[House Report 114-512]
[From the U.S. Government Publishing Office]
114th Congress } { Rept. 114-512
HOUSE OF REPRESENTATIVES
2d Session } { Part 1
======================================================================
STRENGTHENING ACCESS TO VALUABLE EDUCATION AND RETIREMENT SUPPORT ACT
OF 2015
_______
April 20, 2016.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Brady of Texas, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 4294]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 4294) to amend the Internal Revenue Code of 1986 to
ensure that retirement investors receive advice in their best
interests, and for other purposes, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND...........................................6
A. Purpose and Summary................................. 6
B. Background and Need for Legislation................. 6
C. Legislative History................................. 7
II. EXPLANATION OF THE BILL..........................................7
A. Rules Relating to the Provision of Investment Advice
(secs. 2-3 of the bill and sec. 4975 of the Code).. 7
III. VOTES OF THE COMMITTEE..........................................21
IV. BUDGET EFFECTS OF THE BILL......................................22
A. Committee Estimate of Budgetary Effects............. 22
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 22
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 22
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE......23
A. Committee Oversight Findings and Recommendations.... 23
B. Statement of General Performance Goals and
Objectives......................................... 23
C. Information Relating to Unfunded Mandates........... 23
D. Applicability of House Rule XXI 5(b)................ 24
E. Tax Complexity Analysis............................. 24
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 24
G. Duplication of Federal Programs..................... 24
H. Disclosure of Directed Rule Makings................. 25
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........25
A. Text of Existing Law Amended or Repealed by the
Bill, as Reported.................................. 25
B. Changes in Existing Law Proposed by the Bill, as
Reported........................................... 45
VII. DISSENTING VIEWS................................................71
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Strengthening Access to Valuable
Education and Retirement Support Act of 2015'' or the ``SAVERS Act of
2015''.
SEC. 2. PURPOSE.
The purpose of this Act is to provide that advisors who--
(1) provide advice that is impermissible under the prohibited
transaction provisions under section 4975 of the Internal
Revenue Code of 1986, or
(2) breach the best interest standard for the provision of
investment advice,
are subject to liability under the Internal Revenue Code of 1986.
SEC. 3. RULES RELATING TO THE PROVISION OF INVESTMENT ADVICE.
(a) Amendments to the Internal Revenue Code of 1986.--
(1) Exemption for investment advice which is best interest
recommendation.--Section 4975(d) of the Internal Revenue Code
of 1986 is amended by striking ``or'' at the end of paragraph
(22), by striking the period at the end of paragraph (23) and
inserting ``, or'', and by inserting after paragraph (23) the
following:
``(24) provision of investment advice by a fiduciary to a
plan, plan participant, or beneficiary with respect to the
plan, which is a best interest recommendation or a transaction
connected to such advice.''.
(2) Investment advice; best interest recommendation.--Section
4975(e) of such Code is amended by adding at the end the
following:
``(10) Investment advice.--
``(A) In general.--For purposes of this section, the
term `investment advice' means a recommendation that--
``(i) relates to--
``(I) the advisability of acquiring,
holding, disposing, or exchanging any
moneys or other property of a plan by
the plan, plan participants, or plan
beneficiaries, including any
recommendation whether to take a
distribution of benefits from such plan
or any recommendation relating to the
investment of any moneys or other
property of such plan to be distributed
from such plan;
``(II) the management of moneys or
other property of such plan, including
recommendations relating to the
management of moneys or other property
to be distributed from such plan; or
``(III) the advisability of retaining
or ceasing to retain a person who would
receive a fee or other compensation for
providing any of the types of advice
described in this subclause; and
``(ii) is rendered pursuant to--
``(I) a written acknowledgment that
the person is a fiduciary with respect
to the provision of such
recommendation; or
``(II) a mutual agreement,
arrangement, or understanding which may
include limitations on scope, timing,
and responsibility to provide ongoing
monitoring or advice services, between
the person making such recommendation
and the plan, plan participant, or
beneficiary that such recommendation is
individualized to the plan, plan
participant, or beneficiary and such
plan, plan participant, or beneficiary
intends to materially rely on such
recommendation in making investment or
management decisions with respect to
any moneys or other property of such
plan.
``(B) Disclaimer of a mutual agreement, arrangement,
or understanding.--For purposes of subparagraph
(A)(ii)(II), any disclaimer of a mutual agreement,
arrangement, or understanding shall only state the
following: `This information is not individualized to
you, and you are not intended to materially rely on
this information in making investment or management
decisions.'. Such disclaimer shall not be effective
unless such disclaimer is in writing and is
communicated in a clear and prominent manner and an
objective person would reasonably conclude that, based
on all the facts and circumstances, there was not a
mutual agreement, arrangement, or understanding.
``(C) When recommendation treated as made pursuant to
a mutual agreement, arrangement, or understanding.--For
purposes of subparagraph (A)(ii)(II), information shall
not be treated as a recommendation made pursuant to a
mutual agreement, arrangement, or understanding, and
such information shall contain the disclaimer required
by subparagraph (B), if--
``(i) Seller's exception.--The information is
provided in conjunction with full and fair
disclosure in writing to a plan, plan
participant, or beneficiary that the person
providing the information is doing so in its
marketing or sales capacity, including any
information regarding the terms and conditions
of the engagement of the person providing the
information, and that the person is not
intending to provide investment advice within
the meaning of this subparagraph or to
otherwise act as a fiduciary to the plan or
under the obligations of a best interest
recommendation.
``(ii) Swap and security-based swap
transaction.--The person providing the
information is a counterparty or service
provider to the plan in connection with any
transaction based on the information (including
a service arrangement, sale, purchase, loan,
bilateral contract, swap (as defined in section
1a of the Commodity Exchange Act (7 U.S.C.
1a)), or security-based swap (as defined in
section 3(a) of the Securities Exchange Act (15
U.S.C. 78c(a)))), but only if--
``(I) the plan is represented, in
connection with such transaction, by a
plan fiduciary that is independent of
the person providing the information,
and, except in the case of a swap or
security-based swap, independent of the
plan sponsor; and
``(II) prior to entering into such
transaction, the independent plan
fiduciary represents in writing to the
person providing the information that
it is aware that the person has a
financial interest in the transaction
and that it has determined that the
person is not intending to provide
investment advice within the meaning of
this subparagraph or to otherwise act
as a fiduciary to the plan, plan
participants, or plan beneficiaries.
``(iii) Employees of a plan sponsor.--The
person providing the information is an employee
of any sponsoring employer or employee
organization who provides the information to
the plan for no fee or other compensation other
than the employee's normal compensation.
``(iv) Platform providers selection and
monitoring assistance.--The person providing
the information discloses in writing to the
plan fiduciary that the person is not
undertaking to provide investment advice as a
fiduciary (within the meaning of this
paragraph) or under the obligations of a best
interest recommendation and the information
consists solely of--
``(I) making available to the plan,
plan participants, or plan
beneficiaries, without regard to the
individualized needs of the plan, plan
participants, or plan beneficiaries,
securities or other property through a
platform or similar mechanism from
which a plan fiduciary may select or
monitor investment alternatives,
including qualified default investment
alternatives, into which plan
participants or beneficiaries may
direct the investment of assets held
in, or contributed to, their individual
accounts, or
``(II) in connection with a platform
or similar mechanism described in
subclause (I)--
``(aa) identifying investment
alternatives that meet
objective criteria specified by
the plan, such as criteria
concerning expense ratios, fund
sizes, types of asset, or
credit quality, or
``(bb) providing objective
financial data and comparisons
with independent benchmarks to
the plan.
``(v) Valuation.--The information consists
solely of valuation information.
``(vi) Financial education.--The information
consists solely of--
``(I) information described in
Department of Labor Interpretive
Bulletin 96-1 (29 C.F.R. 2509.96-1, as
in effect on January 1, 2015),
regardless of whether such education is
provided to a plan or plan fiduciary or
a participant or beneficiary,
``(II) information provided to
participants or beneficiaries regarding
the factors to consider in deciding
whether to elect to receive a
distribution from a plan and whether to
roll over such distribution to a plan,
so long as any examples of different
distribution alternatives are
accompanied by all material facts and
assumptions on which the examples are
based, or
``(III) any additional information
treated as education by the Secretary.
``(11) Best interest recommendation.--For purposes of this
subsection--
``(A) In general.--The term `best interest
recommendation' means a recommendation--
``(i) for which no more than reasonable
compensation is paid (as determined under
subsection (d)(2)),
``(ii) provided by a person acting with the
care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent
person would exercise based on--
``(I) the information obtained
through the reasonable diligence of the
person regarding factors such as the
advice recipient's age, and
``(II) any other information that the
advice recipient discloses to the
person in connection with receiving
such recommendation, and
``(iii) where the person places the interests
of the plan or advice recipient above its own.
``(B) Investment options; variable compensation.--A
best interest recommendation may include a
recommendation that--
``(i) is based on a limited range of
investment options (which may consist, in whole
or in part, of proprietary products), but only
if any such limitations shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice in
the form of a notice that only states the
following: `This recommendation is based on a
limited range of investment options, and the
same or similar investments may be available at
a different cost (greater or lesser) from other
sources.', or
``(ii) may result in variable compensation to
the person providing the recommendation (or any
affiliate of such person), but only if the
receipt of such compensation shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice.
``(C) Clear disclosure of variable compensation.--For
purposes of this paragraph, clear disclosure of
variable compensation shall include, in a manner
calculated to be understood by the average individual,
each of the following:
``(i) A notice that states only the
following: `This recommendation may result in
varying amounts of fees or other compensation
to the person providing the recommendation (or
its affiliate), and the same or similar
investments may be available at a different
cost (greater or lesser) from other sources.'.
Any regulations or administrative guidance
implementing this clause may not require this
notice to be updated more than annually.
``(ii) A description of any fee or other
compensation that is directly or indirectly
payable to the person (or its affiliate) by the
advice recipient with respect to such
transaction (expressed as an amount, formula,
percentage of assets, per capita charge, or
estimate or range of such compensation).
``(iii) A description of the types and ranges
of any compensation that may be directly or
indirectly payable to the person (or its
affiliate) by any third party in connection
with such transaction (expressed as an amount,
formula, percentage of assets, per capita
charge, or estimate or range of such
compensation).
``(iv) Upon request of the advice recipient,
a disclosure of the specific amounts of
compensation described in clause (iii) that the
person will receive in connection with the
particular transaction (expressed as an amount,
formula, percentage of assets, per capita
charge, or estimate of such compensation).
``(D) Definition of affiliate.--For purposes of this
paragraph, the term `affiliate' has the meaning given
in subsection (f)(8)(J)(ii).
``(E) Correction of certain errors and omissions.--A
recommendation shall not fail to be a best interest
recommendation solely because a person who, acting in
good faith and with reasonable diligence, makes an
error or omission in disclosing the information
specified in subparagraph (B), if the person discloses
the correct information to the advice recipient as soon
as practicable but not later than 30 days from the date
on which the person knows of such error or omission.
``(F) Special rule.--Any notice provided pursuant to
a requirement under subparagraph (B)(i) or subparagraph
(C)(i) shall have no effect on any other notice
otherwise required without regard to this title, and
shall be provided in addition to, and not in lieu of,
any other such notice.''.
(3) Failures relating to best interest recommendation.--
(A) Correction.--Section 4975(f)(5) of such Code is
amended--
(i) by striking ``(5) Correction.--The
terms'' and inserting:
``(5) Correction.--
``(A) In general.--Except as provided in subparagraph
(B), the terms'', and
(ii) by adding at the end the following:
``(B) Determination of `correction' and `correct'
with respect to best interest advice recommendations.--
In the case of a prohibited transaction arising by the
failure of investment advice to be a best interest
recommendation, the terms `correction' and `correct'
mean the payment to, or reimbursement of, actual
damages of the plan, plan participants, or plan
beneficiaries resulting directly from the plan's, plan
participant's, or plan beneficiary's reliance on such
investment advice, if any, that have not otherwise been
paid or reimbursed to the plan, plan participants, or
plan beneficiaries, including payments and
reimbursements made pursuant to subparagraph (A) if
such amount is greater than the amount determined under
subparagraph (A).''.
(B) Amount involved for purposes of excise tax.--The
first sentence of section 4975(f)(4) of such Code is
amended by striking ``excess compensation.'' and
inserting ``excess compensation, and in the case of a
prohibited transaction arising by the failure of
investment advice to be a best interest recommendation,
the amount involved shall be the amount paid to the
person providing the advice (or its affiliate, as
defined in paragraph (8)(J)(ii)) that has not been paid
or reimbursed to the plan, plan participants, or plan
beneficiaries, including payments and reimbursements
made pursuant to paragraph (5).''.
(b) Effective Date.--
(1) Modification of certain rules, and rules and
administrative positions promulgated before enactment but not
effective on january 1, 2015, prohibited.--The Department of
Labor is prohibited from amending any rules or administrative
positions promulgated under section 3(21) of the Employee
Retirement Security Act of 1974 and section 4975(e)(3) of the
Internal Revenue Code of 1986 (including Department of Labor
Interpretive Bulletin 96-1 (29 C.F.R. 2509.96-1) and Department
of Labor Advisory Opinion 2005-23A), and no such rule or
administrative position promulgated by the Department of Labor
prior to the date of the enactment of this Act but not
effective on January 1, 2015, may become effective unless a
bill or joint resolution referred to in paragraph (3) is
enacted as described in such paragraph not later than 60 days
after the date of the enactment of this Act.
(2) General effective date of amendments.--Except as provided
in paragraph (3), the amendments made by subsection (a) of this
section shall take effect on the 61st day after the date of the
enactment of this Act and shall apply with respect to
information provided or recommendations made on or after 2
years after the date of the enactment of this Act.
(3) Exception.--If a bill or joint resolution is enacted
prior to the 61st day after the date of the enactment of this
Act that specifically approves any rules or administrative
positions promulgated under section 3(21) of the Employee
Retirement Income Security Act of 1974 and section 4975(e)(3)
of the Internal Revenue Code of 1986 that is not in effect on
January 1, 2015, the amendments made by subsection (a) of this
section shall not take effect.
(c) Grandfathered Transactions and Services.--The amendments made by
subsection (a) shall not apply to any service or transaction rendered,
entered into, or for which a person has been compensated prior to the
date on which the amendments made by subsection (a) of this Act become
effective under subsection (b)(2).
(d) Transition.--If the amendments made by subsection (a) of this
section take effect, then nothing in this section shall be construed to
prohibit the issuance of guidance to carry out such amendments so long
as such guidance is necessary to implement such amendments. Until such
time as regulations or other guidance is issued to carry out such
amendments, a plan or a fiduciary shall be treated as meeting the
requirements of such amendments if the plan or fiduciary, as the case
may be, complies with a reasonable good faith interpretation of such
amendments.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill, H.R. 4294, as reported by the Committee on Ways
and Means, amends the prohibited transaction rules applicable
to tax-favored savings arrangements to require those providing
investment advice to act in the best interests of their clients
by providing a definition of investment advice that results in
fiduciary status and to provide a prohibited transaction
exemption for advice that is a best interest recommendation
(within the meaning of the bill). Thus, under the bill, a
fiduciary that provides advice that is impermissible or that
breaches the best interest standard is subject to liability
under the Internal Revenue Code of 1986.
B. Background and Need for Legislation
Private-sector employer-sponsored retirement plans and
individual retirement arrangements (IRAs) are valuable tools
used by millions of Americans to help save for retirement. The
existing regulations defining when those rendering investment
advice are treated as fiduciaries were issued in 1975. At that
time, about 45 million Americans participated in private-sector
employer-sponsored plans (33 million in defined benefit plans;
12 million in defined contribution plans), the assets of which
were generally managed by investment professionals. In 2013,
about 130 million Americans participated in private-sector
employer-sponsored plans (39 million in defined benefit plans;
92 million in defined contribution plans), with total assets of
about $8.1 trillion ($3.1 trillion in defined benefit plans; $5
trillion in defined contribution plans). Defined contribution
plan participants commonly direct the investment of their
accounts. Since the creation of IRAs in 1974, the total number
of Americans with IRAs has grown to about 57 million as of
2013, and the total value of assets held in IRAs in 2013 was
about $7 trillion. In light of the changes and growth that have
occurred in the retirement savings area, the 1975 regulations
are now outdated.
The Committee believes that those providing investment
advice to retirement plans and participants (and also other
tax-favored savings arrangements) should generally be treated
as fiduciaries and required to act in the best interests of
plans and plan participants and beneficiaries. The Committee,
therefore, believes that the current law definition regarding
when those providing such investment advice are treated as
fiduciaries should be expanded. At the same time, the Committee
also believes that plans and plan participants should have
access to retirement services and products. This is
particularly the case for small businesses sponsoring
retirement plans and low- and middle-income Americans.
C. Legislative History
Background
H.R. 4294 was introduced on December 18, 2015, and was
referred to the Committee on Ways and Means, and to the
Committee on Education and the Workforce.
Committee action
The Committee on Ways and Means marked up H.R. 4294, the
``Strengthening Access to Valuable Education and Retirement
Support Act of 2015'' or the ``SAVERS Act of 2015,'' on
February 3, 2016, and ordered the bill, as amended, favorably
reported (with a quorum being present).
Committee hearings
On September 30, 2015, the Subcommittee on Oversight of the
Committee on Ways and Means held a public hearing on the
Department of Labor's proposed rule dealing with the provision
of investment advice that results in fiduciary status and
proposed prohibited transaction exemptions.
On October 1, 2009, the Committee on Ways and Means held a
public hearing on the importance of Americans saving for
retirement having access to investment advice.
II. EXPLANATION OF THE BILL
A. Rules Relating to the Provision of Investment Advice (Secs. 2-3 of
the Bill and Sec. 4975 of the Code)
PRESENT LAW
Tax-favored savings arrangements
Tax-favored retirement savings
The Internal Revenue Code of 1986 (``Code'')\1\ provides
two general vehicles for tax-favored retirement savings:
employer-sponsored retirement plans and individual IRAs.\2\
Various requirements must be met for tax-favored treatment to
apply. Retirement plans of private employers also are generally
subject to the Employee Retirement Income Security Act of 1974
(``ERISA''), over which the Department of Labor (``DOL'') has
jurisdiction.\3\
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\1\All section references herein are to the Code unless otherwise
indicated.
\2\Sections 219, 408 and 408A provide rules for IRAs.
\3\ERISA generally does not apply to church plans or plans of
governmental employers.
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The most common type of tax-favored employer-sponsored plan
is a qualified retirement plan, which may be a defined
contribution plan or a defined benefit plan.\4\ Under a defined
contribution plan, benefits are based on a separate account for
each participant, to which are allocated contributions,
earnings and losses.\5\ Defined contribution plans commonly
allow participants to direct the investment of their accounts,
usually by choosing among investment options offered under the
plan. Under a defined benefit plan, benefits are determined
under a plan formula, and benefits under a defined benefit plan
are funded by the general assets of the trust established under
the plan, which are invested by plan fiduciaries; individual
accounts are not maintained for employees participating in the
plan.\6\
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\4\Sec. 401(a). A qualified annuity plan under section 403(a) is
similar to a qualified retirement plan (and subject to similar
requirements) except that plan assets consist of annuity contracts,
rather than investments held in a trust or custodial account.
