1

Joint Committee on Taxation

November 6, 2001

JCX-73-01

DESCRIPTION OF CHAIRMAN’S AMENDMENT IN THE NATURE OF A 

SUBSTITUTE TO H.R. 2269,

THE “RETIREMENT SECURITY ADVICE ACT OF 2001”

Scheduled for a Markup by the House Committee on Ways and Means

on November 7, 2001

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 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.

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.

 

1

 Similar rules apply under the Employee Retirement Income Security Act of 1974 

(“ERISA”).
2

Description of Proposal

The proposal would add a new category of prohibited transaction exemption 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 advisor in connection 

with a sale, acquisition or holding of a security or other property (an “investment transaction”) 

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

proposal, the following would be 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 proposal, certain requirements would have to be met in order for the exemption 

to apply. When initially providing advice about a security or other property, the fiduciary 

advisor would have to 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 would have to 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 would have to be reasonable; and the terms of the investment transaction 

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

The written notification required to be provided by the fiduciary advisor would have to 

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 investment advice, and (5) the advisor’s status 

as a fiduciary of the plan in connection with the provision of the advice. The written notification 

could be provided electronically. In addition, in connection with the initial advice or subsequent 

advice, the required information would have to 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) would have to 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 would have to maintain for at least six years any records necessary 

for determining whether the requirements for the prohibited transaction exemption were met. A 

prohibited transaction would 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.
3

For purposes of the proposal, “fiduciary advisor” would be 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 who satisfies the requirements of applicable insurance, banking and securities laws 

relating to the provision of advice. “Affiliate” would mean an affiliated person as defined under 

section 2(a)(3) of the Investment Company Act of 1940. “Registered representative” would 

mean 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 would be effective with respect to investment advice provided on or after 

January 1, 2002.