by the Staff of 
the Joint Committee on Taxation, August 3, 2006, JCX 38-06.
---------------------------------------------------------------------------

    In fact, the Department has very broad authority under section 
408(a) to grant conditional or unconditional exemptions for any 
fiduciary or transaction or class of fiduciaries or transactions, from 
all or part of the restrictions imposed by sections 406 and 407(a), 
provided that the Secretary finds that such exemption is 
administratively feasible, in the interests of the plan and its 
participants and beneficiaries, and protective of the rights of 
participants and beneficiaries.
    The Department views the class exemption as necessary to provide 
more comprehensive relief for fiduciary investment advice and to 
address certain aspects of the statutory exemption that were unclear or 
that did not extend relief to certain arrangements. For example, the 
flush language in section 408(g)(3)(D) of

[[Page 3834]]

ERISA specifically permits participants to request individualized 
advice after receipt of computer model-based advice, but does not 
indicate whether any prohibited transaction relief would apply. In 
addition, although the Department concluded that computer model-based 
advice was feasible for IRAs to the extent that the advice takes into 
account generally recognized asset classes, some IRAs do not limit 
investment choices in this fashion. The class exemption therefore 
provides substitute relief for advisers that may not be able to take 
full advantage of computer model-based advice as to some IRAs.
    Taking into account the intent of the Congress and the 
administration to dramatically expand the availability of affordable, 
quality investment advice for millions of America's workers 
participating in participant-directed individual account plans and 
IRAs, the Department concluded that the best approach to addressing the 
ambiguities and issues presented by the PPA and statutory exemption was 
to exercise its authority under section 408(a) of ERISA, building on 
the carefully crafted safeguards of the statutory exemption established 
by the Congress, safeguards that the Congress itself determined to be 
administratively feasible, in the interests of the plan and its 
participants and beneficiaries, and protective of the rights of 
participants and beneficiaries.
    A few commenters questioned whether the Department could make the 
findings required by section 408(a) with respect to the class 
exemption. As noted above, section 408(a) conditions exemptive relief 
on a finding by the Department that the exemption is administratively 
feasible, in the interests of the plan and its participants and 
beneficiaries, and protective of the rights of participants and 
beneficiaries. With regard to the class exemption contained in this 
document, the Department finds that the exemption is administratively 
feasible with respect to both compliance by fiduciary advisers electing 
to provide investment advice to participants and beneficiaries and 
enforcement by the Department. The Department finds that the exemption 
is in the interest of plans and their participants and beneficiaries 
because the availability of the exemption will significantly expand the 
opportunities for millions of participants and beneficiaries in 
participant-directed individual account plans and IRAs to obtain 
affordable, quality investment advice that might otherwise not be 
available to them. The Department further finds that the exemption is 
protective of the rights of participants and beneficiaries because of 
the conditions contained in the exemption intended to mitigate 
conflicts of interest that might otherwise affect the quality of 
investment advice. As noted above, the conditions of the class 
exemption build on the protections Congress determined to be 
administratively feasible, in the interest of plans and their 
participants and beneficiaries, and protective of the rights of those 
participants and beneficiaries for purposes of the statutory exemption 
set forth in section 408(g). The specifics of these conditions are 
discussed below, if not previously addressed in connection with the 
statutory exemption provisions.
b. General
    The final class exemption, like the statutory exemption described 
in paragraph (b) of the final rule, provides relief from otherwise 
prohibited transactions relating to the provision of investment advice 
to a plan participant or beneficiary or IRA beneficiary; the 
acquisition, holding or sale of a security or other property pursuant 
to the investment advice; and the direct or indirect receipt of 
compensation by a fiduciary adviser or affiliate in connection with the 
provision of investment advice or the acquisition, holding or sale of a 
security or other property pursuant to the investment advice.
    Unlike the statutory exemption, however, the final class exemption, 
like the proposed class exemption, provides relief for investment 
advice provided to individuals following the furnishing of 
recommendations generated by a computer model or, in instances where 
computer modeling under the statutory exemption is not feasible, the 
furnishing of investment education material. As explained in the 
preamble to the proposal, the computer generated advice recommendations 
and investment education materials are intended to provide individual 
account plan participants and beneficiaries and IRA beneficiaries with 
a context for assessing and evaluating the individualized investment 
advice contemplated by the class exemption. Also, unlike the statutory 
exemption, the final class exemption, like the proposal, applies the 
fee-leveling limits solely to the compensation received by the 
employee, agent or registered representative providing the advice on 
behalf of the fiduciary adviser, as distinguished from compensation 
received by the fiduciary adviser on whose behalf the employee, agent 
or registered representative is providing such advice.
    In general, the class exemption is intended to complement the 
adoption of regulations implementing the statutory exemption by 
furthering the availability of individualized investment advice to both 
participants and beneficiaries in participant-directed individual 
account plans and IRA beneficiaries under circumstances not clearly 
encompassed by the statutory exemption or implementing regulations, as 
described below.
c. Scope of Exemption
    Paragraph (d)(1) of the final rule sets forth the scope of the 
class exemption. Specifically paragraph (d)(1)(i) provides that, with 
respect to the provision of advice to participants and beneficiaries of 
individual account plans, the restrictions of sections 406(a) and 
406(b) of ERISA and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(F) of the Code, shall not apply to the provision of investment advice 
described in section 3(21)(A)(ii) of the Act by a fiduciary adviser to 
a participant or beneficiary of an individual account plan that permits 
such participant or beneficiary to direct the investment of their 
individual accounts; the acquisition, holding, or sale of a security or 
other property pursuant to the investment advice; and, except as 
otherwise provided in the exemption, the direct or indirect receipt of 
fees or other compensation by the fiduciary adviser (or any employee, 
agent, registered representative or affiliate thereof) in connection 
with the provision of the advice or in connection with an acquisition, 
holding, or sale of a security or other property pursuant to the 
investment advice. Paragraph (d)(1)(ii) of the final rule provides the 
same relief with respect to the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (F) of the Code, for investment advice to 
beneficiaries of IRAs.
d. Conditions for Relief
    Paragraph (d)(2) of the final rule provides that the relief 
described in paragraph (d)(1) is available if a fiduciary adviser 
provides advice in accordance with paragraph (d)(3), relating to the 
use of computer models and investment education materials, or paragraph 
(d)(4), relating to the use of fee-level arrangements, or both. In 
addition the fiduciary adviser must satisfy the conditions described in 
paragraphs: (d)(5), requiring authorization by a plan fiduciary or IRA 
beneficiary; (d)(6), relating to the basis for advice; (d)(7), 
requiring policies and

[[Page 3835]]

procedures; (d)(8), requiring disclosure of specified information; 
(d)(9), requiring an annual audit; and (d)(10), specifying other 
miscellaneous conditions. With the exception of paragraph (d)(7), 
relating to the adoption of policies and procedures, the aforementioned 
requirements are modeled after, and were discussed in conjunction with, 
the conditions of the statutory exemption and, accordingly, will not 
again be described or reviewed in this section.
e. Post-computer Model--Investment Education Advice
    Paragraph (d)(3) of the final rule, like the provision of the 
proposed class exemption, requires that, in advance of a participant or 
beneficiary being provided individualized investment advice, the 
participant or beneficiary must be furnished investment recommendations 
generated by either a computer model that meets the requirements of the 
statutory exemption or a computer model developed by a person 
independent of the fiduciary adviser. The proposal contained an 
exception to the general computer modeling requirement for IRAs with 
respect to which types or number of investment choices reasonably 
precludes the use of a computer model that meets certain requirements 
of the regulations under the statutory exemption.
    The Department received a number of comments on this condition of 
the proposal. One commenter requested that the Department clarify 
whether a fiduciary adviser providing individualized advice to a 
participant can utilize the recommendations generated by the computer 
model of another fiduciary adviser. For example, according to this 
commenter, a plan recordkeeper might offer participants access to a 
proprietary computer model that complies with the statutory exemption, 
and the plan sponsor might also provide access through a second advice 
provider. The commenter asked whether the second advice provider could, 
for purposes of the class exemption, rely on the computer model advice 
furnished to a participant by the plan recordkeeper. The Department 
does not believe one fiduciary adviser would necessarily be precluded 
from using another fiduciary adviser's computer modeled recommendations 
for a particular participant, provided that the requirements of 
exemption for both the computer model and individualized advice are 
otherwise satisfied and the individualized advice is reasonably 
contemporaneous with the computer modeled advice.
    One commenter suggested that, given the other safeguards contained 
in the exemption, the requirement for computer modeled advice in 
advance of individualized advice should be eliminated, noting that the 
computer modeled advice will only confuse participants and limit the 
advisers. The Department disagrees. The Department continues to believe 
that the furnishing of computer modeled investment recommendations is 
an important protection and tool for participants in assessing and 
evaluating the individualized recommendations of the fiduciary adviser. 
The computer modeled advice provides participants and beneficiaries a 
means by which they can assess and question, in advance of an 
investment decision, the extent to which the recommendations of the 
fiduciary adviser deviate from modeled advice. For this reason, the 
Department did not adopt the commenter's suggestion.
    One commenter recommended that post-model/education advice be 
subject to a fee-leveling requirement. The Department did not adopt 
this suggestion. First, the Department believes that the class 
exemption contains sufficient safeguards without a fee-leveling 
requirement to protect participants and beneficiaries against biased, 
inappropriate investment advice. Second, given such safeguards, the 
Department does not believe it is appropriate to favor one business 
model for providing investment advice over another business model, 
i.e., those fiduciary advisers that use fee-leveling over those that do 
not, particularly when doing so may only serve to limit the 
availability of investment advice to participants and beneficiaries.
    Several commenters argued that the exception from the class 
exemption's computer modeling requirement that was provided to certain 
IRAs (i.e., where the types or number of investment choices reasonably 
precludes use of computer model meeting the requirements of the 
statutory exemption) be extended to brokerage windows and similar 
arrangements with respect to which the computer modeling of investment 
recommendations is not feasible and that, without such an exception, 
plan participants and beneficiaries utilizing such windows or accounts 
may not have access to the investment advice they need. The Department 
is persuaded that brokerage windows and similar arrangements that 
permit participants to invest beyond a plan's designated investment 
options present the same computer modeling difficulties that are 
encountered by IRAs that impose few restrictions on a beneficiary's 
investment choices. However, with regard to plans that offer 
participants and beneficiaries both designated investment options and a 
brokerage window or similar arrangement, the Department believes 
participants and beneficiaries electing to utilize such arrangements 
would, in addition to investment education materials, also benefit from 
receiving computer modeled investment recommendations with respect to 
the plan's designated investment options in advance of being provided 
individualized investment advice. As with those participants and 
beneficiaries whose investment options, either by plan design or 
choice, are limited to designated investment options, the Department 
believes that computer modeled investment recommendations will help 
participants and beneficiaries considering the use of a brokerage 
window or similar arrangement assess the investment choices available 
through both the brokerage window and the plan, as well as the 
individualized investment recommendations and strategies of the 
fiduciary adviser. The exception contained in the final class 
exemption, at paragraph (d)(3)(ii)(A) of the final rule, reflects this 
position.
    Specifically, paragraph (d)(3)(ii)(A) provides that, in the case of 
a plan that offers a ``brokerage window'', ``self-directed brokerage 
account'' or similar arrangement that enables participants and 
beneficiaries to select investments beyond those designated by the 
plan, if any, before providing investment advice with respect to any 
investment utilizing such arrangement, the participant or beneficiary 
shall be furnished the investment education material described in 
paragraph (d)(3)(ii)(B) and, if the plan offers designated investment 
options, the participant or beneficiary also shall be furnished the 
recommendations generated by a computer model, as required by paragraph 
(d)(3)(i), with regard to such options.
    Some commenters, while supporting the exception from computer 
modeling for IRAs, requested that the Department provide further 
guidance concerning when the types or number of investment choices 
would reasonably preclude the use of a computer model to generate 
investment recommendations. The Department believes that there are a 
variety of factors that may serve to reasonably preclude use of a 
computer model for generating recommendations with respect to the 
investments available under an IRA, including the number of investment 
options offered, the type of investment options (such as

[[Page 3836]]

