9360 Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Proposed Rules 

1Section 601 of the Pension Protection Act of 

2006 (PPA) added sections 408(b)(14) and 408(g) of 

ERISA. The PPA also added parallel provisions to 

the Code at sections 4975(d)(17) and 4975(f)(8). 

Under Reorganization Plan No. 4 of 1978 (43 FR 

47713, Oct. 17, 1978), 5 U.S.C. App. 1, 92 Stat. 

3790, the authority of the Secretary of the Treasury 

to issue rulings under section 4975 of the Code has 

been transferred, with certain exceptions not here 

relevant, to the Secretary of Labor. Therefore, the 

references in this notice to specific sections of 

ERISA should be taken as referring also to the 

corresponding sections of the Code. 

2These comments are available on the 

Department’s Web site at: http://www.dol.gov/ebsa/ 

regs/cmt-investmentadvicefinalrule.html. 

2009 (74 FR 57125), and November 25, 

2009 (74 FR 61585). The CPB proposal’s 

comment period ended on January 12, 

2010. 

Withdrawal of Notice No. 100 

The proposed CBP regulations 

published on October 15, 2009, and on 

which TTB’s proposed rulemaking was 

based, are being withdrawn to allow for 

further consideration of the issues 

involved. Consistent with the CBP 

action, TTB withdraws its proposed 

rulemaking, Notice No. 100, published 

in the Federal Register on October 15, 

2009 at 74 FR 52928. 

Dated: February 3, 2010. 

John J. Manfreda, 

Administrator. 

Approved: February 25, 2010. 

Michael Mundaca, 

Acting Assistant Secretary (Tax Policy). 

[FR Doc. 2010–4374 Filed 3–1–10; 8:45 am] 

BILLING CODE 4810–31–P 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR 2550 

RIN 1210–AB35 

Investment Advice—Participants and 

Beneficiaries 

AGENCY: Employee Benefits Security 

Administration, Labor. 

ACTION: Proposed rule. 

SUMMARY: This document contains a 

proposed rule 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). Upon adoption, the proposed 

rule would implement provisions of a 

statutory prohibited transaction 

exemption, and would replace guidance 

contained in a final rule, published in 

the Federal Register on January 21, 

2009, that was withdrawn by the 

Department pursuant to a Notice 

published in the Federal Register on 

November 20, 2009. Upon adoption, the 

proposed rule affects sponsors, 

fiduciaries, participants and 

beneficiaries of participant-directed 

individual account plans, as well as 

providers of investment and investment 

advice related services to such plans. 

DATES: Written comments on the 

proposed regulations should be 

submitted to the Department of Labor on 

or before May 5, 2010. 

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. 

ADDRESSES: To facilitate the receipt and 

processing of comment letters, the EBSA 

encourages interested persons to submit 

their comments electronically by e-mail 

to e-ORI@dol.gov (enter into subject 

line: 2010 Investment Advice Proposed 

Rule) or by using the Federal 

eRulemaking portal at http:// 

www.regulations.gov. Persons 

submitting comments electronically are 

encouraged not to submit paper copies. 

Persons interested in submitting paper 

copies should send or deliver their 

comments to the Office of Regulations 

and Interpretations, Employee Benefits 

Security Administration, Attn: 2010 

Investment Advice Proposed Rule, 

Room N–5655, U.S. Department of 

Labor, 200 Constitution Avenue, NW., 

Washington, DC 20210. All comments 

will be available to the public, without 

charge, online at http:// 

www.regulations.gov and http:// 

www.dol.gov/ebsa and at the Public 

Disclosure Room, N–1513, Employee 

Benefits Security Administration, U.S. 

Department of Labor, 200 Constitution 

Avenue, NW., Washington, DC 20210. 

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 

Sec. 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 of the effective dates of the 

final rules 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 a 60 day extension 

of the final rule. (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 (74 FR 

59092). 

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 feeleveling 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. 

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Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Proposed Rules 9361 

3FAB 2007–1 provides that ‘‘the fees or other 

compensation (including salary, bonuses, awards, 

promotions or any other thing of value) received, 

directly or indirectly from an employer, affiliate or 

other party, by a fiduciary adviser (or used for the 

adviser’s benefit) may not be based, in whole or 

part, on the investment options selected by 

participants or beneficiaries.’’ See FAB 2007–1, 

footnote 11 (emphasis added). 

C. Analysis and Determination 

As documented in the Department’s 

regulatory impact analysis (RIA) of the 

January 2009 final regulation and class 

exemption, defined contribution (DC) 

plan participants and IRA beneficiaries 

often make costly investment errors. 

Those who receive and follow quality 

investment advice can reduce such 

errors and thereby reap substantial 

financial benefit. The Department 

estimated that the PPA statutory 

exemption as implemented by the final 

regulation, together with the final class 

exemption, would extend investment 

advice to 21 million previously 

unadvised participants and 

beneficiaries, generating $13 billion in 

annual financial benefits at a cost of $5 

billion, for a net annual financial benefit 

of $8 billion. 

In arriving at its estimates, the 

Department assumed that on average 

participants and beneficiaries who are 

advised make investment errors at onehalf 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. The Department has 

determined that the issues raised by 

commenters are sufficient to cast doubt 

as to whether the class exemption’s 

conditions are adequate to mitigate 

advisers’ conflicts. Based on this 

determination regarding the class 

exemption, the Department has decided 

to withdraw the final rule. Notice of the 

withdrawal of the final rule was 

published in the Federal Register on 

November 20, 2009 (74 FR 60156). 

In order to address the absence of 

regulatory guidance on the statutory 

exemption that results from withdrawal 

of the January 2009 final rule, the 

Department is publishing in this notice 

proposed regulations that, upon 

adoption, implement the statutory 

prohibited transaction exemption under 

ERISA Sec. 408(b)(14) and Sec. 408(g), 

and parallel provisions in the Code. The 

proposed regulations do not include a 

class exemption. The Department notes 

that, while relief would have been 

available under the withdrawn class 

exemption, the statutory exemption 

does not provide prohibited transaction 

relief for any individualized advice 

rendered to individuals following the 

furnishing of investment 

recommendations generated by a 

computer model described in the statute 

unless such advice on its own meets the 

requirements of the statute (i.e., is 

generated by a computer model under a 

computer-model arrangement or is 

rendered under a fee-leveling 

arrangement). 

D. Overview of Proposed Regulations 

Proposed Sec. 2550.408g–1 tracks the 

requirements under section 408(g) of 

ERISA that must be satisfied in order for 

the investment advice-related 

transactions described in section 

408(b)(14) to be exempt from the 

prohibitions of section 406. Paragraph 

(a) of the proposal describes the general 

scope of the statutory exemption and 

regulation. Paragraph (b) of the proposal 

sets forth the requirements that must be 

satisfied for an arrangement to qualify as 

an ‘‘eligible investment advice 

arrangement’’ and for the exemption to 

apply. Paragraph (c) of the proposal 

defines certain terms used in the 

regulation. The Appendix to the 

proposal contains a non-mandatory 

model disclosure form that may be used 

to satisfy certain of the requirements 

contained in paragraph (b). Proposed 

Sec. 2550.408g–2 addresses the 

requirements for electing to be treated as 

the only fiduciary and fiduciary adviser 

by reason of developing or marketing a 

computer model or an investment 

advice program used in an ‘‘eligible 

investment advice arrangement.’’ See 

ERISA section 408(g)(11)(A). 

The proposed regulations are nearly 

identical to the provisions of the 

January 2009 final rule that implement 

the statutory exemption. The 

Department’s explanations of such 

provisions provided in the publication 

of the January 2009 final rule and in the 

publication of the related August 2008 

proposed rule (73 FR 49896 (Aug. 22, 

2008)), to the extent not modified or 

superseded in the January 2009 

publication, should be read as 

applicable to the regulations being 

proposed in this notice. The Department 

is not providing a new description of 

the provisions. 

The Department notes, however, that 

the proposed regulations contain 

clarifying language intended to address 

comment letters, mentioned above, that 

expressed concerns with the provisions 

of the final rule that interpret the 

statutory exemption’s fee-leveling 

requirement. In particular, some 

commenters observed that the final rule 

would permit the receipt of varying fees 

by an affiliate of a fiduciary adviser, and 

further opined that this would permit an 

affiliate of a fiduciary adviser to 

establish economic incentives for either 

the fiduciary adviser, or individuals 

providing investment advice on its 

behalf, to recommend investments that 

pay varying fees to the affiliate. 

