[House Report 114-512]
[From the U.S. Government Publishing Office]
114th Congress } { Rept. 114-512
HOUSE OF REPRESENTATIVES
2d Session } { Part 2
======================================================================
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. Kline, from the Committee on Education and the Workforce, submitted
the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4294]
[Including cost estimate of the Congressional Budget Office]
The Committee on Education and the Workforce, 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.
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.''.
(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 rolled over
or otherwise 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 rolled over or otherwise
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 there is no intent for you 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 who 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 and rollover 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, including a clearly-
stated notice that the same or similar
investments may be available at a different
cost (greater or lesser) from other sources,
are clearly disclosed to the advice recipient
prior to any transaction based on the
recommendation, 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, including a
clearly-stated notice that the same or similar
investments may be available at a different
cost (greater or lesser) from other sources, is
clearly disclosed to the advice recipient prior
to any transaction based on the recommendation.
The notices provided pursuant to clauses (i) and (ii)
shall only state the following: `The same or similar
investments may be available at a different cost
(greater or lesser) from other sources.'.
``(C) Clear disclosure of variable compensation.--For
purposes of subparagraph (B)(ii), variable compensation
is clearly disclosed if notification is provided at any
time prior to a transaction based on the person's
recommendation, in a manner calculated to be understood
by the average individual, of the following:
``(i) A notice in writing, including a
clearly-stated notice that the same or similar
investments may be available at a different
cost (greater or lesser) from other sources,
that the person providing the recommendation
(or its affiliate) may receive varying amounts
of fees or other compensation with respect to
such transaction.
``(ii) A description of any fee or other
compensation that is directly payable to the
person (or its affiliate) from 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 indirect compensation that may be paid
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 of such
ranges of 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.''.
(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 advice 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).''.
(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).''.
(4) Exemption relating to investment advice with respect to
certain fee arrangements.--Section 4975(d) of such Code (as
amended by paragraph (1)) is amended by striking ``or'' at the
end of paragraph (23), by striking the period at the end of
paragraph (24) and inserting ``, or'', and by adding after
paragraph (24) the following:
``(25) any transaction, including a contract for service,
between a person providing investment advice described in
subsection (e)(3)(B) and the advice recipient in connection
with such investment advice, if--
``(A) no more than reasonable compensation is paid
(as determined under section 4975(d)(2)) for such
investment advice,
``(B) in a case in which the investment advice is
based on a limited range of investment options (which
may consist, in whole or in part, of proprietary
products), such limitations, including a clearly-stated
notice that the same or similar investments may be
available at a different cost (greater or lesser) from
other sources), shall be clearly disclosed to the
advice recipient prior to any transaction based on the
investment advice,
``(C) in a case in which the investment advice may
result in variable compensation to the person providing
the investment advice (or any affiliate of such
person), the receipt of such compensation, including a
clearly-stated notice that the same or similar
investments may be available at a different cost
(greater or lesser) from other sources, shall be
clearly disclosed to the advice recipient (within the
meaning of subsection (e)(11)(C)), and
``(D) in any case in which a person who, acting in
good faith and with reasonable diligence, makes an
error or omission in disclosing the information
specified in subparagraphs (B) or (C), 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.''.
(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 Income 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 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 are issued to carry out such
amendments, a plan and a fiduciary shall be treated as meeting the
requirements of such amendments if the plan or fiduciary, as the case
may be, makes a good faith effort to comply with such requirements.
Purpose
H.R. 4294, the Strengthening Access to Valuable Education
and Retirement Support Act of 2015 (SAVERS Act), prohibits the
Department of Labor (DOL or department) from implementing its
proposed regulation* amending the regulatory definition of
``fiduciary''\1\ under the Employee Retirement Income Security
Act of 1974 (ERISA)\2\ and the Internal Revenue Code of 1986
(Code),\3\ unless Congress affirmatively approves the final
rule. Instead, the bill updates current law to ensure that all
financial professionals providing personalized advice about
investments, distributions, or the use of other fiduciaries are
legally required to act in the best interest of their
customers. However, unlike the DOL proposed regulation, the
SAVERS Act ensures low- and medium-income savers and small
businesses have continued access to affordable retirement
advice.
---------------------------------------------------------------------------
*The Committee ordered this bill reported to the House of
Representatives on February 2, 2016, and this report reflects the
Committee's views on that date. In the intervening time, the Department
of Labor has published a final regulatory package that changed certain
aspects of the previously proposed rule and exemptions discussed
herein. See, e.g., Definition of the Term ``Fiduciary''; Conflict of
Interest Rule-Retirement Investment Advice, 81 Fed. Reg. 20945 (Apr. 8,
2016). Despite these revisions, the Committee continues to have serious
concerns the final regulation will reduce access to affordable
retirement advice. Press release, H. Comm. on Educ. and the Workforce,
Committee Leaders Respond to Labor Department's Final Fiduciary Rule
(Apr. 6, 2016). http://edworkforce.house.gov/news/
documentsingle.aspx?DocumentID=400576.
\1\Definition of the Term ``Fiduciary''; Conflict of Interest Rule-
Retirement Investment Advice, 80 Fed. Reg. 21928 (Apr. 20, 2015).
\2\29 U.S.C. Sec. 1001 et seq.
\3\26 U.S.C. Sec. 1 et seq. [hereinafter the Code; All section
references herein are to the Code unless otherwise indicated].
---------------------------------------------------------------------------
Committee Action
112TH CONGRESS
Full Committee Hearing Reviewing Policies and Priorities at the U.S.
Department of Labor
On February 16, 2011, the Committee on Education and the
Workforce (Committee) held a hearing entitled ``Policies and
Priorities at the U.S. Department of Labor'' to examine, among
other things, DOL's Employee Benefits Security Administration's
(EBSA) October 2010 proposed regulation significantly expanding
the definition of ``fiduciary'' under ERISA and the Code. The
Honorable Hilda L. Solis, then-Secretary of the U.S. Department
of Labor, was the sole witness. During the hearing,
Representatives Judy Biggert (R-IL) and Carolyn McCarthy (D-NY)
expressed concerns regarding DOL's proposed rule, specifically
in regard to the department's lack of coordination with the
Securities and Exchange Commission.\4\
---------------------------------------------------------------------------
\4\Policies and Priorities at the U.S. Department of Labor: Hearing
Before the H. Comm. on Educ. and the Workforce, 112th Cong. 15, 38
(Feb. 16, 2011).
---------------------------------------------------------------------------
Subcommittee hearing assessing the impact of the Labor Department's
Proposal on Workers and Retirees
On July 26, 2011, the Subcommittee on Health, Employment,
Labor, and Pensions (HELP) held a hearing entitled ``Redefining
`Fiduciary': Assessing the Impact of the Labor Department's
Proposal on Workers and Retirees'' to examine the consequences
of EBSA's 2010 proposed rule. Witnesses included the Honorable
Phyllis Borzi, Assistant Secretary of Labor, Employee Benefits
Security Administration, Washington, D.C.; Mr. Kenneth Bentsen,
Executive Vice President, Securities Industry and Financial
Markets Association, Washington, D.C.; Mr. Kent Mason, Partner,
Davis & Harman LLP, Washington, D.C.; Mr. Donald Myers,
Partner, Morgan, Lewis & Bockius LLP, Washington, D.C.; Mr.
Norman Stein, Professor, Earle Mack School of Law, Drexel
University, Philadelphia, Pennsylvania; and Mr. Jeffrey
Tarbell, Director, Houlihan Lokey, San Francisco, California.
Full committee hearing reviewing the President's Fiscal Year 2013
Budget Proposal for the Department of Labor
On March 21, 2012, the Committee held a hearing entitled
``Reviewing the President's Fiscal Year 2013 Budget Proposal
for the Department of Labor.'' Then-Secretary Solis was the
sole witness. During the hearing, Representatives of both
parties thanked Secretary Solis for withdrawing the 2010
proposed fiduciary rule and inquired as to what criteria would
be considered in a subsequent regulatory proposal.\5\
---------------------------------------------------------------------------
\5\Reviewing the President's Fiscal Year 2013 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 112th Cong. (Mar. 21, 2012).
---------------------------------------------------------------------------
113TH CONGRESS
Full committee hearing reviewing the President's Fiscal Year 2015
Budget Proposal for the Department of Labor
On March 26, 2014, the Committee held a hearing entitled
``Reviewing the President's Fiscal Year 2015 Budget Proposal
for the Department of Labor.'' The Honorable Thomas E. Perez,
Secretary of the U.S. Department of Labor, was the sole
witness. During this hearing, Committee on Education and the
Workforce Chairman John Kline reiterated bipartisan concerns
regarding DOL's ongoing fiduciary rulemaking. Addressing the
consequences of the department's proposed rule, Chairman Kline
urged Secretary Perez to keep in mind ``what the impact will be
on important advice that people, particularly low-income
people, might need.''\6\
---------------------------------------------------------------------------
\6\Reviewing the President's Fiscal Year 2015 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 113th Cong. 86 (Mar. 26, 2014) (closing statement of Rep.
John Kline, Chairman, H. Comm. on Educ. and the Workforce).
---------------------------------------------------------------------------
114TH CONGRESS
Full committee hearing reviewing the President's Fiscal Year 2016
Budget Proposal for the Department of Labor
On March 18, 2015, the Committee held a hearing entitled
``Reviewing the President's Fiscal Year 2016 Budget Proposal
for the Department of Labor.'' Secretary Perez was the sole
witness. During the hearing, Representative Frederica Wilson
(D-FL) warned that a new proposed fiduciary rule should not
``impact the availability of affordable investment advice.''\7\
---------------------------------------------------------------------------
\7\Reviewing the President's Fiscal Year 2016 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 114th Cong. (Mar. 18, 2015) (statement of Rep. Frederica S.
Wilson, Member, H. Comm. on Educ. and the Workforce).
---------------------------------------------------------------------------
Subcommittee hearing examining restricting access to Financial Advice:
Evaluating the Costs and Consequences for Working Families and
Retirees
On June 17, 2015, the HELP Subcommittee held a hearing
entitled ``Restricting Access to Financial Advice: Evaluating
the Costs and Consequences for Working Families and Retirees''
to examine the new DOL Notice of Proposed Rulemaking (NPRM)
amending the regulatory definition of ``fiduciary'' under
ERISA. Witnesses before the Subcommittee included Secretary
Perez; Mr. Jack Haley, Executive Vice President, Fidelity
Investments, Boston, Massachusetts; Mr. Dean Harman, CFP,
Managing Director, Harman Wealth Management, The Woodlands,
Texas; Mr. Dennis Kelleher, President and CEO, Better Markets,
Washington, D.C.; Mr. Kent Mason, Partner, Davis & Harman LLP,
Washington, D.C.; and Dr. Brian Reid, Ph.D., Chief Economist,
Investment Company Institute, Washington, D.C. During the
hearing, Dr. Reid testified opposing DOL's reproposed fiduciary
rule, saying, ``[A]ny policy that impairs retirement savers'
ability to get the help that they need will significantly harm
the prospects of millions of workers. Unfortunately, the DOL
proposal will do just that.''\8\ Additionally, Jack Haley of
Fidelity Investments testified in support of a ``best-interest
fiduciary standard crafted in a way that allows workers choice
and access to the services they need and desire.''\9\
---------------------------------------------------------------------------
\8\Restricting Access to Financial Advice: Evaluating the Costs and
Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. (Jun. 17, 2015) (oral testimony of
Dr. Brian Reid, Ph.D., Chief Economist, Investment Company Institute).
