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Secretary of Labor Thomas E. Perez
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EBSA Final Rules

Investment Advice--Participants and Beneficiaries   [11/20/2009]
[PDF]
FR Doc E9-27889
[Federal Register: November 20, 2009 (Volume 74, Number 223)]
[Rules and Regulations]               
[Page 60156-60157]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20no09-8]                         

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR 2550

RIN 1210-AB13

 
Investment Advice--Participants and Beneficiaries

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Withdrawal of final rule.

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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 
withdrawn.

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.

SUPPLEMENTARY INFORMATION:

A. Background

    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.
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    \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 
at: http://www.dol.gov/ebsa/regs/cmt-investmentadvicefinalrule.html.
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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

[[Page 60157]]

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, 
is withdrawn.

    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