References herein to a qualified retirement plan include a qualified
annuity plan.
\5\Defined contribution plan is defined at section 414(i).
\6\As defined in section 414(j), a defined benefit plan is any plan
that is not a defined contribution plan.
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A ``section 401(k) plan'' is a qualified defined
contribution plan that includes a feature (a ``qualified cash
or deferred arrangement'') under which an employee may elect to
have contributions (elective deferrals) made to the plan,
rather than receive the same amount in cash.\7\ A ``section
403(b) plan'' is generally similar to a section 401(k) plan,
but may be maintained only by a tax-exempt charitable
organization or a public school.\8\
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\7\Section 401(k) provides rules for qualified cash or deferred
arrangements.
\8\Section 403(b) provides rules for these plans. Another type of
tax-favored employer-sponsored plan is a State or local government
eligible deferred compensation plan under section 457(b), which is
similar to a qualified cash or deferred arrangement under section
401(k).
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Some employer-sponsored plans are funded through
contributions by the employer to an IRA established for each
employee. Specifically, an employer may maintain a simplified
employee pension (``SEP'') plan and certain small employers may
maintain a SIMPLE IRA plan.\9\
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\9\Sec. 408(k) and (p).
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A distribution from an employer-sponsored retirement plan
or IRA is includible in income except to the extent it consists
of a return of basis or an excludible distribution from a Roth
arrangement.\10\ In most cases, however, a distribution may be
rolled over on a nontaxable basis to another such plan or an
IRA, either by a direct rollover or by contributing the
distribution to the other plan or IRA within 60 days of
receiving the distribution.\11\
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\10\Sections 402A and 408A provide rules for Roth arrangements.
\11\Secs. 402(c), 403(a)(4), 403(b)(8), 408(d)(3), 408A(e) and
457(e)(16).
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Health savings accounts and Archer MSAs
An individual with a high deductible health plan (and,
subject to exceptions, no other health plan) generally may make
contributions to a health savings account (``HSA'').\12\ In
some cases, such an individual may contribute to an Archer MSA
(that is, medical savings account).\13\ Subject to limits, an
individual's HSA and Archer MSA contributions are deductible in
determining adjusted gross income and are excludable from an
employee's income and wages if made by an employer. HSA and
Archer MSA distributions used for qualified medical expenses
are not includible in gross income. Distributions may also be
rolled over to another HSA or Archer MSA.
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\12\Section 223 provides rules for HSAs.
\13\Section 220 provides rules for Archer MSAs.
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Coverdell education savings accounts
A Coverdell education savings account (``Coverdell ESA'')
is an account created exclusively for the purpose of paying
qualified education expenses of a designated beneficiary.\14\
Subject to income limits, annual after-tax contributions up to
$2,000 may be made until a designated beneficiary reaches age
18. Earnings on contributions to a Coverdell ESA generally are
includible in income when withdrawn; however, distributions are
excludable from income up to the beneficiary's qualified
education expenses for the year. Amounts in a Coverdell ESA may
be rolled over to another Coverdell ESA for the same
beneficiary or certain family members. In general, the balance
in a Coverdell ESA is deemed distributed within 30 days after
the date that the beneficiary reaches age 30.
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\14\Section 530 provides rules for Coverdell ESAs.
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Prohibited transaction rules
In general
The Code prohibits certain transactions (``prohibited
transaction'') between a qualified retirement plan and a
disqualified person.\15\ The prohibited transaction rules under
the Code apply also to IRAs, Archer MSAs, HSAs, and Coverdell
ESAs.\16\
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\15\Sec. 4975. The prohibited transaction rules under the Code
generally do not apply to governmental plans or church plans. However,
under section 503, the trust holding assets of a governmental or church
plan may lose its tax-exempt status in the case of a prohibited
transaction listed in section 503(b). The prohibited transaction rules
under the Code also do not apply to section 403(b) plans. However, the
prohibited transaction rules under ERISA may apply to a section 403(b)
plan unless it is a governmental plan or church plan exempt from ERISA
or is described in 29 C.F.R. section 2510.3-2(f).
\16\These are included in the definition of ``plan'' under section
4975(e)(1).
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Prohibited transactions include the following transactions,
whether direct or indirect, between a plan and a disqualified
person: (1) the sale or exchange or leasing of property, (2)
the lending of money or other extension of credit, (3) the
furnishing of goods, services or facilities, (4) the transfer
to, or use by or for the benefit of, the income or assets of
the plan, (5) in the case of a fiduciary, an act dealing with
the plan's income or assets in the fiduciary's own interest or
for the fiduciary's own account, and (6) the receipt by a
fiduciary of any consideration for the fiduciary's own personal
account from any party dealing with the plan in connection with
a transaction involving the income or assets of the plan.\17\
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\17\Sec. 4975(c)(1).
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A disqualified person is a fiduciary of the plan, a person
providing services to the plan, an employer with employees
covered by the plan, an employee organization or an employee
organization any of whose members are covered by the plan, and
also includes certain owners, officers, directors, highly
compensated employees, family members, and related
entities.\18\ A fiduciary means any person who (1) exercises
any discretionary authority or discretionary control respecting
management of the plan or exercises any authority or control
respecting management or disposition of the plan's assets, (2)
renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other
property of the plan, or has any authority or responsibility to
do so, or (3) has any discretionary authority or discretionary
responsibility in the administration of the plan.\19\
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\18\Sec. 4975(e)(2).
\19\Sec. 4975(e)(3). Fiduciary also includes any named fiduciary
under ERISA section 405(c)(1)(B).
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Certain transactions are statutorily exempt from prohibited
transaction treatment, for example, certain loans to plan
participants and arrangements with a disqualified person for
legal, accounting or other services necessary for the
establishment or operation of a plan if no more than reasonable
compensation is paid for the services.\20\ In addition, an
administrative exemption may be granted, on either an
individual or class basis, subject to a finding that the
exemption is administratively feasible, in the interests of the
plan and of its participants and beneficiaries, and protective
of the rights of participants and beneficiaries of the
plan.\21\ Before an administrative exemption is granted, notice
must be provided to interested persons, notice must be
published in the Federal Register of the pendency of the
exemption, and interested persons must be given an opportunity
to provide comments.
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\20\Sec. 4975(d)(1) and (d)(2).
\21\Sec. 4975(c)(2).
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Excise tax on prohibited transactions\22\
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\22\Under ERISA sections 409 and 502(a)(2), in the case of a breach
of fiduciary responsibility with respect to an employer-sponsored plan,
including a prohibited transaction, a civil suit may be brought by DOL,
a plan participant or beneficiary, or another fiduciary. However, a
cause of action under ERISA is not available with respect to a plan not
subject to ERISA, such as an IRA, HSA, Archer MSA, or Coverdell ESA.
The Code does not provide a private cause of action in the case of a
prohibited transaction, either with respect to an employer-sponsored
plan or an IRA, HSA, Archer MSA, or Coverdell ESA.
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If a prohibited transaction occurs, the disqualified person
who participated in the transaction is generally subject to a
two-tiered excise tax.\23\ The first tier tax is 15 percent of
the amount involved in the transaction. The second tier tax,
imposed if the prohibited transaction is not corrected within a
certain period, is 100 percent of the amount involved.
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\23\In the case of an IRA, HSA, Archer MSA or Coverdell ESA, the
sanction for some prohibited transactions is the loss of tax-favored
status, rather than an excise tax. See section 408(e)(2), also cross-
referenced in sections 220(e)(2), 223(e)(2) and 530(e).
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For purposes of the excise tax, the amount involved with
respect to a prohibited transaction is generally the greater of
(1) the amount of money and the fair market value of the other
property given or (2) the amount of money and the fair market
value of the other property received.\24\ For purposes of the
excise tax, ``correction'' and ``correct'' mean, with respect
to a prohibited transaction, undoing the transaction to the
extent possible, but in any case placing the plan in a
financial position not worse than that in which it would be if
the disqualified person were acting under the highest fiduciary
standards.
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\24\In the case of certain transactions for services for which more
than reasonable compensation is paid, the amount involved is only the
excess compensation.
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Jurisdiction over the prohibited transaction rules
Jurisdiction over the Code provisions governing qualified
retirement plans and similar ERISA provisions is divided
between the Department of the Treasury (``Treasury'') and DOL
by Executive Order, referred to as Reorganization Plan No. 4 of
1978 (``Reorganization Plan'').\25\ As part of this division,
with certain exceptions, Treasury authority was transferred to
DOL with respect to regulations, rulings, opinions, and
exemptions under the prohibited transaction provisions of the
Code.\26\ As a result, DOL regulations and other guidance
relating to prohibited transactions apply for Code purposes, as
well as for ERISA purposes, and DOL has the authority to grant
individual and class exemptions applicable under the Code,
including with respect to IRAs, HSAs, Archer MSAs, and
Coverdell ESAs. However, DOL has no enforcement authority with
respect to these accounts that are not covered under ERISA.
Treasury has exclusive enforcement authority with respect to
these accounts.
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\25\43 Fed. Reg. 47713, October 17, 1978.
\26\Secs. 102 and 105 of the Reorganization Plan. Rules for
coordination concerning certain fiduciary actions are provided under
section 103 of the Reorganization Plan. In addition, under section 3003
of ERISA, Treasury and DOL are directed to consult with each other from
time to time with respect to the prohibited transaction rules and
exemptions.
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Rules relating to investment advice
Fiduciary status
As described above, a fiduciary includes a person who
renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other
property of the plan, or has any authority or responsibility to
do so.
Existing DOL regulations, issued in 1975, provide that a
person is deemed to be rendering ``investment advice'' to an
employee benefit plan for this purpose only if:
the person renders advice to the plan as to
the value of securities or other property, or makes
recommendation as to the advisability of investing in,
purchasing, or selling securities or other property;
and
the person either directly or indirectly
(for example, through or together with any affiliate)
(1) has discretionary authority or control, whether or
not pursuant to agreement, arrangement or
understanding, with respect to purchasing or selling
securities or other property for the plan, or (2)
renders any advice as described above on a regular
basis to the plan pursuant to a mutual agreement,
arrangement or understanding, written or otherwise,
between the person and the plan or a fiduciary with
respect to the plan, that the person's services will
serve as a primary basis for investment decisions with
respect to plan assets, and that the person will render
individualized investment advice to the plan based on
the particular needs of the plan regarding matters such
as, among other things, investment policies or
strategy, overall portfolio composition, or
diversification of plan investments.\27\
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\27\29 C.F.R. sec. 2510.3-21(c).
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The regulations further provide that a person who is a
fiduciary with respect to a plan by reason of rendering
investment advice (as described above) for a fee or other
compensation, direct or indirect, with respect to any moneys or
other property of the plan, or having any authority or
responsibility to do so, is not deemed to be a fiduciary
regarding any assets of the plan with respect to which the
person does not have any discretionary authority, discretionary
control or discretionary responsibility, does not exercise any
authority or control, does not render investment advice (as
described above) for a fee or other compensation, and does not
have any authority or responsibility to render such investment
advice. However, this rule does not exempt the person from
ERISA liability attributable to a breach of responsibility by a
co-fiduciary or exclude the person from the definition of the
term party in interest\28\ based on providing services to the
plan with respect to any assets of the plan.
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\28\Party in interest is the term under ERISA that corresponds to
disqualified person under the Code and it is defined in a similar
manner.
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In addition to the regulations, other guidance issued by
DOL, Interpretive Bulletin 96-1, provides that the furnishing
of mere investment education to a participant or beneficiary in
a participant-directed individual account plan does not
constitute the rendering of investment advice.\29\ For this
purpose, investment education includes the following categories
of information and materials (described more fully in
Interpretive Bulletin 96-1): plan information, general
financial and investment information, asset allocation models,
and interactive investment materials. Interpretive Bulletin 96-
1 notes that the information and materials described in the
four categories merely represent examples of the type of
information and materials that may be furnished to participants
and beneficiaries without such information and materials
constituting investment advice, and there may be many other
examples of information, materials, and educational services
that, if furnished to participants and beneficiaries, would not
constitute investment advice. Accordingly, Interpretive
Bulletin 96-1 provides that no inferences should be drawn from
the description of the four categories with respect to whether
the furnishing of any information, materials or educational
services not described therein may constitute investment
advice.
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\29\29 C.F.R. sec. 2905.96-1. This treatment applies irrespective
of who provides the information (for example, the plan sponsor,
fiduciary or service provider), the frequency with which the
information is shared, the form in which the information and materials
are provided (for example, on an individual or group basis, in writing
or orally, or via video or computer software), or whether an identified
category of information and materials is furnished alone or in
combination with other identified categories of information and
materials.
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Statutory exemptions relating to investment advice
If certain requirements are met, specific transactions
relating to investment advice are exempt from prohibited
transaction treatment if the advice is provided by a fiduciary
advisor through an eligible investment advice arrangement.\30\
The exemptions apply to (1) the provision of investment advice
to a plan participant or beneficiary with respect to a security
or other property available as an investment under the plan,
(2) an investment transaction (that is, a sale, acquisition, or
holding of a security or other property) pursuant to the
advice, and (3) the direct or indirect receipt of fees or other
compensation in connection with the provision of the advice or
an investment transaction pursuant to the advice.
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\30\Sec. 4975(d)(17) and (f)(8). These exemptions and parallel
exemptions under ERISA section 408(b)(14) and (g) were established by
section 601 of the Pension Protection Act of 2006, Pub. L. No. 109-280.
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For purposes of the exemptions, an eligible investment
advice arrangement is generally an arrangement that either (1)
provides that any fees (including any commission or
compensation) received by the fiduciary adviser for investment
advice or with respect to an investment transaction with
respect to plan assets do not vary depending on the basis of
any investment option selected (sometimes referred to as ``fee-
leveling''), or (2) uses a computer model under an investment
advice program that meets specified requirements in connection
with the provision of investment advice to a participant or
beneficiary.\31\ The arrangement must be expressly authorized
by a plan fiduciary other than (1) the person offering the
investment advice program, (2) any person providing investment
options under the plan, or (3) any affiliate of (1) or (2).\32\
In addition, the fiduciary adviser must provide disclosures
applicable under securities laws; any investment transaction
must occur solely at the direction of the investment advice
recipient; the compensation received by the fiduciary adviser
and affiliates in connection with the investment transaction
must be reasonable; and the terms of the investment transaction
must be at least as favorable to the plan as an arm's length
transaction would be.
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\31\Various requirements with respect to notices and disclosure,
recordkeeping and audits must also be met.
\32\Affiliate for this purpose means an affiliated person as
defined under section 2(a)(3) of the Investment Company Act of 1940.
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DOL proposed regulations and ``BIC'' exemption
On April 20, 2015, DOL proposed regulations that would
replace the current regulations relating to investment advice
with a new standard as to whether a person is a fiduciary based
on rendering investment advice, generally to be applicable
eight months after final regulations are published.\33\ Under
the proposed regulations, a person is a fiduciary based on
rendering investment advice if the person:
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\33\Definition of the Term ``Fiduciary''; Conflict of Interest
Rule-Retirement Investment Advice, 80 Fed. Reg. 21928, April 20, 2015.
The proposed regulations would apply for purposes of ERISA and the
prohibited transaction rules of the Code.
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provides to a plan, a plan fiduciary, an
IRA,\34\ or an IRA owner certain types of
recommendations or statements (as described below) that
constitute investment advice with respect to plan or
IRA assets in exchange for a fee or other compensation,
and
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\34\IRA is defined in the proposed guidance to include HSAs, Archer
MSAs, and Coverdell ESAs, as well as IRAs. In Part IV.E of the preamble
to the proposed regulations, DOL requests comments as to whether it is
appropriate to cover individual accounts other than IRAs and treat them
in a manner similar to IRAs. 80 Fed. Reg. at 21947.
---------------------------------------------------------------------------
either directly or indirectly (such as
through an affiliate), (1) represents or acknowledges
that it is acting as a fiduciary with respect to the
investment advice, or (2) renders the advice pursuant
to a written or verbal agreement, arrangement or
understanding that the advice is individualized to, or
that the advice is specifically directed to, the advice
recipient for consideration in making investment or
management decisions with respect to securities or
other property of the plan or IRA.
Under the proposed regulations, investment advice includes:
a recommendation as to the advisability of
acquiring, holding, disposing of or exchanging
securities or other property, including a
recommendation to take a distribution of benefits or a
recommendation as to the investment of securities or
other property to be rolled over or otherwise
distributed from the plan or IRA;\35\
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\35\DOL Advisory Opinion 2005-23A (December 7, 2005) addresses the
question of whether a recommendation that a participant in a pension
plan roll over his or her account balance to an IRA to take advantage
of investment options not available under the plan constitutes
investment advice with respect to plan assets. The advisory opinion
expresses the view that, with respect to a person who is not otherwise
a plan fiduciary, merely advising a plan participant to take an
otherwise permissible plan distribution, even when the advice is
combined with a recommendation as to how the distribution should be
invested, does not constitute investment advice within the meaning of
the existing DOL investment advice regulations defining when a person
is a fiduciary by virtue of providing investment advice with respect to
employee benefit plan assets. The advisory opinion provides that DOL
does not view a recommendation to take a distribution as advice or a
recommendation concerning a particular investment (that is, purchasing
or selling securities or other property) as contemplated by the
regulations and that any investment recommendation regarding the
proceeds of a distribution would be advice with respect to funds that
are no longer plan assets. Part IV.A(1) of the preamble to the proposed
regulations notes that the proposed regulations, if finalized, would
supersede Advisory Opinion 2005-23A. 80 Fed. Reg. at 21939.
---------------------------------------------------------------------------
a recommendation as to the management of
securities or other property, including recommendations
as to the management of securities or other property to
be rolled over or otherwise distributed from the plan
or IRA;
an appraisal, fairness opinion, or similar
statement, whether verbal or written, concerning the
value of securities or other property if provided in
connection with a specific transaction or transactions
involving the acquisition, disposition, or exchange, of
such securities or other property by the plan or IRA;
and
a recommendation of a person who is also
going to receive a fee or other compensation for
providing any of the types of advice described above.
Subject to specified requirements for each exception, the
proposed regulations provide exceptions (referred to as
``carve-outs'') for (1) certain counterparties in transactions
with an employee benefit plan (referred to as the ``seller's
carve-out''); (2) swap and security-based swap transactions
with an employee benefit plan; (3) employees of an employee
benefit plan sponsor; (4) platform providers to employee
benefit plans; (5) persons providing selection and monitoring
assistance to employee benefit plans; (6) financial reports and
valuations (including to an IRA or IRA owner); and (7)
investment education (including to an IRA or IRA owner), under
standards somewhat different from the standards in the existing
DOL guidance. However, an exception does not apply if the
person represents or acknowledges that it is acting as a
fiduciary with respect to the advice. In conjunction with the
proposed regulations, DOL has proposed two new prohibited
transaction class exemptions, including a ``best interest
contract'' (or ``BIC'') exemption,\36\ as well as proposing
changes to various existing class exemptions.