investments in individual securities), and the relative costs of 
developing and maintaining such computer models and benefits of 
offering such model-generated advice services to IRA beneficiaries. The 
Department believes this will be an evolving, rather than static, 
standard. As computer modeling of investment advice develops, the 
Department anticipates that the feasibility of developing models to 
take into account a wider variety of investment choices also will 
change. The Department has retained the IRA exception without change 
from the proposal. See paragraph (d)(3)(ii)(B) of the final rule.
    The investment education material required to be furnished under 
the final rule is identical to that described in the proposal. 
Specifically, paragraph (d)(3)(ii)(B) of the final rule requires that 
participants and beneficiaries be furnished with material, such as 
graphs, pie charts, case studies, worksheets, or interactive software 
or similar programs, that reflect or produce asset allocation models 
taking into account the age (or time horizon) and risk profile of the 
beneficiary, to the extent known. As with the proposal, the final rule 
makes clear that nothing precludes the furnishing of material, in 
addition to the foregoing, reflecting asset allocation portfolios of 
hypothetical individuals with different time horizons and risk 
profiles.
    Also like the proposal, the final rule also requires that: (A) 
Models must be based on generally accepted investment theories that 
take into account the historic returns of different asset classes 
(e.g., equities, bonds, or cash) over defined periods of time; (B) such 
models must 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 material contractual relationship with the 
fiduciary adviser; and (C) all material facts and assumptions on which 
such models are based (e.g., retirement ages, life expectancies, income 
levels, financial resources, replacement income ratios, inflation 
rates, and rates of return) accompany the models.
    The proposal further required that the provided individualized, 
rather than computer modeled, investment advice (post-model/investment 
education advice) not recommend investment options that may generate 
for the fiduciary adviser, or certain other persons, greater income 
than other options of the same asset class, unless the fiduciary 
adviser prudently concludes that the recommendation is in the best 
interest of the participant or beneficiary and explains the basis for 
that conclusion to the participant or beneficiary. The proposal further 
required that the advice provider document the basis of any advice 
given to the participant or beneficiary within 30 days following the 
provision of the advice.
    One commenter objected to the requirement that the furnished advice 
be documented, arguing that the advisers are required to comply with 
both ERISA prudence standards and FINRA suitability standards and that 
the documentation requirement does not add any additional protection. 
Another commenter argued that such explanations were not sufficiently 
protective of participants and beneficiaries. The Department disagrees 
with these comments. One of the many protections encompassed in the 
class exemption is the audit requirement. The Department expects that a 
critical part of the audit will involve a review of the explanations 
required to be documented by the fiduciary adviser. Without such 
documentation, auditors would have no basis for assessing compliance 
with a number of the conditions of the class exemption, including those 
set forth in paragraphs (d)(3)(ii)(A) and (B) and (d)(6) of the final 
rule.
    One comment misconstrued the requirement, reading the proposal as 
not requiring the fiduciary adviser to provide an explanation regarding 
investments that might generate higher fees until 30 days after the 
provision of the advice. Under the proposal, the explanation was 
required to be provided in advance of the advice, but that explanation 
was not required to be documented for the fiduciary adviser's records, 
as well as for the required audit, until 30 days after the provision of 
the advice. The Department believes that it may not always be practical 
for a fiduciary adviser to document the advice they provide 
contemporaneously with the provision of that advice and, therefore, 
provided a limited period within which such advice must be documented.
    In an effort to address both ambiguity and confusion with respect 
to the aforementioned requirement, the Department has combined and 
simplified the requirement for purposes of the final class exemption. 
Further, because the Department believes that this requirement, in its 
revised form, would offer additional protections to participants and 
beneficiaries without being unnecessarily burdensome on fiduciary 
advisers, the Department is making it a general requirement of the 
final class exemption. In this regard, paragraph (d)(6)(ii) of the 
final rule provides that, in connection with the provision of any 
investment advice covered by the class exemption, the fiduciary adviser 
must conclude that the advice to be provided is prudent and in the best 
interest of the participant or beneficiary, and explain to the 
participant or beneficiary the basis for the conclusion, including, if 
applicable, why and how the advice deviates from or relates to the 
computer modeled recommendations or investment education materials 
furnished in satisfaction of paragraph (d)(3)(i) or (ii), and why the 
advice includes an option(s) with higher fees than other options in the 
same asset class(es) available under the plan. Further under paragraph 
(d)(6)(ii), not later than 30 days following such explanation, the 
employee, agent or registered representative providing the advice on 
behalf of the fiduciary adviser must document the explanation. The 
final rule, like the proposal, also requires this documentation to be 
retained in accordance with the record retention requirements of 
paragraph (e) of the final rule. See paragraph (d)(6)(ii)(C) of the 
final rule.
f. Use of Fee-Leveling
    Paragraph (d)(4) of the final rule addresses the fee-leveling 
requirement of the class exemption. As proposed, the class exemption 
applied the fee-leveling requirement only to the individuals who 
provide the investment advice on behalf of the fiduciary adviser, 
namely, employees, agents, and registered representatives. This is in 
contrast to the fee-leveling requirement under the statutory exemption, 
as described above with respect to paragraph (b) of the final rule, 
which applied the fee-leveling requirement at both the entity 
(fiduciary adviser)-level and the individual (employee, agent, 
registered representative)-level. In this regard, the Department was 
persuaded that the additional safeguards provided for in the class 
exemption were sufficient to permit the application of the fee-leveling 
requirement at the individual-level, rather than fiduciary adviser-
entity level, without compromising the availability of informed, 
unbiased, and objective investment advice for participants and 
beneficiaries. As explained in the discussion relating to the fee-
leveling provisions of the statutory exemption, some commenters 
objected to the limited scope of the fee-leveling requirement and other 
commenters requested that the breadth of the fee-leveling requirement 
be narrowed. The Department continues to believe it reached the 
appropriate balance of protections and flexibility in the proposal and, 
accordingly is

[[Page 3837]]

adopting the fee-leveling framework of the proposed class exemption 
without modification in the final rule.
g. Policies and Procedures
    The proposed exemption contained a requirement that the fiduciary 
adviser adopt and follow written policies and procedures that are 
designed to assure compliance with the conditions of the exemption. As 
explained in the preamble to the proposal, the Department believes that 
the maintenance of such policies and procedures will help ensure 
compliance with the exemption, as well as support a finding that, for 
purposes of section 408(a)(1), the exemption is administratively 
feasible. The Department has not changed its view in this regard and, 
in the absence of any comments objecting to this provision of the 
proposal, is adopting this requirement without change in the final 
rule. See paragraph (d)(7). The Department also notes that the auditor 
engaged to conduct an audit pursuant to paragraph (d)(9) of the final 
rule, discussed earlier, is required, as part of that audit, to review 
a fiduciary adviser's compliance with its policies and procedures.

5. Retention of Records

    Both the proposed regulation implementing the statutory exemption 
and the proposed class exemption had record retention requirements, 
with respect to which there were no comments. Paragraph (e) of the 
final rule sets forth the record retention requirements now applicable 
to both investment advice arrangements relying on the statutory 
exemption, as set forth in paragraph (b), and investment advice 
provided pursuant to the class exemption, as set forth in paragraph 
(d), of the final rule. Paragraph (e) provides that the fiduciary 
adviser must maintain, for a period of not less than 6 years after the 
provision of investment advice under the section any records necessary 
for determining whether the applicable requirements of the final rule 
have been met, noting that a transaction prohibited under section 406 
of ERISA 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.

6. Noncompliance

    The proposed class exemption specifically addressed the effects of 
noncompliance with the exemption. In this regard, the proposal 
explained that the class exemption would not apply to any covered 
transaction in connection with the provision of investment advice to an 
individual participant or beneficiary with respect to which the 
conditions of the exemption have not been satisfied. The proposal also 
indicated that, in the case of a pattern or practice of noncompliance 
with any of the conditions, the exemption would not apply to any 
transaction in connection with the provision of investment advice 
provided by the fiduciary adviser during the period over which the 
pattern or practice extended.
    Several commenters objected to the ``pattern or practice'' 
provision, arguing that because non-compliant advice is already subject 
to an excise tax under the Code, extending the penalty to all advice 
provided during a period, without regard to it being compliant advice, 
is unnecessary and punitive. Commenters also argued that the concept of 
a ``pattern or practice'' was unclear. Some commenters suggested the 
penalty should be prospective only, while others argued there should be 
a de minimus rule or period for correcting such noncompliance before 
losing the relief of the exemption for compliant advice. On the other 
side, one commenter argued that increased penalties for noncompliance 
would make the exemption more protective.
    The Department believes that one of the most significant deterrents 
to noncompliance with the conditions of the statutory and class 
exemption is the potentially significant excise taxes applicable to 
transactions that fail to satisfy the conditions of the exemptions. The 
Department believes that the ``pattern or practice'' provision creates 
additional incentives on the part of fiduciary advisers taking 
advantage of the exemptive relief to be vigilant in designing and 
following policies, procedures and practices that will assure 
compliance. The Department, therefore, has retained this provision in 
the final rule. Unlike the proposal, however, the provision now applies 
to both relief under the statutory exemption and the class exemption. 
As revised, paragraph (f) of the final rule provides that: (1) The 
relief from the prohibited transaction provisions of section 406 of 
ERISA and the sanctions resulting from the application of section 4975 
of the Code described in paragraphs (b) and (d) of the final rule shall 
not apply to any transaction described in such paragraphs in connection 
with the provision of investment advice to an individual participant or 
beneficiary with respect to which the applicable conditions of the 
final rule have not been satisfied; and (2), in the case of a pattern 
or practice of noncompliance with any of the applicable conditions of 
the final rule, the relief described in paragraph (b) or (d) shall not 
apply to any transaction in connection with the provision of investment 
advice provided by the fiduciary adviser during the period over which 
the pattern or practice extended.
    With respect to what the Department might view as a ``pattern or 
practice'' of noncompliance with the exemptions, the Department 
believes that it is important to identify both individual violations 
and patterns of such violations. Isolated, unrelated, or accidental 
occurrences would not themselves constitute a pattern or practice. 
However, intentional, regular, deliberate practices involving more than 
isolated events or individuals, or institutionalized practices will 
almost always constitute a pattern or practice. In determining whether 
a pattern or practice exists, the Department will consider whether the 
noncompliance appears to be part of either written or unwritten 
policies or established practices, whether there is evidence of similar 
noncompliance with respect to more than one plan or arrangement, and 
whether the noncompliance is within a fiduciary adviser's control.

7. Effective Date

    The Department proposed that the regulation would be effective 60 
days after the date of publication of the final rule and that the class 
exemption would be effective 90 days after the date of publication of 
the final exemption. One commenter suggested that the 60 day effective 
date would not constitute sufficient time to comply with the final 
rule. One commenter suggested that the final rule should be effective 
no earlier than the later of July 1, 2009, or 180 days after 
publication of the final rule. Another commenter requested that rule be 
made effective upon publication.
    Given the importance of investment advice to participants and 
beneficiaries generally and given that the exemptions contained in this 
final rule will expand the opportunity for participant and 
beneficiaries to obtain affordable, quality investment advice, the 
Department believes that the final rule should be effective on the 
earliest possible date. Accordingly, the final rule contained in this 
document will be effective 60 days after the date of publication in the 
Federal Register and will apply to transactions described in paragraphs 
(b) and (d) of the final rule occurring on or after that date.

8. General Information

    The attention of interested persons is directed to the following:

[[Page 3838]]

    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from other provisions of the Act and the Code, including any 
prohibited transaction provisions to which the exemption does not apply 
and the general fiduciary responsibility provisions of section 404 of 
the Act. Section 404 requires, among other things, that a fiduciary 
discharge its duties with respect to the plan prudently and solely in 
the interests of the plan's participants and beneficiaries. A 
transaction's qualification for an exemption also does not affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) The exemptions contained herein are supplemental to, and not in 
derogation of, any other provisions of the Act and the Code, including 
statutory or administrative exemptions and transitional rules; and
    (3) In accordance with section 408(a) of ERISA and section 
4975(c)(2) of the Code, and based on the entire record, the Department 
finds that, as discussed above, the class exemption contained in this 
document is administratively feasible, in the interests of the plan(s) 
and IRAs and of its participants and beneficiaries, and protective of 
the rights of the participants and beneficiaries of the plan and IRAs.

C. Overview of Final Sec.  2550.408g-2

    Section 408(g)(11)(A) of ERISA provides that, with respect to an 
arrangement that relies on use of a computer model to qualify as an 
``eligible investment advice arrangement'' under the statutory 
exemption, a person who develops the computer model, or markets the 
investment advice program or computer model, shall be treated as a 
fiduciary of a plan by reason of the provision of investment advice 
referred to in ERISA section 3(21)(A)(ii) to the plan participant or 
beneficiary, and shall be treated as a ``fiduciary adviser'' for 
purposes of ERISA sections 408(b)(14) and 408(g), except that the 
Secretary of Labor may prescribe rules under which only one fiduciary 
adviser may elect to be treated as a fiduciary with respect to the 
plan. Section 4975(f)(8)(J)(i) of the Code contains a parallel 
provision to ERISA section 408(g)(11)(A) that applies for purposes of 
Code sections 4975(d)(17) and 4975(f)(8).
    In conjunction with the proposed regulation implementing the 
statutory exemption for investment advice, the Department also proposed 
a rule, Sec.  2550.408g-2, governing the requirements for electing to 
be treated as a fiduciary and fiduciary adviser by reason of developing 
or marketing a computer model or an investment advice program used in 
an eligible investment advice arrangement. Section 2550.408g-2 sets 
forth requirements that must be satisfied in order for one such 
fiduciary adviser to elect to be treated as a fiduciary under such an 
eligible investment advice arrangement. See paragraph (a) of Sec.  
2550.408g-2.
    Paragraph (b)(1) of Sec.  2550.408g-2 provides that, if an election 
meets the requirements of paragraph (b)(2) of the proposal, then the 
person identified in the election shall be the sole fiduciary adviser 
treated as a fiduciary by reason of developing or marketing a computer 
model, or marketing an investment advice program, used in an eligible 
investment advice arrangement. Paragraph (b)(2) requires that the 
election be in writing and that the writing: identify the arrangement, 
and person offering the arrangement, with respect to which the election 
is to be effective; and identify the person who is the fiduciary 
adviser, the person who develops the computer model or markets the 
computer model or investment advice program with respect to the 
arrangement, and the person who elects to be treated as the only 
fiduciary, and fiduciary adviser, by reason of developing such computer 
model or marketing such computer model or investment advice program. 
Paragraph (b)(2) of Sec.  2550.408g-2 also requires that the election 
be signed by the person acknowledging that it elects to be treated as 
the only fiduciary and fiduciary adviser; that a copy of the election 
be furnished to the plan fiduciary who authorized use of the 
arrangement; and that the writing be retained in accordance with the 
record retention requirements of Sec.  2550.408g-1(e).
    The Department received no substantive comments on this regulation 
and, therefore, is adopting the regulation substantially as proposed. 
This regulation, like Sec.  2550.408g-1, will be effective 60 days 
after the date of publication of the final rule in the Federal 
Register.

D. Regulatory Impact Analysis

1. Summary

    In the regulatory impact analysis (RIA) for the proposed regulation 
and class exemption (hereafter, ``the proposals''), the Department 
noted that, historically, many participants and beneficiaries in 
participant-directed defined contribution plans and beneficiaries of 
individual retirement accounts (IRAs) (collectively hereafter, 
``participants'') have made investment mistakes. The Department 
anticipates that full implementation of the PPA under this final 
regulation, together with this class exemption (hereafter, the ``final 
rule''), by extending quality, expert investment advice to a greater 
number of participants will improve investment decisions and results. 
This improvement in investment results reflects reductions in 
investment errors, including poor trading strategies and inadequate 
diversification. The Department further anticipates that the increased 
investment advice resulting from the final rule also will reduce 
participants' investment related expenses, further improving their 
overall investment results, and will improve the welfare of 
participants by better aligning participant investments and their risk 
tolerances.
    The provisions of the final rule are designed to promote the 
availability of affordable, quality investment advice.

2. Public Comments

    The Department received several comments on the regulatory impact 
analysis of the proposals. The following is a summary of the major 
comments and the Department's response thereto.
a. Trading Strategies
    A number of commenters objected to the Department's contention that 
participants' active attempts to ``time the market'' constitute 
inferior trading strategies that result in losses. According to these 
commenters, the term ``market timing'' ``no longer defines investment 
strategies providing investors with enhanced risk-adjusted returns'' 
and professionals are proficient in actively managing clients' 
portfolios. The commenters further asserted that the Department should 
not favor one investment strategy over another.
    The Department continues to believe that automatic rebalancing is 
likely to be superior on average to participants' own efforts (without 
benefit of expert advice) to time the market (meaning to reallocate 
assets in anticipation of future market movements). However, this says 
nothing about the relative merits of active professional account 
management. The Department is unaware of any studies that measure the 
performance of managed accounts relative to that of target date funds 
or other automatic rebalancing arrangements, and proffers no view as to 
whether one strategy is superior to another.