\9\Restricting Access to Financial Advice: Evaluating the Costs and
Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. (Jun. 17, 2015) (oral testimony of
Mr. Jack Haley, Executive Vice President, Fidelity Investments).
---------------------------------------------------------------------------
Subcommittee hearing examining the Principles for Ensuring Retirement
Advice Serves the Best Interests of Working Families and
Retirees
On December 2, 2015, the HELP Subcommittee held a hearing
entitled ``Principles for Ensuring Retirement Advice Serves the
Best Interests of Working Families and Retirees'' to further
examine the DOL NPRM amending the regulatory definition of
``fiduciary'' under ERISA. Notably, the Subcommittee considered
the potential negative effects of the NPRM on small businesses
and low- and middle-income families. Witnesses before the
Subcommittee included the Honorable Bradford (Brad) Campbell,
Counsel, Drinker Biddle & Reath LLP, Washington, D.C.; Ms.
Rachel A. Doba, President, DB Engineering, LLC, Indianapolis,
Indiana; Mr. Jules O. Gaudreau, Jr. ChFC, CIC, President, The
Gaudreau Group, Inc., Wilbraham, Massachusetts; and Ms. Marilyn
Mohrman-Gillis, Esq., Managing Director, Public Policy &
Communications, Certified Financial Planner Board of Standards,
Washington, D.C. During the hearing,\10\ witnesses praised the
bipartisan principles outlined by Representatives Phil Roe (R-
TN), Richard Neal (D-MA), Peter Roskam (R-IL), and Michelle
Lujan Grisham (D-NM) for a legislative solution to help
strengthen retirement security.
---------------------------------------------------------------------------
\10\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. (Dec. 2, 2015).
---------------------------------------------------------------------------
H.R. 4294, Strengthening Access to Valuable Education and Retirement
Support Act of 2015, introduced
On December 18, 2015, Representative Peter Roskam (R-IL),
along with Representatives Phil Roe (R-TN), Richard Neal (D-
MA), John Larson (D-CT), Tom Reed (R-NY), and Michelle Lujan
Grisham (D-NM), introduced the Strengthening Access to Valuable
Education and Retirement Support Act of 2015 (H.R. 4294).\11\
Recognizing the threat of DOL's proposed ``fiduciary'' rule,
the bipartisan bill was introduced to protect consumers and
preserve access to affordable financial advice for low- and
middle-income families. The legislation amends the Internal
Revenue Code to require retirement advisors to act in their
clients' best interest, and prohibits DOL from implementing its
flawed proposal unless Congress affirmatively approves the
final rule.
---------------------------------------------------------------------------
\11\H.R. 4294, 114th Cong. (2015).
---------------------------------------------------------------------------
Committee passes H.R.4294, Strengthening Access to Valuable Education
and Retirement Support Act of 2015
On February 2, 2016, the Committee on Education and the
Workforce considered H.R. 4294, the Strengthening Access to
Valuable Education and Retirement Support Act of 2015.\12\
Representative Earl L. ``Buddy'' Carter (R-GA) offered an
amendment in the nature of a substitute, making technical
changes to the introduced bill. The Committee voted to adopt
the amendment in the nature of a substitute by voice vote. One
additional amendment was offered and subsequently withdrawn.
The Committee favorably reported H.R. 4294, as amended, to the
House of Representatives by a vote of 22-14.
---------------------------------------------------------------------------
\12\H.R. 4294, Strengthening Access to Valuable Education and
Retirement Support Act of 2015: Markup Before the H. Comm. on Educ. and
the Workforce, 114th Cong. (Feb. 2, 2016).
---------------------------------------------------------------------------
Background
PRESENT LAW
Tax-favored savings arrangements
Tax-favored retirement savings
The Code provides two general vehicles for tax-favored
retirement savings: employer-sponsored retirement plans and
individual retirement arrangements (IRAs).\13\ Various
requirements must be met for tax-favored treatment to apply.
Retirement plans of private employers are also generally
subject to the ERISA, over which the Secretary of Labor has
jurisdiction.
---------------------------------------------------------------------------
\13\Sections 219, 408 and 408A provide rules for IRAs.
---------------------------------------------------------------------------
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.\14\ Under a
defined contribution plan, benefits are based on a separate
account for each participant, to which are allocated
contributions, earnings and losses.\15\ Defined contribution
plans commonly allow participants to direct the investment of
their accounts, usually by choosing among investment options
offered under the plan. Under a defined benefit plan, benefits
are determined under a plan formula, and benefits under a
defined benefit plan are funded by the general assets of the
trust established under the plan, which are invested by plan
fiduciaries; individual accounts are not maintained for
employees participating in the plan.\16\
---------------------------------------------------------------------------
\14\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. Simplified employee pension (SEP) plans under section
408(k) and SIMPLE IRA plans under section 408(p) are employer-sponsored
plans funded through contributions by the employer to an IRA
established for each employee.
\15\Defined contribution plan is defined at section 414(i).
\16\As defined in section 414(j), a defined benefit plan is any
plan that is not a defined contribution plan.
---------------------------------------------------------------------------
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.\17\ 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.\18\
---------------------------------------------------------------------------
\17\Sections 402A and 408A provide rules for Roth arrangements.
\18\Sec. Sec. 402(c), 403(a)(4), 403(b)(8), 408(d)(3), 408A(e), and
457(e)(16).
---------------------------------------------------------------------------
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).\19\ In some
cases, such an individual may contribute to an Archer MSA.\20\
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.
---------------------------------------------------------------------------
\19\Section 223 provides rules for HSAs.
\20\Section 220 provides rules for Archer MSAs.
---------------------------------------------------------------------------
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.\21\ 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.
---------------------------------------------------------------------------
\21\Section 530 provides rules for Coverdell ESAs.
---------------------------------------------------------------------------
Prohibited transaction rules
The Code prohibits certain transactions (prohibited
transaction) between a qualified retirement plan and a
disqualified person.\22\ The prohibited transaction rules under
the Code apply also to IRAs, Archer MSAs, HSAs, and Coverdell
ESAs.\23\
---------------------------------------------------------------------------
\22\Sec. 4975. Under section 4975 of the Internal Revenue Code of
1986 (the Code), similar rules apply to qualified retirement plans
under Code sec. 401(a) and qualified annuities under Code sec. 403(a)
of private employers, as well as individual retirement arrangements
(IRAs) under Code section 408, health savings accounts (HSAs) under
Code section 223, Archer MSAs under Code section 220, and Coverdell
education savings accounts (Coverdell ESAs) under Code section 530. 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).
\23\These are included in the definition of ``plan'' under section
4975(e)(1).
---------------------------------------------------------------------------
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.\24\
---------------------------------------------------------------------------
\24\Sec. 4975(c)(1).
---------------------------------------------------------------------------
Disqualified persons include a fiduciary of the plan; a
person providing services to the plan; an employer with
employees covered by the plan; an employee organization any of
whose members are covered by the plan; and certain owners,
officers, directors, highly compensated employees, family
members, and related entities.\25\ A fiduciary includes 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.\26\
---------------------------------------------------------------------------
\25\Sec. 4975(e)(2).
\26\Sec. 4975(e)(3). Fiduciary also includes any named fiduciary
under ERISA section 405(c)(1)(B).
---------------------------------------------------------------------------
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.\27\ 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.\28\ 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.
---------------------------------------------------------------------------
\27\Sec. 4975(d)(1) and (d)(2).
\28\Sec. 4975(c)(2).
---------------------------------------------------------------------------
Excise tax on prohibited transactions
If a prohibited transaction occurs, the disqualified person
who participated in the transaction is generally subject to a
two-tiered excise tax.\29\ 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.
---------------------------------------------------------------------------
\29\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).
---------------------------------------------------------------------------
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.\30\ 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.
---------------------------------------------------------------------------
\30\In the case of certain transactions for services for which more
than reasonable compensation is paid, the amount involved is only the
excess compensation.
---------------------------------------------------------------------------
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 the DOL
by Executive Order, referred to as Reorganization Plan No. 4 of
1978 (Reorganization Plan).\31\ 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.\32\ As
a result, DOL regulations and other guidance relating to
prohibited transactions applies 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.
---------------------------------------------------------------------------
\31\Reorganization Plan No. 4 of 1978, 43 Fed. Reg. 47713 (Oct. 17,
1978).
\32\Sec. Sec. 102 and 105 of Reorganization Plan No. 4 of 1978, 43
Fed. Reg. 47713. 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.
---------------------------------------------------------------------------
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.\33\
---------------------------------------------------------------------------
\33\29 C.F.R. Sec. 2510.3-21(c). Under Sec. 102 of Reorganization
Plan No. 4 of 1978, 43 Fed. Reg. 47713, with certain exceptions, the
Secretary of the Treasury's authority with respect to regulations,
rulings, opinions, and exemptions under the prohibited transaction
provisions of the Code was transferred to the Secretary of Labor. As a
result, DOL regulations and other guidance relating to prohibited
transactions, including the grant of exemptions, apply for Code
purposes, as well as for ERISA purposes.
---------------------------------------------------------------------------
The regulations further provide that a person who is a
fiduciary with respect to a plan by reason of rendering
investment advice (as described above) for a fee or other
compensation, direct or indirect, with respect to any moneys or
other property of the plan, or having any authority or
responsibility to do so, is not deemed to be a fiduciary
regarding any assets of the plan with respect to which the
person does not have any discretionary authority, discretionary
control, or discretionary responsibility, does not exercise any
authority or control, does not render investment advice (as
described above) for a fee or other compensation, and does not
have any authority or responsibility to render such investment
advice. However, this rule does not exempt the person from
ERISA liability attributable to a breach of responsibility by a
co-fiduciary or exclude the person from the definition of the
term ``party in interest'' based on providing services to the
plan with respect to any assets of the plan.
