99–006

107TH CONGRESS REPT. 107–262 " ! HOUSE OF REPRESENTATIVES 1st Session Part 2

RETIREMENT SECURITY ADVICE ACT OF 2001

NOVEMBER 13, 2001.—Committed to the Committee of the Whole House on the

State of the Union and ordered to be printed

Mr. THOMAS, from the Committee on Ways and Means,

submitted the following

R E P O R T

together with

ADDITIONAL AND MINORITY VIEWS

[To accompany H.R. 2269]

[Including cost estimate of the Congressional Budget Office]

The Committee on Ways and Means, to whom was referred the

bill (H.R. 2269) to amend title I of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986

to promote the provision of retirement investment advice to workers managing their retirement income assets, having considered

the same, report favorably thereon with an amendment and recommend that the bill as amended do pass.

CONTENTS

Page

I. Summary and Background ........................................................................... 6

A. Purpose and Summary .................................................................... 6

B. Background and Need for Legislation ............................................ 6

C. Legislative History ........................................................................... 6

II. Explanation of the Bill .................................................................................. 6

A. Prohibited Transaction Exemption for the Provision of Investment Advice .................................................................................... 6

III. Votes of the Committee ................................................................................. 8

IV. Budget Effects of the Bill .............................................................................. 9

A. Committee Estimate of Budgetary Effects ..................................... 9

B. Statement Regarding New Budget Authority and Tax Expenditures Budget Authority .................................................................. 9

C. Cost Estimate Prepared by the Congressional Budget Office ...... 10

V. Other Matters To Be Discussed Under the Rules of the House ................ 11

A. Committee Oversight Findings and Recommendations ................ 11

B. Statement of General Performance Goals and Objectives ............ 11

2

C. Constitutional Authority Statement ............................................... 11

D. Information Relating to Unfunded Mandates ............................... 11

E. Applicability of House Rule XXI 5(b) .............................................. 11

F. Tax Complexity Analysis ................................................................. 11

VI. Changes in Existing Law Made by the Bill as Reported ............................ 12

VII. Dissenting Views ........................................................................................... 19

VIII. Additional Views ............................................................................................ 25

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 ‘‘Retirement Security Advice Act of 2001’’.

SEC. 2. PROHIBITED TRANSACTION EXEMPTION FOR THE PROVISION OF INVESTMENT ADVICE.

(a) AMENDMENTS TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF

1974.—

(1) IN GENERAL.—Section 408(b) of the Employee Retirement Income Security

Act of 1974 (29 U.S.C. 1108(b)) is amended by adding at the end the following

new paragraph:

‘‘(14) If the requirements of subsection (g) are met—

‘‘(A) the provision of investment advice referred to in section 3(21)(A)(ii)

provided by a fiduciary adviser (as defined in subsection (g)(4)(A)) to an employee benefit plan or to a participant or beneficiary of an employee benefit

plan,

‘‘(B) the sale, acquisition, or holding of securities or other property (including any lending of money or other extension of credit associated with

the sale, acquisition, or holding of securities or other property) pursuant to

such investment advice, and

‘‘(C) 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 such investment advice.’’.

(2) REQUIREMENTS.—Section 408 of such Act is amended further by adding at

the end the following new subsection:

‘‘(g)(1) The requirements of this subsection are met in connection with the provision of advice referred to in section 3(21)(A)(ii), provided to an employee benefit plan

or a participant or beneficiary of an employee benefit plan by a fiduciary adviser

with respect to such plan, in connection with any sale or acquisition of a security

or other property for purposes of investment of amounts held by such plan, if—

‘‘(A) in the case of the initial provision of such advice with regard to a security

or other property, by such fiduciary adviser to such plan, participant, or beneficiary, the fiduciary adviser provides to the recipient of such advice, at the time

of or before the initial provision of such advice, a clear and conspicuous description, in writing (including by means of electronic communication), of—

‘‘(i) all fees or other compensation relating to such 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 such advice

or in connection with such acquisition or sale,

‘‘(ii) any material affiliation or contractual relationship of the fiduciary

adviser or affiliates thereof in such security or other property,

‘‘(iii) any limitation placed on the scope of the investment advice to be

provided by the fiduciary adviser with respect to any such sale or acquisition, and

‘‘(iv) the types of services offered by the fiduciary advisor in connection

with the provision of investment advice by the fiduciary adviser,

‘‘(B) in the case of the initial or any subsequent provision of such advice to

such plan, participant, or beneficiary, the fiduciary adviser, throughout the 1-

year period following the provision of such advice, maintains the information

described in clauses (i) through (iv) of subparagraph (A) in currently accurate

form for availability, upon request and without charge, to the recipient of such

advice,

‘‘(C) the fiduciary adviser provides appropriate disclosure, in connection with

any such acquisition or sale, in accordance with all applicable securities laws,

‘‘(D) such acquisition or sale occurs solely at the direction of the recipient of

such advice,

‘‘(E) the compensation received by the fiduciary adviser and affiliates thereof

in connection with such acquisition or sale is reasonable, and

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‘‘(F) the terms of such acquisition or sale are at least as favorable to such plan as an arm’s length transaction would be. ‘‘(2) A fiduciary adviser referred to in paragraph (1) who has provided advice referred to in such paragraph shall, for a period of not less than 6 years after the

provision of such advice, maintain 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. ‘‘(3)(A) Subject to subparagraph (B), a plan sponsor or other person who is a fiduciary 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 such

investment advice), if— ‘‘(i) such advice is provided by a fiduciary adviser pursuant to an arrangement

between such plan sponsor or other fiduciary and such fiduciary adviser for the

provision by such fiduciary adviser of investment advice referred to in such section, and ‘‘(ii) the terms of such arrangement require compliance by the fiduciary adviser with the requirements of this subsection.

‘‘(B) 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 arrangement for the provision of advice referred to in

section 3(21)(A)(ii). Such 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 such advice.

‘‘(C) 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).

‘‘(4) For purposes of this subsection and subsection (b)(14)—

‘‘(A) 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 by such

person to the plan or to a participant or beneficiary 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 section 408(b)(4),

‘‘(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 any of clauses (i) through (v).

