Proposed Class Exemption for the Provision of Investment Advice to Participants and Beneficiaries of Self-Directed Individual Account Plans and IRAs, 49924-49932 [E8-19273]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 73, Number 164 (Friday, August 22, 2008)]
[Notices]
[Pages 49924-49932]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-19273]


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Notices
                                                Federal Register
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or proposed rules that are applicable to the public. Notices of hearings 
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Federal Register / Vol. 73, No. 164 / Friday, August 22, 2008 / 
Notices

[[Page 49924]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

RIN 1210-ZA14


Proposed Class Exemption for the Provision of Investment Advice 
to Participants and Beneficiaries of Self-Directed Individual Account 
Plans and IRAs

AGENCY: Employee Benefits Security Administration, DOL.

ACTION: Notice of proposed class exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (Department) of a proposed class exemption from 
certain prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974, as amended (ERISA, or the Act), and from 
certain taxes imposed by the Internal Revenue Code of 1986, as amended 
(Code). If granted, the proposed exemption would permit the provision 
of investment advice described in section 3(21)(A)(ii) of the Act by a 
fiduciary adviser to a participant or beneficiary in an individual 
account plan or individual retirement accounts (and certain similar 
plans), the acquisition, holding or sale of a security or other 
property pursuant to the investment advice, and the direct or indirect 
receipt of fees or other compensation by the fiduciary adviser (or any 
employee, agent, registered representative or affiliate thereof) in 
connection with such transactions. The proposed exemption, if granted, 
would affect sponsors, fiduciaries, participants and beneficiaries of 
participant-directed individual account plans, as well as providers of 
investments and investment advice-related services to such plans.

DATES: Written comments on the proposed exemption should be submitted 
to the Department of Labor on or before October 6, 2008.

ADDRESSES: To facilitate the receipt and processing of comment letters, 
the Employee Benefits Security Administration (EBSA) encourages 
interested persons to submit their comments electronically by e-mail to 
e-ORI@dol.gov (Subject: Investment Advice Class Exemption), or by using 
the Federal eRulemaking portal at https://www.regulations.gov (follow 
instructions for submission of comments). 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: Investment Advice Class 
Exemption, 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 https://www.regulations.gov and 
https://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.

FOR FURTHER INFORMATION CONTACT: Fred Wong, Office of Regulations and 
Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll free number.

SUPPLEMENTARY INFORMATION: This document contains a notice of pendency 
before the Department of a proposed class exemption from the 
restrictions of section 406(a) and 406(b) of the Act and from the taxes 
imposed by section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1) of the Code. The Department is proposing this class 
exemption pursuant to section 408(a) of the Act and section 4975(c)(2) 
of the Code, and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (55 FR 32836, August 10, 1990).\1\ All section 
references herein are to sections of ERISA unless otherwise indicated.
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. 
App. 1 (1996), generally transferred the authority of the Secretary 
of the Treasury to issue exemptions under section 4975(c)(2) of the 
Code to the Secretary of Labor. For purposes of this proposed 
exemption, references to specific provisions of Title I of the Act, 
unless otherwise specified, refer also to the corresponding 
provisions of the Code.
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A. Background

    Section 3(21)(A)(ii) of the Act includes within the definition of 
``fiduciary'' a person that renders investment advice for a fee or 
other compensation, direct or indirect, with respect to any moneys of 
other property of a plan, or has any authority or responsibility to do 
so.\2\ The prohibited transaction provisions of ERISA and the Code 
prohibit an investment advice fiduciary from using the authority, 
control or responsibility that makes it a fiduciary to cause itself, or 
a party in which it has an interest that may affect its best judgment 
as a fiduciary, to receive additional fees. As a result, in the absence 
of a statutory or administrative exemption, fiduciaries are prohibited 
from rendering investment advice to plan participants regarding 
investments that result in the payment of additional advisory and other 
fees to the fiduciaries or their affiliates.
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    \2\ See also 29 CFR 2510.3-21(c).
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    With the growth of participant-directed individual account plans, 
there has been an increasing recognition of the importance of 
investment advice to participants and beneficiaries in such plans. Most 
recently, Congress and the Administration, responding to the need to 
afford participants and beneficiaries greater access to professional 
investment advice, amended the prohibited transaction provisions of 
ERISA and the Code, as part of the Pension Protection Act of 2006 
(PPA),\3\ to permit a broader array of investment advice providers to 
offer their services to participants and beneficiaries responsible for 
investment of assets in their individual accounts and, accordingly, for 
the adequacy of their retirement savings. Specifically, section 601(a) 
of the PPA added a statutory exemption under sections 408(b)(14) and 
408(g) of ERISA. Parallel provisions were added to the Code at section 
4975(d)(17) and 4975(f)(8).\4\
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    \3\ Public Law 109-280, 120 Stat. 780 (Aug. 17, 2006).
    \4\ See PPA section 601(b). Under Reorganization Plan No. 4 of 
1978 (43 FR 47713, October 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.