[[Page 3839]]

b. Permissible Arrangements
    The Department included in its analysis of the proposals a table 
summarizing how compensation of fiduciary advisers can vary in advice 
arrangements operating under the following three scenarios: Absent any 
exemptive relief, pursuant to the PPA statutory exemption, and pursuant 
to the proposed class exemption. As requested in comments, the 
Department advises that the table was not intended to exhaustively list 
all permissible advice arrangements. Some arrangements might operate 
pursuant to other exemptive relief. Participants and plans continue to 
have the option of obtaining advice under arrangements that were 
permitted prior to enactment of the PPA and promulgation of this final 
rule. Furthermore, the Department does not favor any particular 
permissible arrangement over any other.
c. Preferences for Computer Models v. Contact With Advisers
    In response to commenters, the Department is modifying its 
assertion that some participants are dissatisfied with advice from 
computer models. Rather, the cited authorities indicate that plan 
sponsors rate arrangements that include contact with advisers as more 
effective than those that rely exclusively on computer models, and 
provide some evidence that more participants make use of the former 
than the latter.
d. Revenue Sources and Active Marketing
    In its analysis of the proposals the Department suggested that 
advisers with revenue sources other than level \20\ fees paid directly 
by participants, plans or sponsors might market their advisory services 
more actively to certain participant market segments than independent 
advisers do. Some commenters disputed this suggestion. These commenters 
pointed out that independent advisers may receive alternative revenue 
sources such as revenue sharing and may not rely exclusively on level 
fees, and emphasized that plan sponsors mediate adviser efforts to 
market to participants.
---------------------------------------------------------------------------

    \20\ ``Level'' in this context means invariant with respect to 
associated investment decisions.
---------------------------------------------------------------------------

    First, the Department clarifies that in this context 
``independence'' was meant to reference exclusive reliance on level 
fees rather than a lack of affiliation. Second, the Department notes 
that other commenters strongly suggested that alternative sources of 
compensation for investment advisory services may facilitate sales of 
such services where exclusive reliance on level fees would not--
particularly sales of adviser consultations (as distinct from computer 
models alone) to small account holders. Therefore, the Department 
continues to believe that some advisers with such alternative sources 
of compensation for investment advice services will be more inclined 
than independent advisers to market such services to some participant 
market segments. Finally, the Department notes that active marketing 
could target plan sponsors as well as plan participants and IRA 
beneficiaries.
e. Audit Requirement
    In response to comments, the Department notes that its assumption 
that audits would be outsourced to an independent legal professional 
was intended only as a proxy to estimate the cost of compliance with 
the audit requirement. In fact, as discussed earlier in the preamble, 
the Department is not persuaded that there is necessarily one set of 
credentials, such as experience as certified public account or auditor 
or lawyer, that, in and of itself, qualifies an individual or 
organization to conduct the audits required by the statutory and class 
exemptions. Likewise, the Department's assumptions regarding the sample 
of transactions to be audited were adopted for purposes of cost 
estimation and should not be construed as guidance as to how sampling 
should be conducted. Having said that, the assumptions are consistent 
with compliant sampling at the level of the financial institution 
acting as the fiduciary adviser.
f. Advice Quality
    The Department's RIA of the proposals devoted considerable 
attention to the question of whether adviser conflicts might taint 
advice. As detailed there, there is evidence to suggest that conflicted 
advisers sometimes reap profit at investors' expense. The proposals' 
conditions were intended to prevent conflicts from tainting advice. 
Accordingly, the RIA assumed that advice arrangements operating 
pursuant to the proposals would be as effective as arrangements 
operating without need for exemptive relief, notwithstanding the 
conflicts that are attendant to the former.
    As noted earlier in this preamble, some commenters maintained that 
the proposals' conditions, together with the threat of substantial 
excise tax penalties for noncompliance, are sufficiently protective and 
that consequently advice provided pursuant to the proposals will be of 
high quality and reflect the participants' best interests. The 
Department can be confident that advice arrangements operating pursuant 
to the proposals will satisfy the applicable conditions because 
advisers are scrupulous about compliance, the commenters said. Some of 
these commenters suggested that some of the conditions were more 
stringent than necessary and should be relaxed. For example, some 
commenters objected to the proposed condition denying exemptive relief 
to all transactions under an arrangement where there is a pattern or 
practice of failures to satisfy applicable conditions. Relief should be 
denied only to particular transactions for which conditions were not 
satisfied, the commenters said. Some commenters argued that the 
proposals' limits on compensation that can be paid under level fee 
arrangements should be relaxed to permit certain types of performance 
based rewards, bonuses and promotions.
    Also as noted earlier in this preamble, other commenters questioned 
the Department's assumption that advice arrangements operating pursuant 
to the proposals would be as effective as arrangements operating 
without need for exemptive relief, predicting that the former will too 
often be tainted by attendant conflicts. Most of these commenters 
expressed deepest concern with the proposed class exemption, arguing 
that the fiduciary adviser and the person providing the advice may be 
conflicted. Some commenters also expressed concern with the proposed 
regulation's interpretation of the statutory exemption, arguing that 
the fiduciary advisers' affiliates may be conflicted. These commenters 
maintained that the proposals' conditions are not sufficiently 
protective. Persons providing advice on behalf of fiduciary adviser 
entities cannot be fully insulated from conflicts affecting the 
entities or their affiliates, the commenters said, and the proposals' 
procedural safeguards, including disclosure and independent audits, 
together with available enforcement mechanisms, are not sufficient to 
ensure compliance with the proposals' substantive conditions, such as 
unbiasedness and adherence to investment theories. Some commenters 
cautioned that investors are vulnerable to manipulation.
    The Department continues to believe, as it did in connection with 
the proposals, that, in the absence of adequate protections, an 
adviser's conflicts may result in biased advice.\21\

[[Page 3840]]

However, the Department also believes that the safeguards included in 
this final rule, together with associated enforcement mechanisms 
including the potentially significant excise taxes \22\ for 
noncompliance and for patterns and practice of noncompliance, 
effectively minimize the possibility that fiduciary advisers will act 
on their conflicts. Provisions expected to deter noncompliance include 
the annual audit requirement, disclosure of noncompliant activities 
identified in the course of an audit to authorizing plan fiduciaries 
and, in the case of IRAs, to the Department, and the pattern or 
practice provision.
---------------------------------------------------------------------------

    \21\ Since promulgating the proposals the Department has 
considered additional evidence suggesting that adviser conflicts can 
taint advice. See, e.g., U.S. SEC, Protecting Senior Investors: 
Report of Examinations of Securities Firms Providing ``Free Lunch'' 
Sales Seminar (Sept. 2007).
    \22\ Under Code section 4975, fiduciaries participating in 
prohibited transactions may be subject to an excise tax of 15 
percent of the amount involved for each year in the taxable period, 
in addition to which an excise tax of 100 percent of the amount 
involved may be added depending on whether the prohibited 
transactions are timely corrected.
---------------------------------------------------------------------------

    Because the conditions and enforcement mechanisms constitute 
adequate safeguards, the Department believes that any impact of 
conflicts on advice provided pursuant to the statutory and class 
exemptions will be minimal. The Department stands by its assumption 
that advice arrangements operating pursuant to the final rule will be 
as effective as arrangements operating without need for exemptive 
relief.
g. Effect on Expenses
    Two distinct types of inefficiency can result in higher than 
optimal consumer expenditures for a particular type of good. The first 
is prices that are higher than would be efficient. Efficient markets 
require vigorous competition. Sellers with market power can command 
inefficiently high prices, thereby capturing consumer surplus and 
imposing a ``dead weight loss'' of welfare on society. Efficient 
markets also require perfect information and rational, utility 
maximizing consumers. Imperfect information, search costs and 
consumers' behavioral biases likewise can allow some sellers to command 
inefficiently high prices. The Department accordingly has considered 
whether such conditions might exist in the market for investment 
products and services bought by or on behalf of participants.
    The second type of inefficiency is suboptimal consumer choices 
among available products. Even if goods are priced competitively, 
welfare will be lost if consumers make poor purchasing decisions. 
Imperfect information, search costs and behavioral biases can 
compromise purchasing decisions, and the Department has considered 
whether participants' purchases of investment products and services 
might be so compromised.
    In its RIA of the proposals, the Department estimated that fees and 
expenses paid by unadvised participants are higher than necessary by 
11.3 basis points on average. Some commenters on the proposals, as well 
as some commenters on the Department's proposed regulation governing 
disclosure to participant-directed defined contribution (DC) plan 
participants,\23\ disputed this estimate. The commenters pointed to 
evidence that the pricing of investment products and related services 
is competitive and efficient, and contended that there is no credible 
evidence to the contrary.
---------------------------------------------------------------------------

    \23\ See 73 FR 43013 (July 23, 2008).
---------------------------------------------------------------------------

    The commenters raised several specific challenges to the 
Department's analysis. First, they contended that the Department's 
estimate relies inappropriately on dispersion in mutual fund expenses 
as evidence that such expenses are sometimes higher than necessary and 
as a basis for estimating the degree to which this is so. Dispersion in 
expenses reflects differences among the investment products or the 
services bundled with them, the commenters said, and therefore such 
dispersion is consistent with competitive, efficient pricing. Second, 
the commenters argued that the analysis draws incorrect inferences 
about fees and expenses in DC plans. The analysis overlooks the role of 
DC plan fiduciaries in choosing reasonably priced investments and 
relies too much on research that examined retail rather than DC plan 
experience, they said. Third, the commenters highlighted what they say 
are technical flaws in some of the research that the Department had 
cited as supporting the conclusion that fees and expenses are sometimes 
higher than necessary, and they took issue with the Department's 
interpretation of some of the research.
    In response to these commenters, the Department undertook to refine 
and strengthen its analysis. First, the Department agrees that the RIA 
of the proposals relied too heavily on mere dispersion of fees and 
expenses as a basis for estimating whether and to what degree they 
might be higher than necessary. The estimate that they are on average 
11.3 basis points higher than necessary lacks adequate basis and should 
be disregarded. Second, the Department agrees that fees and expenses 
paid by DC plan participants can differ from those paid by retail 
investors. Any evidence of higher than necessary expenses in the retail 
sector might suggest similar circumstances in DC plans, but would not 
demonstrate it. Third, the Department reviewed available research 
literature in light of the commenters, and refined its analysis and 
conclusions accordingly, as summarized immediately below.
    (i) Expense sensitivity--Surveys and studies strongly suggest gaps 
in awareness of and sensitivity to expenses.\24\ Other studies consider 
whether investors with different levels of sophistication make 
different decisions about fees. If more sophisticated investors are 
more sensitive to fees, less sophisticated ones might be paying more 
than would be optimal. Alternatively, they might be paying more in 
order to obtain sophisticated help. Much literature suggests a negative 
relationship between sophistication and expenses paid,\25\ but some 
does not.\26\ Overall this literature leaves open the question of 
whether investment prices are sometimes inefficiently high, but 
suggests that even if prices are efficient investors may make poor 
purchasing decisions. The Department believes that many individual 
investors, including both DC plan participants and IRA beneficiaries,

[[Page 3841]]

historically have not factored expenses optimally into their investment 
choices.
---------------------------------------------------------------------------

    \24\ See e.g., James J. Choi et al., Why Does the Law of One 
Price Fail? An Experiment on Index Mutual Funds, National Bureau of 
Economic Research Working Paper W12261 (May 2006); Jeff Dominitz et 
al., How Do Mutual Funds Fees Affect Investor Choices? Evidence from 
Survey Experiments (May 2008) (unpublished, on file with the 
Department) (Dominitz); and John Turner & Sophie Korczyk, Pension 
Participant Knowledge About Plan Fees, AARP Pub ID: DD-105 (Nov. 
2004). Commenters pointed out that net flows are concentrated in 
mutual funds with low expenses. However it is unclear whether this 
reflects investor fee sensitivity or brand name recognition and 
successful marketing by large, established funds whose low fees are 
attributable to economies of scale.
    \25\ Sebastian M[uuml]ller & Martin Weber, Financial Literacy 
and Mutual Fund Investments: Who Buys Actively Managed Funds?, 
Social Science Research Network Abstract 1093305 (Feb. 14, 2008) 
found that more financially literate investors pay lower front-end 
loads but similar management fees, and suggest that investors who 
know about management fees appear not to care about them. Dominitz 
finds that financially literate individuals are better able to 
estimate fees, and better estimates are associated with more optimal 
investment choices. Brad M. Barber et al., Out of Sight, Out of 
Mind, The Effects of Expenses on Mutual Fund Flows, Journal of 
Business, Volume 79, Number 6, 2095-2119 (2005) found that repeat 
investors are more sensitive to load fees than expense ratios, but 
commenters point out that this finding may be an artifact of 
industry load setting practices.
    \26\ Mark Grinblatt et al., Are Mutual Fund Fees Competitive? 
What IQ-Related Behavior Tells Us, Social Science Research Network 
Abstract 1087120 (Nov. 2007) found that investors with different IQs 
pay similar fees, which ``suggests that fees are set 
competitively.''
---------------------------------------------------------------------------

    (ii) Sector differences--Some studies lend insight to the question 
of whether investment prices are efficient by comparing prices paid or 
performance in different market segments.\27\ The Department believes 
that taken together, this literature suggests that there are 
unexplained differences in prices and performance across sectors but 
fails to demonstrate conclusively whether such differences are 
systematically attributable to inefficiently high investment prices.
    (iii) Market power--At least one study suggests that mutual funds 
may wield market power to mark up prices to inefficient levels.\28\
---------------------------------------------------------------------------

    \27\ John P. Freeman & Stewart L. Brown, Mutual Fund Advisory 
Fees: The Cost of Conflicts of Interest, The Journal of Corporate 
Law, Volume 26, 609-673 (Spring 2001), found that the price paid by 
mutual funds for equity fund management is higher than that paid by 
pension funds. Based on this and other evidence they argue that 
mutual fund fees are often excessive. John C. Coates & R. Glenn 
Hubbard, Competition in the Mutual Fund Industry: Evidence and 
Implications for Policy, Social Science Research Network Abstract 
1005426 (Aug. 2007), challenged Freeman and Brown's methods and 
conclusions, arguing that these differences in prices are 
attributable to differences in services for which Freeman and Brown 
did not account. They offer evidence that fees are competitive. 
Alicia H. Munnell et al., Investment Returns: Defined Benefits vs. 
401(k) Plans, Center for Retirement Research Issue Brief Number 52 
(Sept. 2006), found higher returns in defined benefit (DB) plans 
than in DC plans and offered that ``part of the explanation may rest 
with higher fees'' that are paid by DC plan participants. Rob Bauer 
& Rik G.P. Frehen, The Performance of U.S. Pension Funds, Social 
Science Research Network Abstract 965388 (Jan. 2008), found that DC 
and DB plans both perform close to benchmarks while mutual funds 
underperform, and point to hidden costs in mutual funds as the most 
likely reason. Diane Del Guercio & Paula A. Tkac, The Determinants 
of the Flow of Funds of Managed Portfolios: Mutual Funds vs. Pension 
Funds, The Journal of Financial and Quantitative Analysis, Volume 
37, Number 4, 523-557 (Dec. 2002), found that ``in contrast to 
mutual fund investors, pension clients punish poorly performing 
managers by withdrawing assets under management and do not flock 
disproportionately to recent winners.''
    \28\ Guo Ying Luo, Mutual Fund Fee-Setting, Market Structure and 
Mark-Ups, Economica, Volume 69, Number 274, 245-271 (May 2002), 
exploited differences in market concentration across different 
narrow mutual funds categories, and found that mark-ups average 30 
percent of fees across all categories of no load funds and more than 
70 percent across load funds (assuming a 5-year holding period).
---------------------------------------------------------------------------

