[House Report 115-371]
[From the U.S. Government Publishing Office]
115th Congress } { Rept. 115-371
HOUSE OF REPRESENTATIVES
1st Session } { Part 1
======================================================================
AFFORDABLE RETIREMENT ADVICE FOR SAVERS ACT
_______
October 25, 2017.--Ordered to be printed
_______
Ms. Foxx, 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. 2823]
[Including cost estimate of the Congressional Budget Office]
The Committee on Education and the Workforce, to whom was
referred the bill (H.R. 2823) to amend the Employee Retirement
Income Security Act of 1974 and 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 ``Affordable Retirement Advice for
Savers Act''.
SEC. 2. REPEAL OF FIDUCIARY DEFINITION RULEMAKING.
(a) In General.--The Fiduciary Definition rulemaking described in
subsection (b) is repealed and shall have no force or effect, and the
regulations and prohibited transaction exemptions amended or repealed
by such rulemaking are restored or revived as if such rulemaking had
not been issued.
(b) Fiduciary Definition Rulemaking.--The Fiduciary Definition
rulemaking described in this subsection consists of the following:
(1) The final rule of the Department of Labor titled
``Definition of the Term `Fiduciary'; Conflict of Interest
Rule--Retirement Investment Advice'' published April 8, 2016
(81 Fed. Reg. 20946).
(2) The ``Best Interest Contract Exemption'' published April
8, 2016 (81 Fed. Reg. 21002), and the technical correction
published July 11, 2016 (81 Fed. Reg. 44773).
(3) The ``Class Exemption for Principal Transactions in
Certain Assets Between Investment Advice Fiduciaries and
Employee Benefit Plans and IRAs'' published April 8, 2016 (81
Fed. Reg. 21089), and the technical correction published July
11, 2016 (81 Fed. Reg. 44784).
(4) The ``Amendment to Prohibited Transaction Exemption (PTE)
75-1, Part V, Exemptions From Prohibitions Respecting Certain
Classes of Transactions Involving Employee Benefit Plans and
Certain Broker-Dealers, Reporting Dealers and Banks'' published
April 8, 2016 (81 Fed. Reg. 21139).
(5) The ``Amendment to and Partial Revocation of Prohibited
Transaction Exemption (PTE) 86-128 for Securities Transactions
Involving Employee Benefit Plans and Broker-Dealers; Amendment
to and Partial Revocation of PTE 75-1, Exemptions From
Prohibitions Respecting Certain Classes of Transactions
Involving Employee Benefits Plans and Certain Broker-Dealers,
Reporting Dealers and Banks'' published April 8, 2016 (81 Fed.
Reg. 21181).
(6) The ``Amendments to Class Exemptions 75-1, 77-4, 80-83
and 83-1'' published April 8, 2016 (81 Fed. Reg. 21208).
(7) The ``Amendment to and Partial Revocation of Prohibited
Transaction Exemption (PTE) 84-24 for Certain Transactions
Involving Insurance Agents and Brokers, Pension Consultants,
Insurance Companies, and Investment Company Principal
Underwriters'' published April 8, 2016 (81 Fed. Reg. 21147).
SEC. 3. RULES RELATING TO THE PROVISION OF INVESTMENT ADVICE.
(a) Amendments to the Employee Retirement Income Security Act of
1974.--
(1) Definition of investment advice.--Section 3(21) of the
Employee Retirement Income Security Act of 1974 (29 U.S.C.
1002(21)) is amended by adding at the end the following:
``(C)(i) For purposes of clause (ii) of subparagraph (A), the term
`investment advice' means a recommendation communicated electronically,
on paper, or orally that--
``(I) relates to--
``(aa) the advisability of acquiring, holding,
disposing, or exchanging any moneys or other property
of a plan by the plan, plan participants, or plan
beneficiaries, including any recommendation whether to
take a distribution of benefits from such plan or any
recommendation relating to the investment of any moneys
or other property of such plan to be distributed from
such plan;
``(bb) the management of moneys or other property of
such plan, including recommendations relating to the
management of moneys or other property to be
distributed from such plan; or
``(cc) the advisability of retaining or ceasing to
retain a person who would receive a fee or other
compensation for providing any of the types of advice
described in this subclause; and
``(II) is rendered pursuant to--
``(aa) a written acknowledgment, provided
electronically or on paper, of the obligation of the
advisor to comply with section 404 with respect to the
provision of such recommendation; or
``(bb) a mutual agreement, arrangement, or
understanding, which may include limitations on scope,
timing, and responsibility to provide ongoing
monitoring or advice services, between the person
making such recommendation and the plan that such
recommendation is individualized to the plan and such
plan intends to materially rely on such recommendation
in making investment or management decisions with
respect to any moneys or other property of such plan.
``(ii) For purposes of clause (i)(II)(bb), any disclaimer of a mutual
agreement, arrangement, or understanding shall state only the
following: `This communication is not individualized to you, and you
are not intended to rely materially on this communication in making
investment or management decisions.'. Such disclaimer shall not be
effective unless such disclaimer is in writing and is communicated in a
clear and prominent manner and an objective person would reasonably
conclude that, based on all the facts and circumstances, there was not
a mutual agreement, arrangement, or understanding.
``(iii) For purposes of clause (i)(II)(bb), a communication shall not
be considered to be a recommendation made pursuant to a mutual
agreement, arrangement, or understanding, if such communication
contains the disclaimer required by clause (ii), and--
``(I) it is provided in conjunction with clear and prominent
disclosure in writing to a plan, plan participant, or
beneficiary that the person providing the communication is
doing so in its marketing or sales capacity, including any
communication regarding the terms and conditions of the
engagement of the person providing the communication, 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;
``(II) the person providing the communication is a current or
potential counterparty or service provider to the plan in
connection with any transaction based on the communication, but
only if--
``(aa) the plan is represented, in connection with
such transaction, by a plan fiduciary that is
independent of the person providing the communication,
and, except in the case of a 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)))),
independent of the plan sponsor; and
``(bb) prior to such transaction, the independent
plan fiduciary represents in writing to the person
providing the communication that it is aware that the
person has a financial interest in the transaction and
that it has determined that the person is not intending
to provide investment advice within the meaning of this
subparagraph or to otherwise act as a fiduciary to the
plan subject to section 404;
``(III) the person providing the communication is an employee
of any sponsoring employer or affiliate or employee
organization who provides the communication to the plan for no
fee or other compensation other than the employee's normal
compensation;
``(IV) the person providing the communication discloses in
writing to the plan fiduciary that the person is not
undertaking to provide investment advice as a fiduciary to the
plan subject to section 404 and the communication consists
solely of--
``(aa) making available to the plan, without regard
to the individualized needs of the plan, securities or
other property or investment products through a
platform or similar mechanism from which a plan
fiduciary may select or monitor investment
alternatives; or
``(bb) in connection with a platform or similar
mechanism described in item (aa)--
``(AA) identifying investment alternatives
that meet objective criteria specified by the
plan, such as criteria concerning expense
ratios, fund sizes, types of asset, or credit
quality;
``(BB) providing objective financial data and
comparisons with independent benchmarks to the
plan; or
``(CC) identifying a sample set of investment
alternatives based on the plan's stated
criteria in response to an inquiry from a plan
fiduciary;
``(V) the communication consists solely of valuation
information; or
``(VI) the communication consists solely of--
``(aa) information described in Department of Labor
Interpretive Bulletin 96-1 (29 C.F.R. 2509.96-1, as in
effect on January 1, 2015), regardless of whether such
education is provided to a plan or plan fiduciary or a
participant or beneficiary;
``(bb) information provided to participants or
beneficiaries regarding the factors to consider in
deciding whether to elect to receive a distribution
from a plan or an individual retirement plan (as
defined in section 7701(a)(37) of the Internal Revenue
Code of 1986) and whether to roll over such
distribution to a plan or an individual retirement plan
(as defined in section 7701(a)(37) of the Internal
Revenue Code of 1986), so long as any examples of
different distribution alternatives are accompanied by
all material facts and assumptions on which the
examples are based; or
``(cc) any additional information treated as
education by the Secretary.''.
(2) Exemption relating to investment advice.--Section 408(b)
of the Employee Retirement Income Security Act of 1974 is
amended by adding at the end the following:
``(21)(A) Any transaction, including a contract for service,
between a person providing investment advice described in
section 3(21)(A)(ii) and the advice recipient in connection
with such investment advice, and any transaction consisting of
the provision of such investment advice, if the following
conditions are satisfied:
``(i) No more than reasonable compensation is paid
(as determined under section 408(b)(2)) for such
investment advice.
``(ii) If the investment advice is based on a limited
range of investment options (which may consist, in
whole or in part, of proprietary products), such
limitations shall be clearly disclosed to the advice
recipient prior to any transaction based on the
investment advice in the form of a notice that only
states the following: `This recommendation is based on
a limited range of investment options, and the same or
similar investments may be available at a different
cost (greater or lesser) from other sources.'.
``(iii) If the investment advice may result in
variable compensation to the person providing the
investment advice (or any affiliate of such person),
the receipt of such compensation shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice. For
purposes of this subparagraph, clear disclosure of
variable compensation shall include, in a manner
calculated to be understood by the average individual,
each of the following:
``(I) A notice that states only the
following: `This recommendation may result in
varying amounts of fees or other compensation
to the person providing the recommendation (or
its affiliate), and the same or similar
investments may be available at a different
cost (greater or lesser) from other sources.'.
Any regulations or administrative guidance
implementing this subclause may not require
this notice to be updated more than annually.
``(II) A description of any fee or other
compensation that is directly or indirectly
payable to the person (or its affiliate) by the
advice recipient with respect to such
transaction (expressed as an amount, formula,
percentage of assets, per capita charge, or
estimate or range of such compensation).
``(III) A description of the types and ranges
of any compensation that are reasonably
expected to be directly or indirectly payable
to the person (or its affiliate) by any third
party in connection with such transaction
(expressed as an amount, formula, percentage of
assets, per capita charge, or estimate or range
of such compensation).
``(IV) Upon request of the advice recipient,
a disclosure of the specific amounts of
compensation described in clause (iii) that the
person will receive in connection with the
particular transaction (expressed as an amount,
formula, percentage of assets, per capita
charge, or estimate of such compensation).
``(B) No recommendation will fail to satisfy the conditions
described in clauses (i) through (iii) of subparagraph (A)
solely because the person, acting in good faith and with
reasonable diligence, makes an error or omission in disclosing
the information specified in such clauses, provided that the
person discloses the correct information to the advice
recipient as soon as practicable, but not later than 30 days
from the date on which the person knows of such error or
omission.
``(C) Any notice provided pursuant to a requirement under
clause (ii) or clause (iii)(I) of subparagraph (A) shall have
no effect on any other notice otherwise required without regard
to this title, and shall be provided in addition to, and not in
lieu of, any other such notice.
``(D) For purposes of this paragraph, the term `affiliate'
has the meaning given in subsection (g)(11)(B).''.
(b) Amendments to the Internal Revenue Code of 1986.--
(1) Exemption for investment advice which is best interest
recommendation.--Section 4975(d) of the Internal Revenue Code
of 1986 is amended by striking ``or'' at the end of paragraph
(22), by striking the period at the end of paragraph (23) and
inserting ``, or'', and by inserting after paragraph (23) the
following:
``(24) provision of investment advice by a fiduciary to a
plan, plan participant, or beneficiary with respect to the
plan, which is a best interest recommendation or a transaction
connected to such advice.''.
(2) Investment advice; best interest recommendation.--Section
4975(e) of such Code is amended by adding at the end the
following:
``(10) Investment advice.--
``(A) In general.--For purposes of this section, the
term `investment advice' means a recommendation,
communicated electronically, on paper, or orally,
that--
``(i) relates to--
``(I) the advisability of acquiring,
holding, disposing, or exchanging any
moneys or other property of a plan by
the plan, plan participants, or plan
beneficiaries, including any
recommendation whether to take a
distribution of benefits from such plan
or any recommendation relating to the
investment of any moneys or other
property of such plan to be distributed
from such plan;
``(II) the management of moneys or
other property of such plan, including
recommendations relating to the
management of moneys or other property
to be distributed from such plan; or
``(III) the advisability of retaining
or ceasing to retain a person who would
receive a fee or other compensation for
providing any of the types of advice
described in this subclause; and
``(ii) is rendered pursuant to--
``(I) a written acknowledgment,
provided electronically or on paper,
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 state only the
following: `This communication is not individualized to
you, and you are not intended to rely materially on
this communication 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), a communication
shall not be treated as a recommendation made pursuant
to a mutual agreement, arrangement, or understanding,
if such communication contains the disclaimer required
by subparagraph (B), and--
``(i) Seller's exception.--The communication
is provided in conjunction with clear and
prominent disclosure in writing to a plan, plan
participant, or beneficiary that the person
providing the communication is doing so in its
marketing or sales capacity, including any
communication regarding the terms and
conditions of the engagement of the person
providing the communication, 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) Certain counterparties or service
providers.--The person providing the
communication is a current or potential
counterparty or service provider to the plan in
connection with any transaction based on the
communication, but only if--
``(I) the plan is represented, in
connection with such transaction, by a
plan fiduciary that is independent of
the person providing the communication,
and, except in the case of a 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)))), 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 communication 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 communication is an
employee of any sponsoring employer or
affiliate or employee organization who provides
the communication 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 communication 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 communication
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 or
investment products through a platform
or similar mechanism from which a plan
fiduciary may select or monitor
investment alternatives; 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;
``(bb) providing objective
financial data and comparisons
with independent benchmarks to
the plan; or
``(cc) identifying a sample
set of investment alternatives
based on the plan's stated
criteria in response to an
inquiry from a plan fiduciary.
``(v) Valuation.--The communication consists
solely of valuation information.
``(vi) Financial education.--The
communication consists solely of--
``(I) information described in
Department of Labor Interpretive
Bulletin 96-1 (29 C.F.R. 2509.96-1, as
in effect on January 1, 2015),
regardless of whether such education is
provided to a plan or plan fiduciary or
a participant or beneficiary;
``(II) information provided to
participants or beneficiaries regarding
the factors to consider in deciding
whether to elect to receive a
distribution from a plan and whether to
roll over such distribution to a plan,
so long as any examples of different
distribution alternatives are
accompanied by all material facts and
assumptions on which the examples are
based; or
``(III) any additional information
treated as education by the Secretary.
``(11) Best interest recommendation.--For purposes of this
subsection--
``(A) In general.--The term `best interest
recommendation' means a recommendation--
``(i) for which no more than reasonable
compensation is paid (as determined under
subsection (d)(2));
``(ii) provided by a person acting with the
care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent
person would exercise based on--
``(I) the information obtained
through the reasonable diligence of the
person regarding factors such as the
advice recipient's age; and
``(II) any other information that the
advice recipient discloses to the
person in connection with receiving
such recommendation; and
``(iii) where the person places the interests
of the plan or advice recipient above its own.
``(B) Investment options; variable compensation.--A
best interest recommendation may include a
recommendation that--
``(i) is based on a limited range of
investment options (which may consist, in whole
or in part, of proprietary products), but only
if any such limitations shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice in
the form of a notice that only states the
following: `This recommendation is based on a
limited range of investment options, and the
same or similar investments may be available at
a different cost (greater or lesser) from other
sources.'; or
``(ii) may result in variable compensation to
the person providing the recommendation (or any
affiliate of such person), but only if the
receipt of such compensation shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice.
``(C) Clear disclosure of variable compensation.--For
purposes of this paragraph, clear disclosure of
variable compensation shall include, in a manner
calculated to be understood by the average individual,
each of the following:
``(i) A notice that states only the
following: `This recommendation may result in
varying amounts of fees or other compensation
to the person providing the recommendation (or
its affiliate), and the same or similar
investments may be available at a different
cost (greater or lesser) from other sources.'.
Any regulations or administrative guidance
implementing this clause may not require this
notice to be updated more than annually.
``(ii) A description of any fee or other
compensation that is directly or indirectly
payable to the person (or its affiliate) by the
advice recipient with respect to such
transaction (expressed as an amount, formula,
percentage of assets, per capita charge, or
estimate or range of such compensation).
``(iii) A description of the types and ranges
of any compensation that are reasonably
expected to be directly or indirectly payable
to the person (or its affiliate) by any third
party in connection with such transaction
(expressed as an amount, formula, percentage of
assets, per capita charge, or estimate or range
of such compensation).
``(iv) Upon request of the advice recipient,
a disclosure of the specific amounts of
compensation described in clause (iii) that the
person will receive in connection with the
particular transaction (expressed as an amount,
formula, percentage of assets, per capita
charge, or estimate of such compensation).
``(D) Definition of affiliate.--For purposes of this
paragraph, the term `affiliate' has the meaning given
in subsection (f)(8)(J)(ii).
``(E) Correction of certain errors and omissions.--A
recommendation shall not fail to be a best interest
recommendation solely because a person who, acting in
good faith and with reasonable diligence, makes an
error or omission in disclosing the information
specified in subparagraph (B), if the person discloses
the correct information to the advice recipient as soon
as practicable but not later than 30 days from the date
on which the person knows of such error or omission.
``(F) Special rule.--Any notice provided pursuant to
a requirement under subparagraph (B)(i) or subparagraph
(C)(i) shall have no effect on any other notice
otherwise required without regard to this title, and
shall be provided in addition to, and not in lieu of,
any other such notice.''.
(3) Failures relating to best interest recommendation.--
(A) Correction.--Section 4975(f)(5) of such Code is
amended--
(i) by striking ``(5) Correction.--The
terms'' and inserting:
``(5) Correction.--
``(A) In general.--Except as provided in subparagraph
(B), the terms'', and
(ii) by adding at the end the following:
``(B) Determination of `correction' and `correct'
with respect to best interest advice recommendations.--
In the case of a prohibited transaction arising by the
failure of investment advice to be a best interest
recommendation, the terms `correction' and `correct'
mean the payment to, or reimbursement of, actual
damages of the plan, plan participants, or plan
beneficiaries resulting directly from the plan's, plan
participant's, or plan beneficiary's reliance on such
investment advice, if any, that have not otherwise been
paid or reimbursed to the plan, plan participants, or
plan beneficiaries, including payments and
reimbursements made pursuant to subparagraph (A) if
such amount is greater than the amount determined under
subparagraph (A).''.
(B) Amount involved for purposes of excise tax.--The
first sentence of section 4975(f)(4) of such Code is
amended by striking ``excess compensation.'' and
inserting ``excess compensation, and in the case of a
prohibited transaction arising by the failure of
investment advice to be a best interest recommendation,
the amount involved shall be the amount paid to the
person providing the advice (or its affiliate, as
defined in paragraph (8)(J)(ii)) that has not been paid
or reimbursed to the plan, plan participants, or plan
beneficiaries, including payments and reimbursements
made pursuant to paragraph (5).''.
(c) Effective Date.--The amendments made by subsections (a) and (b)
shall take effect on the date of the enactment of this Act and shall
apply with respect to communications provided or recommendations made
on or after 2 years after such date.
(d) Grandfathered Transactions and Services.--The amendments made by
subsections (a) and (b) 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 become effective under
subsection (c).
(e) Transition.--Until such time as regulations or other guidance are
issued to carry out the amendments made by subsections (a) and (b), a
plan or a fiduciary shall be treated as meeting the requirements of
such amendments if the plan or fiduciary, as the case may be, complies
with a reasonable good faith interpretation of such amendments.
Purpose
H.R. 2823, the Affordable Retirement Advice for Savers Act,
protects access to affordable retirement advice by overturning
the Department of Labor's (DOL) flawed regulation that amended
the regulatory definition of ``fiduciary''\1\ under the
Employee Retirement Income Security Act of 1974 (ERISA)\2\ and
the Internal Revenue Code of 1986 (tax code).\3\ Additionally,
H.R. 2823 ensures 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.
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\1\Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice, 81 Fed. Reg. 20946 (Apr. 8, 2016).
[hereinafter Final Rule].
\2\29 U.S.C. Sec. 1001 et seq. ERISA section citations will be used
throughout.
\3\26 U.S.C. Sec. 1 et seq. [hereinafter the tax code].
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Committee Action
112TH CONGRESS
Full committee hearing on policies and priorities at DOL
On February 16, 2011, the Committee on Education and the
Workforce (Committee) held a hearing titled ``Policies and
Priorities at the U.S. Department of Labor'' to examine, among
other issues, DOL's Employee Benefits Security Administration's
(EBSA) October 2010 proposed regulation that significantly
expanded the definition of ``fiduciary'' under ERISA and the
tax code. The Honorable Hilda L. Solis, then-Secretary of the
U.S. Department of Labor, was the sole witness. During the
hearing, Reps. Judy Biggert (R-IL) and Carolyn McCarthy (D-NY)
expressed concerns regarding DOL's proposed rule, specifically
in regard to the Department's lack of coordination with the
Securities and Exchange Commission.\4\
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\4\Policies and Priorities at the U.S. Department of Labor: Hearing
Before the H. Comm. on Educ. and the Workforce, 112th Cong. 15, 38
(Feb. 16, 2011).
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Subcommittee hearing on the impact of DOL's proposal on workers and
retirees
On July 26, 2011, the Subcommittee on Health, Employment,
Labor, and Pensions (HELP) held a hearing titled ``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, then-Assistant Secretary of Labor, EBSA,
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 on the President's Fiscal Year 2013 Budget
Proposal for DOL
On March 21, 2012, the Committee held a hearing titled
``Reviewing the President's Fiscal Year 2013 Budget Proposal
for the Department of Labor.'' Then-Secretary Solis was the
sole witness. During the hearing, members of both parties
thanked Secretary Solis for withdrawing the 2010 proposed
fiduciary rule and inquired as to what criteria would be
considered in a subsequent regulatory proposal.\5\
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\5\Reviewing the President's Fiscal Year 2013 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 112th Cong. (Mar. 21, 2012).
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113TH CONGRESS
Full committee hearing on the President's Fiscal Year 2015 Budget
Proposal for DOL
On March 26, 2014, the Committee held a hearing titled
``Reviewing the President's Fiscal Year 2015 Budget Proposal
for the Department of Labor.'' The Honorable Thomas E. Perez,
then-Secretary of the U.S. Department of Labor, was the sole
witness. During this hearing, then-Committee Chairman John
Kline (R-MN) reiterated bipartisan concerns regarding DOL's
ongoing fiduciary rulemaking. Addressing the consequences of
the Department's proposed rule, Chairman Kline urged Secretary
Perez to keep in mind ``what the impact will be on important
advice that people, particularly low-income people, might
need.''\6\
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\6\Reviewing the President's Fiscal Year 2015 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 113th Cong. 86 (Mar. 26, 2014) (closing statement of Rep.
John Kline, Chairman, H. Comm. on Educ. and the Workforce).
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114TH CONGRESS
Full committee hearing on the President's Fiscal Year 2016 Budget
Proposal for DOL
On March 18, 2015, the Committee held a hearing titled
``Reviewing the President's Fiscal Year 2016 Budget Proposal
for the Department of Labor.'' Then-Secretary Perez was the
sole witness. During the hearing, Rep. Frederica Wilson (D-FL)
warned that a new proposed fiduciary rule should not ``impact
the availability of affordable investment advice.''\7\
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\7\Reviewing the President's Fiscal Year 2016 Budget Proposal for
the Department of Labor: Hearing Before the H. Comm. on Educ. and the
Workforce, 114th Cong. (Mar. 18, 2015) (statement of Rep. Frederica S.
Wilson, Member, H. Comm. on Educ. and the Workforce).
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Subcommittee hearing on Restricting Access to Financial Advice and
Evaluating the Impact on Working Families and Retirees
On June 17, 2015, the HELP Subcommittee held a hearing
titled ``Restricting Access to Financial Advice: Evaluating the
Costs and Consequences for Working Families and Retirees'' to
examine the new DOL Notice of Proposed Rulemaking (2015 NPRM)
amending the regulatory definition of ``fiduciary'' under ERISA
and the tax code. Witnesses before the Subcommittee included
then-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 Brian Reid, Ph.D.,
Chief Economist, Investment Company Institute, Washington, D.C.
During the hearing, Dr. Reid testified in opposition to DOL's
revised fiduciary rule, stating, ``[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, Mr. Haley testified in support of a ``best-
interest fiduciary standard crafted in a way that allows
workers choice and access to the services they need and
desire.''\9\
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\8\Restricting Access to Financial Advice: Evaluating the Costs and
Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Emp., Lab., 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, Inv. Co. Inst.).
\9\Restricting Access to Financial Advice: Evaluating the Costs and
Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Emp., Lab., and Pensions of the H. Comm. on Educ.
and the Workforce, 114th Cong. (Jun. 17, 2015) (oral testimony of Mr.
Jack Haley, Executive Vice President, Fidelity Investments).
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Subcommittee hearing on 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
titled ``Principles for Ensuring Retirement Advice Serves the
Best Interests of Working Families and Retirees'' to further
examine the 2015 NPRM. Notably, the Subcommittee considered the
potential negative effects of the 2015 NPRM on small businesses
and low- and middle-income families. Witnesses before the
Subcommittee included the Honorable Bradford 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 then-Chairman of the HELP
Subcommittee David ``Phil'' Roe (R-TN), Reps. Richard Neal (D-
MA), Peter Roskam (R-IL), and Michelle Lujan Grisham (D-NM) for
a legislative solution to help strengthen retirement security.
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\10\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Emp., Lab., and Pensions of the H. Comm. on Educ. and the
Workforce, 114th Cong. (Dec. 2, 2015).
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Introduction of H.R. 4293, Affordable Retirement Advice Protection Act,
and H.R. 4294, Strengthening Access to Valuable Education and
Retirement Support Act
On December 18, 2015, then-HELP Chairman Roe introduced the
Affordable Retirement Advice Protection Act (H.R. 4293)\11\
with five cosponsors.\12\ The same day, Rep. Roskam introduced
the Strengthening Access to Valuable Education and Retirement
Support Act (H.R. 4294)\13\ with five cosponsors.\14\
Recognizing the threat of DOL's proposed rule, then-HELP
Subcommittee Chairman Roe and Rep. Roskam introduced the
bipartisan bills to protect consumers and preserve access to
affordable financial advice for low- and middle-income
families. The bills proposed amending ERISA and the tax code,
respectively, to require retirement professionals act in their
clients' best interest and to prohibit DOL from implementing
its flawed proposal unless Congress affirmatively approves the
final rule.
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\11\H.R. 4293, 114th Cong. (2015).
\12\Original co-sponsors of H.R. 4293 include Reps. Richard Neal
(D-MA), Peter Roskam (R-IL), John Larson (D-CT), Earl L. ``Buddy''
Carter (R-GA), and David Scott (D-GA).
\13\H.R. 4294, 114th Cong. (2015).
\14\Original co-sponsors of H.R. 4294 include Reps. Phil Roe (R-
TN), Richard Neal (D-MA), John Larson (D-CT), Tom Reed (R-NY), and
Michelle Lujan Grisham (D-NM).
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Committee passage of H.R. 4293, Affordable Retirement Advice Protection
Act
On February 2, 2016, the Committee considered H.R. 4293,
the Affordable Retirement Advice Protection Act.\15\ Then-HELP
Subcommittee Chairman Roe offered an amendment in the nature of
a substitute, making technical changes to the introduced bill.
The Committee voted to adopt the amendment in the nature of a
substitute by voice vote. One additional amendment was offered
but voted down by voice vote. The Committee favorably reported
H.R. 4293, as amended, to the House of Representatives by a
vote of 22 to 14.
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\15\H.R. 4293, Affordable Retirement Advice Protection Act: Markup
Before the H. Comm. on Educ. and the Workforce, 114th Cong. (Feb. 2,
2016).