Therefore, commenters argued, the final 

rule would not adequately protect 

participants and beneficiaries from 

advice influenced by the affiliates’ 

interests. In response, the Department is 

emphasizing in the proposal that, as 

stated in Field Assistance Bulletin 

2007–1 (February 2, 2007) (FAB 2007– 

1), the receipt by a fiduciary adviser of 

any payment from any party (including 

an affiliate of the fiduciary adviser), or 

used for the benefit of such fiduciary 

adviser, that is based, in whole or part, 

on investments selected by participants 

or beneficiaries would be inconsistent 

with the fee-leveling requirement of the 

statutory exemption.3 The Department 

also is further clarifying that this 

limitation applies both to an entity that 

is retained to render advice, and to any 

employee, agent, or registered 

representative of such an entity. Thus, 

even though an affiliate of a fiduciary 

adviser may receive fees that vary 

depending on investment options 

selected, any provision of financial or 

economic incentives by an affiliate (or 

any other party) to a fiduciary adviser or 

any individual employed by such 

fiduciary adviser (e.g., an employee 

providing advice on its behalf or an 

individual responsible for supervising 

such an employee) to favor certain 

investments would be impermissible. 

These are reflected in the proposal at 

paragraph (b)(3)(i)(D) of Sec. 2550.408g– 

1. 

The proposed regulation also 

provides, in connection with investment 

advice arrangements that use computer 

models, that a computer model shall be 

designed and operated to avoid 

investment recommendations that 

inappropriately distinguish among 

investment options within a single asset 

class on the basis of a factor that cannot 

confidently be expected to persist in the 

future (paragraph (b)(4)(i)(E)(3)). While 

some differences between investment 

options within a single asset class, such 

as differences in fees and expenses or 

management style, are likely to persist 

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9362 Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Proposed Rules 

4See sections 408(g)(3)(C), 408(g)(8)(B), and 

408(g)(11)(A) (flush language) of ERISA. 

in the future and therefore to constitute 

appropriate criteria for asset allocation, 

other differences, such as differences in 

historical performance, are less likely to 

persist and therefore less likely to 

constitute appropriate criteria for asset 

allocation. Asset classes, in contrast, can 

more often be distinguished from one 

another on the basis of differences in 

their historical risk and return 

characteristics. 

E. Effective Date 

The Department proposes that the 

regulations contained in this notice will 

be effective 60 days after publication of 

the final regulations in the Federal 

Register. The Department invites 

comments on whether the final 

regulations should be made effective on 

a different date. 

F. Request for Comment 

The Department invites comments 

from interested persons on the proposed 

regulations. In particular, the 

Department solicits comments on the 

conditions applicable to investment 

advice arrangements that use computer 

models under proposed § 2550.408g– 

1(b)(4)(i), including responses to the 

following questions. 

What investment theories are 

generally accepted for purposes of 

§ 2550.408g–1(b)(4)(i)(A), and what 

investment practices are consistent or 

inconsistent with such theories? Should 

this regulation specify such theories and 

require their application? Should the 

regulation dictate the bases for model 

parameters such as the probability 

distribution of future returns to assets 

classes or particular investments? 

Should the regulation specify certain 

practices as required by generally 

accepted investment theories, or certain 

other practices as proscribed by such 

theories? What are examples of 

investment theories that are not 

generally accepted? Should this 

regulation expressly proscribe the 

application of certain such theories? 

What historical data should be taken 

into account in determining a model’s 

expectation for future performance of 

asset classes and specific investment 

alternatives? Should the regulation 

specify minimum standards for the data, 

such as a minimum number of years of 

experience to be included in the data? 

What types of criteria are appropriate 

and objective bases for asset allocation 

pursuant to proposed § 2550.408g– 

1(b)(4)(i)(D)? Should this regulation 

expressly designate some criteria as 

appropriate and objective and/or other 

criteria as not appropriate or not 

objective? Should it do both, thereby 

establishing a list of criteria that models 

must consider to the exclusion of all 

others? For example, the regulation 

could provide that computer models 

must consider only the historical risks 

and returns of different asset classes as 

a whole, information about the 

participants, and the expenses and asset 

allocation of each investment option 

under the plan. Is a fund’s past 

performance relative to the average for 

its asset class an appropriate criterion 

for allocating assets to the fund? Under 

what if any conditions would it be 

consistent with generally accepted 

investment theories and with 

consideration of fees pursuant to 

§ 2550.408g–1(b)(4)(i)(B) to recommend 

a fund with superior past performance 

over an alternative fund in the same 

asset class with average performance but 

lower fees? Should the regulation 

specify such conditions? On what if any 

bases can a fund’s superior past 

performance be demonstrated to derive 

not from chance but from factors that 

are likely to persist and continue to 

affect performance in the future? Should 

the use of a fund’s superior past 

performance as a criterion for allocating 

assets to the fund be conditioned on 

such demonstration? How, if at all, 

should a model take into account 

investment management style? For 

example, all else equal, should a model 

ascribe different levels of risk to 

passively and actively managed 

investment options? 

To facilitate the receipt and 

processing of comment letters, the EBSA 

encourages interested persons to submit 

their comments electronically by e-mail 

to e-ORI@dol.gov (enter into subject 

line: 2010 Investment Advice Proposed 

Rule) or by using the Federal 

eRulemaking portal at http:// 

www.regulations.gov. Persons 

submitting comments electronically are 

encouraged not to submit paper copies. 

Persons interested in submitting paper 

copies should send or deliver their 

comments to the Office of Regulations 

and Interpretations, Employee Benefits 

Security Administration, Attn: 2010 

Investment Advice Proposed Rule, 

Room N–5655, U.S. Department of 

Labor, 200 Constitution Avenue, NW., 

Washington, DC 20210. All comments 

will be available to the public, without 

charge, online at http:// 

www.regulations.gov and http:// 

www.dol.gov/ebsa and at the Public 

Disclosure Room, N–1513, Employee 

Benefits Security Administration, U.S. 

Department of Labor, 200 Constitution 

Avenue, NW., Washington, DC 20210. 

The comment period for the proposed 

regulations will end May 5, 2010. The 

Department believes that this period of 

time will afford interested persons an 

adequate amount of time to analyze the 

proposal and submit comments. Written 

comments on the proposed regulations 

should be submitted to the Department 

on or before May 5, 2010. 

G. Regulatory Impact Analysis 

Need for Regulatory Action 

As documented in the Department’s 

regulatory impact analysis of the August 

2008 proposed regulation, there is 

evidence that many participants in 

participant-directed defined 

contribution (DC) plans and 

beneficiaries of individual retirement 

accounts (IRAs) (collectively hereafter, 

‘‘participants’’) make poor investment 

decisions due to flawed information or 

reasoning. These participants may pay 

higher fees and expenses than necessary 

for investment products and services, 

engage in excessive or poorly timed 

trading or fail to adequately diversify 

their portfolios and thereby assume 

uncompensated risk, take more or less 

than optimal levels of compensated risk, 

and/or pay unnecessarily high taxes. 

Financial losses (including foregone 

earnings) from such mistakes likely 

amounted to more than $85 billion in 

2009. These losses compound and grow 

larger as workers progress toward and 

into retirement. 

The Department anticipates that full 

implementation of the PPA under this 

proposed regulation will ensure that 

quality, expert investment advice is 

provided to the greatest number of 

participants. The Department further 

anticipates that the increased 

investment advice resulting from the 

rule will improve participants 

investment decisions and results and 

reduce investment related errors and 

expenses. 

In the statutory exemption, Congress 

called on the Department to provide 

regulatory guidance addressing the 

certification of computer model 

investment advice programs, a model 

form for disclosure of fees and other 

compensation received by the fiduciary 

adviser or an affiliate, and rules under 

which only one fiduciary adviser may 

elect to be treated as a fiduciary.4 This 

proposed regulation addressed these 

issues, as well as additional questions 

raised by employers and other 

fiduciaries regarding their 

responsibilities in connection with 

other provisions of the statutory 

exemption. 