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[[Page 49925]]

    Section 408(b)(14) of ERISA provides that certain investment 
advice-related transactions will be exempt from the prohibitions of 
section 406 if the requirements of section 408(g) are met. Section 
408(g) of ERISA requires that investment advice must be provided by a 
fiduciary adviser under an ``eligible investment advice arrangement'' 
that meets a ``level fee'' requirement (ERISA section 408(g)(2)(A)(i)) 
or a ``computer model'' requirement (ERISA section 408(g)(2)(A)(ii)). 
However, PPA section 601(b)(3)(C) restricts the general availability of 
an eligible investment advice arrangement based on utilization of a 
computer model for certain plans described in Code section 4975(e)(1) 
(collectively referred to herein as Individual Retirement Accounts or 
IRAs), unless the Secretary of Labor, in consultation with the 
Secretary of the Treasury, determines that there is a computer model 
investment advice program that may be utilized by an IRA to provide 
investment advice to the account beneficiary which meets the 
requirements described in PPA section 601(b)(3)(B).\5\
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    \5\ PPA section 601(b)(3)(C)(i).
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    On December 4, 2006, the Department published two Requests for 
Information in the Federal Register soliciting information to assist 
the Department in the development of regulations under ERISA section 
408(b)(14) and 408(g), and in making its determination with respect to 
the utilization of computer models for IRAs. 71 FR 70429; 71 FR 70427. 
Concurrent with the publication of this document, the Department 
reported to Congress its determination that there exist computer models 
that meet the requirements described in PPA section 601(b)(3)(B). In 
addition, appearing elsewhere in today's Federal Register, the 
Department is publishing proposed regulations that would implement the 
provisions of the statutory exemption for the provision of investment 
advice to participants and beneficiaries under sections 408(b)(14) and 
408(g), and parallel provisions in Code section 4975.
    This class exemption is intended to complement the adoption of 
those implementing regulations by furthering the availability of 
individualized investment advice to both participants and beneficiaries 
in participant-directed individual account plans and IRA beneficiaries 
under circumstances not encompassed in the statutory exemption or 
implementing regulations, as described below.

B. Overview of Proposed Class Exemption

1. General

    In general, the proposed class exemption, like the statutory 
exemption and proposed regulations published thereunder (proposed 29 
CFR 2550.408g-1), provides relief from otherwise prohibited 
transactions relating to the provision of investment advice to the 
participant or beneficiary with respect to a security or other property 
available as an investment under a plan or IRA; the acquisition, 
holding or sale of a security or other property available as an 
investment under a plan or IRA pursuant to the investment advice; and 
the direct or indirect receipt of compensation by a fiduciary adviser 
or affiliate in connection with the provision of investment advice or 
the acquisition, holding or sale of a security or other property 
available as an investment under the plan or IRA pursuant to the 
investment advice.
    Unlike the statutory exemption and proposed regulations, however, 
the class exemption would provide relief for individualized investment 
advice to individuals following the furnishing of recommendations 
generated by a computer model or, in the case of IRAs with respect to 
which modeling is not feasible, the furnishing of certain investment 
education material. The computer generated advice recommendations and 
investment education materials are intended to provide individual 
account plan participants and beneficiaries and IRA beneficiaries with 
a context for assessing and evaluating the individualized investment 
advice contemplated by the exemption. Also unlike the statutory 
exemption and proposed regulations, the class exemption, as discussed 
below, applies the fee-leveling limits solely to the compensation 
received by the employee, agent or registered representative providing 
the advice on behalf of the fiduciary adviser, as distinguished from 
compensation received by the fiduciary adviser on whose behalf the 
employee, agent or registered representative is providing such advice.

2. Scope of Exemption--Sections I and II

    Sections I and II of the proposal define the scope of the class 
exemption. Section I provides that, with respect to the provision of 
advice to participants and beneficiaries of individual account plans, 
the restrictions of sections 406(a) and 406(b) of ERISA and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (F) of the Code, shall not 
apply to the provision of investment advice described in section 
3(21)(A)(ii) of the Act by a fiduciary adviser to a participant or 
beneficiary of an individual account plan that permits such participant 
or beneficiary to direct the investment of their individual accounts; 
the acquisition, holding, or sale of a security or other property 
pursuant to the investment advice; and, except as otherwise provided in 
the exemption, the direct or indirect receipt of fees or other 
compensation by the fiduciary adviser (or any employee, agent, 
registered representative or affiliate thereof) in connection with the 
provision of the advice or in connection with an acquisition, holding, 
or sale of a security or other property pursuant to the investment 
advice. Section II provides the same relief with respect to the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (F) of the Code, for 
investment advice to beneficiaries of IRAs.

3. Conditions--Section III

General--Paragraphs (a)-(d)
    Paragraphs (a) through (c) set forth general requirements relating 
to the arrangements and investment advice covered by the exemption, 
without regard to whether a fiduciary adviser uses a computer model or 
levels fees in connection with the providing of individualized 
investment advice. Paragraph (a) provides that the investment advice 
arrangement must be authorized by a plan fiduciary (or, in the case of 
an IRA, the IRA beneficiary) other than: the person offering the 
investment advice arrangement; any person providing designated 
investment options under the plan; or any affiliate of either. The 
terms designated investment options and affiliate are defined in 
Section IV, described below. Paragraph (a) further provides that for 
purposes of such authorization, an IRA beneficiary will not be treated 
as an affiliate of a person solely by reason of being an employee of 
such person, thereby, enabling employees of a fiduciary adviser to take 
advantage of the investment advice arrangements offered by their 
employer under the exemption. Paragraph (b) requires that the provided 
investment advice be based on certain generally accepted investment 
theories. Paragraph (c) requires that the investment advice must take 
into account information furnished by a participant or beneficiary.

[[Page 49926]]