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Committee passage of H.R. 4294, Strengthening Access to Valuable
Education and Retirement Support Act of 2015
On February 2, 2016, the Committee considered H.R. 4294,
the Strengthening Access to Valuable Education and Retirement
Support Act of 2015.\16\ Rep. 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 to 14.
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\16\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).
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Introduction of H.J. Res. 88, Disapproving the Rule Submitted by the
Department of Labor Related to the Definition of the Term
``Fiduciary''
On April 19, 2016, then-HELP Subcommittee Chairman Roe,
along with Reps. Charles Boustany (R-LA) and Ann Wagner (R-MO),
introduced H.J. Res. 88, Disapproving the rule submitted by the
Department of Labor relating to the definition of the term
``Fiduciary,'' pursuant to the Congressional Review Act.\17\
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\17\5 U.S.C. Sec. 801.
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Committee passage of H.J. Res. 88, Disapproving the Rule Submitted by
the Department of Labor Related to the Definition of the Term
``Fiduciary''
On April 21, 2016, the Committee considered H.J. Res. 88
and reported the resolution favorably to the House of
Representatives by a vote of 22 to 14.
Congressional passage and Presidential veto of H.J. Res. 88,
Disapproving the Rule Submitted by the Department of Labor
Related to the Definition of the Term ``Fiduciary''
On April 28, 2016, the House of Representatives passed H.J.
Res. 88 by a vote of 234 to 183. The Senate subsequently passed
the resolution of disapproval on May 24, 2016, by a vote of 56
to 41. On June 7, 2016, President Obama vetoed H.J. Res. 88. On
June 22, 2016, the House failed to override the President's
veto by a vote of 239 to 180.
115TH CONGRESS
Subcommittee hearing on Regulatory Barriers Facing Workers and Families
Saving for Retirement
On May 18, 2017, the HELP Subcommittee, chaired by Rep. Tim
Walberg (R-MI) held a hearing titled ``Regulatory Barriers
Facing Workers and Families Saving for Retirement'' to further
examine the impact of the DOL's flawed fiduciary rule on low-
and middle-income savers in anticipation of the rule going into
effect on June 9, 2017.\18\ Witnesses included the Honorable
Bradford (Brad) Campbell, Partner, Drinker Biddle & Reath LLP,
Washington, D.C.; Jason Furman, Ph.D., Senior Fellow, Peterson
Institute for International Economics, Washington, D.C.; Mr.
James Kais, Senior Vice President and Managing Director,
Retirement Practice Leader, Transamerica, Saint Petersburg,
Florida; and, Mr. Erik Sossa, Vice President, Global Benefits
and Wellness, PepsiCo, Inc., Purchase, New York. During the
hearing, Mr. Campbell warned that costs would increase and
access to investment advice and assistance would decrease on
June 9, the day the fiduciary regulation was scheduled to go
into effect.\19\
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\18\Regulatory Barriers Facing Workers and Families Saving for
Retirement: Hearing Before the Subcomm. on Health, Emp., Lab., and
Pensions of the H. Comm. on Educ. and the Workforce, 115th Cong. (May
18, 2017).
\19\Regulatory Barriers Facing Workers and Families Saving for
Retirement: Hearing Before the Subcomm. on Health, Emp., Lab., and
Pensions of the H. Comm. on Educ. and the Workforce, 115th Cong. (May
18, 2017) (written testimony of the Hon. Bradford Campbell, Partner,
Drinker Biddle & Reath LLP).
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Introduction of H.R. 2823, Affordable Retirement Advice for Savers Act
On June 8, 2017, Rep. Roe, along with HELP Subcommittee
Chairman Walberg, Vice Chairman Joe Wilson (R-SC), and Rep.
Roskam introduced H.R. 2823, the Affordable Retirement Advice
for Savers Act, to overturn DOL's flawed fiduciary rule and
improve policies governing financial advice to enhance
protections for retirement savers.\20\ The legislation amends
ERISA and the tax code to strengthen retirement planning by
requiring retirement advisors to serve their clients' best
interests; enhance transparency and accountability through
clear, simple, and relevant disclosure requirements; ensure
small business owners continue receiving the help they need to
provide retirement plans for their employees; and protect
access to high-quality, affordable retirement advice so more
Americans can retire with dignity and financial security.
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\20\H.R. 2823, 115th Cong. (2017).
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Committee passage of H.R. 2823, Affordable Retirement Advice for Savers
Act
On July 19, 2017, the Committee considered H.R. 2823, the
Affordable Retirement Advice for Savers Act.\21\ Rep. Roe
offered an amendment in the nature of a substitute, making
technical changes to the introduced bill. The Committee voted
to adopt the amendment in the nature of a substitute by voice
vote. One additional amendment was offered but was voted down
by voice vote. The Committee favorably reported H.R. 2823, as
amended, to the House of Representatives by a vote of 23 to 17.
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\21\H.R. 2823, Affordable Retirement Advice for Savers Act: Markup
Before the H. Comm. on Educ. and the Workforce, 115th Cong. (Jul. 19,
2017).
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Technical Background
Pension Plans and Fiduciary Requirements under ERISA
ERISA is generally administered by the Secretary of Labor
and establishes various requirements for employee pension
benefit plans (pension plans).\22\ A pension plan may be a
defined contribution plan (also referred to as an ``individual
account plan'') or a defined benefit plan.
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\22\ERISA applies also to employee welfare benefit plans. ERISA
generally does not apply to church plans or plans of governmental
employers. Under the tax code, qualified retirement plans and annuities
described in tax code sections 401(a) and 403(a) (other than,
generally, church plans or plans of governmental employers) are subject
to many of the same requirements as apply under ERISA. Tax code
requirements are administered by the Secretary of the Treasury, through
the Internal Revenue Service.
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Under a defined contribution plan, benefits are based on an
individual account for each participant, to which are allocated
contributions, earnings, and losses.\23\ Defined contribution
plans commonly allow participants to direct the investment of
their accounts, usually by choosing among investment options
offered under the plan.
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\23\Defined contribution plan (or individual account plan) is
defined at ERISA section 3(34).
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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.\24\
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\24\As defined in ERISA section 3(35), a defined benefit plan
generally is any plan that is not a defined contribution plan.
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In general, under ERISA a person is a fiduciary with
respect to a plan to the extent the person: (1) exercises any
discretionary authority or discretionary control respecting
management of the plan or exercises any authority or control
respecting management or disposition of plan assets; (2)
renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other
property of such plan, or has any authority or responsibility
to do so; or, (3) has any discretionary authority or
discretionary responsibility in the administration of the
plan.\25\
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\25\ERISA Sec. 3(21). ``Fiduciary'' also includes a person
designated by a named fiduciary to carry out fiduciary responsibilities
(other than trustee responsibilities) under the plan.
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ERISA requires a fiduciary of a plan to discharge duties
with respect to the plan solely in the interest of the
participants and beneficiaries, for the exclusive purpose of
providing benefits to participants and their beneficiaries and
defraying reasonable expenses of administering the plan, and
with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like
aims.\26\ With respect to plan assets, ERISA requires a
fiduciary to diversify the investments of the plan so as to
minimize the risk of large losses unless under the
circumstances it is clearly prudent not to do so.
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\26\ERISA Sec. 404(a)(1). ERISA section 402(a)(1) requires a plan
to be established pursuant to a written instrument that provides for
one or more named fiduciaries who jointly or severally have authority
to control and manage the operation and administration of the plan. For
this purpose, the term ``named fiduciary'' means a fiduciary who is
named in the plan instrument, or who, pursuant to a procedure specified
in the plan, is identified as a fiduciary by a person who is an
employer or employee organization with respect to the plan or by an
employer and an employee organization acting jointly.
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A plan fiduciary that breaches any of the fiduciary
responsibilities, obligations, or duties imposed by ERISA
(including the prohibited transaction rules discussed infra) is
personally liable to make good to the plan any losses to the
plan resulting from such breach and to restore to the plan any
profits the fiduciary has made through the use of plan
assets.\27\ A plan fiduciary may be liable also for a breach of
responsibility by another fiduciary (a ``co-fiduciary'') in
certain circumstances, for example, if the fiduciary's failure
to fulfill the fiduciary's own duties enabled the co-fiduciary
to commit the breach.\28\ Certain fiduciary violations may
result in the imposition of a civil penalty.\29\
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\27\ERISA Sec. 409. Under ERISA section 502(a)(2), an action for a
breach of fiduciary responsibility may be brought by DOL, a plan
participant or beneficiary, or another fiduciary.
\28\ERISA Sec. 405.
\29\ERISA Sec. Sec. 502(i) and (l).
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ERISA provides a special rule in the case of a defined
contribution plan that permits participants to exercise control
over the assets in their individual accounts (often referred to
as ``participant-directed investments'').\30\ Under the special
rule, if a participant exercises control over the assets in his
or her account, the participant is not deemed to be a fiduciary
by reason of such exercise and no person who is otherwise a
fiduciary is liable for any loss, or by reason of any breach,
that results from the participant's exercise of control.
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\30\ERISA Sec. 404(c) (implemented by regulations at 29 C.F.R.
Sec. 2550.404c-1). 29 C.F.R. Sec. 2550.404c-5 provides rules for
qualified default investment alternatives (QDIAs) if a participant does
not select any investment options.)
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General prohibited transaction rules
ERISA prohibits a plan fiduciary from causing the plan to
engage in certain transactions (prohibited transactions)
between the plan and a party in interest if the fiduciary knows
or should know that the transaction is a prohibited
transaction.\31\ Prohibited transactions include the following,
whether direct or indirect, between a plan and a party in
interest: (1) the sale or exchange or leasing of property; (2)
the lending of money or other extension of credit; (3) the
furnishing of goods, services, or facilities; (4) the transfer
to, or use by or for the benefit of, a party in interest, of
any assets of the plan; or, (5) an acquisition, on behalf of
the plan, of any employer security or employer real property in
violation of ERISA restrictions.\32\ In addition, these rules
prohibit a fiduciary that has authority or discretion to
control or manage the assets of a plan to permit the plan to
hold any employer security or employer real property if the
fiduciary knows or should know that holding the security or
real property violates ERISA restrictions. These rules also
provide that a fiduciary with respect to a plan must not: (1)
deal with the assets of the plan in the fiduciary's own
interest or for his own account; (2) in the fiduciary's
individual or in any other capacity, act in any transaction
involving the plan on behalf of a party (or represent a party)
whose interests are adverse to the interests of the plan or the
interests of its participants or beneficiaries; or, (3) receive
any consideration for the fiduciary's own personal account from
any party dealing with the plan in connection with a
transaction involving the assets of the plan.
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\31\ERISA Sec. 406. Under tax code section 4975, similar rules
apply to qualified retirement plans and annuities of private employers
(other than, generally, church plans), as well as individual retirement
arrangements (IRAs) under tax code section 408, health savings accounts
(HSAs) under tax code section 223, Archer MSAs under tax code section
220, and Coverdell education savings accounts (Coverdell ESAs) under
tax code section 530. A violation of the tax code rules may result in
the imposition of an excise tax on the violator.
\32\ERISA section 407 restricts the acquisition or holding of
employer securities and employer real property by a plan.
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For purposes of ERISA, a party in interest includes any
fiduciary (including any administrator, officer, trustee, or
custodian), counsel, or employee of the plan; a person
providing services to the plan; an employer any of whose
employees are covered by the plan; an employee organization any
of whose members are covered by the plan; and certain owners,
relatives, employees, officers, directors, and related
entities.\33\
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\33\ERISA Sec. 3(14).
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Certain transactions are statutorily exempt from prohibited
transaction treatment, for example, certain loans to plan
participants and arrangements with a party in interest for
legal, accounting, or other services necessary for the
establishment or operation of a plan if no more than reasonable
compensation is paid for the services.\34\ 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.\35\
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\34\ERISA Sec. 408(b).
\35\ERISA Sec. 408(a). Before an administrative exemption is
granted, notice must be published in the Federal Register of the
pendency of the exemption, notice must be provided to interested
persons, and interested persons must be given an opportunity to present
views. An opportunity for a hearing must be provided and a
determination on the record must be made with respect to the required
findings described above. In addition, an exception may be granted only
after consultation and coordination with the Secretary of the Treasury.
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Under section 102 of the Reorganization Plan No. 4 of
1978,\36\ 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 tax 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 tax code purposes, as well as for ERISA purposes.
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\36\43 Fed. Reg. 47713 (Oct. 17, 1978).
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Rules relating to investment advice
Fiduciary status and prohibited transaction exemptions
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. As discussed below, DOL regulations issued in 1975 (1975
regulations) and 2016 (2016 regulations) describe the
circumstances in which a person is a fiduciary by reason of
rendering investment advice. Additionally, administrative and
statutory prohibited transaction exemptions are available with
respect to fiduciaries that render investment advice.
1975 Regulations and investment education
Under the 1975 regulations and before June 6, 2016, a
person was deemed to be rendering ``investment advice'' to an
employee benefit plan for this purpose only if the following
occurred:
The person rendered advice to the plan as to
the value of securities or other property or made
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) had 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)
rendered 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 would
serve as a primary basis for investment decisions with
respect to plan assets, and that the person would
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.\37\
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\37\29 C.F.R. Sec. 2510.3-21(c), as in effect before June 7, 2016.
Under 29 C.F.R. Sec. 2510.3-21(j) of the 2016 DOL regulations,
discussed below, similar rules apply as of June 7, 2016, and until June
9, 2017.
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The regulations further provided 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, was 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 did 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, 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.\38\ For this purpose, investment education includes the
following categories of information and materials (described
more fully in Interpretive Bulletin 96-1): plan information,
general financial and investment information, asset allocation
models, and interactive investment materials. Interpretive
Bulletin 96-1 notes that the information and materials
described in the four categories merely represent examples of
the type of information and materials that may be furnished to
participants and beneficiaries without such information and
materials constituting investment advice, and there may be many
other examples of information, materials, and educational
services which, if furnished to participants and beneficiaries,
would not constitute investment advice. Accordingly,
Interpretive Bulletin 96-1 provides that no inferences should
be drawn from the description of the four categories with
respect to whether the furnishing of any information,
materials, or educational services not described therein may
constitute investment advice.
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\38\29 C.F.R. Sec. 2905.96-1. This treatment applies irrespective
of who provides the information (for example, the plan sponsor,
fiduciary, or service provider), the frequency with which the
information is shared, the form in which the information and materials
are provided (for example, on an individual or group basis, in writing
or orally, or via video or computer software), or whether an identified
category of information and materials is furnished alone or in
combination with other identified categories of information and
materials.
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Statutory exemptions relating to investment advice
If certain requirements are met, specific transactions
relating to investment advice are exempt from prohibited
transaction treatment if the advice is provided by a fiduciary
advisor through an eligible investment advice arrangement.\39\
The exemptions apply to (1) the provision of investment advice
to a plan participant or beneficiary with respect to a security
or other property available as an investment under the plan;
(2) an investment transaction (that is, a sale, acquisition, or
holding of a security or other property) pursuant to the
advice; and (3) the direct or indirect receipt of fees or other
compensation in connection with the provision of the advice or
an investment transaction pursuant to the advice.
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\39\ERISA Sec. Sec. 408(b)(14) and (g) (enacted by section 601 of
the Pension Protection Act of 2006, Pub. L. No. 109-280). Similar
exemptions apply under Code section 4975(d)(17) and (f)(8).
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For purposes of the exemptions, an eligible investment
advice arrangement is generally an arrangement that either (1)
provides that any fees (including any commission or
compensation) received by the fiduciary advisor for investment
advice or with respect to an investment transaction with
respect to plan assets do not vary depending on the basis of
any investment option selected (sometimes referred to as ``fee-
leveling'') or (2) uses a computer model under an investment
advice program that meets specified requirements in connection
with the provision of investment advice to a participant or
beneficiary.\40\ 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).\41\
In addition, the fiduciary advisor must provide disclosures
applicable under securities laws; any investment transaction
must occur solely at the direction of the investment advice
recipient; the compensation received by the fiduciary advisor
and affiliates in connection with the investment transaction
must be reasonable; and the terms of the investment transaction
must be at least as favorable to the plan as an arm's length
transaction would be.
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\40\Various requirements with respect to notices and disclosure,
recordkeeping and audits must also be met.
\41\Affiliate for this purpose means an affiliated person as
defined under section 2(a)(3) of the Investment Company Act of 1940.
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2016 regulations and prohibited transaction exemptions
On April 8, 2016, DOL issued final regulations that
replaced the 1975 regulations relating to investment advice
with a new standard as to whether a person is a fiduciary based
on rendering investment advice, generally applicable June 9,
2017.\42\ Under the 2016 regulations, a person is a fiduciary
based on rendering investment advice if the following occurs:
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\42\Final Rule, 81 Fed. Reg. 20946. The 2016 regulations are
effective June 7, 2016, and, when originally issued, were generally
applicable as of April 10, 2017. However, the applicability date for
some requirements was extended until June 9, 2017. 82 Fed. Reg. 16902
(Apr. 7, 2017). DOL Field Assistance Bulletin 2017-02, issued May 22,
2017, provides a temporary enforcement policy with respect to the 2016
regulations. As of July 19, 2017, the date this bill was ordered
reported, all requirements were to become applicable by January 1,
2018.
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The person provides to a plan, a plan
fiduciary, a plan participant or beneficiary, an
IRA,\43\ or an IRA owner certain types of
recommendations (as described below) that constitute
investment advice with respect to plan or IRA assets
for a fee or other compensation, direct or indirect;
and
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\43\IRA is defined in the regulations to include HSAs, Archer MSAs,
and Coverdell ESAs, as well as IRAs.
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With respect to the investment advice
described above, the recommendation is made either
directly or indirectly (such as through or together
with an affiliate) by a person who (1) represents or
acknowledges that it is acting as a fiduciary; (2)
renders the advice pursuant to a written or verbal
agreement, arrangement, or understanding that the
advice is based on the particular investment needs of
the advice recipient; or, (3) directs the advice to a
specific advice recipient or recipients regarding the
advisability of a particular investment or management
decision with respect to securities or other investment
property of the plan or IRA.\44\
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\44\29 C.F.R. Sec. Sec. 2510.3-21(a)(1) and (2). Under 29 C.F.R.
Sec. 2510.3-21(d), similar to the 1975 regulations, status as a
fiduciary with respect to a plan by reason of rendering investment
advice with respect to certain plan assets does not of itself cause a
person to be a fiduciary with respect to other plan assets.
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Under the regulations, investment advice includes the
following:
A recommendation as to the advisability of
acquiring, holding, disposing of, or exchanging,
securities or other investment property, or a
recommendation as to how securities or other investment
property should be invested after the securities or
other investment property are rolled over, transferred,
or distributed from the plan or IRA; and
A recommendation as to the management of
securities or other investment property, including,
among other things, recommendations on investment
policies or strategies, portfolio composition,
selection of other persons to provide investment advice
or investment management services, selection of
investment account arrangements (such as brokerage
versus advisory), or recommendations with respect to
rollovers, transfers, or distributions from a plan or
IRA, including whether, in what amount, in what form,
and to what destination such a rollover, transfer, or
distribution should be made.\45\
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\45\29 C.F.R. Sec. Sec. 2510.3-21(a)(1)(i) and (ii). Under the tax
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. At 81 Fed. Reg. at 20964, the preamble to the
regulations notes that the regulations supersede DOL Advisory Opinion
2005-23A (December 7, 2005), which 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.
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Under the regulations, ``recommendation'' means a
communication that, based on its content, context, and
presentation, would reasonably be viewed as a suggestion that
the advice recipient engage in or refrain from taking a
particular course of action.\46\ The determination of whether a
recommendation has been made is an objective rather than
subjective inquiry. In addition, the more individually tailored
the communication is to a specific advice recipient or
recipients about (e.g. a security, investment property, or
investment strategy), the more likely the communication will be
viewed as a recommendation. Providing a selective list of
securities to a particular advice recipient as appropriate for
that investor would be a recommendation as to the advisability
of acquiring securities even if no recommendation is made with
respect to any one security. Further, a series of actions,
directly or indirectly (such as through or together with an
affiliate), that may not constitute a recommendation when
viewed individually may amount to a recommendation when
considered in the aggregate. It makes no difference whether the
communication is initiated by a person or a computer software
program.
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\46\29 C.F.R. Sec. 2510.3-21(b)(1).
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The 2016 regulations specify that the provision of services
or the furnishing or making available of information and
materials in conformance with standards described in the
regulations with respect to the following situations is not a
recommendation: (1) platform providers; (2) selection and
monitoring assistance; (3) general communications; and (4)
investment education.\47\ The 2016 regulations further provide
that, except for persons who represent or acknowledge that they
are acting as a fiduciary, a person is not deemed to be a
fiduciary solely because of the following activities that meet
standards described in the regulations: (1) transactions with
independent fiduciaries with financial expertise; (2) swap and
security-based swap transactions; and, (3) certain employees
(such as an employee of the plan sponsor) receiving no
additional compensation in connection with the advice.\48\
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\47\29 C.F.R. Sec. 2510.3-21(b)(2). Determinations as to whether
another activity constitutes a recommendation must be made by reference
to the criteria set forth above in the definition of
``recommendation.'' The regulations withdraw Interpretive Bulletin 96-
1, relating to investment education, and revise the standards for plan
information, general financial and investment information, asset
allocation models, and interactive investment materials.
\48\29 C.F.R. Sec. 2510.3-21(c). Under 29 C.F.R. Sec. 2510.3-
21(e), certain persons are not deemed to be fiduciaries solely because
of the execution of securities transactions on behalf of a plan or IRA.
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In conjunction with the 2016 regulations, DOL issued two
new prohibited transaction class exemptions with respect to
investment advice and related transactions: the Best Interest
Contract (BIC) exemption and the Class Exemption for Principal
Transactions in Certain Assets Between Investment Advice
Fiduciaries and Employee Benefit Plans and IRAs (Principal
Transactions Exemption).\49\ In addition, the following
previously issued exemptions were amended (and, in some cases,
repealed in part):
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\49\Best Interest Contract Exemption, 81 Fed. Reg. 21002 (Apr. 8,
2016), as corrected at 81 Fed. Reg. 44773 (Jul. 11, 2016), and Class
Exemption for Principal Transactions in Certain Assets Between
Investment Advice Fiduciaries and Employee Benefit Plans and IRAs, 81
Fed. Reg. 21089 (Apr. 8, 2016), as corrected at 81 Fed. Reg. 44784
(July 11, 2016). When originally issued, these exemptions and the
changes to previously issued exemptions were applicable as of April 10,
2017. However, the applicability date was extended to June 9, 2017,
with certain aspects applicable January 1, 2018. 82 Fed. Reg. 16902
(Apr. 7, 2017).
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Prohibited Transaction Exemption (PTE) 75-1
(Part V), Exemptions From Prohibitions Respecting
Certain Classes of Transactions Involving Employee
Benefit Plans and Certain Broker-Dealers, Reporting
Dealers and Banks;
PTE 84-24 for Certain Transactions Involving
Insurance Agents and Brokers, Pension Consultants,
Insurance Companies, and Investment Company Principal
Underwriters;
PTE 86-128 for Securities Transactions
Involving Employee Benefit Plans and Broker-Dealers and
PTE 75-1 (Parts I and II); and
Class Exemptions 75-1 (Parts III and IV),
77-4, 80-83 and 83-1.\50\
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\50\81 Fed. Reg. 21139 (Apr. 8, 2016); 81 Fed. Reg. 21147 (Apr. 8,
2016); 81 Fed. Reg. 21181 (Apr. 8, 2016); 81 Fed. Reg. 21208 (Apr. 8,
2016).
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The new prohibited transaction exemptions and amendments of
previously issued exemptions generally require adherence to
specified standards (referred to as ``impartial conduct
standards''), including that investment advice be in the ``best
interest'' of the plan, participant, IRA, or IRA owner to which
it relates (hereinafter, collectively, ``investor''). For this
purpose, investment advice is in the best interest of an
investor when the person or persons providing the advice act
with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like
aims, based on the investment objectives, risk tolerance,
financial circumstances, and needs of the investor, without
regard to the financial or other interests of the person or
persons providing the advice (or a related party). The
exemptions are conditioned also on meeting specified
requirements relating to compensation, contract terms, anti-
conflict safeguards, notices and disclosures, and record-
keeping, as applicable under the particular exemption.
Summary of H.R. 2823
The bill repeals the 2016 regulations, the BIC Exemption,
the Principal Transactions Exemption, and the amendments to
(and partial repeals of) other previously issued exemptions.
The bill provides that the regulations and prohibited
transaction exemptions amended or repealed by the Fiduciary
Definition rulemaking are restored or revived as if the
rulemaking had not been issued.
As described further below, the bill also amends the
statutory definition of fiduciary under ERISA and the tax code
by adding a definition of investment advice. In addition,
subject to specified requirements, the bill adds a new
statutory prohibited transaction exemption for any transaction,
including a contract for service, between a person providing
investment advice and the advice recipient in connection with
the investment advice, and any transaction consisting of the
provision of the investment advice.
DEFINITION OF INVESTMENT ADVICE
General rule
As defined under the bill, investment advice includes
certain recommendations rendered under certain conditions.
Specifically, a recommendation (if rendered under the
conditions described below) communicated electronically, on
paper, or orally may be investment advice if it relates to the
following:
The advisability of acquiring, holding,
disposing, or exchanging of any moneys or other
property of a plan by the plan, plan participants, or
plan beneficiaries, including any recommendation
whether to take a distribution of benefits from the
plan or any recommendation relating to the investment
of any moneys or other property of the plan to be
distributed from the plan;
The management of moneys or other property
of the plan, including recommendations relating to the
management of moneys or other property to be
distributed from the plan; or
The advisability of retaining or ceasing to
retain a person who would receive a fee or other
compensation for providing any of these types of
advice.\51\
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\51\Because a rollover always occurs in connection with a
distribution, recommendations relating to moneys or other property to
be distributed from a plan include recommendations relating to
rollovers of such moneys or other property.
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In order for a recommendation to be investment advice, it
must be rendered pursuant to either of the following:
A written acknowledgment, provided
electronically or on paper, of the obligation of the
advisor to comply with the fiduciary standards under
ERISA with respect to the provision of the
recommendation; or,
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 the recommendation and the plan that the
recommendation is individualized to the plan and there
is an intent 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 state only the following: ``This communication is not
individualized to you, and you are not intended to rely
materially on this communication 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.
Communications not treated as investment advice
Under the bill, a communication provided in the
circumstances described below is not considered a
recommendation made pursuant to a mutual agreement,
arrangement, or understanding for purposes of the definition of
investment advice if the communication contains the disclaimer
described above.
The communication is provided in conjunction with
clear and prominent disclosure in writing to a plan, plan
participant, or beneficiary that the person providing the
communication is doing so in its marketing or sales capacity,
including any communication regarding the terms and conditions
of the engagement of the person providing the communication,
and that the person is not intending to provide investment
advice (as defined under the bill) or to otherwise act within
and under the obligations of the best interest standard.
The person providing the communication is a
current or potential counterparty or service provider to the
plan in connection with any transaction based on the
communication, provided the plan is represented, in connection
with the transaction, by a plan fiduciary independent of the
person providing the communication, and, except in the case of
a swap\52\ or security-based swap,\53\ independent of the plan
sponsor. Further, prior to the transaction, the independent
plan fiduciary must represent in writing to the person
providing the communication that it is aware the person has a
financial interest in the transaction and it has determined the
person is not intending to provide investment advice (as
defined under the bill) or to otherwise act as a fiduciary to
the plan.