‘‘(B) The term ‘affiliate’ means an affiliated person, as defined in section

2(a)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a)(3)).

‘‘(C) The term ‘registered representative’ means a person described in section

3(a)(18) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) or section

202(a)(17) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)(17)).’’.

(b) AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986.—

(1) EXEMPTION FROM PROHIBITED TRANSACTIONS.—Subsection (d) of section

4975 of the Internal Revenue Code of 1986 (relating to exemptions from tax on

prohibited transactions) is amended—

(A) in paragraph (14), by striking ‘‘or’’ at the end;

(B) in paragraph (15), by striking the period at the end and inserting

‘‘; or’’; and

(C) by adding at the end the following new paragraph:

‘‘(16) any transaction described in subsection (f)(7)(A) in connection with the

provision of investment advice described in subsection (e)(3)(B), in any case in

which—

‘‘(A) the investment of assets of the plan is subject to the direction of plan

participants or beneficiaries,

‘‘(B) the advice is provided to the plan or a participant or beneficiary of

the plan by a fiduciary adviser in connection with any sale, acquisition, or

holding of a security or other property for purposes of investment of plan

assets, and

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‘‘(C) the requirements of subsection (f)(7)(B) are met in connection with

the provision of the advice.’’

(2) ALLOWED TRANSACTIONS AND REQUIREMENTS.—Subsection (f) of such section 4975 (relating to other definitions and special rules) is amended by adding

at the end the following new paragraph:

‘‘(7) PROVISIONS RELATING TO INVESTMENT ADVICE PROVIDED BY FIDUCIARY ADVISERS.—

‘‘(A) TRANSACTIONS ALLOWABLE IN CONNECTION WITH INVESTMENT ADVICE

PROVIDED BY FIDUCIARY ADVISERS.—The transactions referred to in subsection (d)(16), in connection with the provision of investment advice by a

fiduciary adviser, are the following:

‘‘(i) the provision of the advice to the plan, participant, or beneficiary;

‘‘(ii) the sale, acquisition, or holding of a security or other property

(including any lending of money or other extension of credit associated

with the sale, acquisition, or holding of a security or other property)

pursuant to the advice; and

‘‘(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 a sale, acquisition, or holding of a security or other property pursuant to the advice.

‘‘(B) REQUIREMENTS RELATING TO PROVISION OF INVESTMENT ADVICE BY FIDUCIARY ADVISERS.—The requirements of this subparagraph (referred to in

subsection (d)(16)(C)) are met in connection with the provision of investment advice referred to in subsection (e)(3)(B), provided to a plan or a participant or beneficiary of a plan by a fiduciary adviser with respect to the

plan in connection with any sale, acquisition, or holding of a security or

other property for purposes of investment of amounts held by the plan, if—

‘‘(i) in the case of the initial provision of the advice with regard to

the security or other property by the fiduciary adviser to the plan, participant, or beneficiary, the fiduciary adviser provides to the recipient

of the advice, at a time reasonably contemporaneous with the initial

provision of the advice, a written notification (which may consist of notification by means of electronic communication)—

‘‘(I) 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,

‘‘(II) of any material affiliation or contractual relationship of the

fiduciary adviser or affiliates thereof in the security or other property,

‘‘(III) of any limitation placed on the scope of the investment advice to be provided by the fiduciary adviser with respect to any

such sale, acquisition, or holding of a security or other property,

‘‘(IV) of the types of services provided by the fiduciary advisor in

connection with the provision of investment advice by the fiduciary

adviser, and

‘‘(V) that the adviser is acting as a fiduciary of the plan in connection with the provision of the advice,

‘‘(ii) 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,

‘‘(iii) the sale, acquisition, or holding occurs solely at the direction of

the recipient of the advice,

‘‘(iv) 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

‘‘(v) 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.

‘‘(C) STANDARDS FOR PRESENTATION OF INFORMATION.—The notification required to be provided to participants and beneficiaries under subparagraph

(B)(i) shall be written in a clear and conspicuous manner and in a manner

calculated to be understood by the average plan participant and shall be

sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of the information required to be provided in the

notification.

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‘‘(D) EXEMPTION CONDITIONED ON MAKING REQUIRED INFORMATION AVAILABLE ANNUALLY, ON REQUEST, AND IN THE EVENT OF MATERIAL CHANGE.—

The requirements of subparagraph (B)(i) shall be deemed not to have been

met in connection with the initial or any subsequent provision of advice described in subparagraph (B) to the plan, participant, or beneficiary if, at

any time during the provision of advisory services to the plan, participant,

or beneficiary, the fiduciary adviser fails to maintain the information described in subclauses (I) through (IV) of subparagraph (B)(i) in currently accurate form and in the manner required by subparagraph (C), or fails—

‘‘(i) to provide, without charge, such currently accurate information to

the recipient of the advice no less than annually,

‘‘(ii) to make such currently accurate information available, upon request and without charge, to the recipient of the advice, or

‘‘(iii) in the event of a material change to the information described

in subclauses (I) through (IV) of subparagraph (B)(i), to provide, without charge, such currently accurate information to the recipient of the

advice at a time reasonably contemporaneous to the material change in

information.

‘‘(E) MAINTENANCE FOR 6 YEARS OF EVIDENCE OF COMPLIANCE.—A fiduciary adviser referred to in subparagraph (B) who has provided advice referred to in such subparagraph shall, for a period of not less than 6 years

after the provision of the advice, maintain any records necessary for determining whether the requirements of the preceding provisions of this paragraph and of subsection (d)(16) have been met. A transaction prohibited

under subsection (c)(1) 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.

‘‘(F) DEFINITIONS.—For purposes of this paragraph and subsection

(d)(16)—

‘‘(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 by the person to the plan or to a

participant or beneficiary 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),

‘‘(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 any of subclauses (I) through (V) who satisfies the requirements of applicable insurance, banking, and securities laws

relating to the provision of the advice.

‘‘(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).’’

SEC. 3. EFFECTIVE DATE.

The amendments made by this Act shall apply with respect to advice referred to

in section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 or

section 4975(e)(3)(B) of the Internal Revenue Code of 1986 provided on or after January 1, 2002.