    Paragraph (d) of Section III requires that the fiduciary adviser 
must provide advice in accordance with paragraph (e) or paragraph (f) 
or both. As discussed below, paragraph (e) generally requires the 
provision of investment advice generated by a computer model in advance 
of providing individualized, non-computer modeled advice. Paragraph (f) 
requires that investment advice be provided in a manner with respect to 
which fees or other compensation received by an employee, agent or 
registered representative providing investment advice on behalf of a 
fiduciary adviser do not vary based on the investment option selected 
by the participant or beneficiary. Paragraph (d) also permit the 
provision of investment advice using a combination of computer 
generated advice and fee-leveling.
Use of Computer Models--Paragraph (e)
    Paragraph (e)(1) requires that, prior to the provision of other 
investment advice covered by the class exemption, participants and 
beneficiaries must be furnished with investment recommendations 
generated by a computer model. The computer model must either meet the 
requirements of ERISA section 408(g)(3)(B) and (C) \6\ or meet the 
requirements of section 408(g)(3)(B) and be designed and maintained by 
a person independent of the fiduciary adviser (and any of the adviser's 
affiliates) and utilize methodologies and parameters determined 
appropriate solely by the independent person. If the conditions of 
section III are satisfied, then the class exemption provides relief, as 
described in sections I and II, in connection with both the investment 
advice generated by the computer model and the non-computer model 
generated investment advice subsequently provided.
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    \6\ In general, paragraph (3)(B) of section 408(g) provides that 
a computer model under an investment advice program must apply 
certain generally accepted investment theories, utilize relevant 
information about the participant, utilize prescribed objective 
criteria to provide asset allocation portfolios comprised of 
investment options available under the plan, operate in a manner 
that is not biased in favor of certain investments, and take into 
account all investment options under the plan in specifying how a 
participant's account balance should be invested. Paragraph (3)(C) 
of section 408(g) requires that a computer model utilized under an 
investment advice program be certified as meeting the requirements 
of paragraph (3)(B) by an eligible investment expert. Proposed 
regulations being published in today's Federal Register provide 
further guidance with respect to the computer model requirements 
contained in ERISA section 408(g)(3).
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    In order to satisfy paragraph (e)(1), a computer model must, at 
least, meet the requirements of section 408(g)(3)(B) and the 
regulations issued thereunder applicable to a computer model that 
serves as the basis of an eligible investment advice arrangement under 
the statutory exemption and related regulations (proposed 29 CFR 
2550.408g-1(d)(1)). Additionally, unless the computer model is 
developed and maintained by a person independent of the fiduciary 
adviser (and its affiliates), the computer model must be certified, in 
accordance with ERISA section 408(g)(3)(C) and related regulations 
(proposed 29 CFR 2550.408g-1(d)(2)), as satisfying those requirements. 
Thus, unless the computer model is developed and maintained by an 
independent person, the model must meet the same requirements, 
including certification, as under the statutory exemption and related 
regulations. With respect to the inclusion of independently developed 
and maintained computer models under paragraph (e)(1), the Department 
opined in Advisory Opinion 2001-09A (Dec. 14, 2001) (AO 2001-09A) that 
an investment adviser providing investment advice regarding investments 
that pay additional fees to the adviser could avoid prohibited 
transaction issues under ERISA section 406(b)(1) and (3) by utilizing 
computer methodologies developed, maintained and overseen by an 
independent person to generate the advice provided. This continues to 
be the view of the Department.\7\ However, as with investment advice 
provided under the statutory exemption, the Department believes that 
plan participants and beneficiaries may want the flexibility to obtain 
other investment advice after receiving computer-generated advice, and 
advisers may be willing to offer such services. Accordingly, paragraph 
(e)(1) similarly encompasses transactions in connection with investment 
advice received after investment advice generated by a computer model 
developed and maintained by a person independent of the fiduciary 
adviser and its affiliates. For purposes of this paragraph, the term 
``independent'' is defined in paragraph (h) of Section IV. The 
Department notes, however, that it continues to believe that what 
constitutes ``independent'' for purposes of the analysis in AO 2001-09A 
is an inherently factual question,\8\ and that no inferences should be 
drawn with regard to the effect of the definition contained in 
paragraph (h) of section IV on the analysis in AO 2001-09A.
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    \7\ See Field Assistance Bulletin 2007-01 (February 2, 2007).
    \8\ See AO 2001-09A, footnote 11 (``whether a party is 
`independent' for purposes of the subject analysis will generally 
involve a determination as to whether there exists a financial 
interest (e.g., compensation, fees, etc.), ownership interest, or 
other relationship, agreement or understanding that would limit the 
ability of the party to carry out its responsibility beyond the 
control, direction or influence of the fiduciary'').
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    The general requirement for computer model investment advice set 
forth in paragraph (e)(1) also applies to IRAs, unless the fiduciary 
adviser determines that the types or number of investment choices 
available to an IRA beneficiary reasonably precludes the use of a 
computer model meeting of the requirements of section ERISA 
408(g)(3)(B). See paragraph (e)(2) of Section III. If the fiduciary 
adviser so concludes, paragraph (e)(2) of Section III requires that the 
beneficiary be provided certain investment education-type materials, 
such as graphs, pie charts, case studies, worksheets, or interactive 
software or similar programs, that reflect or produce asset allocation 
models taking into account the age (or time horizon) and risk profile 
of the beneficiary, to the extent known. Paragraph (e)(2) also sets 
forth some general standards intended to ensure the reasonableness and 
objectivity of the materials furnished. These materials, like the 
investment advice generated by a computer model required under 
paragraph (e)(1), are intended to provide a means by which a 
participant or beneficiary may assess the individualized advice 
provided by the fiduciary adviser, taking into account whether and to 
what extent the individualized advice deviates from the computer 
generated advice or education-type materials furnished in advance by 
the fiduciary adviser.
    Paragraph (e)(3) of Section III requires that the investment advice 
provided does not recommend investment options that may generate for 
the fiduciary adviser, or certain other persons, greater income than 
other options of the same asset class, unless the fiduciary adviser 
prudently concludes that the recommendation is in the best interest of 
the participant or beneficiary and explains the basis for that 
conclusion to the participant or beneficiary. Section III(e)(4), 
described below, imposes a specific documentation requirement with 
respect to any such advice. Section III(e)(3) does not apply to 
investment advice generated solely by use of a computer model described 
in paragraph (e)(1)(A) or (B) of section III.
    Paragraph (e)(4) of Section III generally requires that not later 
than 30 days following the provision of investment advice under 
paragraph (e), the individual providing the advice on behalf of the 
fiduciary adviser must document the basis of any investment option(s) 
recommended to a participant or beneficiary, including an explanation