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\52\A swap for this purpose is defined in section 1a of the
Commodity Exchange Act (7 U.S.C. Sec. 1a).
\53\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)).
---------------------------------------------------------------------------
The person providing the communication is an
employee of any sponsoring employer or affiliate or employee
organization who provides the communication to the plan for no
fee or other compensation other than the employee's normal
compensation.
The person providing the communication discloses
in writing to the plan fiduciary that the person is not
undertaking to provide investment advice as a fiduciary. In
addition, the communication provided consists solely of the
following:
Making available to the plan without
regard to the individualized needs of the plan,
securities or other property or investment products
through a platform or similar mechanism from which a
plan fiduciary may select or monitor investment
alternatives; or
In connection with a platform or similar
mechanism described above, (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; (2)
providing objective financial data and comparisons with
independent benchmarks to the plan; or (3) identifying
a sample set of investment alternatives based on the
plan's stated criteria in response to an inquiry from a
plan fiduciary.
The communication consists solely of valuation
information.
The communication consists solely of the
following:
Information described in DOL
Interpretive Bulletin 96-1 as in effect on January 1,
2015, regardless of whether the education is provided
to a plan or plan fiduciary or a participant or
beneficiary;
Information provided to participants or
beneficiaries regarding the factors to consider in
deciding whether to elect to receive a distribution
from a plan or an IRA and whether to roll over the
distribution to a plan or an IRA, so long as any
examples of different distribution alternatives are
accompanied by all material facts and assumptions on
which the examples are based; or
Any additional information treated as
education by the Secretary of Labor.
EXEMPTION
The bill provides a prohibited transaction exemption for
any transaction, including a contract for service, between a
person (referred to herein as the ``investment advisor'')
providing investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other
property of the plan, and the advice recipient in connection
with the investment advice, as well as any transaction
consisting of the provision of the investment advice.\54\
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\54\Like all fiduciary acts, transactions covered by the exemption
are also subject to the general fiduciary standard under ERISA.
---------------------------------------------------------------------------
The exemption applies if the following conditions are met:
No more than reasonable compensation is paid for
the investment advice.\55\
---------------------------------------------------------------------------
\55\Reasonable compensation for this purpose is determined as under
the present-law prohibited transaction exemption under ERISA section
408(b)(2) for an arrangement with a disqualified person for services
necessary for the establishment or operation of a plan if no more than
reasonable compensation is paid therefor.
---------------------------------------------------------------------------
If the investment advice is based on a limited
range of investment options, which may consist, in whole or in
part, of proprietary products, the limitations must be clearly
disclosed to the advice recipient before any transaction based
on the investment advice in the form of a notice that states
only the following: ``This recommendation is based on a limited
range of investment options, and the same or similar
investments may be available at a different cost (greater or
lesser) from other sources.''
If the investment advice may result in variable
compensation to the investment advisor (or any affiliate\56\
thereof), the receipt of the compensation must be clearly
disclosed to the advice recipient before any transaction based
on the investment advice. For this purpose, clear disclosure of
variable compensation must include, in a manner calculated to
be understood by the average individual, each of the following:
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\56\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.
---------------------------------------------------------------------------
A notice that states exactly: ``This
recommendation may result in varying amounts of fees or
other compensation to the person providing the
recommendation (or its affiliate), and the same or
similar investments may be available at a different
cost (greater or lesser) from other sources'';\57\
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\57\Any regulations or other administrative guidance implementing
this requirement may not require this notice to be updated more
frequently than annually.
---------------------------------------------------------------------------
A description of any fee or other
compensation that is directly or indirectly payable to
the investment advisor (or its affiliate) by the advice
recipient with respect to the transaction (expressed as
an amount, formula, percentage of assets, per capita
charge, or estimate or range of the compensation);
A description of the types and ranges of
any compensation that are reasonably expected to be
directly or indirectly payable to the investment
advisor (or its affiliate) by any third party in
connection with the transaction (expressed as an
amount, formula, percentage of assets, per capita
charge, or estimate or range of the compensation); and
On request of the advice recipient, a
disclosure of the specific amounts of compensation
described herein that the investment advisor will
receive in connection with the particular transaction
(expressed as an amount, formula, percentage of assets,
per capita charge, or estimate of the compensation).
A notice with respect to limitations on the range of
investment options on which investment advice is based or with
respect to variable compensation shall have no effect on any
other notice otherwise required without regard to ERISA and
shall be provided in addition to, and not in lieu of, any other
such notice.
Under the bill, a recommendation will not fail to satisfy
the conditions for the exemption solely because the investment
advisor, acting in good faith and with reasonable diligence,
makes an error or omission in disclosing the information
specified above if the investment advisor discloses the correct
information to the advice recipient as soon as practicable, but
not later than 30 days from the date on which the investment
advisor knows of the error or omission.
EFFECTIVE DATE
The amendments made by the bill generally take effect on
the date of enactment and apply with respect to communications
provided or recommendations made on or after two years after
the date of enactment. However, 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. Until
the time when regulations or other guidance is issued to carry
out the amendments made by the bill, a plan or a fiduciary will
be treated as meeting the requirements of the amendments if the
plan or fiduciary, as applicable, complies with a reasonable
good faith interpretation of the amendments.
Committee Views
DOL'S 2016 REGULATION
Background
A. DOL's abandoned 2010 proposal
The Obama administration long argued the regulatory
definition of an ``investment advice'' fiduciary is
insufficiently restrictive.\58\ To address this concern, in
2010 EBSA issued a complicated proposed regulation expanding
the definition of ``fiduciary.''\59\ 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 issue a revised
rulemaking.\60\
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\58\See Council of Econ. 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].
\59\Definition of the Term ``Fiduciary,'' 75 Fed. Reg. 65263 (Oct.
15, 2010).
\60\See Press Release, Dept. of Lab.U.S. Labor Department's EBSA to
re-propose rule on definition of a fiduciary (Sept. 19, 2011), http://
www.dol.gov/ebsa/newsroom/2011/11-1382-NAT.html.
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B. DOL's 2015 NPRM
At a February 2015 speech at AARP, President Obama
announced his intention to go forward with this rulemaking.\61\
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 2015 NPRM in April.\62\ The new
proposal was preceded by a Council of Economic Advisors report
arguing that ``conflicted advice'' costs Americans $17 billion
annually.\63\ 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, paid on average 1
percent more annually. These assumptions came under intense
scrutiny from analysts who argued IRA holders actually paid
only 0.16 percent more and that these fees were justifiable due
to a higher level of service.\64\
---------------------------------------------------------------------------
\61\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.
\62\Definition of the Term ``Fiduciary,'' 80 Fed. Reg. 21928.
\63\CEA Report, supra note 58, at 2.
\64\Letter from David M. Abbey, Deputy Gen. Counsel, Retirement
Policy, Inv. Co. Inst. and Brian Reid, Chief Economist, Inv. Co. Inst.,
to the Hon. Howard Shelanski, Admin., Office of Info. and Reg. Aff.,
OMB (Apr. 7, 2015), http://www.ici.org/pdf/15_ici_omb_data.pdf.
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a. DOL's 2016 regulation & exemptions
As previously stated, DOL finalized the 2016 regulation on
April 8, 2016.\65\ The rule effectively eliminated the
``regular basis,'' ``mutual agreement,'' and ``primary basis''
prongs of the five-part test. This makes it much more difficult
to offer commission-based retirement accounts, where the
advisor receives payment when transactions are executed (as
opposed to an ``advisory account,'' where the advisor receives
a flat fee or percentage of assets annually to manage the
account). Because non-fiduciary commission-based accounts are a
cost-effective way to engage low- and middle-income savers,
this regulation risks millions of retirement savers losing
access to advice.
---------------------------------------------------------------------------
\65\Final Rule, 81 Fed. Reg. 20946 (Apr. 8, 2016).
---------------------------------------------------------------------------
In addition to the 2015 NPRM itself, DOL also finalized a
number of exemptions from the prohibited transaction rules if
the advice provider fulfills a number of conditions. The most
consequential of these is the BIC exemption. The centerpiece of
this exemption is a requirement that the advisor sign a
contract promising to provide advice only in the client's best
interest. Under this exemption and the regulation, advisors
must be subject to class action litigation, and certain
previously non-fiduciary ``education'' may trigger fiduciary
liability. Finally, advisory firms are no longer able to market
to small businesses without triggering fiduciary liability,
which may have significant effects on the market. In sum, the
final rule has jeopardized Americans' access to affordable
advice.
b. Congressional response
Because of its primary jurisdiction over this regulation,
the Committee has exhaustively reviewed the consequences of
this Obama-era regulation. The 2015 NPRM received thousands of
comments, including numerous letters from members.\66\ On July
21, 2015, every Republican member of the Committee signed a
comment letter calling for the proposal to be withdrawn,
highlighting testimony from the hearing held by the HELP
Subcommittee on June 17, 2015.\67\ This comment letter also
explained the Committee's longstanding interest in pursuing a
responsible best interest standard.
---------------------------------------------------------------------------
\66\Comments received through September 24, 2015, are published on
EBSA's website, http://www.dol.gov/ebsa/regs/cmt-1210-AB32-2.html.
\67\Letter from the Hon. John Kline, Chairman, H. Comm. on Educ.
and the Workforce, et al. to the Hon. Thomas E. Perez, Sec'y, Dep't of
Labor (July 21, 2015), http://edworkforce.house.gov/uploadedfiles/7-21-
15-dol_fiduciary_rule.pdf.
---------------------------------------------------------------------------
Additionally, 46 House Democrats notably signed a letter
led by then-HELP Subcommittee Ranking Member Polis (D-CO)
calling for publication of the revised rule prior to
finalizing, as well as a supplemental comment period.\68\
Another letter, signed by 96 House Democrats, expressed
concerns that the current proposal could reduce access to
investment advice for both small businesses and low- and
middle-income individuals.\69\ In all, over half of House
Democrats signed letters questioning DOL's proposal.
---------------------------------------------------------------------------
\68\See, e.g., Letter from the Hon. Jared Polis, member of
Congress, 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.
\69\Letter from the Hon. Gwen Moore, member of Congress, et al. to
the Hon. Thomas E. Perez, Sec'y, Dep't of Labor (Sept. 24, 2015) (on
file with the Committee).
---------------------------------------------------------------------------
On December 18, 2015, then-HELP Subcommittee Chairman Roe,
along with a bipartisan group of lawmakers, introduced two
bills that established a legislative alternative to DOL's
proposed fiduciary regulation. The Committee favorably reported
both bills in February 2016. However, the bills were not
considered by the House.
After DOL finalized its 2016 regulations, both houses of
Congress approved a joint resolution of disapproval under the
Congressional Review Act (H.J. Res. 88). However, due to
President Obama's veto of that legislation, the rule remained
in place, to become applicable on April 10, 2017, and certain
BIC requirements were to be applicable January 1, 2018.
c. Trump administration's response
On February 3, 2017, President Trump declared a priority of
his administration is ``to empower Americans to make their own
financial decisions, to facilitate their ability to save for
retirement and build the individual wealth necessary to afford
typical lifetime expenses. . . .''\70\ Recognizing the Obama
administration's regulation ``may not be consistent'' with this
policy, the President directed DOL to analyze a number of
questions regarding the regulation's likely consequences.
Subsequently, DOL requested public comments on the questions
posed by the President.\71\ In two separate letters signed by
every Committee Republican, the Committee urged the Trump
administration to delay the applicability of the rule until the
conclusion of the analysis directed by the President.\72\
However, in announcing a 60-day delay, DOL advised stakeholders
to ``plan on and prepare for compliance.''\73\
---------------------------------------------------------------------------
\70\Presidential Memorandum on Fiduciary Duty Rule (Feb. 3, 2017),
https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-
memorandum-fiduciary-duty-rule.
\71\Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice; Best Interest Contract Exemption
(Prohibited Transaction Exemption 2016-01); Class Exemption for
Principal Transactions in Certain Assets Between Investment Advice
Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction
Exemption 2016-02); Prohibited Transaction Exemptions 75-1, 77-4, 80-
83, 83-1, 84-24 and 86-128, 82 Fed. Reg. 12319 (Mar. 2, 2017)
(proposing to extend the applicability date of the fiduciary regulation
by 60 days and asking detailed questions regarding the consequences of
the fiduciary regulation).
\72\Letter from the Hon. Virginia Foxx, Chairwoman, H. Comm. on
Educ. and the Workforce, et al. to Mr. Edward Hugler, Acting Sec'y,
Dep't of Labor (Mar. 17, 2017), https://www.dol.gov/sites/default/
files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/
1210-0AB79/00817.pdf; Letter from the Hon. Virginia Foxx, Chairwoman,
H. Comm. on Educ. and the Workforce, et al. to Mr. Edward Hugler,
Acting Sec'y, Dep't of Labor (Apr. 17, 2017), https://www.dol.gov/
sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/
public-comments/1210-AB79/01298.pdf.
\73\Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice; Best Interest Contract Exemption
(Prohibited Transaction Exemption 2016-01); Class Exemption for
Principal Transactions in Certain Assets Between Investment Advice
Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction
Exemption 2016-02); Prohibited Transaction Exemptions 75-1, 77-4, 80-
83, 83-1, 84-24 and 86- 128, 82 Fed. Reg. 16902, 16907 (Apr. 7, 2017).
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On May 22, 2017, Secretary of Labor Alexander Acosta
published an op-ed in the Wall Street Journal announcing the
final rule would not be delayed beyond the 60-day period.\74\
As such, parts of the rule originally scheduled to go into
effect on April 10, 2017, went into effect on June 9, 2017,
with the full rule scheduled to go into effect on January 1,
2018. Additionally, DOL published a request for information
(RFI) on July 5, 2017, seeking public comments ``that could
form the basis of new exemptions or changes/revisions to the
rule and PTEs'' as well as comment to delay the January 1,
2018, applicability date.\75\
---------------------------------------------------------------------------
\74\Alexander Acosta, Deregulators Must Follow the Law, So
Regulators Will Too: As the Labor Department acts to revise the
Fiduciary Rule and others, the process requires patience, The Wall
Street Journal (May 22, 2017, 7:00 PM), https://www.wsj.com/articles/
deregulators-must-follow-the-law-so-regulators-will-too-1495494029.
\75\Request for Information Regarding the Fiduciary Rule and
Prohibited Transaction Exemptions, 82 Fed. Reg. 128, 31278 (Jul. 6,
2017). The Securities and Exchange Commission requested public comment
on the standard of conduct for broker-dealers, which could affect
retirement savers. See Sec. & Exchange Commission, Public Comments from
Retail Investors and Other Interested Parties on Standards of Conduct
for Investment Advisers and Broker-Dealers (2017), https://www.sec.gov/
news/public-statement/statement-chairman-clayton-2017-05-31.
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CONCERNS WITH DOL'S 2016 REGULATION
DOL's regulation significantly disrupted the retirement
services marketplace. Based on overwhelming testimony from a
diverse group of stakeholders, the final rule will restrict
access to affordable financial advice for lower- and middle-
income Americans, and make it harder for small businesses to
set up retirement plans. For these reasons, the rule should be
repealed and replaced with the substance of H.R. 2823.
Restricted access to advice
The 2016 regulations will have the net effect of locking
lower- and middle-income investors out of the advice
market.\76\ According to recent studies, account minimums and
prices are expected to rise in connection with this regulation,
increasing the advice gap for low-balance savers.\77\ The
consequences are dire, with one study estimating that as many
as 28 million Americans could be forced out of managed
retirement accounts.\78\ Advisors should have a legal duty to
act in the ``best interests'' of their clients; however,
``fiduciary'' status under the 2016 regulations would result in
the legal prohibition of most transactions because of how the
advisor is compensated.\79\ At a HELP Subcommittee hearing in
June 2015, Mr. Kent Mason, a partner at Davis and Harman LLP,
testified to this effect about the proposed rule:
---------------------------------------------------------------------------
\76\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Emp., Lab., and Pensions of the H. Comm. on Educ.
and the Workforce, 114th Cong. 5 (Jun. 17, 2015) (written testimony of
Kent Mason, Partner, Davis & Harman LLP).
\77\U.S. Chamber of Commerce, The Data is in: The Fiduciary Rule
will Harm Small Retirement Savers, 5 (Spring 2017), https://
www.uschamber.com/sites/default/files/ccmc_
fiduciaryrule_harms_smallbusiness.pdf.
\78\Meghan Milloy, The Consequences of the fiduciary Rule for
Consumers, American Action Forum, (Apr. 10, 2017) https://
www.americanactionforum.org/research/consequences-fiduciary-rule-
consumers/ (assuming a minimum account balance requirement of $30,000).
\79\Mason, supra note 76, 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.\80\
---------------------------------------------------------------------------
\80\Id. at 5.
DOL claims its goal is not to eliminate commission-based
accounts,\81\ but it failed to adequately rectify this gaping
inadequacy in the 2016 regulations. For example, while the BIC
exemption permits advisors to continue to receive commissions
under certain circumstances, there are several onerous
requirements that will increase the cost of advice, which will
inevitably be passed on to investors. In fact, one survey found
90 percent of financial professionals believe consumers will
pay more for professional advice services as a result of the
rule.\82\ Those costs will make continued advice to small and
mid-size accounts unaffordable or unavailable.\83\
---------------------------------------------------------------------------
\81\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Emp., Lab., 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, Dep't of Labor).
\82\U.S. Chamber of Commerce, supra note 77, at 5.
\83\Restricting Access to Financial Advice: Evaluating the Costs
and Consequences for Working Families and Retirees: Hearing Before the
Subcomm. on Health, Emp., Lab., 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).
---------------------------------------------------------------------------
Even worse, while the BIC exemption allows for commissions
under certain circumstances, the type of advice offered may be
limited in a way that could not be in the client's best
interest, solely because of the advisor's means of
compensation.\84\ Additionally, the BIC exemption envisions
class action litigation under state law. The Investment Company
Institute voiced concern that this litigation tool will not
protect investors from bad advice but will effectively price
small-balance savers out of the market:\85\
---------------------------------------------------------------------------
\84\Campbell, supra note 19, at 2.
\85\Letter from Paul Schott Stevens, President & CEO, Inv. Co.
Inst. to the Hon. Phil Roe, member of Congress (July 18, 2017) (on file
with the Committee).
As we have noted in numerous commentary, the
fiduciary rulemaking by the Department is excessively
convoluted and--without significant revisions--will
harm the very individuals it was designed to protect.
Retirement savers with smaller balances are in
particular jeopardy of losing access to retirement
advice or products given the sheer compliance burden
and litigation risk facing advisors under the
Department's fiduciary duty rule. Promoting litigation
as an enforcement strategy--as the Department has
done--brings significant risk, expense and
uncertainty.\86\
---------------------------------------------------------------------------
\86\Id.
In fact, this new requirement could impose between $70 and
$150 million in legal costs each year.\87\ Clearly, the costs
associated with this litigation will drive costs up for those
least able to bear it--low- and middle-income retirement
savers.
---------------------------------------------------------------------------
\87\U.S. Chamber of Commerce, supra note 77, at 5.
---------------------------------------------------------------------------
Even worse, the rule reduces the educational material that
can be provided. For example, if an IRA provider notes a sample
asset allocation, it cannot mention examples of funds in those
asset classes without triggering fiduciary duties. Therefore,
IRA owners will likely be deprived of that information. During
the June 17, 2015, HELP Subcommittee hearing, Brian Reid,
Ph.D., gave the following warning:
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.\88\
---------------------------------------------------------------------------
\88\Reid, supra note 8, at 6.
Mr. Jules Gaudreau, testifying 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.\89\
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\89\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Emp., Lab., and Pensions of the H. Comm. on Educ. and the
Workforce, 114th Cong. 3 (Dec. 2, 2015) (written testimony of Mr. Jules
O. Gaudreau, Jr. ChFC, CIC, President, The Gaudreau Group, Inc.).
The Honorable Brad Campbell concurred with these sentiments
at the May 18, 2017, HELP Subcommittee hearing stating,
``working with a professional is about more than picking
investments--it is about a relationship that includes education
and other financial assistance, no matter how the professional
is paid.''\90\
---------------------------------------------------------------------------
\90\Campbell, supra note 19, at 4.
---------------------------------------------------------------------------
Fewer employer-provided retirement plans
Small business owners provide nearly half a trillion
dollars in retirement savings for 9 million households.\91\ It
was already difficult for employers to offer retirement plans,
and unfortunately, DOL's 2016 regulations only added more
impediments. According to Mr. Campbell witness testimony:
---------------------------------------------------------------------------
\91\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.
The cumulative effect of decades of regulation and
legislation has increased the burden on employers
sponsoring retirement plans, making it more difficult--
especially for small employers--to offer retirement
plans to their workers. While well-intentioned, the
growth of rules and requirements over time has
increased significantly the complexity of administering
retirement plans. Though some simplified plan designs
are available to small employers that reduce the
administrative complexity, they also come with real
restrictions, such as reduced limits on the amount
workers and employers can contribute to the plan.\92\
---------------------------------------------------------------------------
\92\Campbell, supra note 19, at 3.
In a letter in support of H.R. 2823, the National
Association for the Self-Employed voiced concerns about the
DOL's 2016 regulations' effect on small businesses, arguing
that a one-size-fits-all regulation ``results in increased
costs for our smallest businesses. To have a strong and healthy
workforce, we need a small business community that can flourish
and strengthen our economy. Superfluous rules like these are
simply a barrier to economic growth.''\93\
---------------------------------------------------------------------------
\93\Letter from Katie Vlietstra, Vice President of Gov't Rel. &
Pub. Aff., Nat'l. Ass'n for the Self-Employed to the Hon. Phil Roe,
member of Congress (June 12, 2017), https://www.nase.org/sf-docs/
default-source/advocacy-documents/20170612-fidicury-legislation-letter-
of-support.pdf? sfvrsn=0.
---------------------------------------------------------------------------
DOL's 2016 regulations hold large and small businesses to
different standards, with greater restrictions and additional
burdens placed on small businesses. Under most circumstances,
merely selling advice services is not fiduciary ``investment
advice.''\94\ In one counterproductive exception, however,
retirement advisors would trigger fiduciary duties if they sell
to an employer-sponsored plan managing under $50 million in
assets, such as a small business's plan.\95\ Because of the
complicated new requirements, institutions providing retirement
plans are prohibited from offering assistance to small business
plan sponsors in selecting investment options to offer their
employees. However, those selling to larger plans do not have
this requirement.
---------------------------------------------------------------------------
\94\Final Rule, 81 Fed. Reg. at 20997-98.
\95\Final Rule, 81 Fed. Reg. at 20999.
---------------------------------------------------------------------------
At a December 2, 2015, HELP Subcommittee hearing, Ms.
Rachel Doba criticized the proposed rule's concept that small
businesses should be treated differently:
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 sell 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.\96\
---------------------------------------------------------------------------
\96\Principles for Ensuring Retirement Advice Serves the Best
Interests of Working Families and Retirees: Hearing Before the Subcomm.
on Health, Emp., Lab., 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).
Because of the complicated new requirements, institutions
providing retirement plans are effectively 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.
To continue providing services to small businesses,
advisors may either need to increase fees or qualify for an
exemption. Amplifying these concerns, the National Federation
of Independent Business (NFIB) sent a comment letter to DOL,
addressing questions in President Trump's memorandum and
criticizing the regulation because advisors will no longer
provide advice to small businesses that establish retirement
plans in an affordable manner.\97\ According to NFIB,
``employees of these small businesses--the very individuals the
Rule purports to benefit--stand to lose access to retirement
benefits.''\98\
---------------------------------------------------------------------------
\97\Letter from Daniel Bosch, Senior Manager, Reg. Pol'y, Nat'l
Fed'n of Indep. Bus. to the Emp. Benefits Sec. Admin. (Mar. 16, 2017),
https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/
rules-and-regulations/public-comments/1210-AB79/00975.pdf.
\98\Id. at 5.
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LEGISLATION TO ENHANCE RETIREMENT SECURITY
On June 8, 2017, Rep. Roe introduced the Affordable
Retirement Advice for Savers Act (H.R. 2823) to repeal the
Obama administration's fiduciary rule and protect access to
affordable retirement advice for low- and middle-income
savers.\99\ The bill amends both ERISA and the tax code to
establish a statutory definition of ``investment advice'' and
ensures that all financial professionals providing personalized
advice about retirement investments, distributions, or the use
of other advisors are legally required to act in the best
interest of their clients. The technical provisions of this
legislation were described supra.
---------------------------------------------------------------------------
\99\H.R. 2823, 115th Cong. (2017).
---------------------------------------------------------------------------
The legislation reflects the sponsors' shared commitment to
preserving access to affordable retirement advice for workers,
retirees, and small business owners while maintaining important
protections under ERISA and the tax code. Generally, the bill
broadens the definition of ``investment advice'' such that a
fiduciary relationship occurs any time an advisor provides one
of a broad array of recommendations relating to retirement
accounts. The relationship occurs when there is an
acknowledgement of fiduciary status or a mutual agreement that
the advice is personalized and that the advice recipient
intends to materially rely on the recommendation when making
decisions about plan assets.
Further, the bill provides greater protections for savers
by prohibiting an advisor from disclaiming a mutual agreement
unless the advisor makes certain explicit disclosures and an
objective person would reasonably conclude there was no mutual
agreement. The bill also exempts advice from the prohibited
transaction rules so long as only reasonable compensation is
paid and certain disclosure requirements are met. Additionally,
the bill amends the tax code to provide an exemption from the
prohibited transaction rules if, among other requirements, an
advisor places the interest of the client above the advisor's
own.
More specifically, the legislation does the following:
Repeals the Obama-era 2016 regulation;
Ensures personalized retirement advice about
investments, distributions, or hiring other advisors
triggers fiduciary obligations;
Requires financial professionals who advise
IRAs to act in their clients' best interests;
Adds a provision to the tax code requiring,
as a condition of an exemption, that the advisor act
with ``care, skill, prudence, and diligence'' based on
the situation and must place the interest of the client
above the advisor's own;
Preserves the ability of retirement savers
to receive financial education, such as examples of
investment alternatives that fit within asset classes;
Encourages the creation of small-business
retirement plans by permitting advisors to provide
information to small businesses without immediately
incurring fiduciary liability;
Enables personalized advice for low-balance
accounts by rejecting the Obama administration's rules
requiring commission-based advisors to comply with
impractical reporting requirements; and
Permits advice regarding 401(k)
distributions (including rollovers), so long as the
advice is in the participant's best interest, and
provides advisors two years to comply with the new
requirements.
Conclusion
H.R. 2823, the Affordable Retirement Advice for Savers Act,
protects access to affordable retirement advice for low- and
middle-income individuals by overturning the DOL's flawed 2016
regulations that amended the regulatory definition of
``fiduciary'' under ERISA and the tax code. Additionally, H.R.
2823 strengthens 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 interests of their clients.
Section-by-Section
The following is a section-by-section analysis of the
Amendment in the Nature of a Substitute offered by Rep. Roe and
reported favorably by the Committee.
Section 1. Provides the short title is the ``Affordable
Retirement Advice for Savers Act.''
Section 2. Repeals the DOL's fiduciary definition
rulemaking and regulations and prohibited transaction
exemptions amended or repealed by such rulemaking.
Section 3. Amends the definition of ``investment advice''
under the Employee Retirement Income Security Act of 1974 and
the Internal Revenue Code; exempts certain transactions related
to investment advice; and prescribes effective dates,
grandfathered transactions and services, 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. 2823 protects access to affordable retirement
advice by overturning DOL's flawed regulation that amended the
regulatory definition of ``fiduciary'' under ERISA and the tax
code.