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1Similar rules apply under the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’).

I. SUMMARY AND BACKGROUND

A. PURPOSE AND SUMMARY

The tax provisions of the bill, H.R. 2269, as amended (the ‘‘Retirement Security Advice Act of 2001’’), create a new category of

prohibited transaction exemptions for investment advice, the investment of assets, and the receipt of fees in connection with retirement plans and accounts, Archer MSAs, and Coverdell education

savings accounts. The bill will facilitate the provision of investment

advice in connection with retirement savings and enable workers to

better manage their retirement assets.

B. BACKGROUND AND NEED FOR LEGISLATION

The provisions approved by the Committee will facilitate the provision of investment advice in connection with retirement savings.

C. LEGISLATIVE HISTORY

COMMITTEE ACTION

The Committee on Ways and Means marked up the provisions of

the bill on November 7, 2001, and ordered the bill reported, as

amended, on November 7, 2001, by a roll call vote of 25 yeas and

15 nays, with a quorum present.

II. EXPLANATION OF THE BILL

A. PROHIBITED TRANSACTION EXEMPTION FOR THE PROVISION OF INVESTMENT ADVICE (SEC. 2(b) OF THE BILL AND SEC. 4975 OF THE

CODE)

PRESENT LAW

Present law prohibits certain transactions between an employee

benefit plan and a disqualified person.1 Disqualified persons include a fiduciary of the plan, a person providing services to the

plan, and an employer with employees covered by the plan. For

this purpose, a fiduciary includes any person who (1) exercises any

authority or control respecting management or disposition of the

plan’s assets, (2) renders investment advice for a fee or other compensation with respect to any plan moneys or property, or has the

authority or responsibility to do so, or (3) has any discretionary authority or responsibility in the administration of the plan.

Prohibited transactions include (1) the sale, exchange or leasing

of property, (2) the lending of money or other extension of credit,

(3) the furnishing of goods, services or facilities, (4) the transfer to,

or use by or for the benefit of, the income or assets of the plan, (5)

in the case of a fiduciary, any act that deals with the plan’s income

or assets the for the fiduciary’s own interest or account, and (6) the

receipt by a fiduciary of any consideration for the fiduciary’s own

personal account from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

However, certain transactions are exempt from prohibited transaction treatment, for example, certain loans to plan participants.

7

If a prohibited transaction occurs, the disqualified person who

participates in the transaction is subject to a two-tier excise tax.

The first level tax is 15 percent of the amount involved in the

transaction. The second level tax is imposed if the prohibited transaction is not corrected within a certain period and is 100 percent

of the amount involved. The prohibited transaction rules apply to

a qualified retirement plan, a qualified retirement annuity, an individual retirement account or annuity, an Archer MSA, or a Coverdell education savings account.

REASONS FOR CHANGE

The Committee believes that providing prohibited transaction exemptions will facilitate the provision of investment advice to individuals who are responsible for directing the investment of their retirement assets.

EXPLANATION OF PROVISION

The provision adds a new category of prohibited transaction exemptions in connection with the provision of investment advice

with respect to plan assets for a fee if (1) the investment of plan

assets is subject to the direction of plan participants or beneficiaries, (2) the advice is provided to the plan or a participant or

beneficiary by a fiduciary advisory in connection with a sale, acquisition or holding of a security or other property (an ‘‘investment

transaction’’) for purposes of investment plan assets, and (3) certain other requirements are met. Under the provision, the following

are exempt from prohibited transaction treatment: (1) the provision

of investment advice to the plan, participant or beneficiary, (2) an

investment transaction (including any lending of money or other

extension of credit associated with the investment transaction) pursuant to the advice, and (3) the direct or indirect receipt of fees or

other compensation by a fiduciary advisor or affiliate (or any employee, agent or registered representative of the fiduciary advisor

or affiliate) in connection with the provision of the advice or an investment transaction pursuant to the advice.

Under the provision, certain requirements must be met in order

for the exemption to apply. When initially providing advice about

a security or other property, the fiduciary advisor must provide to

the recipient of the advice, on a reasonably contemporaneous basis,

written notification of specified information (discussed below) as

well as any disclosure required in connection with the investment

transaction under any applicable securities laws. In addition, the

investment transaction must occur solely at the direction of the recipient of the advice; the compensation received by the advisor and

affiliates in connection with the investment transaction must be at

least as favorable as an arm’s length transaction would be.

The written notification required to be provided by the fiduciary

advisor must include information about the following: (1) all fees

or compensation to be received by the advisor or an affiliate (including from a third party) in connection with the advice or the investment transaction, (2) any material affiliation or contractual relationship of the advisor or affiliates in the security or other property involved in the investment transaction (3) any limitation to be

placed on the scope of the investment advice, (4) the types of services provided by the advisor in connection with the provision of inVerDate 06-NOV-2001 00:16 Nov 15, 2001 Jkt 099006 PO 00000 Frm 00007 Fmt 6659 Sfmt 6602 E:\HR\OC\HR262P2.XXX pfrm01 PsN: HR262P2
8

vestment advice, and (5) the advisor’s status as a fiduciary of the

plan in connection with the provision of the advice. The written notification can be provided electronically. In addition, in connection

with the initial advice or subsequent advice, the required information must be provided in currently accurate form at least annually

and also when requested by the recipient of the advice and when

there is a material change in the information. Any notification (or

currently accurate information) must be written in a clear and conspicuous manner, calculated to be understood by the average plan

participant, and be sufficiently accurate and comprehensive reasonably to apprise participants and beneficiaries of the required information.

The fiduciary advisor must maintain for at least six years any

records necessary for determining whether the requirements for

the prohibited transaction exemption were met. A prohibited transaction will not be considered to have occurred merely because

records were lost or destroyed before the end of six years due to

circumstances beyond the advisor’s control.