    (iv) What expenses buy--A number of studies considered the degree 
to which expense dispersion is a function of product features and 
bundled services, and if it is, whether that dispersion is justified by 
differences in observable attendant financial benefits such as 
performance. Some of this literature also considered the degree to 
which investors choose investments where expenses are so justified. In 
the Department's view this literature taken together suggests that a 
substantial portion of expense dispersion is attributable to 
distribution expenses, including compensation of intermediaries and 
advertising.\29\ It casts doubt on whether such expenses are duly 
offset by observable financial benefits. Most studies are consistent 
with the possibility that such expenses are at least partly offset by 
unobserved benefits such as reduced search costs and other support for 
novice and unsophisticated investors, but most are also consistent with 
the possibility that some expenses are not so offset and that 
investors, especially unsophisticated ones, sometimes pay inefficiently 
high prices.\30\ The authors of some studies expressly interpreted 
their failure to identify offsetting financial benefits as evidence 
that prices are inefficiently high. Some suggested that conflicted 
intermediaries may serve their own and fund managers' interests, 
thereby generating inefficiently high profits for either or both. 
Others disagreed, believing that investors efficiently derive a 
combination of financial and intangible benefits for their expense 
dollars.\31\
---------------------------------------------------------------------------

    \29\ The literature also attributed much expense dispersion to 
differences in the cost of managing different types of funds. For 
example, active equity management is more expensive than passive and 
management of foreign or small cap equity funds is more expensive 
than management of large cap domestic equity funds. Investors 
therefore might optimally diversify across funds with different 
levels of investment management expense. Some studies questioned 
whether active management delivers observable financial benefits 
commensurate to the associate expense. For example, Kenneth R. 
French, The Cost of Active Investing, Social Science Research 
Network Abstract 1105775 (Apr. 2008), found that investors spend 
0.67 percent of aggregate U.S. stock market value each year 
searching for superior return, and characterized this as society's 
cost of price discovery.
    \30\ Both of these hypotheses are also consistent with 
literature finding a negative link between sophistication and 
expenses.
    \31\ The following is a sampling of findings and interpretations 
reported in various studies that the Department reviewed. The 
Department observes that some of these studies have been published 
in peer-reviewed journals, while others have not. Some are working 
papers subject to later revision. Some research is visibly supported 
by industry or other interests, and some may be independent. Very 
little of this research separately examines DC plan investing. 
Nearly all of it examines mutual fund markets to the exclusion of 
certain competing insurance company or bank products. Some of it 
examines foreign experience. The Department believes it must be 
cautious in drawing inferences from this research as to whether 
investment prices paid by participants are efficient.
    Daniel B. Bergstresser et al., Assessing the Costs and Benefits 
of Brokers in the Mutual Fund Industry, Social Science Research 
Network Abstract 616981 (Sept. 2007), found that investors who pay 
to purchase funds via intermediaries realize inferior returns, and 
said this result is consistent with either intangible benefits for 
investors or inefficiently high prices due to conflicts.
    Ralph Bluethgen et al., Financial Advice and Individual 
Investors' Portfolios, Social Science Research Network Abstract 
968197 (Mar. 2008), found that advisers (who are mostly compensated 
by commission) improve diversification and allocation across classes 
while increasing fees and turnover. They said these findings are 
consistent with ``honest advice.''
    Mercer Bullard et al., Investor Timing and Fund Distribution 
Channels, Social Science Research Network Abstract 1070545 (Dec. 
2007), found that investors who transact through conflicted advisers 
incur timing underperformance.
    Susan Christoffersen et al., The Economics of Mutual-Fund 
Brokerage: Evidence from the Cross Section of Investment Channels, 
Science Research Network Abstract 687522 (Dec. 2005), identified 
some financial benefits reaped by investors who pay to invest 
through intermediaries.
    Sean Collins, Fees and Expenses of Mutual Funds, 2006, 
Investment Company Institute Research Fundamentals, Volume 16, 
Number 2 (June 2007), reported that mutual fund fees and expenses 
are declining.
    Sean Collins, Are S&P 500 Index Mutual Funds Commodities?, 
Investment Company Institute Perspective, Volume 11, Number 3 (Aug. 
2005), argued that S&P 500 index funds are not uniform commodities. 
For example, they are distributed in different ways. He found that 
91 percent of the variation in these funds' expense ratios can be 
explained by a combination of fund asset size, investor account 
size, fee waivers and separate fees, and investor advice that is 
bundled into expense ratios. He argued that these funds 
competitively pass economies of scale along to investors, and 
reported that assets and flows are concentrated in low-cost funds.
    Henrik Cronqvist, Advertising and Portfolio Choice, Social 
Science Research Network Abstract 920693 (July 26, 2006), found that 
fund advertising steered investors toward ``portfolios with higher 
fees, more risk, more active management, more `hot' sectors, and 
more home bias.'' He suggested that ``with the use of advertising, 
funds can differentiate themselves and therefore charge investors 
higher fees than the lowest-cost supplier in the industry.''
    Daniel N. Deli, Mutual Fund Advisory Contracts: An Empirical 
Investigation, The Journal of Finance, Volume 57, Number 1, 109-133 
(Feb. 2002), found that differences in investment advisers' marginal 
compensation reflected differences in their marginal product, 
difficulty in measuring adviser performance, control environments, 
and scale economies. Based on this finding, he suggested that 
investment prices are efficient and recommended caution in any 
regulatory effort to influence such prices.
    Edwin J. Elton et al., Are Investors Rational? Choices Among 
Index Funds, The Journal of Finance, Volume 59, Number 1, 261-288 
(Feb. 2004), found that flows into high-expense (and therefore 
predictably low performance) S&P 500 index mutual funds were higher 
than would be expected in an efficient market. They concluded that, 
because investors are not perfectly informed and rational, inferior 
products can prosper. Commenters, however, contended that, because 
the authors scaled flows by fund size and smaller funds have higher 
expenses, these findings exaggerated the degree to which flows are 
directed to high-expense funds.
    Javier Gil-Bazo & Pablo Ruiz-Verd[uacute], Yet Another Puzzle? 
Relation Between Price and Performance in the Mutual Fund Industry, 
Social Science Research Network Abstract 947448 (March 2007), found 
that ``funds with worse before-fee performance charge higher fees.'' 
They hypothesized that lower-performing funds lose sophisticated 
investors to higher performing funds, then are left with relatively 
unsophisticated investors who are not as responsive to price.
    John A. Haslem et al., Performance and Characteristics of 
Actively Managed Retail Equity Mutual Funds with Diverse Expense 
Ratios, Financial Services Review, Volume 17, Number 1, 49-68 
(2008), found that funds with lower expenses have superior returns. 
John A. Haslem et al., Identification and Performance of Equity 
Mutual Funds with High Management Fees and Expense Ratios, Journal 
of Investing, Volume 16, Number 2 (2007), found that certain 
performance measures vary negatively with fees and, on that basis, 
suggested that mutual funds do not compete strongly on price and 
that expenses are too high.
    Sarah Holden & Michael Hadley, The Economics of Providing 401(k) 
Plans: Services, Fees and Expenses 2006, Investment Company 
Institute Research Fundamentals, Volume 16, Number 4 (Sept. 2007), 
reported that 401(k) mutual fund investors tended to pay lower than 
average expenses and that 401(k) assets were concentrated in low-
cost funds.
    Ali Hortacsu & Chad Syverson, Product Differentiation, Search 
Costs, and Competition in the Mutual Fund Industry: A Case Study of 
S&P 500 Index Funds, Quarterly Journal of Economics, 403 (May 2004), 
documented dispersion in S&P 500 Index Fund expense ratios, and 
reported that low-cost funds had a dominant, but falling, market 
share. They concluded that an influx of novice investors who must 
defray search costs explained dispersion in expenses and flows to 
high-expense funds.
    Todd Houge & Jay W. Wellman, The Use and Abuse of Mutual Fund 
Expenses, Social Science Research Network Abstract 880463 (Jan. 
2006), found that load funds charge higher 12b-1 and management 
fees. They attributed this to abusive market segmentation that 
extracted excessive fees from unsophisticated investors.
    Giuliano Iannotta & Marco Navone, Search Costs and Mutual Fund 
Fee Dispersion, Social Science Research Network Abstract 1231843 
(Aug. 2008), analyzed the effect of search costs on mutual fund fees 
with data on broad U.S. domestic equity funds. They estimated the 
portion of the expense ratio that was not justified by the quality 
of service provided, by the cost structure of the investment 
company, or by the specificities of the clientele served by the fund 
and found that its dispersion was lower for highly visible funds and 
for funds that invested heavily in marketing. In the case of the 
U.S. mutual fund market, they argued, the dispersion of this 
residual demonstrated the extent to which some firms can charge a 
``non-marginal'' (that is higher than competitive) price.
    Marc M. Kramer, The Influence of Financial Advice on Individual 
Investor Portfolio Performance, Social Science Research Network 
Abstract 1144702 (Mar. 2008), found that advised investors took less 
risk and thereby reaped lower returns. Risk-adjusted performance was 
similar. Adjusting further for investor characteristics, advised 
investors performed slightly worse.
    Erik R. Sirri & Peter Tufano, Costly Search and Mutual Fund 
Flows, The Journal of Finance, Volume 53, Number 5, 1589-1622 (Oct. 
1998), found that investors were ``fee sensitive in that lower-fee 
funds and funds that reduce fees grow faster.'' Investors' fee 
sensitivity was not symmetric, however.
    Edward Tower & Wei Zheng, Ranking Mutual Fund Families: Minimum 
Expenses and Maximum Loads as Markers for Moral Turpitude, Social 
Science Research Network Abstract 1265103 (Sept. 2008), found a 
negative relationship between expense ratios and gross performance. 
The Division of Investment Management: Report on Mutual Fund Fees 
and Expenses, U.S. Securities and Exchange Commission (Dec. 2000), 
at http://www.sec.gov/news/studies/feestudy.htm, described mutual 
fund fees and expenses and identified major factors that influenced 
fee levels but did not assess whether prices were efficient.
    Xinge Zhao, The Role of Brokers and Financial Advisors Behind 
Investment Into Load Funds, China Europe International Business 
School Working Paper (Dec. 2005), at http://www.ceibs.edu/faculty/zxinge/brokerrole-zhao.pdf, found that funds with higher loads 
received higher flows, and suggested that conflicted intermediaries 
enriched themselves at investors' expense.

---------------------------------------------------------------------------

[[Page 3842]]

    In light of this literature and public commenters, the Department 
believes that the available research provides an insufficient basis to 
confidently determine whether or to what degree participants pay 
inefficiently high investment prices. Market conditions that may lead 
to inefficiently high prices--namely imperfect information, search 
costs and investor behavioral biases--certainly exist in the retail IRA 
market and likely exist to some degree in particular segments of the DC 
plan market. The Department believes there is a strong possibility that 
at least some participants, especially IRA beneficiaries, pay 
inefficiently high investment prices. If so, the Department would 
expect these actions to reduce that inefficiency. This would increase 
participants' welfare by transferring surplus from producers of 
investment products and services to them and by reducing dead weight 
loss. The Department additionally believes that even where investment 
prices are efficient, participants often make bad investment decisions 
with respect to expenses--that is, they buy investment products and 
services whose marginal cost exceed the associated marginal benefit to 
them.\32\
---------------------------------------------------------------------------

    \32\ It is possible that the converse could sometimes occur: 
participants might fail to buy efficiently priced products and 
services whose marginal cost lags the associated marginal benefit to 
them. In that case advice, by correcting this error, might lead to 
higher expenses, but would still improve welfare. Because research 
suggests that participants are insensitive to fees rather than 
excessively sensitive to them, the Department believes that this 
converse situation is likely to be rare.
---------------------------------------------------------------------------

    The Department expects these actions to reduce such investment 
errors, improving participant and societal welfare. However, the 
Department has no basis on which to quantify such errors or 
improvements.

3. Impact Assessment

    Although the Department anticipates that these actions will 
increase the availability of investment advice to DC plan participants 
and the use of advice by IRA beneficiaries, the Department is uncertain 
how changing market conditions might affect the incidence and magnitude 
of investment errors, as well as the availability, use, and effect of 
investment advice. Recent developments in financial markets and in the 
market for financial products and services underscore this uncertainty. 
However, given that the costs of this regulation are due to the cost of 
providing (or paying for) investment advice, it will be incurred only 
to the extent that participants seek advice and anticipate improved 
returns on their investments. Thus, the Department remains confident 
that these actions will yield positive net benefits though we are 
uncertain of the magnitude. The Department believes that the approach 
used in the analysis for the proposed rule could reflect the long-term 
effects of these actions and can be viewed as a reasonable upper bound. 
The Department's assumptions are summarized in Tables 1, 2, and 3.

         Table 1--Availability of Advice to DC Plan Participants
------------------------------------------------------------------------
                                                 Any advice
                Policy context                   (computer       Live
                                                  or live)     adviser
------------------------------------------------------------------------
Pre-PPA.......................................          40%          20%
PPA...........................................           50           25
Class exemption...............................           60           35
------------------------------------------------------------------------
Note: There are approximately 66 million DC participants.


                       Table 2--Number of Entities
------------------------------------------------------------------------
                                          Pre PPA      PPA         CE
------------------------------------------------------------------------
DC:
    Plans offering (000s)..............     209.46     261.82     314.19
    Participants offered (MM)..........      26.44      33.05      39.66
    Participants using (MM)............       6.61       8.26      10.25
IRA:
    IRAs using (MM)....................      16.81      25.47      33.97
------------------------------------------------------------------------


[[Page 3843]]


                             Table 3--Use of Advice by DC Plan and IRA Participants
----------------------------------------------------------------------------------------------------------------
                                      Share of participants              Dollars advised ($ trillions)
                                             advised         ---------------------------------------------------
                                   --------------------------
          Policy context                    DC plans
                                   --------------------------     IRA        DC plans       IRAs       Combined
                                       Where
                                      offered      Overall
----------------------------------------------------------------------------------------------------------------
Pre-PPA...........................          25%          10%          33%        $0.30        $1.40        $1.70
PPA...............................           25           13           50         0.30         2.10         2.50
Class exemption...................           26           16           67         0.40         2.80         3.20
----------------------------------------------------------------------------------------------------------------
Note: There are approximately 66 million DC participants and approximately 51 million IRA beneficiaries.

    As in its RIA of the proposals, the Department assumes here that 
advised participants make investment errors at one-half the rate of 
unadvised participants. The remaining errors reflect participant 
failures to follow advice, together with possible flaws in some advice. 
Advice arrangements operating without need for exemptive relief, 
pursuant to the PPA statutory exemption, and pursuant to the class 
exemption are equally effective on average, the Department assumes.
    The Department expects the PPA as implemented by this regulation, 
together with this class exemption, to reduce investment errors to the 
benefit of participants. The Department's estimates of investment 
errors and reductions from investment advice are summarized in Table 4.