Alternatives 

Executive Order 12866 requires an 

economically significant regulation to 

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Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Proposed Rules 9363 

include an assessment of the costs and 

benefits of potentially effective and 

reasonably feasible alternatives to a 

planned regulation, and an explanation 

of why the planned regulatory action is 

preferable to the identified potential 

alternatives. In formulating this 

proposed regulation, the Department 

considered two alternative approaches 

that are discussed below. 

Detailed, Prescriptive Substantive 

Standards for Computer Model Design 

To assure the quality of investment 

advice provided pursuant to the 

statutory exemption, this proposed 

regulation relies primarily on safeguards 

against bias that might otherwise arise 

from advisers’ conflicts of interest. 

These safeguards include, for example, 

strong procedural standards for 

certification of computer models and 

audits of investment advice programs, 

and strict, carefully drawn standards for 

level-fee arrangements that broadly 

proscribe all manner of variable 

payments to advisers. 

As an additional approach to ensuring 

that investment advice is not tainted by 

conflicts of interest, the Department 

considered requiring that a computer 

model consider only the historical risks 

and returns of different asset classes as 

a whole, information about the 

participants, and the expenses and asset 

allocation of each investment option 

under the plan. However, the 

Department believes that the approach it 

has taken will effectively ensure that 

advice is not tainted by conflicts of 

interest, so the addition of such a 

restriction would be unnecessary. The 

Department also believes that such a 

restriction may inhibit innovations in 

investment advice that utilizes 

additional information, which could 

reduce the economic benefits of the 

statutory exemption. Nonetheless, the 

Department, as reflected in questions 

appearing earlier in this preamble, is 

interested in further exploring the 

merits of adopting such an alternative 

approach. 

Additional Exemptive Relief 

The Department’s January 2009 final 

rule included a class exemption that 

would establish alternative conditions 

for granting prohibited transaction relief 

in connection with the provision of 

investment advice. The Department 

considered retaining such a class 

exemption in this new proposed rule. 

However, after considering issues raised 

by public comments received in 

response to the Department’s February 

4, 2009, notice, the Department decided 

to withdraw the class exemption. As 

discussed earlier, a number of 

commenters questioned the adequacy of 

the final class exemption’s conditions to 

mitigate the potential for investment 

adviser self-dealing. The Department 

decided not to retain the class 

exemption in this proposal, because it 

found that the questions raised in these 

comments cast sufficient doubt on the 

conditions’ adequacy to mitigate 

advisers’ conflicts. The regulatory 

impact of the decision to withdraw the 

class exemption is discussed below. 

Withdrawal of the Class Exemption 

As documented in the Department’s 

regulatory impact analysis (RIA) of the 

January 2009 final regulation and class 

exemption, defined contribution (DC) 

plan participants and IRA beneficiaries 

often make costly investment errors. 

Those who receive and follow quality 

investment advice can reduce such 

errors and thereby reap substantial 

financial benefit. Although the 

Department anticipated that the final 

rule would increase the availability of 

investment advice to DC plan 

participants and the use of advice by 

IRA beneficiaries, the Department stated 

that it was uncertain how changing 

market conditions might affect the 

incidence and magnitude of investment 

errors, as well as the availability, use, 

and effect of investment advice. 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, potentially generating as 

much as $13 billion in annual financial 

benefits at a cost of $5 billion, for a net 

annual financial benefit of $8 billion. In 

the 2009 final rule’s RIA, Department 

stated its belief that the approach used 

in the analysis could reflect the longterm effects of these actions. 

In arriving at its estimates, the 

Department assumed that on average 

participants and beneficiaries who are 

advised make investment errors at onehalf 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. 

In its February 4, 2009, notice 

proposing to extend the effective dates 

of the final regulation and class 

exemption, the Department solicited 

public comments on the provisions of 

those rules and on the merits of 

rescinding, modifying or retaining the 

rules. 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. 

Impact Assessment 

In arriving at its January 2009 

estimates of the combined effects of the 

final regulation and class exemption, 

the Department assumed that the 

incidence of investment advice 

arrangements permissible prior to the 

PPA would remain unchanged, while 

investment advice arrangements 

operating pursuant to the PPA statutory 

exemption and those operating pursuant 

to the class exemption would claim 

equal shares of the estimated growth of 

advice arrangements. 

The Department has now updated its 

estimates of the costs and benefits of the 

proposed regulation to reflect the 

withdrawal of the class exemption. It is 

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9364 Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Proposed Rules 

likely that some previously unadvised 

participants and beneficiaries who 

would have received advice pursuant to 

the class exemption will instead receive 

advice pursuant to the PPA statutory 

exemption, while others will remain 

unadvised. 

Recently the Administration has taken 

major steps toward broad financial 

regulatory reform. On June 17, 2009, the 

President announced the 

Administration’s proposal for ‘‘21st 

Century Financial Regulatory Reform.’’ 

The proposal includes provisions 

designed to strengthen investor 

protections in ways that the Department 

believes may beneficially influence the 

market for investment advice. 

Comprehensive reforms to the market 

for financial products and services, 

together with the PPA’s exemptive relief 

as implemented by the Department’s 

final regulation, may promote the 

availability of quality, affordable 

investment advice more than the latter 

would alone. 

The estimates provided in the table 

below show three possible impacts for 

the proposed regulation: ‘‘low’’ estimates 

assume that all of those who would 

have received advice pursuant to the 

class exemption instead remain 

unadvised, ‘‘mid’’ estimates assume that 

one-half receive advice pursuant to the 

PPA statutory exemption, and ‘‘high’’ 

estimates assume that all receive such 

advice. The Department has updated its 

estimates to reflect year-end 2008 DC 

plan and IRA assets. Otherwise, the 

assumptions and calculations remain 

the same as presented in the preamble 

to the January 2009 final regulation and 

class exemption. The Department’s low, 

middle, and high estimates are 

presented in Table 1, below. 

TABLE 1—EFFECT OF PPA STATUTORY EXEMPTION AS IMPLEMENTED BY PROPOSED REGULATION $BILLIONS, ANNUAL, IN

2008 DOLLARS AND AT 2008 ASSET LEVELS

Investment errors eliminated Cost of advice Net effect 

Low .............................................................................................................................................. $5.5 $1.5 $3.9 

Mid ............................................................................................................................................... 8.2 2.3 5.9 

High .............................................................................................................................................. 10.9 3.1 7.8 

On the basis of these estimates the 

Department believes that this proposed 

regulation, in isolation from the 

withdrawn class exemption, will yield 

benefits sufficient to justify its costs. 

The Department continues to believe 

that DC plan participants and IRA 

beneficiaries often make costly 

investment errors, and that those who 

receive and follow quality investment 

advice can reduce such errors and 

thereby reap substantial financial 

benefit. 

H. Executive Order 12866 Statement 

Under Executive Order 12866, the 

Department must designate a regulatory 

action it believes is ‘‘significant’’’ and 

therefore subject to the requirements of 

the Executive Order and OMB review. 

Under section 3(f), the order defines a 

‘‘significant regulatory action’’ as an 

action that is likely to result in a rule 

(1) having an annual effect on the 

economy of $100 million or more, or 

adversely and materially affecting a 

sector of the economy, productivity, 

competition, jobs, the environment, 

public health or safety, or State, local or 

tribal governments or communities (also 

referred to as ‘‘economically 

significant’’); (2) creating serious 

inconsistency or otherwise interfering 

with an action taken or planned by 

another agency; (3) materially altering 

the budgetary impacts of entitlement 

grants, user fees, or loan programs or the 

rights and obligations of recipients 

thereof; or (4) raising novel legal or 

policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. 

Pursuant to the terms of the Executive 

Order, this action, comprising this 

proposed rule, is economically 

significant under section 3(f)(1) of the 

Executive Order because it is likely to 

have an effect on the economy of $100 

million or more in any one year. 

Accordingly, the Department undertook 

the foregoing analysis of the action’s 

impact. On the basis of that analysis, the 

Department believes that the action’s 

benefits justify its costs. 

I. Regulatory Flexibility Act 

As it did in the January 2009 final 

rule, the Department hereby certifies 

that this proposed rule will not have a 

significant economic impact on a 

substantial number of small entities. For 

purposes of the analysis, the 

Department proposed to continue its 

usual practice of considering a small 

entity to be an employee benefit plan 

with fewer than 100 participants. The 

Department consulted with the Small 

Business Administration Office of 

Advocacy concerning use of this 

participant count standard for 

Regulatory Flexibility Act purposes and 

requested public comment on this issue 

in the January 2009 final rule. The 

Department did not receive any 

comments that address its use of the 

participant count standard and 

continues to consider a small entity to 

be an employee benefit plan with fewer 

than 100 participants. 