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. 2823 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
goal of H.R. 2823 is to ensure 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. Additionally, the bill
protects access to affordable retirement advice by overturning
the DOL regulation amending the regulatory definition of
``fiduciary'' under ERISA and the tax code.
Duplication of Federal Programs
No provision of H.R. 2823 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. 2823 does not
specifically direct the completion of any specific rulemakings
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. 2823 from the Director of the
Congressional Budget Office:
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 18, 2017.
Hon. Virginia Foxx,
Chairwoman, Committee on Education and the Workforce,
House of Representatives, Washington, DC.
Dear Madam Chairwoman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2823, the
Affordable Retirement Advice for Savers Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Noah
Meyerson.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 2823--Affordable Retirement Advice for Savers Act
H.R. 2823 would repeal regulations that are commonly
referred to as the ``fiduciary rule.'' Those regulations
broaden the types of financial advice about pension and
retirement plans that impose a fiduciary obligation on the
advisor, which means that the advice must be in the sole
interest of plan participants. The Department of Labor issued
that rule on April 8, 2016. Parts of the rule became effective
on June 9, 2017, and under current law, the rule takes full
effect on January 1, 2018. H.R. 2823 would reinstate the
previously existing regulations.
In addition, the bill would amend the prohibited
transaction (or ``self-dealing'') rules applicable under the
Internal Revenue Code and the Employee Retirement Income
Security Act of 1974 to fiduciaries of employer-sponsored
pension and retirement plans, individual retirement accounts,
and health savings accounts. The bill would add a definition of
investment advice that would be used to determine when a
fiduciary relationship exists. The bill also would add a new
statutory exemption related to investment advice that a
fiduciary can provide to those tax-favored plans and accounts,
plan participants, or beneficiaries. Among other provisions,
H.R. 2823 would change requirements regarding disclosure of
potential compensation accruing to the fiduciary or an
affiliate.
The staff of the Joint Committee on Taxation (JCT)
estimates that the bill would have a negligible effect on
revenues for the period between 2017 and 2027. Because enacting
H.R. 2823 would affect revenues, pay-as-you-go procedures
apply. Enacting the bill would not affect direct spending.
CBO and JCT estimate that enacting H.R. 2823 would not
increase net direct spending or on-budget deficits by more than
$5 billion in any of the four consecutive 10-year periods
beginning in 2028.
CBO and JCT have determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Noah Meyerson.
The estimate was approved by Theresa Gullo, Assistant Director
for Budget Analysis.
Committee Cost Estimate
Clause 3(d)(1) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison of the
costs that would be incurred in carrying out H.R. 2823.
However, clause 3(d)(2)(B) of that rule provides that this
requirement does not apply when the Committee has included in
its report a timely submitted cost estimate of the bill
prepared by the Director of the Congressional Budget Office
under section 402 of the Congressional Budget Act.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic and existing law in which no change is
proposed is shown in roman):
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):
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
* * * * * * *
TITLE I--PROTECTION OF EMPLOYEE BENEFIT RIGHTS
Subtitle A--General Provisions
* * * * * * *
DEFINITIONS
Sec. 3. For purposes of this title:
(1) The terms ``employee welfare benefit plan'' and ``welfare
plan'' mean any plan, fund, or program which was heretofore or
is hereafter established or maintained by an employer or by an
employee organization, or by both, to the extent that such
plan, fund, or program was established or is maintained for the
purpose of providing for its participants or their
beneficiaries, through the purchase of insurance or otherwise,
(A) medical, surgical, or hospital care or benefits, or
benefits in the event of sickness, accident, disability, death
or unemployment, or vacation benefits, apprenticeship or other
training programs, or day care centers, scholarship funds, or
prepaid legal services, or (B) any benefit described in section
302(c) of the Labor Management Relations Act, 1947 (other than
pensions on retirement or death, and insurance to provide such
pensions).
(2)(A) Except as provided in subparagraph (B), the terms
``employee pension benefit plan'' and ``pension plan'' mean any
plan, fund, or program which was heretofore or is hereafter
established or maintained by an employer or by an employee
organization, or by both, to the extent that by its express
terms or as a result of surrounding circumstances such plan,
fund, or program--
(i) provides retirement income to employees, or
(ii) results in a deferral of income by employees for
periods extending to the termination of covered
employment or beyond,
regardless of the method of calculating the contributions made
to the plan, the method of calculating the benefits under the
plan or the method of distributing benefits from the plan. A
distribution from a plan, fund, or program shall not be treated
as made in a form other than retirement income or as a
distribution prior to termination of covered employment solely
because such distribution is made to an employee who has
attained age 62 and who is not separated from employment at the
time of such distribution.
(B) The Secretary may by regulation prescribe rules
consistent with the standards and purposes of this Act
providing one or more exempt categories under which--
(i) severance pay arrangements, and
(ii) supplemental retirement income payments, under
which the pension benefits of retirees or their
beneficiaries are supplemented to take into account
some portion or all of the increases in the cost of
living (as determined by the Secretary of Labor) since
retirement,
shall, for purposes of this title, be treated as welfare plans
rather than pension plans. In the case of any arrangement or
payment a principal effect of which is the evasion of the
standards or purposes of this Act applicable to pension plans,
such arrangement or payment shall be treated as a pension plan.
An applicable voluntary early retirement incentive plan (as
defined in section 457(e)(11)(D)(ii) of the Internal Revenue
Code of 1986) making payments or supplements described in
section 457(e)(11)(D)(i) of such Code, and an applicable
employment retention plan (as defined in section 457(f)(4)(C)
of such Code) making payments of benefits described in section
457(f)(4)(A) of such Code, shall, for purposes of this title,
be treated as a welfare plan (and not a pension plan) with
respect to such payments and supplements.
(3) The term ``employee benefit plan'' or ``plan'' means an
employee welfare benefit plan or an employee pension benefit
plan or a plan which is both an employee welfare benefit plan
and an employee pension benefit plan.
(4) The term ``employee organization'' means any labor union
or any organization of any kind, or any agency or employee
representation committee, association, group, or plan, in which
employees participate and which exists for the purpose, in
whole or in part, of dealing with employers concerning an
employee benefit plan, or other matters incidental to
employment relationships; or any employees' beneficiary
association organized for the purpose in whole or in part, of
establishing such a plan.
(5) The term ``employer'' means any person acting directly as
an employer, or indirectly in the interest of an employer, in
relation to an employee benefit plan; and includes a group or
association of employers acting for an employer in such
capacity.
(6) The term ``employee'' means any individual employed by an
employer.
(7) The term ``participant'' means any employee or former
employee of an employer, or any member or former member of an
employee organization, who is or may become eligible to receive
a benefit of any type from an employee benefit plan which
covers employees of such employer or members of such
organization, or whose beneficiaries may be eligible to receive
any such benefit.
(8) The term ``beneficiary'' means a person designated by a
participant, or by the terms of an employee benefit plan, who
is or may become entitled to a benefit thereunder.
(9) The term ``person'' means an individual, partnership,
joint venture, corporation, mutual company, joint-stock
company, trust, estate, unincorporated organization,
association, or employee organization.
(10) The term ``State'' includes any State of the United
States, the District of Columbia, Puerto Rico, the Virgin
Islands, American Samoa, Guam, Wake Island, and the Canal Zone.
The term ``United States'' when used in the geographic sense
means the States and the Outer Continental Shelf lands defined
in the Outer Continental Shelf Lands Act (43 U.S.C. 1331-1343).
(11) The term ``commerce'' means trade, traffic, commerce,
transportation, or communication between any State and any
place outside thereof.
(12) The term ``industry or activity affecting commerce''
means any activity, business, or industry in commerce or in
which a labor dispute would hinder or obstruct commerce or the
free flow of commerce, and includes any activity or industry
``affecting commerce'' within the meaning of the Labor
Management Relations Act, 1947, or the Railway Labor Act.
(13) The term ``Secretary'' means the Secretary of Labor.
(14) The term ``party in interest'' means, as to an employee
benefit plan--
(A) any fiduciary (including, but not limited to, any
administrator, officer, trustee, or custodian),
counsel, or employee of such employee benefit plan;
(B) a person providing services to such plan;
(C) an employer any of whose employees are covered by
such plan;
(D) an employee organization any of whose members are
covered by such plan;
(E) an owner, direct or indirect, of 50 percent or
more of--
(i) the combined voting power of all classes
of stock entitled to vote or the total value of
shares of all classes of stock of a
corporation,
(ii) the capital interest or the profits
interest of a partnership, or
(iii) the beneficial interest of a trust or
unincorporated enterprise,
which is an employer or an employee organization
described in subparagraph (C) or (D);
(F) a relative (as defined in paragraph (15)) of any
individual described in subparagraph (A), (B), (C), or
(E);
(G) a corporation, partnership, or trust or estate of
which (or in which) 50 percent or more of--
(i) the combined voting power of all classes
of stock entitled to vote or the total value of
shares of all classes of stock of such
corporation,
(ii) the capital interest or profits interest
of such partnership, or
(iii) the beneficial interest of such trust
or estate,
is owned directly or indirectly, or held by persons
described in subparagraph (A), (B), (C), (D), or (E);
(H) an employee, officer, director (or an individual
having powers or responsibilities similar to those of
officers or directors), or a 10 percent or more
shareholder directly or indirectly, of a person
described in subparagraph (B), (C), (D), (E), or (G),
or of the employee benefit plan; or
(I) a 10 percent or more (directly or indirectly in
capital or profits) partner or joint venturer of a
person described in subparagraph (B), (C), (D), (E), or
(G).
The Secretary, after consultation and coordination with the
Secretary of the Treasury, may by regulation prescribe a
percentage lower than 50 percent for subparagraph (E) and (G)
and lower than 10 percent for subparagraph (H) or (I). The
Secretary may prescribe regulations for determining the
ownership (direct or indirect) of profits and beneficial
interests, and the manner in which indirect stockholdings are
taken into account. Any person who is a party in interest with
respect to a plan to which a trust described in section
501(c)(22) of the Internal Revenue Code of 1986 is permitted to
make payments under section 4223 shall be treated as a party in
interest with respect to such trust.
(15) The term ``relative'' means a spouse, ancestor, lineal
descendant, or spouse of a lineal descendant.
(16)(A) The term ``administrator'' means--
(i) the person specifically so designated by the
terms of the instrument under which the plan is
operated;
(ii) if an administrator is not so designated, the
plan sponsor; or
(iii) in the case of a plan for which an
administrator is not designated and a plan sponsor
cannot be identified, such other person as the
Secretary may by regulation prescribe.
(B) The term ``plan sponsor'' means (i) the employer in the
case of an employee benefit plan established or maintained by a
single employer, (ii) the employee organization in the case of
a plan established or maintained by an employee organization,
or (iii) in the case of a plan established or maintained by two
or more employers or jointly by one or more employers and one
or more employee organizations, the association, committee,
joint board of trustees, or other similar group of
representatives of the parties who establish or maintain the
plan.
(17) The term ``separate account'' means an account
established or maintained by an insurance company under which
income, gains, and losses, whether or not realized, from assets
allocated to such account, are, in accordance with the
applicable contract, credited to or charged against such
account without regard to other income, gains, or losses of the
insurance company.
(18) The term ``adequate consideration'' when used in part 4
of subtitle B means (A) in the case of a security for which
there is a generally recognized market, either (i) the price of
the security prevailing on a national securities exchange which
is registered under section 6 of the Securities Exchange Act of
1934, or (ii) if the security is not traded on such a national
securities exchange, a price not less favorable to the plan
than the offering price for the security as established by the
current bid and asked prices quoted by persons independent of
the issuer and of any party in interest; and (B) in the case of
an asset other than a security for which there is a generally
recognized market, the fair market value of the asset as
determined in good faith by the trustee or named fiduciary
pursuant to the terms of the plan and in accordance with
regulations promulgated by the Secretary.
(19) The term ``nonforfeitable'' when used with respect to a
pension benefit or right means a claim obtained by a
participant or his beneficiary to that part of an immediate or
deferred benefit under a pension plan which arises from the
participant's service, which is unconditional, and which is
legally enforceable against the plan. For purposes of this
paragraph, a right to an accrued benefit derived from employer
contributions shall not be treated as forfeitable merely
because the plan contains a provision described in section
203(a)(3).
(20) The term ``security'' has the same meaning as such term
has under section 2(1) of the Securities Act of 1933 (15 U.S.C.
77b(1)).
(21)(A) Except as otherwise provided in subparagraph (B), a
person is a fiduciary with respect to a plan to the extent (i)
he exercises any discretionary authority or discretionary
control respecting management of such plan or exercises any
authority or control respecting management or disposition of
its assets, (ii) he renders investment advice for a fee or
other compensation, direct or indirect, with respect to any
moneys or other property of such plan, or has any authority or
responsibility to do so, or (iii) he has any discretionary
authority or discretionary responsibility in the administration
of such plan. Such term includes any person designated under
section 405(c)(1)(B).
(B) If any money or other property of an employee benefit
plan is invested in securities issued by an investment company
registered under the Investment Company Act of 1940, such
investment shall not by itself cause such investment company or
such investment company's investment adviser or principal
underwriter to be deemed to be a fiduciary or a party in
interest as those terms are defined in this title, except
insofar as such investment company or its investment adviser or
principal underwriter acts in connection with an employee
benefit plan covering employees of the investment company, the
investment adviser, or its principal underwriter. Nothing
contained in this subparagraph shall limit the duties imposed
on such investment company, investment adviser, or principal
underwriter by any other law.
(C)(i) For purposes of clause (ii) of subparagraph (A), the
term ``investment advice'' means a recommendation communicated
electronically, on paper, or orally that--
(I) relates to--
(aa) the advisability of acquiring, holding,
disposing, or exchanging any moneys or other
property of a plan by the plan, plan
participants, or plan beneficiaries, including
any recommendation whether to take a
distribution of benefits from such plan or any
recommendation relating to the investment of
any moneys or other property of such plan to be
distributed from such plan;
(bb) the management of moneys or other
property of such plan, including
recommendations relating to the management of
moneys or other property to be distributed from
such plan; or
(cc) the advisability of retaining or ceasing
to retain a person who would receive a fee or
other compensation for providing any of the
types of advice described in this subclause;
and
(II) is rendered pursuant to--
(aa) a written acknowledgment, provided
electronically or on paper, of the obligation
of the advisor to comply with section 404 with
respect to the provision of such
recommendation; or
(bb) a mutual agreement, arrangement, or
understanding, which may include limitations on
scope, timing, and responsibility to provide
ongoing monitoring or advice services, between
the person making such recommendation and the
plan that such recommendation is individualized
to the plan and such plan intends to materially
rely on such recommendation in making
investment or management decisions with respect
to any moneys or other property of such plan.
(ii) For purposes of clause (i)(II)(bb), any disclaimer of a
mutual agreement, arrangement, or understanding shall state
only the following: ``This communication is not individualized
to you, and you are not intended to rely materially on this
communication in making investment or management decisions.''.
Such disclaimer shall not be effective unless such disclaimer
is in writing and is communicated in a clear and prominent
manner and an objective person would reasonably conclude that,
based on all the facts and circumstances, there was not a
mutual agreement, arrangement, or understanding.
(iii) For purposes of clause (i)(II)(bb), a communication
shall not be considered to be a recommendation made pursuant to
a mutual agreement, arrangement, or understanding, if such
communication contains the disclaimer required by clause (ii),
and--
(I) it is provided in conjunction with clear and
prominent disclosure in writing to a plan, plan
participant, or beneficiary that the person providing
the communication is doing so in its marketing or sales
capacity, including any communication regarding the
terms and conditions of the engagement of the person
providing the communication, 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;
(II) the person providing the communication is a
current or potential counterparty or service provider
to the plan in connection with any transaction based on
the communication, but only if--
(aa) the plan is represented, in connection
with such transaction, by a plan fiduciary that
is independent of the person providing the
communication, and, except in the case of a
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)))),
independent of the plan sponsor; and
(bb) prior to such transaction, the
independent plan fiduciary represents in
writing to the person providing the
communication that it is aware that the person
has a financial interest in the transaction and
that it has determined that the person is not
intending to provide investment advice within
the meaning of this subparagraph or to
otherwise act as a fiduciary to the plan
subject to section 404;
(III) the person providing the communication is an
employee of any sponsoring employer or affiliate or
employee organization who provides the communication to
the plan for no fee or other compensation other than
the employee's normal compensation;
(IV) the person providing the communication discloses
in writing to the plan fiduciary that the person is not
undertaking to provide investment advice as a fiduciary
to the plan subject to section 404 and the
communication consists solely of--
(aa) making available to the plan, without
regard to the individualized needs of the plan,
securities or other property or investment
products through a platform or similar
mechanism from which a plan fiduciary may
select or monitor investment alternatives; or
(bb) in connection with a platform or similar
mechanism described in item (aa)--
(AA) identifying investment
alternatives that meet objective
criteria specified by the plan, such as
criteria concerning expense ratios,
fund sizes, types of asset, or credit
quality;
(BB) providing objective financial
data and comparisons with independent
benchmarks to the plan; or
(CC) identifying a sample set of
investment alternatives based on the
plan's stated criteria in response to
an inquiry from a plan fiduciary;
(V) the communication consists solely of valuation
information; or
(VI) the communication consists solely of--
(aa) information described in Department of
Labor Interpretive Bulletin 96-1 (29 C.F.R.
2509.96-1, as in effect on January 1, 2015),
regardless of whether such education is
provided to a plan or plan fiduciary or a
participant or beneficiary;
(bb) information provided to participants or
beneficiaries regarding the factors to consider
in deciding whether to elect to receive a
distribution from a plan or an individual
retirement plan (as defined in section
7701(a)(37) of the Internal Revenue Code of
1986) and whether to roll over such
distribution to a plan or an individual
retirement plan (as defined in section
7701(a)(37) of the Internal Revenue Code of
1986), so long as any examples of different
distribution alternatives are accompanied by
all material facts and assumptions on which the
examples are based; or
(cc) any additional information treated as
education by the Secretary.
(22) The term ``normal retirement benefit'' means the greater
of the early retirement benefit under the plan, or the benefit
under the plan commencing at normal retirement age. The normal
retirement benefit shall be determined without regard to--
(A) medical benefits, and
(B) disability benefits not in excess of the
qualified disability benefit.
For purposes of this paragraph, a qualified disability benefit
is a disability benefit provided by a plan which does not
exceed the benefit which would be provided for the participant
if he separated from the service at normal retirement age. For
purposes of this paragraph, the early retirement benefit under
a plan shall be determined without regard to any benefit under
the plan which the Secretary of the Treasury finds to be a
benefit described in section 204(b)(1)(G).
(23) The term ``accrued benefit'' means--
(A) in the case of a defined benefit plan, the
individual's accrued benefit determined under the plan
and, except as provided in section 204(c)(3), expressed
in the form of an annual benefit commencing at normal
retirement age, or
(B) in the case of a plan which is an individual
account plan, the balance of the individual's account.
The accrued benefit of an employee shall not be less than the
amount determined under section 204(c)(2)(B) with respect to
the employee's accumulated contribution.
(24) The term ``normal retirement age'' means the earlier
of--
(A) the time a plan participant attains normal
retirement age under the plan, or
(B) the later of--
(i) the time a plan participant attains age
65, or
(ii) the 5th anniversary of the time a plan
participant commenced participation in the
plan.
(25) The term ``vested liabilities'' means the present value
of the immediate or deferred benefits available at normal
retirement age for participants and their beneficiaries which
are nonforfeitable.
(26) The term ``current value'' means fair market value where
available and otherwise the fair value as determined in good
faith by a trustee or a named fiduciary (as defined in section
402(a)(2)) pursuant to the terms of the plan and in accordance
with regulations of the Secretary, assuming an orderly
liquidation at the time of such determination.
(27) The term ``present value'', with respect to a liability,
means the value adjusted to reflect anticipated events. Such
adjustments shall conform to such regulations as the Secretary
of the Treasury may prescribe.
(28) The term ``normal service cost'' or ``normal cost''
means the annual cost of future pension benefits and
administrative expenses assigned, under an actuarial cost
method, to years subsequent to a particular valuation date of a
pension plan. The Secretary of the Treasury may prescribe
regulations to carry out this paragraph.
(29) The term ``accrued liability'' means the excess of the
present value, as of a particular valuation date of a pension
plan, of the projected future benefit costs and administrative
expenses for all plan participants and beneficiaries over the
present value of future contributions for the normal cost of
all applicable plan participants and beneficiaries. The
Secretary of the Treasury may prescribe regulations to carry
out this paragraph.
(30) The term ``unfunded accrued liability'' means the excess
of the accrued liability, under an actuarial cost method which
so provides, over the present value of the assets of a pension
plan. The Secretary of the Treasury may prescribe regulations
to carry out this paragraph.
(31) The term ``advance funding actuarial cost method'' or
``actuarial cost method'' means a recognized actuarial
technique utilized for establishing the amount and incidence of
the annual actuarial cost of pension plan benefits and
expenses. Acceptable actuarial cost methods shall include the
accrued benefit cost method (unit credit method), the entry age
normal cost method, the individual level premium cost method,
the aggregate cost method, the attained age normal cost method,
and the frozen initial liability cost method. The terminal
funding cost method and the current funding (pay-as-you-go)
cost method are not acceptable actuarial cost methods. The
Secretary of the Treasury shall issue regulations to further
define acceptable actuarial cost methods.
(32) The term ``governmental plan'' means a plan established
or maintained for its employees by the Government of the United
States, by the government of any State or political subdivision
thereof, or by any agency or instrumentality of any of the
foregoing. The term ``governmental plan'' also includes any
plan to which the Railroad Retirement Act of 1935 or 1937
applies, and which is financed by contributions required under
that Act and any plan of an international organization which is
exempt from taxation under the provisions of the International
Organizations Immunities Act (59 Stat. 669). The term
``governmental plan'' includes a plan which is established and
maintained by an Indian tribal government (as defined in
section 7701(a)(40) of the Internal Revenue Code of 1986), a
subdivision of an Indian tribal government (determined in
accordance with section 7871(d) of such Code), or an agency or
instrumentality of either, and all of the participants of which
are employees of such entity substantially all of whose
services as such an employee are in the performance of
essential governmental functions but not in the performance of
commercial activities (whether or not an essential government
function)
(33)(A) The term ``church plan'' means a plan established and
maintained (to the extent required in clause (ii) of
subparagraph (B)) for its employees (or their beneficiaries) by
a church or by a convention or association of churches which is
exempt from tax under section 501 of the Internal Revenue Code
of 1986.
(B) The term ``church plan'' does not include a plan--
(i) which is established and maintained primarily for
the benefit of employees (or their beneficiaries) of
such church or convention or association of churches
who are employed in connection with one or more
unrelated trades or businesses (within the meaning of
section 513 of the Internal Revenue Code of 1986), or
(ii) if less than substantially all of the
individuals included in the plan are individuals
described in subparagraph (A) or in clause (ii) of
subparagraph (C) (or their beneficiaries).
(C) For purposes of this paragraph--
(i) A plan established and maintained for its
employees (or their beneficiaries) by a church or by a
convention or association of churches includes a plan
maintained by an organization, whether a civil law
corporation or otherwise, the principal purpose or
function of which is the administration or funding of a
plan or program for the provision of retirement
benefits or welfare benefits, or both, for the
employees of a church or a convention or association of
churches, if such organization is controlled by or
associated with a church or a convention or association
of churches.
(ii) The term employee of a church or a convention or
association of churches includes--
(I) a duly ordained, commissioned, or
licensed minister of a church in the exercise
of his ministry, regardless of the source of
his compensation;
(II) an employee of an organization, whether
a civil law corporation or otherwise, which is
exempt from tax under section 501 of the
Internal Revenue Code of 1986 and which is
controlled by or associated with a church or a
convention or association of churches; and
(III) an individual described in clause (v).
(iii) A church or a convention or association of
churches which is exempt from tax under section 501 of
the Internal Revenue Code of 1986 shall be deemed the
employer of any individual included as an employee
under clause (ii).
(iv) An organization, whether a civil law corporation
or otherwise, is associated with a church or a
convention or association of churches if it shares
common religious bonds and convictions with that church
or convention or association of churches.
(v) If an employee who is included in a church plan
separates from the service of a church or a convention
or association of churches or an organization, whether
a civil law corporation or otherwise, which is exempt
from tax under section 501 of the Internal Revenue Code
of 1986 and which is controlled by or associated with a
church or a convention or association of churches, the
church plan shall not fail to meet the requirements of
this paragraph merely because the plan--
(I) retains the employee's accrued benefit or
account for the payment of benefits to the
employee or his beneficiaries pursuant to the
terms of the plan; or
(II) receives contributions on the employee's
behalf after the employee's separation from
such service, but only for a period of 5 years
after such separation, unless the employee is
disabled (within the meaning of the disability
provisions of the church plan or, if there are
no such provisions in the church plan, within
the meaning of section 72(m)(7) of the Internal
Revenue Code of 1986) at the time of such
separation from service.
(D)(i) If a plan established and maintained for its employees
(or their beneficiaries) by a church or by a convention or
association of churches which is exempt from tax under section
501 of the Internal Revenue Code of 1986 fails to meet one or
more of the requirements of this paragraph and corrects its
failure to meet such requirements within the correction period,
the plan shall be deemed to meet the requirements of this
paragraph for the year in which the correction was made and for
all prior years.
(ii) If a correction is not made within the correction
period, the plan shall be deemed not to meet the requirements
of this paragraph beginning with the date on which the earliest
failure to meet one or more of such requirements occurred.
(iii) For purposes of this subparagraph, the term
``correction period'' means--
(I) the period ending 270 days after the date of
mailing by the Secretary of the Treasury of a notice of
default with respect to the plan's failure to meet one
or more of the requirements of this paragraph; or
(II) any period set by a court of competent
jurisdiction after a final determination that the plan
fails to meet such requirements, or, if the court does
not specify such period, any reasonable period
determined by the Secretary of the Treasury on the
basis of all the facts and circumstances, but in any
event not less than 270 days after the determination
has become final; or
(III) any additional period which the Secretary of
the Treasury determines is reasonable or necessary for
the correction of the default,
whichever has the latest ending date.
(34) The term ``individual account plan'' or ``defined
contribution plan'' means a pension plan which provides for an
individual account for each participant and for benefits based
solely upon the amount contributed to the participant's
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be
allocated to such participant's account.
(35) The term ``defined benefit plan'' means a pension plan
other than an individual account plan; except that a pension
plan which is not an individual account plan and which provides
a benefit derived from employer contributions which is based
partly on the balance of the separate account of a
participant--
(A) for the purposes of section 202, shall be treated
as an individual account plan, and
(B) for the purposes of paragraph (23) of this
section and section 204, shall be treated as an
individual account plan to the extent benefits are
based upon the separate account of a participant and as
a defined benefit plan with respect to the remaining
portion of benefits under the plan.
(36) The term ``excess benefit plan'' means a plan maintained
by an employer solely for the purpose of providing benefits for
certain employees in excess of the limitations on contributions
and benefits imposed by section 415 of the Internal Revenue
Code of 1986 on plans to which that section applies, without
regard to whether the plan is funded. To the extent that a
separable part of a plan (as determined by the Secretary of
Labor) maintained by an employer is maintained for such
purpose, that part shall be treated as a separate plan which is
an excess benefit plan.
(37)(A) The term ``multiemployer plan'' means a plan--
(i) to which more than one employer is required to
contribute,
(ii) which is maintained pursuant to one or more
collective bargaining agreements between one or more
employee organizations and more than one employer, and
(iii) which satisfies such other requirements as the
Secretary may prescribe by regulation.