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\36\Proposed Best Interest Contract Exemption, 80 Fed. Reg. 21960,
April 20, 2015. This class exemption is proposed to become applicable
at the same time as the 2015 proposed fiduciary regulations, eight
months after publication of final regulations.
---------------------------------------------------------------------------
The proposed BIC class exemption generally applies to
compensation received by an investment adviser or related party
in connection with a transaction (that is, a purchase, sale or
holding of assets) resulting from investment advice provided to
``retirement investors,'' meaning plan participants or
beneficiaries who direct the investment of the assets in their
accounts, IRA owners who make investment decisions with respect
to their IRAs, and a plan sponsor (or employee, officer, or
director thereof) of a plan with fewer than 100 participants
where the plan does not provide for participant-directed
investments and the plan sponsor acts as a fiduciary who has
authority to make plan investment decisions. Under the proposed
exemption, investment advice is in the best interest of a
retirement investor when the adviser and financial institution
providing the advice act with the care, skill, prudence, and
diligence under the circumstances then prevailing that a
prudent person would exercise based on the investment
objectives, risk tolerance, financial circumstances, and needs
of the retirement investor, without regard to the financial or
other interests of the adviser, financial institution or any
affiliate, related entity, or other party.\37\
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\37\The preamble to the proposed exemption states, ``Under this
standard, the Adviser and Financial Institution must put the interests
of the Retirement Investor ahead of the financial interests of the
Adviser, Financial Institution or their Affiliates, Related Entities or
any other party.'' 80 C.F.R. at 21970.
---------------------------------------------------------------------------
Assets subject to the proposed BIC class exemption include
the following: bank deposits; certificates of deposit (CDs);
shares or interests in mutual funds; bank collective funds;
insurance company separate accounts; exchange-traded REITs
(Real Estate Investment Trusts); exchange-traded funds;
corporate bonds offered pursuant to a registration statement
under the Securities Act of 1933; agency debt securities and
U.S. Treasury securities; insurance and annuity contracts,
guaranteed investment contracts, and exchange-traded equity
securities. In order for the proposed exemption to apply,
specific requirements must be met relating to the investment
advice contract (described below), impartial conduct with
respect to the advice, range of investment options, cost and
fee disclosures to retirement investors, disclosures to DOL and
recordkeeping.
The proposed BIC class exemption requires that, before
making any recommendations on investment transactions, the
adviser and financial institution enter into a written contract
with the retirement investor as follows:
the contract affirmatively states that the
adviser and financial institution are fiduciaries under
the ERISA or the Code, or both, with respect to any
investment recommendation to the retirement investor;
under the contract, the adviser and
financial institution specifically agree to adhere to
certain impartial conduct standards, which include
providing investment advice that is in the best
interest of the retirement investor, not recommending
investment in an asset if they (or affiliates) will
receive more than reasonable compensation in relation
to the total services they provide to the retirement
investor with respect to the investment, and not
providing any statements about an asset, fees, material
conflict of interest, and any other matter related to
the retirement investor's investment decision that are
misleading;
under the contract, the adviser and
financial institution provide certain warranties and
make certain disclosures related to fees and conflicts
of interest; and
the contract must not have exculpatory
provisions disclaiming or otherwise limiting liability
of the adviser or financial institution for a violation
of the contract's terms, or a provision under which a
plan, IRA, or retirement investor waives or qualifies
its right to bring or participate in a class action or
other representative action in court in a dispute with
the adviser or financial institution.\38\
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\38\As described in DOL's background discussion of the proposed
exemption, the contract terms to which advisors and financial
institutions must agree in order to qualify for the proposed BIC class
exemption potentially create a cause of action that may be used by
retirement investors to enforce these contract terms. 80 Fed. Reg. at
21972-21973. For example, an IRA owner could have a contract claim if
the adviser recommends an investment product that is not in the IRA
owner's best interest, even though, as noted above, the Code does not
create such a cause of action for an IRA owner. As noted above, a cause
of action under ERISA also is not available with respect to a plan not
subject to ERISA, such as an IRA.
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REASONS FOR CHANGE
Impartial investment advice plays an important role in
helping workers to save for retirement. The Committee is
concerned that existing regulations may not apply a fiduciary
standard of care with respect to investment advice in all
appropriate circumstances. On the other hand, proposed rules
issued by the Department of Labor would restrict access to
investment advice. For example, the Committee is concerned that
the Department of Labor's proposed rules, particularly the
proposed best interest contract exemption, purport to
effectively delegate to the plaintiffs trial bar the Department
of Treasury's authority to enforce the fiduciary rules with
respect to IRAs, by making the creation of a private right of
action a prerequisite to providing investment advice. The
Committee seeks to assure that fiduciary status applies when
appropriate and to require fiduciaries that provide investment
advice to act in the best interests of their clients, while not
imposing administrative requirements so burdensome as to limit
the availability of advice.
EXPLANATION OF PROVISION
In general
The provision specifies that its purpose is to provide that
advisors who (1) provide advice that is impermissible under the
prohibited transaction provisions of the Code, or (2) breach
the best interest standard for the provision of investment
advice, are subject to liability under the Code.
The provision adds a statutory definition of investment
advice to the prohibited transaction rules under the Code.\39\
In addition, subject to specified requirements, the provision
adds a new statutory exemption for the provision of investment
advice by a fiduciary to a plan, plan participant, or
beneficiary with respect to the plan, referred to as a ``best
interest recommendation,'' or a transaction connected to the
advice.
---------------------------------------------------------------------------
\39\The provision supersedes both existing DOL regulations and the
proposed regulations and exemptions issued by DOL in April 2015, as
described in Present Law.
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Definition of investment advice
General rule
A person providing investment advice, as defined under the
provision, for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of the plan, or
having any authority or responsibility to do so, is generally
treated as a fiduciary with respect to the plan (and thus is a
disqualified person with respect to the plan).
Specifically, under the provision, a recommendation that
relates to any of the following may be investment advice (if
rendered under the conditions described below):
the advisability of acquiring, holding,
disposing, or exchanging any moneys or other property
of a plan by the plan, plan participants, or plan
beneficiaries, including any recommendation whether to
take a distribution of benefits from the plan or any
recommendation relating to the investment of any moneys
or other property of the plan to be distributed from
the plan;
the management of moneys or other property
of the plan, including recommendations relating to the
management of moneys or other property to be
distributed from the plan; or
the advisability of retaining or ceasing to
retain a person who would receive a fee or other
compensation for providing any of these types of
advice.
A rollover is always done in connection with a
distribution. Thus, recommendations relating to moneys or other
property to be distributed from a plan include recommendations
relating to rollovers of such moneys or other property.
In order for a recommendation to be investment advice, it
must be rendered pursuant to either of the following:
a written acknowledgment that the person is
a fiduciary with respect to the provision of the
recommendation; or
a mutual agreement, arrangement, or
understanding, which may include limitations as to the
scope, timing, and responsibility to provide ongoing
monitoring or advice services, between the person
making the recommendation and the plan, plan
participant, or beneficiary that (1) the recommendation
is individualized to the plan, plan participant, or
beneficiary and (2) the plan, plan participant, or
beneficiary intends to materially rely on the
recommendation in making investment or management
decisions with respect to any moneys or other property
of the plan.
Disclaimer of a mutual agreement, arrangement, or
understanding
Under the provision, any disclaimer of a mutual agreement,
arrangement, or understanding with respect to a recommendation
must only state the following: ``This information is not
individualized to you, and you are not intended to materially
rely on this information in making investment or management
decisions.'' Further, this disclaimer is not effective unless
it is in writing and is communicated in a clear and prominent
manner and an objective person would reasonably conclude that,
based on all the facts and circumstances, there was not a
mutual agreement, arrangement, or understanding.
Information not treated as investment advice
Under the provision, information provided in the
circumstances described below is not treated as a
recommendation made pursuant to a mutual agreement,
arrangement, or understanding for purposes of the definition of
investment advice. The information in these circumstances shall
contain the disclaimer described above.
Seller's exception. The information is provided in
conjunction with full and fair disclosure in writing to a plan,
plan participant, or beneficiary that the person providing the
information is doing so in its marketing or sales capacity,
including any information regarding the terms and conditions of
the engagement of the person providing the information, and
that the person is not intending to provide investment advice
(as defined under the provision) or to otherwise act as a
fiduciary to the plan or to act under the obligations of a best
interest recommendation (described below).
Swap and security-based swap transaction. The person
providing the information is a counterparty or service provider
to the plan in connection with any transaction based on the
information (including a service arrangement, sale, purchase,
loan, bilateral contract, swap,\40\ or security-based
swap\41\). In addition, the plan is represented, in connection
with the transaction, by a plan fiduciary that is independent
of the person providing the information, and, except in the
case of a swap or security-based swap, independent of the plan
sponsor. Further, prior to entering into the transaction, the
independent plan fiduciary represents in writing to the person
providing the information that it is aware that the person has
a financial interest in the transaction and that it has
determined that the person is not intending to provide
investment advice (as defined under the provision) or to
otherwise act as a fiduciary to the plan, plan participants, or
plan beneficiaries.
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\40\A swap for this purpose is defined in section 1a of the
Commodity Exchange Act (7 U.S.C. sec. 1a).
\41\A security-based swap for this purpose is defined in section
3(a) of the Securities Exchange Act (15 U.S.C. sec. 78c(a)).
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Employees of a plan sponsor. The person providing the
information is an employee of any sponsoring employer or
employee organization who provides the information to the plan
for no fee or other compensation other than the employee's
normal compensation.
Platform providers selection and monitoring assistance. The
person providing the information discloses in writing to the
plan fiduciary that the person is not undertaking to provide
investment advice as a fiduciary or under the obligations of a
best interest recommendation. In addition, the information
provided consists solely of either of the following:
making available to the plan, plan
participants, or plan beneficiaries, without regard to
the individualized needs of the plan, plan
participants, or plan beneficiaries, securities or
other property through a platform or similar mechanism
from which a plan fiduciary may select or monitor
investment alternatives, including qualified default
investment alternatives, into which plan participants
or beneficiaries may direct the investment of assets
held in, or contributed to, their individual accounts;
or
in connection with a platform or similar
mechanism described above, either (1) identifying
investment alternatives that meet objective criteria
specified by the plan, such as criteria concerning
expense ratios, fund sizes, types of asset, or credit
quality, or (2) providing objective financial data and
comparisons with independent benchmarks to the plan.
Valuation. The information consists solely of valuation
information.
Financial education. The information consists solely of the
following:
information described in DOL Interpretive
Bulletin 96-1 as in effect on January 1, 2015,
regardless of whether the education is provided to a
plan or plan fiduciary or a participant or beneficiary;
information provided to participants or
beneficiaries regarding the factors to consider in
deciding whether to elect to receive a distribution
from a plan and whether to roll over the distribution
to a plan, so long as any examples of different
distribution alternatives are accompanied by all
material facts and assumptions on which the examples
are based; or
any additional information treated as
education by the Secretary of the Treasury.\42\
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\42\However, under the Reorganization Plan, discussed above, the
Secretary of Labor is granted interpretive authority over this
provision.
---------------------------------------------------------------------------
Best interest recommendation exemption
The provision includes a prohibited transaction exemption
for the provision of investment advice by a fiduciary to a
plan, plan participant, or beneficiary with respect to the
plan, or a transaction connected to the advice, in the case of
a ``best interest recommendation.''
As defined under the provision, a best interest
recommendation is a recommendation:
for which no more than reasonable
compensation is paid;\43\
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\43\Reasonable compensation for this purpose is determined as under
the present-law prohibited transaction exemption for an arrangement
with a disqualified person for services necessary for the establishment
or operation of a plan if no more than reasonable compensation is paid
therefor. Sec. 4975(d)(2).
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provided by a person (referred to herein as
the ``adviser'') acting with the care, skill, prudence,
and diligence under the circumstances then prevailing
that a prudent person would exercise based on the
information obtained through the adviser's reasonable
diligence regarding factors such as the advice
recipient's age and any other information that the
advice recipient discloses to the adviser in connection
with receiving the recommendation; and
where the adviser places the interests of
the plan or advice recipient above its own.
A best interest recommendation may include a recommendation
that is based on a limited range of investment options, which
may consist, in whole or in part, of proprietary products, but
only if any limitations are clearly disclosed to the advice
recipient before any transaction based on the investment advice
in the form of a notice that states only the following: ``This
recommendation is based on a limited range of investment
options, and the same or similar investments may be available
at a different cost (greater or lesser) from other sources.''
A best interest recommendation may also include a
recommendation that may result in variable compensation to the
adviser (or any affiliate\44\ of the adviser), but only if the
receipt of the compensation is clearly disclosed to the advice
recipient before any transaction based on the investment
advice. For this purpose, clear disclosure of variable
compensation must include, in a manner calculated to be
understood by the average individual, each of the following:
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\44\Under the provision, affiliate is defined as under the present-
law exemption relating to investment advice, that is, an affiliated
person as defined under section 2(a)(3) of the Investment Company Act
of 1940.
---------------------------------------------------------------------------
(1) a notice that states only the following: ``This
recommendation may result in varying amounts of fees or
other compensation to the person providing the
recommendation (or its affiliate), and the same or
similar investments may be available at a different
cost (greater or lesser) from other sources.''\45\
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\45\Any regulations or other administrative guidance implementing
this requirement may not require this notice to be updated more
frequently than annually with respect to a particular recommendation
that constitutes investment advice, regardless of whether multiple
transactions are based on the advice. However, a new notice would be
required with respect to any new recommendation that constitutes
investment advice.
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(2) A description of any fee or other compensation
that is directly or indirectly payable to the adviser
(or its affiliate) by the advice recipient with respect
to the transaction (expressed as an amount, formula,
percentage of assets, per capita charge, or estimate or
range of the compensation).
(3) A description of the types and ranges of any
compensation that may be directly or indirectly payable
to the adviser (or its affiliate) by any third party in
connection with the transaction (expressed as an
amount, formula, percentage of assets, per capita
charge, or estimate or range of the compensation).
(4) On request of the advice recipient, a disclosure
of the specific amounts of compensation described in
(3) that the adviser will receive in connection with
the particular transaction (expressed as an amount,
formula, percentage of assets, per capita charge, or
estimate of the compensation).
A notice with respect to limitations on the range of
investment options on which a recommendation is based or with
respect to variable compensation shall have no effect on any
other notice otherwise required without regard to the Code and
shall be provided in addition to, and not in lieu of, any other
such notice.
Under the provision, a recommendation will not fail to be a
best interest recommendation solely because a person who,
acting in good faith and with reasonable diligence, makes an
error or omission in disclosing the information specified above
if the person discloses the correct information to the advice
recipient as soon as practicable, but not later than 30 days
from the date on which the person knows of the error or
omission.
The provision includes special rules relating to the amount
involved and correction with respect to a prohibited
transaction arising by the failure of investment advice to be a
best interest recommendation. In that case, the amount involved
is the amount paid to the person providing the advice (or its
affiliate) that has not been paid or reimbursed to the plan,
plan participants, or plan beneficiaries, including payments
and reimbursements made pursuant to a correction (as described
in the following sentence). In addition, ``correction'' and
``correct'' in this case mean the payment to, or reimbursement
of, actual damages of the plan, plan participants, or plan
beneficiaries resulting directly from the plan's, plan
participant's, or plan beneficiary's reliance on the investment
advice, if any, that have not otherwise been paid or reimbursed
to the plan, plan participants, or plan beneficiaries,
including payments and reimbursements made pursuant to the
general correction rule under present law (that is, undoing the
transaction to the extent possible, but in any case placing the
plan in a financial position not worse than that in which it
would be if the disqualified person were acting under the
highest fiduciary standards) if such amount is greater than the
amount determined under the present-law correction rule.
EFFECTIVE DATE
The amendments made by the provision generally are
effective on the 61st day after the date of enactment of the
provision and apply with respect to information provided or
recommendations made on or after two years after the date of
enactment. However, if, before the 61st day after the date of
enactment, a bill or joint resolution is enacted that
specifically approves any rules or administrative positions
that are promulgated under the Code and ERISA statutory
definitions of fiduciary\46\ and are not in effect on January
1, 2015, the amendments made by the provision will not take
effect. In addition, the amendments made by the provision do
not apply to any service or transaction rendered, entered into,
or for which a person has been compensated before the date on
which the amendments generally become effective.
---------------------------------------------------------------------------
\46\Sec. 4975(e)(3) and ERISA sec. 3(21).
---------------------------------------------------------------------------
DOL is prohibited from amending any rules or administrative
positions promulgated under the Code and ERISA statutory
definitions of fiduciary (including DOL Interpretive Bulletin
96-1 and Advisory Opinion 2005-23A, discussed in Present Law),
and no rule or administrative position promulgated by DOL
before the date of enactment of the provision but not effective
on January 1, 2015, may become effective unless a bill or joint
resolution as described above is enacted not later than 60 days
after the date of enactment of the provision. If the amendments
made by the provision take effect, nothing in the provision is
to be construed to prohibit the issuance of guidance to carry
out the amendments so long as the guidance is necessary to
implement the amendments. Until the time when regulations or
other guidance is issued to carry out the amendments, a plan or
a fiduciary will be treated as meeting the requirements of the
amendments if the plan or fiduciary, as applicable, complies
with a reasonable good faith interpretation of the amendments.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the vote of the Committee on Ways and Means in its
consideration of H.R. 4294, the ``Strengthening Access to
Valuable Education and Retirement Support Act of 2015'' or the
``SAVERS Act of 2015,'' on February 3, 2016.
The Chairman's amendment in the nature of a substitute was
adopted by a voice vote (with a quorum being present).
The bill, H.R. 4294, was ordered favorably reported to the
House of Representatives as amended by a roll call vote of 26
yeas to 12 nays (with a quorum being present). The vote was as
follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Rangel....... ........ X .........
Mr. Nunes...................... X ........ ......... Mr. McDermott.... ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Reichert................... X ........ ......... Mr. Neal......... X ........ .........
Mr. Boustany................... ........ ........ ......... Mr. Becerra...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Price...................... X ........ ......... Mr. Thompson..... X ........ .........
Mr. Buchanan................... X ........ ......... Mr. Larson....... X ........ .........
Mr. Smith (NE)................. X ........ ......... Mr. Blumenauer... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Kind......... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Marchant................... X ........ ......... Mr. Crowley...... ........ X .........
Ms. Black...................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Reed....................... X ........ ......... Ms. Sanchez...... ........ X .........
Mr. Young...................... X ........ .........
Mr. Kelly...................... X ........ .........
Mr. Renacci.................... X ........ .........
Mr. Meehan..................... X ........ .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
Mr. Dold....................... X ........ .........
Mr. Rice....................... X ........ .........
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 4294, as
reported.
The bill, as reported, is estimated to have a negligible
effect on Federal fiscal year budget receipts for the period
2016-2026.