For purposes of the provision, ‘‘fiduciary advisor’’ is defined as a

person who is a fiduciary of the plan by reason of the provision of

investment advice to the plan, a participant or beneficiary and who

is also (1) registered as an investment advisor under the Investment Advisors Act of 1940 or under State laws, (2) a bank or similar financial institution supervised by the United States or a State,

(3) an insurance company qualified to do business under State law,

(4) registered as a broker or dealer under the Securities Exchange

Act of 1934, (5) an affiliate of any of the preceding, or (6) an employee, agent or representative of any of the preceding or (6) an

employee, agent or representative of any of the preceding who satisfies the requirements of applicable insurance, banking and securities laws relating to the provision of advice. ‘‘Affiliate’’ means an

affiliated person as defined under section 2(a)(3) of the Investment

Company Act of 1940. ‘‘Registered representative’’ means a person

described in section 3(a)(18) of the Securities Exchange Act of 1934

or a person described in section 202(a)(17) of the Investment Advisors Act of 1940.

EFFECTIVE DATE

The provision is effective with respect to investment advice provided on or after January 1, 2002.

III. VOTES OF THE COMMITTEE

In compliance with clause 3(b) of rule XIII of the Rules of the

House of Representatives, the following statements are made concerning the votes of the Committee of Ways and Means in its consideration of the bill, H.R. 2269.

MOTION TO REPORT THE BILL

The bill, H.R. 2269, as amended, was ordered favorably reported

by a roll call vote of 25 yeas to 15 nays (with a quorum being

present). The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

9

Representatives Yea Nay Present Representative Yea Nay Present

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Coyne ............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Herger ............................. X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. Camp .............................. X ........... ............. Mr. Kleczka ........................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Nussle ............................. ........... ........... ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... X ........... ............. Mr. McNulty .......................... ........... X .............

Ms. Dunn .............................. X ........... ............. Mr. Jefferson ........................ ........... X .............

Mr. Collins ............................ X ........... ............. Mr. Tanner ............................ X ........... .............

Mr. Portman .......................... X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. English ........................... X ........... ............. Mrs. Thurman ....................... ........... X .............

Mr. Watkins ........................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. Hayworth ......................... X ........... ............. Mr. Pomeroy ......................... ........... X .............

Mr. Weller .............................. X ........... .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

IV. BUDGET EFFECTS OF THE BILL

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of the rule XIII of the Rules of

the House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the

bill, H.R. 2269, as reported.

The bill is estimated to have the following effects on budget receipts for fiscal years 2002–2006:

ESTIMATED BUDGET EFFECTS OF THE REVENUE PROVISIONS CONTAINED IN H.R. 2269, THE ‘‘RETIREMENT SECURITY ADVICE ACT OF 2001,’’ AS REPORTED BY THE COMMITTEE ON WAYS AND

MEANS

[Fiscal years 2002–2006, in millions of dollars]

Provision Effective 2002 2003 2004 2005 2006 2002–06

Add a new category of prohibited transaction exemption

for investment advice, certain

investments of plan assets,

and the receipt of fees in

connection with the advice or

investments ........................... iapo/a 1/1/02 Negligible Revenue Effect

Legend for ‘‘Effective’’ column: iapo/a=investment advice provided on or after.

Note.—Details may not add to totals due to rounding.

Source: Joint Committee on Taxation.

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the bill does not involve increased tax expenditures.

10

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the

House of Representatives, requiring a cost estimate prepared by

the CBO, the following statement by CBO is provided.

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE,

Washington, DC, November 9, 2001.

Hon. WILLIAM ‘‘BILL’’ M. THOMAS,

Chairman, Committee on Ways and Means,

House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 2269, the Retirement Security Advice Act of 2001.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is Geoffrey Gehardt.

Sincerely,

BARRY B. ANDERSON

(For Dan L. Crippen, Director).

Enclosure.

H.R. 2269—Retirement Security Advice Act of 2001

H.R. 2269 would amend the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code so that

employer-sponsored retirement plans may provide plan participants with direct access to fiduciary advisers. Under current law,

employers may not provide participants in their retirement plans

with direct access to financial advisers for the purpose of providing

individual investment advice.

The Congressional Budget Office and the Joint Committee on

Taxation estimate that H.R. 2269 would have a negligible effect on

federal spending and revenues. This version of the bill is similar

to the version approved by the House Committee on Education and

the Workforce on October 3, 2001, and our estimate is unchanged.

Because H.R. 2269 would affect receipts, pay-as-you-go procedures

would apply to the bill.

In modifying provisions of ERISA and the Internal Revenue

Code, the legislation also would establish certain requirements that

must be followed by advisers who are provided by plan sponsors.

H.R. 2269 would require that fiduciary advisers must disclose to

employees all fees, as well as any financial holdings or potential

conflicts that could affect their investment advice. Fees collected

though such advice would not be subject to the excise taxes imposed by section 4975 of the Internal Revenue Code. The bill would

also require advisers to act in the best financial interest of the employee and to maintain records related to such advice for at least

six years.

H.R. 2269 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act and would

not affect the budgets of state, local, or tribal governments.

The CBO staff contact for this estimate is Geoffrey Gerhardt.

The estimate was approve by Peter H. Fontaine, Deputy Assistant

Director for Budget Analysis.

11

V. OTHER MATTERS TO BE DISCUSSED UNDER THE

RULES OF THE HOUSE

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the

House of Representatives (relating to oversight findings), the Committee advises that it was a result of the Committee’s oversight review concerning retirement security that the Committee concluded

that it is appropriate and timely to enact the revenue provision included in the bill as reported.

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for any measure that authorizes funding is required.

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of the rule XIII of the Rules of the

House of Representative (relating to Constitutional Authority), the

Committee states that the Committee’s action in reporting this bill

is derived from Article I of the Constitution, Section 8 (‘‘The Congress shall have Power To lay and collect Taxes, Duties, Imposts,

and Excises . . .’’), and from the 16th Amendment to the Constitution.

D. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of

the Unfunded Mandates Act of 1995 (P.L. 104–4).

The Committee has determined that the bill does not contain

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental

mandate on State, local, or tribal governments.

E. APPLICABILITY OF HOUSE RULE XXI 5(b)

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not

be considered as passed or agreed to unless so determined by a

vote of not less than three-fifths of the Members voting, a quorum

being present.’’ The Committee has carefully reviewed the provisions of the bill, and states that the provisions of the bill do not

involve any Federal income tax rate increases within the meaning

of the rule.

F. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the ‘‘IRS Reform Act’’) requires the Joint

Committee on Taxation (in consultation with the Internal Revenue

Service and the Department of Treasury) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the House Committee on Ways and Means, the

12

Senate Committee on Finance, or any committee of conference if

the legislation includes a provision that directly or indirectly

amends the Internal Revenue Code and has widespread applicability to individuals or small businesses.

The staff of the Joint Committee on Taxation has determined

that a complexity analysis is not required under section 4022(b) of

the IRS Reform Act because the bill contains no provisions that

amend the Internal Revenue Code and that have ‘‘widespread applicability’’ to individuals or small businesses.

VI. 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 italics,

existing law in which no change is proposed is shown in roman):

SECTION 408 OF THE EMPLOYEE RETIREMENT INCOME

SECURITY ACT OF 1974

EXEMPTIONS FROM PROHIBITED TRANSACTIONS

SEC. 408. (a)***

(b) The prohibitions provided in section 406 shall not apply to

any of the following transactions:

(1) * * *

* * * * * * *

(14) If the requirements of subsection (g) are met— (A) the provision of investment advice referred to in section 3(21)(A)(ii) provided by a fiduciary adviser (as defined

in subsection (g)(4)(A)) to an employee benefit plan or to a

participant or beneficiary of an employee benefit plan,

(B) the sale, acquisition, or holding of securities or other

property (including any lending of money or other extension

of credit associated with the sale, acquisition, or holding of

securities or other property) pursuant to such investment

advice, and

(C) 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 such investment advice.

* * * * * * *

(g)(1) The requirements of this subsection are met in connection

with the provision of advice referred to in section 3(21)(A)(ii), provided to an employee benefit plan or a participant or beneficiary of

an employee benefit plan by a fiduciary adviser with respect to such

plan, in connection with any sale or acquisition of a security or

other property for purposes of investment of amounts held by such

plan, if—

(A) in the case of the initial provision of such advice with regard to a security or other property, by such fiduciary adviser

to such plan, participant, or beneficiary, the fiduciary adviser

provides to the recipient of such advice, at the time of or before

13

the initial provision of such advice, a clear and conspicuous description, in writing (including by means of electronic communication), of— (i) all fees or other compensation relating to such 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 such advice or in connection with such acquisition or sale,

(ii) any material affiliation or contractual relationship of

the fiduciary adviser or affiliates thereof in such security or

other property,

(iii) any limitation placed on the scope of the investment

advice to be provided by the fiduciary adviser with respect

to any such sale or acquisition, and

(iv) the types of services offered by the fiduciary advisor

in connection with the provision of investment advice by the

fiduciary adviser,

(B) in the case of the initial or any subsequent provision of

such advice to such plan, participant, or beneficiary, the fiduciary adviser, throughout the 1-year period following the provision of such advice, maintains the information described in

clauses (i) through (iv) of subparagraph (A) in currently accurate form for availability, upon request and without charge, to

the recipient of such advice,

(C) the fiduciary adviser provides appropriate disclosure, in

connection with any such acquisition or sale, in accordance

with all applicable securities laws,

(D) such acquisition or sale occurs solely at the direction of

the recipient of such advice,

(E) the compensation received by the fiduciary adviser and affiliates thereof in connection with such acquisition or sale is

reasonable, and

(F) the terms of such acquisition or sale are at least as favorable to such plan as an arm’s length transaction would be.

(2) A fiduciary adviser referred to in paragraph (1) who has provided advice referred to in such paragraph shall, for a period of not

less than 6 years after the provision of such advice, maintain 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.

(3)(A) Subject to subparagraph (B), a plan sponsor or other person who is a fiduciary 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 such investment advice), if—

(i) such advice is provided by a fiduciary adviser pursuant to

an arrangement between such plan sponsor or other fiduciary

and such fiduciary adviser for the provision by such fiduciary

adviser of investment advice referred to in such section, and

(ii) the terms of such arrangement require compliance by the

fiduciary adviser with the requirements of this subsection.

14

(B) 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 arrangement for the provision of advice referred to in section

3(21)(A)(ii). Such 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

such advice.

(C) 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).

(4) For purposes of this subsection and subsection (b)(14)— (A) 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 by such person to the plan or to

a participant or beneficiary 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

section 408(b)(4),

(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 any of clauses (i) through (v).

(B) The term ‘‘affiliate’’ means an affiliated person, as defined

in section 2(a)(3) of the Investment Company Act of 1940 (15

U.S.C. 80a–2(a)(3)).

(C) The term ‘‘registered representative’’ means a person described in section 3(a)(18) of the Securities Exchange Act of

1934 (15 U.S.C. 78c(a)(18)) or section 202(a)(17) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)(17)).

SECTION 4975 OF THE INTERNAL REVENUE CODE OF

1986

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

(a) * * *

* * * * * * *

(d) EXEMPTIONS.—Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to—

(1) * * *

* * * * * * *

(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); øor¿

15

(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)ø.¿; or

(16) any transaction described in subsection (f)(7)(A) in connection with the provision of investment advice described in

subsection (e)(3)(B), in any case in which— (A) the investment of assets of the plan is subject to the

direction of plan participants or beneficiaries,

(B) the advice is provided to the plan or a participant or

beneficiary of the plan by a fiduciary adviser in connection

with any sale, acquisition, or holding of a security or other

property for purposes of investment of plan assets, and

(C) the requirements of subsection (f)(7)(B) are met in

connection with the provision of the advice.

* * * * * * *

(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of

this section— (1) * * *

* * * * * * *

(7) PROVISIONS RELATING TO INVESTMENT ADVICE PROVIDED

BY FIDUCIARY ADVISERS.— (A) TRANSACTIONS ALLOWABLE IN CONNECTION WITH INVESTMENT ADVICE PROVIDED BY FIDUCIARY ADVISERS.—The

transactions referred to in subsection (d)(16), in connection

with the provision of investment advice by a fiduciary adviser, are the following:

(i) the provision of the advice to the plan, participant, or beneficiary;

(ii) the sale, acquisition, or holding of a security or

other property (including any lending of money or

other extension of credit associated with the sale, acquisition, or holding of a security or other property)

pursuant to the advice; and

(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 a sale,

acquisition, or holding of a security or other property

pursuant to the advice.