(B) For purposes of this paragraph, all trades or businesses
(whether or not incorporated) which are under common control
within the meaning of section 4001(b)(1) are considered a
single employer.
(C) Notwithstanding subparagraph (A), a plan is a
multiemployer plan on and after its termination date if the
plan was a multiemployer plan under this paragraph for the plan
year preceding its termination date.
(D) For purposes of this title, notwithstanding the preceding
provisions of this paragraph, for any plan year which began
before the date of the enactment of the Multiemployer Pension
Plan Amendments Act of 1980, the term ``multiemployer plan''
means a plan described in section 3(37) of this Act as in
effect immediately before such date.
(E) Within one year after the date of the enactment of the
Multiemployer Pension Plan Amendments Act of 1980, a
multiemployer plan may irrevocably elect, pursuant to
procedures established by the corporation and subject to the
provisions of sections 4403(b) and (c), that the plan shall not
be treated as a multiemployer plan for all purposes under this
Act or the Internal Revenue Code of 1954 if for each of the
last 3 plan years ending prior to the effective date of the
Multiemployer Pension Plan Amendments Act of 1980--
(i) the plan was not a multiemployer plan because the
plan was not a plan described in section 3(37)(A)(iii)
of this Act and section 414(f)(1)(C) of the Internal
Revenue Code of 1954 (as such provisions were in effect
on the day before the date of the enactment of the
Multiemployer Pension Plan Amendments Act of 1980 );
and
(ii) the plan had been identified as a plan that was
not a multiemployer plan in substantially all its
filings with the corporation, the Secretary of Labor
and the Secretary of the Treasury.
(F)(i) For purposes of this title a qualified football
coaches plan--
(I) shall be treated as a multiemployer plan to the
extent not inconsistent with the purposes of this
subparagraph; and
(II) notwithstanding section 401(k)(4)(B) of the
Internal Revenue Code of 1986, may include a qualified
cash and deferred arrangement.
(ii) For purposes of this subparagraph, the term ``qualified
football coaches plan'' means any defined contribution plan
which is established and maintained by an organization--
(I) which is described in section 501(c) of such
Code;
(II) the membership of which consists entirely of
individuals who primarily coach football as full-time
employees of 4-year colleges or universities described
in section 170(b)(1)(A)(ii) of such Code; and
(III) which was in existence on September 18, 1986.
(G)(i) Within 1 year after the enactment of the
Pension Protection Act of 2006--
(I) an election under subparagraph (E) may be
revoked, pursuant to procedures prescribed by
the Pension Benefit Guaranty Corporation, if,
for each of the 3 plan years prior to the date
of the enactment of that Act, the plan would
have been a multiemployer plan but for the
election under subparagraph (E), and
(II) a plan that meets the criteria in
clauses (i) and (ii) of subparagraph (A) of
this paragraph or that is described in clause
(vi) may, pursuant to procedures prescribed by
the Pension Benefit Guaranty Corporation, elect
to be a multiemployer plan, if--
(aa) for each of the 3 plan years
immediately preceding the first plan
year for which the election under this
paragraph is effective with respect to
the plan, the plan has met those
criteria or is so described,
(bb) substantially all of the plan's
employer contributions for each of
those plan years were made or required
to be made by organizations that were
exempt from tax under section 501 of
the Internal Revenue Code of 1986, and
(cc) the plan was established prior
to September 2, 1974.
(ii) An election under this subparagraph shall be
effective for all purposes under this Act and under the
Internal Revenue Code of 1986, starting with any plan
year beginning on or after January 1, 1999, and ending
before January 1, 2008, as designated by the plan in
the election made under clause (i)(II).
(iii) Once made, an election under this subparagraph
shall be irrevocable, except that a plan described in
clause (i)(II) shall cease to be a multiemployer plan
as of the plan year beginning immediately after the
first plan year for which the majority of its employer
contributions were made or required to be made by
organizations that were not exempt from tax under
section 501 of the Internal Revenue Code of 1986.
(iv) The fact that a plan makes an election under
clause (i)(II) does not imply that the plan was not a
multiemployer plan prior to the date of the election or
would not be a multiemployer plan without regard to the
election.
(v)(I) No later than 30 days before an election is
made under this subparagraph, the plan administrator
shall provide notice of the pending election to each
plan participant and beneficiary, each labor
organization representing such participants or
beneficiaries, and each employer that has an obligation
to contribute to the plan, describing the principal
differences between the guarantee programs under title
IV and the benefit restrictions under this title for
single employer and multiemployer plans, along with
such other information as the plan administrator
chooses to include.
(II) Within 180 days after the date of enactment of
the Pension Protection Act of 2006, the Secretary shall
prescribe a model notice under this clause.
(III) A plan administrator's failure to provide the
notice required under this subparagraph shall be
treated for purposes of section 502(c)(2) as a failure
or refusal by the plan administrator to file the annual
report required to be filed with the Secretary under
section 101(b)(1).
(vi) A plan is described in this clause if it is a
plan sponsored by an organization which is described in
section 501(c)(5) of the Internal Revenue Code of 1986
and exempt from tax under section 501(a) of such Code
and which was established in Chicago, Illinois, on
August 12, 1881.
(vii) For purposes of this Act and the Internal Revenue Code
of 1986, a plan making an election under this subparagraph
shall be treated as maintained pursuant to a collective
bargaining agreement if a collective bargaining agreement,
expressly or otherwise, provides for or permits employer
contributions to the plan by one or more employers that are
signatory to such agreement, or participation in the plan by
one or more employees of an employer that is signatory to such
agreement, regardless of whether the plan was created,
established, or maintained for such employees by virtue of
another document that is not a collective bargaining agreement.
(38) The term ``investment manager'' means any fiduciary
(other than a trustee or named fiduciary, as defined in section
402(a)(2))--
(A) who has the power to manage, acquire, or dispose
of any asset of a plan;
(B) who (i) is registered as an investment adviser
under the Investment Advisers Act of 1940; (ii) is not
registered as an investment adviser under such Act by
reason of paragraph (1) of section 203A(a) of such Act,
is registered as an investment adviser under the laws
of the State (referred to in such paragraph (1)) in
which it maintains its principal office and place of
business, and, at the time the fiduciary last filed the
registration form most recently filed by the fiduciary
with such State in order to maintain the fiduciary's
registration under the laws of such State, also filed a
copy of such form with the Secretary; (iii) is a bank,
as defined in that Act; or (iv) is an insurance company
qualified to perform services described in subparagraph
(A) under the laws of more than one State; and
(C) has acknowledged in writing that he is a
fiduciary with respect to the plan.
(39) The terms ``plan year'' and ``fiscal year of the plan''
mean, with respect to a plan, the calendar, policy, or fiscal
year on which the records of the plan are kept.
(40)(A) The term ``multiple employer welfare arrangement''
means an employee welfare benefit plan, or any other
arrangement (other than an employee welfare benefit plan),
which is established or maintained for the purpose of offering
or providing any benefit described in paragraph (1) to the
employees of two or more employers (including one or more self-
employed individuals), or to their beneficiaries, except that
such term does not include any such plan or other arrangement
which is established or maintained--
(i) under or pursuant to one or more agreements which
the Secretary finds to be collective bargaining
agreements,
(ii) by a rural electric cooperative, or
(iii) by a rural telephone cooperative association.
(B) For purposes of this paragraph--
(i) two or more trades or businesses, whether or not
incorporated, shall be deemed a single employer if such
trades or businesses are within the same control group,
(ii) the term ``control group'' means a group of
trades or businesses under common control,
(iii) the determination of whether a trade or
business is under ``common control'' with another trade
or business shall be determined under regulations of
the Secretary applying principles similar to the
principles applied in determining whether employees of
two or more trades or businesses are treated as
employed by a single employer under section 4001(b),
except that, for purposes of this paragraph, common
control shall not be based on an interest of less than
25 percent,
(iv) the term ``rural electric cooperative'' means--
(I) any organization which is exempt from tax
under section 501(a) of the Internal Revenue
Code of 1986 and which is engaged primarily in
providing electric service on a mutual or
cooperative basis, and
(II) any organization described in paragraph
(4) or (6) of section 501(c) of the Internal
Revenue Code of 1986 which is exempt from tax
under section 501(a) of such Code and at least
80 percent of the members of which are
organizations described in subclause (I), and
(v) the term ``rural telephone cooperative
association'' means an organization described in
paragraph (4) or (6) of section 501(c) of the Internal
Revenue Code of 1986 which is exempt from tax under
section 501(a) of such Code and at least 80 percent of
the members of which are organizations engaged
primarily in providing telephone service to rural areas
of the United States on a mutual, cooperative, or other
basis.
(41) Single-employer plan.--The term ``single-employer plan''
means an employee benefit plan other than a multiemployer plan.
(41) The term ``single-employer plan'' means a plan which is
not a multiemployer plan.
(42) the term ``plan assets'' means plan assets as defined by
such regulations as the Secretary may prescribe, except that
under such regulations the assets of any entity shall not be
treated as plan assets if, immediately after the most recent
acquisition of any equity interest in the entity, less than 25
percent of the total value of each class of equity interest in
the entity is held by benefit plan investors. For purposes of
determinations pursuant to this paragraph, the value of any
equity interest held by a person (other than such a benefit
plan investor) who has discretionary authority or control with
respect to the assets of the entity or any person who provides
investment advice for a fee (direct or indirect) with respect
to such assets, or any affiliate of such a person, shall be
disregarded for purposes of calculating the 25 percent
threshold. An entity shall be considered to hold plan assets
only to the extent of the percentage of the equity interest
held by benefit plan investors. For purposes of this paragraph,
the term ``benefit plan investor'' means an employee benefit
plan subject to part 4, any plan to which section 4975 of the
Internal Revenue Code of 1986 applies, and any entity whose
underlying assets include plan assets by reason of a plan's
investment in such entity.
* * * * * * *
Subtitle B--Regulatory Provisions
* * * * * * *
Part 4--Fiduciary Responsibility
* * * * * * *
EXEMPTIONS FROM PROHIBITED TRANSACTIONS
Sec. 408. (a) The Secretary shall establish an exemption
procedure for purposes of this subsection. Pursuant to such
procedure, he may grant a conditional or unconditional
exemption of any fiduciary or transaction, or class of
fiduciaries or transactions, from all or part of the
restrictions imposed by sections 406 and 407(a). Action under
this subsection may be taken only after consultation and
coordination with the Secretary of the Treasury. An exemption
granted under this section shall not relieve a fiduciary from
any other applicable provision of this Act. The Secretary may
not grant an exemption under this subsection unless he finds
that such exemption is--
(1) administratively feasible,
(2) in the interests of the plan and of its
participants and beneficiaries, and
(3) protective of the rights of participants and
beneficiaries of such plan.
Before granting an exemption under this subsection from section
406(a) or 407(a), the Secretary shall publish notice in the
Federal Register of the pendency of the exemption, shall
require that adequate notice be given to interested persons,
and shall afford interested persons opportunity to present
views. The Secretary may not grant an exemption under this
subsection from section 406(b) unless he affords an opportunity
for a hearing and makes a determination on the record with
respect to the findings required by paragraphs (1), (2), and
(3) of this subsection.
(b) The prohibitions provided in section 406 shall not apply
to any of the following transactions:
(1) Any loans made by the plan to parties in interest
who are participants or beneficiaries of the plan if
such loans (A) are available to all such participants
and beneficiaries on a reasonably equivalent basis, (B)
are not made available to highly compensated employees
(within the meaning of section 414(q) of the Internal
Revenue Code of 1986) in an amount greater than the
amount made available to other employees, (C) are made
in accordance with specific provisions regarding such
loans set forth in the plan, (D) bear a reasonable rate
of interest, and (E) are adequately secured. A loan
made by a plan shall not fail to meet the requirements
of the preceding sentence by reason of a loan repayment
suspension described under section 414(u)(4) of the
Internal Revenue Code of 1986.
(2) Contracting or making reasonable arrangements
with a party in interest for office space, or legal,
accounting, or other services necessary for the
establishment or operation of the plan, if no more than
reasonable compensation is paid therefor.
(3) A loan to an employee stock ownership plan (as
defined in section 407(d)(6)), if--
(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and
(B) such loan is at an interest rate which is
not in excess of a reasonable rate.
If the plan gives collateral to a party in interest for
such loan, such collateral may consist only of
qualifying employer securities (as defined in section
407(d)(5)).
(4) The investment of all or part of a plan's assets
in deposits which bear a reasonable interest rate in a
bank or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such
bank or other institution and employees of
affiliates of such bank or other institution,
or
(B) such investment is expressly authorized
by a provision of the plan or by a fiduciary
(other than such bank or institution or
affiliate thereof) who is expressly empowered
by the plan to so instruct the trustee with
respect to such investment.
(5) Any contract for life insurance, health
insurance, or annuities with one or more insurers which
are qualified to do business in a State, if the plan
pays no more than adequate consideration, and if each
such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a party in interest which is wholly owned
(directly or indirectly) by the employer
maintaining the plan, or by any person which is
a party in interest with respect to the plan,
but only if the total premiums and annuity
considerations written by such insurers for
life insurance, health insurance, or annuities
for all plans (and their employers) with
respect to which such insurers are parties in
interest (not including premiums or annuity
considerations written by the employer
maintaining the plan) do not exceed 5 percent
of the total premiums and annuity
considerations written for all lines of
insurance in that year by such insurers (not
including premiums or annuity considerations
written by the employer maintaining the plan).
(6) The providing of any ancillary service by a bank
or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan, and if--
(A) such bank or similar financial
institution has adopted adequate internal
safeguards which assure that the providing of
such ancillary service is consistent with sound
banking and financial practice, as determined
by Federal or State supervisory authority, and
(B) the extent to which such ancillary
service is provided is subject to specific
guidelines issued by such bank or similar
financial institution (as determined by the
Secretary after consultation with Federal and
State supervisory authority), and adherence to
such guidelines would reasonably preclude such
bank or similar financial institution from
providing such ancillary service (i) in an
excessive or unreasonable manner, and (ii) in a
manner that would be inconsistent with the best
interests of participants and beneficiaries of
employee benefit plans.
Such ancillary services shall not be provided at more
than reasonable compensation.
(7) The exercise of a privilege to convert
securities, to the extent provided in regulations of
the Secretary, but only if the plan receives no less
than adequate consideration pursuant to such
conversion.
(8) Any transaction between a plan and (i) a common
or collective trust fund or pooled investment fund
maintained by a party in interest which is a bank or
trust company supervised by a State or Federal agency
or (ii) a pooled investment fund of an insurance
company qualified to do business in a State, if--
(A) the transaction is a sale or purchase of
an interest in the fund,
(B) the bank, trust company, or insurance
company receives not more than reasonable
compensation, and
(C) such transaction is expressly permitted
by the instrument under which the plan is
maintained, or by a fiduciary (other than the
bank, trust company, or insurance company, or
an affiliate thereof) who has authority to
manage and control the assets of the plan.
(9) The making by a fiduciary of a distribution of
the assets of the plan in accordance with the terms of
the plan if such assets are distributed in the same
manner as provided under section 4044 of this Act
(relating to allocation of assets).
(10) Any transaction required or permitted under part
1 of subtitle E of title IV.
(11) A merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231.
(12) The sale by a plan to a party in interest on or
after December 18, 1987, of any stock, if--
(A) the requirements of paragraphs (1) and
(2) of subsection (e) are met with respect to
such stock,
(B) on the later of the date on which the
stock was acquired by the plan, or January 1,
1975, such stock constituted a qualifying
employer security (as defined in section
407(d)(5) as then in effect), and
(C) such stock does not constitute a
qualifying employer security (as defined in
section 407(d)(5) as in effect at the time of
the sale).
(13) Any transfer made before January 1, 2026, of
excess pension assets from a defined benefit plan to a
retiree health account in a qualified transfer
permitted under section 420 of the Internal Revenue
Code of 1986 (as in effect on the date of the enactment
of the Surface Transportation and Veterans Health Care
Choice Improvement Act of 2015).
(14) Any transaction in connection with the provision
of investment advice described in section 3(21)(A)(ii)
to a participant or beneficiary of an individual
account plan that permits such participant or
beneficiary to direct the investment of assets in their
individual account, if--
(A) the transaction is--
(i) the provision of the investment
advice to the participant or
beneficiary of the plan with respect to
a security or other property available
as an investment under the plan,
(ii) the acquisition, holding, or
sale of a security or other property
available as an investment under the
plan pursuant to the investment advice,
or
(iii) the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser or an affiliate
thereof (or any employee, agent, or
registered representative of the
fiduciary adviser or affiliate) in
connection with the provision of the
advice or in connection with an
acquisition, holding, or sale of a
security or other property available as
an investment under the plan pursuant
to the investment advice; and
(B) the requirements of subsection (g) are
met.
(15)(A) Any transaction involving the purchase or
sale of securities, or other property (as determined by
the Secretary), between a plan and a party in interest
(other than a fiduciary described in section 3(21)(A))
with respect to a plan if--
(i) the transaction involves a block trade,
(ii) at the time of the transaction, the
interest of the plan (together with the
interests of any other plans maintained by the
same plan sponsor), does not exceed 10 percent
of the aggregate size of the block trade,
(iii) the terms of the transaction, including
the price, are at least as favorable to the
plan as an arm's length transaction, and
(iv) the compensation associated with the
purchase and sale is not greater than the
compensation associated with an arm's length
transaction with an unrelated party.
(B) For purposes of this paragraph, the term ``block
trade'' means any trade of at least 10,000 shares or
with a market value of at least $200,000 which will be
allocated across two or more unrelated client accounts
of a fiduciary.
(16) Any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary), between a plan and a party in interest if--
(A) the transaction is executed through an
electronic communication network, alternative
trading system, or similar execution system or
trading venue subject to regulation and
oversight by--
(i) the applicable Federal regulating
entity, or
(ii) such foreign regulatory entity
as the Secretary may determine by
regulation,
(B) either--
(i) the transaction is effected
pursuant to rules designed to match
purchases and sales at the best price
available through the execution system
in accordance with applicable rules of
the Securities and Exchange Commission
or other relevant governmental
authority, or
(ii) neither the execution system nor
the parties to the transaction take
into account the identity of the
parties in the execution of trades,
(C) the price and compensation associated
with the purchase and sale are not greater than
the price and compensation associated with an
arm's length transaction with an unrelated
party,
(D) if the party in interest has an ownership
interest in the system or venue described in
subparagraph (A), the system or venue has been
authorized by the plan sponsor or other
independent fiduciary for transactions
described in this paragraph, and
(E) not less than 30 days prior to the
initial transaction described in this paragraph
executed through any system or venue described
in subparagraph (A), a plan fiduciary is
provided written or electronic notice of the
execution of such transaction through such
system or venue.
(17)(A) Transactions described in subparagraphs (A),
(B), and (D) of section 406(a)(1) between a plan and a
person that is a party in interest other than a
fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the
investment of the plan assets involved in the
transaction or renders investment advice (within the
meaning of section 3(21)(A)(ii)) with respect to those
assets, solely by reason of providing services to the
plan or solely by reason of a relationship to such a
service provider described in subparagraph (F), (G),
(H), or (I) of section 3(14), or both, but only if in
connection with such transaction the plan receives no
less, nor pays no more, than adequate consideration.
(B) For purposes of this paragraph, the term
``adequate consideration'' means--
(i) in the case of a security for which there
is a generally recognized market--
(I) the price of the security
prevailing on a national securities
exchange which is registered under
section 6 of the Securities Exchange
Act of 1934, taking into account
factors such as the size of the
transaction and marketability of the
security, or
(II) if the security is not traded on
such a national securities exchange, a
price not less favorable to the plan
than the offering price for the
security as established by the current
bid and asked prices quoted by persons
independent of the issuer and of the
party in interest, taking into account
factors such as the size of the
transaction and marketability of the
security, and
(ii) in the case of an asset other than a
security for which there is a generally
recognized market, the fair market value of the
asset as determined in good faith by a
fiduciary or fiduciaries in accordance with
regulations prescribed by the Secretary.
(18) Foreign exchange transactions.--Any foreign
exchange transactions, between a bank or broker-dealer
(or any affiliate of either), and a plan (as defined in
section 3(3)) with respect to which such bank or
broker-dealer (or affiliate) is a trustee, custodian,
fiduciary, or other party in interest, if--
(A) the transaction is in connection with the
purchase, holding, or sale of securities or
other investment assets (other than a foreign
exchange transaction unrelated to any other
investment in securities or other investment
assets),
(B) at the time the foreign exchange
transaction is entered into, the terms of the
transaction are not less favorable to the plan
than the terms generally available in
comparable arm's length foreign exchange
transactions between unrelated parties, or the
terms afforded by the bank or broker-dealer (or
any affiliate of either) in comparable arm's-
length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or
broker-dealer (or affiliate) for a particular
foreign exchange transaction does not deviate
by more than 3 percent from the interbank bid
and asked rates for transactions of comparable
size and maturity at the time of the
transaction as displayed on an independent
service that reports rates of exchange in the
foreign currency market for such currency, and
(D) the bank or broker-dealer (or any
affiliate of either) does not have investment
discretion, or provide investment advice, with
respect to the transaction.
(19) Cross trading.--Any transaction described in
sections 406(a)(1)(A) and 406(b)(2) involving the
purchase and sale of a security between a plan and any
other account managed by the same investment manager,
if--
(A) the transaction is a purchase or sale,
for no consideration other than cash payment
against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the
independent current market price of the
security (within the meaning of section
270.17a-7(b) of title 17, Code of Federal
Regulations),
(C) no brokerage commission, fee (except for
customary transfer fees, the fact of which is
disclosed pursuant to subparagraph (D)), or
other remuneration is paid in connection with
the transaction,
(D) a fiduciary (other than the investment
manager engaging in the cross-trades or any
affiliate) for each plan participating in the
transaction authorizes in advance of any cross-
trades (in a document that is separate from any
other written agreement of the parties) the
investment manager to engage in cross trades at
the investment manager's discretion, after such
fiduciary has received disclosure regarding the
conditions under which cross trades may take
place (but only if such disclosure is separate
from any other agreement or disclosure
involving the asset management relationship),
including the written policies and procedures
of the investment manager described in
subparagraph (H),
(E) each plan participating in the
transaction has assets of at least
$100,000,000, except that if the assets of a
plan are invested in a master trust containing
the assets of plans maintained by employers in
the same controlled group (as defined in
section 407(d)(7)), the master trust has assets
of at least $100,000,000,
(F) the investment manager provides to the
plan fiduciary who authorized cross trading
under subparagraph (D) a quarterly report
detailing all cross trades executed by the
investment manager in which the plan
participated during such quarter, including the
following information, as applicable: (i) the
identity of each security bought or sold; (ii)
the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv)
trade price and the method used to establish
the trade price,
(G) the investment manager does not base its
fee schedule on the plan's consent to cross
trading, and no other service (other than the
investment opportunities and cost savings
available through a cross trade) is conditioned
on the plan's consent to cross trading,
(H) the investment manager has adopted, and
cross-trades are effected in accordance with,
written cross-trading policies and procedures
that are fair and equitable to all accounts
participating in the cross-trading program, and
that include a description of the manager's
pricing policies and procedures, and the
manager's policies and procedures for
allocating cross trades in an objective manner
among accounts participating in the cross-
trading program, and
(I) the investment manager has designated an
individual responsible for periodically
reviewing such purchases and sales to ensure
compliance with the written policies and
procedures described in subparagraph (H), and
following such review, the individual shall
issue an annual written report no later than 90
days following the period to which it relates
signed under penalty of perjury to the plan
fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed
during the course of the review, the level of
compliance, and any specific instances of non-
compliance.
The written report under subparagraph (I) shall also
notify the plan fiduciary of the plan's right to
terminate participation in the investment manager's
cross-trading program at any time.
(20)(A) Except as provided in subparagraphs (B) and
(C), a transaction described in section 406(a) in
connection with the acquisition, holding, or
disposition of any security or commodity, if the
transaction is corrected before the end of the
correction period.
(B) Subparagraph (A) does not apply to any
transaction between a plan and a plan sponsor or its
affiliates that involves the acquisition or sale of an
employer security (as defined in section 407(d)(1)) or
the acquisition, sale, or lease of employer real
property (as defined in section 407(d)(2)).
(C) In the case of any fiduciary or other party in
interest (or any other person knowingly participating
in such transaction), subparagraph (A) does not apply
to any transaction if, at the time the transaction
occurs, such fiduciary or party in interest (or other
person) knew (or reasonably should have known) that the
transaction would (without regard to this paragraph)
constitute a violation of section 406(a).
(D) For purposes of this paragraph, the term
``correction period'' means, in connection with a
fiduciary or party in interest (or other person
knowingly participating in the transaction), the 14-day
period beginning on the date on which such fiduciary or
party in interest (or other person) discovers, or
reasonably should have discovered, that the transaction
would (without regard to this paragraph) constitute a
violation of section 406(a).
(E) For purposes of this paragraph--
(i) The term ``security'' has the meaning
given such term by section 475(c)(2) of the
Internal Revenue Code of 1986 (without regard
to subparagraph (F)(iii) and the last sentence
thereof).
(ii) The term ``commodity'' has the meaning
given such term by section 475(e)(2) of such
Code (without regard to subparagraph (D)(iii)
thereof).
(iii) The term ``correct'' means, with
respect to a transaction--
(I) to undo the transaction to the
extent possible and in any case to make
good to the plan or affected account
any losses resulting from the
transaction, and
(II) to restore to the plan or
affected account any profits made
through the use of assets of the plan.
(21)(A) Any transaction, including a contract for
service, between a person providing investment advice
described in section 3(21)(A)(ii) and the advice
recipient in connection with such investment advice,
and any transaction consisting of the provision of such
investment advice, if the following conditions are
satisfied:
(i) No more than reasonable compensation is
paid (as determined under section 408(b)(2))
for such investment advice.
(ii) If the investment advice is based on a
limited range of investment options (which may
consist, in whole or in part, of proprietary
products), such limitations shall be clearly
disclosed to the advice recipient prior to any
transaction based on the investment advice in
the form of a notice that only states the
following: ``This recommendation is based on a
limited range of investment options, and the
same or similar investments may be available at
a different cost (greater or lesser) from other
sources.''.
(iii) If the investment advice may result in
variable compensation to the person providing
the investment advice (or any affiliate of such
person), the receipt of such compensation shall
be clearly disclosed to the advice recipient
prior to any transaction based on the
investment advice. For purposes of this
subparagraph, clear disclosure of variable
compensation shall include, in a manner
calculated to be understood by the average
individual, each of the following:
(I) A notice that states only the
following: ``This recommendation may
result in varying amounts of fees or
other compensation to the person
providing the recommendation (or its
affiliate), and the same or similar
investments may be available at a
different cost (greater or lesser) from
other sources.''. Any regulations or
administrative guidance implementing
this subclause may not require this
notice to be updated more than
annually.
(II) A description of any fee or
other compensation that is directly or
indirectly payable to the person (or
its affiliate) by the advice recipient
with respect to such transaction
(expressed as an amount, formula,
percentage of assets, per capita
charge, or estimate or range of such
compensation).
(III) A description of the types and
ranges of any compensation that are
reasonably expected to be directly or
indirectly payable to the person (or
its affiliate) by any third party in
connection with such transaction
(expressed as an amount, formula,
percentage of assets, per capita
charge, or estimate or range of such
compensation).
(IV) Upon request of the advice
recipient, a disclosure of the specific
amounts of compensation described in
clause (iii) that the person will
receive in connection with the
particular transaction (expressed as an
amount, formula, percentage of assets,
per capita charge, or estimate of such
compensation).