[[Page 49927]]

as to how such recommendation relates to the recommendations or 
information provided or generated pursuant to paragraph (e)(1) or, if 
applicable, paragraph (e)(2). As an example, in the case of an IRA 
described in paragraph (e)(2) with respect to which a fiduciary adviser 
provides several generic asset allocation portfolios prior to rendering 
investment advice, the documentation required by paragraph (e)(4) must 
include explanations as to the asset allocation portfolio on which the 
investment advice is based, including reasons for its selection or 
deviation from those provided, and how the recommended investments 
provide the appropriate asset class exposures consistent with the 
portfolio.
    Paragraph (e)(4) further requires that with respect to any 
investment advice that recommends investment options that may generate 
for the fiduciary adviser, or certain persons, greater income than 
other options of the same asset class, the individual providing the 
investment advice on behalf of the fiduciary adviser must, not later 
than 30 days following its provision, document the basis for concluding 
that the recommendation is in the best interest of the participant or 
beneficiary. As with the requirements of paragraph (e)(3), this 
requirement does not apply to investment advice generated solely by use 
of a computer model described in paragraph (e)(1)(A) or (B) of Section 
III.
    Paragraph (e)(5) provides that the documentation required by 
paragraph (e)(4) must be retained in accordance with the exemption's 
record-retention provision, section paragraph (n) of Section III, 
described below.
Use of Fee-Leveling--Paragraph (f)
    Paragraph (f) of Section III requires that any fees or other 
compensation (including salary, bonuses, awards, promotions, 
commissions or any other thing of value) received, directly or 
indirectly, by an employee, agent or registered representative 
providing advice on behalf of the fiduciary adviser pursuant to the 
class exemption do not vary depending on the basis of any investment 
option selected by a participant or beneficiary. The Department notes 
that, in contrast to the fee-leveling requirement under the statutory 
exemption as described above and interpreted in proposed regulations 
being published in today's Federal Register, the fee-leveling 
requirement under paragraph (f) applies only to the individual who 
provides investment advice. In this regard, the Department is persuaded 
that the safeguards provided for in the class exemption are sufficient 
to permit the application of the fee-leveling requirement at the 
individual-level, rather than fiduciary adviser-entity level, without 
compromising the availability of informed, unbiased, and objective 
investment advice for participants and beneficiaries.
Disclosure--Paragraphs (g)-(h)
    The disclosure provisions set forth in paragraph (g) of Section III 
generally track the disclosure provisions of the proposed regulations. 
See proposed 29 CFR 2550.408g-1(g). In this regard, paragraph (g) of 
Section III requires that a fiduciary adviser furnish certain 
information, without charge, to a participant or beneficiary in advance 
of the initial provision of investment advice under the class 
exemption, and at least once each year thereafter during which the 
adviser provides investment advice to the participant or beneficiary 
under the class exemption.
    Pursuant to paragraph (g)(1), a fiduciary adviser is required to 
provide to participants and beneficiaries a written notification 
describing: The role of any party that has a material affiliation or 
material contractual relationship with the fiduciary adviser in the 
development of the computer model described in paragraph (e)(1) or 
materials described in section paragraph (e)(2) of Section III and in 
the selection of investment options available under the plan; the past 
performance and historical rates of return of the designated investment 
options available under the plan or IRA to the extent such information 
is not otherwise provided; all fees or other compensation relating to 
the advice that the fiduciary adviser or any affiliate thereof is to 
receive (including compensation provided by any third party) in 
connection with the provision of the advice or in connection with the 
sale, acquisition, or holding of the security or other property; and of 
any material affiliation or material contractual relationship of the 
fiduciary adviser or affiliates thereof in the security or other 
property.
    The notification also is required to explain the manner, and under 
what circumstances, any participant or beneficiary information provided 
under the investment advice arrangement will be used or disclosed, and 
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 an arrangement that utilizes a computer 
model pursuant to paragraph (e)(1), any limitations on the ability of 
the computer model to take into account an investment option that 
constitutes an investment primarily in qualifying employer securities, 
as provided for in proposed 29 CFR 2550.408g-1(d)(1)(v). This 
disclosure of limitations on a computer model's ability to take into 
account investments in qualifying employer securities parallels a 
similar requirement contained in the proposed regulations under section 
408(g)(3) being published today.\9\
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    \9\ For a description of computer model limitations, see 
proposed regulations published in today's Federal Register.
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    In addition to the foregoing, the notification must inform 
participants and beneficiaries that the fiduciary adviser is acting as 
a fiduciary of the plan in connection with the provision of the advice, 
and that the participants or beneficiaries may separately arrange for 
the provision of advice by another adviser, that could have no material 
affiliation with, and receives no fees or other compensation in 
connection with, the security or other property recommended to the 
participant or beneficiary.
    Paragraph (g)(2)(i) provides that the information furnished 
pursuant to paragraph (g)(1) must be written in a clear and concise 
manner and in a manner calculated to be understood by the average plan 
participant and is sufficiently accurate and comprehensive to 
reasonably apprise such participants and beneficiaries of the 
information required to be disclosed. Paragraph (g)(2)(ii) notes that 
the appendix to proposed 29 CFR 2550.408g-1 contains a model disclosure 
form that may be used to provide the required notification of 
information described in paragraph (g)(1)(iii). Paragraph (g)(2)(ii) 
makes clear that use of the model is voluntary. However, use of an 
appropriately completed model disclosure form will be deemed to satisfy 
the requirements of paragraphs (g)(1) and (2)(i) with respect to such 
information.
    Paragraph (g)(3) indicates that required notification may be 
provided in written or electronic form.
    Paragraph (g)(4) requires that the fiduciary adviser provide, 
without charge, updated information to the advice recipient concerning 
any material change to the information required to be provided to the 
advice recipient under section III(g) at a time reasonably 
contemporaneous to the change in information.
    Paragraph (h) requires that the fiduciary adviser provide 
appropriate disclosure, in connection with the sale, acquisition, or 
holding of the security or other property, in accordance with all 
applicable securities laws.

