Alert March 02, 2010

DOL Issues Proposed Regulation to Replace Previously-Issued Guidance on Investment Advice for Participant-Directed ERISA Plans and IRAs

The Department of Labor (the “DOL”) issued a proposed regulation (the “Proposed Regulation”) under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”), addressing the provision of investment advice by a firm to participant-directed ERISA plan participants and individual retirement account beneficiaries regarding investments in products offered by the firm or its affiliates.  The Proposed Regulation replaces guidance contained in the final rule published on January 21, 2009 (the “Withdrawn Regulation”), the effective date of which was delayed several times in 2009 and which was ultimately withdrawn by the DOL on November 20, 2009 in anticipation of proposing a new rule.  (The Withdrawn Regulation was originally proposed in 2008, as described in the September 2, 2008 Alert.  The subsequent delays of the effective date and withdrawal of the Withdrawn Regulation are described in the February 17, 2009 Alert, the May 26, 2009 Alert and the November 24, 2009 Alert.

The Proposed Regulation provides guidance regarding two statutory prohibited transaction exemptions that were included in amendments to ERISA and the Code in 2006 – a “fee‑leveling” exemption and a “computer model” exemption.  Although the Proposed Regulation is substantially similar to the Withdrawn Regulation, there are notable differences.  First, the Proposed Regulation does not include an administrative prohibited transaction class exemption that had been incorporated within the Withdrawn Regulation, which (among other things) would have permitted the firm providing the advice to receive fees or compensation based upon the selection of an investment option by a plan participant or IRA beneficiary.  Second, the Proposed Regulation expressly prohibits a firm providing investment advice (including any employee, agent or representative of the firm) from receiving any payment from an affiliate of the firm that is based upon the selection of an investment option by a plan participant or IRA beneficiary.  Therefore, even though an affiliate may receive fees that vary based upon the investment option selected, the affiliate may not provide financial or economic incentives to the firm providing the advice (or any employee, agent or representative of the firm) based upon the investment option selected.  Finally, the Proposed Regulation provides that, in connection with investment advice arrangements that use computer models, the computer models may not inappropriately distinguish among investment options within a single asset class based upon factors that may not continue in the future.  The DOL indicated that, in its view, this would prohibit computer models from distinguishing among investment options in a single asset class based on historical performance.

The Proposed Regulation is proposed to be effective 60 days after the final version is published in the Federal Register.  (The statutory exemptions are generally effective already.)  Comments are due by May 5, 2010.  For more information regarding the Proposed Regulation, please see the discussion of the Withdrawn Regulation in the September 2, 2008 Alert.