        Table 4--Long Term Investment Errors and Impact of Advice
                          [$ billions, annual]
------------------------------------------------------------------------
                                                  Errors eliminated by
                                    Remaining            advice
          Policy context              errors   -------------------------
                                                Incremental   Cumulative
------------------------------------------------------------------------
No advice........................         $115           $0           $0
Pre-PPA advice only..............          101           14           14
PPA..............................           95            7           20
Class exemption..................           88            7           27
------------------------------------------------------------------------

    In the RIA of the proposals, the Department estimated costs of $1.8 
billion for advice arrangements operating under the PPA statutory 
exemption and $2.3 billion for advice arrangements under the class 
exemption. As the requirement to document and keep records on the basis 
of advice provided under the class exemption was broadened, costs of 
about $610 million were added to the costs of the class exemption, 
leading to a new estimate of $2.9 billion. The current cost estimates 
are summarized in Table 5.

                         Table 5--Cost of Advice
------------------------------------------------------------------------
                                                                Class
                                     Pre-PPA        PPA       exemption
------------------------------------------------------------------------
Incremental
    Advice cost ($ billions).....        $3.80        $1.80        $2.90
Advice cost rate (bps, average)..           23           23           37
Cumulative (combined with
 policies to the left)
    Advice cost ($ billions).....        $3.80        $5.60        $8.50
    Advice cost rate (bps,                  23           23           26
     average)....................
------------------------------------------------------------------------

4. Alternatives

    In formulating this final rule, the Department considered several 
alternative approaches, which it detailed in its RIA of the proposals. 
The Department in these final actions did not adopt any of the 
alternatives discussed in its RIA of the proposals, having received no 
sufficiently persuasive comments suggesting that it should. Some public 
commenters on the proposals suggested alternatives the Department had 
not yet considered. The furthest reaching commenters, expressing 
concern that conflicts permitted under the proposals would taint 
advice, suggested that the Department should either withdraw the 
proposals or modify them to require stricter and/or broader fee 
leveling. As detailed above, the Department believes these actions' 
conditions are sufficiently protective to safeguard the quality of 
advice. Accordingly, the Department did not pursue these alternatives. 
Other commenters suggested more incremental revisions to the proposals. 
The Department's decisions whether to adopt these suggestions are 
discussed earlier in this preamble.

5. Uncertainty

    As previously stated, the Department is uncertain how changing 
market conditions might affect the incidence and magnitude of 
investment errors, as well as the availability, use, and effect of 
investment advice. Recent developments in financial markets and in the 
market for financial products and

[[Page 3844]]

services underscore this uncertainty. On one hand, falling account 
balances might reduce the magnitude of both investment errors and 
potential gains from corrective advice. On the other hand, volatility 
and losses in financial markets might amplify these, and might increase 
plan sponsors' propensity to make advice available and participants' 
propensity to seek and follow advice. At the same time, restructuring 
and consolidation among suppliers of financial products and services 
might alter the cost and availability of advice. The Department intends 
its quantitative estimates to reflect the long-term effects that will 
encompass a variety of market circumstances. The literature and 
experience underlying the Department's estimates reflect a variety of 
historical market contexts and conditions. However, given the 
uncertainty, we now present the estimate as a plausible upper bound for 
the possible effects.
    Regardless, the Department remains highly confident in its 
conclusion expressed in its RIA of the proposals that investment errors 
are common and often large, producing large avoidable losses (including 
foregone earnings) in the long run for participants. It likewise 
remains confident that participants can reduce errors substantially by 
obtaining and following good advice. Public comments on the proposals 
reinforce these conclusions.
    The Department also remains confident that these actions, by 
relaxing rules governing arrangements under which advice can be 
delivered, will promote wider use of advice. However, the Department is 
uncertain to what extent advice will reach participants and to what 
extent advice that does reach them will reduce errors. To illustrate 
that uncertainty, the Department conducted sensitivity tests of how its 
estimates of the reduction in investment errors attributable to the PPA 
and this class exemption would change in response to alternative 
assumptions regarding the availability, use, and quality of advice. 
Table 6 summarizes the results of these tests.

                         Table 6--Uncertainty in Estimate of Investment Error Reduction
                                              [$ billions annually]
----------------------------------------------------------------------------------------------------------------
                                                                            Impact of
                          Scenarios                            Impact of      class      Impact of    Remaining
                                                                  PPA       exemption    all advice     errors
----------------------------------------------------------------------------------------------------------------
Advice eliminates:
    75% of errors...........................................          $10          $10          $43          $80
    50% of errors...........................................            7            7           27           88
    25% of errors...........................................            3            3           13           96
After PPA/class exemption, advice reaches:
    15%/21% of DC and 60%/80% of IRA........................           11            8           33           82
    13%/16% of DC and 50%/67% of IRA........................            7            7           27           88
    11%/13% of DC and 40%/50% of IRA........................            3            4           20           95
----------------------------------------------------------------------------------------------------------------

    The Department remains uncertain whether the magnitude and 
incidence of investment errors and the potential for correction of such 
errors in the context of IRAs might differ from that in the context of 
ERISA-covered DC plans. If a DC plan's menu of investment options is 
efficient then the incidence and/or magnitude of errors might be 
smaller than in the IRA context. If it is inefficient then errors might 
be more numerous and/or larger, but the potential for correcting them 
might be constrained. Commenters that address this issue mostly suggest 
that menus are efficient.
    The Department remains uncertain about the mix of advice and other 
support arrangements that will compose the market, and about the 
relative effectiveness of alternative investment advice arrangements or 
other means of supporting participants' investment decisions. As 
discussed above, comments on these questions are mixed and provide no 
basis for the Department to revise its baseline assumption that all 
arrangements will be equally effective.
    The Department is uncertain about the potential magnitude of any 
transitional costs associated with this final rule. These might include 
costs associated with efforts of prospective fiduciary advisers to 
adapt their business practices to the applicable conditions. They might 
also include transaction costs associated with initial implementation 
of investment recommendations by newly advised participants. The 
Department's concern over this uncertainty is modest because commenters 
on the proposals emphasize the industry's willingness to comply with 
these actions' conditions and the benefits to investors of implementing 
sound recommendations.
    Another source of uncertainty involves potential indirect 
downstream effects of this final rule. Investment advice may sometimes 
come packaged with broader financial advice, which may include advice 
on how much to contribute to a DC plan. The Department has no basis to 
estimate the incidence of such broad advice or its effects, but notes 
that those effects could be large. The opening of large new markets to 
a variety of investment advice arrangements to which they were 
heretofore closed may affect the evolution of investment advice 
products and services and related technologies and their distribution 
channels and respective market shares. Other possible indirect effects 
that the Department lacks bases to estimate include financial market 
impacts of changes in investor behavior and related macroeconomic 
effects.
    However, given that the costs of this regulation are due to the 
cost of providing (or paying for) investment advice, it will be 
incurred only to the extent that participants seek advice and 
anticipate improved returns on their investments. Thus, the Department 
remains confident that these actions will yield positive net benefits 
though we are uncertain of the magnitude.

E. Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is significant and therefore subject to the 
requirements of the Executive Order and review by the Office of 
Management and Budget (OMB). This action, comprising this final rule, 
is economically significant under section 3(f)(1) of the Executive 
Order because it is likely to have an effect on the economy of $100 
million or more in any one year. Accordingly, the Department undertook 
the foregoing analysis of the action's impact. On that basis the 
Department believes that the action's benefits justify its costs.

[[Page 3845]]

F. Regulatory Flexibility Act

    In the notice of proposed rulemaking, the Department certified that 
the proposed regulation, if adopted, would not have a significant 
economic impact on a substantial number of small entities. For purposes 
of the analysis, the Department proposed to continue its usual practice 
of considering a small entity to be an employee benefit plan with fewer 
than 100 participants. The Department consulted with the Small Business 
Administration Office of Advocacy concerning use of this participant 
count standard for Regulatory Flexibility Act purposes and requested 
public commenters on this issue. The Department did not receive any 
comments that address its use of the participant count standard and 
continues to consider a small entity to be an employee benefit plan 
with fewer than 100 participants.
    The Department received a comment from a small investment advisory 
firm that provides investment management services to IRA beneficiaries. 
The commenter expressed concern that it will incur substantial cost to 
comply with the PPA's statutory exemption in order to continue 
providing investment advisory services for its IRA clients. The 
Department observes, however, that investment advice arrangements that 
were permissible before enactment of the PPA remain permissible without 
respect to whether they satisfy the conditions of the PPA's statutory 
exemption. Therefore the Department does not detect in this comment 
evidence of a substantial impact on a small entity.
    Another commenter stated that small plan sponsors will bear an 
additional fiduciary burden under the statutory exemption, because it 
allows them to enter into investment advice arrangements with 
conflicted fiduciary advisers. Therefore, the commenter opined, the 
Department should have completed an Initial Regulatory Flexibility 
Analysis when proposing the regulation. The Department notes, however, 
that the permissibility of such arrangements is established by statute 
and not by this implementing regulation. The Department also notes that 
small plan sponsors remain free to enter into advice arrangements that 
are free from conflicts. Therefore the Department does not detect in 
this comment evidence of a substantial impact on a significant number 
of small entities.
    In light of the foregoing, the Department hereby certifies that the 
final rule will not have a significant impact on a substantial number 
of small entities.

G. Congressional Review Act

    This final rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and will be transmitted to the Congress and 
the Comptroller General for review.

H. Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, the final rule does not 
include any federal mandate that will result in expenditures by state, 
local, or tribal governments in the aggregate of more than $100 
million, adjusted for inflation, or increase expenditures by the 
private sector of more than $100 million, adjusted for inflation.

I. Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism and requires the adherence to specific 
criteria by federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. This final rule does not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Section 514 of ERISA provides, with certain 
exceptions specifically enumerated, that the provisions of Titles I and 
IV of ERISA supersede any and all laws of the States as they relate to 
any employee benefit plan covered under ERISA. The requirements 
implemented in the rule do not alter the fundamental provisions of the 
statute with respect to employee benefit plans, and as such would have 
no implications for the States or the relationship or distribution of 
power between the national government and the States.

J. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the notice of proposed rulemaking 
(NPRM) solicited commenters on the information collections included 
therein. The Department also submitted an information collection 
request (ICR) to OMB in accordance with 44 U.S.C. 3507(d), 
contemporaneously with the publication of the NPRM, for OMB's review. 
No public comments were received that specifically addressed the 
paperwork burden analysis of the information collections.
    The Department submitted an ICR to OMB for its request of a new 
information collection. OMB approved the ICR on January 9, 2009, under 
OMB Control Number 1210-0134, which will expire on January 31, 2012.
    In order to use the statutory exemption and/or the class exemption 
to provide investment advice to participants and beneficiaries in 
participant-directed DC plans and beneficiaries of IRAs (collectively 
hereafter, ``participants''), investment advisory firms are required to 
make disclosures to participants and hire an independent auditor to 
conduct a compliance audit and issue an audit report every year. 
Investment advice firms following the conditions of the exemption based 
on disclosure of computer model-generated investment advice are 
required to obtain certification of the model from an eligible 
investment expert. The class exemption conditions its relief on 
establishing written policies and procedures, and both exemptions 
impose recordkeeping requirements. These paperwork requirements are 
designed to safeguard the interests of participants in connection with 
investment advice covered by the exemptions.
    The calculation of the estimated hour and cost burden of the ICRs 
under the statutory and class exemption were discussed in detail in the 
NPRM and are summarized below.\33\
---------------------------------------------------------------------------

    \33\ Changes made to the disclosure requirements in the final 
rule are specifically identified below. In addition to the 
disclosure requirements contained in the NPRM, the final statutory 
and class exemption provide that, if a computer model does not make 
recommendations with respect to investment options that constitute 
certain investment funds, products, or services, the fiduciary 
adviser must provide the participant or beneficiary with information 
explaining such funds, products, or services when the investment 
advice generated by the computer model is presented. For purposes of 
this analysis, the Department assumes that this information is 
readily available to the fiduciary advisor and will not necessarily 
have to be given to the participant in paper form. Therefore, no 
additional paperwork burden was added. The numbers presented also 
reflect a very minor update of the number of DC plan participants 
utilizing advice.
---------------------------------------------------------------------------

1. Final Statutory Exemption Hour and Cost Burden

    The Department estimates that the third-party disclosures, computer 
model certification, and audit requirements for

[[Page 3846]]

the final statutory exemption will require approximately 4.0 million 
burden hours with an equivalent cost of approximately $416.8 million 
and a cost burden of approximately $579.4 million in the first year. In 
each subsequent year the total labor burden hours are estimated to be 
approximately 2.1 million hours with an equivalent cost of 
approximately $215.6 million and the cost burden is estimated at 
approximately $430.1 million per year.

2. Final Class Exemption Hour and Cost Burden

    The Department estimates that the third-party disclosures, the 
written policies and procedures, and the recordkeeping and audit 
requirements for the final class exemption will require a total of 
approximately 12.1 million burden hours with an equivalent cost of 
approximately $991.3 million and a total cost burden of approximately 
$63.2 million in the first year. In each subsequent year, the total 
burden hours are estimated at approximately 11.4 million hours with an 
equivalent cost of approximately $905.6 million and a total cost burden 
of approximately $63.2 million per year.
    These numbers include an additional 7.7 million burden hours ($610 
million in equivalent costs) in all years due to the extension in the 
final class exemption of the requirement that fiduciary advisers in 
arrangements using fee-leveling conclude that the provided advice is in 
the best interest of the participant or beneficiary, explain the basis 
of this conclusion, document the explanation within 30 days, and retain 
the documentation. Under the proposed class exemption, this requirement 
only applied to arrangements involving post-computer model or post-
investment education investment advice.

3. Overall Exemption Hour and Cost Burden

    The Department estimates that the third-party disclosures, the 
computer model certification, the written policies and procedures, and 
the recordkeeping and audit requirements for the statutory and class 
exemptions require approximately 16.1 million burden hours with an 
equivalent cost of approximately $1.41 billion and a cost burden of 
approximately $642.6 million in the first year. The labor burden hours 
in each subsequent year are approximately 13.5 million hours with an 
equivalent cost of approximately $1.12 billion and the cost burden in 
each subsequent year is approximately $493.3 million per year. These 
paperwork burden estimates are summarized as follows:
    Type of Review: New collection (Request for new OMB Control 
Number).
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Titles: (1) Proposed Class Exemption for the Provision of 
Investment Advice to Participants and Beneficiaries of Self-Directed 
Individual Account Plans and IRAs, and (2) Proposed Investment Advice 
Regulation.
    OMB Control Number: 1210-NEW.
    Affected Public: Business or other for-profit.
    Estimated Number of Respondents: 16,000.
    Estimated Number of Annual Responses: 20,789,000.
    Frequency of Response: Initially, Annually, Upon Request, when a 
material change.
    Estimated Total Annual Burden Hours: 16,126,000 hours in the first 
year; 13,504,000 hours in each subsequent year.
    Estimated Total Annual Burden Cost: $642,552,000 for the first 
year; $493,253,000 for each subsequent year.