In addition to the regulations, other guidance issued by
DOL in 1996 (Interpretive Bulletin 96-1) provides that the
furnishing of mere investment education to a participant or
beneficiary in a participant-directed individual account plan
does not constitute the rendering of investment advice.\34\ For
this purpose, investment education includes the following
categories of information and materials: plan information,
general financial and investment information, asset allocation
models, and interactive investment materials. Interpretive
Bulletin 96-1 more fully describes these categories and notes
that the information and materials merely represent examples of
the type that may be furnished to participants and
beneficiaries without such information and materials
constituting investment advice, and that there may be many
other examples of information, materials, and educational
services, which if furnished to participants and beneficiaries,
would not constitute investment advice. Accordingly,
Interpretive Bulletin 96-1 provides that no inferences should
be drawn from the description of the four categories with
respect to whether the furnishing of any information,
materials, or educational services not described therein may
constitute investment advice.
---------------------------------------------------------------------------
\34\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.
---------------------------------------------------------------------------
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.\35\
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.
---------------------------------------------------------------------------
\35\ERISA Sec. 408(b)(14) and (g), enacted by section 601 of the
Pension Protection Act of 2006, Pub. L. No. 109-280.
---------------------------------------------------------------------------
For purposes of the exemptions, an eligible investment
advice arrangement is generally an arrangement that either (1)
provides that any fees (including any commission or
compensation) received by the fiduciary advisor for investment
advice or with respect to an investment transaction with
respect to plan assets do not vary depending on the basis of
any investment option selected (sometimes referred to as ``fee-
leveling''), or (2) uses a computer model under an investment
advice program that meets specified requirements in connection
with the provision of investment advice to a participant or
beneficiary.\36\ 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).\37\
In addition, the fiduciary advisor must provide disclosures
applicable under securities laws; any investment transaction
must occur solely at the direction of the investment advice
recipient; the compensation received by the fiduciary advisor
and affiliates in connection with the investment transaction
must be reasonable; and the terms of the investment transaction
must be at least as favorable to the plan as an arm's length
transaction would be.
---------------------------------------------------------------------------
\36\Various requirements with respect to notices and disclosure,
recordkeeping and audits must also be met.
\37\Affiliate for this purpose means an affiliated person as
defined under section 2(a)(3) of the Investment Company Act of 1940, 15
U.S.C. Sec. 80a-2(a)(3).
---------------------------------------------------------------------------
DOL'S 2015 PROPOSED REGULATIONS AND ``BIC'' EXEMPTION
On April 20, 2015, DOL proposed regulations that would
replace the current regulations relating to investment advice
with a new standard as to whether a person is a fiduciary based
on rendering investment advice, generally to be applicable
eight months after final regulations are published.\38\ Under
the proposed regulations, a person is a fiduciary based on
rendering investment advice if the person does the following:
---------------------------------------------------------------------------
\38\Definition of the Term ``Fiduciary,'' 80 Fed. Reg. at 21928.
The proposed regulations would apply for purposes of ERISA and the
prohibited transaction rules of the Code. DOL had previously proposed a
regulation similarly expanding fiduciary liability. Definition of the
Term ``Fiduciary,'' 75 Fed. Reg. 65263 (Oct. 15, 2010) [hereinafter
2010 Proposal]. That proposal was withdrawn due to bipartisan
opposition.
---------------------------------------------------------------------------
Provides to a plan, a plan fiduciary, an
IRA,\39\ 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
---------------------------------------------------------------------------
\39\IRA is defined in the proposed guidance to include HSAs, Archer
MSAs, and Coverdell ESAs, as well as IRAs. In Part IV.E of the preamble
to the proposed regulations, DOL requests comments as to whether it is
appropriate to cover individual accounts other than IRAs and treat them
in a manner similar to IRAs. Definition of the Term ``Fiduciary,'' 80
Fed. Reg. at 21947.
---------------------------------------------------------------------------
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
the following:
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;\40\
---------------------------------------------------------------------------
\40\Under the Code, a distribution from an employer-sponsored
retirement plan, IRA, HSA, Archer MSA, or Coverdell ESA may be rolled
over (often referred to as a ``rollover'') to a similar arrangement and
continue to receive tax-favored treatment. DOL Advisory Opinion 2005-
23A (Dec. 7, 2005) addresses the question of whether a recommendation
that a participant in a pension plan roll over his or her account
balance to an IRA to take advantage of investment options not available
under the plan constitutes investment advice with respect to plan
assets. The advisory opinion expresses the view that, with respect to a
person who is not otherwise a plan fiduciary, merely advising a plan
participant to take an otherwise permissible plan distribution, even
when the advice is combined with a recommendation as to how the
distribution should be invested, does not constitute investment advice
within the meaning of the existing DOL investment advice regulations
defining when a person is a fiduciary by virtue of providing investment
advice with respect to employee benefit plan assets. The advisory
opinion provides that DOL does not view a recommendation to take a
distribution as advice or a recommendation concerning a particular
investment (that is, purchasing or selling securities or other
property) as contemplated by the regulations and that any investment
recommendation regarding the proceeds of a distribution would be advice
with respect to funds that are no longer plan assets. Part IV.A(1) of
the preamble to the proposed regulations notes that the proposed
regulations, if finalized, would supersede Advisory Opinion 2005-23A.
Definition of the Term ``Fiduciary,'' 80 Fed. Reg. at 21939.
---------------------------------------------------------------------------
A recommendation as to the management of
securities or other property, including recommendations
as to the management of securities or other property to
be rolled over or otherwise distributed from the plan
or IRA;
An appraisal, fairness opinion, or similar
statement, whether verbal or written, concerning the
value of securities or other property if provided in
connection with a specific transaction or transactions
involving the acquisition, disposition, or exchange of
such securities or other property by the plan or IRA;
and
A recommendation of a person who is also
going to receive a fee or other compensation for
providing any of the types of advice described above.
Subject to specified requirements for each exception, the
proposed regulations provide exceptions (referred to as
``carve-outs'') for (1) certain counterparties in transactions
with an employee benefit plan (referred to as the ``seller's
carve-out''); (2) swap and security-based swap transactions
with an employee benefit plan; (3) employees of an employee
benefit plan sponsor; (4) platform providers to employee
benefit plans; (5) persons providing selection and monitoring
assistance to employee benefit plans; (6) financial reports and
valuations (including to an IRA or IRA owner); and (7)
investment education (including to an IRA or IRA owner), under
standards somewhat different from the standards in the existing
DOL guidance. However, an exception does not apply if the
person represents or acknowledges that it is acting as a
fiduciary with respect to the advice. In conjunction with the
proposed regulations, DOL proposed new prohibited transaction
class exemptions, including a ``best interest contract'' (or
BIC) exemption,\41\ as well as proposing changes to various
existing class exemptions.
---------------------------------------------------------------------------
\41\Proposed Best Interest Contract Exemption, 80 Fed. Reg. 21960
(Apr. 20, 2015). This class exemption is proposed to become applicable
at the same time as the 2015 proposed fiduciary regulations, eight
months after publication of final regulations.
---------------------------------------------------------------------------
The proposed BIC class exemption generally applies to
compensation received by an investment advisor or related party
in connection with a transaction (that is, a purchase, sale, or
holding of assets) resulting from investment advice provided to
``retirement investors,'' meaning plan participants or
beneficiaries who direct the investment of the assets in their
accounts, IRA owners who make investment decisions with respect
to their IRAs, and a plan sponsor (or employee, officer, or
director thereof) of a plan with fewer than 100 participants
where the plan does not provide for participant-directed
investments and the plan sponsor acts as a fiduciary who has
authority to make plan investment decisions. Only advice in the
best interest of the saver under the proposed regulation
qualifies for the exemption.\42\
---------------------------------------------------------------------------
\42\The preamble to the proposed exemption states, ``Under this
standard, the Adviser and Financial Institution must put the interests
of the Retirement Investor ahead of the financial interests of the
Adviser, Financial Institution or their Affiliates, Related Entities or
any other party.'' Proposed Best Interest Contract Exemption, 80 Fed.
Reg. at 21970.
---------------------------------------------------------------------------
Assets subject to the proposed BIC class exemption include
the following: bank deposits; certificates of deposit (CDs);
shares or interests in mutual funds; bank collective funds;
insurance company separate accounts; exchange-traded REITs
(Real Estate Investment Trusts); exchange-traded funds;
corporate bonds offered pursuant to a registration statement
under the Securities Act of 1933; agency debt securities and
U.S. Treasury Securities; insurance and annuity contracts;
guaranteed investment contracts; and exchange-traded equity
securities. The proposed BIC class exemption requires that,
before making any recommendations on investment transactions,
the advisor and financial institution enter into a written
contract with the retirement investor as follows:
The contract affirmatively states that the
advisor and financial institution are fiduciaries under
ERISA, the Code, or both, with respect to any
investment recommendation to the retirement investor;
Under the contract, the advisor and
financial institution specifically agree to adhere to
certain impartial conduct standards, which include
providing investment advice that is in the best
interest of the retirement investor, not recommending
investment in an asset if they (or affiliates) will
receive more than reasonable compensation in relation
to the total services they provide to the retirement
investor with respect to the investment, and not
providing any statements about an asset, fees, material
conflict of interest, and any other matter related to
the retirement investor's investment decision that are
misleading;
Under the contract, the advisor and
financial institution provide certain warranties and
make certain disclosures related to fees and conflicts
of interest; and
The contract must not have exculpatory
provisions disclaiming or otherwise limiting liability
of the advisor or financial institution for a violation
of the contract's terms, or a provision under which a
plan, IRA, or retirement investor waives or qualifies
its right to bring or participate in a class action or
other representative action in court in a dispute with
the advisor or financial institution.\43\
---------------------------------------------------------------------------
\43\As described in DOL's background discussion of the proposed
exemption, the contract terms to which advisors and financial
institutions must agree in order to qualify for the proposed BIC class
exemption potentially create a cause of action that may be used by
retirement investors to enforce these contract terms. Proposed Best
Interest Contract Exemption, 80 Fed. Reg. at 21972, 21973.
---------------------------------------------------------------------------
Summary of H.R. 4294
The bill\44\ 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.
---------------------------------------------------------------------------
\44\H.R. 4294, 114th Cong. (2015).
---------------------------------------------------------------------------
The bill adds a statutory definition of investment advice
to the prohibited transaction provisions of the Code. In
addition, subject to specified requirements, the bill adds new
statutory exemptions 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,'' and any transaction between a person
providing investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other
property of the plan.
DEFINITION OF INVESTMENT ADVICE
General rule
The statutory definition of investment advice under the
bill applies (as the regulatory definition applies under
present law) for purposes of determining if a person is a
fiduciary with respect to a plan based on rendering investment
advice 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, and thus, is a
disqualified person with respect to the plan. As defined under
the bill, investment advice includes certain recommendations
rendered under certain conditions.
Specifically, under the bill, the recommendations that may
be investment advice (if rendered under the conditions
described below) are those that relate to the following:
The advisability of acquiring, holding,
disposing, or exchanging any moneys or other property
of a plan by the plan, plan participants, or plan
beneficiaries, including any recommendation whether to
take a distribution of benefits from the plan or any
recommendation relating to the investment of any moneys
or other property of the plan to be rolled over or
otherwise 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 rolled
over or otherwise 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.