(B) REQUIREMENTS RELATING TO PROVISION OF INVESTMENT ADVICE BY FIDUCIARY ADVISERS.—The requirements of

this subparagraph (referred to in subsection (d)(16)(C)) are

met in connection with the provision of investment advice

referred to in subsection (e)(3)(B), provided to a plan or a

participant or beneficiary of a plan by a fiduciary adviser

with respect to the plan in connection with any sale, acquisition, or holding of a security or other property for purposes of investment of amounts held by the plan, if—

(i) in the case of the initial provision of the advice

with regard to the security or other property by the fiVerDate 06-NOV-2001 00:16 Nov 15, 2001 Jkt 099006 PO 00000 Frm 00015 Fmt 6659 Sfmt 6603 E:\HR\OC\HR262P2.XXX pfrm01 PsN: HR262P2
16

duciary adviser to the plan, participant, or beneficiary,

the fiduciary adviser provides to the recipient of the advice, at a time reasonably contemporaneous with the

initial provision of the advice, a written notification

(which may consist of notification by means of electronic communication)— (I) 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,

(II) of any material affiliation or contractual relationship of the fiduciary adviser or affiliates

thereof in the security or other property,

(III) of any limitation placed on the scope of the

investment advice to be provided by the fiduciary

adviser with respect to any such sale, acquisition,

or holding of a security or other property,

(IV) of the types of services provided by the fiduciary advisor in connection with the provision of

investment advice by the fiduciary adviser, and

(V) that the adviser is acting as a fiduciary of

the plan in connection with the provision of the advice,

(ii) 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,

(iii) the sale, acquisition, or holding occurs solely at

the direction of the recipient of the advice,

(iv) 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

(v) 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.

(C) STANDARDS FOR PRESENTATION OF INFORMATION.—

The notification required to be provided to participants and

beneficiaries under subparagraph (B)(i) shall be written in

a clear and conspicuous manner and in a manner calculated to be understood by the average plan participant

and shall be sufficiently accurate and comprehensive to

reasonably apprise such participants and beneficiaries of

the information required to be provided in the notification.

(D) EXEMPTION CONDITIONED ON MAKING REQUIRED INFORMATION AVAILABLE ANNUALLY, ON REQUEST, AND IN THE

EVENT OF MATERIAL CHANGE.—The requirements of subparagraph (B)(i) shall be deemed not to have been met in

connection with the initial or any subsequent provision of

advice described in subparagraph (B) to the plan, participant, or beneficiary if, at any time during the provision of

advisory services to the plan, participant, or beneficiary, the

17

fiduciary adviser fails to maintain the information described in subclauses (I) through (IV) of subparagraph

(B)(i) in currently accurate form and in the manner required by subparagraph (C), or fails—

(i) to provide, without charge, such currently accurate information to the recipient of the advice no less

than annually,

(ii) to make such currently accurate information

available, upon request and without charge, to the recipient of the advice, or

(iii) in the event of a material change to the information described in subclauses (I) through (IV) of subparagraph (B)(i), to provide, without charge, such currently accurate information to the recipient of the advice at a time reasonably contemporaneous to the material change in information.

(E) MAINTENANCE FOR 6 YEARS OF EVIDENCE OF COMPLIANCE.—A fiduciary adviser referred to in subparagraph (B)

who has provided advice referred to in such subparagraph

shall, for a period of not less than 6 years after the provision of the advice, maintain any records necessary for determining whether the requirements of the preceding provisions of this paragraph and of subsection (d)(16) have been

met. A transaction prohibited under subsection (c)(1) 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.

(F) DEFINITIONS.—For purposes of this paragraph and

subsection (d)(16)—

(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 by the person to the plan or to a participant or beneficiary 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),

(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 any of subclauses (I)

through (V) who satisfies the requirements of applicable insurance, banking, and securities laws

relating to the provision of the advice.

18

(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).

* * * * * * *

(19)

VII. DISSENTING VIEWS

We support the effort of the majority to bring before this Committee the issue of improved access to investment advice for millions of American workers. We agree that, in light of the growth

of self-directed pension plans, we must take steps to ensure that

the 42 million workers who participate in, and are beneficiaries

under, such plans have easy access to information designed to help

them make better investment choices. However, we are disappointed that an issue of such importance was brought before the

Committee in this manner.

The Committee on Education and the Workforce recognized the

importance of this issue. Before marking up H.R. 2269 in full Committee, their Subcommittee on Employer-Employee Relations held

five hearings between February 15, 2000, and August 2, 2001. On

the other hand, this Committee did not hold one single hearing either in Subcommittee or full Committee. We lost a great opportunity to engage in dialogue with the proponents and opponents of

this bill regarding the advantages and disadvantages of the approach adopted in H.R. 2269. We remain hopeful there will be an

opportunity for us to come together and discuss all the issues, various available options, and agree on the best solution to this problem. This approach is necessary as millions of workers look to us

to protect the security of their pension benefits.

While some of us are primarily concerned with only a single provision of the bill, collectively, there are many areas of concern that

are addressed herein.

A fundamental premise of our pension law is that people who

manage or administer assets of a pension plan cannot engage in

any transaction under the plan in which they have a financial or

other conflict of interest. These limitations are referred to as the

prohibited transaction rules. There are limited statutory and regulatory exemptions from these rules, but only for cases that are determined to be in the best interest of plan participants and beneficiaries. When the prohibited transaction rules were enacted, there

was considerable debate concerning whether such transactions

should be subject to a complete bar, or if such transactions should

be permitted if the plan received adequate compensation. The risks

to the integrity of our pension system were considered to be too

great if plan transactions involving a financial interest or other

conflict were permitted. Thus, a complete bar was adopted.

The financial markets and financial transactions have become far

more complicated since the prohibited transaction rules were enacted. In addition, the type of pension plan used by employers to

deliver retirement benefits to their workers has changed. We recognize the need to respond to the changing market for pension plans,

but we also value the importance of protecting the integrity of our

pension system. Because of these tensions, we believe we would all

20

be better served if we could come to the table and engage in a process that results in legislation that adequately addresses all the

issues raised by these competing needs.