(B) No recommendation will fail to satisfy the
conditions described in clauses (i) through (iii) of
subparagraph (A) solely because the person, acting in
good faith and with reasonable diligence, makes an
error or omission in disclosing the information
specified in such clauses, provided that the person
discloses the correct information to the advice
recipient as soon as practicable, but not later than 30
days from the date on which the person knows of such
error or omission.
(C) Any notice provided pursuant to a requirement
under clause (ii) or clause (iii)(I) of subparagraph
(A) shall have no effect on any other notice otherwise
required without regard to this title, and shall be
provided in addition to, and not in lieu of, any other
such notice.
(D) For purposes of this paragraph, the term
``affiliate'' has the meaning given in subsection
(g)(11)(B).
(c) Nothing in section 406 shall be construed to prohibit any
fiduciary from--
(1) receiving any benefit to which he may be entitled
as a participant or beneficiary in the plan, so long as
the benefit is computed and paid on a basis which is
consistent with the terms of the plan as applied to all
other participants and beneficiaries;
(2) receiving any reasonable compensation for
services rendered, or for the reimbursement of expenses
properly and actually incurred, in the performance of
his duties with the plan; except that no person so
serving who already receives full time pay from an
employer or an association of employers, whose
employees are participants in the plan, or from an
employee organization whose members are participants in
such plan shall receive compensation from such plan,
except for reimbursement of expenses properly and
actually incurred; or
(3) serving as a fiduciary in addition to being an
officer, employee, agent, or other representative of a
party in interest.
(d)(1) Section 407(b) and subsections (b), (c), and (e) of
this section shall not apply to a transaction in which a plan
directly or indirectly--
(A) lends any part of the corpus or income of the
plan to,
(B) pays any compensation for personal services
rendered to the plan to, or
(C) acquires for the plan any property from, or sells
any property to,
any person who is with respect to the plan an owner-employee
(as defined in section 401(c)(3) of the Internal Revenue Code
of 1986), a member of the family (as defined in section
267(c)(4) of such Code) of any such owner-employee, or any
corporation in which any such owner-employee owns, directly or
indirectly, 50 percent or more of the total combined voting
power of all classes of stock entitled to vote or 50 percent or
more of the total value of shares of all classes of stock of
the corporation.
(2)(A) For purposes of paragraph (1), the following shall be
treated as owner-employees:
(i) A shareholder-employee.
(ii) A participant or beneficiary of an individual
retirement plan (as defined in section 7701(a)(37) of
the Internal Revenue Code of 1986).
(iii) An employer or association of employees which
establishes such an individual retirement plan under
section 408(c) of such Code.
(B) Paragraph (1)(C) shall not apply to a transaction which
consists of a sale of employer securities to an employee stock
ownership plan (as defined in section 407(d)(6)) by a
shareholder-employee, a member of the family (as defined in
section 267(c)(4) of such Code) of any such owner-employee, or
a corporation in which such a shareholder-employee owns stock
representing a 50 percent or greater interest described in
paragraph (1).
(C) For purposes of paragraph (1)(A), the term ``owner-
employee'' shall only include a person described in clause (ii)
or (iii) of subparagraph (A).
(3) For purposes of paragraph (2), the term ``shareholder-
employee'' means an employee or officer of an S corporation (as
defined in section 1361(a)(1) of such Code) who owns (or is
considered as owning within the meaning of section 318(a)(1) of
such Code) more than 5 percent of the outstanding stock of the
corporation on any day during the taxable year of such
corporation.
(e) Sections 406 and 407 shall not apply to the acquisition
or sale by a plan of qualifying employer securities (as defined
in section 407(d)(5)) or acquisition, sale or lease by a plan
of qualifying employer real property (as defined in section
407(d)(4))--
(1) if such acquisition, sale, or lease is for
adequate consideration (or in the case of a marketable
obligation, at a price not less favorable to the plan
than the price determined under section 407(e)(1)),
(2) if no commission is charged with respect thereto,
and
(3) if--
(A) the plan is an eligible individual
account plan (as defined in section 407(d)(3)),
or
(B) in the case of an acquisition or lease of
qualifying employer real property by a plan
which is not an eligible individual account
plan, or of an acquisition of qualifying
employer securities by such a plan, the lease
or acquisition is not prohibited by section
407(a).
(f) Section 406(b)(2) shall not apply to any merger or
transfer described in subsection (b)(11).
(g) Provision of Investment Advice to Participant and
Beneficiaries.--
(1) In general.--The prohibitions provided in section
406 shall not apply to transactions described in
subsection (b)(14) if the investment advice provided by
a fiduciary adviser is provided under an eligible
investment advice arrangement.
(2) Eligible investment advice arrangement.--For
purposes of this subsection, the term ``eligible
investment advice arrangement'' means an arrangement--
(A) which either--
(i) provides that any fees (including
any commission or other compensation)
received by the fiduciary adviser for
investment advice or with respect to
the sale, holding, or acquisition of
any security or other property for
purposes of investment of plan assets
do not vary depending on the basis of
any investment option selected, or
(ii) uses a computer model under an
investment advice program meeting the
requirements of paragraph (3) in
connection with the provision of
investment advice by a fiduciary
adviser to a participant or
beneficiary, and
(B) with respect to which the requirements of
paragraph (4), (5), (6), (7), (8), and (9) are
met.
(3) Investment advice program using computer model.--
(A) In general.--An investment advice program
meets the requirements of this paragraph if the
requirements of subparagraphs (B), (C), and (D)
are met.
(B) Computer model.--The requirements of this
subparagraph are met if the investment advice
provided under the investment advice program is
provided pursuant to a computer model that--
(i) applies generally accepted
investment theories that take into
account the historic returns of
different asset classes over defined
periods of time,
(ii) utilizes relevant information
about the participant, which may
include age, life expectancy,
retirement age, risk tolerance, other
assets or sources of income, and
preferences as to certain types of
investments,
(iii) utilizes prescribed objective
criteria to provide asset allocation
portfolios comprised of investment
options available under the plan,
(iv) operates in a manner that is not
biased in favor of investments offered
by the fiduciary adviser or a person
with a material affiliation or
contractual relationship with the
fiduciary adviser, and
(v) takes into account all investment
options under the plan in specifying
how a participant's account balance
should be invested and is not
inappropriately weighted with respect
to any investment option.
(C) Certification.--
(i) In general.--The requirements of
this subparagraph are met with respect
to any investment advice program if an
eligible investment expert certifies,
prior to the utilization of the
computer model and in accordance with
rules prescribed by the Secretary, that
the computer model meets the
requirements of subparagraph (B).
(ii) Renewal of certifications.--If,
as determined under regulations
prescribed by the Secretary, there are
material modifications to a computer
model, the requirements of this
subparagraph are met only if a
certification described in clause (i)
is obtained with respect to the
computer model as so modified.
(iii) Eligible investment expert.--
The term ``eligible investment expert''
means any person--
(I) which meets such
requirements as the Secretary
may provide, and
(II) does not bear any
material affiliation or
contractual relationship with
any investment adviser or a
related person thereof (or any
employee, agent, or registered
representative of the
investment adviser or related
person).
(D) Exclusivity of recommendation.--The
requirements of this subparagraph are met with
respect to any investment advice program if--
(i) the only investment advice
provided under the program is the
advice generated by the computer model
described in subparagraph (B), and
(ii) any transaction described in
subsection (b)(14)(A)(ii) occurs solely
at the direction of the participant or
beneficiary.
Nothing in the preceding sentence shall
preclude the participant or beneficiary from
requesting investment advice other than that
described in subparagraph (A), but only if such
request has not been solicited by any person
connected with carrying out the arrangement.
(4) Express authorization by separate fiduciary.--The
requirements of this paragraph are met with respect to
an arrangement if the arrangement is expressly
authorized by a plan fiduciary other than the person
offering the investment advice program, any person
providing investment options under the plan, or any
affiliate of either.
(5) Annual audit.--The requirements of this paragraph
are met if an independent auditor, who has appropriate
technical training or experience and proficiency and so
represents in writing--
(A) conducts an annual audit of the
arrangement for compliance with the
requirements of this subsection, and
(B) following completion of the annual audit,
issues a written report to the fiduciary who
authorized use of the arrangement which
presents its specific findings regarding
compliance of the arrangement with the
requirements of this subsection.
For purposes of this paragraph, an auditor is
considered independent if it is not related to the
person offering the arrangement to the plan and is not
related to any person providing investment options
under the plan.
(6) Disclosure.--The requirements of this paragraph
are met if--
(A) the fiduciary adviser provides to a
participant or a beneficiary before the initial
provision of the investment advice with regard
to any security or other property offered as an
investment option, a written notification
(which may consist of notification by means of
electronic communication)--
(i) of the role of any party that has
a material affiliation or contractual
relationship with the fiduciary adviser
in the development of the investment
advice program and in the selection of
investment options available under the
plan,
(ii) of the past performance and
historical rates of return of the
investment options available under the
plan,
(iii) of all fees or other
compensation relating to the advice
that the fiduciary adviser or any
affiliate thereof is to receive
(including compensation provided by any
third party) in connection with the
provision of the advice or in
connection with the sale, acquisition,
or holding of the security or other
property,
(iv) of any material affiliation or
contractual relationship of the
fiduciary adviser or affiliates thereof
in the security or other property,
(v) the manner, and under what
circumstances, any participant or
beneficiary information provided under
the arrangement will be used or
disclosed,
(vi) of the types of services
provided by the fiduciary adviser in
connection with the provision of
investment advice by the fiduciary
adviser,
(vii) that the adviser is acting as a
fiduciary of the plan in connection
with the provision of the advice, and
(viii) that a recipient of the advice
may separately arrange for the
provision of advice by another adviser,
that could have no material affiliation
with and receive no fees or other
compensation in connection with the
security or other property, and
(B) at all times during the provision of
advisory services to the participant or
beneficiary, the fiduciary adviser--
(i) maintains the information
described in subparagraph (A) in
accurate form and in the manner
described in paragraph (8),
(ii) provides, without charge,
accurate information to the recipient
of the advice no less frequently than
annually,
(iii) provides, without charge,
accurate information to the recipient
of the advice upon request of the
recipient, and
(iv) provides, without charge,
accurate information to the recipient
of the advice concerning any material
change to the information required to
be provided to the recipient of the
advice at a time reasonably
contemporaneous to the change in
information.
(7) Other conditions.--The requirements of this
paragraph are met if--
(A) the fiduciary adviser provides
appropriate disclosure, in connection with the
sale, acquisition, or holding of the security
or other property, in accordance with all
applicable securities laws,
(B) the sale, acquisition, or holding occurs
solely at the direction of the recipient of the
advice,
(C) the compensation received by the
fiduciary adviser and affiliates thereof in
connection with the sale, acquisition, or
holding of the security or other property is
reasonable, and
(D) the terms of the sale, acquisition, or
holding of the security or other property are
at least as favorable to the plan as an arm's
length transaction would be.
(8) Standards for presentation of information.--
(A) In general.--The requirements of this
paragraph are met if the notification required
to be provided to participants and
beneficiaries under paragraph (6)(A) is written
in a clear and conspicuous manner and in a
manner calculated to be understood by the
average plan participant and is sufficiently
accurate and comprehensive to reasonably
apprise such participants and beneficiaries of
the information required to be provided in the
notification.
(B) Model form for disclosure of fees and
other compensation.--The Secretary shall issue
a model form for the disclosure of fees and
other compensation required in paragraph
(6)(A)(iii) which meets the requirements of
subparagraph (A).
(9) Maintenance for 6 years of evidence of
compliance.--The requirements of this paragraph are met
if a fiduciary adviser who has provided advice referred
to in paragraph (1) maintains, for a period of not less
than 6 years after the provision of the advice, any
records necessary for determining whether the
requirements of the preceding provisions of this
subsection and of subsection (b)(14) have been met. A
transaction prohibited under section 406 shall not be
considered to have occurred solely because the records
are lost or destroyed prior to the end of the 6-year
period due to circumstances beyond the control of the
fiduciary adviser.
(10) Exemption for plan sponsor and certain other
fiduciaries.--
(A) In general.--Subject to subparagraph (B),
a plan sponsor or other person who is a
fiduciary (other than a fiduciary adviser)
shall not be treated as failing to meet the
requirements of this part solely by reason of
the provision of investment advice referred to
in section 3(21)(A)(ii) (or solely by reason of
contracting for or otherwise arranging for the
provision of the advice), if--
(i) the advice is provided by a
fiduciary adviser pursuant to an
eligible investment advice arrangement
between the plan sponsor or other
fiduciary and the fiduciary adviser for
the provision by the fiduciary adviser
of investment advice referred to in
such section,
(ii) the terms of the eligible
investment advice arrangement require
compliance by the fiduciary adviser
with the requirements of this
subsection, and
(iii) the terms of the eligible
investment advice arrangement include a
written acknowledgment by the fiduciary
adviser that the fiduciary adviser is a
fiduciary of the plan with respect to
the provision of the advice.
(B) Continued duty of prudent selection of
adviser and periodic review.--Nothing in
subparagraph (A) shall be construed to exempt a
plan sponsor or other person who is a fiduciary
from any requirement of this part for the
prudent selection and periodic review of a
fiduciary adviser with whom the plan sponsor or
other person enters into an eligible investment
advice arrangement for the provision of
investment advice referred to in section
3(21)(A)(ii). The plan sponsor or other person
who is a fiduciary has no duty under this part
to monitor the specific investment advice given
by the fiduciary adviser to any particular
recipient of the advice.
(C) Availability of plan assets for payment
for advice.--Nothing in this part shall be
construed to preclude the use of plan assets to
pay for reasonable expenses in providing
investment advice referred to in section
3(21)(A)(ii).
(11) Definitions.--For purposes of this subsection
and subsection (b)(14)--
(A) Fiduciary adviser.--The term ``fiduciary
adviser'' means, with respect to a plan, a
person who is a fiduciary of the plan by reason
of the provision of investment advice referred
to in section 3(21)(A)(ii) by the person to a
participant or beneficiary of the plan and who
is--
(i) registered as an investment
adviser under the Investment Advisers
Act of 1940 (15 U.S.C. 80b-1 et seq.)
or under the laws of the State in which
the fiduciary maintains its principal
office and place of business,
(ii) a bank or similar financial
institution referred to in subsection
(b)(4) or a savings association (as
defined in section 3(b)(1) of the
Federal Deposit Insurance Act (12
U.S.C. 1813(b)(1)), but only if the
advice is provided through a trust
department of the bank or similar
financial institution or savings
association which is subject to
periodic examination and review by
Federal or State banking authorities,
(iii) an insurance company qualified
to do business under the laws of a
State,
(iv) a person registered as a broker
or dealer under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.),
(v) an affiliate of a person
described in any of clauses (i) through
(iv), or
(vi) an employee, agent, or
registered representative of a person
described in clauses (i) through (v)
who satisfies the requirements of
applicable insurance, banking, and
securities laws relating to the
provision of the advice.
For purposes of this part, a person who
develops the computer model described in
paragraph (3)(B) or markets the investment
advice program or computer model shall be
treated as a person who is a fiduciary of the
plan by reason of the provision of investment
advice referred to in section 3(21)(A)(ii) to a
participant or beneficiary and shall be treated
as a fiduciary adviser for purposes of this
subsection and subsection (b)(14), except that
the Secretary may prescribe rules under which
only 1 fiduciary adviser may elect to be
treated as a fiduciary with respect to the
plan.
(B) Affiliate.--The term ``affiliate'' of
another entity means an affiliated person of
the entity (as defined in section 2(a)(3) of
the Investment Company Act of 1940 (15 U.S.C.
80a-2(a)(3))).
(C) Registered representative.--The term
``registered representative'' of another entity
means a person described in section 3(a)(18) of
the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity for the
broker or dealer referred to in such section)
or a person described in section 202(a)(17) of
the Investment Advisers Act of 1940 (15 U.S.C.
80b-2(a)(17)) (substituting the entity for the
investment adviser referred to in such
section).
* * * * * * *
----------
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) Initial Taxes on Disqualified Person.--There is hereby
imposed a tax on each prohibited transaction. The rate of tax
shall be equal to 15 percent of the amount involved with
respect to the prohibited transaction for each year (or part
thereof) in the taxable period. The tax imposed by this
subsection shall be paid by any disqualified person who
participates in the prohibited transaction (other than a
fiduciary acting only as such).
(b) Additional Taxes on Disqualified Person.--In any case in
which an initial tax is imposed by subsection (a) on a
prohibited transaction and the transaction is not corrected
within the taxable period, there is hereby imposed a tax equal
to 100 percent of the amount involved. The tax imposed by this
subsection shall be paid by any disqualified person who
participated in the prohibited transaction (other than a
fiduciary acting only as such).
(c) Prohibited Transaction.--
(1) General rule.--For purposes of this section, the
term ``prohibited transaction'' means any direct or
indirect--
(A) sale or exchange, or leasing, of any
property between a plan and a disqualified
person;
(B) lending of money or other extension of
credit between a plan and a disqualified
person;
(C) furnishing of goods, services, or
facilities between a plan and a disqualified
person;
(D) transfer to, or use by or for the benefit
of, a disqualified person of the income or
assets of a plan;
(E) act by a disqualified person who is a
fiduciary whereby he deals with the income or
assets of a plan in his own interests or for
his own account; or
(F) receipt of any consideration for his own
personal account by any disqualified person who
is a fiduciary from any party dealing with the
plan in connection with a transaction involving
the income or assets of the plan.
(2) Special exemption.--The Secretary shall establish
an exemption procedure for purposes of this subsection.
Pursuant to such procedure, he may grant a conditional
or unconditional exemption of any disqualified person
or transaction, orders of disqualified persons or
transactions, from all or part of the restrictions
imposed by paragraph (1) of this subsection. Action
under this subparagraph may be taken only after
consultation and coordination with the Secretary of
Labor. The Secretary may not grant an exemption under
this paragraph unless he finds that such exemption is--
(A) administratively feasible,
(B) in the interests of the plan and of its
participants and beneficiaries, and
(C) protective of the rights of participants
and beneficiaries of the plan.
Before granting an exemption under this paragraph, the
Secretary shall require adequate notice to be given to
interested persons and shall publish notice in the
Federal Register of the pendency of such exemption and
shall afford interested persons an opportunity to
present views. No exemption may be granted under this
paragraph with respect to a transaction described in
subparagraph (E) or (F) of paragraph (1) unless the
Secretary affords an opportunity for a hearing and
makes a determination on the record with respect to the
findings required under subparagraphs (A), (B), and (C)
of this paragraph, except that in lieu of such hearing
the Secretary may accept any record made by the
Secretary of Labor with respect to an application for
exemption under section 408(a) of title I of the
Employee Retirement Income Security Act of 1974.
(3) Special rule for individual retirement
accounts.--An individual for whose benefit an
individual retirement account is established and his
beneficiaries shall be exempt from the tax imposed by
this section with respect to any transaction concerning
such account (which would otherwise be taxable under
this section) if, with respect to such transaction, the
account ceases to be an individual retirement account
by reason of the application of section 408(e)(2)(A) or
if section 408(e)(4) applies to such account.
(4) Special rule for Archer MSAs.--An individual for
whose benefit an Archer MSA (within the meaning of
section 220(d)) is established shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
220(e)(2) applies to such transaction.
(5) Special rule for Coverdell education savings
accounts.--An individual for whose benefit a Coverdell
education savings account is established and any
contributor to such account shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
530(d) applies with respect to such transaction.
(6) Special rule for health savings accounts.--An
individual for whose benefit a health savings account
(within the meaning of section 223(d)) is established
shall be exempt from the tax imposed by this section
with respect to any transaction concerning such account
(which would otherwise be taxable under this section)
if, with respect to such transaction, the account
ceases to be a health savings account by reason of the
application of section 223(e)(2) to such account.
(d) Exemptions.--Except as provided in subsection (f)(6), the
prohibitions provided in subsection (c) shall not apply to--
(1) any loan made by the plan to a disqualified
person who is a participant or beneficiary of the plan
if such loan--
(A) is available to all such participants or
beneficiaries on a reasonably equivalent basis,
(B) is not made available to highly
compensated employees (within the meaning of
section 414(q)) in an amount greater than the
amount made available to other employees,
(C) is made in accordance with specific
provisions regarding such loans set forth in
the plan,
(D) bears a reasonable rate of interest, and
(E) is adequately secured;
(2) any contract, or reasonable arrangement, made
with a disqualified person for office space, or legal,
accounting, or other services necessary for the
establishment or operation of the plan, if no more than
reasonable compensation is paid therefor;
(3) any loan to an leveraged employee stock ownership
plan (as defined in subsection (e)(7)), if--
(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and
(B) such loan is at a reasonable rate of
interest, and any collateral which is given to
a disqualified person by the plan consists only
of qualifying employer securities (as defined
in subsection (e)(8));
(4) the investment of all or part of a plan's assets
in deposits which bear a reasonable interest rate in a
bank or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such
bank or other institution and employees of
affiliates of such bank or other institution,
or
(B) such investment is expressly authorized
by a provision of the plan or by a fiduciary
(other than such bank or institution or
affiliates thereof) who is expressly empowered
by the plan to so instruct the trustee with
respect to such investment;
(5) any contract for life insurance, health
insurance, or annuities with one or more insurers which
are qualified to do business in a State if the plan
pays no more than adequate consideration, and if each
such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a disqualified person which is wholly
owned (directly or indirectly) by the employer
establishing the plan, or by any person which
is a disqualified person with respect to the
plan, but only if the total premiums and
annuity considerations written by such insurers
for life insurance, health insurance, or
annuities for all plans (and their employers)
with respect to which such insurers are
disqualified persons (not including premiums or
annuity considerations written by the employer
maintaining the plan) do not exceed 5 percent
of the total premiums and annuity
considerations written for all lines of
insurance in that year by such insurers (not
including premiums or annuity considerations
written by the employer maintaining the plan);
(6) the provision of any ancillary service by a bank
or similar financial institution supervised by the
United States or a State, if such service is provided
at not more than reasonable compensation, if such bank
or other institution is a fiduciary of such plan, and
if--
(A) such bank or similar financial
institution has adopted adequate internal
safeguards which assure that the provision of
such ancillary service is consistent with sound
banking and financial practice, as determined
by Federal or State supervisory authority, and
(B) the extent to which such ancillary
service is provided is subject to specific
guidelines issued by such bank or similar
financial institution (as determined by the
Secretary after consultation with Federal and
State supervisory authority), and under such
guidelines the bank or similar financial
institution does not provide such ancillary
service--
(i) in an excessive or unreasonable
manner, and
(ii) in a manner that would be
inconsistent with the best interests of
participants and beneficiaries of
employee benefit plans;
(7) the exercise of a privilege to convert
securities, to the extent provided in regulations of
the Secretary but only if the plan receives no less
than adequate consideration pursuant to such
conversion;
(8) any transaction between a plan and a common or
collective trust fund or pooled investment fund
maintained by a disqualified person which is a bank or
trust company supervised by a State or Federal agency
or between a plan and a pooled investment fund of an
insurance company qualified to do business in a State
if--
(A) the transaction is a sale or purchase of
an interest in the fund,
(B) the bank, trust company, or insurance
company receives not more than a reasonable
compensation, and
(C) such transaction is expressly permitted
by the instrument under which the plan is
maintained, or by a fiduciary (other than the
bank, trust company, or insurance company, or
an affiliate thereof) who has authority to
manage and control the assets of the plan;
(9) receipt by a disqualified person of any benefit
to which he may be entitled as a participant or
beneficiary in the plan, so long as the benefit is
computed and paid on a basis which is consistent with
the terms of the plan as applied to all other
participants and beneficiaries;
(10) receipt by a disqualified person of any
reasonable compensation for services rendered, or for
the reimbursement of expenses properly and actually
incurred, in the performance of his duties with the
plan, but no person so serving who already receives
full-time pay from an employer or an association of
employers, whose employees are participants in the plan
or from an employee organization whose members are
participants in such plan shall receive compensation
from such fund, except for reimbursement of expenses
properly and actually incurred;
(11) service by a disqualified person as a fiduciary
in addition to being an officer, employee, agent, or
other representative of a disqualified person;
(12) the making by a fiduciary of a distribution of
the assets of the trust in accordance with the terms of
the plan if such assets are distributed in the same
manner as provided under section 4044 of title IV of
the Employee Retirement Income Security Act of 1974
(relating to allocation of assets);
(13) any transaction which is exempt from section 406
of such Act by reason of section 408(e) of such Act (or
which would be so exempt if such section 406 applied to
such transaction) or which is exempt from section 406
of such Act by reason of section 408(b)(12) of such
Act;
(14) any transaction required or permitted under part
1 of subtitle E of title IV or section 4223 of the
Employee Retirement Income Security Act of 1974, but
this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(15) a merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231 of such Act,
but this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(16) a sale of stock held by a trust which
constitutes an individual retirement account under
section 408(a) to the individual for whose benefit such
account is established if--
(A) such stock is in a bank (as defined in
section 581) or a depository institution
holding company (as defined in section 3(w)(1)
of the Federal Deposit Insurance Act (12 U.S.C.