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 bill, any disclaimer of a mutual agreement,
arrangement, or understanding with respect to a recommendation
must only state the following: ``This information is not
individualized to you, and there is no intent for you to
materially rely on this information in making investment or
management decisions.'' Further, this disclaimer is not
effective unless it is in writing and is communicated in a
clear and prominent manner and an objective person would
reasonably conclude that, based on all the facts and
circumstances, there was not a mutual agreement, arrangement,
or understanding.
Information not treated as investment advice
Under the bill, information provided in the circumstances
described below is not treated as a recommendation made
pursuant to a mutual agreement, arrangement, or understanding
for purposes of the definition of investment advice. The
information in these circumstances shall contain the disclaimer
described above.
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 bill) 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,\45\ or security-based
swap\46\). 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 bill) or to otherwise
act as a fiduciary to the plan, plan participants, or plan
beneficiaries.
---------------------------------------------------------------------------
\45\A swap for this purpose is defined in section 1a of the
Commodity Exchange Act, 7 U.S.C. Sec. 1a.
\46\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).
---------------------------------------------------------------------------
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 and rollover 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.
EXEMPTIONS RELATING TO INVESTMENT ADVICE
Best interest recommendation exemption
The bill 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 in
the case of a ``best interest recommendation.''
As defined under the bill, a best interest recommendation
is a recommendation:
For which no more than reasonable
compensation is paid (determined as described below),
Provided by a person (referred to in this
description as the ``advisor'') 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 advisor's
reasonable diligence regarding factors such as the
advice recipient's age and any other information that
the advice recipient discloses to the advisor in
connection with receiving the recommendation, and
Where the advisor places the interests of
the plan or advice recipient above its own.
A best interest recommendation may include a recommendation
(1) 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 (including a clearly-
stated notice that the same or similar investments may be
available at a different cost (greater or lesser) from other
sources) are clearly disclosed to the advice recipient before
any transaction based on the recommendation, or (2) that may
result in variable compensation to the advisor (or any
affiliate\47\ of the advisor), but only if the receipt of the
compensation (including a clearly-stated notice that the same
or similar investments may be available at a different cost
(greater or lesser) from other sources) is clearly disclosed to
the advice recipient before any transaction based on the
recommendation. The notices required under this rule must state
only the following: ``The same or similar investments may be
available at a different cost (greater or lesser) from other
sources.''
---------------------------------------------------------------------------
\47\Under the bill, affiliate is defined as under the present-law
exemption relating to investment advice, that is, an affiliated person
as defined under section 2(a)(3) of the Investment Company Act of 1940,
15 U.S.C. Sec. 80a-2(a)(3).
---------------------------------------------------------------------------
In addition, for purposes of the required disclosure of
variable compensation, variable compensation is considered
clearly disclosed if notification is provided at any time
before a transaction based on the advisor's recommendation, in
a manner calculated to be understood by the average individual.
The notification must include the following:
(1) A notice in writing (including a clearly-stated
notice that the same or similar investments may be
available at a different cost (greater or lesser) from
other sources) that the advisor (or its affiliate) may
receive varying amounts of fees or other compensation
with respect to the transaction,
(2) A description of any fee or other compensation
that is directly payable to the advisor (or its
affiliate) from 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
indirect compensation that may be paid to the advisor
(or its affiliate) by any third party in connection
with a transaction based on the advisor's
recommendation (expressed as an amount, formula,
percentage of assets, per capita charge, or estimate of
the ranges of compensation),
(4) On request of the advice recipient, a disclosure
of the specific amounts of compensation described in
(3) that the advisor will receive in connection with
the particular transaction (expressed as an amount,
formula, percentage of assets, per capita charge, or
estimate of the compensation).
Under the bill, 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 bill also provides 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).
Exemption for certain fee arrangements
The bill also provides a prohibited transaction exemption
for any transaction, including a contract for service, between
a person (referred to in this description as the ``investment
advisor'') providing investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or
other property of the plan, and the advice recipient in
connection with the investment advice.
The exemption applies if--
No more than reasonable compensation is paid
for the investment advice;\48\
---------------------------------------------------------------------------
\48\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).
---------------------------------------------------------------------------
In a case in which the investment advice is
based on a limited range of investment options, which
may consist, in whole or in part, of proprietary
products, the limitations (including a clearly-stated
notice that the same or similar investments may be
available at a different cost (greater or lesser) from
other sources) must be clearly disclosed to the advice
recipient before any transaction based on the
investment advice;
In a case in which the investment advice may
result in variable compensation to the investment
advisor (or any affiliate), the receipt of the
compensation (including a clearly-stated notice that
the same or similar investments may be available at a
different cost (greater or lesser) from other sources)
must be clearly disclosed to the advice recipient (in
accordance with the requirements under the best
interest recommendation exemption); and
In any case in which a person who, acting in
good faith and with reasonable diligence, makes an
error or omission in disclosing the required
information, the person discloses the correct
information to the advice recipient as soon as
practicable, but not later than 30 days from the date
on which the person knows of the error or omission.
EFFECTIVE DATE
The amendments made by the bill generally are effective on
the 61st day after the date of enactment of the bill and apply
with respect to information provided or recommendations made on
or after two years after the date of enactment. However, if,
before the 61st day after the date of enactment, a bill or
joint resolution is enacted that specifically approves any
rules or administrative positions that are promulgated under
the Code and ERISA statutory definitions of fiduciary\49\ and
are not in effect on January 1, 2015, the amendments made by
the bill will not take effect. In addition, the amendments made
by the bill do not apply to any service or transaction
rendered, entered into, or for which a person has been
compensated before the date on which the amendments generally
become effective.
---------------------------------------------------------------------------
\49\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 bill but not effective on
January 1, 2015, may become effective unless a bill or joint
resolution as described above is enacted not later than 60 days
after the date of enactment. If the amendments made by the bill
take effect, nothing in the bill is to be construed to prohibit
the issuance of guidance to carry out the amendments so long as
the guidance is necessary to implement the amendments. Until
the time when regulations or other guidance is issued to carry
out the amendments, a plan and a fiduciary will be treated as
meeting the requirements of the amendments if the plan or
fiduciary, as applicable, makes a good faith effort to comply
with the requirements.
Committee Views
DOL'S ABANDONED 2010 PROPOSAL
The Obama administration has long argued the regulatory
definition of an investment advice fiduciary is insufficiently
restrictive.\50\ To address this concern, in 2010, EBSA issued
a complicated proposed regulation expanding the definition of
fiduciary.''\51\ On September 19, 2011, in the face of
bipartisan opposition from the Committee and others in Congress
related to access to advice and cost, EBSA withdrew its
original proposal and announced it would repropose a revised
rulemaking.\52\
---------------------------------------------------------------------------
\50\See Council of Economic Advisors, The Effects of Conflicted
Investment Advice on Retirement Saving, (Feb. 2015) http://
www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf.
[hereinafter CEA Report].
\51\2010 Proposal, 75 Fed. Reg. 65263.
\52\See Press Release, Dept. of Labor, U.S. Labor Department's EBSA
to re-propose rule on definition of a fiduciary (Sept. 19, 2011),
http://www.dol.gov/ebsa/newsroom/2011/11-1382-NAT.html.
---------------------------------------------------------------------------
CONCERNS WITH DOL'S 2015 PROPOSAL
DOL's April 2015 notice of proposed rulemaking
At a February 2015 speech at AARP, President Obama
announced his intention to go forward with this rulemaking.\53\
In this speech and subsequent public statements, the
administration rebranded the proposed regulation as a consumer
protection against ``backdoor payments and hidden fees''
generated by structural conflicts of interest in the retirement
advice industry. After review by the Office of Management and
Budget (OMB), DOL released its new notice of proposed
rulemaking (the 2015 NPRM) in April 2015.\54\ The new proposal
was preceded by a Council of Economic Advisors report arguing
that ``conflicted advice'' costs Americans $17 billion
annually.\55\ This figure assumes that IRA investors were duped
into rolling over 401(k) funds into high cost mutual funds by
advisors and brokers and, as a result, pay on average 1 percent
more annually. These assumptions have come under intense
scrutiny from analysts who argue IRA holders actually pay only
0.16 percent more and that these fees are justifiable due to a
higher level of service.\56\
---------------------------------------------------------------------------
\53\Press Release, White House Office of the Press Secretary,
Remarks by the President at the AARP (Feb. 23, 2015), http://
www.whitehouse.gov/the-press-office/2015/02/23/remarks-president-aarp.
\54\Definition of the Term ``Fiduciary,'' 80 Fed. Reg. at 21928.
\55\CEA Report, supra note 50, at 2.
\56\Letter from David M. Abbey, Deputy Gen. Counsel, Retirement
Policy, Inv. Co. Inst. and Brian Reid, Chief Economist, Investment
Company Inst., to the Hon. Howard Shelanski, Admin., Office of Info.
and Reg. Aff., OMB (Apr. 7, 2015), http://www.ici.org/pdf/
15_ici_omb_data.pdf.
---------------------------------------------------------------------------
Proposed exemptions
In addition to the NPRM itself, DOL's proposed regulatory
package also includes six prohibited transaction exemptions--
some new and a few revisions of existing exemptions. The most
notable is the BIC exemption. DOL claims this exemption will
provide a framework permitting newly-minted fiduciaries to
continue to receive commissions and other payments that would
otherwise be prohibited by ERISA. However, to qualify for the
exemption, an investment advisor would need to enter into a
contract (before any investment recommendation is made)
acknowledging fiduciary status and agree to abide by certain
requirements. While advisors should work in the best interest
of their clients, this requirement is unworkable because
potential clients would be required to sign this contract
before the advisory relationship actually begins.\57\
---------------------------------------------------------------------------
\57\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 8 (Jun. 17, 2015) (written
testimony of Jack Haley, Exec. Vice President, Fidelity Invs.).
---------------------------------------------------------------------------
Summary of key concerns
Based on overwhelming testimony from a diverse group of
stakeholders, the Committee has concluded the DOL proposal
would disrupt advisory relationships, contains a multitude of
technical shortcomings, and would bring about a number of
unacceptable consequences. There are three general criticisms:
(1) if finalized, the proposal would restrict access to
affordable financial advice for lower- and middle-income
Americans; (2) if finalized, the proposal would make it harder
for employers (especially small businesses) to set up
retirement plans; and (3) DOL's rushed and uncoordinated
process resulted in an unworkable proposal. DOL received
comment letters from stakeholders and Congress reflecting these
concerns.
Restricted access to advice
The proposed regulation will have the net effect of locking
lower- and middle-income investors out of the advice
market.\58\ Advisors should have a legal duty to act in the
``best interests'' of their clients; however, ``fiduciary''
status would result in the legal prohibition of most
transactions because of how the advisor is compensated.\59\ At
a HELP Subcommittee hearing in June 2015, Mr. Kent Mason,
Partner of Davis and Harman LLP, testified to this effect:
---------------------------------------------------------------------------
\58\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 8 (Jun. 17, 2015) (written
testimony of Kent Mason, Partner, Davis & Harman LLP).