Some of our Members believe that no general exemption from the

prohibited transaction rules should be permitted. They believe that

such an approach has too great a potential for fraud and abuse.

They argue that such a change would weaken or eliminate rules

designed to prevent abuse of plan participants. Those of us who

hold these views regard the disclosure provisions, minimum qualification requirements for advisors, and the availability of independent advice to plan participants when there is conflicted advice

as an inadequate substitute for erosion of the protections American

workers currently have under the prohibited transaction rules.

Another group of us believe that if certain safeguards are built

into the system, an exemption to the prohibited transaction rules

is permissible. The approach to ensure the existence of adequate

safeguards varies according to the area of greatest concern for the

Member. Some of us believe that if there is clear and meaningful

disclosure, H.R. 2269 would be acceptable. Others are concerned

with the qualification requirements for advisors as contained in the

bill. Still others are concerned with the availability of independent

advice to plan participants when there is conflicted advice. While

some of us are concerned primarily with only a single provision,

collectively, there are numerous areas of concerns. These are all addressed below.

1. Disclosure

We are pleased with the changes made to the underlying disclosure provision that were included in the Chairman’s substitute to

H.R. 2269 as introduced. We acknowledge that these changes will

go a long way in providing information to plan participants as they

struggle to make the best investments they can among the choice

available to them. We hope these changes also are reflected in the

provisions of the bill that fall under the Employee Retirement Income Security Act (ERISA) as it is brought to the floor.

Some of us would have preferred to improve a little further the

standard adopted by the majority. We would have liked to provide

the Department of Labor (DOL) regulatory authority under which

it could provide a model disclosure form. This becomes important

in light of the fact that the majority of the Committee on Education

and the Workforce stated in its committee report views that it intends for the disclosure to be a flexible standard that each advisor

would be able to interpret. We find this standard to be unacceptable. We do not believe that such an undeterminable standard was

intended by the Members of this Committee. An Amendment that

was proposed by Mr. Pomeroy and withdrawn would have ensured

that disclosure under the bill followed a uniform standard. Adequate and meaningful disclosure to participants is very important.

We believe that disclosure should be honest, straightforward, and

uniform. In addition, it is important that disclosure made by electronic means be consistent with regulations issued by the DOL and

the Treasury Department.

21

2. Minimum qualification requirements for advisors

Under H.R. 2269, a fiduciary advisor means a person who is a

fiduciary of the plan by reason of providing investment advice to

the plan, a participant, or beneficiary, and who is (1) registered as

an investment advisor under the Investment Adviser Act of 1940,

(2) a bank or similar financial institution, (3) an insurance company, (4) a registered broker or dealer under the Securities Act of

1934, (5) an affiliate of a person described above, or (6) an employee, agent or registered representative of a person described

above who satisfies the requirements of applicable law relating to

advice.

Those of us who have concerns regarding the qualification standard for investment advisors, as contained in the bill, believe this

standard is inadequate for the following reasons. Banks and insurance companies would be permitted to be qualified advisors but are

currently exempt from the Investment Advisers Act with respect to

providing investment advice. Consequently, in States that do not

have any qualification standards applicable to these entities, employees would be permitted to provide investment advice without

demonstrating that they meet any level of proficiency in this area.

Because these entities are exempt under the Investment Advisers Act, there is no Federal level of regulation with respect to investment advice. Moreover, regulation at the state level is not uniform. While there are some states, such as California, that require

an insurance agent to pass a written examination that is prepared

and administered by the state; some states, such as Washington,

allow anyone who meets the following requirements to be agents

(1) be at least eighteen years of age, (2) be a resident of and actually reside in the state, and (3) be trustworthy and competent.

Further, the bill provides that an affiliate of a qualified entity

would be a qualified investment advisor. An affiliate is broadly defined under the Investment Adviser Act to include all employees.

Also, the bill specifically provides that an employee, agent, or registered representative of a qualified entity who satisfies the requirements of applicable law relating to advice would be a qualified

agent under the law. This provides another opening for employees

of banks and insurance companies to act as qualified investment

advisors under the bill, without meeting any qualification requirements in some cases.

An amendment offered by Mr. Pomeroy and withdrawn would

have ensured that all persons who give investment advice have a

license under federal or state law or be registered with the Department of Labor. By doing so, the Pomeroy amendment would have

provided an administrative remedy—i.e. the prospect of losing one’s

license—to ensure that advisers fulfill their fiduciary duties.

We believe it is imperative to ensure that only trained qualified

persons provide investment advice to plan participants. The integrity of our pension system is too important. To permit a lesser

standard here than we would in any other area involving investment advice would directly undermine the integrity of our pension

system. We are hopeful that as the bill moves through the legislative process our negotiations in this area will bring us to an acceptable middle ground.

22

3. Availability of independent advice

With regard to the need to provide plan participant with independent advice, under the plan, when there is conflicted advice,

some of us do not believe that the advisor who was selected by the

employer to provide investment advice to the plan, participants and

beneficiaries should be forced to share the contract with a competitor. Others among us believe that if we are permitting advisors to

give conflicted advice to plan participants, we should ensure that

they have the ability to receive non-conflicted advice. The latter

group believes that if this option is not present, the claim that we

are providing plan participants access to investment advice is nothing more than an empty promise.

Those of us who have concerns in this area do not believe that

the only choice for plan participants should be to accept conflicted

advice or go without any advice. Such a standard is not in the best

interest of the plan participants or the beneficiaries. Yet, these are

the very people proponents argue this bill is intended to help.

Some who oppose this modification have argued that advice is

never truly free of conflict. We have a different view on this issue.

Current law allows a plan sponsor to obtain investment advice

from one of about twenty firms which provide this service, mainly

through the internet. The fact that these independent firms do not

sell their own products, nor do they earn differential fees for the

investment options recommended provides an important element of

protection against workers receiving conflicted advice.