[[Page 49928]]

Policies and Procedures--Paragraph (i)
    Paragraph (j) of Section III requires that the fiduciary adviser 
adopt and follow written policies and procedures that are designed to 
assure compliance with the conditions of the exemption. The Department 
believes that the maintenance of such policies and procedures will help 
ensure compliance with the exemption, as well as support a finding 
that, for purposes of section 408(a)(1), the exemption is 
administratively feasible. In this regard, the Department notes that, 
as discussed below, the auditor engaged pursuant to paragraph (j) is 
required to review a fiduciary adviser's compliance with its policies 
and procedures.
Annual Audit--Paragraph (j)
    The annual audit requirements of this proposed class exemption 
generally track the audit requirements applicable to investment advice 
arrangements offered under the statutory exemption and regulations 
issued thereunder, appearing elsewhere in today's Federal Register. See 
proposed 29 CFR 2550.408g-1(f).
    Paragraph (j)(1)(i) of Section III of the proposed class exemption 
requires that, at least annually, the fiduciary adviser engage an 
independent auditor to conduct an audit, and prepare a report with 
respect thereto and setting forth its specific findings, to determine 
compliance with the policies and procedures required under paragraph 
(i) of Section III and the requirements of the class exemption. The 
auditor, within 60 days following the completion of the audit, must 
furnish its report to the fiduciary adviser and, except with respect to 
an arrangement with an IRA, to the fiduciary that authorized the 
investment advice arrangement, as required under paragraph (a) of 
Section III. The audit must be conducted by an auditor who has 
appropriate technical training or experience and proficiency and so 
represents in writing to the fiduciary adviser. Paragraph (j)(2) 
provides that for purposes of paragraph (j)(1), 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 IRA or any person 
providing designated investment options under the plan or IRA.
    Paragraph (j)(1)(ii) contains additional requirements that apply 
with respect to an arrangement with an IRA. Under this provision, the 
fiduciary adviser, within 30 days following receipt of the report from 
the auditor, as described in paragraph (j)(1)(i), must furnish a copy 
of the report to the IRA beneficiary or make such report available on 
its Web site, provided, however, that with respect to availability on a 
Web site, such IRA beneficiaries must be provided information, with the 
information required to be furnished pursuant to section III(g)(1), 
concerning the purpose of the report, and how and where to locate the 
report applicable to their account. With respect to making the report 
available on a Web site, the Department believes that this alternative 
to furnishing reports to IRA beneficiaries satisfies the requirement of 
section 104(d)(1) of the Electronic Signatures in Global and National 
Commerce Act (E-SIGN) \10\ that any exemption from the consumer consent 
requirements of section 101(c) of E-SIGN must be necessary to eliminate 
a substantial burden on electronic commerce and will not increase the 
material risk of harm to consumers. The Department solicits comments on 
this finding. Further, in the event that the report of the auditor 
identifies noncompliance with the policies and procedures required by 
section III(i) or the conditions of the class exemption, the fiduciary 
adviser, within 30 days following receipt of the report from the 
auditor, must send a copy of the report to the Department at the 
address provided in the class exemption.
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    \10\ 15 U.S.C. 7004(d)(1) (2000).
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    Paragraph (j)(3) provides that, in conducting the audit required in 
(j)(1), the auditor must 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 the policies 
and procedures required under paragraph (i) of Section III and the 
requirements of the class exemption. Paragraph (j)(3) also makes clear, 
however, that it does not 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.
Miscellaneous Conditions--Paragraphs (k)-(m)
    Paragraphs (k)-(m) track provisions of the statutory exemption and 
proposed regulations, appearing elsewhere in today's Federal Register. 
See proposed 29 CFR 2550.408g-1(h). Paragraph (k) of Section III 
requires that the sale, acquisition or holding of a security or other 
property on behalf of a plan or IRA under the exemption must occur 
solely at the direction of the recipient of the investment advice. 
Paragraph (l) requires that the compensation received by the fiduciary 
adviser and affiliates thereof in connection with the sale, acquisition 
or holding of the security or other property must be reasonable. 
Paragraph (m) requires that the terms of the sale, acquisition or 
holding of the security or other property must be at least as favorable 
to the plan or IRA as an arm's length transaction with an unrelated 
party would be.
Record Retention--Paragraph (n)
    Paragraph (n) of Section III provides that the fiduciary adviser 
must maintain, in a manner accessible for audit or examination, for a 
period not less than six years after the provision of investment advice 
any records necessary to determine, explain or verify compliance with 
the conditions of the class exemption.

4. Definitions--Section IV

    Section IV defines certain terms that apply for purposes of the 
class exemption. In general, the definitions applied for purposes of 
the class exemption comport with the definitions applied to terms under 
the statutory exemption and the proposed regulations, appearing 
elsewhere in today's Federal Register. See proposed 29 CFR 2550.408g-
1(j).
    As a threshold matter, this proposed class exemption would be 
available only in connection with investment advice provided by a 
fiduciary adviser. Paragraph (a) defines the term ``fiduciary 
adviser.'' This definition tracks the statutory definition of that 
term.
    Paragraph (b) defines the term ``registered representative'' of 
another entity to mean a person described in section 3(a)(18) of the 
Securities Exchange Act of 1934 (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 (substituting the 
entity for the investment adviser referred to in such section). 
Paragraph (c) defines the term ``individual retirement account'' and 
paragraph (d) defines the term ``affiliate'' for purposes of the class 
exemption.
    As with the proposed regulations, the proposed class exemption, at 
paragraphs (e) and (f), respectively, also defines the terms ``material 
affiliation'' and ``material contractual relationship.'' Paragraph 
(e)(1) defines a person with a ``material affiliation'' with another 
person as: any affiliate of the other person; any person directly or 
indirectly owning, controlling, or holding, 5