\59\Id. at 3, 4.
The framework set up by the DOL could work
conceptually, but in its current form, it would, like
the original 2010 proposal, cut off the option for low
and middle-income individuals and small businesses to
receive personalized investment assistance, even if
that assistance is in the best interest of the
recipient.\60\
---------------------------------------------------------------------------
\60\Id. at 5.
DOL claims its goal is not to eliminate commission-based
accounts,\61\ but failed to adequately rectify this gaping
inadequacy in the proposal. For example, the BIC exemption--the
main exemption that would be used--is too complex and
ultimately unusable.\62\ Specifically, while the BIC exemption
permits advisors to continue to receive commissions, there are
several onerous disclosure and information-gathering
requirements that will increase costs, which will be passed on
to investors or make continued advice to small- and mid-size
accounts unaffordable and thereby unavailable.\63\ At the same
hearing, Mr. Dean Harman, CFP, Managing Director at Harman
Wealth Management, stated:
---------------------------------------------------------------------------
\61\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 5 (Jun. 17, 2015) (written
testimony of The Hon. Thomas E. Perez, U.S. Sec'y, Dept. of Labor).
\62\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 10 (Jun. 17, 2015) (written
testimony of Dean Harman, CFP, Managing Dir., Harman Wealth
Management).
\63\Id. at 14.
The DOL has created a new exemption, [the BIC
exemption or BICE] . . . Unfortunately, BICE has missed
the mark and, as currently proposed, would lead to the
same unwanted consequence as the 2010 proposal . . . by
hugely increasing the burdens on financial advisors and
financial institutions.\64\
---------------------------------------------------------------------------
\64\Id. at 15.
Even more troubling, an advisor and client would need to
have a signed contract prior to any meaningful conversation. At
the same hearing, Mr. Jack Haley, Executive Vice President of
Fidelity Investments, summarized the consequences of this
---------------------------------------------------------------------------
proposed rule:
Today, we are able to help these workers by
discussing potential product and service offerings with
them. The proposed DOL exemption would require a signed
contract before a conversation could even occur. And
since our customers speak to different phone reps each
time they call, the rule would require each of our
customers to have a signed contact with each of our
phone reps in order to get answers to these basic
questions. For Fidelity, requiring nearing 25 million
customers to sign contracts before we can continue to
service them would be a significant impediment to
ongoing engagement with them, potentially suppressing
their savings levels and retirement security.\65\
---------------------------------------------------------------------------
\65\Haley, supra note 57, at 8.
The exemption imposes burdensome new disclosure and data
collection requirements on investment advisors.\66\ However,
the exemption would only cover recommendations with respect to
limited categories of investments; fiduciaries could not
recommend real estate, securities futures, or some non-publicly
traded securities, limiting investor options.\67\ The exemption
also requires reporting and prediction of all direct and
indirect compensation for recommended investments, costs for
competing alternative products, and cost projections at one-,
five-, and ten-year intervals.\68\
---------------------------------------------------------------------------
\66\Proposed Best Interest Contract Exemption, 80 Fed. Reg. at
21987.
\67\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. 5 (Dec. 2, 2015) (written testimony of Jules
Gaudreau, Jr., ChFC, CIC, President, The Gaudreau Group, Inc.).
\68\Proposed Best Interest Contract Exemption, 80 Fed. Reg. at
21985.
---------------------------------------------------------------------------
The Committee has heard extensive witness testimony from
advisors and other experts explaining why these requirements
are unworkable. For example, at a June 17, 2015, HELP
Subcommittee hearing, Dr. Brian Reid, Ph.D. Chief Economist,
Investment Company Institute, testified:
The Best Interest Contact Exemption is prohibitively
costly, in addition to being convoluted and unworkable.
Brokers subject to the Exemption's many new
limitations, burdens, and costs, as well as increased
exposure liability, are not likely to work for less
compensation, as the DOL presumes.\69\
---------------------------------------------------------------------------
\69\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. 4 (Jun. 17, 2015) (written
testimony of Dr. Brian Reid, Ph.D., Chief Economist, Inv. Co. Inst.).
---------------------------------------------------------------------------
At the same hearing, Mr. Mason asserted:
Under the DOL proposal, financial institutions would
be prohibited from providing any specific assistance to
individuals seeking help with the rollover and
distribution process. This is the case in large part
because any financial institution providing IRA
services would have a conflict of interest with respect
to advice regarding the rollover decision, thus
creating a prohibited transaction. Most read the BIC
exemption in the re-proposal as not covering this type
of assistance, thus rendering the assistance
categorically prohibited. Others read the BIC exemption
as technically applicable to this assistance, but
effectively unavailable because of the exemption's
unworkable conditions. Either interpretation denies
assistance to many in need of help in navigating the
retirement savings options that exist after termination
of employment. Among many unfortunate consequences,
this would cause a drastic curtailment of call center,
brokerage, and other assistance to those terminating
employment, leading to greatly increased leakage of
assets from the retirement system.\70\
---------------------------------------------------------------------------
\70\Mason, supra note 58, at 8.
Mr. Jules Gaudreau, Jr. ChFC, CIC, President of The
Gaudreau Group, Inc., at a December 2, 2015, HELP Subcommittee
---------------------------------------------------------------------------
hearing echoed these concerns:
It is, therefore, important to make sure that U.S.
retirement savings and tax policies encourage
individuals to take personal responsibility for the
need to save to protect their financial futures. It is
also important to be sure that the rules in place to
protect these savers and savings do not so burden the
mechanisms for saving that the rules themselves become
a barrier to achieving the goal of post-retirement
financial security.\71\
---------------------------------------------------------------------------
\71\Gaudreau, supra note 67, at 3.
There is also concern that the disclosure requirements will
overwhelm investors with the volume of fine print, resulting in
confusion or functional non-disclosure.\72\ Cumulatively, these
burdensome requirements will serve to discourage savings,
ultimately harming low- and middle-income savers. Finally,
fiduciaries of employee benefit plans would continue to be
subject to the DOL enforcement regime, while aggrieved private
parties could sue IRA fiduciaries under state contract law,
empowering the plaintiffs' bar.\73\
---------------------------------------------------------------------------
\72\Id. at 4.
\73\Proposed Best Interest Contract Exemption, 80 Fed. Reg. at
21985; Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. 7 (Dec. 2, 2015) (written testimony of the
Hon. Bradford Campbell, Counsel, Drinker Biddle & Reath LLP).
---------------------------------------------------------------------------
Fewer employer-provided retirement plans
Small business owners provide nearly half a trillion
dollars in retirement savings for 9 million households.\74\
Employers are very concerned that the new rule makes it much
harder, or perhaps impossible, for small businesses to set up
retirement plans and for plan participants to receive advice.
During the June 17, 2015, HELP Subcommittee hearing, Dr. Brian
Reid, Ph.D., Chief Economist, Investment Company Institute,
warned:
---------------------------------------------------------------------------
\74\U.S. Chamber of Commerce, Locked Out of Retirement: The Threat
to Small Business Retirement Savings (Jun. 9, 2015), http://
www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/US-Chamber-
Locked-Out-of-Retirement-White-Paper.pdf.
Research shows that investors with access to advice
have more diversified portfolios and take on more
appropriate levels of risk than those who do not
receive advice or information. Indeed, in its
justification of an earlier rule change, the DOL said
that retirement investors who do not receive investment
advice are twice as likely to make poor investment
choices as those who do receive that advice. The
benefits of advice--and, conversely, the harm of losing
access to advice--are significant.\75\
---------------------------------------------------------------------------
\75\Reid, supra note 69, at 6.
At the same hearing, Mr. Jack Haley, Executive Vice
---------------------------------------------------------------------------
President of Fidelity Investments, concurred:
Under the DOL proposal, access to affordable
financial help will be effectively prohibited--even
when it is the in investor's best interest. Small
businesses and lower- and middle-income investors will
be harmed the most. . . . The proposed DOL rule
specifically prohibits service providers from assisting
small businesses. The result would have a devastating
impact on retirement coverage and savings for millions
of workers employed by small businesses across the
country.\76\
---------------------------------------------------------------------------
\76\Haley, supra note 57, at 3, 6.
Additionally, DOL's proposed rule holds large and small
businesses to different standards, with greater restrictions
and additional burdens placed on small businesses. At a
December 2, 2015, HELP Subcommittee hearing, Ms. Rachel Doba,
President of DB Engineering, LLC, voiced concerns about the
effects of the more stringent rules in DOL's proposal on her
---------------------------------------------------------------------------
small business and employees:
DOL seems to believe that small business owners, such
as me, are not as sophisticated as large businesses,
and therefore, need additional protections. The
validity of this rationale is based on faulty
assumptions, and does not justify discriminatory
treatment. When I work with my financial advisor, I am
aware that he is providing a service for a fee and
selling a product. I would not be able to run a
successful business if I were not able to understand
when I am involved in a sales discussion--particularly,
if it follows a basic disclosure that an advisor is
selling a proprietary financial product, that the
advisor is paid to see the product, and the advisor is
not providing fiduciary advice. . . . The assumption
that small plans, participants and IRA owners cannot
understand the difference between sales and advice does
not match my real world experience. The Department can
protect participants, IRA owners, and small plans with
the same kind of disclosures that it requires of large
plans under the large plan carve out, but without
eliminating their right to choose the services and
products that best fit their needs.\77\
---------------------------------------------------------------------------
\77\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. 5 (Dec. 2, 2015) (written testimony of
Rachel Doba, President, DB Engineering, LLC).
At the same hearing, the Honorable Brad Campbell, Counsel,
Drinker Biddle & Reath LLP, and former U.S. Assistant Secretary
of Labor for Employee Benefits, also warned about the potential
detrimental effects of DOL's proposal on small businesses,
saying, ``Small plans and small-account IRA owners may be most
in need of basic investment advice, but they would be least
likely to be served by the Proposal due to the increased
compliance costs and increased legal liability risks it
unnecessarily creates.''\78\
---------------------------------------------------------------------------
\78\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Employment, Labor, and Pensions of the H. Comm. on Educ. and
the Workforce, 114th Cong. 5 (Dec. 2, 2015) (written testimony of the
Hon. Bradford Campbell, Counsel, Drinker Biddle & Reath LLP).
---------------------------------------------------------------------------
Because of the complicated new requirements, institutions
providing retirement plans would be prohibited from offering
assistance to small business plan sponsors in selecting
investment options to offer their employees. While public
policy should encourage employers to help workers save for
retirement, it is counterproductive for DOL to refuse to
provide an exemption for advice provided to small businesses.
