The Conflicted Investment Advice Prohibition Act of 2009 (H.R. 1988) was introduced by Congressman Rob Andrews (D-New Jersey)
The bill cites the impact of the recent market turmoil on retirement savings, and notes 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 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. 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 advice…unless the investment adviser is an independent investment adviser’ as defined in the proposed legislation. The term “independent investment adviser’ is used in place of the term “fiduciary adviser’ that was incorporated in the PPA.
“Independent Investment Adviser”
As for what constitutes an “independent investment adviser,’ he 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 a 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 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 the adviser receives for the advice must not be “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
- per-participant basis
- written agreement.
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 do pending regulations from the Department of Labor (See “DoL Finalizes Investment Advice Rule.”)
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 duty…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.’
The bill is available here.
Background about Investment Advice
The legislation from Andrews reflects his view against pending regulations from the DoL.
Just before President Barack Obama was inaugurated, the DoL published investment regulations updating the PPA to allow investment companies to provide advice to participants of 401(k)s and individual retirement accounts (IRAs). The provision, one of the most controversial of the Pension Protection Act (see “IMHO: Irreconcilable Differences’), 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. For retirement plan advisers already receiving level compensation, the regulations could be viewed as an opportunity to differentiate in the market (see “DoL Rule Gives More Advice Options’).
However, the new Administration decided to delay implementation in order to seek more comments (see “Controversy Brews over Investment Advice Regs’). After seeking comment, the effective date was pushed from March 23 to May 22 “to allow additional time for the Department to evaluate questions of law and policy concerning the rules” (see “Investment Advice Rule Implementation Delayed’).
According to the DoL, a number of comment letters expressed the view that the final rules raise significant issues of law and policy that should be further reviewed by the Department. Specifically, questions were raised as to the scope of the final rules’ administrative class exemption, and disagreement was expressed with the interpretation of the statutory exemption’s conditions contained within the final rules.
Among others, Andrews and Congressman George Miller (D-California), chairman of the House Education and Labor Committee, charged that the regulations allow for biased advice from investment companies.
Last month, at a House Education & Labor Subcommittee meeting titled “Retirement Security: The Importance of an Independent Adviser,” Andrews said that, “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 Addresses Investment Advice Regulations’). Andrews also said the DoL rules would “expose millions of Americans to the Madoffs of the world.”
Also in Washington this week, Miller and Andrews introduced 401(k) fee legislation (see “Miller, Andrews Introduce 401(k) Fee Disclosure Bill’).