The “Conflicted Investment Advice Prohibition Act of 2009” was introduced earlier this week by Congressman Rob Andrews (D-New Jersey). Last month at a House Education & Labor Subcommittee meeting titled “Retirement Security: The Importance of an Independent Adviser”, Andrews said that, “â€¦on the eve of the inauguration of President Barack Obama, the Bush administration attempted to finalize a regulation concerning the Employee Retirement Income Security Act (ERISA) that raised substantial questions of law and policy.” (see HELP Committee Hearing on Advice Focused on Conflicts of Interest ).
He was referring, of course, to final regulations issued by the Department of Labor, pursuant to the Pension Protection Act of 2006 (see DoL Finalizes Rules on Investment Advice ), which Andrews said in last month’s hearing would “expose millions of Americans to the Madoffs of the world.” The provision, one of the most controversial of the Pension Protection Act (1) , outlined a path by which advisers with potential conflicts of interest – essentially those whose compensation for providing advice could vary based on the investments recommended – would receive an exemption to ERISA’s prohibited transaction restrictions if they adhered to specific procedures and disclosures (see The Pension Protection Act – This Changes Everything ).
Congressman Andrews and Congressman George Miller (D-California), who chairs the House Education and Labor Committee, had threatened to block the implementation of the final advice regulations (see Miller, Andrews Threaten to Block Advice Regulation ), before an executive order from White House Chief of Staff Rahm Emanuel made the issue moot (see White House Executive Order Snares Fee Disclosure, Advice Regs ).
(1) For a discussion of the issues, see IMHO: Irreconcilable Differences .
After citing the impact of the recent market turmoil on retirement savings, and noting that, with over two-thirds of the assets in 401(k)-style defined contribution plans invested in equities (either directly or through mutual funds) "participants are exposed to increased risk and lack meaningful access to independent investment advice to help them better plan for their retirement," the bill goes on to say that "currently 401(k) plan account holders have access to a self-interested or conflicted investment adviser," and then cites a Government Accountability Office report that concluded that "conflicts of interest can have an adverse affect on defined benefit and defined contribution plans."
The bill ( H.R. 1988) then turns its attention to defining an "independent investment adviser" as one who is a fiduciary of the plan by virtue of the advice they provide to the plan. That's significant because the bill also says that a plan sponsor/fiduciary for a defined contribution plan that allows participants to direct their investments "shall not appoint, contract with, or otherwise arrange for an investment adviser to provide investment adviceâ€¦ unless the investment adviser is an independent investment adviser" as defined in the proposed legislation - a term it uses in place of the term "fiduciary adviser" that was incorporated in the PPA.
"Independent Investment Adviser"
As for what constitutes an "independent investment adviser, they must be "registered as an investment adviser under the Investment Advisers Act of 1940, or under the laws of the state in which the adviser maintains its principal office and place of business, or a bank or similar financial institution (but only if the investment advice provided is provided through a trust department which is subject to periodic examination and review by Federal or State banking authorities), or any other person if they are a registered representative.
An independent investment adviser must not "provide or manage" any plan assets in those individual accounts. Additionally, the fees they receive for their advice must not be "â€¦received from any person or persons (or anyone affiliated with such persons) that market, sell, manage or provide investments in which plan assets of any individual account plan are invested."
Alternatively, those fees must not vary based on the advice provided, and must be calculated pursuant to one or more of the following:
- flat percentage of plan assets, or
- per-participant basis
Finally, that advice must be provided pursuant to a written agreement with the participant that must, among other things, provide that:
- the investment adviser is a fiduciary of the plan with respect to the provision of the advice,
- the advice be provided "only by registered representatives of the investment adviser or an affiliate thereof",
- the adviser discloses whether the investment adviser has any material financial, referral, or other relationship or arrangement with an entity "that creates or may create" a conflict of interest for the adviser - and, if so, discloses that arrangement
The bill also provides for the provision of advice using a computer model that meets specific standards, as does the pending DoL regulations.
Ultimately, as is the case under current law, this legislation confirms that plan fiduciaries have a responsibility to prudently select and "periodically review" the "independent investment adviser", but "has no dutyâ€¦ to monitor the specific investment advice given by the independent investment adviser to any particular recipient of the advice." Additionally, the legislation also notes that nothing in the Act "shall be construed to preclude the use of plan assets to pay for reasonable expenses in providing investment advice."
A copy of the bill is available here (thanks to Jason Roberts ofReish Luftman Reicher & Cohen) .
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