List of Subjects in 29 CFR Part 2550

    Employee benefit plans, Exemptions, Fiduciaries, Investments, 
Pensions, Prohibited transactions, Reporting and recordkeeping 
requirements, and Securities.

0
For the reasons set forth in the preamble, the Department amends 
Chapter XXV, subchapter F, part 2550 of Title 29 of the Code of Federal 
Regulations as follows:

SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT 
INCOME SECURITY ACT OF 1974

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

0
1. The authority citation for part 2550 is revised to read as follows:

    Authority: 29 U.S.C. 1135; and Secretary of Labor's Order No. 1-
2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401b-1 also issued under 
sec. 102, Reorganization Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 
1978), 3 CFR, 1978 Comp. 332, effective Dec. 31, 1978, 44 FR 1065 
(Jan. 3, 1978), 3 CFR, 1978 Comp. 332. Sec. 2550.401c-1 also issued 
under 29 U.S.C. 1101. Sections 2550.404c-1 and 2550.404c-5 also 
issued under 29 U.S.C. 1104. Sec. 2550.407c-3 also issued under 29 
U.S.C. 1107. Sec. 2550.404a-2 also issued under 26 U.S.C. 401 note 
(sec. 657, Pub. L. 107-16, 115 Stat. 38). Sec. 2550.408b-1 also 
issued under 29 U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan 
No. 4 of 1978, 3 CFR, 1978 Comp. p. 332, effective Dec. 31, 1978, 44 
FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 Comp. 332. Sec. 2550.408b-19 
also issued under sec. 611, Public Law 109-280, 120 Stat. 780, 972, 
and sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. 
p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 
CFR, 1978 Comp. 332. Sec. 2550.408g-1 also issued under sec. 102, 
Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p. 332, 
effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 
Comp. 332. Sec. 2550.408g-2 also issued under 29 U.S.C. 1108(g) and 
sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p. 
332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 
1978 Comp. 332. Sec. 2550.412-1 also issued under 29 U.S.C. 1112.

0
2. Add Sec.  2550.408g-1 to read as follows:


Sec.  2550.408g-1  Investment advice--participants and beneficiaries.

    (a) In general. (1) This section provides relief from the 
prohibitions of section 406 of the Employee Retirement Income Security 
Act of 1974, as amended (ERISA or the Act), and section 4975 of the 
Internal Revenue Code of 1986, as amended (the Code), for certain 
transactions in connection with the provision of investment advice to 
participants and beneficiaries. This section, at paragraph (b), 
implements the statutory exemption set forth at sections 408(b)(14) and 
408(g)(1) of ERISA and sections 4975(d)(17) and 4975(f)(8) of the Code. 
This section, at paragraph (d), prescribes, pursuant to section 408(a) 
of ERISA and section 4975(c)(2) of the Code, a class exemption for 
certain transactions not otherwise covered by the statutory exemption. 
The requirements and conditions set forth in this section apply solely 
for the relief described in paragraphs (b) and (d) of this section and, 
accordingly, no inferences should be drawn with respect to requirements 
applicable to the provision of investment advice not addressed by this 
section.
    (2) Nothing contained in ERISA section 408(g)(1), Code section 
4975(f)(8), this regulation or the class exemption contained herein 
imposes an obligation on a plan fiduciary or any other party to offer, 
provide or otherwise make available any investment advice to a 
participant or beneficiary.
    (3) Nothing contained in ERISA section 408(g)(1), Code section 
4975(f)(8), this regulation or the class exemption contained herein 
invalidates or otherwise affects prior regulations, exemptions, 
interpretive or other guidance issued by the Department of Labor 
pertaining to the provision of investment advice and the circumstances 
under which such advice may or may not constitute a prohibited

[[Page 3847]]

transaction under section 406 of ERISA or section 4975 of the Code.
    (b) Statutory exemption. (1) General. Sections 408(b)(14) and 
408(g)(1) of ERISA provide an exemption from the prohibitions of 
section 406 of ERISA for transactions described in section 408(b)(14) 
of ERISA in connection with the provision of investment advice to a 
participant or a beneficiary if the investment advice is provided by a 
fiduciary adviser under an ``eligible investment advice arrangement.'' 
Sections 4975(d)(17) and (f)(8) of the Code contain parallel provisions 
to ERISA sections 408(b)(14) and (g)(1).
    (2) Eligible investment advice. For purposes of section 408(g)(1) 
of ERISA and section 4975(f)(8) of the Code, an ``eligible investment 
advice arrangement'' means an arrangement that meets either the 
requirements of paragraph (b)(3) of this section or paragraph (b)(4) of 
this section, or both.
    (3) Arrangements that use fee-leveling. For purposes of this 
section, an arrangement is an eligible investment advice arrangement 
if--
    (i)(A) Any investment advice is based on generally accepted 
investment theories that take into account the historic returns of 
different asset classes over defined periods of time, although nothing 
herein shall preclude any investment advice from being based on 
generally accepted investment theories that take into account 
additional considerations;
    (B) Any investment advice takes into account investment management 
and other fees and expenses attendant to the recommended investments;
    (C) Any investment advice takes into account, to the extent 
furnished by a plan, participant or beneficiary, information relating 
to age, time horizons (e.g., life expectancy, retirement age), risk 
tolerance, current investments in designated investment options, other 
assets or sources of income, and investment preferences of the 
participant or beneficiary. A fiduciary adviser shall request such 
information, but nothing in this paragraph (b)(3)(i)(C) shall require 
that any investment advice take into account information requested, but 
not furnished by a participant or beneficiary, nor preclude requesting 
and taking into account additional information that a plan or 
participant or beneficiary may provide;
    (D) Any fees or other compensation (including salary, bonuses, 
awards, promotions, commissions or other things of value) received, 
directly or indirectly, by any employee, agent or registered 
representative that provides investment advice on behalf of a fiduciary 
adviser does not vary depending on the basis of any investment option 
selected by a participant or beneficiary;
    (E) 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 by a participant or 
beneficiary; and
    (ii) The requirements of paragraphs (b)(5), (6), (7), and (8) and 
paragraph (e) of this section are met.
    (4) Arrangements that use computer models. For purposes of this 
section, an arrangement is an eligible investment advice arrangement if 
the only investment advice provided under the arrangement is advice 
that is generated by a computer model described in paragraphs (b)(4)(i) 
and (ii) of this section under an investment advice program and with 
respect to which the requirements of paragraphs (b)(5), (6), (7), and 
(8) and paragraph (e) are met.
    (i) A computer model shall be designed and operated to--
    (A) Apply generally accepted investment theories that take into 
account the historic returns of different asset classes over defined 
periods of time, although nothing herein shall preclude a computer 
model from applying generally accepted investment theories that take 
into account additional considerations;
    (B) Take into account investment management and other fees and 
expenses attendant to the recommended investments;
    (C) Request from a participant or beneficiary and, to the extent 
furnished, utilize information relating to age, time horizons (e.g., 
life expectancy, retirement age), risk tolerance, current investments 
in designated investment options, other assets or sources of income, 
and investment preferences; provided, however, that nothing herein 
shall preclude a computer model from requesting and taking into account 
additional information that a plan or a participant or beneficiary may 
provide;
    (D) Utilize appropriate objective criteria to provide asset 
allocation portfolios comprised of investment options available under 
the plan;
    (E) Avoid investment recommendations that:
    (1) Inappropriately favor investment options offered by the 
fiduciary adviser or a person with a material affiliation or material 
contractual relationship with the fiduciary adviser over other 
investment options, if any, available under the plan; or
    (2) Inappropriately favor investment options that may generate 
greater income for the fiduciary adviser or a person with a material 
affiliation or material contractual relationship with the fiduciary 
adviser; and
    (F)(1) Except as provided in clause (2) of this paragraph (F), take 
into account all designated investment options, within the meaning of 
paragraph (c)(1) of this section, available under the plan without 
giving inappropriate weight to any investment option.
    (2) A computer model shall not be treated as failing to meet the 
requirements of this paragraph merely because it does not make 
recommendations relating to the acquisition, holding or sale of an 
investment option that:
    (i) Constitutes an investment primarily in qualifying employer 
securities;
    (ii) Constitutes an investment fund, product or service that 
allocates the invested assets of a participant or beneficiary to 
achieve varying degrees of long-term appreciation and capital 
preservation through equity and fixed income exposures, based on a 
defined time horizon (such as retirement age or life expectancy) or 
level of risk of the participant or beneficiary, provided that, 
contemporaneous with the provision of investment advice generated by 
the computer model, the participant or beneficiary is also furnished a 
general description of such funds, products or services and how they 
operate; or
    (iii) Constitutes an annuity option with respect to which a 
participant or beneficiary may allocate assets toward the purchase of a 
stream of retirement income payments guaranteed by an insurance 
company, provided that, contemporaneous with the provision of 
investment advice generated by the computer model, the participant or 
beneficiary is also furnished a general description of such options and 
how they operate.
    (ii) Prior to utilization of the computer model, the fiduciary 
adviser shall obtain a written certification, meeting the requirements 
of paragraph (b)(4)(iv) of this section, from an eligible investment 
expert, within the meaning of paragraph (b)(4)(iii) of this section, 
that the computer model meets the requirements of paragraph (b)(4)(i) 
of this section. If, following certification, a computer model is 
modified in a manner that may affect its ability to meet the 
requirements of paragraph (b)(4)(i), the fiduciary adviser shall, prior 
to utilization of the modified model,

[[Page 3848]]

obtain a new certification from an eligible investment expert that the 
computer model, as modified, meets the requirements of paragraph 
(b)(4)(i).
    (iii) The term ``eligible investment expert'' means a person that, 
through employees or otherwise, has the appropriate technical training 
or experience and proficiency to analyze, determine and certify, in a 
manner consistent with paragraph (b)(4)(iv) of this section, whether a 
computer model meets the requirements of paragraph (b)(4)(i) of this 
section; except that the term ``eligible investment expert'' does not 
include any person that has any material affiliation or material 
contractual relationship with the fiduciary adviser, with a person with 
a material affiliation or material contractual relationship with the 
fiduciary adviser, or with any employee, agent, or registered 
representative of the foregoing.
    (iv) A certification by an eligible investment expert shall--
    (A) Be in writing;
    (B) Contain--
    (1) An identification of the methodology or methodologies applied 
in determining whether the computer model meets the requirements of 
paragraph (b)(4)(i) of this section;
    (2) An explanation of how the applied methodology or methodologies 
demonstrated that the computer model met the requirements of paragraph 
(b)(4)(i) of this section;
    (3) A description of any limitations that were imposed by any 
person on the eligible investment expert's selection or application of 
methodologies for determining whether the computer model meets the 
requirements of paragraph (b)(4)(i) of this section;
    (4) A representation that the methodology or methodologies were 
applied by a person or persons with the educational background, 
technical training or experience necessary to analyze and determine 
whether the computer model meets the requirements of paragraph 
(b)(4)(i); and
    (5) A statement certifying that the eligible investment expert has 
determined that the computer model meets the requirements of paragraph 
(b)(4)(i) of this section; and
    (C) Be signed by the eligible investment expert.
    (v) The selection of an eligible investment expert as required by 
this section is a fiduciary act governed by section 404(a)(1) of ERISA.
    (5) Arrangement must be authorized by a plan fiduciary. (i) Except 
as provided in paragraph (b)(5)(ii), the arrangement pursuant to which 
investment advice is provided to participants and beneficiaries 
pursuant to this section must be expressly authorized by a plan 
fiduciary (or, in the case of an Individual Retirement Account (IRA), 
the IRA beneficiary) other than: The person offering the arrangement; 
any person providing designated investment options under the plan; or 
any affiliate of either. Provided, however, that for purposes of the 
preceding, in the case of an IRA, an IRA beneficiary will not be 
treated as an affiliate of a person solely by reason of being an 
employee of such person.
    (ii) In the case of an arrangement pursuant to which investment 
advice is provided to participants and beneficiaries of a plan 
sponsored by the person offering the arrangement or a plan sponsored by 
an affiliate of such person, the authorization described in paragraph 
(b)(5)(i) may be provided by the plan sponsor of such plan, provided 
that the person or affiliate offers the same arrangement to 
participants and beneficiaries of unaffiliated plans in the ordinary 
course of its business.
    (iii) For purposes of the authorization described in paragraph 
(b)(5)(i), a plan sponsor shall not be treated as a person providing a 
designated investment option under the plan merely because one of the 
designated investment options of the plan is an option that permits 
investment in securities of the plan sponsor or an affiliate.
    (6) Annual audit. (i) The fiduciary adviser shall, at least 
annually, engage an independent auditor, who has appropriate technical 
training or experience and proficiency, and so represents in writing to 
the fiduciary adviser, to:
    (A) Conduct an audit of the investment advice arrangements for 
compliance with the requirements of this section; and
    (B) Within 60 days following completion of the audit, issue a 
written report to the fiduciary adviser and, except with respect to an 
arrangement with an IRA, to each fiduciary who authorized the use of 
the investment advice arrangement, in accordance with paragraph (b)(5) 
of this section, setting forth the specific findings of the auditor 
regarding compliance of the arrangement with the requirements of this 
section.
    (ii) With respect to an arrangement with an IRA, the fiduciary 
adviser:
    (A) Within 30 days following receipt of the report from the 
auditor, as described in paragraph (b)(6)(i)(B) of this section, shall 
furnish a copy of the report to the IRA beneficiary or make such report 
available on its Web site, provided that such beneficiaries are 
provided information, with the information required to be disclosed 
pursuant to paragraph (b)(7) of this section, concerning the purpose of 
the report, and how and where to locate the report applicable to their 
account; and
    (B) In the event that the report of the auditor identifies 
noncompliance with the requirements of this section, within 30 days 
following receipt of the report from the auditor, shall send a copy of 
the report to the Department of Labor at the following address: 
Investment Advice Exemption Notification--Statutory, U.S. Department of 
Labor, Employee Benefits Security Administration, Room N-1513, 200 
Constitution Ave., NW., Washington, DC 20210.
    (iii) For purposes of this paragraph (b)(6), an auditor is 
considered independent if it does not have a material affiliation or 
material contractual relationship with the person offering the 
investment advice arrangement to the plan or with any designated 
investment options under the plan.
    (iv) For purposes of this paragraph (b)(6), the auditor shall 
review sufficient relevant information to formulate an opinion as to 
whether the investment advice arrangements, and the advice provided 
pursuant thereto, offered by the fiduciary adviser during the audit 
period were in compliance with this section. Nothing in this paragraph 
shall preclude an auditor from using information obtained by sampling, 
as reasonably determined appropriate by the auditor, investment advice 
arrangements, and the advice pursuant thereto, during the audit period.
    (v) The selection of an auditor for purposes of this paragraph 
(b)(6) is a fiduciary act governed by section 404(a)(1) of ERISA.
    (7) Disclosure. (i) The fiduciary adviser must provide, without 
charge, to a participant or a beneficiary before the initial provision 
of investment advice with regard to any security or other property 
offered as an investment option, a written notification of:
    (A) The role of any party that has a material affiliation or 
material 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;
    (B) The past performance and historical rates of return of the 
designated investment options available under the plan, to the extent 
that such information is not otherwise provided;
    (C) All fees or other compensation that the fiduciary adviser or 
any affiliate thereof is to receive (including