Even worse, the DOL proposal actually will drive up costs
for small businesses, while shielding larger businesses from
the same costs. The proposal requires that advisors to plans
with fewer than 100 participants or less than $100 million in
plan assets assume fiduciary status, with the attendant burdens
and costs passed onto the small business.\79\ However, larger
plans do not have this requirement. To continue to provide
services to small businesses, advisors will either need to
increase fees or qualify for an exemption. Ms. Rachel Doba,
provided further testimony to this effect at the December 2,
2015, HELP Subcommittee hearing:
---------------------------------------------------------------------------
\79\Definition of the Term ``Fiduciary,'' 80 Fed. Reg. at 12957.
Because advisors to small businesses are not carved
out of the fiduciary definition, they must change their
fee arrangements, or qualify for a special rule called
an ``exemption'' in order to provide services on the
same terms [as] before. . . . There are certain
exceptions to these new rules, called ``prohibited
transaction exemptions,'' but as DOL has proposed the
new rules, the exemptions generally won't help
financial advisors who are working with small
businesses to set up plans.\80\
---------------------------------------------------------------------------
\80\Doba, supra note 77, at 6.
However, while these exemptions apply for IRAs, it is not
clear that the exemption will apply for other tax-preferred
vehicles frequently used by small businesses.\81\ Echoing
similar concerns, the National Federation of Independent
Business sent a letter to DOL noting its concern that advisors
will no longer provide advice to small businesses that
establish retirement plans because the proposed regulation
could prohibit (or make cost-prohibitive) the arrangements
currently prevalent.\82\ Additionally, the Small Business
Administration's Office of Advocacy submitted a comment letter
to the Department warning, ``the proposed rule would likely
increase the [advisors'] costs and burdens associated with
serving smaller plans . . . [and] could limit financial
advisors' ability to offer savings and investment advice to
clients . . . ultimately lead[ing] advisors to stop providing
retirement services to small businesses.''\83\
---------------------------------------------------------------------------
\81\Sec. 102 of Reorganization Plan No. 4 of 1978, 43 Fed. Reg. at
47713.
\82\Letter from Amanda Austin, Vice President, Public Policy, Nat'l
Fed'n of Indep. Bus. to the Emp. Benefits Sec. Admin. (May 5, 2015),
http://www.dol.gov/ebsa/pdf/1210-AB32-2-00039.pdf.
\83\Comment letter from the Small Bus. Admin's Office of Advocacy
5, 6 (Jul. 17, 2015),
http://www.dol.gov/ebsa/pdf/1210-AB32-2-00403.pdf.
---------------------------------------------------------------------------
Procedural concerns
DOL's process in developing the rule and considering
industry comments has been called into question. Through
oversight inquiries and a request for an extended comment
period, the Committee examined the process that led to the
proposal.
The Committee also has procedural concerns with the
proposed rule. According to some estimates, the average OMB
review for DOL proposals is nearly 120 days.\84\ However, the
2015 NPRM was only in the OMB formal review process for less
than half the average time (only 50 days). This shorter
timeframe indicates the administration has not adequately
considered stakeholder concerns. At the HELP Subcommittee's
June 17, 2015, hearing, Mr. Kent Mason explained DOL's
defective process:
---------------------------------------------------------------------------
\84\Meagan Leonhardt, DOL Fiduciary Rule Released Publicly (Apr.
13, 2015), http://wealthmanagement.com/industry/dol-fiduciary-rule-
released-publicly.
OMB's 50-day review of the re-proposal was
startlingly brief:
The review period was almost a month shorter
than the next shortest review period for any
significant retirement regulatory proposal in the last
10 years.
It was less than half the average review
period of other significant retirement regulatory
proposals in the last 10 years (which was 109 days).
Equally startling is that the review period
after OMB received significant public input was
actually just a few days. For example, a critical
meeting to discuss new information was held on April 9,
2015, and the DOL proposal was issued on April 14,
2015, a mere five days later.\85\
---------------------------------------------------------------------------
\85\Mason, supra note 58, at 11.
Additionally, the proposed rule provided the public less
time to review and offer feedback than the department's 2010
proposal (90 days versus 104 days respectively). A number of
letters requesting an extension of the comment period were
circulated, including a letter from Education and the Workforce
Committee Republicans.\86\ Finally, the 2015 NPRM provides for
an eight-month transition period between final approval and the
effective date of the new rules. According to stakeholders,
eight months is insufficient to overhaul business operations
and data collection systems necessary to comply with the
requirements of both the 2015 NPRM and the primary exemption--
the BIC exemption.\87\
---------------------------------------------------------------------------
\86\Letter from the Hon. John Kline, Chairman, H. Comm. on Educ.
and the Workforce, et al to the Hon. Thomas E. Perez, Sec'y, Dep't of
Labor (May 29, 2015), http://edworkforce.house.gov/uploadedfiles/05-29-
15-dol-fiduciary-comment-extension.pdf.; See also, e.g., Letter from
the Hon. Frederica S. Wilson, et al to the Hon. Thomas Perez, Sec'y,
Dep't of Labor (May 6, 2015), http://wealthmanagement.com/site-files/
wealthmanagement.com/files/uploads/2015/02/
Fiduciary%20Rule%20Letter%20to%20Secretary%20Perez.pdf (Letter from 18
House Democrats).
\87\Mason, supra note 58, at 10.
---------------------------------------------------------------------------
Congressional comment letters
The 2015 NPRM received thousands of comments, including
numerous letters from Members of Congress.\88\ Notably, 46
House Democrats signed a letter led by HELP Subcommittee
Ranking Member Polis (D-CO) calling for publication of the
revised rule prior to finalizing, as well as a supplemental
comment period.\89\ A number of other Democratic letters have
expressed concerns that the current proposal could reduce
access to investment advice for both small businesses and low-
and middle-income individuals.\90\ In all, over half of House
Democrats have signed letters questioning the DOL's proposal.
---------------------------------------------------------------------------
\88\Comments received through September 24, 2015, are published on
EBSA's website,
http://www.dol.gov/ebsa/regs/cmt-1210-AB32-2.html.
\89\See, e.g., Letter from the Hon. Jared Polis, et al to the Hon.
Thomas E. Perez, Sec'y, Dep't of Labor (Oct. 30, 2015), http://
df2d4c59ccf47b6bc124-
2951e9520e07371e6076e0c8af900fc2.r54.cf5.rackcdn.com/wp-content/
uploads/Secretary-Perez-Fiduciary-Comment-Period-Letter-10-30-15.pdf.
\90\Letter from the Hon. Gwen Moore, et al to the Hon. Thomas E.
Perez, Sec'y, Dep't of Labor (Sept. 24, 2015) (on file with the
Committee).
---------------------------------------------------------------------------
On July 21, 2015, every Republican member of the Committee
on Education and the Workforce signed a comment letter calling
for the proposal to be withdrawn, highlighting testimony from a
hearing held by the HELP Subcommittee on June 17, 2015.\91\
This comment letter also explained the Committee's longstanding
interest in pursuing a responsible best interest standard.
---------------------------------------------------------------------------
\91\Letter from the Hon. John Kline, Chairman, H. Comm. on Educ.
and the Workforce, et al to the Hon. Thomas E. Perez, Sec'y, Dep't of
Labor (Jul. 21, 2015), http://edworkforce.house.gov/uploadedfiles/7-21-
15---dol--fiduciary--rule.pdf.
---------------------------------------------------------------------------
H.R. 4293 AND H.R. 4294: BIPARTISAN BILLS ENHANCING RETIREMENT SECURITY
After the HELP Subcommittee's June 17, 2015, hearing,\92\ a
number of other committees examined the rule, including the
House Committee on Financial Services\93\ and the House
Committee on Ways and Means.\94\ On November 5, 2015, HELP
Subcommittee Chairman Roe led a group of bipartisan lawmakers
in announcing their intention to introduce a substantive
alternative to the DOL's proposed fiduciary regulation.\95\
Subsequently, two complementary bills were introduced on
December 18, 2015. H.R. 4293 (ARAPA) amends ERISA, while H.R.
4294 (SAVERS Act) adds similar provisions in the Code. The
technical provisions of this legislation were described supra.
---------------------------------------------------------------------------
\92\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Employment, Labor, and Pensions of the H. Comm. on
Educ. and the Workforce, 114th Cong. (Jun. 17, 2015).
\93\Preserving Retirement Security and Investment Choices for All
Americans: Joint Hearing Before the Subcomms. on Oversight and
Investigations and Capital Markets and Government Sponsored Enterprises
of the H. Comm. on Financial Services, 114th Cong. (Sept. 10, 2015).
\94\Hearing on the Department of Labor's Proposed Fiduciary Rule:
Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways and
Means, 114th Cong. (Sept. 30, 2015).
\95\Press Release, H. Comm. on Educ. and the Workforce, Bipartisan
House Members Outline Legislative Principles to Ensure Retirement
Advisors Protect Clients' Best Interests (Nov. 5, 2015), http://
edworkforce.house.gov/news/documentsingle.aspx?DocumentID=399747.
---------------------------------------------------------------------------
The legislation reflects the sponsors shared commitment to
preserving access to affordable retirement advice for workers,
retirees, and small business owners. More specifically, the
legislation embodies the following principles:
Promoting families and individuals saving for a
financially-secure retirement is an essential public policy
good.
Retirement advisors must serve in their clients'
best interests and must be required to do so.
Retirement advisors must deliver clear, simple,
and relevant disclosure of material conflicts, including
compensation received and all investment fees to individuals
saving for retirement.
Public policies must protect access to
investment advice and education for low- and middle-income
workers and retirees.
Public policies should never deny individuals
the financial information they need to make informed decisions.
Investor choice and consumer access to all
investment services--such as proprietary products, commission-
based sales, and guaranteed lifetime income--should be
preserved in a way that does not pick winners and losers.
Small business owners should have access to the
financial advice and products they need to establish and
maintain retirement plans and help workers save for retirement.
At their core, the bipartisan legislative proposals achieve
DOL's stated goal of ensuring that retirement advisors act in
their clients' best interests. However, unlike the DOL's
proposal, the bills effectively balance this higher standard
with the need to protect access to affordable retirement advice
for low- and middle-income workers and retirees.
Conclusion
H.R. 4294, the Strengthening Access to Valuable Education
and Retirement Support Act of 2015, enhances retirement
security without the pitfalls of the recent DOL proposed
regulation amending the regulatory definition of ``fiduciary''
in ERISA. The bill prohibits DOL from implementing its proposed
regulation without affirmative Congressional approval. The bill
also updates current law to ensure that all financial
professionals providing personalized advice about investments,
distributions, or the use of other fiduciaries are legally
required to act in the best interest of their customers.
However, unlike the DOL proposed regulation, the bill ensures
individual and small businesses have continued access to
affordable retirement advice.
Section-by-Section
The following is a section-by-section analysis of the
Amendment in the Nature of a Substitute offered by Rep. Carter
and reported favorably by the Committee.