1813(w)(1)),
(B) such stock is held by such trust as of
the date of the enactment of this paragraph,
(C) such sale is pursuant to an election
under section 1362(a) by such bank or company,
(D) such sale is for fair market value at the
time of sale (as established by an independent
appraiser) and the terms of the sale are
otherwise at least as favorable to such trust
as the terms that would apply on a sale to an
unrelated party,
(E) such trust does not pay any commissions,
costs, or other expenses in connection with the
sale, and
(F) the stock is sold in a single transaction
for cash not later than 120 days after the S
corporation election is made;
(17) Any transaction in connection with the provision
of investment advice described in subsection (e)(3)(B)
to a participant or beneficiary in a plan that permits
such participant or beneficiary to direct the
investment of plan assets in an individual account,
if--
(A) the transaction is--
(i) the provision of the investment
advice to the participant or
beneficiary of the plan with respect to
a security or other property available
as an investment under the plan,
(ii) the acquisition, holding, or
sale of a security or other property
available as an investment under the
plan pursuant to the investment advice,
or
(iii) the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser or an affiliate
thereof (or any employee, agent, or
registered representative of the
fiduciary adviser or affiliate) in
connection with the provision of the
advice or in connection with an
acquisition, holding, or sale of a
security or other property available as
an investment under the plan pursuant
to the investment advice; and
(B) the requirements of subsection (f)(8) are
met,
(18) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person (other than a fiduciary described in subsection
(e)(3)) with respect to a plan if--
(A) the transaction involves a block trade,
(B) at the time of the transaction, the
interest of the plan (together with the
interests of any other plans maintained by the
same plan sponsor), does not exceed 10 percent
of the aggregate size of the block trade,
(C) the terms of the transaction, including
the price, are at least as favorable to the
plan as an arm's length transaction, and
(D) the compensation associated with the
purchase and sale is not greater than the
compensation associated with an arm's length
transaction with an unrelated party,
(19) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person if--
(A) the transaction is executed through an
electronic communication network, alternative
trading system, or similar execution system or
trading venue subject to regulation and
oversight by--
(i) the applicable Federal regulating
entity, or
(ii) such foreign regulatory entity
as the Secretary of Labor may determine
by regulation,
(B) either--
(i) the transaction is effected
pursuant to rules designed to match
purchases and sales at the best price
available through the execution system
in accordance with applicable rules of
the Securities and Exchange Commission
or other relevant governmental
authority, or
(ii) neither the execution system nor
the parties to the transaction take
into account the identity of the
parties in the execution of trades,
(C) the price and compensation associated
with the purchase and sale are not greater than
the price and compensation associated with an
arm's length transaction with an unrelated
party,
(D) if the disqualified person has an
ownership interest in the system or venue
described in subparagraph (A), the system or
venue has been authorized by the plan sponsor
or other independent fiduciary for transactions
described in this paragraph, and
(E) not less than 30 days prior to the
initial transaction described in this paragraph
executed through any system or venue described
in subparagraph (A), a plan fiduciary is
provided written or electronic notice of the
execution of such transaction through such
system or venue,
(20) transactions described in subparagraphs (A),
(B), and (D) of subsection (c)(1) between a plan and a
person that is a disqualified person other than a
fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the
investment of the plan assets involved in the
transaction or renders investment advice (within the
meaning of subsection (e)(3)(B)) with respect to those
assets, solely by reason of providing services to the
plan or solely by reason of a relationship to such a
service provider described in subparagraph (F), (G),
(H), or (I) of subsection (e)(2), or both, but only if
in connection with such transaction the plan receives
no less, nor pays no more, than adequate consideration,
(21) any foreign exchange transactions, between a
bank or broker-dealer (or any affiliate of either) and
a plan (as defined in this section) with respect to
which such bank or broker-dealer (or affiliate) is a
trustee, custodian, fiduciary, or other disqualified
person person, if--
(A) the transaction is in connection with the
purchase, holding, or sale of securities or
other investment assets (other than a foreign
exchange transaction unrelated to any other
investment in securities or other investment
assets),
(B) at the time the foreign exchange
transaction is entered into, the terms of the
transaction are not less favorable to the plan
than the terms generally available in
comparable arm's length foreign exchange
transactions between unrelated parties, or the
terms afforded by the bank or broker-dealer (or
any affiliate of either) in comparable arm's-
length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or
broker-dealer (or affiliate) for a particular
foreign exchange transaction does not deviate
by more than 3 percent from the interbank bid
and asked rates for transactions of comparable
size and maturity at the time of the
transaction as displayed on an independent
service that reports rates of exchange in the
foreign currency market for such currency, and
(D) the bank or broker-dealer (or any
affiliate of either) does not have investment
discretion, or provide investment advice, with
respect to the transaction,
(22) any transaction described in subsection
(c)(1)(A) involving the purchase and sale of a security
between a plan and any other account managed by the
same investment manager, if--
(A) the transaction is a purchase or sale,
for no consideration other than cash payment
against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the
independent current market price of the
security (within the meaning of section
270.17a-7(b) of title 17, Code of Federal
Regulations),
(C) no brokerage commission, fee (except for
customary transfer fees, the fact of which is
disclosed pursuant to subparagraph (D)), or
other remuneration is paid in connection with
the transaction,
(D) a fiduciary (other than the investment
manager engaging in the cross-trades or any
affiliate) for each plan participating in the
transaction authorizes in advance of any cross-
trades (in a document that is separate from any
other written agreement of the parties) the
investment manager to engage in cross trades at
the investment manager's discretion, after such
fiduciary has received disclosure regarding the
conditions under which cross trades may take
place (but only if such disclosure is separate
from any other agreement or disclosure
involving the asset management relationship),
including the written policies and procedures
of the investment manager described in
subparagraph (H),
(E) each plan participating in the
transaction has assets of at least
$100,000,000, except that if the assets of a
plan are invested in a master trust containing
the assets of plans maintained by employers in
the same controlled group (as defined in
section 407(d)(7) of the Employee Retirement
Income Security Act of 1974), the master trust
has assets of at least $100,000,000,
(F) the investment manager provides to the
plan fiduciary who authorized cross trading
under subparagraph (D) a quarterly report
detailing all cross trades executed by the
investment manager in which the plan
participated during such quarter, including the
following information, as applicable: (i) the
identity of each security bought or sold; (ii)
the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv)
trade price and the method used to establish
the trade price,
(G) the investment manager does not base its
fee schedule on the plan's consent to cross
trading, and no other service (other than the
investment opportunities and cost savings
available through a cross trade) is conditioned
on the plan's consent to cross trading,
(H) the investment manager has adopted, and
cross-trades are effected in accordance with,
written cross-trading policies and procedures
that are fair and equitable to all accounts
participating in the cross-trading program, and
that include a description of the manager's
pricing policies and procedures, and the
manager's policies and procedures for
allocating cross trades in an objective manner
among accounts participating in the cross-
trading program, and
(I) the investment manager has designated an
individual responsible for periodically
reviewing such purchases and sales to ensure
compliance with the written policies and
procedures described in subparagraph (H), and
following such review, the individual shall
issue an annual written report no later than 90
days following the period to which it relates
signed under penalty of perjury to the plan
fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed
during the course of the review, the level of
compliance, and any specific instances of non-
compliance.
The written report shall also notify the plan fiduciary
of the plan's right to terminate participation in the
investment manager's cross-trading program at any time,
[or]
(23) except as provided in subsection (f)(11), a
transaction described in subparagraph (A), (B), (C), or
(D) of subsection (c)(1) in connection with the
acquisition, holding, or disposition of any security or
commodity, if the transaction is corrected before the
end of the correction period[.], or
(24) provision of investment advice by a fiduciary to
a plan, plan participant, or beneficiary with respect
to the plan, which is a best interest recommendation or
a transaction connected to such advice.
(e) Definitions.--
(1) Plan.--For purposes of this section, the term
``plan'' means--
(A) a trust described in section 401(a) which
forms a part of a plan, or a plan described in
section 403(a), which trust or plan is exempt
from tax under section 501(a),
(B) an individual retirement account
described in section 408(a),
(C) an individual retirement annuity
described in section 408(b),
(D) an Archer MSA described in section
220(d),
(E) a health savings account described in
section 223(d),
(F) a Coverdell education savings account
described in section 530, or
(G) a trust, plan, account, or annuity which,
at any time, has been determined by the
Secretary to be described in any preceding
subparagraph of this paragraph.
(2) Disqualified person.--For purposes of this
section, the term ``disqualified person'' means a
person who is--
(A) a fiduciary;
(B) a person providing services to the plan;
(C) an employer any of whose employees are
covered by the plan;
(D) an employee organization any of whose
members are covered by the plan;
(E) an owner, direct or indirect, of 50
percent or more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of a corporation,
(ii) the capital interest or the
profits interest of a partnership, or
(iii) the beneficial interest of a
trust or unincorporated enterprise,
which is an employer or an employee
organization described in subparagraph (C) or
(D);
(F) a member of the family (as defined in
paragraph (6)) of any individual described in
subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or
estate of which (or in which) 50 percent or
more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of such corporation,
(ii) the capital interest or profits
interest of such partnership, or
(iii) the beneficial interest of such
trust or estate, is owned directly or
indirectly, or held by persons
described in subparagraph (A), (B),
(C), (D), or (E);
(H) an officer, director (or an individual
having powers or responsibilities similar to
those of officers or directors), a 10 percent
or more shareholder, or a highly compensated
employee (earning 10 percent or more of the
yearly wages of an employer) of a person
described in subparagraph (C), (D), (E), or
(G); or
(I) a 10 percent or more (in capital or
profits) partner or joint venturer of a person
described in subparagraph (C), (D), (E), or
(G).
The Secretary, after consultation and coordination with
the Secretary of Labor or his delegate, may by
regulation prescribe a percentage lower than 50 percent
for subparagraphs (E) and (G) and lower than 10 percent
for subparagraphs (H) and (I).
(3) Fiduciary.--For purposes of this section, the
term ``fiduciary'' means any person who--
(A) exercises any discretionary authority or
discretionary control respecting management of
such plan or exercises any authority or control
respecting management or disposition of its
assets,
(B) renders investment advice for a fee or
other compensation, direct or indirect, with
respect to any moneys or other property of such
plan, or has any authority or responsibility to
do so, or
(C) has any discretionary authority or
discretionary responsibility in the
administration of such plan.
Such term includes any person designated under section
405(c)(1)(B) of the Employee Retirement Income Security
Act of 1974.
(4) Stockholdings.--For purposes of paragraphs
(2)(E)(i) and (G)(i) there shall be taken into account
indirect stockholdings which would be taken into
account under section 267(c), except that, for purposes
of this paragraph, section 267(c)(4) shall be treated
as providing that the members of the family of an
individual are the members within the meaning of
paragraph (6).
(5) Partnerships; trusts.--For purposes of paragraphs
(2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the
ownership of profits or beneficial interests shall be
determined in accordance with the rules for
constructive ownership of stock provided in section
267(c) (other than paragraph (3) thereof), except that
section 267(c)(4) shall be treated as providing that
the members of the family of an individual are the
members within the meaning of paragraph (6).
(6) Member of family.--For purposes of paragraph
(2)(F), the family of any individual shall include his
spouse, ancestor, lineal descendant, and any spouse of
a lineal descendant.
(7) Employee stock ownership plan.--The term
``employee stock ownership plan'' means a defined
contribution plan--
(A) which is a stock bonus plan which is
qualified, or a stock bonus and a money
purchase plan both of which are qualified under
section 401(a), and which are designed to
invest primarily in qualifying employer
securities; and
(B) which is otherwise defined in regulations
prescribed by the Secretary.
A plan shall not be treated as an employee stock
ownership plan unless it meets the requirements of
section 409(h), section 409(o), and, if applicable,
section 409(n), section 409(p), and section 664(g) and,
if the employer has a registration-type class of
securities (as defined in section 409(e)(4)), it meets
the requirements of section 409(e).
(8) Qualifying employer security.--The term
``qualifying employer security'' means any employer
security within the meaning of section 409(l). If any
moneys or other property of a plan are invested in
shares of an investment company registered under the
Investment Company Act of 1940, the investment shall
not cause that investment company or that investment
company's investment adviser or principal underwriter
to be treated as a fiduciary or a disqualified person
for purposes of this section, except when an investment
company or its investment adviser or principal
underwriter acts in connection with a plan covering
employees of the investment company, its investment
adviser, or its principal underwriter.
(9) Section made applicable to withdrawal liability
payment funds.--For purposes of this section--
(A) In general.--The term ``plan'' includes a
trust described in section 501(c)(22).
(B) Disqualified person.--In the case of any
trust to which this section applies by reason
of subparagraph (A), the term ``disqualified
person'' includes any person who is a
disqualified person with respect to any plan to
which such trust is permitted to make payments
under section 4223 of the Employee Retirement
Income Security Act of 1974.
(10) Investment advice.--
(A) In general.--For purposes of this
section, the term ``investment advice'' means a
recommendation, communicated electronically, on
paper, or orally, that--
(i) relates to--
(I) the advisability of
acquiring, holding, disposing,
or exchanging any moneys or
other property of a plan by the
plan, plan participants, or
plan beneficiaries, including
any recommendation whether to
take a distribution of benefits
from such plan or any
recommendation relating to the
investment of any moneys or
other property of such plan to
be distributed from such plan;
(II) the management of moneys
or other property of such plan,
including recommendations
relating to the management of
moneys or other property to be
distributed from such plan; or
(III) the advisability of
retaining or ceasing to retain
a person who would receive a
fee or other compensation for
providing any of the types of
advice described in this
subclause; and
(ii) is rendered pursuant to--
(I) a written acknowledgment,
provided electronically or on
paper, 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 state only the following: ``This
communication is not individualized to you, and
you are not intended to rely materially on this
communication 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), a communication shall not be
treated as a recommendation made pursuant to a
mutual agreement, arrangement, or
understanding, if such communication contains
the disclaimer required by subparagraph (B),
and--
(i) Seller's exception.--The
communication is provided in
conjunction with clear and prominent
disclosure in writing to a plan, plan
participant, or beneficiary that the
person providing the communication is
doing so in its marketing or sales
capacity, including any communication
regarding the terms and conditions of
the engagement of the person providing
the communication, 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) Certain counterparties or
service providers.--The person
providing the communication is a
current or potential counterparty or
service provider to the plan in
connection with any transaction based
on the communication, but only if--
(I) the plan is represented,
in connection with such
transaction, by a plan
fiduciary that is independent
of the person providing the
communication, and, except in
the case of a 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)))), 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
communication 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 communication
is an employee of any sponsoring
employer or affiliate or employee
organization who provides the
communication 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 communication 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
communication 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 or investment
products through a platform or
similar mechanism from which a
plan fiduciary may select or
monitor investment
alternatives; 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;
(bb) providing
objective financial
data and comparisons
with independent
benchmarks to the plan;
or
(cc) identifying a
sample set of
investment alternatives
based on the plan's
stated criteria in
response to an inquiry
from a plan fiduciary.
(v) Valuation.--The communication
consists solely of valuation
information.
(vi) Financial education.--The
communication consists solely of--
(I) information described in
Department of Labor
Interpretive Bulletin 96-1 (29
C.F.R. 2509.96-1, as in effect
on January 1, 2015), regardless
of whether such education is
provided to a plan or plan
fiduciary or a participant or
beneficiary;
(II) information provided to
participants or beneficiaries
regarding the factors to
consider in deciding whether to
elect to receive a distribution
from a plan and whether to roll
over such distribution to a
plan, so long as any examples
of different distribution
alternatives are accompanied by
all material facts and
assumptions on which the
examples are based; or
(III) any additional
information treated as
education by the Secretary.
(11) Best interest recommendation.--For purposes of
this subsection--
(A) In general.--The term ``best interest
recommendation'' means a recommendation--
(i) for which no more than reasonable
compensation is paid (as determined
under subsection (d)(2));
(ii) provided by a person acting with
the care, skill, prudence, and
diligence under the circumstances then
prevailing that a prudent person would
exercise based on--
(I) the information obtained
through the reasonable
diligence of the person
regarding factors such as the
advice recipient's age; and
(II) any other information
that the advice recipient
discloses to the person in
connection with receiving such
recommendation; and
(iii) where the person places the
interests of the plan or advice
recipient above its own.
(B) Investment options; variable
compensation.--A best interest recommendation
may include a recommendation that--
(i) is based on a limited range of
investment options (which may consist,
in whole or in part, of proprietary
products), but only if any such
limitations shall be clearly disclosed
to the advice recipient prior to any
transaction based on the investment
advice in the form of a notice that
only states the following: ``This
recommendation is based on a limited
range of investment options, and the
same or similar investments may be
available at a different cost (greater
or lesser) from other sources.''; or
(ii) may result in variable
compensation to the person providing
the recommendation (or any affiliate of
such person), but only if the receipt
of such compensation shall be clearly
disclosed to the advice recipient prior
to any transaction based on the
investment advice.
(C) Clear disclosure of variable
compensation.--For purposes of this paragraph,
clear disclosure of variable compensation shall
include, in a manner calculated to be
understood by the average individual, each of
the following:
(i) A notice that states only the
following: ``This recommendation may
result in varying amounts of fees or
other compensation to the person
providing the recommendation (or its
affiliate), and the same or similar
investments may be available at a
different cost (greater or lesser) from
other sources.''. Any regulations or
administrative guidance implementing
this clause may not require this notice
to be updated more than annually.
(ii) A description of any fee or
other compensation that is directly or
indirectly payable to the person (or
its affiliate) by the advice recipient
with respect to such transaction
(expressed as an amount, formula,
percentage of assets, per capita
charge, or estimate or range of such
compensation).
(iii) A description of the types and
ranges of any compensation that are
reasonably expected to be directly or
indirectly payable to the person (or
its affiliate) by any third party in
connection with such transaction
(expressed as an amount, formula,
percentage of assets, per capita
charge, or estimate or range of such
compensation).
(iv) Upon request of the advice
recipient, a disclosure of the specific
amounts of compensation described in
clause (iii) that the person will
receive in connection with the
particular transaction (expressed as an
amount, formula, percentage of assets,
per capita charge, or estimate of such
compensation).
(D) Definition of affiliate.--For purposes of
this paragraph, the term ``affiliate'' has the
meaning given in subsection (f)(8)(J)(ii).
(E) Correction of certain errors and
omissions.--A recommendation shall not fail to
be a best interest recommendation solely
because a person who, acting in good faith and
with reasonable diligence, makes an error or
omission in disclosing the information
specified in subparagraph (B), if the person
discloses the correct information to the advice
recipient as soon as practicable but not later
than 30 days from the date on which the person
knows of such error or omission.
(F) Special rule.--Any notice provided
pursuant to a requirement under subparagraph
(B)(i) or subparagraph (C)(i) shall have no
effect on any other notice otherwise required
without regard to this title, and shall be
provided in addition to, and not in lieu of,
any other such notice.
(f) Other Definitions and Special Rules.--For purposes of
this section--
(1) Joint and several liability.--If more than one
person is liable under subsection (a) or (b) with
respect to any one prohibited transaction, all such
persons shall be jointly and severally liable under
such subsection with respect to such transaction.
(2) Taxable period.--The term ``taxable period''
means, with respect to any prohibited transaction, the
period beginning with the date on which the prohibited
transaction occurs and ending on the earliest of--
(A) the date of mailing a notice of
deficiency with respect to the tax imposed by
subsection (a) under section 6212,
(B) the date on which the tax imposed by
subsection (a) is assessed, or
(C) the date on which correction of the
prohibited transaction is completed.
(3) Sale or exchange; encumbered property.--A
transfer or real or personal property by a disqualified
person to a plan shall be treated as a sale or exchange
if the property is subject to a mortgage or similar
lien which the plan assumes or if it is subject to a
mortgage or similar lien which a disqualified person
placed on the property within the 10-year period ending
on the date of the transfer.
(4) Amount involved.--The term ``amount involved''
means, with respect to a prohibited transaction, the
greater of the amount of money and the fair market
value of the other property given or the amount of
money and the fair market value of the other property
received; except that, in the case of services
described in paragraphs (2) and (10) of subsection (d)
the amount involved shall be only the [excess
compensation.] excess compensation, and in the case of
a prohibited transaction arising by the failure of
investment advice to be a best interest recommendation,
the amount involved shall be the amount paid to the
person providing the advice (or its affiliate, as
defined in paragraph (8)(J)(ii)) that has not been paid
or reimbursed to the plan, plan participants, or plan
beneficiaries, including payments and reimbursements
made pursuant to paragraph (5). For purposes of the
preceding sentence, the fair market value--
(A) in the case of the tax imposed by
subsection (a), shall be determined as of the
date on which the prohibited transaction
occurs; and
(B) in the case of the tax imposed by
subsection (b), shall be the highest fair
market value during the taxable period.
(5) Correction.--
(A) In general.--[The terms] Except as
provided in subparagraph (B), the terms
``correction'' and ``correct'' mean, with
respect to a prohibited transaction, undoing
the transaction to the extent possible, but in
any case placing the plan in a financial
position not worse than that in which it would
be if the disqualified person were acting under
the highest fiduciary standards.
(B) Determination of ``correction'' and
``correct'' with respect to best interest
advice recommendations.--In the case of a
prohibited transaction arising by the failure
of investment advice to be a best interest
recommendation, the terms ``correction'' and
``correct'' mean the payment to, or
reimbursement of, actual damages of the plan,
plan participants, or plan beneficiaries
resulting directly from the plan's, plan
participant's, or plan beneficiary's reliance
on such investment advice, if any, that have
not otherwise been paid or reimbursed to the
plan, plan participants, or plan beneficiaries,
including payments and reimbursements made
pursuant to subparagraph (A) if such amount is
greater than the amount determined under
subparagraph (A).
(6) Exemptions not to apply to certain
transactions.--
(A) In general.--In the case of a trust
described in section 401(a) which is part of a
plan providing contributions or benefits for
employees some or all of whom are owner-
employees (as defined in section 401(c)(3)),
the exemptions provided by subsection (d)
(other than paragraphs (9) and (12)) shall not
apply to a transaction in which the plan
directly or indirectly--
(i) lends any part of the corpus or
income of the plan to,
(ii) pays any compensation for
personal services rendered to the plan
to, or
(iii) acquires for the plan any
property from, or sells any property
to,
any such owner-employee, a member of the family
(as defined in section 267(c)(4)) of any such
owner-employee, or any corporation in which any
such owner-employee owns, directly or
indirectly, 50 percent or more of the total
combined voting power of all classes of stock
entitled to vote or 50 percent or more of the
total value of shares of all classes of stock
of the corporation.
(B) Special rules for shareholder-employees,
etc.
(i) In general.--For purposes of
subparagraph (A), the following shall
be treated as owner-employees:
(I) A shareholder-employee.
(II) A participant or
beneficiary of an individual
retirement plan (as defined in
section 7701(a)(37)).
(III) An employer or
association of employees which
establishes such an individual
retirement plan under section
408(c).
(ii) Exception for certain
transactions involving shareholder-
employees.--Subparagraph (A)(iii) shall
not apply to a transaction which
consists of a sale of employer
securities to an employee stock
ownership plan (as defined in
subsection (e)(7)) by a shareholder-
employee, a member of the family (as
defined in section 267(c)(4)) of such
shareholder-employee, or a corporation
in which such a shareholder-employee
owns stock representing a 50 percent or
greater interest described in
subparagraph (A).
(iii) Loan exception.--For purposes
of subparagraph (A)(i), the term
``owner-employee'' shall only include a
person described in subclause (II) or
(III) of clause (i).
(C) Shareholder-employee.--For purposes of
subparagraph (B), the term ``shareholder-
employee'' means an employee or officer of an S
corporation who owns (or is considered as
owning within the meaning of section 318(a)(1))
more than 5 percent of the outstanding stock of
the corporation on any day during the taxable
year of such corporation.
(7) S corporation repayment of loans for qualifying
employer securities.--A plan shall not be treated as
violating the requirements of section 401 or 409 or
subsection (e)(7), or as engaging in a prohibited
transaction for purposes of subsection (d)(3), merely
by reason of any distribution (as described in section
1368(a)) with respect to S corporation stock that
constitutes qualifying employer securities, which in
accordance with the plan provisions is used to make
payments on a loan described in subsection (d)(3) the
proceeds of which were used to acquire such qualifying
employer securities (whether or not allocated to
participants). The preceding sentence shall not apply
in the case of a distribution which is paid with
respect to any employer security which is allocated to
a participant unless the plan provides that employer
securities with a fair market value of not less than
the amount of such distribution are allocated to such
participant for the year which (but for the preceding
sentence) such distribution would have been allocated
to such participant.
(8) Provision of investment advice to participant and
beneficiaries.--
(A) In general.--The prohibitions provided in
subsection (c) shall not apply to transactions
described in subsection (d)(17) if the
investment advice provided by a fiduciary
adviser is provided under an eligible
investment advice arrangement.
(B) Eligible investment advice arrangement.--
For purposes of this paragraph, the term
``eligible investment advice arrangement''
means an arrangement--
(i) which either--
(I) provides that any fees
(including any commission or
other compensation) received by
the fiduciary adviser for
investment advice or with
respect to the sale, holding,
or acquisition of any security
or other property for purposes
of investment of plan assets do
not vary depending on the basis
of any investment option
selected, or
(II) uses a computer model
under an investment advice
program meeting the
requirements of subparagraph
(C) in connection with the
provision of investment advice
by a fiduciary adviser to a
participant or beneficiary, and
(ii) with respect to which the
requirements of subparagraphs (D), (E),
(F), (G), (H), and (I) are met.
(C) Investment advice program using computer
model.--
(i) In general.--An investment advice
program meets the requirements of this
subparagraph if the requirements of
clauses (ii), (iii), and (iv) are met.
(ii) Computer model.--The
requirements of this clause are met if
the investment advice provided under
the investment advice program is
provided pursuant to a computer model
that--
(I) applies generally
accepted investment theories
that take into account the
historic returns of different
asset classes over defined
periods of time,
(II) utilizes relevant
information about the
participant, which may include
age, life expectancy,
retirement age, risk tolerance,
other assets or sources of
income, and preferences as to
certain types of investments,
(III) utilizes prescribed
objective criteria to provide
asset allocation portfolios
comprised of investment options
available under the plan,
(IV) operates in a manner
that is not biased in favor of
investments offered by the
fiduciary adviser or a person
with a material affiliation or
contractual relationship with
the fiduciary adviser, and
(V) takes into account all
investment options under the
plan in specifying how a
participant's account balance
should be invested and is not
inappropriately weighted with
respect to any investment
option.
(iii) Certification.--
(I) In general.--The
requirements of this clause are
met with respect to any
investment advice program if an
eligible investment expert
certifies, prior to the
utilization of the computer
model and in accordance with
rules prescribed by the
Secretary of Labor, that the
computer model meets the
requirements of clause (ii).
(II) Renewal of
certifications.--If, as
determined under regulations
prescribed by the Secretary of
Labor, there are material
modifications to a computer
model, the requirements of this
clause are met only if a
certification described in
subclause (I) is obtained with
respect to the computer model
as so modified.
(III) Eligible investment
expert.--The term ``eligible
investment expert'' means any
person which meets such
requirements as the Secretary
of Labor may provide and which
does not bear any material
affiliation or contractual
relationship with any
investment adviser or a related
person thereof (or any
employee, agent, or registered
representative of the
investment adviser or related
person).
(iv) Exclusivity of recommendation.--
The requirements of this clause are met
with respect to any investment advice
program if--
(I) the only investment
advice provided under the
program is the advice generated
by the computer model described
in clause (ii), and
(II) any transaction
described in subsection
(d)(17)(A)(ii) occurs solely at
the direction of the
participant or beneficiary.
Nothing in the preceding sentence shall
preclude the participant or beneficiary
from requesting investment advice other
than that described in clause (i), but
only if such request has not been
solicited by any person connected with
carrying out the arrangement.
(D) Express authorization by separate
fiduciary.--The requirements of this
subparagraph are met with respect to an
arrangement if the arrangement is expressly
authorized by a plan fiduciary other than the
person offering the investment advice program,
any person providing investment options under
the plan, or any affiliate of either.
(E) Audits.--
(i) In general.--The requirements of
this subparagraph are met if an
independent auditor, who has
appropriate technical training or
experience and proficiency and so
represents in writing--
(I) conducts an annual audit
of the arrangement for
compliance with the
requirements of this paragraph,
and
(II) following completion of
the annual audit, issues a
written report to the fiduciary
who authorized use of the
arrangement which presents its
specific findings regarding
compliance of the arrangement
with the requirements of this
paragraph.
(ii) Special rule for individual
retirement and similar plans.--In the
case of a plan described in
subparagraphs (B) through (F) (and so
much of subparagraph (G) as relates to
such subparagraphs) of subsection
(e)(1), in lieu of the requirements of
clause (i), audits of the arrangement
shall be conducted at such times and in
such manner as the Secretary of Labor
may prescribe.
(iii) Independent auditor.--For
purposes of this subparagraph, an
auditor is considered independent if it
is not related to the person offering
the arrangement to the plan and is not
related to any person providing
investment options under the plan.