J. Congressional Review Act 

This proposed regulation is a major 

rule is subject to the Congressional 

Review Act provisions of the Small 

Business Regulatory Enforcement 

Fairness Act of 1996 (5 U.S.C. 801 et 

seq.) and, if finalized, will be 

transmitted to the Congress and the 

Comptroller General for review. 

K. Unfunded Mandates Reform Act 

For purposes of the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), as well as Executive Order 

12875, the proposed rule does not 

include any Federal mandate that will 

result in expenditures by state, local, or 

tribal governments in the aggregate of 

more than $100 million, adjusted for 

inflation, or increase expenditures by 

the private sector of more than $100 

million, adjusted for inflation. 

L. Federalism Statement 

Executive Order 13132 (August 4, 

1999) outlines fundamental principles 

of federalism and requires the 

adherence to specific criteria by Federal 

agencies in the process of their 

formulation and implementation of 

policies that have substantial direct 

effects on the States, the relationship 

between the national government and 

the States, or on the distribution of 

power and responsibilities among the 

various levels of government. This 

proposed rule does not have federalism 

implications because it has no 

substantial direct effect on the States, on 

the relationship between the national 

government and the States, or on the 

distribution of power and 

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5The increase in the estimated number of DC 

plans offering advice and DC plan participants 

utilizing advice is due to updating the count to 

reflect 2006 Form 5500 data, the latest year for 

which Form 5500 data is available. The counts in 

the 2009 Final Rule were based on 2005 Form 5500 

data. The postage rate was increased to $0.44 from 

$0.42 due to the January 2009 increase. The labor 

hour rates were updated to reflect 2009 rates 

instead of 2008 rates, which were used in the 2009 

Final Rule. 

6 If the ‘low’ estimate were used, which assumes 

that all of the participants who would have received 

advice pursuant to the class exemption instead 

remain unadvised, the statutory exemption will 

require approximately 4 million burden hours with 

an equivalent cost of approximately $444.7 million 

and a cost burden of approximately $579.4 million 

in the first year. In each subsequent year, the total 

labor burden hours are estimated to be 

approximately 2.2 million hours with an equivalent 

cost of approximately $229.9 million and the cost 

burden is estimated at approximately $430.1 

million per year. If the ‘high’ estimate were used, 

which assumes that all of the participants who 

would have received advice pursuant to the class 

exemption will receive advice under the statutory 

exemption, the statutory exemption will require 

approximately 4.9 million burden hours with an 

equivalent cost of approximately $528.7 million 

and a cost burden of approximately $580.2 million 

in the first year. In each subsequent year, the total 

labor burden hours are estimated to be 

approximately 2.7 million hours with an equivalent 

cost of approximately $275.3 million and the cost 

burden is estimated at approximately $430.9 

million per year. 

responsibilities among the various 

levels of government. Section 514 of 

ERISA provides, with certain exceptions 

specifically enumerated, that the 

provisions of Titles I and IV of ERISA 

supersede any and all laws of the States 

as they relate to any employee benefit 

plan covered under ERISA. The 

requirements implemented in the rule 

do not alter the fundamental provisions 

of the statute with respect to employee 

benefit plans, and as such would have 

no implications for the States or the 

relationship or distribution of power 

between the national government and 

the States. 

M. Paperwork Reduction Act 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995 

(PRA) (44 U.S.C. 3506(c)(2)), the 

Department submitted an ICR to OMB 

for its request of a new information 

collection for the previous final rule. 

OMB approved the ICR on January 9, 

2009, under OMB Control Number 

1210–0134, which will expire on 

January 31, 2012. 

In connection with the issuance of 

this proposed rule, the Department 

submitted a revised ICR to OMB on 

October 23, 2009, reflecting information 

collection requirements associated with 

the PPA statutory exemption. In order to 

use the statutory exemption to provide 

investment advice to participants and 

beneficiaries in participant-directed DC 

plans and beneficiaries of IRAs 

(collectively hereafter, ‘‘participants’’), 

investment advisory firms are required 

to make disclosures to participants, hire 

an independent auditor to conduct a 

compliance audit, and issue an audit 

report every year. Investment advice 

firms following the conditions of the 

exemption based on computer modelgenerated investment advice are 

required to obtain certification of the 

model from an eligible investment 

expert. These information collection 

requirements are designed to safeguard 

the interests of participants in 

connection with investment advice 

covered by the exemption. 

This paperwork burden analysis 

reflects a very minor increase to the 

estimated number of DC plan sponsors 

offering advice, the number of DC plan 

participants utilizing advice, the labor 

hour rates used to estimate the hour 

burden, and the postage rate used to 

estimate the cost burden.5 All other 

calculations remain the same as in the 

January 2009 final rule. 

Statutory Exemption Hour and Cost 

Burden 

For purposes of determining the hour 

and cost burden associated with the 

statutory exemption, the Department’s 

analysis uses the ‘‘mid’’ estimate 

discussed under the section above, 

which assumes that one-half of 

participants who would have received 

advice pursuant to the class exemption 

now will receive advice pursuant to the 

PPA statutory exemption. The 

Department estimates that the thirdparty disclosures, computer model 

certification, and audit requirements for 

the statutory exemption will require 

approximately 4.5 million burden hours 

with an equivalent cost of 

approximately $486.7 million and a cost 

burden of approximately $579.8 million 

in the first year. In each subsequent 

year, the total labor burden hours are 

estimated to be approximately 2.4 

million hours with an equivalent cost of 

approximately $252.6 million and the 

cost burden is estimated at 

approximately $430.5 million per year.6

These paperwork burden estimates 

are summarized as follows: 

Type of Review: Revised Collection. 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Titles: Statutory Exemption for the 

Provision of Investment Advice to 

Participants and Beneficiaries of 

Participant-Directed Individual Account 

Plans and IRAs. 

OMB Control Number: 1210–0134. 

Affected Public: Business or other forprofit. 

Estimated Number of Respondents: 

16,000. 

Estimated Number of Annual 

Responses: 15,156,000. 

Frequency of Response: Initially, 

Annually, Upon Request, when a 

material change. 

Estimated Total Annual Burden 

Hours: 4,453,000 hours in the first year; 

2,428,000 hours in each subsequent 

year. 

Estimated Total Annual Burden Cost: 

$579,808,000 in the first year; 

$430,508,000 for each subsequent year. 

List of Subjects in 29 CFR Part 2550 

Employee benefit plans, Exemptions, 

Fiduciaries, Investments, Pensions, 

Prohibited transactions, Reporting and 

recordkeeping requirements, and 

Securities. 

For the reasons set forth in the 

preamble, Chapter XXV, subchapter F, 

part 2550 of Title 29 of the Code of 

Federal Regulations is proposed to be 

amended as follows: 

PART 2550—RULES AND 

REGULATIONS FOR FIDUCIARY 

RESPONSIBILITY 

1. The authority citation for part 2550 

is revised to read as follows: 

Authority: 29 U.S.C. 1135; and Secretary 

of Labor’s Order No. 6–2009, 74 FR 21524 

(May 7, 2009). Secs. 2550.401b–1, 

2550.408b–1, 2550.408b–19, 2550.408g–1, 

and 2550.408g–2 also issued under sec. 102, 

Reorganization Plan No. 4 of 1978, 5 U.S.C. 

App. Sec. 2550.401c–1 also issued under 29 

U.S.C. 1101. Sections 2550.404c–1 and 

2550.404c–5 also issued under 29 U.S.C. 

1104. Sec. 2550.407c–3 also issued under 29 

U.S.C. 1107. Sec. 2550.404a–2 also issued 

under 26 U.S.C. 401 note (sec. 657(c)(2), Pub. 

L. 107–16, 115 Stat. 38, 136 (2001)). Sec. 

2550.408b–1 also issued under 29 U.S.C. 

1108(b)(1). Sec. 2550.408b–19 also issued 

under sec. 611(g)(3), Public Law 109–280, 

120 Stat. 780, 975 (2006). 

2. Add § 2550.408g–1 to read as 

follows: 

§ 2550.408g–1 Investment advice— 

participants and beneficiaries. 