Pursuant to clause 8 of rule XIII of the Rules of the House
of Representatives, the following statement is made by the
Joint Committee on Taxation with respect to the provisions of
the bill amending the Internal Revenue Code of 1986: The gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not ``major legislation''
for purposes of requiring that the estimate include the
budgetary effects of changes in economic output, employment,
capital stock and other macroeconomic variables.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that there are no new or increased tax
expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 10, 2016.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4294, the
Strengthening Access to Valuable Education and Retirement
Support Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Peter
Huether.
Sincerely,
Keith Hall.
Enclosure.
H.R. 4294--Strengthening Access to Valuable Education and Retirement
Support Act of 2015
H.R. 4294, the Strengthening Access to Valuable Education
and Retirement Support Act of 2015, amends the section of the
Internal Revenue Code that prohibits self-dealing transactions
by fiduciaries of certain tax-favored plans, including
employer-sponsored retirement plans, individual retirement
accounts and health savings accounts. The bill would add a
definition of investment advice to that section of the Internal
Revenue Code. The bill would also add a new statutory exemption
related to investment advice that a fiduciary can provide to
these tax-favored plans, plan participants, or beneficiaries.
Among other provisions, H.R. 4294 would change requirements
regarding disclosure of potential compensation accruing to the
fiduciary or an affiliate.
The staff of the Joint Committee on Taxation (JCT)
estimates that the bill would have a negligible effect on
revenues for the period between 2016 and 2026. Enacting the
bill would not affect direct spending. Because enacting H.R.
4294 would affect revenues, pay-as-you-go procedures apply.
CBO and JCT estimate that enacting H.R. 4294 would not
increase net direct spending or on-budget deficits by more than
$5 billion in any of the four consecutive 10-year periods
beginning in 2027.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Peter Huether.
The estimate was approved by David Weiner, Assistant Director
for Tax Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was as a result of the
Committee's review of the provisions of H.R. 4294 that the
Committee concluded that it is appropriate to report the bill,
as amended, favorably to the House of Representatives with the
recommendation that the bill do pass.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill, and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code of 1986 and has widespread applicability
to individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Internal Revenue
Code of 1986 and that have ``widespread applicability'' to
individuals or small businesses, within the meaning of the
rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(g)(2) of H. Res. 5 (114th
Congress), the Committee states that no provision of the bill
establishes or reauthorizes: (1) a program of the Federal
Government known to be duplicative of another Federal program,
(2) a program included in any report from the Government
Accountability Office to Congress pursuant to section 21 of
Public Law 111-139, or (3) a program related to a program
identified in the most recent Catalog of Federal Domestic
Assistance, published pursuant to the Federal Program
Information Act (Public Law 95-220, as amended by Public Law
98-169).
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (114th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
A. Text of Existing Law Amended or Repealed by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) Initial Taxes on Disqualified Person.--There is hereby
imposed a tax on each prohibited transaction. The rate of tax
shall be equal to 15 percent of the amount involved with
respect to the prohibited transaction for each year (or part
thereof) in the taxable period. The tax imposed by this
subsection shall be paid by any disqualified person who
participates in the prohibited transaction (other than a
fiduciary acting only as such).
(b) Additional Taxes on Disqualified Person.--In any case in
which an initial tax is imposed by subsection (a) on a
prohibited transaction and the transaction is not corrected
within the taxable period, there is hereby imposed a tax equal
to 100 percent of the amount involved. The tax imposed by this
subsection shall be paid by any disqualified person who
participated in the prohibited transaction (other than a
fiduciary acting only as such).
(c) Prohibited Transaction.--
(1) General rule.--For purposes of this section, the
term ``prohibited transaction'' means any direct or
indirect--
(A) sale or exchange, or leasing, of any
property between a plan and a disqualified
person;
(B) lending of money or other extension of
credit between a plan and a disqualified
person;
(C) furnishing of goods, services, or
facilities between a plan and a disqualified
person;
(D) transfer to, or use by or for the benefit
of, a disqualified person of the income or
assets of a plan;
(E) act by a disqualified person who is a
fiduciary whereby he deals with the income or
assets of a plan in his own interests or for
his own account; or
(F) receipt of any consideration for his own
personal account by any disqualified person who
is a fiduciary from any party dealing with the
plan in connection with a transaction involving
the income or assets of the plan.
(2) Special exemption.--The Secretary shall establish
an exemption procedure for purposes of this subsection.
Pursuant to such procedure, he may grant a conditional
or unconditional exemption of any disqualified person
or transaction, orders of disqualified persons or
transactions, from all or part of the restrictions
imposed by paragraph (1) of this subsection. Action
under this subparagraph may be taken only after
consultation and coordination with the Secretary of
Labor. The Secretary may not grant an exemption under
this paragraph unless he finds that such exemption is--
(A) administratively feasible,
(B) in the interests of the plan and of its
participants and beneficiaries, and
(C) protective of the rights of participants
and beneficiaries of the plan.
Before granting an exemption under this paragraph, the
Secretary shall require adequate notice to be given to
interested persons and shall publish notice in the
Federal Register of the pendency of such exemption and
shall afford interested persons an opportunity to
present views. No exemption may be granted under this
paragraph with respect to a transaction described in
subparagraph (E) or (F) of paragraph (1) unless the
Secretary affords an opportunity for a hearing and
makes a determination on the record with respect to the
findings required under subparagraphs (A), (B), and (C)
of this paragraph, except that in lieu of such hearing
the Secretary may accept any record made by the
Secretary of Labor with respect to an application for
exemption under section 408(a) of title I of the
Employee Retirement Income Security Act of 1974.
(3) Special rule for individual retirement
accounts.--An individual for whose benefit an
individual retirement account is established and his
beneficiaries shall be exempt from the tax imposed by
this section with respect to any transaction concerning
such account (which would otherwise be taxable under
this section) if, with respect to such transaction, the
account ceases to be an individual retirement account
by reason of the application of section 408(e)(2)(A) or
if section 408(e)(4) applies to such account.
(4) Special rule for Archer MSAs.--An individual for
whose benefit an Archer MSA (within the meaning of
section 220(d)) is established shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
220(e)(2) applies to such transaction.
(5) Special rule for Coverdell education savings
accounts.--An individual for whose benefit a Coverdell
education savings account is established and any
contributor to such account shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
530(d) applies with respect to such transaction.
(6) Special rule for health savings accounts.--An
individual for whose benefit a health savings account
(within the meaning of section 223(d)) is established
shall be exempt from the tax imposed by this section
with respect to any transaction concerning such account
(which would otherwise be taxable under this section)
if, with respect to such transaction, the account
ceases to be a health savings account by reason of the
application of section 223(e)(2) to such account.
(d) Exemptions.--Except as provided in subsection (f)(6), the
prohibitions provided in subsection (c) shall not apply to--
(1) any loan made by the plan to a disqualified
person who is a participant or beneficiary of the plan
if such loan--
(A) is available to all such participants or
beneficiaries on a reasonably equivalent basis,
(B) is not made available to highly
compensated employees (within the meaning of
section 414(q)) in an amount greater than the
amount made available to other employees,
(C) is made in accordance with specific
provisions regarding such loans set forth in
the plan,
(D) bears a reasonable rate of interest, and
(E) is adequately secured;
(2) any contract, or reasonable arrangement, made
with a disqualified person for office space, or legal,
accounting, or other services necessary for the
establishment or operation of the plan, if no more than
reasonable compensation is paid therefor;
(3) any loan to an leveraged employee stock ownership
plan (as defined in subsection (e)(7)), if--
(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and
(B) such loan is at a reasonable rate of
interest, and any collateral which is given to
a disqualified person by the plan consists only
of qualifying employer securities (as defined
in subsection (e)(8));
(4) the investment of all or part of a plan's assets
in deposits which bear a reasonable interest rate in a
bank or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such
bank or other institution and employees of
affiliates of such bank or other institution,
or
(B) such investment is expressly authorized
by a provision of the plan or by a fiduciary
(other than such bank or institution or
affiliates thereof) who is expressly empowered
by the plan to so instruct the trustee with
respect to such investment;
(5) any contract for life insurance, health
insurance, or annuities with one or more insurers which
are qualified to do business in a State if the plan
pays no more than adequate consideration, and if each
such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a disqualified person which is wholly
owned (directly or indirectly) by the employer
establishing the plan, or by any person which
is a disqualified person with respect to the
plan, but only if the total premiums and
annuity considerations written by such insurers
for life insurance, health insurance, or
annuities for all plans (and their employers)
with respect to which such insurers are
disqualified persons (not including premiums or
annuity considerations written by the employer
maintaining the plan) do not exceed 5 percent
of the total premiums and annuity
considerations written for all lines of
insurance in that year by such insurers (not
including premiums or annuity considerations
written by the employer maintaining the plan);
(6) the provision of any ancillary service by a bank
or similar financial institution supervised by the
United States or a State, if such service is provided
at not more than reasonable compensation, if such bank
or other institution is a fiduciary of such plan, and
if--
(A) such bank or similar financial
institution has adopted adequate internal
safeguards which assure that the provision of
such ancillary service is consistent with sound
banking and financial practice, as determined
by Federal or State supervisory authority, and
(B) the extent to which such ancillary
service is provided is subject to specific
guidelines issued by such bank or similar
financial institution (as determined by the
Secretary after consultation with Federal and
State supervisory authority), and under such
guidelines the bank or similar financial
institution does not provide such ancillary
service--
(i) in an excessive or unreasonable
manner, and
(ii) in a manner that would be
inconsistent with the best interests of
participants and beneficiaries of
employee benefit plans;
(7) the exercise of a privilege to convert
securities, to the extent provided in regulations of
the Secretary but only if the plan receives no less
than adequate consideration pursuant to such
conversion;
(8) any transaction between a plan and a common or
collective trust fund or pooled investment fund
maintained by a disqualified person which is a bank or
trust company supervised by a State or Federal agency
or between a plan and a pooled investment fund of an
insurance company qualified to do business in a State
if--
(A) the transaction is a sale or purchase of
an interest in the fund,
(B) the bank, trust company, or insurance
company receives not more than a reasonable
compensation, and
(C) such transaction is expressly permitted
by the instrument under which the plan is
maintained, or by a fiduciary (other than the
bank, trust company, or insurance company, or
an affiliate thereof) who has authority to
manage and control the assets of the plan;
(9) receipt by a disqualified person of any benefit
to which he may be entitled as a participant or
beneficiary in the plan, so long as the benefit is
computed and paid on a basis which is consistent with
the terms of the plan as applied to all other
participants and beneficiaries;
(10) receipt by a disqualified person of any
reasonable compensation for services rendered, or for
the reimbursement of expenses properly and actually
incurred, in the performance of his duties with the
plan, but no person so serving who already receives
full-time pay from an employer or an association of
employers, whose employees are participants in the plan
or from an employee organization whose members are
participants in such plan shall receive compensation
from such fund, except for reimbursement of expenses
properly and actually incurred;
(11) service by a disqualified person as a fiduciary
in addition to being an officer, employee, agent, or
other representative of a disqualified person;
(12) the making by a fiduciary of a distribution of
the assets of the trust in accordance with the terms of
the plan if such assets are distributed in the same
manner as provided under section 4044 of title IV of
the Employee Retirement Income Security Act of 1974
(relating to allocation of assets);
(13) any transaction which is exempt from section 406
of such Act by reason of section 408(e) of such Act (or
which would be so exempt if such section 406 applied to
such transaction) or which is exempt from section 406
of such Act by reason of section 408(b)(12) of such
Act;
(14) any transaction required or permitted under part
1 of subtitle E of title IV or section 4223 of the
Employee Retirement Income Security Act of 1974, but
this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(15) a merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231 of such Act,
but this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(16) a sale of stock held by a trust which
constitutes an individual retirement account under
section 408(a) to the individual for whose benefit such
account is established if--
(A) such stock is in a bank (as defined in
section 581) or a depository institution
holding company (as defined in section 3(w)(1)
of the Federal Deposit Insurance Act (12 U.S.C.
1813(w)(1)),
(B) such stock is held by such trust as of
the date of the enactment of this paragraph,
(C) such sale is pursuant to an election
under section 1362(a) by such bank or company,
(D) such sale is for fair market value at the
time of sale (as established by an independent
appraiser) and the terms of the sale are
otherwise at least as favorable to such trust
as the terms that would apply on a sale to an
unrelated party,
(E) such trust does not pay any commissions,
costs, or other expenses in connection with the
sale, and
(F) the stock is sold in a single transaction
for cash not later than 120 days after the S
corporation election is made;
(17) Any transaction in connection with the provision
of investment advice described in subsection (e)(3)(B)
to a participant or beneficiary in a plan that permits
such participant or beneficiary to direct the
investment of plan assets in an individual account,
if--
(A) the transaction is--
(i) the provision of the investment
advice to the participant or
beneficiary of the plan with respect to
a security or other property available
as an investment under the plan,
(ii) the acquisition, holding, or
sale of a security or other property
available as an investment under the
plan pursuant to the investment advice,
or
(iii) the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser or an affiliate
thereof (or any employee, agent, or
registered representative of the
fiduciary adviser or affiliate) in
connection with the provision of the
advice or in connection with an
acquisition, holding, or sale of a
security or other property available as
an investment under the plan pursuant
to the investment advice; and
(B) the requirements of subsection (f)(8) are
met,
(18) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person (other than a fiduciary described in subsection
(e)(3)) with respect to a plan if--
(A) the transaction involves a block trade,
(B) at the time of the transaction, the
interest of the plan (together with the
interests of any other plans maintained by the
same plan sponsor), does not exceed 10 percent
of the aggregate size of the block trade,
(C) the terms of the transaction, including
the price, are at least as favorable to the
plan as an arm's length transaction, and
(D) the compensation associated with the
purchase and sale is not greater than the
compensation associated with an arm's length
transaction with an unrelated party,
(19) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person if--
(A) the transaction is executed through an
electronic communication network, alternative
trading system, or similar execution system or
trading venue subject to regulation and
oversight by--
(i) the applicable Federal regulating
entity, or
(ii) such foreign regulatory entity
as the Secretary of Labor may determine
by regulation,
(B) either--
(i) the transaction is effected
pursuant to rules designed to match
purchases and sales at the best price
available through the execution system
in accordance with applicable rules of
the Securities and Exchange Commission
or other relevant governmental
authority, or
(ii) neither the execution system nor
the parties to the transaction take
into account the identity of the
parties in the execution of trades,
(C) the price and compensation associated
with the purchase and sale are not greater than
the price and compensation associated with an
arm's length transaction with an unrelated
party,
(D) if the disqualified person has an
ownership interest in the system or venue
described in subparagraph (A), the system or
venue has been authorized by the plan sponsor
or other independent fiduciary for transactions
described in this paragraph, and
(E) not less than 30 days prior to the
initial transaction described in this paragraph
executed through any system or venue described
in subparagraph (A), a plan fiduciary is
provided written or electronic notice of the
execution of such transaction through such
system or venue,
(20) transactions described in subparagraphs (A),
(B), and (D) of subsection (c)(1) between a plan and a
person that is a disqualified person other than a
fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the
investment of the plan assets involved in the
transaction or renders investment advice (within the
meaning of subsection (e)(3)(B)) with respect to those
assets, solely by reason of providing services to the
plan or solely by reason of a relationship to such a
service provider described in subparagraph (F), (G),
(H), or (I) of subsection (e)(2), or both, but only if
in connection with such transaction the plan receives
no less, nor pays no more, than adequate consideration,
(21) any foreign exchange transactions, between a
bank or broker-dealer (or any affiliate of either) and
a plan (as defined in this section) with respect to
which such bank or broker-dealer (or affiliate) is a
trustee, custodian, fiduciary, or other disqualified
person person, if--
(A) the transaction is in connection with the
purchase, holding, or sale of securities or
other investment assets (other than a foreign
exchange transaction unrelated to any other
investment in securities or other investment
assets),
(B) at the time the foreign exchange
transaction is entered into, the terms of the
transaction are not less favorable to the plan
than the terms generally available in
comparable arm's length foreign exchange
transactions between unrelated parties, or the
terms afforded by the bank or broker-dealer (or
any affiliate of either) in comparable arm's-
length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or
broker-dealer (or affiliate) for a particular
foreign exchange transaction does not deviate
by more than 3 percent from the interbank bid
and asked rates for transactions of comparable
size and maturity at the time of the
transaction as displayed on an independent
service that reports rates of exchange in the
foreign currency market for such currency, and
(D) the bank or broker-dealer (or any
affiliate of either) does not have investment
discretion, or provide investment advice, with
respect to the transaction,
(22) any transaction described in subsection
(c)(1)(A) involving the purchase and sale of a security
between a plan and any other account managed by the
same investment manager, if--
(A) the transaction is a purchase or sale,
for no consideration other than cash payment
against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the
independent current market price of the
security (within the meaning of section
270.17a-7(b) of title 17, Code of Federal
Regulations),
(C) no brokerage commission, fee (except for
customary transfer fees, the fact of which is
disclosed pursuant to subparagraph (D)), or
other remuneration is paid in connection with
the transaction,
(D) a fiduciary (other than the investment
manager engaging in the cross-trades or any
affiliate) for each plan participating in the
transaction authorizes in advance of any cross-
trades (in a document that is separate from any
other written agreement of the parties) the
investment manager to engage in cross trades at
the investment manager's discretion, after such
fiduciary has received disclosure regarding the
conditions under which cross trades may take
place (but only if such disclosure is separate
from any other agreement or disclosure
involving the asset management relationship),
including the written policies and procedures
of the investment manager described in
subparagraph (H),
(E) each plan participating in the
transaction has assets of at least
$100,000,000, except that if the assets of a
plan are invested in a master trust containing
the assets of plans maintained by employers in
the same controlled group (as defined in
section 407(d)(7) of the Employee Retirement
Income Security Act of 1974), the master trust
has assets of at least $100,000,000,
(F) the investment manager provides to the
plan fiduciary who authorized cross trading
under subparagraph (D) a quarterly report
detailing all cross trades executed by the
investment manager in which the plan
participated during such quarter, including the
following information, as applicable: (i) the
identity of each security bought or sold; (ii)
the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv)
trade price and the method used to establish
the trade price,
(G) the investment manager does not base its
fee schedule on the plan's consent to cross
trading, and no other service (other than the
investment opportunities and cost savings
available through a cross trade) is conditioned
on the plan's consent to cross trading,
(H) the investment manager has adopted, and
cross-trades are effected in accordance with,
written cross-trading policies and procedures
that are fair and equitable to all accounts
participating in the cross-trading program, and
that include a description of the manager's
pricing policies and procedures, and the
manager's policies and procedures for
allocating cross trades in an objective manner
among accounts participating in the cross-
trading program, and
(I) the investment manager has designated an
individual responsible for periodically
reviewing such purchases and sales to ensure
compliance with the written policies and
procedures described in subparagraph (H), and
following such review, the individual shall
issue an annual written report no later than 90
days following the period to which it relates
signed under penalty of perjury to the plan
fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed
during the course of the review, the level of
compliance, and any specific instances of non-
compliance.
