[Federal Register: November 20, 2009 (Volume 74, Number 223)]
[Rules and Regulations]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR 2550
Investment Advice--Participants and Beneficiaries
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Withdrawal of final rule.
SUMMARY: This document withdraws final rules under the Employee
Retirement Income Security Act, and parallel provisions of the Internal
Revenue Code of 1986, relating to the provision of investment advice to
participants and beneficiaries in individual account plans, such as
401(k) plans, and beneficiaries of individual retirement accounts (and
certain similar plans). Final rules were published in the Federal
Register on January 21, 2009 (74 FR 3822). The effective and
applicability dates of the final rules had been deferred until May 17,
2010, in order to permit a review of policy and legal issues raised
with respect to the rules. As discussed in this Notice, the Department
has determined to withdraw the final rules. The Department also intends
to soon propose a revised rule limited to the application of the
statutory exemption relating to investment advice.
DATES: Effective January 19, 2010, the final rule published January 21,
2009 amending 29 CFR Part 2550 (74 FR 3822), for which the effective
and applicability date was delayed on March 20, 2009 (74 FR 11847), May
22, 2009 (74 FR 23951) and November 17, 2009 (74 FR 59092), is
FOR FURTHER INFORMATION CONTACT: Fred Wong, Office of Regulations and
Interpretations, Employee Benefits Security Administration (EBSA),
(202) 693-8500. This is not a toll-free number.
On January 21, 2009, the Department of Labor published final rules
on the provision of investment advice to participants and beneficiaries
of participant-directed individual account plans and to beneficiaries
of individual retirement accounts and certain similar plans (IRAs) (74
FR 3822). The rules implement a statutory prohibited transaction
exemption under ERISA Section 408(b)(14) and Sec. 408(g), and under
section 4975 of the Internal Revenue Code of 1986 (Code),\1\ and also
contain an administrative class exemption granting additional relief.
As published, these rules were to be effective on March 23, 2009. On
February 4, 2009, the Department published in the Federal Register (74
FR 6007) an invitation for public comment on a proposed 60-day
extension for the effective dates of the final rules until May 22,
2009, and a proposed conforming amendment to the applicability date of
Section 2550.408g-1, in order to afford the Agency the opportunity to
review legal and policy issues relating to the final rules. The
Department also invited public comments on the provisions of those
rules and on the merits of rescinding, modifying or retaining the
rules. In response to this invitation, the Department received 28
comment letters.\2\ On March 20, 2009, the Department adopted the 60-
day extension of the final rule's effective and applicability date.
(See 74 FR 11847). In order to afford the Department additional time to
consider the issues raised by commenters, the effective and
applicability dates were further delayed until November 18, 2009 (74 FR
23951), and then until May 17, 2010.
\1\ These provisions were added to ERISA and the Code by the
Pension Protection Act of 2006 (PPA), Public Law 109-280, 120 Stat.
780 (Aug. 17, 2006).
\2\ These comments are available on the Department's Web site
B. Comments Received
A number of the commenters expressed the view that the final rule
raises significant issues of law and policy, and should be withdrawn.
Several of these commenters argued that the class exemption contained
in the final rule permits financial interests that would cause a
fiduciary adviser, and individuals providing investment advice on
behalf of a fiduciary adviser, to have conflicts of interest, but does
not contain conditions that would adequately mitigate such conflicts.
They asserted that investment advice provided under the class exemption
therefore might be tainted by the fiduciary adviser's conflicts. Other
commenters expressed concerns about those provisions of the rule
relating to the ``fee-leveling'' requirement under the statutory
exemption. In particular, some opined that the Department's
interpretation of the statutory exemption's fee-leveling requirement is
incorrect for permitting the receipt of varying fees by an affiliate of
a fiduciary adviser. As a result, they argued, a fiduciary adviser
under such a fee-leveling arrangement has a conflict of interest, and
the final rule does not adequately protect against investment advice
that is influenced by the financial interests of the fiduciary
adviser's affiliates. Commenters who advocated retention of the final
rule argued that it contains strong safeguards that would protect the
interests of plan participants and beneficiaries.
C. Analysis and Determination
As documented in the Department's regulatory impact analysis (RIA)
of the January 2009 final regulation and class exemption, defined
contribution (DC) plan participants and IRA beneficiaries
often make costly investment errors. Those who receive and follow
quality investment advice can reduce such errors and thereby reap
substantial financial benefit. The Department estimated that the PPA
statutory exemption as implemented by the final regulation, together
with the final class exemption, would extend investment advice to 21
million previously unadvised participants and beneficiaries, generating
$13 billion in annual financial benefits at a cost of $5 billion, for a
net annual financial benefit of $8 billion.
In arriving at its estimates, the Department assumed that on
average participants and beneficiaries who are advised make investment
errors at one-half the rate of those who are not. The Department
further assumed that different types of investment advice arrangements
on average would be equally effective: Arrangements operating without
need for exemptive relief, those operating pursuant to the PPA, and
those operating pursuant to the class exemption all would reduce
investment errors by one-half on average.
The Department's assumptions regarding the effectiveness of
different advice arrangements were subject to uncertainty, particularly
as applied to its assessment of the final class exemption's effects. In
the preamble to the January 2009 final regulation and class exemption
the Department noted evidence that conflicts of interest, such as those
that might be attendant to advice arrangements operating pursuant to
the class exemption, can sometimes taint advice. Conflicted advisers
pursuing their own interests, and the investment managers who
compensate them, may profit at the expense of participants and
beneficiaries. The conditions attached to the class exemption were
intended to ensure that advisers operating pursuant to the class
exemption would honor the interests of participants and beneficiaries.
As discussed earlier, a number of commenters raised legal and
policy issues concerning the exemption and, in particular, questioned
the adequacy of the final class exemption's conditions to mitigate the
potential for investment adviser self-dealing. The Department believes
that the questions raised in these comments are sufficient to cast
doubt on the conditions' adequacy to mitigate advisers' conflicts. If
conflicts are not mitigated advice might be tainted. Therefore the
Department has set aside its previous assumption that participants and
beneficiaries who follow advice delivered pursuant to the final class
exemption will commit investment errors at one-half the rate of those
who are unadvised, together with its previous conclusion that the final
class exemption's benefits justify its cost. Instead the Department
believes that doubts as to whether the final class exemption's
conditions are adequate to mitigate conflicts justify withdrawal of the
final class exemption. Accordingly, the Department is withdrawing the
January 2009 final rule. With regard to the statutory prohibited
transaction exemption under ERISA Section 408(b)(14) and Section
408(g), and Code Section 4975, in order to address the absence of
regulatory guidance that results from withdrawal of the January 2009
final rule, the Department intends to propose regulations that, upon
adoption, implement those provisions. Work is currently being completed
on those proposed regulations, and the Department anticipates that they
will be published in the Federal Register shortly.
For the reasons set forth above, the publication on January 21,
2009 (74 FR 3822), of the final rule amending 29 CFR Part 2550, for
which the effective and applicability date was delayed on March 20,
2009 (74 FR 11847), May 22, 2009 (74 FR 23951) and November 17, 2009,
Signed at Washington, DC, this 16th day of November 2009.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. E9-27889 Filed 11-19-09; 8:45 am]
BILLING CODE 4510-29-P