(a) In general. (1) This section 

provides relief from the prohibitions of 

section 406 of the Employee Retirement 

Income Security Act of 1974, as 

amended (ERISA or the Act), and 

section 4975 of the Internal Revenue 

Code of 1986, as amended (the Code), 

for certain transactions in connection 

with the provision of investment advice 

to participants and beneficiaries. This 

section, at paragraph (b), implements 

the statutory exemption set forth at 

sections 408(b)(14) and 408(g)(1) of 

ERISA and sections 4975(d)(17) and 

4975(f)(8) of the Code. The requirements 

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and conditions set forth in this section 

apply solely for the relief described in 

paragraph (b) of this section and, 

accordingly, no inferences should be 

drawn with respect to requirements 

applicable to the provision of 

investment advice not addressed by this 

section. 

(2) Nothing contained in ERISA 

section 408(g)(1), Code section 

4975(f)(8), or this regulation imposes an 

obligation on a plan fiduciary or any 

other party to offer, provide or 

otherwise make available any 

investment advice to a participant or 

beneficiary. 

(3) Nothing contained in ERISA 

section 408(g)(1), Code section 

4975(f)(8), or this regulation invalidates 

or otherwise affects prior regulations, 

exemptions, interpretive or other 

guidance issued by the Department of 

Labor pertaining to the provision of 

investment advice and the 

circumstances under which such advice 

may or may not constitute a prohibited 

transaction under section 406 of ERISA 

or section 4975 of the Code. 

(b) Statutory exemption. (1) General. 

Sections 408(b)(14) and 408(g)(1) of 

ERISA provide an exemption from the 

prohibitions of section 406 of ERISA for 

transactions described in section 

408(b)(14) of ERISA in connection with 

the provision of investment advice to a 

participant or a beneficiary if the 

investment advice is provided by a 

fiduciary adviser under an ‘‘eligible 

investment advice arrangement.’’ 

Sections 4975(d)(17) and (f)(8) of the 

Code contain parallel provisions to 

ERISA sections 408(b)(14) and (g)(1). 

(2) Eligible investment advice. For 

purposes of section 408(g)(1) of ERISA 

and section 4975(f)(8) of the Code, an 

‘‘eligible investment advice 

arrangement’’ means an arrangement 

that meets either the requirements of 

paragraph (b)(3) of this section or 

paragraph (b)(4) of this section, or both. 

(3) Arrangements that use feeleveling. For purposes of this section, an 

arrangement is an eligible investment 

advice arrangement if— 

(i)(A) Any investment advice is based 

on generally accepted investment 

theories that take into account the 

historic risks and returns of different 

asset classes over defined periods of 

time, although nothing herein shall 

preclude any investment advice from 

being based on generally accepted 

investment theories that take into 

account additional considerations; 

(B) Any investment advice takes into 

account investment management and 

other fees and expenses attendant to the 

recommended investments; 

(C) Any investment advice takes into 

account, to the extent furnished by a 

plan, participant or beneficiary, 

information relating to age, time 

horizons (e.g., life expectancy, 

retirement age), risk tolerance, current 

investments in designated investment 

options, other assets or sources of 

income, and investment preferences of 

the participant or beneficiary. A 

fiduciary adviser shall request such 

information, but nothing in this 

paragraph (b)(3)(i)(C) shall require that 

any investment advice take into account 

information requested, but not 

furnished by a participant or 

beneficiary, nor preclude requesting and 

taking into account additional 

information that a plan or participant or 

beneficiary may provide; 

(D) No fiduciary adviser (including 

any employee, agent, or registered 

representative) that provides investment 

advice receives from any party 

(including an affiliate of the fiduciary 

adviser), directly or indirectly, any fee 

or other compensation (including 

commissions, salary, bonuses, awards, 

promotions, or other things of value) 

that is based in whole or in part on a 

participant’s or beneficiary’s selection of 

an investment option; and 

(ii) The requirements of paragraphs 

(b)(5), (6), (7), and (8) and paragraph (d) 

of this section are met. 

(4) Arrangements that use computer 

models. For purposes of this section, an 

arrangement is an eligible investment 

advice arrangement if the only 

investment advice provided under the 

arrangement is advice that is generated 

by a computer model described in 

paragraphs (b)(4)(i) and (ii) of this 

section under an investment advice 

program and with respect to which the 

requirements of paragraphs (b)(5), (6), 

(7), and (8) and paragraph (d) are met. 

(i) A computer model shall be 

designed and operated to— 

(A) Apply generally accepted 

investment theories that take into 

account the historic risks and returns of 

different asset classes over defined 

periods of time, although nothing herein 

shall preclude a computer model from 

applying generally accepted investment 

theories that take into account 

additional considerations; 

(B) Take into account investment 

management and other fees and 

expenses attendant to the recommended 

investments; 

(C) Request from a participant or 

beneficiary and, to the extent furnished, 

utilize information relating to age, time 

horizons (e.g., life expectancy, 

retirement age), risk tolerance, current 

investments in designated investment 

options, other assets or sources of 

income, and investment preferences; 

provided, however, that nothing herein 

shall preclude a computer model from 

requesting and taking into account 

additional information that a plan or a 

participant or beneficiary may provide; 

(D) Utilize appropriate objective 

criteria to provide asset allocation 

portfolios comprised of investment 

options available under the plan; 

(E) Avoid investment 

recommendations that: 

(1) Inappropriately favor investment 

options offered by the fiduciary adviser 

or a person with a material affiliation or 

material contractual relationship with 

the fiduciary adviser over other 

investment options, if any, available 

under the plan; 

(2) Inappropriately favor investment 

options that may generate greater 

income for the fiduciary adviser or a 

person with a material affiliation or 

material contractual relationship with 

the fiduciary adviser; or 

(3) Inappropriately distinguish among 

investment options within a single asset 

class on the basis of a factor that cannot 

confidently be expected to persist in the 

future; and 

(F)(1) Except as provided in paragraph 

(b)(4)(i)(F)(2) of this section, take into 

account all designated investment 

options, within the meaning of 

paragraph (c)(1) of this section, available 

under the plan without giving 

inappropriate weight to any investment 

option. 

(2) A computer model shall not be 

treated as failing to meet the 

requirements of this paragraph merely 

because it does not make 

recommendations relating to the 

acquisition, holding or sale of an 

investment option that: 

(i) Constitutes an investment 

primarily in qualifying employer 

securities; 

(ii) Constitutes an investment fund, 

product or service that allocates the 

invested assets of a participant or 

beneficiary to achieve varying degrees of 

long-term appreciation and capital 

preservation through equity and fixed 

income exposures, based on a defined 

time horizon (such as retirement age or 

life expectancy) or level of risk of the 

participant or beneficiary, provided 

that, contemporaneous with the 

provision of investment advice 

generated by the computer model, the 

participant or beneficiary is also 

furnished a general description of such 

funds, products or services and how 

they operate; or 

(iii) Constitutes an annuity option 

with respect to which a participant or 

beneficiary may allocate assets toward 

the purchase of a stream of retirement 

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income payments guaranteed by an 

insurance company, provided that, 

contemporaneous with the provision of 

investment advice generated by the 

computer model, the participant or 

beneficiary is also furnished a general 

description of such options and how 

they operate. 

(ii) Prior to utilization of the computer 

model, the fiduciary adviser shall obtain 

a written certification, meeting the 

requirements of paragraph (b)(4)(iv) of 

this section, from an eligible investment 

expert, within the meaning of paragraph 

(b)(4)(iii) of this section, that the 

computer model meets the requirements 

of paragraph (b)(4)(i) of this section. If, 

following certification, a computer 

model is modified in a manner that may 

affect its ability to meet the 

requirements of paragraph (b)(4)(i), the 

fiduciary adviser shall, prior to 

utilization of the modified model, 

obtain a new certification from an 

eligible investment expert that the 

computer model, as modified, meets the 

requirements of paragraph (b)(4)(i). 