The written report shall also notify the plan fiduciary
of the plan's right to terminate participation in the
investment manager's cross-trading program at any time,
or
(23) except as provided in subsection (f)(11), a
transaction described in subparagraph (A), (B), (C), or
(D) of subsection (c)(1) in connection with the
acquisition, holding, or disposition of any security or
commodity, if the transaction is corrected before the
end of the correction period.
(e) Definitions.--
(1) Plan.--For purposes of this section, the term
``plan'' means--
(A) a trust described in section 401(a) which
forms a part of a plan, or a plan described in
section 403(a), which trust or plan is exempt
from tax under section 501(a),
(B) an individual retirement account
described in section 408(a),
(C) an individual retirement annuity
described in section 408(b),
(D) an Archer MSA described in section
220(d),
(E) a health savings account described in
section 223(d),
(F) a Coverdell education savings account
described in section 530, or
(G) a trust, plan, account, or annuity which,
at any time, has been determined by the
Secretary to be described in any preceding
subparagraph of this paragraph.
(2) Disqualified person.--For purposes of this
section, the term ``disqualified person'' means a
person who is--
(A) a fiduciary;
(B) a person providing services to the plan;
(C) an employer any of whose employees are
covered by the plan;
(D) an employee organization any of whose
members are covered by the plan;
(E) an owner, direct or indirect, of 50
percent or more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of a corporation,
(ii) the capital interest or the
profits interest of a partnership, or
(iii) the beneficial interest of a
trust or unincorporated enterprise,
which is an employer or an employee
organization described in subparagraph (C) or
(D);
(F) a member of the family (as defined in
paragraph (6)) of any individual described in
subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or
estate of which (or in which) 50 percent or
more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of such corporation,
(ii) the capital interest or profits
interest of such partnership, or
(iii) the beneficial interest of such
trust or estate, is owned directly or
indirectly, or held by persons
described in subparagraph (A), (B),
(C), (D), or (E);
(H) an officer, director (or an individual
having powers or responsibilities similar to
those of officers or directors), a 10 percent
or more shareholder, or a highly compensated
employee (earning 10 percent or more of the
yearly wages of an employer) of a person
described in subparagraph (C), (D), (E), or
(G); or
(I) a 10 percent or more (in capital or
profits) partner or joint venturer of a person
described in subparagraph (C), (D), (E), or
(G).
The Secretary, after consultation and coordination with
the Secretary of Labor or his delegate, may by
regulation prescribe a percentage lower than 50 percent
for subparagraphs (E) and (G) and lower than 10 percent
for subparagraphs (H) and (I).
(3) Fiduciary.--For purposes of this section, the
term ``fiduciary'' means any person who--
(A) exercises any discretionary authority or
discretionary control respecting management of
such plan or exercises any authority or control
respecting management or disposition of its
assets,
(B) renders investment advice for a fee or
other compensation, direct or indirect, with
respect to any moneys or other property of such
plan, or has any authority or responsibility to
do so, or
(C) has any discretionary authority or
discretionary responsibility in the
administration of such plan.
Such term includes any person designated under section
405(c)(1)(B) of the Employee Retirement Income Security
Act of 1974.
(4) Stockholdings.--For purposes of paragraphs
(2)(E)(i) and (G)(i) there shall be taken into account
indirect stockholdings which would be taken into
account under section 267(c), except that, for purposes
of this paragraph, section 267(c)(4) shall be treated
as providing that the members of the family of an
individual are the members within the meaning of
paragraph (6).
(5) Partnerships; trusts.--For purposes of paragraphs
(2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the
ownership of profits or beneficial interests shall be
determined in accordance with the rules for
constructive ownership of stock provided in section
267(c) (other than paragraph (3) thereof), except that
section 267(c)(4) shall be treated as providing that
the members of the family of an individual are the
members within the meaning of paragraph (6).
(6) Member of family.--For purposes of paragraph
(2)(F), the family of any individual shall include his
spouse, ancestor, lineal descendant, and any spouse of
a lineal descendant.
(7) Employee stock ownership plan.--The term
``employee stock ownership plan'' means a defined
contribution plan--
(A) which is a stock bonus plan which is
qualified, or a stock bonus and a money
purchase plan both of which are qualified under
section 401(a), and which are designed to
invest primarily in qualifying employer
securities; and
(B) which is otherwise defined in regulations
prescribed by the Secretary.
A plan shall not be treated as an employee stock
ownership plan unless it meets the requirements of
section 409(h), section 409(o), and, if applicable,
section 409(n), section 409(p), and section 664(g) and,
if the employer has a registration-type class of
securities (as defined in section 409(e)(4)), it meets
the requirements of section 409(e).
(8) Qualifying employer security.--The term
``qualifying employer security'' means any employer
security within the meaning of section 409(l). If any
moneys or other property of a plan are invested in
shares of an investment company registered under the
Investment Company Act of 1940, the investment shall
not cause that investment company or that investment
company's investment adviser or principal underwriter
to be treated as a fiduciary or a disqualified person
for purposes of this section, except when an investment
company or its investment adviser or principal
underwriter acts in connection with a plan covering
employees of the investment company, its investment
adviser, or its principal underwriter.
(9) Section made applicable to withdrawal liability
payment funds.--For purposes of this section--
(A) In general.--The term ``plan'' includes a
trust described in section 501(c)(22).
(B) Disqualified person.--In the case of any
trust to which this section applies by reason
of subparagraph (A), the term ``disqualified
person'' includes any person who is a
disqualified person with respect to any plan to
which such trust is permitted to make payments
under section 4223 of the Employee Retirement
Income Security Act of 1974.
(f) Other Definitions and Special Rules.--For purposes of
this section--
(1) Joint and several liability.--If more than one
person is liable under subsection (a) or (b) with
respect to any one prohibited transaction, all such
persons shall be jointly and severally liable under
such subsection with respect to such transaction.
(2) Taxable period.--The term ``taxable period''
means, with respect to any prohibited transaction, the
period beginning with the date on which the prohibited
transaction occurs and ending on the earliest of--
(A) the date of mailing a notice of
deficiency with respect to the tax imposed by
subsection (a) under section 6212,
(B) the date on which the tax imposed by
subsection (a) is assessed, or
(C) the date on which correction of the
prohibited transaction is completed.
(3) Sale or exchange; encumbered property.--A
transfer or real or personal property by a disqualified
person to a plan shall be treated as a sale or exchange
if the property is subject to a mortgage or similar
lien which the plan assumes or if it is subject to a
mortgage or similar lien which a disqualified person
placed on the property within the 10-year period ending
on the date of the transfer.
(4) Amount involved.--The term ``amount involved''
means, with respect to a prohibited transaction, the
greater of the amount of money and the fair market
value of the other property given or the amount of
money and the fair market value of the other property
received; except that, in the case of services
described in paragraphs (2) and (10) of subsection (d)
the amount involved shall be only the excess
compensation. For purposes of the preceding sentence,
the fair market value--
(A) in the case of the tax imposed by
subsection (a), shall be determined as of the
date on which the prohibited transaction
occurs; and
(B) in the case of the tax imposed by
subsection (b), shall be the highest fair
market value during the taxable period.
(5) Correction.--The terms ``correction'' and
``correct'' mean, with respect to a prohibited
transaction, undoing the transaction to the extent
possible, but in any case placing the plan in a
financial position not worse than that in which it
would be if the disqualified person were acting under
the highest fiduciary standards.
(6) Exemptions not to apply to certain
transactions.--
(A) In general.--In the case of a trust
described in section 401(a) which is part of a
plan providing contributions or benefits for
employees some or all of whom are owner-
employees (as defined in section 401(c)(3)),
the exemptions provided by subsection (d)
(other than paragraphs (9) and (12)) shall not
apply to a transaction in which the plan
directly or indirectly--
(i) lends any part of the corpus or
income of the plan to,
(ii) pays any compensation for
personal services rendered to the plan
to, or
(iii) acquires for the plan any
property from, or sells any property
to,
any such owner-employee, a member of the family
(as defined in section 267(c)(4)) of any such
owner-employee, or any corporation in which any
such owner-employee owns, directly or
indirectly, 50 percent or more of the total
combined voting power of all classes of stock
entitled to vote or 50 percent or more of the
total value of shares of all classes of stock
of the corporation.
(B) Special rules for shareholder-employees,
etc.
(i) In general.--For purposes of
subparagraph (A), the following shall
be treated as owner-employees:
(I) A shareholder-employee.
(II) A participant or
beneficiary of an individual
retirement plan (as defined in
section 7701(a)(37)).
(III) An employer or
association of employees which
establishes such an individual
retirement plan under section
408(c).
(ii) Exception for certain
transactions involving shareholder-
employees.--Subparagraph (A)(iii) shall
not apply to a transaction which
consists of a sale of employer
securities to an employee stock
ownership plan (as defined in
subsection (e)(7)) by a shareholder-
employee, a member of the family (as
defined in section 267(c)(4)) of such
shareholder-employee, or a corporation
in which such a shareholder-employee
owns stock representing a 50 percent or
greater interest described in
subparagraph (A).
(iii) Loan exception.--For purposes
of subparagraph (A)(i), the term
``owner-employee'' shall only include a
person described in subclause (II) or
(III) of clause (i).
(C) Shareholder-employee.--For purposes of
subparagraph (B), the term ``shareholder-
employee'' means an employee or officer of an S
corporation who owns (or is considered as
owning within the meaning of section 318(a)(1))
more than 5 percent of the outstanding stock of
the corporation on any day during the taxable
year of such corporation.
(7) S corporation repayment of loans for qualifying
employer securities.--A plan shall not be treated as
violating the requirements of section 401 or 409 or
subsection (e)(7), or as engaging in a prohibited
transaction for purposes of subsection (d)(3), merely
by reason of any distribution (as described in section
1368(a)) with respect to S corporation stock that
constitutes qualifying employer securities, which in
accordance with the plan provisions is used to make
payments on a loan described in subsection (d)(3) the
proceeds of which were used to acquire such qualifying
employer securities (whether or not allocated to
participants). The preceding sentence shall not apply
in the case of a distribution which is paid with
respect to any employer security which is allocated to
a participant unless the plan provides that employer
securities with a fair market value of not less than
the amount of such distribution are allocated to such
participant for the year which (but for the preceding
sentence) such distribution would have been allocated
to such participant.
(8) Provision of investment advice to participant and
beneficiaries.--
(A) In general.--The prohibitions provided in
subsection (c) shall not apply to transactions
described in subsection (d)(17) if the
investment advice provided by a fiduciary
adviser is provided under an eligible
investment advice arrangement.
(B) Eligible investment advice arrangement.--
For purposes of this paragraph, the term
``eligible investment advice arrangement''
means an arrangement--
(i) which either--
(I) provides that any fees
(including any commission or
other compensation) received by
the fiduciary adviser for
investment advice or with
respect to the sale, holding,
or acquisition of any security
or other property for purposes
of investment of plan assets do
not vary depending on the basis
of any investment option
selected, or
(II) uses a computer model
under an investment advice
program meeting the
requirements of subparagraph
(C) in connection with the
provision of investment advice
by a fiduciary adviser to a
participant or beneficiary, and
(ii) with respect to which the
requirements of subparagraphs (D), (E),
(F), (G), (H), and (I) are met.
(C) Investment advice program using computer
model.--
(i) In general.--An investment advice
program meets the requirements of this
subparagraph if the requirements of
clauses (ii), (iii), and (iv) are met.
(ii) Computer model.--The
requirements of this clause are met if
the investment advice provided under
the investment advice program is
provided pursuant to a computer model
that--
(I) applies generally
accepted investment theories
that take into account the
historic returns of different
asset classes over defined
periods of time,
(II) utilizes relevant
information about the
participant, which may include
age, life expectancy,
retirement age, risk tolerance,
other assets or sources of
income, and preferences as to
certain types of investments,
(III) utilizes prescribed
objective criteria to provide
asset allocation portfolios
comprised of investment options
available under the plan,
(IV) operates in a manner
that is not biased in favor of
investments offered by the
fiduciary adviser or a person
with a material affiliation or
contractual relationship with
the fiduciary adviser, and
(V) takes into account all
investment options under the
plan in specifying how a
participant's account balance
should be invested and is not
inappropriately weighted with
respect to any investment
option.
(iii) Certification.--
(I) In general.--The
requirements of this clause are
met with respect to any
investment advice program if an
eligible investment expert
certifies, prior to the
utilization of the computer
model and in accordance with
rules prescribed by the
Secretary of Labor, that the
computer model meets the
requirements of clause (ii).
(II) Renewal of
certifications.--If, as
determined under regulations
prescribed by the Secretary of
Labor, there are material
modifications to a computer
model, the requirements of this
clause are met only if a
certification described in
subclause (I) is obtained with
respect to the computer model
as so modified.
(III) Eligible investment
expert.--The term ``eligible
investment expert'' means any
person which meets such
requirements as the Secretary
of Labor may provide and which
does not bear any material
affiliation or contractual
relationship with any
investment adviser or a related
person thereof (or any
employee, agent, or registered
representative of the
investment adviser or related
person).
(iv) Exclusivity of recommendation.--
The requirements of this clause are met
with respect to any investment advice
program if--
(I) the only investment
advice provided under the
program is the advice generated
by the computer model described
in clause (ii), and
(II) any transaction
described in subsection
(d)(17)(A)(ii) occurs solely at
the direction of the
participant or beneficiary.
Nothing in the preceding sentence shall
preclude the participant or beneficiary
from requesting investment advice other
than that described in clause (i), but
only if such request has not been
solicited by any person connected with
carrying out the arrangement.
(D) Express authorization by separate
fiduciary.--The requirements of this
subparagraph are met with respect to an
arrangement if the arrangement is expressly
authorized by a plan fiduciary other than the
person offering the investment advice program,
any person providing investment options under
the plan, or any affiliate of either.
(E) Audits.--
(i) In general.--The requirements of
this subparagraph are met if an
independent auditor, who has
appropriate technical training or
experience and proficiency and so
represents in writing--
(I) conducts an annual audit
of the arrangement for
compliance with the
requirements of this paragraph,
and
(II) following completion of
the annual audit, issues a
written report to the fiduciary
who authorized use of the
arrangement which presents its
specific findings regarding
compliance of the arrangement
with the requirements of this
paragraph.
(ii) Special rule for individual
retirement and similar plans.--In the
case of a plan described in
subparagraphs (B) through (F) (and so
much of subparagraph (G) as relates to
such subparagraphs) of subsection
(e)(1), in lieu of the requirements of
clause (i), audits of the arrangement
shall be conducted at such times and in
such manner as the Secretary of Labor
may prescribe.
(iii) Independent auditor.--For
purposes of this subparagraph, an
auditor is considered independent if it
is not related to the person offering
the arrangement to the plan and is not
related to any person providing
investment options under the plan.
(F) Disclosure.--The requirements of this
subparagraph are met if--
(i) the fiduciary adviser provides to
a participant or a beneficiary before
the initial provision of the investment
advice with regard to any security or
other property offered as an investment
option, a written notification (which
may consist of notification by means of
electronic communication)--
(I) of the role of any party
that has a material affiliation
or contractual relationship
with the fiduciary adviser, in
the development of the
investment advice program and
in the selection of investment
options available under the
plan,
(II) of the past performance
and historical rates of return
of the investment options
available under the plan,
(III) of all fees or other
compensation relating to the
advice that the fiduciary
adviser or any affiliate
thereof is to receive
(including compensation
provided by any third party) in
connection with the provision
of the advice or in connection
with the sale, acquisition, or
holding of the security or
other property,
(IV) of any material
affiliation or contractual
relationship of the fiduciary
adviser or affiliates thereof
in the security or other
property,
(V) the manner, and under
what circumstances, any
participant or beneficiary
information provided under the
arrangement will be used or
disclosed,
(VI) of the types of services
provided by the fiduciary
adviser in connection with the
provision of investment advice
by the fiduciary adviser,
(VII) that the adviser is
acting as a fiduciary of the
plan in connection with the
provision of the advice, and
(VIII) that a recipient of
the advice may separately
arrange for the provision of
advice by another adviser, that
could have no material
affiliation with and receive no
fees or other compensation in
connection with the security or
other property, and
(ii) at all times during the
provision of advisory services to the
participant or beneficiary, the
fiduciary adviser--
(I) maintains the information
described in clause (i) in
accurate form and in the manner
described in subparagraph (H),
(II) provides, without
charge, accurate information to
the recipient of the advice no
less frequently than annually,
(III) provides, without
charge, accurate information to
the recipient of the advice
upon request of the recipient,
and
(IV) provides, without
charge, accurate information to
the recipient of the advice
concerning any material change
to the information required to
be provided to the recipient of
the advice at a time reasonably
contemporaneous to the change
in information.
(G) Other conditions.--The requirements of
this subparagraph 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) the sale, acquisition, or
holding 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.
(H) Standards for presentation of
information.--
(i) In general.--The requirements of
this subparagraph are met if the
notification required to be provided to
participants and beneficiaries under
subparagraph (F)(i) is written in a
clear and conspicuous manner and in a
manner calculated to be understood by
the average plan participant and is
sufficiently accurate and comprehensive
to reasonably apprise such participants
and beneficiaries of the information
required to be provided in the
notification.
(ii) Model form for disclosure of
fees and other compensation.--The
Secretary of Labor shall issue a model
form for the disclosure of fees and
other compensation required in
subparagraph (F)(i)(III) which meets
the requirements of clause (i).
(I) Maintenance for 6 years of evidence of
compliance.--The requirements of this
subparagraph are met if a fiduciary adviser who
has provided advice referred to in subparagraph
(A) maintains, for a period of not less than 6
years after the provision of the advice, any
records necessary for determining whether the
requirements of the preceding provisions of
this paragraph and of subsection (d)(17) have
been met. A transaction prohibited under
subsection (c) 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.
(J) Definitions.--For purposes of this
paragraph and subsection (d)(17)--
(i) Fiduciary adviser.--The term
``fiduciary adviser'' means, with
respect to a plan, a person who is a
fiduciary of the plan by reason of the
provision of investment advice referred
to in subsection (e)(3)(B) by the
person to a participant or beneficiary
of the plan and who is--
(I) registered as an
investment adviser under the
Investment Advisers Act of 1940
(15 U.S.C. 80b-1 et seq.) or
under the laws of the State in
which the fiduciary maintains
its principal office and place
of business,
(II) a bank or similar
financial institution referred
to in subsection (d)(4) or a
savings association (as defined
in section 3(b)(1) of the
Federal Deposit Insurance Act
(12 U.S.C. 1813(b)(1)), but
only if the advice is provided
through a trust department of
the bank or similar financial
institution or savings
association which is subject to
periodic examination and review
by Federal or State banking
authorities,
(III) an insurance company
qualified to do business under
the laws of a State,
(IV) a person registered as a
broker or dealer under the
Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.),
(V) an affiliate of a person
described in any of subclauses
(I) through (IV), or
(VI) an employee, agent, or
registered representative of a
person described in subclauses
(I) through (V) who satisfies
the requirements of applicable
insurance, banking, and
securities laws relating to the
provision of the advice.