[[Page 3849]]

compensation provided by any third party) in connection with--
    (1) The provision of the advice;
    (2) The sale, acquisition, or holding of any security or other 
property pursuant to such advice; or
    (3) Any rollover or other distribution of plan assets or the 
investment of distributed assets in any security or other property 
pursuant to such advice;
    (D) Any material affiliation or material contractual relationship 
of the fiduciary adviser or affiliates thereof in the security or other 
property;
    (E) The manner, and under what circumstances, any participant or 
beneficiary information provided under the arrangement will be used or 
disclosed;
    (F) The types of services provided by the fiduciary adviser in 
connection with the provision of investment advice by the fiduciary 
adviser, including, with respect to a computer model arrangement 
referred to in paragraph (b)(4) of this section, any limitations on the 
ability of a computer model to take into account an investment 
primarily in qualifying employer securities;
    (G) The adviser is acting as a fiduciary of the plan in connection 
with the provision of the advice; and
    (H) 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.
    (ii)(A) The notification required under paragraph (b)(7)(i) of this 
section must be written in a clear and conspicuous manner and in a 
manner calculated to be understood by the average plan participant and 
must be sufficiently accurate and comprehensive to reasonably apprise 
such participants and beneficiaries of the information required to be 
provided in the notification.
    (B) The appendix to this section contains a model disclosure form 
that may be used to provide notification of the information described 
in paragraph (b)(7)(i)(C) of this section. Use of the model form is not 
mandatory. However, use of an appropriately completed model disclosure 
form will be deemed to satisfy the requirements of paragraphs (b)(7)(i) 
and (ii) of this section with respect to such information.
    (iii) The notification required under paragraph (b)(7)(i) of this 
section may, in accordance with 29 CFR 2520.104b-1, be provided in 
written or electronic form.
    (iv) With respect to the information required to be disclosed 
pursuant to paragraph (b)(7)(i) of this section, the fiduciary adviser 
shall, at all times during the provision of advisory services to the 
participant or beneficiary pursuant to the arrangement,--
    (A) Maintain accurate, up-to-date information in a form that is 
consistent with paragraph (b)(7)(ii) of this section,
    (B) Provide, without charge, accurate, up-to-date information to 
the recipient of the advice no less frequently than annually,
    (C) Provide, without charge, accurate information to the recipient 
of the advice upon request of the recipient, and
    (D) Provide, without charge, to the recipient of the advice any 
material change to the information described in paragraph (b)(7)(i) at 
a time reasonably contemporaneous to the change in information.
    (8) Other Conditions. The requirements of this paragraph are met 
if-
    (i) 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,
    (ii) Any sale, acquisition, or holding of a security or other 
property occurs solely at the direction of the recipient of the advice,
    (iii) 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
    (iv) 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.
    (c) Definitions. For purposes of this section:
    (1) The term ``designated investment option'' means any investment 
option designated by the plan into which participants and beneficiaries 
may direct the investment of assets held in, or contributed to, their 
individual accounts. The term ``designated investment option'' shall 
not include ``brokerage windows,'' ``self-directed brokerage 
accounts,'' or similar plan arrangements that enable participants and 
beneficiaries to select investments beyond those designated by the 
plan.
    (2)(i) 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) of 
ERISA by the person to the participant or beneficiary of the plan and 
who is--
    (A) 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,
    (B) A bank or similar financial institution referred to in section 
408(b)(4) of ERISA 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,
    (C) An insurance company qualified to do business under the laws of 
a State,
    (D) A person registered as a broker or dealer under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.),
    (E) An affiliate of a person described in any of clauses (A) 
through (D), or
    (F) An employee, agent, or registered representative of a person 
described in paragraphs (c)(2)(i)(A) through (E) of this section who 
satisfies the requirements of applicable insurance, banking, and 
securities laws relating to the provision of advice.
    (ii) Except as provided under 29 CFR 2550.408g-2, a fiduciary 
adviser includes any person who develops the computer model, or markets 
the computer model or investment advice program, utilized in 
satisfaction of paragraph (b)(4) of this section.
    (3) A ``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).
    (4) ``Individual Retirement Account'' or ``IRA'' means--
    (i) An individual retirement account described in section 408(a) of 
the Code;
    (ii) An individual retirement annuity described in section 408(b) 
of the Code;
    (iii) An Archer MSA described in section 220(d) of the Code;
    (iv) A health savings account described in section 223(d) of the 
Code;
    (v) A Coverdell education savings account described in section 530 
of the Code; or
    (vi) A trust, plan, account, or annuity which, at any time, has 
been determined by the Secretary of the Treasury to be described in any 
of paragraphs (c)(4)(i) through (v) of this section.
    (5) An ``affiliate'' of another person means--
    (i) Any person directly or indirectly owning, controlling, or 
holding with

[[Page 3850]]

power to vote, 5 percent or more of the outstanding voting securities 
of such other person;
    (ii) Any person 5 percent or more of whose outstanding voting 
securities are directly or indirectly owned, controlled, or held with 
power to vote, by such other person;
    (iii) Any person directly or indirectly controlling, controlled by, 
or under common control with, such other person; and
    (iv) Any officer, director, partner, copartner, or employee of such 
other person.
    (6)(i) A person with a ``material affiliation'' with another person 
means--
    (A) Any affiliate of the other person;
    (B) Any person directly or indirectly owning, controlling, or 
holding, 5 percent or more of the interests of such other person; and
    (C) Any person 5 percent or more of whose interests are directly or 
indirectly owned, controlled, or held, by such other person.
    (ii) For purposes of paragraph (c)(6)(i) of this section, 
``interest'' means with respect to an entity--
    (A) The combined voting power of all classes of stock entitled to 
vote or the total value of the shares of all classes of stock of the 
entity if the entity is a corporation;
    (B) The capital interest or the profits interest of the entity if 
the entity is a partnership; or
    (C) The beneficial interest of the entity if the entity is a trust 
or unincorporated enterprise.
    (7) Persons have a ``material contractual relationship'' if 
payments made by one person to the other person pursuant to contracts 
or agreements between the persons exceed 10 percent of the gross 
revenue, on an annual basis, of such other person.
    (8) ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    (d) Class exemption. (1) General. Pursuant to section 408(a) of the 
Act and section 4975(c)(2) of the Code--
    (i) The restrictions of sections 406(a) and 406(b) of the Act and 
the sanctions resulting from the application of section 4975 of the 
Code, by reason of section 4975(c)(1)(A) through (F) of the Code, shall 
not apply to:
    (A) The provision of investment advice described in section 
3(21)(A)(ii) of the Act by a fiduciary adviser to a participant or 
beneficiary of an individual account plan that permits such participant 
or beneficiary to direct the investment of their individual accounts;
    (B) The acquisition, holding, or sale of a security or other 
property pursuant to the investment advice; and
    (C) except as otherwise provided in this exemption, the direct or 
indirect receipt of fees or other compensation by the fiduciary adviser 
(or any employee, agent, registered representative or affiliate 
thereof) in connection with the provision of the advice or in 
connection with an acquisition, holding, or sale of a security or other 
property pursuant to the investment advice, provided that the 
conditions set forth in paragraph (d)(2) are met;
    (ii) The sanctions resulting from the application of section 4975 
of the Code, by reason of section 4975(c)(1)(A) through (F) of the 
Code, shall not apply to:
    (A) The provision of investment advice described in section 
4975(e)(3)(B) of the Code by a fiduciary adviser to a beneficiary of an 
IRA that permits such beneficiary to direct the investment of the 
assets of his or her IRA;
    (B) The acquisition, holding, or sale of a security or other 
property pursuant to the investment advice; and
    (C) Except as otherwise provided in this exemption, the direct or 
indirect receipt of fees or other compensation by the fiduciary adviser 
(or any employee, agent, registered representative or affiliate 
thereof) in connection with the provision of the advice or in 
connection with an acquisition, holding, or sale of a security or other 
property pursuant to the investment advice, provided that the 
conditions set forth in paragraph (d)(2) of this section are met.
    (2) Conditions. The relief described in paragraph (d)(1) shall be 
available if the fiduciary adviser--
    (i) Provides investment advice in accordance with paragraphs (d)(3) 
or (4), or both; and
    (ii) Satisfies the requirements of paragraphs (d)(5) through (10).
    (3) Use of computer model or investment education. The requirements 
of this paragraph (d)(3) will be satisfied if:
    (i) Except as provided in paragraph (d)(3)(ii), before providing 
other investment advice covered by this exemption, the participant or 
beneficiary shall be furnished with investment recommendations 
generated by a computer model that--
    (A) Meets the requirements of paragraphs (b)(4)(i) and (ii); or
    (B) Meets the requirements of paragraph (b)(4)(i) and was designed 
and is maintained by a person independent of the fiduciary adviser (and 
any of the adviser's affiliates) and utilizes methodologies and 
parameters determined appropriate solely by the independent person, 
without influence from the fiduciary adviser (or any of the adviser's 
affiliates); for purposes of this paragraph (d)(3)(i), a person is 
``independent'' of another person if it is not an affiliate of the 
other person, and does not have a material affiliation or material 
contractual relationship with the other person.
    (ii)(A) In the case of a plan that offers a ``brokerage window,'' 
``self-directed brokerage account'' or similar arrangement that enables 
participants and beneficiaries to select investments beyond those 
designated by the plan, if any, before providing investment advice with 
respect to any investment utilizing such arrangement, the participant 
or beneficiary shall be furnished the material described in paragraph 
(d)(3)(ii)(B) and, if the plan offers designated investment options, 
the participant or beneficiary also shall be furnished the 
recommendations described in paragraph (d)(3)(i ) with regard to such 
options.
    (B) In the case of an IRA with respect to which the types or number 
of investment choices reasonably precludes the use of a computer model 
meeting the requirements of section 408(g)(3)(B) of ERISA to generate 
recommendations, before providing other investment advice covered by 
this exemption, the participant or beneficiary shall be furnished with 
material, such as graphs, pie charts, case studies, worksheets, or 
interactive software or similar programs, that reflect or produce asset 
allocation models taking into account the age (or time horizon) and 
risk profile of the beneficiary, to the extent known. Nothing shall 
preclude the furnishing of material, in addition to the foregoing, 
reflecting asset allocation portfolios of hypothetical individuals with 
different time horizons and risk profiles. For purposes of any 
materials provided pursuant to this paragraph (d)(3)(ii):
    (1) Models must be based on generally accepted investment theories 
that take into account the historic returns of different asset classes 
(e.g., equities, bonds, or cash) over defined periods of time;
    (2) Such models must 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 material contractual relationship with the 
fiduciary adviser; and
    (3) All material facts and assumptions on which such models are 
based (e.g., retirement ages, life expectancies, income levels, 
financial resources, replacement income ratios, inflation

[[Page 3851]]

rates, and rates of return) accompany the models.
    (iii) The fiduciary adviser shall retain the information furnished 
pursuant to paragraph (d)(3)(i) or (ii) in accordance with paragraph 
(e) of this section.
    (4) Use of fee-leveling. Any fees or other compensation (including 
salary, bonuses, awards, promotions, commissions or any other thing of 
value) received, directly or indirectly, by an employee, agent or 
registered representative providing advice on behalf of the fiduciary 
adviser pursuant to this exemption (as distinguished from any 
compensation received by the fiduciary adviser on whose behalf the 
employee, agent or registered representative is providing such advice) 
do not vary depending on the basis of any investment option selected by 
a participant or beneficiary.
    (5) Authorized by a plan fiduciary or IRA beneficiary. (i) Except 
as provided in paragraph (d)(5)(ii), the arrangement pursuant to which 
investment advice is provided to participants and beneficiaries is 
expressly authorized in advance by a plan fiduciary (or, in the case of 
an IRA, the IRA beneficiary) other than: The person offering the 
investment advice arrangement; any person providing designated 
investment options under the plan; or any affiliate of either. 
Provided, however, that for purposes of the preceding, in the case of 
an IRA, an IRA beneficiary will not be treated as an affiliate of a 
person solely by reason of being an employee of such person.
    (ii) In the case of an arrangement pursuant to which investment 
advice is provided to participants and beneficiaries of a plan 
sponsored by the person offering the arrangement or a plan sponsored by 
an affiliate of such person, the authorization described in paragraph 
(d)(5)(i) may be provided by the plan sponsor of such plan, provided 
that the person or affiliate offers the same arrangement to 
participants and beneficiaries of unaffiliated plans in the ordinary 
course of its business.
    (iii) For purposes of the authorization described in paragraph 
(d)(5)(i), a plan sponsor shall not be treated as a person providing a 
designated investment option under the plan merely because one of the 
designated investment options of the plan is an option that permits 
investment in securities of the plan sponsor or an affiliate.
    (6) Basis for advice. (i) The investment advice--
    (A) Is based on generally accepted investment theories that take 
into account the historic returns of different asset classes over 
defined periods of time; provided, however, that nothing herein shall 
preclude any investment advice from being based on generally accepted 
investment theories that take into account additional considerations;
    (B) Takes into account investment management and other fees and 
expenses attendant to the recommended investments; and
    (C) Takes into account, to the extent furnished by a plan, 
participant or beneficiary, information relating to age, time horizons 
(e.g., life expectancy, retirement age), risk tolerance, current 
investments in designated investment options, other assets or sources 
of income, and investment preferences of the participant or 
beneficiary. A fiduciary adviser shall request such information, but 
nothing in this paragraph (d)(6)(i)(C) shall require that any 
investment advice take into account information requested, but not 
furnished by a participant or beneficiary, nor preclude requesting and 
taking into account additional information that a plan or participant 
or beneficiary may provide.
    (ii) In connection with the provision of the investment advice--
    (A) The fiduciary adviser concludes that the advice to be provided 
is prudent and in the best interest of the participant or beneficiary, 
and explains to the participant or beneficiary--
    (1) The basis for the conclusion,
    (2) If applicable, why the advice includes an option(s) with higher 
fees than other options in the same asset class(es) available under the 
plan, and
    (3) If applicable, in the case of investment advice provided 
pursuant to paragraph (d)(3)(i) or (ii), how the advice deviates from 
or relates to the information provided pursuant to such paragraphs;
    (B) Not later than 30 days following the explanation described in 
paragraph (d)(6)(ii)(A), the employee, agent, or registered 
representative providing the advice on behalf of the fiduciary adviser 
shall document such explanation; and
    (C) The fiduciary adviser retains the documentation developed 
pursuant to paragraph (d)(6)(ii)(B) in accordance with paragraph (e) of 
this section.
    (7) Policies and procedures. The fiduciary adviser adopts and 
follows written policies and procedures that are designed to assure 
compliance with the conditions of this exemption.
    (8) Disclosure. (i) The fiduciary adviser provides, without charge, 
to the participant or beneficiary before the initial provision of 
investment advice under the class exemption, written notification of:
    (A) The role of any party that has a material affiliation or 
material contractual relationship with the fiduciary adviser in the 
development of the computer model described in paragraph (d)(3)(i) of 
this section or, if applicable, the materials described in paragraph 
(d)(3)(ii) of this section, and, to the extent applicable, in the 
selection of investment options available under the plan;
    (B) The types of services provided by the fiduciary adviser in 
connection with the provision of investment advice by the fiduciary 
adviser, including, with respect to a computer model arrangement 
referred to in paragraph (d)(3)(i) of this section, any limitations on 
the ability of a computer model to take into account an investment 
primarily in qualifying employer securities; and
    (C) The information described in paragraphs (b)(7)(i)(B) through 
(E), (G) and (H);
    (ii)(A) Such notification must be written in a clear and 
conspicuous manner and in a manner calculated to be understood by the 
average plan participant and shall be sufficiently accurate and 
comprehensive to reasonably apprise such participants and beneficiaries 
of the information required to be disclosed;
    (B) The appendix to this section contains a model disclosure form 
that may be used to provide the notification of information described 
in paragraph (b)(7)(i)(C). Use of the model disclosure form is not 
mandatory. However, use of an appropriately completed model disclosure 
form will be deemed to satisfy the requirements of paragraphs 
(d)(8)(i)(C) and (d)(8)(ii)(A) with respect to such information.
    (iii) Such notification may, in accordance with 29 CFR 2520.104b-1, 
be provided in written or electronic form.
    (iv) With respect to the information required to be disclosed 
pursuant to paragraph (d)(8)(i) of this section, the fiduciary adviser 
shall, at all times during the provision of advisory services to the 
participant or beneficiary pursuant to the arrangement--
    (A) Maintain accurate, up-to-date information in a form that is 
consistent with paragraph (d)(8)(ii) of this section,
    (B) Provide, without charge, accurate, up-to-date information to 
the recipient of the advice no less frequently than annually,
    (C) Provide, without charge, accurate information to the recipient 
of the advice upon request of the recipient, and
    (D) Provide, without charge, to the recipient of the advice any 
material change to the information described in paragraph (d)(8)(i) at 
a time reasonably