(iii) The term ‘‘eligible investment 

expert’’ means a person that, through 

employees or otherwise, has the 

appropriate technical training or 

experience and proficiency to analyze, 

determine and certify, in a manner 

consistent with paragraph (b)(4)(iv) of 

this section, whether a computer model 

meets the requirements of paragraph 

(b)(4)(i) of this section; except that the 

term ‘‘eligible investment expert’’ does 

not include any person that has any 

material affiliation or material 

contractual relationship with the 

fiduciary adviser, with a person with a 

material affiliation or material 

contractual relationship with the 

fiduciary adviser, or with any employee, 

agent, or registered representative of the 

foregoing. 

(iv) A certification by an eligible 

investment expert shall— 

(A) Be in writing; 

(B) Contain— 

(1) An identification of the 

methodology or methodologies applied 

in determining whether the computer 

model meets the requirements of 

paragraph (b)(4)(i) of this section; 

(2) An explanation of how the applied 

methodology or methodologies 

demonstrated that the computer model 

met the requirements of paragraph 

(b)(4)(i) of this section; 

(3) A description of any limitations 

that were imposed by any person on the 

eligible investment expert’s selection or 

application of methodologies for 

determining whether the computer 

model meets the requirements of 

paragraph (b)(4)(i) of this section; 

(4) A representation that the 

methodology or methodologies were 

applied by a person or persons with the 

educational background, technical 

training or experience necessary to 

analyze and determine whether the 

computer model meets the requirements 

of paragraph (b)(4)(i); and 

(5) A statement certifying that the 

eligible investment expert has 

determined that the computer model 

meets the requirements of paragraph 

(b)(4)(i) of this section; and 

(C) Be signed by the eligible 

investment expert. 

(v) The selection of an eligible 

investment expert as required by this 

section is a fiduciary act governed by 

section 404(a)(1) of ERISA. 

(5) Arrangement must be authorized 

by a plan fiduciary. (i) Except as 

provided in paragraph (b)(5)(ii), the 

arrangement pursuant to which 

investment advice is provided to 

participants and beneficiaries pursuant 

to this section must be expressly 

authorized by a plan fiduciary (or, in the 

case of an Individual Retirement 

Account (IRA), the IRA beneficiary) 

other than: the person offering the 

arrangement; any person providing 

designated investment options under 

the plan; or any affiliate of either. 

Provided, however, that for purposes of 

the preceding, in the case of an IRA, an 

IRA beneficiary will not be treated as an 

affiliate of a person solely by reason of 

being an employee of such person. 

(ii) In the case of an arrangement 

pursuant to which investment advice is 

provided to participants and 

beneficiaries of a plan sponsored by the 

person offering the arrangement or a 

plan sponsored by an affiliate of such 

person, the authorization described in 

paragraph (b)(5)(i) may be provided by 

the plan sponsor of such plan, provided 

that the person or affiliate offers the 

same arrangement to participants and 

beneficiaries of unaffiliated plans in the 

ordinary course of its business. 

(iii) For purposes of the authorization 

described in paragraph (b)(5)(i), a plan 

sponsor shall not be treated as a person 

providing a designated investment 

option under the plan merely because 

one of the designated investment 

options of the plan is an option that 

permits investment in securities of the 

plan sponsor or an affiliate. 

(6) Annual audit. (i) The fiduciary 

adviser shall, at least annually, engage 

an independent auditor, who has 

appropriate technical training or 

experience and proficiency, and so 

represents in writing to the fiduciary 

adviser, to: 

(A) Conduct an audit of the 

investment advice arrangements for 

compliance with the requirements of 

this section; and 

(B) Within 60 days following 

completion of the audit, issue a written 

report to the fiduciary adviser and, 

except with respect to an arrangement 

with an IRA, to each fiduciary who 

authorized the use of the investment 

advice arrangement, in accordance with 

paragraph (b)(5) of this section, setting 

forth the specific findings of the auditor 

regarding compliance of the 

arrangement with the requirements of 

this section. 

(ii) With respect to an arrangement 

with an IRA, the fiduciary adviser: 

(A) Within 30 days following receipt 

of the report from the auditor, as 

described in paragraph (b)(6)(i)(B) of 

this section, shall furnish a copy of the 

report to the IRA beneficiary or make 

such report available on its website, 

provided that such beneficiaries are 

provided information, with the 

information required to be disclosed 

pursuant to paragraph (b)(7) of this 

section, concerning the purpose of the 

report, and how and where to locate the 

report applicable to their account; and 

(B) In the event that the report of the 

auditor identifies noncompliance with 

the requirements of this section, within 

30 days following receipt of the report 

from the auditor, shall send a copy of 

the report to the Department of Labor at 

the following address: Investment 

Advice Exemption Notification, U.S. 

Department of Labor, Employee Benefits 

Security Administration, Room N–1513, 

200 Constitution Ave., NW., 

Washington, DC, 20210. 

(iii) For purposes of this paragraph 

(b)(6), an auditor is considered 

independent if it does not have a 

material affiliation or material 

contractual relationship with the person 

offering the investment advice 

arrangement to the plan or with any 

designated investment options under 

the plan. 

(iv) For purposes of this paragraph 

(b)(6), the auditor shall review sufficient 

relevant information to formulate an 

opinion as to whether the investment 

advice arrangements, and the advice 

provided pursuant thereto, offered by 

the fiduciary adviser during the audit 

period were in compliance with this 

section. Nothing in this paragraph shall 

preclude an auditor from using 

information obtained by sampling, as 

reasonably determined appropriate by 

the auditor, investment advice 

arrangements, and the advice pursuant 

thereto, during the audit period. 

(v) The selection of an auditor for 

purposes of this paragraph (b)(6) is a 

fiduciary act governed by section 

404(a)(1) of ERISA. 

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(7) Disclosure. (i) The fiduciary 

adviser must provide, without charge, to 

a participant or a beneficiary before the 

initial provision of investment advice 

with regard to any security or other 

property offered as an investment 

option, a written notification of: 

(A) The role of any party that has a 

material affiliation or material 

contractual relationship with the 

fiduciary adviser in the development of 

the investment advice program, and in 

the selection of investment options 

available under the plan; 

(B) The past performance and 

historical rates of return of the 

designated investment options available 

under the plan, to the extent that such 

information is not otherwise provided; 

(C) All fees or other compensation 

that the fiduciary adviser or any affiliate 

thereof is to receive (including 

compensation provided by any third 

party) in connection with— 

(1) The provision of the advice; 

(2) The sale, acquisition, or holding of 

any security or other property pursuant 

to such advice; or 

(3) Any rollover or other distribution 

of plan assets or the investment of 

distributed assets in any security or 

other property pursuant to such advice; 

(D) Any material affiliation or 

material contractual relationship of the 

fiduciary adviser or affiliates thereof in 

the security or other property; 

(E) The manner, and under what 

circumstances, any participant or 

beneficiary information provided under 

the arrangement will be used or 

disclosed; 

(F) The types of services provided by 

the fiduciary adviser in connection with 

the provision of investment advice by 

the fiduciary adviser, including, with 

respect to a computer model 

arrangement referred to in paragraph 

(b)(4) of this section, any limitations on 

the ability of a computer model to take 

into account an investment primarily in 

qualifying employer securities; 

(G) The adviser is acting as a fiduciary 

of the plan in connection with the 

provision of the advice; and 

(H) That a recipient of the advice may 

separately arrange for the provision of 

advice by another adviser that could 

have no material affiliation with and 

receive no fees or other compensation in 

connection with the security or other 

property. 

(ii)(A) The notification required under 

paragraph (b)(7)(i) of this section must 

be written in a clear and conspicuous 

manner and in a manner calculated to 

be understood by the average plan 

participant and must be sufficiently 

accurate and comprehensive to 

reasonably apprise such participants 

and beneficiaries of the information 

required to be provided in the 

notification. 

(B) The appendix to this section 

contains a model disclosure form that 

may be used to provide notification of 

the information described in paragraph 

(b)(7)(i)(C) of this section. Use of the 

model form is not mandatory. However, 

use of an appropriately completed 

model disclosure form will be deemed 

to satisfy the requirements of paragraphs 

(b)(7)(i) and (ii) of this section with 

respect to such information. 

(iii) The notification required under 

paragraph (b)(7)(i) of this section may, 

in accordance with 29 CFR 2520.104b– 

1, be provided in written or electronic 

form. 