For purposes of this title, a person
who develops the computer model
described in subparagraph (C)(ii) or
markets the investment advice program
or computer model shall be treated as a
person who is a fiduciary of the plan
by reason of the provision of
investment advice referred to in
subsection (e)(3)(B) to a participant
or beneficiary and shall be treated as
a fiduciary adviser for purposes of
this paragraph and subsection (d)(17),
except that the Secretary of Labor may
prescribe rules under which only 1
fiduciary adviser may elect to be
treated as a fiduciary with respect to
the plan.
(ii) Affiliate.--The term
``affiliate'' of another entity means
an affiliated person of the entity (as
defined in section 2(a)(3) of the
Investment Company Act of 1940 (15
U.S.C. 80a-2(a)(3))).
(iii) Registered representative.--The
term ``registered representative'' of
another entity means a person described
in section 3(a)(18) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity
for the broker or dealer referred to in
such section) or a person described in
section 202(a)(17) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(17)) (substituting the entity for
the investment adviser referred to in
such section).
(9) Block trade.--The term ``block trade'' means any
trade of at least 10,000 shares or with a market value
of at least $200,000 which will be allocated across two
or more unrelated client accounts of a fiduciary.
(10) Adequate consideration.--The term ``adequate
consideration'' means--
(A) in the case of a security for which there
is a generally recognized market--
(i) the price of the security
prevailing on a national securities
exchange which is registered under
section 6 of the Securities Exchange
Act of 1934, taking into account
factors such as the size of the
transaction and marketability of the
security, or
(ii) if the security is not traded on
such a national securities exchange, a
price not less favorable to the plan
than the offering price for the
security as established by the current
bid and asked prices quoted by persons
independent of the issuer and of the
party in interest, taking into account
factors such as the size of the
transaction and marketability of the
security, and
(B) in the case of an asset other than a
security for which there is a generally
recognized market, the fair market value of the
asset as determined in good faith by a
fiduciary or fiduciaries in accordance with
regulations prescribed by the Secretary of
Labor.
(11) Correction period.--
(A) In general.--For purposes of subsection
(d)(23), the term ``correction period'' means
the 14-day period beginning on the date on
which the disqualified person discovers, or
reasonably should have discovered, that the
transaction would (without regard to this
paragraph and subsection (d)(23)) constitute a
prohibited transaction.
(B) Exceptions.--
(i) Employer securities.--Subsection
(d)(23) does not apply to any
transaction between a plan and a plan
sponsor or its affiliates that involves
the acquisition or sale of an employer
security (as defined in section
407(d)(1) of the Employee Retirement
Income Security Act of 1974) or the
acquisition, sale, or lease of employer
real property (as defined in section
407(d)(2) of such Act).
(ii) Knowing prohibited
transaction.--In the case of any
disqualified person, subsection (d)(23)
does not apply to a transaction if, at
the time the transaction is entered
into, the disqualified person knew (or
reasonably should have known) that the
transaction would (without regard to
this paragraph) constitute a prohibited
transaction.
(C) Abatement of tax where there is a
correction.--If a transaction is not treated as
a prohibited transaction by reason of
subsection (d)(23), then no tax under
subsections (a) and (b) shall be assessed with
respect to such transaction, and if assessed
the assessment shall be abated, and if
collected shall be credited or refunded as an
overpayment.
(D) Definitions.--For purposes of this
paragraph and subsection (d)(23)--
(i) Security.--The term ``security''
has the meaning given such term by
section 475(c)(2) (without regard to
subparagraph (F)(iii) and the last
sentence thereof).
(ii) Commodity.--The term
``commodity'' has the meaning given
such term by section 475(e)(2) (without
regard to subparagraph (D)(iii)
thereof).
(iii) Correct.--The term ``correct''
means, with respect to a transaction--
(I) to undo the transaction
to the extent possible and in
any case to make good to the
plan or affected account any
losses resulting from the
transaction, and
(II) to restore to the plan
or affected account any profits
made through the use of assets
of the plan.
(g) Application of Section.--This section shall not apply--
(1) in the case of a plan to which a guaranteed
benefit policy (as defined in section 401(b)(2)(B) of
the Employee Retirement Income Security Act of 1974) is
issued, to any assets of the insurance company,
insurance service, or insurance organization merely
because of its issuance of such policy;
(2) to a governmental plan (within the meaning of
section 414(d)); or
(3) to a church plan (within the meaning of section
414(e)) with respect to which the election provided by
section 410(d) has not been made.
In the case of a plan which invests in any security issued by
an investment company registered under the Investment Company
Act of 1940, the assets of such plan shall be deemed to include
such security but shall not, by reason of such investment, be
deemed to include any assets of such company.
(h) Notification of Secretary of Labor.--Before sending a
notice of deficiency with respect to the tax imposed by
subsection (a) or (b), the Secretary shall notify the Secretary
of Labor and provide him a reasonable opportunity to obtain a
correction of the prohibited transaction or to comment on the
imposition of such tax.
(i) Cross Reference.--For provisions concerning coordination
procedures between Secretary of Labor and Secretary of the
Treasury with respect to application of tax imposed by this
section and for authority to waive imposition of the tax
imposed by subsection (b), see section 3003 of the Employee
Retirement Income Security Act of 1974.
* * * * * * *
B. Changes in Existing Law Proposed by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
proposed by the bill, as reported, are shown as follows
(existing law proposed to be omitted is enclosed in black
brackets, new matter is printed in italic, existing law in
which no change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
made by the bill, as reported, are shown as follows (existing
law proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, and existing law in which no
change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) Initial Taxes on Disqualified Person.--There is hereby
imposed a tax on each prohibited transaction. The rate of tax
shall be equal to 15 percent of the amount involved with
respect to the prohibited transaction for each year (or part
thereof) in the taxable period. The tax imposed by this
subsection shall be paid by any disqualified person who
participates in the prohibited transaction (other than a
fiduciary acting only as such).
(b) Additional Taxes on Disqualified Person.--In any case in
which an initial tax is imposed by subsection (a) on a
prohibited transaction and the transaction is not corrected
within the taxable period, there is hereby imposed a tax equal
to 100 percent of the amount involved. The tax imposed by this
subsection shall be paid by any disqualified person who
participated in the prohibited transaction (other than a
fiduciary acting only as such).
(c) Prohibited Transaction.--
(1) General rule.--For purposes of this section, the
term ``prohibited transaction'' means any direct or
indirect--
(A) sale or exchange, or leasing, of any
property between a plan and a disqualified
person;
(B) lending of money or other extension of
credit between a plan and a disqualified
person;
(C) furnishing of goods, services, or
facilities between a plan and a disqualified
person;
(D) transfer to, or use by or for the benefit
of, a disqualified person of the income or
assets of a plan;
(E) act by a disqualified person who is a
fiduciary whereby he deals with the income or
assets of a plan in his own interests or for
his own account; or
(F) receipt of any consideration for his own
personal account by any disqualified person who
is a fiduciary from any party dealing with the
plan in connection with a transaction involving
the income or assets of the plan.
(2) Special exemption.--The Secretary shall establish
an exemption procedure for purposes of this subsection.
Pursuant to such procedure, he may grant a conditional
or unconditional exemption of any disqualified person
or transaction, orders of disqualified persons or
transactions, from all or part of the restrictions
imposed by paragraph (1) of this subsection. Action
under this subparagraph may be taken only after
consultation and coordination with the Secretary of
Labor. The Secretary may not grant an exemption under
this paragraph unless he finds that such exemption is--
(A) administratively feasible,
(B) in the interests of the plan and of its
participants and beneficiaries, and
(C) protective of the rights of participants
and beneficiaries of the plan.
Before granting an exemption under this paragraph, the
Secretary shall require adequate notice to be given to
interested persons and shall publish notice in the
Federal Register of the pendency of such exemption and
shall afford interested persons an opportunity to
present views. No exemption may be granted under this
paragraph with respect to a transaction described in
subparagraph (E) or (F) of paragraph (1) unless the
Secretary affords an opportunity for a hearing and
makes a determination on the record with respect to the
findings required under subparagraphs (A), (B), and (C)
of this paragraph, except that in lieu of such hearing
the Secretary may accept any record made by the
Secretary of Labor with respect to an application for
exemption under section 408(a) of title I of the
Employee Retirement Income Security Act of 1974.
(3) Special rule for individual retirement
accounts.--An individual for whose benefit an
individual retirement account is established and his
beneficiaries shall be exempt from the tax imposed by
this section with respect to any transaction concerning
such account (which would otherwise be taxable under
this section) if, with respect to such transaction, the
account ceases to be an individual retirement account
by reason of the application of section 408(e)(2)(A) or
if section 408(e)(4) applies to such account.
(4) Special rule for Archer MSAs.--An individual for
whose benefit an Archer MSA (within the meaning of
section 220(d)) is established shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
220(e)(2) applies to such transaction.
(5) Special rule for Coverdell education savings
accounts.--An individual for whose benefit a Coverdell
education savings account is established and any
contributor to such account shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
530(d) applies with respect to such transaction.
(6) Special rule for health savings accounts.--An
individual for whose benefit a health savings account
(within the meaning of section 223(d)) is established
shall be exempt from the tax imposed by this section
with respect to any transaction concerning such account
(which would otherwise be taxable under this section)
if, with respect to such transaction, the account
ceases to be a health savings account by reason of the
application of section 223(e)(2) to such account.
(d) Exemptions.--Except as provided in subsection (f)(6), the
prohibitions provided in subsection (c) shall not apply to--
(1) any loan made by the plan to a disqualified
person who is a participant or beneficiary of the plan
if such loan--
(A) is available to all such participants or
beneficiaries on a reasonably equivalent basis,
(B) is not made available to highly
compensated employees (within the meaning of
section 414(q)) in an amount greater than the
amount made available to other employees,
(C) is made in accordance with specific
provisions regarding such loans set forth in
the plan,
(D) bears a reasonable rate of interest, and
(E) is adequately secured;
(2) any contract, or reasonable arrangement, made
with a disqualified person for office space, or legal,
accounting, or other services necessary for the
establishment or operation of the plan, if no more than
reasonable compensation is paid therefor;
(3) any loan to an leveraged employee stock ownership
plan (as defined in subsection (e)(7)), if--
(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and
(B) such loan is at a reasonable rate of
interest, and any collateral which is given to
a disqualified person by the plan consists only
of qualifying employer securities (as defined
in subsection (e)(8));
(4) the investment of all or part of a plan's assets
in deposits which bear a reasonable interest rate in a
bank or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such
bank or other institution and employees of
affiliates of such bank or other institution,
or
(B) such investment is expressly authorized
by a provision of the plan or by a fiduciary
(other than such bank or institution or
affiliates thereof) who is expressly empowered
by the plan to so instruct the trustee with
respect to such investment;
(5) any contract for life insurance, health
insurance, or annuities with one or more insurers which
are qualified to do business in a State if the plan
pays no more than adequate consideration, and if each
such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a disqualified person which is wholly
owned (directly or indirectly) by the employer
establishing the plan, or by any person which
is a disqualified person with respect to the
plan, but only if the total premiums and
annuity considerations written by such insurers
for life insurance, health insurance, or
annuities for all plans (and their employers)
with respect to which such insurers are
disqualified persons (not including premiums or
annuity considerations written by the employer
maintaining the plan) do not exceed 5 percent
of the total premiums and annuity
considerations written for all lines of
insurance in that year by such insurers (not
including premiums or annuity considerations
written by the employer maintaining the plan);
(6) the provision of any ancillary service by a bank
or similar financial institution supervised by the
United States or a State, if such service is provided
at not more than reasonable compensation, if such bank
or other institution is a fiduciary of such plan, and
if--
(A) such bank or similar financial
institution has adopted adequate internal
safeguards which assure that the provision of
such ancillary service is consistent with sound
banking and financial practice, as determined
by Federal or State supervisory authority, and
(B) the extent to which such ancillary
service is provided is subject to specific
guidelines issued by such bank or similar
financial institution (as determined by the
Secretary after consultation with Federal and
State supervisory authority), and under such
guidelines the bank or similar financial
institution does not provide such ancillary
service--
(i) in an excessive or unreasonable
manner, and
(ii) in a manner that would be
inconsistent with the best interests of
participants and beneficiaries of
employee benefit plans;
(7) the exercise of a privilege to convert
securities, to the extent provided in regulations of
the Secretary but only if the plan receives no less
than adequate consideration pursuant to such
conversion;
(8) any transaction between a plan and a common or
collective trust fund or pooled investment fund
maintained by a disqualified person which is a bank or
trust company supervised by a State or Federal agency
or between a plan and a pooled investment fund of an
insurance company qualified to do business in a State
if--
(A) the transaction is a sale or purchase of
an interest in the fund,
(B) the bank, trust company, or insurance
company receives not more than a reasonable
compensation, and
(C) such transaction is expressly permitted
by the instrument under which the plan is
maintained, or by a fiduciary (other than the
bank, trust company, or insurance company, or
an affiliate thereof) who has authority to
manage and control the assets of the plan;
(9) receipt by a disqualified person of any benefit
to which he may be entitled as a participant or
beneficiary in the plan, so long as the benefit is
computed and paid on a basis which is consistent with
the terms of the plan as applied to all other
participants and beneficiaries;
(10) receipt by a disqualified person of any
reasonable compensation for services rendered, or for
the reimbursement of expenses properly and actually
incurred, in the performance of his duties with the
plan, but no person so serving who already receives
full-time pay from an employer or an association of
employers, whose employees are participants in the plan
or from an employee organization whose members are
participants in such plan shall receive compensation
from such fund, except for reimbursement of expenses
properly and actually incurred;
(11) service by a disqualified person as a fiduciary
in addition to being an officer, employee, agent, or
other representative of a disqualified person;
(12) the making by a fiduciary of a distribution of
the assets of the trust in accordance with the terms of
the plan if such assets are distributed in the same
manner as provided under section 4044 of title IV of
the Employee Retirement Income Security Act of 1974
(relating to allocation of assets);
(13) any transaction which is exempt from section 406
of such Act by reason of section 408(e) of such Act (or
which would be so exempt if such section 406 applied to
such transaction) or which is exempt from section 406
of such Act by reason of section 408(b)(12) of such
Act;
(14) any transaction required or permitted under part
1 of subtitle E of title IV or section 4223 of the
Employee Retirement Income Security Act of 1974, but
this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(15) a merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231 of such Act,
but this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(16) a sale of stock held by a trust which
constitutes an individual retirement account under
section 408(a) to the individual for whose benefit such
account is established if--
(A) such stock is in a bank (as defined in
section 581) or a depository institution
holding company (as defined in section 3(w)(1)
of the Federal Deposit Insurance Act (12 U.S.C.
1813(w)(1)),
(B) such stock is held by such trust as of
the date of the enactment of this paragraph,
(C) such sale is pursuant to an election
under section 1362(a) by such bank or company,
(D) such sale is for fair market value at the
time of sale (as established by an independent
appraiser) and the terms of the sale are
otherwise at least as favorable to such trust
as the terms that would apply on a sale to an
unrelated party,
(E) such trust does not pay any commissions,
costs, or other expenses in connection with the
sale, and
(F) the stock is sold in a single transaction
for cash not later than 120 days after the S
corporation election is made;
(17) Any transaction in connection with the provision
of investment advice described in subsection (e)(3)(B)
to a participant or beneficiary in a plan that permits
such participant or beneficiary to direct the
investment of plan assets in an individual account,
if--
(A) the transaction is--
(i) the provision of the investment
advice to the participant or
beneficiary of the plan with respect to
a security or other property available
as an investment under the plan,
(ii) the acquisition, holding, or
sale of a security or other property
available as an investment under the
plan pursuant to the investment advice,
or
(iii) the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser or an affiliate
thereof (or any employee, agent, or
registered representative of the
fiduciary adviser or affiliate) in
connection with the provision of the
advice or in connection with an
acquisition, holding, or sale of a
security or other property available as
an investment under the plan pursuant
to the investment advice; and
(B) the requirements of subsection (f)(8) are
met,
(18) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person (other than a fiduciary described in subsection
(e)(3)) with respect to a plan if--
(A) the transaction involves a block trade,
(B) at the time of the transaction, the
interest of the plan (together with the
interests of any other plans maintained by the
same plan sponsor), does not exceed 10 percent
of the aggregate size of the block trade,
(C) the terms of the transaction, including
the price, are at least as favorable to the
plan as an arm's length transaction, and
(D) the compensation associated with the
purchase and sale is not greater than the
compensation associated with an arm's length
transaction with an unrelated party,
(19) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person if--
(A) the transaction is executed through an
electronic communication network, alternative
trading system, or similar execution system or
trading venue subject to regulation and
oversight by--
(i) the applicable Federal regulating
entity, or
(ii) such foreign regulatory entity
as the Secretary of Labor may determine
by regulation,
(B) either--
(i) the transaction is effected
pursuant to rules designed to match
purchases and sales at the best price
available through the execution system
in accordance with applicable rules of
the Securities and Exchange Commission
or other relevant governmental
authority, or
(ii) neither the execution system nor
the parties to the transaction take
into account the identity of the
parties in the execution of trades,
(C) the price and compensation associated
with the purchase and sale are not greater than
the price and compensation associated with an
arm's length transaction with an unrelated
party,
(D) if the disqualified person has an
ownership interest in the system or venue
described in subparagraph (A), the system or
venue has been authorized by the plan sponsor
or other independent fiduciary for transactions
described in this paragraph, and
(E) not less than 30 days prior to the
initial transaction described in this paragraph
executed through any system or venue described
in subparagraph (A), a plan fiduciary is
provided written or electronic notice of the
execution of such transaction through such
system or venue,
(20) transactions described in subparagraphs (A),
(B), and (D) of subsection (c)(1) between a plan and a
person that is a disqualified person other than a
fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the
investment of the plan assets involved in the
transaction or renders investment advice (within the
meaning of subsection (e)(3)(B)) with respect to those
assets, solely by reason of providing services to the
plan or solely by reason of a relationship to such a
service provider described in subparagraph (F), (G),
(H), or (I) of subsection (e)(2), or both, but only if
in connection with such transaction the plan receives
no less, nor pays no more, than adequate consideration,
(21) any foreign exchange transactions, between a
bank or broker-dealer (or any affiliate of either) and
a plan (as defined in this section) with respect to
which such bank or broker-dealer (or affiliate) is a
trustee, custodian, fiduciary, or other disqualified
person person, if--
(A) the transaction is in connection with the
purchase, holding, or sale of securities or
other investment assets (other than a foreign
exchange transaction unrelated to any other
investment in securities or other investment
assets),
(B) at the time the foreign exchange
transaction is entered into, the terms of the
transaction are not less favorable to the plan
than the terms generally available in
comparable arm's length foreign exchange
transactions between unrelated parties, or the
terms afforded by the bank or broker-dealer (or
any affiliate of either) in comparable arm's-
length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or
broker-dealer (or affiliate) for a particular
foreign exchange transaction does not deviate
by more than 3 percent from the interbank bid
and asked rates for transactions of comparable
size and maturity at the time of the
transaction as displayed on an independent
service that reports rates of exchange in the
foreign currency market for such currency, and
(D) the bank or broker-dealer (or any
affiliate of either) does not have investment
discretion, or provide investment advice, with
respect to the transaction,
(22) any transaction described in subsection
(c)(1)(A) involving the purchase and sale of a security
between a plan and any other account managed by the
same investment manager, if--
(A) the transaction is a purchase or sale,
for no consideration other than cash payment
against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the
independent current market price of the
security (within the meaning of section
270.17a-7(b) of title 17, Code of Federal
Regulations),
(C) no brokerage commission, fee (except for
customary transfer fees, the fact of which is
disclosed pursuant to subparagraph (D)), or
other remuneration is paid in connection with
the transaction,
(D) a fiduciary (other than the investment
manager engaging in the cross-trades or any
affiliate) for each plan participating in the
transaction authorizes in advance of any cross-
trades (in a document that is separate from any
other written agreement of the parties) the
investment manager to engage in cross trades at
the investment manager's discretion, after such
fiduciary has received disclosure regarding the
conditions under which cross trades may take
place (but only if such disclosure is separate
from any other agreement or disclosure
involving the asset management relationship),
including the written policies and procedures
of the investment manager described in
subparagraph (H),
(E) each plan participating in the
transaction has assets of at least
$100,000,000, except that if the assets of a
plan are invested in a master trust containing
the assets of plans maintained by employers in
the same controlled group (as defined in
section 407(d)(7) of the Employee Retirement
Income Security Act of 1974), the master trust
has assets of at least $100,000,000,
(F) the investment manager provides to the
plan fiduciary who authorized cross trading
under subparagraph (D) a quarterly report
detailing all cross trades executed by the
investment manager in which the plan
participated during such quarter, including the
following information, as applicable: (i) the
identity of each security bought or sold; (ii)
the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv)
trade price and the method used to establish
the trade price,
(G) the investment manager does not base its
fee schedule on the plan's consent to cross
trading, and no other service (other than the
investment opportunities and cost savings
available through a cross trade) is conditioned
on the plan's consent to cross trading,
(H) the investment manager has adopted, and
cross-trades are effected in accordance with,
written cross-trading policies and procedures
that are fair and equitable to all accounts
participating in the cross-trading program, and
that include a description of the manager's
pricing policies and procedures, and the
manager's policies and procedures for
allocating cross trades in an objective manner
among accounts participating in the cross-
trading program, and
(I) the investment manager has designated an
individual responsible for periodically
reviewing such purchases and sales to ensure
compliance with the written policies and
procedures described in subparagraph (H), and
following such review, the individual shall
issue an annual written report no later than 90
days following the period to which it relates
signed under penalty of perjury to the plan
fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed
during the course of the review, the level of
compliance, and any specific instances of non-
compliance.