Section 1. Provides the short title is the ``Strengthening
Access to Valuable Education and Retirement Support Act of
2015.''
Section 2. Describes the purpose of the Act to provide that
financial advisors that violate the prohibited transaction
rules under the Internal Revenue Code of 1986 or breach the
best interest standard for the provision of investment advice
are subject to liability under the Code.
Section 3. Amends the definition of ``investment advice''
under the tax code; exempts certain transactions from tax code
prohibitions; prescribes effective dates and transition rules.
Explanation of Amendments
The amendments, including the amendment in the nature of a
substitute, are explained in the body of this report.
Application of Law to the Legislative Branch
Section 102(b)(3) of Public Law 104-1 requires a
description of the application of this bill to the legislative
branch. H.R. 4294, the Strengthening Access to Valuable
Education and Retirement Support Act of 2015 (SAVERS Act),
prohibits the Department of Labor (DOL or department) from
implementing its proposed regulation amending the regulatory
definition of ``fiduciary'' under the Employee Retirement
Income Security Act of 1974 (ERISA) and the Internal Revenue
Code of 1986 (Code), unless Congress affirmatively approves the
final rule. Instead, the bill updates current law to ensure
that all financial professionals providing personalized advice
about investments, distributions, or the use of other
fiduciaries are legally required to act in the best interest of
their customers. However, unlike the DOL proposed regulation,
the SAVERS Act ensures low- and medium-income savers and small
businesses have continued access to affordable retirement
advice.
Unfunded Mandate Statement
Section 423 of the Congressional Budget and Impoundment
Control Act (as amended by Section 101(a)(2) of the Unfunded
Mandates Reform Act, P.L. 104-4) requires a statement of
whether the provisions of the reported bill include unfunded
mandates. This issue is addressed in the CBO letter.
Earmark Statement
H.R. 4294 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of House Rule XXI.
Roll Call Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee Report to include for
each record vote on a motion to report the measure or matter
and on any amendments offered to the measure or matter the
total number of votes for and against and the names of the
Members voting for and against.
Statement of General Performance Goals and Objectives
In accordance with clause (3)(c) of House Rule XIII, the
goals of H.R. 4294 are to reduce the federal footprint and
restore local control of education, while empowering parents
and education leaders to hold schools accountable for
effectively teaching students.
Duplication of Federal Programs
No provision of H.R. 4294 establishes or reauthorizes a
program of the Federal Government known to be duplicative of
another Federal program, a program that was included in any
report from the Government Accountability Office to Congress
pursuant to section 21 of Public Law 111-139, or a program
related to a program identified in the most recent Catalog of
Federal Domestic Assistance.
Disclosure of Directed Rule Makings
The committee estimates that enacting H.R. 4294 does not
specifically direct the completion of any specific rule makings
within the meaning of 5 U.S.C. 551.
Statement of Oversight Findings and Recommendations of the Committee
In compliance with clause 3(c)(1) of rule XIII and clause
2(b)(1) of rule X of the Rules of the House of Representatives,
the committee's oversight findings and recommendations are
reflected in the body of this report.
New Budget Authority and CBO Cost Estimate
With respect to the requirements of clause 3(c)(2) of rule
XIII of the Rules of the House of Representatives and section
308(a) of the Congressional Budget Act of 1974 and with respect
to requirements of clause 3(c)(3) of rule XIII of the Rules of
the House of Representatives and section 402 of the
Congressional Budget Act of 1974, the committee has received
the following estimate for H.R. 4294 from the Director of the
Congressional Budget Office:
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 20, 2016.
Hon. John Kline,
Chairman, Committee on Education and the Workforce,
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 Noah
Meyerson.
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, would amend 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 also would add a new
statutory exemption related to investment advice that a
fiduciary can provide to those 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.
On April 6, 2016, the Department of Labor issued new
regulations relating to investment advice within pension and
retirement plans; those regulations are sometimes referred to
as the ``fiduciary rule.'' H.R. 4294 would prevent those or any
similar regulations from becoming effective unless a bill or
joint resolution approving them was passed within 60 days of
enactment of H.R. 4294.
The staff of the Joint Committee on Taxation (JCT)
estimates that the bill would have a negligible effect on
revenues over the 2016-2026 period. 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 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.
Committee Cost Estimate
Clause 3(d)(1) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison of the
costs that would be incurred in carrying out H.R. 4294.
However, clause 3(d)(2)(B) of that rule provides that this
requirement does not apply when the committee has included in
its report a timely submitted cost estimate of the bill
prepared by the Director of the Congressional Budget Office
under section 402 of the Congressional Budget Act.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, 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[.],
(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
(25) any transaction, including a contract for
service, between a person providing investment advice
described in subsection (e)(3)(B) and the advice
recipient in connection with such investment advice,
if--
(A) no more than reasonable compensation is
paid (as determined under section 4975(d)(2))
for such investment advice,
(B) in a case in which the investment advice
is based on a limited range of investment
options (which may consist, in whole or in
part, of proprietary products), such
limitations, including a clearly-stated notice
that the same or similar investments may be
available at a different cost (greater or
lesser) from other sources), shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice,
(C) in a case in which the investment advice
may result in variable compensation to the
person providing the investment advice (or any
affiliate of such person), the receipt of such
compensation, including a clearly-stated notice
that the same or similar investments may be
available at a different cost (greater or
lesser) from other sources, shall be clearly
disclosed to the advice recipient (within the
meaning of subsection (e)(11)(C)), and
(D) in any case in which a person who, acting
in good faith and with reasonable diligence,
makes an error or omission in disclosing the
information specified in subparagraphs (B) or
(C), 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.
(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 rolled over or otherwise
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
rolled over or otherwise
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
there is no intent for you 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 who 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 and
rollover 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, including a clearly-stated
notice that the same or similar
investments may be available at a
different cost (greater or lesser) from
other sources, are clearly disclosed to
the advice recipient prior to any
transaction based on the
recommendation, 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, including a
clearly-stated notice that the same or
similar investments may be available at
a different cost (greater or lesser)
from other sources, is clearly
disclosed to the advice recipient prior
to any transaction based on the
recommendation.
The notices provided pursuant to clauses (i)
and (ii) shall only state the following: ``The
same or similar investments may be available at
a different cost (greater or lesser) from other
sources.''.
(C) Clear disclosure of variable
compensation.--For purposes of subparagraph
(B)(ii), variable compensation is clearly
disclosed if notification is provided at any
time prior to a transaction based on the
person's recommendation, in a manner calculated
to be understood by the average individual, of
the following:
(i) A notice in writing, including a
clearly-stated notice that the same or
similar investments may be available at
a different cost (greater or lesser)
from other sources, that the person
providing the recommendation (or its
affiliate) may receive varying amounts
of fees or other compensation with
respect to such transaction.
(ii) A description of any fee or
other compensation that is directly
payable to the person (or its
affiliate) from 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 indirect compensation
that may be paid 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 of such ranges of
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) 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 advice 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).
(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.
* * * * * * *
MINORITY VIEWS
After decades of hard work, many middle-class Americans
seek out financial advice on how to invest their retirement
nest egg. This is one of the biggest financial decisions they
will make in their lives. When making it, they often rely on
the financial advice they are given and implicitly trust that
it is in their best interest. Unfortunately, that's not always
the case. Loopholes in a decades-old regulation allow
unscrupulous advisors to provide ``conflicted advice'' and put
their financial interests ahead of their retirement clients'.
Conflicted advice costs retirement plan participants $17
billion in losses every year and could result in a loss of
almost a quarter of an individual's savings over a 35-year
period.\1\ Rather than taking steps to fix this problem, H.R.
4294 perpetuates this unacceptable status quo.
---------------------------------------------------------------------------
\1\Council of Economic Advisors, The Effects of Conflicted
Investment Advice on Retirement Savings 17-18 (Feb. 2015) ; available
at: https://www.whitehouse.gov/sites/default/files/docs/
cea_coi_report_final.pdf.
---------------------------------------------------------------------------
H.R. 4294 also includes an unnecessary, constitutionally-
suspect procedural mechanism that prohibits the Department of
Labor's (DOL's) final conflict of interest rule from taking
effect unless it is approved by Congress within 60 days. This
``affirmative approval'' process is similar to the one
enumerated in the Regulations from the Executive in Need of
Scrutiny (REINS) Act. The REINS Act is a central component of
the Republican-led Congress's hyper-partisan, anti-regulatory
agenda. The Coalition for Sensible Safeguards (CSS), an
alliance of over 150 labor, scientific, research, good
government, faith, community, health, environment, and public
interest groups, urged opposition to H.R. 4294 and another
bill, H.R. 4293, which is nearly identical to H.R. 4294. In
crafting a so-called alternative to the DOL's conflict of
interest rule, House Republicans decided to advance two
companion bills: H.R. 4294 amends the Internal Revenue Code
(IRC), which governs tax-favored retirement savings such as
Individual Retirement Accounts (IRAs). H.R. 4293 amends the
Employee Retirement Income Security Act (ERISA; P.L. 93-406),
which governs retirement plans of private employers. The core
provisions of both bills are nearly identical, and the
Education and Workforce Committee considered H.R. 4294 and H.R.
4293 during the same mark-up.
Many groups, including CSS, registered their opposition to
both bills. CSS cited H.R. 4293 and H.R. 4294's procedural
requirement as a ``threat to our democratic process.''\2\ In
its opposition letter, the CSS said using ``a REINS-like
mechanism to overturn this particular rule is unprecedented.
These bills' passage will only embolden radical members of both
chambers to attempt this scheme to derail other rules,
potentially jeopardizing crucial public health and safety and
environmental protections.''\3\
---------------------------------------------------------------------------
\2\Coalition for Sensible Safeguards, ``Mark-up on H.R. 4293, the
Affordable Retirement Advice Protection Act and H.R. 4294,
Strengthening Access to Valuable Education and Retirement Support
Act,'' (Feb. 2016); available at: http://www.sensiblesafeguards.org/wp-
content/uploads/CSS-letter-on-H.R.-4293-4294-.pdf.
\3\Id.
---------------------------------------------------------------------------
In addition to the CSS, a diverse stakeholder coalition
weighed in against H.R. 4294. That coalition includes: AARP,
AFL-CIO, Alliance for Retired Americans, American Federation of
State, County, and Municipal Employees (AFSCME), Association of
University Centers on Disabilities, Better Markets, Center for
Economic Justice, Center for Global Policy Solutions, Center
for Responsible Lending, The Committee for the Fiduciary
Standard, Consumer Action, Consumer Federation of America,
Consumers Union, Demos, Financial Planning Coalition,
International Association of Machinists and Aerospace Workers,
International Association of Sheet Metal, Air, Rail, and
Transportation Workers, International Brotherhood of Electrical
Workers, Leadership Conference on Civil and Human Rights, Main
Street Alliance, NAACP, National Active and Retired Federal
Employees Association (NARFE), National Committee to Preserve
Social Security and Medicare, National Consumers League,
National Council of La Raza, Pension Rights Center, Public
Citizen, Public Investors Arbitration Bar Association, Service
Employees International Union (SEIU), and U.S. PIRG.