[[Page 49929]]

percent or more of the interests of such other person; and any person 5 
percent or more of whose interests are directly or indirectly owned, 
controlled, or held, by such other person. The Department notes that 
the definition of material affiliation includes an affiliate, as 
defined in paragraph (d) of section IV, and that, whereas the 
definition of affiliate focuses on voting securities owned, controlled 
or held, the definition of material affiliate focuses not only on the 
voting interests, but also on any interest. In this regard, paragraph 
(e)(2) defines the term ``interest'' for purposes of paragraph (e)(1).
    Paragraph (f) provides that persons have a ``material contractual 
relationship'' if payments made by one person to the other person 
pursuant to written contracts or agreements between the persons exceed 
10 percent of the gross revenue, on an annual basis, of such other 
person. The Department believes that one person's receipt of more than 
10 percent of gross revenue from another person is sufficiently 
significant to be considered material. However, the Department 
specifically invites comments on whether the percentage test should be 
higher or lower and, if so, why.
    Paragraph (g) defines ``control'' to mean the power to exercise a 
controlling influence over the management or policies of a person other 
than an individual.
    Paragraph (h) of Section IV defines, for purposes of paragraph 
(e)(1) of Section III, the term ``independent'' to mean a person that 
is not an affiliate of the other person and does not have a material 
affiliation or material contractual relationship with the other person.
    For purposes of paragraphs (a), (g)(1) and (j)(2) of Section III of 
the proposal, paragraph (i) of Section IV defines the term ``designated 
investment option'' to mean 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. However, the term ``designated investment option'' does 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.

5. Effect of Noncompliance--Section V

    Section V clarifies that the class exemption will not apply to any 
transaction (described in section I or II) in connection with the 
provision of investment advice to an individual participant or 
beneficiary with respect to which the conditions of the exemption have 
not been satisfied. In addition, in the case of a pattern or practice 
of noncompliance with any of the conditions, the exemption will 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.

C. Effective Date

    The Department is proposing an effective date for the proposed 
class exemption which is 90 days after the publication of the final 
exemption in the Federal Register.

D. General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from other provisions of the Act and the Code, including any 
prohibited transaction provisions to which the exemption does not apply 
and the general fiduciary responsibility provisions of section 404 of 
the Act. Section 404 requires, among other things, that a fiduciary 
discharge its duties with respect to the plan prudently and solely in 
the interests of the plan's participants and beneficiaries. A 
transaction's qualification for an exemption also does not affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) If granted, the proposed exemption will apply to a transaction 
only if the conditions specified in the exemption are met; and
    (3) The proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and the Code, 
including statutory or administrative exemptions and transitional 
rules.

E. Written Comments

    Interested persons are encouraged to submit written comments on the 
proposed exemption. Comments are due not later than 45 days after the 
date of publication of the proposal in the Federal Register. The 
Employee Benefits Security Administration encourages interested persons 
to submit their comments electronically by e-mail to e-ORI@dol.gov 
(Subject: Investment Advice Class Exemption). Persons submitting 
comments electronically are encouraged not to submit paper copies. 
Persons interested in submitting paper copies should refer to the 
information set forth above under Addresses for the specific 
information relating to the delivery comments. All comments will be 
available to the public, without charge, online at https://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.

F. Executive Order 12866; Paperwork Reduction Act

    The Department's full Regulatory Impact Analysis for the class 
exemption proposed herein and rules proposed under the statutory 
exemption for investment advice can be found in the preamble to those 
proposed rules appearing elsewhere in today's Federal Register .

G. Proposed Exemption

    The Department has under consideration the grant of the following 
class exemption under the authority of section 408(a) of ERISA and 
section 4975(c)(2) of the Code, and in accordance with the procedures 
set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 
10, 1990).

Section I--Proposed Exemption for the Provision of Investment Advice to 
Participants and Beneficiaries of Individual Account Plans

    The restrictions of sections 406(a) and 406(b) of ERISA and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (F) of the Code, shall not 
apply to:
    (a) The provision of investment advice described in section 
3(21)(A)(ii) of the Act by a fiduciary adviser to a participant or 
beneficiary of an individual account plan that permits such participant 
or beneficiary to direct the investment of their individual accounts;
    (b) the acquisition, holding, or sale of a security or other 
property pursuant to the investment advice; and
    (c) except as otherwise provided in this exemption, the direct or 
indirect receipt of fees or other compensation by the fiduciary adviser 
(or any employee, agent, registered representative or affiliate 
thereof) in connection with the provision of the advice or in 
connection with an acquisition, holding, or sale of a security or other 
property pursuant to the investment advice, provided that the 
conditions set forth in section III below are met.

[[Page 49930]]

Section II--Proposed Exemption for the Provision of Investment Advice 
to Beneficiaries of Individual Retirement Accounts

    The sanctions resulting from the application of section 4975 of the 
Code, by reason of section 4975(c)(1)(A) through (F) of the Code, shall 
not apply to:
    (a) The provision of investment advice described in section 
4975(e)(3)(B) of the Code by a fiduciary adviser to a beneficiary of an 
Individual Retirement Account (IRA) that permits such beneficiary to 
direct the investment of the assets of his or her IRA;
    (b) the acquisition, holding, or sale of a security or other 
property pursuant to the investment advice; and
    (c) except as otherwise provided in this exemption, the direct or 
indirect receipt of fees or other compensation by the fiduciary adviser 
(or any employee, agent, registered representative or affiliate 
thereof) in connection with the provision of the advice or in 
connection with an acquisition, holding, or sale of a security or other 
property pursuant to the investment advice, provided that the 
conditions set forth in section III below are met.