The written report shall also notify the plan fiduciary
of the plan's right to terminate participation in the
investment manager's cross-trading program at any time,
[or]
(23) except as provided in subsection (f)(11), a
transaction described in subparagraph (A), (B), (C), or
(D) of subsection (c)(1) in connection with the
acquisition, holding, or disposition of any security or
commodity, if the transaction is corrected before the
end of the correction period[.], or
(24) provision of investment advice by a fiduciary to
a plan, plan participant, or beneficiary with respect
to the plan, which is a best interest recommendation or
a transaction connected to such advice.
(e) Definitions.--
(1) Plan.--For purposes of this section, the term
``plan'' means--
(A) a trust described in section 401(a) which
forms a part of a plan, or a plan described in
section 403(a), which trust or plan is exempt
from tax under section 501(a),
(B) an individual retirement account
described in section 408(a),
(C) an individual retirement annuity
described in section 408(b),
(D) an Archer MSA described in section
220(d),
(E) a health savings account described in
section 223(d),
(F) a Coverdell education savings account
described in section 530, or
(G) a trust, plan, account, or annuity which,
at any time, has been determined by the
Secretary to be described in any preceding
subparagraph of this paragraph.
(2) Disqualified person.--For purposes of this
section, the term ``disqualified person'' means a
person who is--
(A) a fiduciary;
(B) a person providing services to the plan;
(C) an employer any of whose employees are
covered by the plan;
(D) an employee organization any of whose
members are covered by the plan;
(E) an owner, direct or indirect, of 50
percent or more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of a corporation,
(ii) the capital interest or the
profits interest of a partnership, or
(iii) the beneficial interest of a
trust or unincorporated enterprise,
which is an employer or an employee
organization described in subparagraph (C) or
(D);
(F) a member of the family (as defined in
paragraph (6)) of any individual described in
subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or
estate of which (or in which) 50 percent or
more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of such corporation,
(ii) the capital interest or profits
interest of such partnership, or
(iii) the beneficial interest of such
trust or estate, is owned directly or
indirectly, or held by persons
described in subparagraph (A), (B),
(C), (D), or (E);
(H) an officer, director (or an individual
having powers or responsibilities similar to
those of officers or directors), a 10 percent
or more shareholder, or a highly compensated
employee (earning 10 percent or more of the
yearly wages of an employer) of a person
described in subparagraph (C), (D), (E), or
(G); or
(I) a 10 percent or more (in capital or
profits) partner or joint venturer of a person
described in subparagraph (C), (D), (E), or
(G).
The Secretary, after consultation and coordination with
the Secretary of Labor or his delegate, may by
regulation prescribe a percentage lower than 50 percent
for subparagraphs (E) and (G) and lower than 10 percent
for subparagraphs (H) and (I).
(3) Fiduciary.--For purposes of this section, the
term ``fiduciary'' means any person who--
(A) exercises any discretionary authority or
discretionary control respecting management of
such plan or exercises any authority or control
respecting management or disposition of its
assets,
(B) renders investment advice for a fee or
other compensation, direct or indirect, with
respect to any moneys or other property of such
plan, or has any authority or responsibility to
do so, or
(C) has any discretionary authority or
discretionary responsibility in the
administration of such plan.
Such term includes any person designated under section
405(c)(1)(B) of the Employee Retirement Income Security
Act of 1974.
(4) Stockholdings.--For purposes of paragraphs
(2)(E)(i) and (G)(i) there shall be taken into account
indirect stockholdings which would be taken into
account under section 267(c), except that, for purposes
of this paragraph, section 267(c)(4) shall be treated
as providing that the members of the family of an
individual are the members within the meaning of
paragraph (6).
(5) Partnerships; trusts.--For purposes of paragraphs
(2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the
ownership of profits or beneficial interests shall be
determined in accordance with the rules for
constructive ownership of stock provided in section
267(c) (other than paragraph (3) thereof), except that
section 267(c)(4) shall be treated as providing that
the members of the family of an individual are the
members within the meaning of paragraph (6).
(6) Member of family.--For purposes of paragraph
(2)(F), the family of any individual shall include his
spouse, ancestor, lineal descendant, and any spouse of
a lineal descendant.
(7) Employee stock ownership plan.--The term
``employee stock ownership plan'' means a defined
contribution plan--
(A) which is a stock bonus plan which is
qualified, or a stock bonus and a money
purchase plan both of which are qualified under
section 401(a), and which are designed to
invest primarily in qualifying employer
securities; and
(B) which is otherwise defined in regulations
prescribed by the Secretary.
A plan shall not be treated as an employee stock
ownership plan unless it meets the requirements of
section 409(h), section 409(o), and, if applicable,
section 409(n), section 409(p), and section 664(g) and,
if the employer has a registration-type class of
securities (as defined in section 409(e)(4)), it meets
the requirements of section 409(e).
(8) Qualifying employer security.--The term
``qualifying employer security'' means any employer
security within the meaning of section 409(l). If any
moneys or other property of a plan are invested in
shares of an investment company registered under the
Investment Company Act of 1940, the investment shall
not cause that investment company or that investment
company's investment adviser or principal underwriter
to be treated as a fiduciary or a disqualified person
for purposes of this section, except when an investment
company or its investment adviser or principal
underwriter acts in connection with a plan covering
employees of the investment company, its investment
adviser, or its principal underwriter.
(9) Section made applicable to withdrawal liability
payment funds.--For purposes of this section--
(A) In general.--The term ``plan'' includes a
trust described in section 501(c)(22).
(B) Disqualified person.--In the case of any
trust to which this section applies by reason
of subparagraph (A), the term ``disqualified
person'' includes any person who is a
disqualified person with respect to any plan to
which such trust is permitted to make payments
under section 4223 of the Employee Retirement
Income Security Act of 1974.
(10) Investment advice.--
(A) In general.--For purposes of this
section, the term ``investment advice'' means a
recommendation that--
(i) relates to--
(I) the advisability of
acquiring, holding, disposing,
or exchanging any moneys or
other property of a plan by the
plan, plan participants, or
plan beneficiaries, including
any recommendation whether to
take a distribution of benefits
from such plan or any
recommendation relating to the
investment of any moneys or
other property of such plan to
be distributed from such plan;
(II) the management of moneys
or other property of such plan,
including recommendations
relating to the management of
moneys or other property to be
distributed from such plan; or
(III) the advisability of
retaining or ceasing to retain
a person who would receive a
fee or other compensation for
providing any of the types of
advice described in this
subclause; and
(ii) is rendered pursuant to--
(I) a written acknowledgment
that the person is a fiduciary
with respect to the provision
of such recommendation; or
(II) a mutual agreement,
arrangement, or understanding
which may include limitations
on scope, timing, and
responsibility to provide
ongoing monitoring or advice
services, between the person
making such recommendation and
the plan, plan participant, or
beneficiary that such
recommendation is
individualized to the plan,
plan participant, or
beneficiary and such plan, plan
participant, or beneficiary
intends to materially rely on
such recommendation in making
investment or management
decisions with respect to any
moneys or other property of
such plan.
(B) Disclaimer of a mutual agreement,
arrangement, or understanding.--For purposes of
subparagraph (A)(ii)(II), any disclaimer of a
mutual agreement, arrangement, or understanding
shall only state the following: ``This
information is not individualized to you, and
you are not intended to materially rely on this
information in making investment or management
decisions.''. Such disclaimer shall not be
effective unless such disclaimer is in writing
and is communicated in a clear and prominent
manner and an objective person would reasonably
conclude that, based on all the facts and
circumstances, there was not a mutual
agreement, arrangement, or understanding.
(C) When recommendation treated as made
pursuant to a mutual agreement, arrangement, or
understanding.--For purposes of subparagraph
(A)(ii)(II), information shall not be treated
as a recommendation made pursuant to a mutual
agreement, arrangement, or understanding, and
such information shall contain the disclaimer
required by subparagraph (B), if--
(i) Seller's exception.--The
information is provided in conjunction
with full and fair disclosure in
writing to a plan, plan participant, or
beneficiary that the person providing
the information is doing so in its
marketing or sales capacity, including
any information regarding the terms and
conditions of the engagement of the
person providing the information, and
that the person is not intending to
provide investment advice within the
meaning of this subparagraph or to
otherwise act as a fiduciary to the
plan or under the obligations of a best
interest recommendation.
(ii) Swap and security-based swap
transaction.--The person providing the
information is a counterparty or
service provider to the plan in
connection with any transaction based
on the information (including a service
arrangement, sale, purchase, loan,
bilateral contract, swap (as defined in
section 1a of the Commodity Exchange
Act (7 U.S.C. 1a)), or security-based
swap (as defined in section 3(a) of the
Securities Exchange Act (15 U.S.C.
78c(a)))), but only if--
(I) the plan is represented,
in connection with such
transaction, by a plan
fiduciary that is independent
of the person providing the
information, and, except in the
case of a swap or security-
based swap, independent of the
plan sponsor; and
(II) prior to entering into
such transaction, the
independent plan fiduciary
represents in writing to the
person providing the
information that it is aware
that the person has a financial
interest in the transaction and
that it has determined that the
person is not intending to
provide investment advice
within the meaning of this
subparagraph or to otherwise
act as a fiduciary to the plan,
plan participants, or plan
beneficiaries.
(iii) Employees of a plan sponsor.--
The person providing the information is
an employee of any sponsoring employer
or employee organization who provides
the information to the plan for no fee
or other compensation other than the
employee's normal compensation.
(iv) Platform providers selection and
monitoring assistance.--The person
providing the information discloses in
writing to the plan fiduciary that the
person is not undertaking to provide
investment advice as a fiduciary
(within the meaning of this paragraph)
or under the obligations of a best
interest recommendation and the
information consists solely of--
(I) making available to the
plan, plan participants, or
plan beneficiaries, without
regard to the individualized
needs of the plan, plan
participants, or plan
beneficiaries, securities or
other property through a
platform or similar mechanism
from which a plan fiduciary may
select or monitor investment
alternatives, including
qualified default investment
alternatives, into which plan
participants or beneficiaries
may direct the investment of
assets held in, or contributed
to, their individual accounts,
or
(II) in connection with a
platform or similar mechanism
described in subclause (I)--
(aa) identifying
investment alternatives
that meet objective
criteria specified by
the plan, such as
criteria concerning
expense ratios, fund
sizes, types of asset,
or credit quality, or
(bb) providing
objective financial
data and comparisons
with independent
benchmarks to the plan.
(v) Valuation.--The information
consists solely of valuation
information.
(vi) Financial education.--The
information consists solely of--
(I) information described in
Department of Labor
Interpretive Bulletin 96-1 (29
C.F.R. 2509.96-1, as in effect
on January 1, 2015), regardless
of whether such education is
provided to a plan or plan
fiduciary or a participant or
beneficiary,
(II) information provided to
participants or beneficiaries
regarding the factors to
consider in deciding whether to
elect to receive a distribution
from a plan and whether to roll
over such distribution to a
plan, so long as any examples
of different distribution
alternatives are accompanied by
all material facts and
assumptions on which the
examples are based, or
(III) any additional
information treated as
education by the Secretary.
(11) Best interest recommendation.--For purposes of
this subsection--
(A) In general.--The term ``best interest
recommendation'' means a recommendation--
(i) for which no more than reasonable
compensation is paid (as determined
under subsection (d)(2)),
(ii) provided by a person acting with
the care, skill, prudence, and
diligence under the circumstances then
prevailing that a prudent person would
exercise based on--
(I) the information obtained
through the reasonable
diligence of the person
regarding factors such as the
advice recipient's age, and
(II) any other information
that the advice recipient
discloses to the person in
connection with receiving such
recommendation, and
(iii) where the person places the
interests of the plan or advice
recipient above its own.
(B) Investment options; variable
compensation.--A best interest recommendation
may include a recommendation that--
(i) is based on a limited range of
investment options (which may consist,
in whole or in part, of proprietary
products), but only if any such
limitations shall be clearly disclosed
to the advice recipient prior to any
transaction based on the investment
advice in the form of a notice that
only states the following: ``This
recommendation is based on a limited
range of investment options, and the
same or similar investments may be
available at a different cost (greater
or lesser) from other sources.'', or
(ii) may result in variable
compensation to the person providing
the recommendation (or any affiliate of
such person), but only if the receipt
of such compensation shall be clearly
disclosed to the advice recipient prior
to any transaction based on the
investment advice.
(C) Clear disclosure of variable
compensation.--For purposes of this paragraph,
clear disclosure of variable compensation shall
include, in a manner calculated to be
understood by the average individual, each of
the following:
(i) A notice that states only the
following: ``This recommendation may
result in varying amounts of fees or
other compensation to the person
providing the recommendation (or its
affiliate), and the same or similar
investments may be available at a
different cost (greater or lesser) from
other sources.''. Any regulations or
administrative guidance implementing
this clause may not require this notice
to be updated more than annually.
(ii) A description of any fee or
other compensation that is directly or
indirectly payable to the person (or
its affiliate) by the advice recipient
with respect to such transaction
(expressed as an amount, formula,
percentage of assets, per capita
charge, or estimate or range of such
compensation).
(iii) A description of the types and
ranges of any compensation that may be
directly or indirectly payable to the
person (or its affiliate) by any third
party in connection with such
transaction (expressed as an amount,
formula, percentage of assets, per
capita charge, or estimate or range of
such compensation).
(iv) Upon request of the advice
recipient, a disclosure of the specific
amounts of compensation described in
clause (iii) that the person will
receive in connection with the
particular transaction (expressed as an
amount, formula, percentage of assets,
per capita charge, or estimate of such
compensation).
(D) Definition of affiliate.--For purposes of
this paragraph, the term ``affiliate'' has the
meaning given in subsection (f)(8)(J)(ii).
(E) Correction of certain errors and
omissions.--A recommendation shall not fail to
be a best interest recommendation solely
because a person who, acting in good faith and
with reasonable diligence, makes an error or
omission in disclosing the information
specified in subparagraph (B), if the person
discloses the correct information to the advice
recipient as soon as practicable but not later
than 30 days from the date on which the person
knows of such error or omission.
(F) Special rule.--Any notice provided
pursuant to a requirement under subparagraph
(B)(i) or subparagraph (C)(i) shall have no
effect on any other notice otherwise required
without regard to this title, and shall be
provided in addition to, and not in lieu of,
any other such notice.
(f) Other Definitions and Special Rules.--For purposes of
this section--
(1) Joint and several liability.--If more than one
person is liable under subsection (a) or (b) with
respect to any one prohibited transaction, all such
persons shall be jointly and severally liable under
such subsection with respect to such transaction.
(2) Taxable period.--The term ``taxable period''
means, with respect to any prohibited transaction, the
period beginning with the date on which the prohibited
transaction occurs and ending on the earliest of--
(A) the date of mailing a notice of
deficiency with respect to the tax imposed by
subsection (a) under section 6212,
(B) the date on which the tax imposed by
subsection (a) is assessed, or
(C) the date on which correction of the
prohibited transaction is completed.
(3) Sale or exchange; encumbered property.--A
transfer or real or personal property by a disqualified
person to a plan shall be treated as a sale or exchange
if the property is subject to a mortgage or similar
lien which the plan assumes or if it is subject to a
mortgage or similar lien which a disqualified person
placed on the property within the 10-year period ending
on the date of the transfer.
(4) Amount involved.--The term ``amount involved''
means, with respect to a prohibited transaction, the
greater of the amount of money and the fair market
value of the other property given or the amount of
money and the fair market value of the other property
received; except that, in the case of services
described in paragraphs (2) and (10) of subsection (d)
the amount involved shall be only the [excess
compensation.] excess compensation, and in the case of
a prohibited transaction arising by the failure of
investment advice to be a best interest recommendation,
the amount involved shall be the amount paid to the
person providing the advice (or its affiliate, as
defined in paragraph (8)(J)(ii)) that has not been paid
or reimbursed to the plan, plan participants, or plan
beneficiaries, including payments and reimbursements
made pursuant to paragraph (5). For purposes of the
preceding sentence, the fair market value--
(A) in the case of the tax imposed by
subsection (a), shall be determined as of the
date on which the prohibited transaction
occurs; and
(B) in the case of the tax imposed by
subsection (b), shall be the highest fair
market value during the taxable period.
[(5) Correction.--The terms]
(5) Correction._
(A) In general._Except as provided in
subparagraph (B), the terms ``correction'' and
``correct'' mean, with respect to a prohibited
transaction, undoing the transaction to the
extent possible, but in any case placing the
plan in a financial position not worse than
that in which it would be if the disqualified
person were acting under the highest fiduciary
standards.