H.R. 4294 ENABLES UNSCRUPULOUS ADVISORS TO CONTINUE TO EVADE FIDUCIARY
OBLIGATIONS AND PUT THEIR FINANCIAL INTERESTS AHEAD OF THEIR CLIENTS'
Enacted in 1974, ERISA describes the circumstances when a
person has a fiduciary obligation for rendering investment
advice.\4\ The DOL issued regulations in 1975 that further
defined such circumstances using a five-part test. Under the
regulations, to be held to ERISA's fiduciary standard with
respect to providing investment advice, an individual must: (1)
make recommendations on investing in, purchasing or selling
securities or other property, or give advice as to their value
(2) on a regular basis (3) pursuant to a mutual understanding
that the advice (4) will serve as a primary basis for
investment decisions, and (5) will be individualized to the
particular needs of the plan.\5\ Unless each of the five
elements of this test is satisfied for each time advice is
given, then an investment advisor is not treated as a
fiduciary.
---------------------------------------------------------------------------
\4\29 U.S.C. 1002(21).
\5\29 C.F.R. 2510.3-21(c), 40 Fed. Reg. 50843 (Oct. 1975);
available at: http://www/gpo.gov/fdsys/pkg/CFR-2011-title29-vo19/pdf/
CFR-2011-title29-vo19-sec2510-3-21.pdf.
---------------------------------------------------------------------------
This five-part test has not kept pace with the changed
retirement savings and planning landscape, and loopholes have
emerged that can be exploited. For instance, an unscrupulous
advisor providing individualized investment advice to a
retirement client about rolling over assets from an employer-
sponsored retirement plan--such as a 401(k)--to an Individual
Retirement Account (IRA) does not have to abide by a fiduciary
obligation. Neither does an advisor who provides retirement
savings advice on a one-time basis. As a result of this
deficient five-part test, certain advisors are able to provide
substandard advice and steer retirement clients toward
financial products with sky-high fees that are not in their
clients' best interest. Such products may enrich the advisor
yet insidiously erode the savings of workers and retirees. To
get away with this, so-called advisors can insert boilerplate
disclaimers in the fine print. As Secretary Perez has correctly
noted, ``the corrosive power of fine print and buried fees can
eat away like a chronic illness at a person's savings.''\6\
---------------------------------------------------------------------------
\6\Testimony of Secretary of Labor Thomas E. Perez before the
Health, Employment, Labor, and Pensions (HELP) Subcommittee of the
Education and Workforce Committee (June 2015); available at: http://
www.dol.gov/newsroom/congress/20150617_Perez.
---------------------------------------------------------------------------
Recognizing that the existing regulation is broken and in
desperate need of reform, the DOL undertook a rulemaking effort
to revise the definition of who is a fiduciary under the
Employee Retirement Income Security Act (ERISA) as a result of
giving investment advice. H.R. 4294 represents a deeply flawed
response to the DOL's conflict of interest rulemaking effort.
Rather than closing loopholes in the existing regulation that
enable unscrupulous advisors to offer substandard retirement
savings advice to middle-class Americans, the bill codifies
them.
Specifically, to qualify as a fiduciary under the
provisions of H.R. 4294, investment advice must be rendered for
a fee pursuant to 1) ``written acknowledgement'' of the
fiduciary obligation; or 2) ``a mutual agreement, arrangement,
or understanding'' that it is ``individualized'' to the client
and the client ``intends to materially rely'' on the advice.
However, under H.R. 4294, financial advisors would be able
to continue to avoid their fiduciary obligations just by
providing a written disclaimer that says the following:
This information is not individualized to you, and
there is no intent for you to materially rely on this
information in making investment and management
decisions.
This language mirrors the kind of boilerplate disclaimer
currently used by certain firms and advisors to avoid fiduciary
obligations. While Committee Democrats believe disclosures and
disclaimers are no substitute for a meaningful, enforceable
fiduciary standard, there is also research to suggest that, on
their own, disclosures and disclaimers can be ineffective and
even detrimental to clients:
According to an industry association study, ``two-
thirds of Americans with defined contribution (DC) plans or
IRAs admit to spending less than five minutes examining their
retirement plan disclosures--one in five say they rarely or
never read the disclosure paperwork at all.''\7\
---------------------------------------------------------------------------
\7\Life Insurance Management Research Association (LIMRA), ``Many
Americans Don't Fully Read Retirement Plan Disclosures; Few Know What
Fees they Pay,'' (August 2012); available at: http://www.limra.com/
Posts/PR/News_Releases/LIMRA_Study_Many_Americans_
Don_t_Fully_Read_Retirement_Plan
_Disclosures;_Few_Know_What_Fees_They_Pay.aspx.
---------------------------------------------------------------------------
Disclosures often fail to make clients aware of
the nature of their advisors' conflicts, let alone understand
the potential implications of such conflicts.\8\
---------------------------------------------------------------------------
\8\Department of Labor, ``Fiduciary Investment Advice, Regulatory
Impact Analysis,'' (April 2015); available at: http://www.dol.gov/ebsa/
pdf/conflictsofinterestria.pdf.
---------------------------------------------------------------------------
Disclosure of advisor conflicts can backfire since
clients can interpret disclosure of advisor conflicts as a sign
of honesty.\9\ In this case, disclosure may even be harmful to
workers and retirees seeking to invest their savings because
they could potentially create an illusion of fiduciary
protection.
---------------------------------------------------------------------------
\9\Id.
---------------------------------------------------------------------------
Committee Democrats believe H.R. 4294 includes two other
incredibly broad and ill-advised exemptions from fiduciary
responsibilities. According to the Financial Planning
Coalition,``firms and advisors will be allowed to provide an
unlimited amount of advice to their clients, as long as they
provide disclosure in writing that they are only providing the
advice in a `marketing or sales capacity' . . . In addition,
the bills allow for advisors to escape fiduciary duty by
claiming they made a `good-faith' error in their disclosure to
their clients.''\10\
---------------------------------------------------------------------------
\10\Financial Planning Coalition, ``H.R. 4293 and H.R. 4294 Would
Reduce Protections for Retirement Investors,'' (Jan. 2016); available
at:
https://filemanager.capwiz.com/filemanager/file-mgr/cfp/
2016_01_29_HR_4294_and_4293_Would_Reduce_Protection_for_Retirement_Inves
tors.pdf.
---------------------------------------------------------------------------
H.R. 4294 ESTABLISHES AN UNNECESSARY, CONSTITUTIONALLY-SUSPECT PROCESS
TO ENABLE THE REPUBLICAN-LED CONGRESS TO ASSERT VETO POWER OVER THE DOL
RULE
H.R. 4294 requires that Congress affirmatively approve the
DOL's final ``conflict of interest'' rule within 60 days after
the bill's enactment. If a bill or joint resolution is not
approved within 60 days, then H.R. 4294's provisions shall take
effect. The bill's ``affirmative approval'' requirement is akin
to the one specified in the REINS Act (H.R. 427). In July 2015,
the REINS Act was brought to the House floor for a vote. The
bill passed on a near party-line vote. Only 2 House Democrats
supported it.
Committee Democrats believe the bill's ``affirmative
approval'' mechanism is not necessary. Under the Congressional
Review Act (CRA), which was enacted as part of then-Speaker
Gingrich and House Republicans' so-called Contract with
America, Congress already possesses the authority to review and
nullify a rule. According to the Government Accountability
Office (GAO), the CRA ``gives Congress an opportunity to review
most rules before they take effect and to disapprove those
found to be too burdensome, excessive, inappropriate,
duplicative, or otherwise objectionable.''\11\
---------------------------------------------------------------------------
\11\United States Government Accountability Office, Testimony
Before the Subcommittee on Commercial and Administrative Law, House
Committee on Judiciary, ``Perspectives of 10 Years of Congressional
Review Act Implementation,'' (March 2006); available at: http://
www.gao.gov/new.items/d06601t.pdf.
---------------------------------------------------------------------------
Additionally, Committee Democrats share the concerns that
have been raised about the potential constitutionality of the
bill's ``affirmative approval'' mechanism. After the
Immigration and Naturalization Service (INS) suspended a
particular deportation, the agency was overruled by the U.S.
House of Representatives under certain provisions of the
Immigration and Nationality Act. In INS v. Chadha, the Supreme
Court found this House veto to be unconstitutional because
Congress was taking a legislative action, which had to be
passed by both houses of Congress and presented to the
President for approval in order to satisfy the bicameralism and
presentment clauses of the U.S. Constitution.\12\
---------------------------------------------------------------------------
\12\INS v. CHADHA, 462 U.S. 919 (1983).
---------------------------------------------------------------------------
The ``affirmative approval'' mechanism in H.R. 4294 may run
afoul of the Court's decision in Chadha, as either the House or
Senate--acting alone--could reject or not act upon the bill or
joint resolution. Such an outcome may raise similar ``one House
legislative veto'' concerns that the Court ruled to be
unconstitutional in Chadha.
DEMOCRATIC MOTION AND AMENDMENT
Ranking Member Scott offered a motion to indefinitely
postpone the mark-up, asserting it was premature for the
Committee to consider H.R. 4293 and H.R. 4294 prior to the
DOL's finalization of the conflict of interest rule. The motion
failed on a voice vote.
ROLL CALL VOTES ON FINAL PASSAGE
H.R. 4294 was reported by straight party-line votes of 22
ayes and 14 nays. No Democratic Committee Members voted in
favor of the bills.
CONCLUSION
Committee Democrats remain committed to responsible
solutions that help workers earn and collectively bargain for
decent wages, achieve a better balance between work and family
life, end workplace discrimination, and retire with security
and dignity. H.R. 4294 is not among these solutions.
Instead of reserving judgment on the DOL's final conflict
of interest rulemaking, the Majority rushed to mark-up these
deeply flawed, constitutionally-questionable bills. Committee
Democrats believe that we can do better. Workers and retirement
savers deserve better. They deserve fiduciary protections when
investing their hard-earned retirement savings; and,
regrettably, that's not what H.R. 4294 delivers.
For the reasons stated above, among others, Committee
Democrats unanimously opposed H.R. 4294 when the Committee on
Education and the Workforce considered them on February 2,
2016. We urge the full House of Representatives to do the same.
Robert C. ``Bobby'' Scott,
Ranking Member.
Joe Courtney.
Frederica S. Wilson.
Mark Pocan.
Raul M. Grijalva.
Mark DeSaulnier.
Susan A. Davis.
Jared Polis.
Alma S. Adams.
Marcia L. Fudge.
Mark Takano.
Hakeem S. Jeffries.
Suzanne Bonamici.
Ruben Hinojosa.
[all]