Section III. Conditions

    (a) The arrangement pursuant to which investment advice is provided 
to participants and beneficiaries is expressly authorized in advance by 
a plan fiduciary (or, in the case of an IRA, the IRA beneficiary) other 
than: The person offering the investment advice 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.
    (b) The investment advice is based on generally accepted investment 
theories that take into account the historic returns of different asset 
classes over defined periods of time; provided, however, that nothing 
herein shall preclude any investment advice from being based on 
generally accepted investment theories that take into account 
additional considerations.
    (c) The investment advice takes into account information furnished 
by a participant or beneficiary relating to age, life expectancy, 
retirement age, risk tolerance, other assets or sources of income and 
investment preferences, although nothing herein shall preclude any 
investment advice from taking into account additional information that 
a participant or beneficiary may provide.
    (d) The fiduciary adviser provides advice in accordance with 
paragraph (e) or (f), or both.
    (e)(1) Except as provided in subparagraph (2), before providing 
other investment advice covered by this exemption, participants and 
beneficiaries shall be furnished with investment recommendations 
generated by a computer model that--(A) meets the requirements of ERISA 
section 408(g)(3)(B) and (C); or (B) meets the requirements of section 
408(g)(3)(B) and was designed and is maintained by a person independent 
of the fiduciary adviser (and any of the adviser's affiliates) and 
utilizes methodologies and parameters determined appropriate solely by 
the independent person, without influence from the fiduciary adviser 
(or any of the adviser's affiliates);
    (2) In the case of an IRA with respect to which the types or number 
of investment choices reasonably precludes the use of a computer model 
meeting the requirements of section 408(g)(3)(B) of ERISA to generate 
investment recommendations, before providing other investment advice 
covered by this exemption, beneficiaries shall be furnished with 
material, such as graphs, pie charts, case studies, worksheets, or 
interactive software or similar programs, that reflect or produce asset 
allocation models taking into account the age (or time horizon) and 
risk profile of the beneficiary, to the extent known. Nothing shall 
preclude the furnishing of material, in addition to the foregoing, 
reflecting asset allocation portfolios of hypothetical individuals with 
different time horizons and risk profiles. For purposes of any 
materials provided pursuant to this subparagraph (2): (A) models must 
be based on generally accepted investment theories that take into 
account the historic returns of different asset classes (e.g., 
equities, bonds, or cash) over defined periods of time; (B) such models 
must operate in a manner that is not biased in favor of investments 
offered by the fiduciary adviser or a person with a material 
affiliation or material contractual relationship with the fiduciary 
adviser; and (C) all material facts and assumptions on which such 
models are based (e.g., retirement ages, life expectancies, income 
levels, financial resources, replacement income ratios, inflation 
rates, and rates of return) accompany the models;
    (3) The investment advice provided does not recommend investment 
options that may generate for the fiduciary adviser or any employee, 
agent or registered representative, or any affiliate thereof, or any 
person with a material affiliation or material contractual relationship 
with the foregoing, greater income than other options of the same asset 
class, unless the adviser prudently concludes that the recommendation 
is in the best interest of the participant or beneficiary and explains 
the basis for that conclusion to the participant or beneficiary. This 
subparagraph (3) shall not apply to investment advice generated solely 
by use of a computer model described in clause (A) or (B) of 
subparagraph (1);
    (4) Not later than 30 days following the provision of investment 
advice under this paragraph (e), the employee, agent or registered 
representative providing the advice on behalf of the fiduciary adviser 
shall document the basis of any investment option(s) recommended to a 
participant or beneficiary, including an explanation as to how such 
recommendation relates to the recommendations or information provided 
or generated pursuant to subparagraph (1) or (2) of this paragraph (e); 
and, with respect to any investment advice (other than generated solely 
by a computer model described in clause (A) or (B) of subparagraph (1)) 
that recommends investment options that may generate for the fiduciary 
adviser or any employee, agent or registered representative, or any 
affiliate thereof, or any person with a material affiliation or 
material contractual relationship with the foregoing, greater income 
than other options of the same asset class, the basis for concluding 
that the recommendation is in the best interest of the participant or 
beneficiary;
    (5) Any documentation required by subparagraph (4) of this 
paragraph (e) shall be retained in accordance with paragraph (n) of 
this section.
    (f) Any fees or other compensation (including salary, bonuses, 
awards, promotions, commissions or any other thing of value) received, 
directly or indirectly, by an employee, agent or registered 
representative providing advice on behalf of the fiduciary adviser 
pursuant to this exemption (as distinguished from any compensation 
received by the fiduciary adviser on whose behalf the employee, agent 
or registered representative is providing such advice) do not vary 
depending on the basis of any investment option selected by a 
participant or beneficiary.
    (g)(1) The fiduciary adviser provides, without charge, to the 
participant or beneficiary before the initial provision of investment 
advice under this exemption, and at least once each year thereafter 
during which the fiduciary adviser provides investment advice to the 
participant or beneficiary, written notification: (i) Of the role of 
any party