[[Page 3852]]

contemporaneous to the change in information.
    (9) Annual audit. (i) The fiduciary adviser shall, at least 
annually, engage an independent auditor, who has appropriate technical 
training or experience and proficiency and so represents in writing to 
the fiduciary adviser, to:
    (A) Conduct an audit for compliance with the policies and 
procedures of paragraph (d)(7) of this section and the requirements of 
paragraph (d) of this section; and
    (B) Within 60 days following the completion of the audit, issue a 
written report to the fiduciary adviser, and, except with respect to an 
arrangement with an IRA, to each fiduciary who authorized the 
arrangement, in accordance with paragraph (d)(5), setting forth the 
specific findings of the auditor regarding compliance of the 
arrangement with the policies and procedures of paragraph (d)(7) and 
the requirements of paragraph (d) of this section.
    (ii) With respect to an arrangement with an IRA, the fiduciary 
adviser:
    (A) Within 30 days following receipt of the report from the 
auditor, shall furnish a copy of the report to the IRA beneficiary or 
make such report available on its Web site, provided that such 
beneficiaries are provided information, with the information required 
to be disclosed pursuant to paragraph (d)(8) of this section, 
concerning the purpose of the report, and how and where to locate the 
report applicable to their account; and
    (B) In the event that the report of the auditor identifies 
noncompliance with the policies and procedures required by paragraph 
(d)(7) or the conditions of paragraph (d) of this section, within 30 
days following receipt of the report from the auditor, sends a copy of 
the report to the Department of Labor at the following address: 
Investment Advice Notification--Class Exemption, U.S. Department of 
Labor, Employee Benefits Security Administration, Room N-1513, 200 
Constitution Ave., NW., Washington, DC 20210.
    (iii) For purposes of paragraph (d)(9)(i), an auditor is considered 
independent if it does not have a material affiliation or material 
contractual relationship with the person offering the investment advice 
arrangement to the plan or IRA or any designated investment options 
under the plan or IRA.
    (iv) For purposes of the audit described in paragraph (d)(9)(i), 
the auditor shall review sufficient relevant information to formulate 
an opinion as to whether the investment advice arrangements, and the 
advice provided pursuant thereto, offered by the fiduciary adviser 
during the audit period were in compliance with the policies and 
procedures of paragraph (d)(7) of this section and the requirements of 
this paragraph (d); provided, however, that nothing in this 
subparagraph shall preclude an auditor from using information obtained 
by sampling, as reasonably determined appropriate by the auditor, 
investment advice arrangements, and the advice pursuant thereto, during 
the audit period.
    (v) The selection of an auditor for purposes of this paragraph 
(d)(9) is a fiduciary act governed by section 404(a)(1) of ERISA.
    (10) Other. The requirements of paragraph (b)(8), relating to other 
conditions, and paragraph (e), relating to retention of records, of 
this section are met.
    (e) Retention of records. The fiduciary adviser must maintain, for 
a period of not less than 6 years after the provision of investment 
advice under this section any records necessary for determining whether 
the applicable requirements of this section have been met. A 
transaction prohibited under section 406 of ERISA 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.
    (f) Noncompliance. (1) The relief from the prohibited transaction 
provisions of section 406 of ERISA and the sanctions resulting from the 
application of section 4975 of the Code described in paragraphs (b) and 
(d) of this section shall not apply to any transaction described in 
such paragraphs in connection with the provision of investment advice 
to an individual participant or beneficiary with respect to which the 
applicable conditions of this section have not been satisfied.
    (2) In the case of a pattern or practice of noncompliance with any 
of the applicable conditions of this section, the relief described in 
paragraph (b) or (d) shall not apply to any transaction in connection 
with the provision of investment advice provided by the fiduciary 
adviser during the period over which the pattern or practice extended.
    (g) Applicability date. This section shall apply to transactions 
described in paragraphs (b) and (d) of this section occurring on or 
after March 23, 2009.

Appendix to Sec.  2550.408g-1

Fiduciary Adviser Disclosure

    This document contains important information about [enter name 
of Fiduciary Adviser] and how it is compensated for the investment 
advice provided to you. You should carefully consider this 
information in your evaluation of that advice.
    [enter name of Fiduciary Adviser] has been selected to provide 
investment advisory services for the [enter name of Plan]. [enter 
name of Fiduciary Adviser] will be providing these services as a 
fiduciary under the Employee Retirement Income Security Act (ERISA). 
[enter name of Fiduciary Adviser], therefore, must act prudently and 
with only your interest in mind when providing you recommendations 
on how to invest your retirement assets.

Compensation of the Fiduciary Adviser and Related Parties

    [enter name of Fiduciary Adviser] (is/is not) compensated by the 
plan for the advice it provides. (if compensated by the plan, 
explain what and how compensation is charged (e.g., asset-based fee, 
flat fee, per advice)). (If applicable, [enter name of Fiduciary 
Adviser] is not compensated on the basis of the investment(s) 
selected by you.)
    Affiliates of [enter name of Fiduciary Adviser] (if applicable 
enter, and other parties with whom [enter name of Fiduciary Adviser] 
is related or has a material financial relationship) also will be 
providing services for which they will be compensated. These 
services include: [enter description of services, e.g., investment 
management, transfer agent, custodial, and shareholder services for 
some/all the investment funds available under the plan.]
    When [enter name of Fiduciary Adviser] recommends that you 
invest your assets in an investment fund of its own or one of its 
affiliates and you follow that advice, [enter name of Fiduciary 
Adviser] or that affiliate will receive compensation from the 
investment fund based on the amount you invest. The amounts that 
will be paid by you will vary depending on the particular fund in 
which you invest your assets and may range from --% to --%. Specific 
information concerning the fees and other charges of each investment 
fund is available from [enter source, such as: your plan 
administrator, investment fund provider (possibly with Internet Web 
site address)]. This information should be reviewed carefully before 
you make an investment decision.
    (if applicable enter, [enter name of Fiduciary Adviser] or 
affiliates of [enter name of Fiduciary Adviser] also receive 
compensation from non-affiliated investment funds as a result 
investments you make as a result of recommendations of [enter name 
of Fiduciary Adviser]. The amount of this compensation also may vary 
depending on the particular fund in which you invest. This 
compensation may range from --% to --%. Specific information 
concerning the fees and other charges of each investment fund is 
available from [enter source, such as: your plan administrator, 
investment fund provider (possibly with Internet Web site address)]. 
This information should be reviewed carefully before you make an 
investment decision.
    (if applicable enter, In addition to the above, [enter name of 
Fiduciary Adviser] or affiliates of [enter name of Fiduciary 
Adviser]

[[Page 3853]]

also receive other fees or compensation, such as commissions, in 
connection with the sale, acquisition or holding of investments 
selected by you as a result of recommendations of [enter name of 
Fiduciary Adviser]. These amounts are: [enter description of all 
other fees or compensation to be received in connection with sale, 
acquisition or holding of investments]. This information should be 
reviewed carefully before you make an investment decision.
    (if applicable enter, When [enter name of Fiduciary Adviser] 
recommends that you take a rollover or other distribution of assets 
from the plan, or recommends how those assets should subsequently be 
invested, [enter name of Fiduciary Adviser] or affiliates of [enter 
name of Fiduciary Adviser] will receive additional fees or 
compensation. These amounts are: [enter description of all other 
fees or compensation to be received in connection with any rollover 
or other distribution of plan assets or the investment of 
distributed assets]. This information should be reviewed carefully 
before you make a decision to take a distribution.

Consider Impact of Compensation on Advice

    The fees and other compensation that [enter name of Fiduciary 
Adviser] and its affiliates receive on account of assets in [enter 
name of Fiduciary Adviser] (enter if applicable, and non-[enter name 
of Fiduciary Adviser]) investment funds are a significant source of 
revenue for the [enter name of Fiduciary Adviser] and its 
affiliates. You should carefully consider the impact of any such 
fees and compensation in your evaluation of the investment advice 
that [enter name of Fiduciary Adviser] provides to you. In this 
regard, you may arrange for the provision of advice by another 
adviser that may have not material affiliation with or receive 
compensation in connection with the investment funds or products 
offered under the plan. This type of advice is/is not available 
through your plan.

Investment Returns

    While understanding investment-related fees and expenses is 
important in making informed investment decisions, it is also 
important to consider additional information about your investment 
options, such as performance, investment strategies and risks. 
Specific information related to the past performance and historical 
rates of return of the investment options available under the plan 
(has/has not) been provided to you by [enter source, such as: your 
plan administrator, investment fund provider]. (If applicable enter. 
If not provided to you, the information is attached to this 
document.)
    For options with returns that vary over time, past performance 
does not guarantee how your investment in the option will perform in 
the future; your investment in these options could lose money.

Parties Participating in Development of Advice Program or Selection of 
Investment Options

    Name, and describe role of, affiliates or other parties with 
whom the fiduciary adviser has a material affiliation or contractual 
relationship that participated in the development of the investment 
advice program (if this is an arrangement that uses computer models) 
or the selection of investment options available under the plan.

Use of Personal Information

    Include a brief explanation of the following--
    What personal information will be collected;
    How the information will be used;
    Parties with whom information will be shared;
    How the information will be protected; and
    When and how notice of the Fiduciary Adviser's privacy statement 
will be available to participants and beneficiaries.
    Should you have any questions about [enter name of Fiduciary 
Adviser] or the information contained in this document, you may 
contact [enter name of contact person for fiduciary adviser, 
telephone number, address].

0
3. Add Sec.  2550.408g-2 to read as follows:


Sec.  2550.408g-2  Investment advice--fiduciary election.

    (a) General. Section 408(g)(11)(A) of the Employee Retirement 
Income Security Act, as amended (ERISA), provides that a person who 
develops a computer model or who markets a computer model or investment 
advice program used in an ``eligible investment advice arrangement'' 
shall be treated as a fiduciary of a plan by reason of the provision of 
investment advice referred to in ERISA section 3(21)(A)(ii) to the plan 
participant or beneficiary, and shall be treated as a ``fiduciary 
adviser'' for purposes of ERISA sections 408(b)(14) and 408(g), except 
that the Secretary of Labor may prescribe rules under which only one 
fiduciary adviser may elect to be treated as a fiduciary with respect 
to the plan. Section 4975(f)(8)(J)(i) of the Internal Revenue Code, as 
amended (the Code), contains a parallel provision to ERISA section 
408(g)(11)(A) that applies for purposes of Code sections 4975(d)(17) 
and 4975(f)(8). This section sets forth requirements that must be 
satisfied in order for one such fiduciary adviser to elect to be 
treated as a fiduciary with respect to a plan under an eligible 
investment advice arrangement.
    (b)(1) If an election meets the requirements in paragraph (b)(2) of 
this section, then the person identified in the election shall be the 
sole fiduciary adviser treated as a fiduciary by reason of developing 
or marketing the computer model, or marketing the investment advice 
program, used in an eligible investment advice arrangement.
    (2) An election satisfies the requirements of this subparagraph 
with respect to an eligible investment advice arrangement if the 
election is in writing and such writing--
    (i) Identifies the investment advice arrangement, and the person 
offering the arrangement, with respect to which the election is to be 
effective;
    (ii) Identifies a person who--
    (A) Is described in any of 29 CFR 2550.408g-1(c)(2)(i)(A) through 
(E);
    (B) Develops the computer model, or markets the computer model or 
investment advice program, utilized in satisfaction of 29 CFR 
2550.408g-1(b)(4) with respect to the arrangement, and
    (C) Acknowledges that it elects to be treated as the only 
fiduciary, and fiduciary adviser, by reason of developing such computer 
model, or marketing such computer model or investment advice program;
    (iii) Is signed by the person identified in paragraph (b)(2)(ii) of 
this section;
    (iv) Is furnished to the fiduciary who authorized the arrangement, 
in accordance with 29 CFR 2550.408g-1(b)(5); and
    (v) Is maintained in accordance with 29 CFR 2550.408g-1(e).

    Signed at Washington, DC, this 9th day of January, 2009.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. E9-710 Filed 1-16-09; 8:45 am]
BILLING CODE 4510-29-P