(B) Determination of ``correction'' and
``correct'' with respect to best interest
advice recommendations.--In the case of a
prohibited transaction arising by the failure
of investment advice to be a best interest
recommendation, the terms ``correction'' and
``correct'' mean the payment to, or
reimbursement of, actual damages of the plan,
plan participants, or plan beneficiaries
resulting directly from the plan's, plan
participant's, or plan beneficiary's reliance
on such investment advice, if any, that have
not otherwise been paid or reimbursed to the
plan, plan participants, or plan beneficiaries,
including payments and reimbursements made
pursuant to subparagraph (A) if such amount is
greater than the amount determined under
subparagraph (A).
(6) Exemptions not to apply to certain
transactions.--
(A) In general.--In the case of a trust
described in section 401(a) which is part of a
plan providing contributions or benefits for
employees some or all of whom are owner-
employees (as defined in section 401(c)(3)),
the exemptions provided by subsection (d)
(other than paragraphs (9) and (12)) shall not
apply to a transaction in which the plan
directly or indirectly--
(i) lends any part of the corpus or
income of the plan to,
(ii) pays any compensation for
personal services rendered to the plan
to, or
(iii) acquires for the plan any
property from, or sells any property
to,
any such owner-employee, a member of the family
(as defined in section 267(c)(4)) of any such
owner-employee, or any corporation in which any
such owner-employee owns, directly or
indirectly, 50 percent or more of the total
combined voting power of all classes of stock
entitled to vote or 50 percent or more of the
total value of shares of all classes of stock
of the corporation.
(B) Special rules for shareholder-employees,
etc.
(i) In general.--For purposes of
subparagraph (A), the following shall
be treated as owner-employees:
(I) A shareholder-employee.
(II) A participant or
beneficiary of an individual
retirement plan (as defined in
section 7701(a)(37)).
(III) An employer or
association of employees which
establishes such an individual
retirement plan under section
408(c).
(ii) Exception for certain
transactions involving shareholder-
employees.--Subparagraph (A)(iii) shall
not apply to a transaction which
consists of a sale of employer
securities to an employee stock
ownership plan (as defined in
subsection (e)(7)) by a shareholder-
employee, a member of the family (as
defined in section 267(c)(4)) of such
shareholder-employee, or a corporation
in which such a shareholder-employee
owns stock representing a 50 percent or
greater interest described in
subparagraph (A).
(iii) Loan exception.--For purposes
of subparagraph (A)(i), the term
``owner-employee'' shall only include a
person described in subclause (II) or
(III) of clause (i).
(C) Shareholder-employee.--For purposes of
subparagraph (B), the term ``shareholder-
employee'' means an employee or officer of an S
corporation who owns (or is considered as
owning within the meaning of section 318(a)(1))
more than 5 percent of the outstanding stock of
the corporation on any day during the taxable
year of such corporation.
(7) S corporation repayment of loans for qualifying
employer securities.--A plan shall not be treated as
violating the requirements of section 401 or 409 or
subsection (e)(7), or as engaging in a prohibited
transaction for purposes of subsection (d)(3), merely
by reason of any distribution (as described in section
1368(a)) with respect to S corporation stock that
constitutes qualifying employer securities, which in
accordance with the plan provisions is used to make
payments on a loan described in subsection (d)(3) the
proceeds of which were used to acquire such qualifying
employer securities (whether or not allocated to
participants). The preceding sentence shall not apply
in the case of a distribution which is paid with
respect to any employer security which is allocated to
a participant unless the plan provides that employer
securities with a fair market value of not less than
the amount of such distribution are allocated to such
participant for the year which (but for the preceding
sentence) such distribution would have been allocated
to such participant.
(8) Provision of investment advice to participant and
beneficiaries.--
(A) In general.--The prohibitions provided in
subsection (c) shall not apply to transactions
described in subsection (d)(17) if the
investment advice provided by a fiduciary
adviser is provided under an eligible
investment advice arrangement.
(B) Eligible investment advice arrangement.--
For purposes of this paragraph, the term
``eligible investment advice arrangement''
means an arrangement--
(i) which either--
(I) provides that any fees
(including any commission or
other compensation) received by
the fiduciary adviser for
investment advice or with
respect to the sale, holding,
or acquisition of any security
or other property for purposes
of investment of plan assets do
not vary depending on the basis
of any investment option
selected, or
(II) uses a computer model
under an investment advice
program meeting the
requirements of subparagraph
(C) in connection with the
provision of investment advice
by a fiduciary adviser to a
participant or beneficiary, and
(ii) with respect to which the
requirements of subparagraphs (D), (E),
(F), (G), (H), and (I) are met.
(C) Investment advice program using computer
model.--
(i) In general.--An investment advice
program meets the requirements of this
subparagraph if the requirements of
clauses (ii), (iii), and (iv) are met.
(ii) Computer model.--The
requirements of this clause are met if
the investment advice provided under
the investment advice program is
provided pursuant to a computer model
that--
(I) applies generally
accepted investment theories
that take into account the
historic returns of different
asset classes over defined
periods of time,
(II) utilizes relevant
information about the
participant, which may include
age, life expectancy,
retirement age, risk tolerance,
other assets or sources of
income, and preferences as to
certain types of investments,
(III) utilizes prescribed
objective criteria to provide
asset allocation portfolios
comprised of investment options
available under the plan,
(IV) operates in a manner
that is not biased in favor of
investments offered by the
fiduciary adviser or a person
with a material affiliation or
contractual relationship with
the fiduciary adviser, and
(V) takes into account all
investment options under the
plan in specifying how a
participant's account balance
should be invested and is not
inappropriately weighted with
respect to any investment
option.
(iii) Certification.--
(I) In general.--The
requirements of this clause are
met with respect to any
investment advice program if an
eligible investment expert
certifies, prior to the
utilization of the computer
model and in accordance with
rules prescribed by the
Secretary of Labor, that the
computer model meets the
requirements of clause (ii).
(II) Renewal of
certifications.--If, as
determined under regulations
prescribed by the Secretary of
Labor, there are material
modifications to a computer
model, the requirements of this
clause are met only if a
certification described in
subclause (I) is obtained with
respect to the computer model
as so modified.
(III) Eligible investment
expert.--The term ``eligible
investment expert'' means any
person which meets such
requirements as the Secretary
of Labor may provide and which
does not bear any material
affiliation or contractual
relationship with any
investment adviser or a related
person thereof (or any
employee, agent, or registered
representative of the
investment adviser or related
person).
(iv) Exclusivity of recommendation.--
The requirements of this clause are met
with respect to any investment advice
program if--
(I) the only investment
advice provided under the
program is the advice generated
by the computer model described
in clause (ii), and
(II) any transaction
described in subsection
(d)(17)(A)(ii) occurs solely at
the direction of the
participant or beneficiary.
Nothing in the preceding sentence shall
preclude the participant or beneficiary
from requesting investment advice other
than that described in clause (i), but
only if such request has not been
solicited by any person connected with
carrying out the arrangement.
(D) Express authorization by separate
fiduciary.--The requirements of this
subparagraph are met with respect to an
arrangement if the arrangement is expressly
authorized by a plan fiduciary other than the
person offering the investment advice program,
any person providing investment options under
the plan, or any affiliate of either.
(E) Audits.--
(i) In general.--The requirements of
this subparagraph are met if an
independent auditor, who has
appropriate technical training or
experience and proficiency and so
represents in writing--
(I) conducts an annual audit
of the arrangement for
compliance with the
requirements of this paragraph,
and
(II) following completion of
the annual audit, issues a
written report to the fiduciary
who authorized use of the
arrangement which presents its
specific findings regarding
compliance of the arrangement
with the requirements of this
paragraph.
(ii) Special rule for individual
retirement and similar plans.--In the
case of a plan described in
subparagraphs (B) through (F) (and so
much of subparagraph (G) as relates to
such subparagraphs) of subsection
(e)(1), in lieu of the requirements of
clause (i), audits of the arrangement
shall be conducted at such times and in
such manner as the Secretary of Labor
may prescribe.
(iii) Independent auditor.--For
purposes of this subparagraph, an
auditor is considered independent if it
is not related to the person offering
the arrangement to the plan and is not
related to any person providing
investment options under the plan.
(F) Disclosure.--The requirements of this
subparagraph are met if--
(i) the fiduciary adviser provides to
a participant or a beneficiary before
the initial provision of the investment
advice with regard to any security or
other property offered as an investment
option, a written notification (which
may consist of notification by means of
electronic communication)--
(I) of the role of any party
that has a material affiliation
or contractual relationship
with the fiduciary adviser, in
the development of the
investment advice program and
in the selection of investment
options available under the
plan,
(II) of the past performance
and historical rates of return
of the investment options
available under the plan,
(III) of all fees or other
compensation relating to the
advice that the fiduciary
adviser or any affiliate
thereof is to receive
(including compensation
provided by any third party) in
connection with the provision
of the advice or in connection
with the sale, acquisition, or
holding of the security or
other property,
(IV) of any material
affiliation or contractual
relationship of the fiduciary
adviser or affiliates thereof
in the security or other
property,
(V) the manner, and under
what circumstances, any
participant or beneficiary
information provided under the
arrangement will be used or
disclosed,
(VI) of the types of services
provided by the fiduciary
adviser in connection with the
provision of investment advice
by the fiduciary adviser,
(VII) that the adviser is
acting as a fiduciary of the
plan in connection with the
provision of the advice, and
(VIII) that a recipient of
the advice may separately
arrange for the provision of
advice by another adviser, that
could have no material
affiliation with and receive no
fees or other compensation in
connection with the security or
other property, and
(ii) at all times during the
provision of advisory services to the
participant or beneficiary, the
fiduciary adviser--
(I) maintains the information
described in clause (i) in
accurate form and in the manner
described in subparagraph (H),
(II) provides, without
charge, accurate information to
the recipient of the advice no
less frequently than annually,
(III) provides, without
charge, accurate information to
the recipient of the advice
upon request of the recipient,
and
(IV) provides, without
charge, accurate information to
the recipient of the advice
concerning any material change
to the information required to
be provided to the recipient of
the advice at a time reasonably
contemporaneous to the change
in information.
(G) Other conditions.--The requirements of
this subparagraph 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) the sale, acquisition, or
holding 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.
(H) Standards for presentation of
information.--
(i) In general.--The requirements of
this subparagraph are met if the
notification required to be provided to
participants and beneficiaries under
subparagraph (F)(i) is written in a
clear and conspicuous manner and in a
manner calculated to be understood by
the average plan participant and is
sufficiently accurate and comprehensive
to reasonably apprise such participants
and beneficiaries of the information
required to be provided in the
notification.
(ii) Model form for disclosure of
fees and other compensation.--The
Secretary of Labor shall issue a model
form for the disclosure of fees and
other compensation required in
subparagraph (F)(i)(III) which meets
the requirements of clause (i).
(I) Maintenance for 6 years of evidence of
compliance.--The requirements of this
subparagraph are met if a fiduciary adviser who
has provided advice referred to in subparagraph
(A) maintains, for a period of not less than 6
years after the provision of the advice, any
records necessary for determining whether the
requirements of the preceding provisions of
this paragraph and of subsection (d)(17) have
been met. A transaction prohibited under
subsection (c) 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.
(J) Definitions.--For purposes of this
paragraph and subsection (d)(17)--
(i) Fiduciary adviser.--The term
``fiduciary adviser'' means, with
respect to a plan, a person who is a
fiduciary of the plan by reason of the
provision of investment advice referred
to in subsection (e)(3)(B) by the
person to a participant or beneficiary
of the plan and who is--
(I) registered as an
investment adviser under the
Investment Advisers Act of 1940
(15 U.S.C. 80b-1 et seq.) or
under the laws of the State in
which the fiduciary maintains
its principal office and place
of business,
(II) a bank or similar
financial institution referred
to in subsection (d)(4) or a
savings association (as defined
in section 3(b)(1) of the
Federal Deposit Insurance Act
(12 U.S.C. 1813(b)(1)), but
only if the advice is provided
through a trust department of
the bank or similar financial
institution or savings
association which is subject to
periodic examination and review
by Federal or State banking
authorities,
(III) an insurance company
qualified to do business under
the laws of a State,
(IV) a person registered as a
broker or dealer under the
Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.),
(V) an affiliate of a person
described in any of subclauses
(I) through (IV), or
(VI) an employee, agent, or
registered representative of a
person described in subclauses
(I) through (V) who satisfies
the requirements of applicable
insurance, banking, and
securities laws relating to the
provision of the advice.
For purposes of this title, a person
who develops the computer model
described in subparagraph (C)(ii) or
markets the investment advice program
or computer model shall be treated as a
person who is a fiduciary of the plan
by reason of the provision of
investment advice referred to in
subsection (e)(3)(B) to a participant
or beneficiary and shall be treated as
a fiduciary adviser for purposes of
this paragraph and subsection (d)(17),
except that the Secretary of Labor may
prescribe rules under which only 1
fiduciary adviser may elect to be
treated as a fiduciary with respect to
the plan.
(ii) Affiliate.--The term
``affiliate'' of another entity means
an affiliated person of the entity (as
defined in section 2(a)(3) of the
Investment Company Act of 1940 (15
U.S.C. 80a-2(a)(3))).
(iii) Registered representative.--The
term ``registered representative'' of
another entity means a person described
in section 3(a)(18) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity
for the broker or dealer referred to in
such section) or a person described in
section 202(a)(17) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(17)) (substituting the entity for
the investment adviser referred to in
such section).
(9) Block trade.--The term ``block trade'' means any
trade of at least 10,000 shares or with a market value
of at least $200,000 which will be allocated across two
or more unrelated client accounts of a fiduciary.
(10) Adequate consideration.--The term ``adequate
consideration'' means--
(A) in the case of a security for which there
is a generally recognized market--
(i) the price of the security
prevailing on a national securities
exchange which is registered under
section 6 of the Securities Exchange
Act of 1934, taking into account
factors such as the size of the
transaction and marketability of the
security, or
(ii) if the security is not traded on
such a national securities exchange, a
price not less favorable to the plan
than the offering price for the
security as established by the current
bid and asked prices quoted by persons
independent of the issuer and of the
party in interest, taking into account
factors such as the size of the
transaction and marketability of the
security, and
(B) in the case of an asset other than a
security for which there is a generally
recognized market, the fair market value of the
asset as determined in good faith by a
fiduciary or fiduciaries in accordance with
regulations prescribed by the Secretary of
Labor.
(11) Correction period.--
(A) In general.--For purposes of subsection
(d)(23), the term ``correction period'' means
the 14-day period beginning on the date on
which the disqualified person discovers, or
reasonably should have discovered, that the
transaction would (without regard to this
paragraph and subsection (d)(23)) constitute a
prohibited transaction.
(B) Exceptions.--
(i) Employer securities.--Subsection
(d)(23) does not apply to any
transaction between a plan and a plan
sponsor or its affiliates that involves
the acquisition or sale of an employer
security (as defined in section
407(d)(1) of the Employee Retirement
Income Security Act of 1974) or the
acquisition, sale, or lease of employer
real property (as defined in section
407(d)(2) of such Act).
(ii) Knowing prohibited
transaction.--In the case of any
disqualified person, subsection (d)(23)
does not apply to a transaction if, at
the time the transaction is entered
into, the disqualified person knew (or
reasonably should have known) that the
transaction would (without regard to
this paragraph) constitute a prohibited
transaction.
(C) Abatement of tax where there is a
correction.--If a transaction is not treated as
a prohibited transaction by reason of
subsection (d)(23), then no tax under
subsections (a) and (b) shall be assessed with
respect to such transaction, and if assessed
the assessment shall be abated, and if
collected shall be credited or refunded as an
overpayment.
(D) Definitions.--For purposes of this
paragraph and subsection (d)(23)--
(i) Security.--The term ``security''
has the meaning given such term by
section 475(c)(2) (without regard to
subparagraph (F)(iii) and the last
sentence thereof).
(ii) Commodity.--The term
``commodity'' has the meaning given
such term by section 475(e)(2) (without
regard to subparagraph (D)(iii)
thereof).
(iii) Correct.--The term ``correct''
means, with respect to a transaction--
(I) to undo the transaction
to the extent possible and in
any case to make good to the
plan or affected account any
losses resulting from the
transaction, and
(II) to restore to the plan
or affected account any profits
made through the use of assets
of the plan.
(g) Application of Section.--This section shall not apply--
(1) in the case of a plan to which a guaranteed
benefit policy (as defined in section 401(b)(2)(B) of
the Employee Retirement Income Security Act of 1974) is
issued, to any assets of the insurance company,
insurance service, or insurance organization merely
because of its issuance of such policy;
(2) to a governmental plan (within the meaning of
section 414(d)); or
(3) to a church plan (within the meaning of section
414(e)) with respect to which the election provided by
section 410(d) has not been made.
In the case of a plan which invests in any security issued by
an investment company registered under the Investment Company
Act of 1940, the assets of such plan shall be deemed to include
such security but shall not, by reason of such investment, be
deemed to include any assets of such company.
(h) Notification of Secretary of Labor.--Before sending a
notice of deficiency with respect to the tax imposed by
subsection (a) or (b), the Secretary shall notify the Secretary
of Labor and provide him a reasonable opportunity to obtain a
correction of the prohibited transaction or to comment on the
imposition of such tax.
(i) Cross Reference.--For provisions concerning coordination
procedures between Secretary of Labor and Secretary of the
Treasury with respect to application of tax imposed by this
section and for authority to waive imposition of the tax
imposed by subsection (b), see section 3003 of the Employee
Retirement Income Security Act of 1974.
* * * * * * *
VII. DISSENTING VIEWS
The majority should not have held this markup at this time.
This bill is an attempted end-run around the executive branch
rule-making process.
What this bill would do is amend the statutory rules that
determine when investment advice given by an advisor to an IRA
owner, retirement plan sponsor, or retirement plan participant
gives rise to fiduciary status.
This issue is an important one. Plan participants and IRA
owners are often not experienced investors. They rely on advice
that is given to them by investment professionals. Ensuring
that this advice is impartial and free from conflicts of
interest is critical.
The Administration first issued proposed regulations on
this issue six years ago in 2010. They received many comments
from consumer and industry groups and decided to redraft the
proposal. That new proposal--issued last year--prompted more
than 3,000 individual comment letters, and was the subject of
petitions that generated hundreds of thousands of signatures.
The Administration has stated that it has taken these comments
and the numerous consultations on all sides of this issue into
account when they prepared a final draft of the rule, which is
now being considered by the Office of Management and the
Budget.
This markup should not have been held until the final rule
is issued, and Congress and consumer and industry groups have
had adequate time to review it.
This bill also sets a harmful precedent. It is a precedent
that Republicans want as part of their effort to pass the REINS
Act (H.R. 427), a bill that passed the House last summer on a
largely party line vote that would effectively bring executive
branch rule-making to a standstill by requiring an affirmative
``yes'' vote from both chambers of Congress before a final rule
may become effective. H.R. 4294 includes a similar requirement
for the soon-to-be-released final rule.
Sandy Levin,
Ranking Member,
Committee on Ways and Means.