[[Page 49931]]

that has a material affiliation or material contractual relationship 
with the fiduciary adviser in the development of the computer model 
described in paragraph (e)(1) of this section or, if applicable, the 
materials described in paragraph (e)(2) of this section, and, to the 
extent applicable, in the selection of investment options available 
under the plan, (ii) of the past performance and historical rates of 
return of the designated investment options available under the plan or 
IRA to the extent such information is not otherwise provided, (iii) of 
all fees or other compensation relating to the advice that the 
fiduciary adviser or any affiliate thereof is to receive (including 
compensation provided by any third party) in connection with the 
provision of the advice or in connection with the sale, acquisition, or 
holding of the security or other property, (iv) of any material 
affiliation or material contractual relationship of the fiduciary 
adviser or affiliates thereof in the security or other property, (v) of 
the manner, and under what circumstances, any participant or 
beneficiary information provided under the arrangement will be used or 
disclosed, (vi) of 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 an arrangement that 
utilizes a computer model pursuant to paragraph (e)(1), any limitations 
on the ability of the computer model to take into account an investment 
option that constitutes an investment primarily in qualifying employer 
securities, as provided for at 29 CFR 2550.408g-1(d)(1)(v), (vii) that 
the fiduciary adviser is acting as a fiduciary of the plan in 
connection with the provision of the investment advice, and (viii) 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 receives no fees or other compensation in connection with, 
the security or other property;
    (2)(i) Such notification must be written in a clear and conspicuous 
manner and in a manner calculated to be understood by the average plan 
participant and shall be sufficiently accurate and comprehensive to 
reasonably apprise such participants and beneficiaries of the 
information required to be disclosed; (ii) the appendix to 29 CFR 
2550.408g-1 contains a model disclosure form that may be used to 
provide the notification of information described in paragraph 
(g)(1)(iii). Use of the model disclosure form is not mandatory. 
However, use of an appropriately completed model disclosure form will 
be deemed to satisfy the requirements of paragraphs (g)(1) and (2)(i) 
with respect to such information.
    (3) Such notification may, in accordance with 29 CFR 2520.104b-1, 
be provided in written or electronic form.
    (4) At all times during the provision of advisory services to the 
participant or beneficiary pursuant to this exemption, the fiduciary 
adviser provides, without charge, accurate information to the recipient 
of the advice concerning any material change to the information 
required to be provided to the recipient of the advice at a time 
reasonably contemporaneous to the change in information.
    (h) 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.
    (i) The fiduciary adviser adopts and follows written policies and 
procedures that are designed to assure compliance with the conditions 
of this exemption.
    (j)(1) The fiduciary adviser--
    (i) at least annually, engages 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, and prepare a report with respect thereto and setting forth its 
specific findings, to determine compliance with the policies and 
procedures of paragraph (i) of this section and the requirements of 
this exemption, and (B) within 60 days following the completion of the 
audit, furnish its report to the fiduciary adviser, and, except with 
respect to an arrangement with an IRA, to the fiduciary who authorized 
the arrangement pursuant to which investment advice under this 
exemption is provided; and
    (ii) with respect to an arrangement with an IRA--(A) within 30 days 
following receipt of the report from the auditor, furnishes a copy of 
the report to the IRA beneficiary or makes such report available on its 
Web site, provided that such beneficiaries are provided information, 
with the information required to be disclosed pursuant to paragraph 
(g)(1) 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 policies and procedures required by paragraph (i) or the conditions 
of this exemption, within 30 days following receipt of the report from 
the auditor, sends a copy of the report to the Department of Labor at 
the following address: Investment Advice Class Exemption Notification, 
U.S. Department of Labor, Employee Benefits Security Administration, 
Room N-1513, 200 Constitution Ave., NW., Washington, DC 20210;
    (2) for purposes of subparagraph (1), 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 IRA or any designated investment options 
under the plan or IRA;
    (3) for purposes of the audit described in subparagraph (1), 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 the policies and 
procedures of paragraph (i) of this section and the requirements of 
this exemption; provided, however, that nothing in this subparagraph 
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.
    (k) The sale, acquisition or holding of a security or other 
property on behalf of a plan or IRA occurs solely at the direction of 
the recipient of the investment advice.
    (l) 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.
    (m) The terms of the sale, acquisition or holding of the security 
or other property are at least as favorable to the plan or IRA as an 
arm's length transaction would be.
    (n) The fiduciary adviser maintains, in a manner accessible for 
audit or examination, for a period not less than six years after the 
provision of investment advice under this exemption, any records 
necessary to determine, explain or verify compliance with the 
conditions of this exemption.

Section IV. Definitions

    (a) 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 described in section 3(21)(A)(ii) of the Act by the person to 
the participant or beneficiary of the plan and who is--

[[Page 49932]]

    (1) 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,
    (2) A bank or similar financial institution referred to in section 
408(b)(4) of the Act 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 which is subject to periodic 
examination and review by Federal or State banking authorities, or
    (3) An insurance company qualified to do business under the laws of 
a State, or
    (4) A person registered as a broker or dealer under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.), or
    (5) An affiliate of a person described in any of clauses (1) 
through (4) above, or
    (6) An employee, agent, or registered representative of a person 
described in clauses (1) through (5) above who satisfies the 
requirements of applicable insurance, banking, and securities laws 
relating to the provision of the advice.
    (b) Registered Representative--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 
investment adviser referred to in such section).
    (c) Individual Retirement Account or IRA means--(1) an individual 
retirement account described in section 408(a) of the Code; (2) an 
individual retirement annuity described in section 408(b) of the Code; 
(3) an Archer MSA described in section 220(d) of the Code; (4) a health 
savings account described in section 223(d) of the Code; (5) a 
Coverdell education savings account described in section 530 of the 
Code; or (6) a trust, plan, account, or annuity which, at any time, has 
been determined by the Secretary of the Treasury to be described in any 
preceding subparagraph of this paragraph [i.e., (1) through (5) above].
    (d) Affiliate--unless specifically provided otherwise, an affiliate 
of another person means--
    (1) 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;
    (2) 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;
    (3) Any person directly or indirectly controlling, controlled by, 
or under common control with, such other person; and
    (4) Any officer, director, partner, copartner, or employee of such 
other person.
    (e) Material Affiliation--(1) 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;
    (C) Any person 5 percent or more of whose interests are directly or 
indirectly owned, controlled, or held, by such other person.
    (2) For purposes of subparagraph (e)(1) of this section, the term 
``interest'' means with re