The investment advice firms currently evaluate all the investment options under the plan. They then make recommendations to

the plan participants based on the overall rating of the investment

fund, and recommend the options they think are best. This has led

some financial service firms to express dissatisfaction with some of

these firms. In some cases, the financial service firm may conclude

that the investment advice firm is not recommending a sufficient

amount of their products or is not promoting the funds that generate the highest profits. While we understand and appreciate the

frustration some of these financial service firms have experienced,

we must be careful not to minimize the element of independence

that is so vital to the integrity of our pension system.

Some of us have concerns in this area but would choose a different approach. Under this alternative approach, we would design

a provision to ensure that there is a sufficient level of diversity

among the investment options available under the plan. We believe

such an approach would diminish the potential for abuse. To be

successful with this approach, it would be necessary to preclude the

plan from receiving conflicted advice. Thus, the exemption from the

prohibited transaction rules would not apply to the plan, as currently permitted under H.R. 2269. Rather, the exemption would be

limited to plan participants and beneficiaries under the plan, as

was included in the Democratic Substitute that was offered by Rep.

Robert Andrews in the markup held by the Committee on Education and the Workforce.

Such an approach would preclude a certain level of bias with respect to the investment funds offered by the plan. We believe that

ensuring diversity among the products as well as among the different companies whose products are offered under the plan can go

23

a long way to diminish the harm that could result with conflicted

advice. This standard will ensure that more meaningful advice is

received by plan participants.

4. Remedies available upon a breach of fiduciary duties

There are a few of us who believe steps must be taken to ensure

that plan participants are empowered within a system that permits

conflicted advice. One of the ways we believe this can be accomplished is by expanding available remedies in the case of a fiduciary breach.

The remedies available to plan participants under ERISA have

not kept pace with the changing face of our pension system. ERISA

was enacted at a time when pension plans were predominantly defined benefit plans. The remedies available under ERISA are designed to respond to a defined benefit plan structure. With the explosion of defined contribution plans and the creation of individual

accounts under these plans it is now possible to measure the financial loss a plan participant has suffered as a result of a fiduciary

breach. However, no modification of the current structure has been

made.

Today, twenty five years after the enactment of ERISA, the

courts remain unresolved as to what damages are permitted to the

participant of a defined contribution plan who has suffered harm

as a result of a fiduciary breach. The ERISA provision which gives

an individual participant a cause of action (section 502(a)(3)) limits

recovery to loss suffered by the plan.

This is a time when every effort should be made to enhance the

right of recovery for plan participants. Yet, under the bill, only the

current limited form of recovery would be continued. We do not believe that, given the significant changes being made to workers’ protections provided under the prohibited transaction rules, the

current form of remedies is adequate. We believe it is important to

enhance the ability of injured participants to recover some of the

economic loss suffered resulting from a breach of fiduciary duty.

In conclusion, we would again state that we agree there is a need

to get improved access to investment advice to the millions of workers who participate in self-directed pension plans. We agree with

the majority that this need must be addressed. However, in light

of the comments expressed above, we believe that the approach

taken under H.R. 2269 has some major problems that must be addressed if we are to move forward on this issue in a meaningful

way. We hope that our majority will give us the opportunity to engage in discussion and design an approach to this need that responds to the many competing interests presented here.

CHARLES B. RANGEL.

WILLIAM J. JEFFERSON.

XAVIER BECERRA.

JIM MCDERMOTT.

JOHN LEWIS.

PETE STARK.

LLOYD DOGGETT.

SANDER LEVIN.

KAREN L. THURMAN.

ROBERT T. MATSUI.

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WILLIAM J. COYNE. JERRY KLECZKA. BEN CARDIN. EARL POMEROY.

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VIII. ADDITIONAL VIEWS

As our pension system continues to move toward a system that

favors defined contribution plans over defined benefit plans, the

need for plan participants to have sophisticated investment advice

to assist them to prepare for their retirement becomes increasingly

imperative. H.R. 2269 as reported from the Education and Workforce Committee represents a reasonable, but flawed, attempt to fill

this need.

Any break in ERISA’s fiduciary rules gives rise to the concern

that investment advice may be given without the sole interest of

the individual plan participant in mind. Ensuring that this is not

an unintended result constitutes an a priori condition for passage

of any bill, and the proponents of this bill must demonstrate that

they have done all they can to prevent such an occurrence. The

Education and Workforce bill fails to accomplish this in two areas:

adequate disclosure, and licensing.

The Substitute offered by Chairman Thomas adequately addresses the former problem. The Substitute imposes additional disclosure requirements on investment advisors that improve the information disclosed to participants as they consider investment options that have an element of self-interest for the advisor. While

additional protections might be helpful, such as requiring disclosure each time the advice is given and requiring that employers

provide independent advisors when it is requested by a plan participant, the disclosure standards in the Chairman’s mark meets the

minimum acceptable level.

Unfortunately, this is not true of the standard governing qualification of investment advisors. As reported by both the Education

and Workforce Committee and the Committee on Ways and Means,

some individuals with no special training or qualifications could

provide investment advice to plan participants because certain financial institutions are exempt from the Investors Advisers Act as

it pertains to investment advice, and not all States have filled in

this gap. In addition, the statutory definition of ‘‘affiliate’’ in the Investment Advisers Act is so broad that any employee could give the

advice. This standard provides an incentive for advice to be offered

by less qualified individuals, which would be less expensive for the

companies providing the service.

This problem could have been solved by an amendment offered

but withdrawn by a Democratic Member, Mr. Pomeroy of North

Dakota. His amendment would have required an employer to provide an advisor who is licensed under state or federal law. However, employees of bank trust departments—a common source for

investment advisors—are not subject to licensure requirements.

Apparently, some believe it would be too great a burden to require

their employees to meet minimum licensing requirements that

would be prescribed by the Secretary of Labor.

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I supported final passage of the Ways and Means Committee

version of H.R. 2269. I strongly hope that Mr. Pomeroy will be able

to work out an agreement with the Chairman of the Committee for

stronger licensing agreements. I also hope that the disclosure

standards adopted in the Chairman’s substitute will be reflected in

the ERISA provisions of the bill when H.R. 2269 is brought to the

House floor. Should disclosure standards be weakened, or licensing

standards not be added, I reserve the right discontinue by support.

RICHARD E. NEAL.

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