(iv) With respect to the information 

required to be disclosed pursuant to 

paragraph (b)(7)(i) of this section, the 

fiduciary adviser shall, at all times 

during the provision of advisory 

services to the participant or beneficiary 

pursuant to the arrangement— 

(A) Maintain accurate, up-to-date 

information in a form that is consistent 

with paragraph (b)(7)(ii) of this section, 

(B) Provide, without charge, accurate, 

up-to-date information to the recipient 

of the advice no less frequently than 

annually, 

(C) Provide, without charge, accurate 

information to the recipient of the 

advice upon request of the recipient, 

and 

(D) Provide, without charge, to the 

recipient of the advice any material 

change to the information described in 

paragraph (b)(7)(i) at a time reasonably 

contemporaneous to the change in 

information. 

(8) Other Conditions. The 

requirements of this paragraph are met 

if— 

(i) 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, 

(ii) Any sale, acquisition, or holding 

of a security or other property occurs 

solely at the direction of the recipient of 

the advice, 

(iii) 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 

(iv) 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) Definitions. For purposes of this 

section: 

(1) The term ‘‘designated investment 

option’’ means any investment option 

designated by the plan into which 

participants and beneficiaries may 

direct the investment of assets held in, 

or contributed to, their individual 

accounts. The term ‘‘designated 

investment option’’ shall not include 

‘‘brokerage windows,’’ ‘‘self-directed 

brokerage accounts,’’ or similar plan 

arrangements that enable participants 

and beneficiaries to select investments 

beyond those designated by the plan. 

(2)(i) 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 

referred to in section 3(21)(A)(ii) of 

ERISA by the person to the participant 

or beneficiary of the plan and who is— 

(A) 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, 

(B) A bank or similar financial 

institution referred to in section 

408(b)(4) of ERISA or a savings 

association (as defined in section 3(b)(1) 

of the Federal Deposit Insurance Act (12 

U.S.C. 1813(b)(1)), but only if the advice 

is provided through a trust department 

of the bank or similar financial 

institution or savings association which 

is subject to periodic examination and 

review by Federal or State banking 

authorities, 

(C) An insurance company qualified 

to do business under the laws of a State, 

(D) A person registered as a broker or 

dealer under the Securities Exchange 

Act of 1934 (15 U.S.C. 78a et seq.), 

(E) An affiliate of a person described 

in paragraphs (c)(2)(i)(A) through (D), or 

(F) An employee, agent, or registered 

representative of a person described in 

paragraphs (c)(2)(i)(A) through (E) of 

this section who satisfies the 

requirements of applicable insurance, 

banking, and securities laws relating to 

the provision of advice. 

(ii) Except as provided under 29 CFR 

2550.408g–2, a fiduciary adviser 

includes any person who develops the 

computer model, or markets the 

computer model or investment advice 

program, utilized in satisfaction of 

paragraph (b)(4) of this section. 

(3) A ‘‘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 

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Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Proposed Rules 9369 

investment adviser referred to in such 

section). 

(4) ‘‘Individual Retirement Account’’ 

or ‘‘IRA’’ means— 

(i) An individual retirement account 

described in section 408(a) of the Code; 

(ii) An individual retirement annuity 

described in section 408(b) of the Code; 

(iii) An Archer MSA described in 

section 220(d) of the Code; 

(iv) A health savings account 

described in section 223(d) of the Code; 

(v) A Coverdell education savings 

account described in section 530 of the 

Code; or 

(vi) A trust, plan, account, or annuity 

which, at any time, has been determined 

by the Secretary of the Treasury to be 

described in any of paragraphs (c)(4)(i) 

through (v) of this section. 

(5) An ‘‘affiliate’’ of another person 

means— 

(i) Any person directly or indirectly 

owning, controlling, or holding with 

power to vote, 5 percent or more of the 

outstanding voting securities of such 

other person; 

(ii) Any person 5 percent or more of 

whose outstanding voting securities are 

directly or indirectly owned, controlled, 

or held with power to vote, by such 

other person; 

(iii) Any person directly or indirectly 

controlling, controlled by, or under 

common control with, such other 

person; and 

(iv) Any officer, director, partner, 

copartner, or employee of such other 

person. 

(6)(i) A person with a ‘‘material 

affiliation’’ with another person 

means— 

(A) Any affiliate of the other person; 

(B) Any person directly or indirectly 

owning, controlling, or holding, 5 

percent or more of the interests of such 

other person; and 

(C) Any person 5 percent or more of 

whose interests are directly or indirectly 

owned, controlled, or held, by such 

other person. 

(ii) For purposes of paragraph (c)(6)(i) 

of this section, ‘‘interest’’ means with 

respect to an entity— 

(A) The combined voting power of all 

classes of stock entitled to vote or the 

total value of the shares of all classes of 

stock of the entity if the entity is a 

corporation; 

(B) The capital interest or the profits 

interest of the entity if the entity is a 

partnership; or 

(C) The beneficial interest of the 

entity if the entity is a trust or 

unincorporated enterprise. 

(7) Persons have a ‘‘material 

contractual relationship’’ if payments 

made by one person to the other person 

pursuant to contracts or agreements 

between the persons exceed 10 percent 

of the gross revenue, on an annual basis, 

of such other person. 

(8) ‘‘Control’’ means the power to 

exercise a controlling influence over the 

management or policies of a person 

other than an individual. 

(d) Retention of records. The fiduciary 

adviser must maintain, for a period of 

not less than 6 years after the provision 

of investment advice under this section 

any records necessary for determining 

whether the applicable requirements of 

this section have been met. A 

transaction prohibited under section 

406 of ERISA 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. 

(e) Noncompliance. (1) The relief from 

the prohibited transaction provisions of 

section 406 of ERISA and the sanctions 

resulting from the application of section 

4975 of the Code described in paragraph 

(b) of this section shall not apply to any 

transaction described in such 

paragraphs in connection with the 

provision of investment advice to an 

individual participant or beneficiary 

with respect to which the applicable 

conditions of this section have not been 

satisfied. 

(2) In the case of a pattern or practice 

of noncompliance with any of the 

applicable conditions of this section, the 

relief described in paragraph (b) shall 

not apply to any transaction in 

connection with the provision of 

investment advice provided by the 

fiduciary adviser during the period over 

which the pattern or practice extended. 

(f) Effective date and applicability 

date. This section shall be effective 

[ENTER DATE 60 DAYS AFTER THE 

DATE OF PUBICATION OF THE FINAL 

RULE]. This section shall apply to 

transactions described in paragraph (b) 

of this section occurring on or after 

[ENTER DATE 60 DAYS AFTER THE 

DATE OF PUBLICATION OF THE 

FINAL RULE]. 

Appendix to § 2550.408g–1 

Fiduciary Adviser Disclosure 

This document contains important 

information about [enter name of Fiduciary 

Adviser] and how it is compensated for the 

investment advice provided to you. You 

should carefully consider this information in 

your evaluation of that advice. 

[enter name of Fiduciary Adviser] has been 

selected to provide investment advisory 

services for the [enter name of Plan]. [enter 

name of Fiduciary Adviser] will be providing 

these services as a fiduciary under the 

Employee Retirement Income Security Act 

(ERISA). [enter name of Fiduciary Adviser], 

therefore, must act prudently and with only 

your interest in mind when providing you 

recommendations on how to invest your 

retirement assets. 

Compensation of the Fiduciary Adviser and 

Related Parties 

[enter name of Fiduciary Adviser] (is/is 

not) compensated by the plan for the advice 

it provides. (if compensated by the plan, 

explain what and how compensation is 

charged (e.g., asset-based fee, flat fee, per 

advice)). (If applicable, [enter name of 

Fiduciary Adviser] is not compensated on the 

basis of the investment(s) selected by you.) 

Affiliates of [enter name of Fiduciary 

Adviser] (if applicable enter, and other 

parties with whom [enter name of Fiduciary 

Adviser] is related or has a material financial 

relationship) also will be providing services 

for which they will be compensated. These 

services include: [enter description of 

services, e.g., investment management, 

transfer agent, custodial, and shareholder 

services for some/all the investment funds 

available under the plan.] 

When [enter name of Fiduciary Adviser] 

recommends that you invest your assets in an 

investment fund of its own or one of its 

affiliates and you follow that advice, [enter 

name of Fiduciary Adviser] or that affiliate 

will receive compensation from the 

investment fund based on the amount you 

invest. The amounts that will be paid by you 

will vary depending on the particular fund in 

which you invest your assets and may range 

from __% to __%. Specific information 

concerning the fees and other charges of each 

investment fund is available from [enter 

source, such as: your plan administrator, 

investment fund provider (possibly with 

Internet Web site address)]. This information 

should be reviewed carefully before you 

make an investment decision. 