(F) Disclosure.--The requirements of this
subparagraph are met if--
(i) the fiduciary adviser provides to
a participant or a beneficiary before
the initial provision of the investment
advice with regard to any security or
other property offered as an investment
option, a written notification (which
may consist of notification by means of
electronic communication)--
(I) of the role of any party
that has a material affiliation
or contractual relationship
with the fiduciary adviser, in
the development of the
investment advice program and
in the selection of investment
options available under the
plan,
(II) of the past performance
and historical rates of return
of the investment options
available under the plan,
(III) of all fees or other
compensation relating to the
advice that the fiduciary
adviser or any affiliate
thereof is to receive
(including compensation
provided by any third party) in
connection with the provision
of the advice or in connection
with the sale, acquisition, or
holding of the security or
other property,
(IV) of any material
affiliation or contractual
relationship of the fiduciary
adviser or affiliates thereof
in the security or other
property,
(V) the manner, and under
what circumstances, any
participant or beneficiary
information provided under the
arrangement will be used or
disclosed,
(VI) of the types of services
provided by the fiduciary
adviser in connection with the
provision of investment advice
by the fiduciary adviser,
(VII) that the adviser is
acting as a fiduciary of the
plan in connection with the
provision of the advice, and
(VIII) that a recipient of
the advice may separately
arrange for the provision of
advice by another adviser, that
could have no material
affiliation with and receive no
fees or other compensation in
connection with the security or
other property, and
(ii) at all times during the
provision of advisory services to the
participant or beneficiary, the
fiduciary adviser--
(I) maintains the information
described in clause (i) in
accurate form and in the manner
described in subparagraph (H),
(II) provides, without
charge, accurate information to
the recipient of the advice no
less frequently than annually,
(III) provides, without
charge, accurate information to
the recipient of the advice
upon request of the recipient,
and
(IV) provides, without
charge, accurate information to
the recipient of the advice
concerning any material change
to the information required to
be provided to the recipient of
the advice at a time reasonably
contemporaneous to the change
in information.
(G) Other conditions.--The requirements of
this subparagraph are met if--
(i) the fiduciary adviser provides
appropriate disclosure, in connection
with the sale, acquisition, or holding
of the security or other property, in
accordance with all applicable
securities laws,
(ii) the sale, acquisition, or
holding occurs solely at the direction
of the recipient of the advice,
(iii) the compensation received by
the fiduciary adviser and affiliates
thereof in connection with the sale,
acquisition, or holding of the security
or other property is reasonable, and
(iv) the terms of the sale,
acquisition, or holding of the security
or other property are at least as
favorable to the plan as an arm's
length transaction would be.
(H) Standards for presentation of
information.--
(i) In general.--The requirements of
this subparagraph are met if the
notification required to be provided to
participants and beneficiaries under
subparagraph (F)(i) is written in a
clear and conspicuous manner and in a
manner calculated to be understood by
the average plan participant and is
sufficiently accurate and comprehensive
to reasonably apprise such participants
and beneficiaries of the information
required to be provided in the
notification.
(ii) Model form for disclosure of
fees and other compensation.--The
Secretary of Labor shall issue a model
form for the disclosure of fees and
other compensation required in
subparagraph (F)(i)(III) which meets
the requirements of clause (i).
(I) Maintenance for 6 years of evidence of
compliance.--The requirements of this
subparagraph are met if a fiduciary adviser who
has provided advice referred to in subparagraph
(A) maintains, for a period of not less than 6
years after the provision of the advice, any
records necessary for determining whether the
requirements of the preceding provisions of
this paragraph and of subsection (d)(17) have
been met. A transaction prohibited under
subsection (c) shall not be considered to have
occurred solely because the records are lost or
destroyed prior to the end of the 6-year period
due to circumstances beyond the control of the
fiduciary adviser.
(J) Definitions.--For purposes of this
paragraph and subsection (d)(17)--
(i) Fiduciary adviser.--The term
``fiduciary adviser'' means, with
respect to a plan, a person who is a
fiduciary of the plan by reason of the
provision of investment advice referred
to in subsection (e)(3)(B) by the
person to a participant or beneficiary
of the plan and who is--
(I) registered as an
investment adviser under the
Investment Advisers Act of 1940
(15 U.S.C. 80b-1 et seq.) or
under the laws of the State in
which the fiduciary maintains
its principal office and place
of business,
(II) a bank or similar
financial institution referred
to in subsection (d)(4) or a
savings association (as defined
in section 3(b)(1) of the
Federal Deposit Insurance Act
(12 U.S.C. 1813(b)(1)), but
only if the advice is provided
through a trust department of
the bank or similar financial
institution or savings
association which is subject to
periodic examination and review
by Federal or State banking
authorities,
(III) an insurance company
qualified to do business under
the laws of a State,
(IV) a person registered as a
broker or dealer under the
Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.),
(V) an affiliate of a person
described in any of subclauses
(I) through (IV), or
(VI) an employee, agent, or
registered representative of a
person described in subclauses
(I) through (V) who satisfies
the requirements of applicable
insurance, banking, and
securities laws relating to the
provision of the advice.
For purposes of this title, a person
who develops the computer model
described in subparagraph (C)(ii) or
markets the investment advice program
or computer model shall be treated as a
person who is a fiduciary of the plan
by reason of the provision of
investment advice referred to in
subsection (e)(3)(B) to a participant
or beneficiary and shall be treated as
a fiduciary adviser for purposes of
this paragraph and subsection (d)(17),
except that the Secretary of Labor may
prescribe rules under which only 1
fiduciary adviser may elect to be
treated as a fiduciary with respect to
the plan.
(ii) Affiliate.--The term
``affiliate'' of another entity means
an affiliated person of the entity (as
defined in section 2(a)(3) of the
Investment Company Act of 1940 (15
U.S.C. 80a-2(a)(3))).
(iii) Registered representative.--The
term ``registered representative'' of
another entity means a person described
in section 3(a)(18) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity
for the broker or dealer referred to in
such section) or a person described in
section 202(a)(17) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(17)) (substituting the entity for
the investment adviser referred to in
such section).
(9) Block trade.--The term ``block trade'' means any
trade of at least 10,000 shares or with a market value
of at least $200,000 which will be allocated across two
or more unrelated client accounts of a fiduciary.
(10) Adequate consideration.--The term ``adequate
consideration'' means--
(A) in the case of a security for which there
is a generally recognized market--
(i) the price of the security
prevailing on a national securities
exchange which is registered under
section 6 of the Securities Exchange
Act of 1934, taking into account
factors such as the size of the
transaction and marketability of the
security, or
(ii) if the security is not traded on
such a national securities exchange, a
price not less favorable to the plan
than the offering price for the
security as established by the current
bid and asked prices quoted by persons
independent of the issuer and of the
party in interest, taking into account
factors such as the size of the
transaction and marketability of the
security, and
(B) in the case of an asset other than a
security for which there is a generally
recognized market, the fair market value of the
asset as determined in good faith by a
fiduciary or fiduciaries in accordance with
regulations prescribed by the Secretary of
Labor.
(11) Correction period.--
(A) In general.--For purposes of subsection
(d)(23), the term ``correction period'' means
the 14-day period beginning on the date on
which the disqualified person discovers, or
reasonably should have discovered, that the
transaction would (without regard to this
paragraph and subsection (d)(23)) constitute a
prohibited transaction.
(B) Exceptions.--
(i) Employer securities.--Subsection
(d)(23) does not apply to any
transaction between a plan and a plan
sponsor or its affiliates that involves
the acquisition or sale of an employer
security (as defined in section
407(d)(1) of the Employee Retirement
Income Security Act of 1974) or the
acquisition, sale, or lease of employer
real property (as defined in section
407(d)(2) of such Act).
(ii) Knowing prohibited
transaction.--In the case of any
disqualified person, subsection (d)(23)
does not apply to a transaction if, at
the time the transaction is entered
into, the disqualified person knew (or
reasonably should have known) that the
transaction would (without regard to
this paragraph) constitute a prohibited
transaction.
(C) Abatement of tax where there is a
correction.--If a transaction is not treated as
a prohibited transaction by reason of
subsection (d)(23), then no tax under
subsections (a) and (b) shall be assessed with
respect to such transaction, and if assessed
the assessment shall be abated, and if
collected shall be credited or refunded as an
overpayment.
(D) Definitions.--For purposes of this
paragraph and subsection (d)(23)--
(i) Security.--The term ``security''
has the meaning given such term by
section 475(c)(2) (without regard to
subparagraph (F)(iii) and the last
sentence thereof).
(ii) Commodity.--The term
``commodity'' has the meaning given
such term by section 475(e)(2) (without
regard to subparagraph (D)(iii)
thereof).
(iii) Correct.--The term ``correct''
means, with respect to a transaction--
(I) to undo the transaction
to the extent possible and in
any case to make good to the
plan or affected account any
losses resulting from the
transaction, and
(II) to restore to the plan
or affected account any profits
made through the use of assets
of the plan.
(g) Application of Section.--This section shall not apply--
(1) in the case of a plan to which a guaranteed
benefit policy (as defined in section 401(b)(2)(B) of
the Employee Retirement Income Security Act of 1974) is
issued, to any assets of the insurance company,
insurance service, or insurance organization merely
because of its issuance of such policy;
(2) to a governmental plan (within the meaning of
section 414(d)); or
(3) to a church plan (within the meaning of section
414(e)) with respect to which the election provided by
section 410(d) has not been made.
In the case of a plan which invests in any security issued by
an investment company registered under the Investment Company
Act of 1940, the assets of such plan shall be deemed to include
such security but shall not, by reason of such investment, be
deemed to include any assets of such company.
(h) Notification of Secretary of Labor.--Before sending a
notice of deficiency with respect to the tax imposed by
subsection (a) or (b), the Secretary shall notify the Secretary
of Labor and provide him a reasonable opportunity to obtain a
correction of the prohibited transaction or to comment on the
imposition of such tax.
(i) Cross Reference.--For provisions concerning coordination
procedures between Secretary of Labor and Secretary of the
Treasury with respect to application of tax imposed by this
section and for authority to waive imposition of the tax
imposed by subsection (b), see section 3003 of the Employee
Retirement Income Security Act of 1974.
* * * * * * *
MINORITY VIEWS
H.R. 2823, the ``Affordable Retirement Advice for Savers
Act,'' would repeal the Department of Labor's (DOL's)
``Conflict of Interest'' rule (or fiduciary rule) finalized
during the Obama Administration, and will also codify loopholes
that enable financial professionals to avoid their fiduciary
obligations. The bill will dramatically weaken protections for
retirement savers and will allow conflicts of interest to once
again go unchecked. H.R. 2823 was reported by straight party-
line votes of 23 ayes and 17 nays. Committee Democrats
unanimously opposed the bill.
BACKGROUND ON FIDUCIARY RULE AND COMMITTEE REPUBLICANS' OPPOSITION TO
IT
Many Americans seek out and rely on financial advice to
help them invest their retirement nest egg. This is one of the
biggest financial decisions they will make in their lives. In
making it, Americans trust that the financial advice given to
them is in their best interests. Unfortunately, that was not
always the case. For years, loophole-ridden rules enabled
unscrupulous financial advisors to provide what is referred to
as ``conflicted advice.'' This is when the profit motives of
financial advisors are prioritized over the best interests of
their retirement clients. Conflicted advice most often occurs
when workers are about to retire and roll over their employer-
based retirement account, such as a 401(k), into an IRA or
other financial account. Conflicted advice has been estimated
to cost retirement plan participants $17 billion in losses
every year and result in a loss of almost a quarter of an
individual's savings over a 35-year period.\1\
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\1\Council of Economic Advisors, The Effects of Conflicted
Investment Advice on Retirement Savings 17-18 (Feb. 2015); available
at: https://permanent.access.gpo.gov/gpo55500/ cea_coi_report_final.pdf
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Recognizing the existing rules were harming workers and
retirement savers, the Obama Administration's DOL diligently
worked to fix them. The DOL pursued a comprehensive and
transparent rulemaking process, conducting hundreds of meetings
and providing the American public a total of nearly six months
to offer comments. In April 2016, the DOL finalized the
``Conflict of Interest Rule,'' which is commonly referred to as
the ``fiduciary rule.'' The final rule strengthened and updated
decades-old regulations and ensured that financial advisors put
the interest of their retirement clients first.\2\
---------------------------------------------------------------------------
\2\81 Fed. Reg. 20945, Definition of the Term ``Fiduciary,''
Conflict of Interest Rule--Retirement Investment Advice, (April 8,
2016); available at: https://www.federalregister.gov/documents/ 2016/
04/08/2016-07924/definition-of-the-term-fiduciary-conflict-of-interest-
rule-retirement-investment-advice
---------------------------------------------------------------------------
Even before the fiduciary rule was finalized, Committee
Republicans opposed it. In February 2016, Committee Republicans
advanced two bills that sought to undermine the fiduciary
rule.\3\
---------------------------------------------------------------------------
\3\Committee on Education and the Workforce Markup of H.R. 4293 and
H.R. 4294, Committee on Education and the Workforce, House Report 114-
511 and 114-512, (February 2, 2016); available at: https://www.gpo.gov/
fdsys/pkg/CRPT-114hrpt511/pdf/CRPT-114hrpt511.pdf and https://
www.gpo.gov/fdsys/ pkg/CRPT-114hrpt512/pdf/CRPT-114hrpt512-pt2.pdf
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Then, less than two weeks after the fiduciary rule was
finalized and published in the Federal Register, Committee
Republicans rushed to judgment and hastily considered a
Congressional Review Act (CRA) joint resolution of disapproval
nullifying it.\4\
---------------------------------------------------------------------------
\4\Committee on Education and the Workforce Markup of H.J.RES.88,
House Report 114-527, (April 21, 2016); available at https://
www.gpo.gov/fdsys/pkg/CRPT-114hrpt527/ pdf/CRPT-114hrpt527-pt1.pdf. On
April 28, 2016, the House voted on H.J. RES.88 and it passed on a
party-line vote of 234-183. Every House Democrat opposed it. After
Senate passage of H.J. RES.88, President Obama vetoed it. On June 22,
2016, the House attempted to override the President's veto. This effort
was unsuccessful, and every House Democrat opposed the veto override.
---------------------------------------------------------------------------
On July 19, 2017, Committee Republicans relentlessly
pressed on with their misguided opposition to the fiduciary
rule to mark-up H.R. 2823. In fact, the Committee's
consideration of H.R. 2823 was the fifth hearing or markup
attacking the fiduciary rule in the past two years alone.\5\ As
Ranking Member Scott noted in his opening statement during the
markup of H.R. 2823, ``that is five more hearings or markups
than we have had on increasing the minimum wage, five more
hearings than we have had on providing paid family or medical
leave, five more hearings than we have had protecting older
workers from discrimination, five more hearings than we have
had on strengthening the OSHA whistleblower protection law, and
five more hearings than we have had on protecting coal miners'
pensions.'' \6\
---------------------------------------------------------------------------
\5\Restricting Access to Financial Advice: Evaluating the Costs and
Consequences for Working Families and Retirees,'' HELP Subcommittee,
June 17, 2015; ``Principles for Ensuring Retirement Advice Serves the
Best Interests of Working Families and Retirees,'' HELP Subcommittee,
December 2, 2015; Markup of H.R. 4293 and H.R. 4294, full Committee,
February 2, 2016; Markup of H.J.RES.88, full Committee, April 21, 2016
\6\Opening Statement of Ranking Member Bobby Scott, Committee on
Education and Workforce Markup of H.R. 2823, (July 19, 2017); available
at: http://democrats-edworkforce. house.gov/imo/media/doc/
RCBS%20OS%20(Fiduciary%20Markup)%20071917.pdf
---------------------------------------------------------------------------
Committee Democrats continue to believe the fiduciary rule
is a responsible solution to a real problem and strongly oppose
efforts, such as H.R. 2823, which undermine key protections for
retirement savers. H.R. 2823 is opposed by the following
organizations: AARP, AFL-CIO, AFSCME, American Association for
Justice, Americans for Financial Reform, Consumer Federation of
America, Economic Policy Institute Policy Center, Financial
Planning Coalition (which is comprised of the Certified
Financial Planner Board of Standards, Financial Planning
Association, and the National Association of Personal Financial
Advisors), National Employment Law Project, and the Pension
Rights Center.
H.R. 2823 TURNS BACK THE CLOCK, ENABLING UNSCRUPULOUS ADVISORS TO ONCE
AGAIN PUT THEIR FINANCIAL INTERESTS AHEAD OF THEIR RETIREMENT CLIENTS'
Under the Employee Retirement Income Security Act of 1974
(ERISA), the DOL possesses the authority to define who is a
fiduciary as a result of providing retirement investment
advice.\7\ In 1975, the DOL issued regulations specifying that
an advisor must meet a five-part test to be a fiduciary.
Specifically, the advisor must make recommendations (1) on
investing in, purchasing, or selling securities or other
property, or give advice as to the value; (2) on a regular
basis; (3) pursuant to a mutual understanding that the advice;
(4) that serve as a primary basis for investment decisions;
and, (5) that are individualized to the particular needs of the
plan regarding such matters as, among other things, investment
policies or strategy, overall portfolio composition, or
diversification of plan investments.
---------------------------------------------------------------------------
\7\29 U.S.C. 1002(21)(a)(ii). Additionally, according to the DOL,
the Reorganization Plan of 1978 (5 U.S.C. App. (2000)) gives the DOL
the authority to define ``fiduciary'' under both ERISA and the Internal
Revenue Code (IRC).
---------------------------------------------------------------------------
This five-part test did not keep pace with the changed
retirement savings and planning landscape, and emerging
loopholes were ripe for exploitation. For instance, an
unscrupulous advisor, who provides individualized or one-time
investment advice to a retirement client about rolling over
assets from an employer-sponsored retirement plan (such as a
401(k)) to a high-fee IRA, does not have to abide by a
fiduciary obligation because the advisor is not giving advice
on a regular basis.
After receiving input from experts and the public, the
Obama Administration's DOL scrapped the five-part test in favor
of a more inclusive definition, one that covers rollover
decisions and IRAs. Under the 2016 fiduciary rule, ``the
following recommendations constitute investment advice, if they
are done for a fee or other compensation: the advisability of
buying, selling, holding, or exchanging investments; how
investments should be invested after being rolled over,
transferred, or distributed from an IRA; the management of
investments; or IRAs, including whether, in what form, in what
amount, and to what destination rollovers, distributions from
IRAs and transfers from IRAs should be made. In addition, the
person who makes a recommendation as listed above must (1)
represent or acknowledge that the person is acting as a
fiduciary, (2) provide a written or verbal understanding that
the advice is based on the particular needs of the advice
recipient; or (3) direct the advice to a specific
recipient.''\8\
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\8\Congressional Research Service, ``DOL's 2016 Fiduciary Rule on
Investment Advice,'' (July 5, 2017); available at: http://www.crs.gov/
reports/pdf/IF10686
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The 2016 DOL rule also specifies that ``certain activities
do not constitute investment advice. These activities include
marketing by platform providers who market without regard to
the needs of individual plans or participants; making available
general communications, such as general circulation
newsletters; providing investment advice; providing advice to
independent fiduciaries with financial expertise (as defined in
the regulations); and executing securities transactions. In
addition, individuals who are employees of a plan sponsor or
employee organization and do not receive compensation for the
advice beyond their normal compensation are not considered to
be providing investment advice.''\9\
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\9\Id.
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H.R. 2823 repeals the 2016 fiduciary rule and its component
parts. In its place, H.R. 2823 establishes a loophole-ridden
standard that unscrupulous advisors could easily skirt by
simply issuing boilerplate written disclaimers or disclosures.
For financial advisors to be subject to the fiduciary
requirement under H.R. 2823, they must render investment advice
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 retirement
client and the retirement client `intends to materially rely'
on the advice. This framework is similar to the loophole-ridden
1975 regulations that were replaced by the DOL's 2016 fiduciary
rule and would enable financial advisors to easily avoid their
fiduciary obligations to their clients. At least with the
deficient 1975 regulations, once advisors became fiduciaries
they could not disclaim away their fiduciary obligation. That
is not the case with H.R. 2823.
Under H.R. 2823, financial advisors would be able
to avoid fiduciary obligations by providing a written
disclaimer that states, ``[t]his communication is not
individualized to you, and you are not intended to rely
materially on this communication in making investment or
management decisions.'' In practice, as the Consumer Federation
of America noted in its letter opposing H.R. 2823, ``a
retirement saver could reasonably believe she was receiving
personalized advice (based, for example, on how the services
were marketed), rely exclusively on that advice in making her
investment decision, and still not be deemed to be in an
advisory relationship under the terms of this bill so long as
the adviser provided the required boilerplate disclaimer''\10\
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\10\Consumer Federation of America, Letter to Chairwoman Foxx and
Ranking Member Scott Opposing H.R. 2823, July 17, 2017, available at:
http://democrats-edworkforce.house.gov/imo/ media/doc/
CFA_ltr%20of%20opposition-H.R.%202823.pdf
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Under H.R. 2823, financial advisors would be able
to avoid fiduciary obligations if they indicate and disclose in
writing that they are acting in a ``marketing or sales
capacity.'' The concern is that advisors would be able to
provide an unlimited amount of advice to their clients as long
as they provide a written disclosure that they are only
providing advice in a ``marketing or sales capacity,'' which
are terms that are not defined in the bill.
Under H.R. 2823, financial advisors would be able
to avoid fiduciary obligations if they claim to have made a
``good faith'' error or omission in their disclosure.
According to the Financial Planning Coalition, which is
comprised of the Certified Financial Planner Board of
Standards, Financial Planning Association, and National
Association of Personal Financial Advisors, H.R. 2823 ``would
weaken, not strengthen, protections for retirement savers; and
would re-open loopholes in the definition of investment advice
that the DOL closed in the Fiduciary Rule. In addition, the
bill would weaken the standard that applies to advice by
allowing financial firms and advisors to easily disclose away
any fiduciary obligations owed to their clients.''\11\
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\11\Financial Planning Coalition, Letter to Chairwoman Foxx,
Ranking Member Scott, and Education and Workforce Committee Members
Opposing H.R. 2823, July 17, 2017, available at: http://democrats-
edworkforce.house.gov/imo/media/doc/FPCltr%20of%20opposition-H.R.%
202823.pdf
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While Committee Democrats believe disclosures and
disclaimers are no substitute for a binding and 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.''\12\
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\12\Life Insurance Management Research Association (LIMRA), ``Many
Americans Don't Fully Read Retirement Plan Disclosures; Few Know What
Fees they Pay,'' (August 2012); available at: http://www.limra.com/
Posts/PR/News_Releases/LIMRA_Study_Many_Americans_
Don_t_Fully_Read_Retirement_Plan_Disclosures;_Few_Know_What_Fees_They
_Pay.aspx.
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Disclosures often fail to make clients aware of
the nature of their advisors' conflicts, let alone understand
the potential implications of such conflicts.\13\
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\13\Department of Labor, ``Fiduciary Investment Advice, Regulatory
Impact Analysis,'' (April 2015); available at: http://www.dol.gov/ebsa/
pdf/conflictsofinterestria.pdf.
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Disclosure of advisor conflicts can backfire since
clients can interpret disclosure of advisor conflicts as a sign
of honesty.\14\ 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.
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\14\Id.
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H.R. 2823 IGNORES REAL WORLD REALITIES REGARDING FIDUCIARY RULE'S
IMPLEMENTATION
The fiduciary rule was initially implemented on June 9,
2017, and there exists some preliminary evidence of how it is
impacting the financial marketplace and faring in the legal
system. Initial reports suggest that the financial services
industry is adapting to and capably complying with the rule.
According to the Consumer Federation of America, ``since
the rule was finalized a little over a year ago, firms of all
types and sizes have announced implementation plans that prove
that the rule is both workable and working as intended to rein
in conflicts, improve investment products, and reduce investor
costs, all while preserving access to advice for even the
smallest accountholders.''\15\
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\15\Consumer Federation of America, Letter to Chairwoman Foxx and
Ranking Member Scott Opposing H.R. 2823, July 17, 2017, available at:
http://democrats-edworkforce.house.gov/imo/media/ doc/
CFA_ltr%20of%20opposition-H.R.%202823.pdf
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According to Morningstar, the industry is ``adapting in
ways that will benefit investors by reducing conflicts of
interest and adding transparency.''\16\ In fact, one official
at Wells Fargo Advisors said she would liken the June 9th
initial implementation date of the fiduciary rule to ``. .
.Y2K. We did a lot of preparation and a lot of work for a day
that ended up feeling a lot like any other day.''\17\ In short,
industry reports contradict the doomsday claims of Committee
Republicans' about the fiduciary rule or their rationale for
H.R. 2823.
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\16\Morningstar, ``Early Evidence on the Department of Labor
Conflict of Interest Rule: New Share Classes Should Reduce Conflicted
Advice, Likely Improving Outcomes for Investors,'' April 2017,
available at: https://corporate1.morningstar.com/ResearchLibrary/
article/802119/early- evidence-on-the-department-of-labor-conflict-of-
interest-rule/
\17\St. Louis Post Dispatch, ``Despite Complaints, fiduciary rule
phase-in is going smoothly,'' June 18, 2017, available at: http://
www.stltoday.com/business/columns/david-nicklaus/despite-complaints-
fiduciary-rule-phase-in-is-going-smoothly/article_d0dfd00a-4706-5d87-
b8a9-029a 7cfee9da.html
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Additionally, courts in three separate jurisdictions
rejected plaintiffs' arguments against the fiduciary rule.\18\
Specifically, the courts found that the DOL not only has the
statutory duty to promulgate the rule under ERISA, but that its
fiduciary rule is a reasonable, workable solution that protects
America's retirement savers. According to the holding by one
court, any delay of the fiduciary rule through injunction
``will produce a public harm that outweighs any harm that
plaintiff may sustain from the rule change.''\19\ Another court
held ``the DOL adequately weighed the monetary and non-monetary
costs on the industry of complying with the rules, against the
benefits to consumers [and in] doing so, the DOL conducted
reasonable cost-benefit analysis.''\20\ The plaintiffs in each
case have appealed.
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\18\Mkt. Synergy Grp., Inc. v. U.S. Dep't of Labor, 16-CV-4083-DDC-
KGS (D. Kan. Feb. 17, 2017); Chamber of Commerce v. Hugler, No. 3:16-
cv-1476-M (N.D. Tex. Feb. 8, 2017); Nat'l Ass'n for Fixed Annuities v.
Perez, 16-cv-1035, 2016 WL 6573480 (D.D.C. Nov. 4, 2016)
\19\Mkt. Synergy Grp., Inc. v. U.S. Dep't of Labor, 16-CV-4083-DDC-
KGS at 62, 2016 WL 6948061 (D. Kan. Nov. 28, 2016).
\20\Chamber of Commerce v. Hugler, 16-cv-1476-M (N.D. Tex. Feb. 8,
2017).
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DEMOCRATIC AMENDMENT
Congresswoman Alma Adams offered a substitute amendment to
codify the fiduciary rule into law. The amendment failed on a
voice vote.
ROLL CALL VOTES ON FINAL PASSAGE
H.R. 2823 was reported by straight party-line votes of 23
ayes and 17 nays. Committee Democrats unanimously opposed the
bill.
CONCLUSION
Since the fiduciary rule was initially implemented in June,
financial advisors are now required to be fiduciaries to their
retirement clients. All working Americans are just now
beginning to receive retirement investment advice that's in
their best interests. H.R. 2823 would abruptly eliminate these
protections for workers and replace them with a loophole-ridden
framework that would put their retirement savings at risk.
Rather than continuing to undermine retirement savings
protections, the Committee should instead focus on addressing
real economic challenges confronting working people and their
families. Committee Democrats remain committed to advancing
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. Clearly, H.R. 2823 is not among these
solutions.
For the reasons stated above, among others, Committee
Democrats unanimously opposed H.R. 2823 when the Committee on
Education and the Workforce considered it on July 19, 2017. We
urge the full House of Representatives to do the same.
Robert C. ``Bobby'' Scott,
Ranking Member.
Susan A. Davis.
Raul M. Grijalva.
Joe Courtney.
Marcia L. Fudge.
Jared Polis.
Gregorio Kilili Camacho Sablan.
Frederica S. Wilson.
Suzanne Bonamici.
Mark Takano.
Alma S. Adams.
Mark DeSaulnier.
Donald Norcross.
Lisa Blunt Rochester.
Raja Krishnamoorthi.
Carol Shea-Porter.
Adriano Espaillat.
[all]