(if applicable enter, [enter name of 

Fiduciary Adviser] or affiliates of [enter name 

of Fiduciary Adviser] also receive 

compensation from non-affiliated investment 

funds as a result of investments you make as 

a result of recommendations of [enter name 

of Fiduciary Adviser]. The amount of this 

compensation also may vary depending on 

the particular fund in which you invest. This 

compensation may range from __% to __%. 

Specific information concerning the fees and 

other charges of each investment fund is 

available from [enter source, such as: your 

plan administrator, investment fund provider 

(possibly with Internet Web site address)]. 

This information should be reviewed 

carefully before you make an investment 

decision. 

(if applicable enter, In addition to the 

above, [enter name of Fiduciary Adviser] or 

affiliates of [enter name of Fiduciary Adviser] 

also receive other fees or compensation, such 

as commissions, in connection with the sale, 

acquisition or holding of investments 

selected by you as a result of 

recommendations of [enter name of Fiduciary 

Adviser]. These amounts are: [enter 

description of all other fees or compensation 

to be received in connection with sale, 

acquisition or holding of investments]. This 

information should be reviewed carefully 

before you make an investment decision. 

(if applicable enter, When [enter name of 

Fiduciary Adviser] recommends that you 

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9370 Federal Register / Vol. 75, No. 40 / Tuesday, March 2, 2010 / Proposed Rules 

take a rollover or other distribution of assets 

from the plan, or recommends how those 

assets should subsequently be invested, 

[enter name of Fiduciary Adviser] or affiliates 

of [enter name of Fiduciary Adviser] will 

receive additional fees or compensation. 

These amounts are: [enter description of all 

other fees or compensation to be received in 

connection with any rollover or other 

distribution of plan assets or the investment 

of distributed assets]. This information 

should be reviewed carefully before you 

make a decision to take a distribution. 

Consider Impact of Compensation on Advice 

The fees and other compensation that 

[enter name of Fiduciary Adviser] and its 

affiliates receive on account of assets in 

[enter name of Fiduciary Adviser] (enter if 

applicable, and non-[enter name of Fiduciary 

Adviser]) investment funds are a significant 

source of revenue for the [enter name of 

Fiduciary Adviser] and its affiliates. You 

should carefully consider the impact of any 

such fees and compensation in your 

evaluation of the investment advice that 

[enter name of Fiduciary Adviser] provides to 

you. In this regard, you may arrange for the 

provision of advice by another adviser that 

may have no material affiliation with or 

receive no compensation in connection with 

the investment funds or products offered 

under the plan. This type of advice is/is not 

available through your plan. 

Investment Returns 

While understanding investment-related 

fees and expenses is important in making 

informed investment decisions, it is also 

important to consider additional information 

about your investment options, such as 

performance, investment strategies and risks. 

Specific information related to the past 

performance and historical rates of return of 

the investment options available under the 

plan (has/has not) been provided to you by 

[enter source, such as: your plan 

administrator, investment fund provider]. (if 

applicable enter, If not provided to you, the 

information is attached to this document.) 

For options with returns that vary over 

time, past performance does not guarantee 

how your investment in the option will 

perform in the future; your investment in 

these options could lose money. 

Parties Participating in Development of 

Advice Program or Selection of Investment 

Options 

Name, and describe role of, affiliates or 

other parties with whom the fiduciary 

adviser has a material affiliation or 

contractual relationship that participated in 

the development of the investment advice 

program (if this is an arrangement that uses 

computer models) or the selection of 

investment options available under the plan. 

Use of Personal Information 

Include a brief explanation of the 

following— 

What personal information will be collected; 

How the information will be used; 

Parties with whom information will be 

shared; 

How the information will be protected; and 

When and how notice of the Fiduciary 

Adviser’s privacy statement will be 

available to participants and beneficiaries. 

Should you have any questions about 

[enter name of Fiduciary Adviser] or the 

information contained in this document, you 

may contact [enter name of contact person for 

fiduciary adviser, telephone number, 

address]. 

3. Add § 2550.408g–2 to read as 

follows: 

§ 2550.408g–2 Investment advice— 

fiduciary election. 

(a) General. Section 408(g)(11)(A) of 

the Employee Retirement Income 

Security Act, as amended (ERISA), 

provides that a person who develops a 

computer model or who markets a 

computer model or investment advice 

program used in an ‘‘eligible investment 

advice arrangement’’ shall be treated as 

a fiduciary of a plan by reason of the 

provision of investment advice referred 

to in ERISA section 3(21)(A)(ii) to the 

plan participant or beneficiary, and 

shall be treated as a ‘‘fiduciary adviser’’ 

for purposes of ERISA sections 

408(b)(14) and 408(g), except that the 

Secretary of Labor may prescribe rules 

under which only one fiduciary adviser 

may elect to be treated as a fiduciary 

with respect to the plan. Section 

4975(f)(8)(J)(i) of the Internal Revenue 

Code, as amended (the Code), contains 

a parallel provision to ERISA section 

408(g)(11)(A) that applies for purposes 

of Code sections 4975(d)(17) and 

4975(f)(8). This section sets forth 

requirements that must be satisfied in 

order for one such fiduciary adviser to 

elect to be treated as a fiduciary with 

respect to a plan under an eligible 

investment advice arrangement. 

(b)(1) If an election meets the 

requirements in paragraph (b)(2) of this 

section, then the person identified in 

the election shall be the sole fiduciary 

adviser treated as a fiduciary by reason 

of developing or marketing the 

computer model, or marketing the 

investment advice program, used in an 

eligible investment advice arrangement. 

(2) An election satisfies the 

requirements of this subparagraph with 

respect to an eligible investment advice 

arrangement if the election is in writing 

and such writing — 

(i) Identifies the investment advice 

arrangement, and the person offering the 

arrangement, with respect to which the 

election is to be effective; 

(ii) Identifies a person who— 

(A) Is described in any of 29 CFR 

2550.408g–1(c)(2)(i)(A) through (E), 

(B) Develops the computer model, or 

markets the computer model or 

investment advice program, utilized in 

satisfaction of 29 CFR 2550.408g–1(b)(4) 

with respect to the arrangement, and 

(C) Acknowledges that it elects to be 

treated as the only fiduciary, and 

fiduciary adviser, by reason of 

developing such computer model, or 

marketing such computer model or 

investment advice program; 

(iii) Is signed by the person identified 

in paragraph (b)(2)(ii) of this section; 

(iv) Is furnished to the fiduciary who 

authorized the arrangement, in 

accordance with 29 CFR 2550.408g– 

1(b)(5); and 

(v) Is maintained in accordance with 

29 CFR 2550.408g–1(d). 

Signed at Washington, DC, this 24th day of 

February 2010. 

Phyllis C. Borzi, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. 2010–4196 Filed 2–26–10; 11:15 am] 

BILLING CODE 4510–29–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 165 

[Docket No. USCG–2009–1132] 

RIN 1625–AA00 

Safety Zone; AVI May Fireworks 

Display, Colorado River, Laughlin, NV 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Coast Guard proposes a 

safety zone, on the navigable waters of 

the lower Colorado River, Laughlin, NV, 

in support of a fireworks display near 

the AVI Resort and Casino. This safety 

zone is necessary to provide for the 

safety of the participants, crew, 

spectators, participating vessels, and 

other vessels and users of the waterway. 

Persons and vessels are prohibited from 

entering into, transiting through, or 

anchoring within this safety zone unless 

authorized by the Captain of the Port, or 

his designated representative. 

DATES: Comments and related material 

must be received by the Coast Guard on 

or before April 1, 2010. Requests for 

public meetings must be received by the 

Coast Guard on or before March 23, 

2010. 

ADDRESSES: You may submit comments 

identified by docket number USCG– 

2009–1132 using any one of the 

following methods: 

(1) Federal eRulemaking Portal: 

http://www.regulations.gov. 

(2) Fax: 202–493–2251. 

(3) Mail: Docket Management Facility 

(M–30), U.S. Department of 

WReier-Aviles on DSKGBLS3C1PROD with PROPOSALS