Last week, Congressman Rob Andrews (D-New Jersey) introduced the Conflicted Investment Advice Prohibition Act of 2009 (see “Andrews Introduces Advice Legislation’). The introduction of this legislation again raises questions over the fate of the final investment advice regulations published earlier this year by the Department of Labor (DoL) in accordance with the Pension Protection Act (PPA). The regulations essentially codified a means by which advisers that provided participant advice for a fee could receive compensation that could vary based on the investments recommended without violating ERISA’s prohibited transaction restrictions. That codification did, however, provide that the so-called “fiduciary adviser” adhere to specific procedures and disclosures.
Those regulations, published in final form as the Bush Administration left office, were delayed by the Obama Administration, which sought additional comments (see “Controversy Brews over Investment Advice Regs’), and pushed the original effective date 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’).
Andrews has been an outspoken critic of those regulations, specifically the class exemption, which his new bill effectively eliminates. It would also eliminate the fee leveling rule for financial institutions, said Brian Graff, executive director and chief executive officer of the American Society of Pension Professionals and Actuaries (ASPPA). Additionally, it makes clear that, under the legislation, the only way financial institutions that manufacture investments will be allowed to offer investments is through a computer model—a provision included in the DoL regulations and subsequently incorporated in the Andrews bill. So-called “off-model” advice will not be allowed by those firms that manufacture product, Graff said. In many respects, Graff said, for those institutions, this is a return to prior law. That prior law was conceptually embodied by the so-called “SunAmerica rule.”
As introduced, the Andrews bill would achieve the goal of limiting conflicts, noted Jason Roberts, an attorney with Reish Luftman Reicher & Cohen. However, he said, the practical question is whether it increases the number of financial firms willing to get into the business of offering advice, and thus, he asked, will it really expand access to advice?
The majority of the bill, or about 95% of the language, according to Roberts, is taken directly from the PPA, most notably with respect to the computer model, audit requirement, and certification. Disclosures are also very similar, although there has been some “tweaking’ he said.
Besides the lack of an ERISA-prohibited transaction class exemption, the most notable difference could be that “in one line they knock out all of the fiduciary adviser’ provision, he said. Roberts said that everything that has been worked on around advice over the last couple of years have been under the fiduciary adviser provision and the eligible investment advice arrangement (see “Help Wanted” and “A Wise Choice?’). “To say the least, this is going to be disruptive,’ he commented. There are many firms who had built out models waiting for the final regulations, he said. And, for those who already pursued the fiduciary adviser, Roberts said he expects many questions to arise around what will happen to those existing relationships and advice arrangements.
Instead of the fiduciary adviser, the term “independent investment adviser’ is introduced. An investment adviser must be: a registered investment adviser (RIA); a bank or similar financial institution, provided that the advice is provided by the trust department of the organization; or a registered representative. The independent investment adviser must not “provide or manage’ any plan assets in the individual accounts for which the advice is being provided and the fees received for that advice cannot be received from those that “market, sell, manage or provide investments in which plan assets of any individual account plan are invested.’
Roberts said another large difference between the Andrews bill and the PPA is that the former outlines exactly how fees can be charged, building the procedures and hurdles into the definition of the independent investment adviser and advice itself, rather than as an amendment. In addition to stating that the fees must not vary based on the advice provided, the bill also says they must be calculated pursuant to one or more of the following: flat-dollar, flat percentage of plan assets, per-participant basis, or a written agreement.
For those advisers who are RIAs, the rules are fairly straightforward, asserted Roberts. For other advisers, however, the question remains: How will these allow for them to be “independent investment advisers?’
According to Roberts, if a wirehouse or independent broker/dealer wanted to allow their advisers to pursue offering investment advice under the Andrews bill, they would have to do the following:
- The registered rep would have to acknowledge fiduciary status.
- The firm for which the representative works could not provide or manage investment options in the plan.
- The registered rep (and any affiliates) could not receive fees based on the investment options, either directly or indirectly.
Another model that might emerge from this, Roberts predicted, would be for a retirement plan adviser who doesn’t want to meet individually with participants (or, because of broker/dealer restrictions, cannot meet the requirements above) but has a sponsor client interested in advice for participants to link together with a trust department to bring in bank CFPs to the client to offer individual investment advice.
One thing that should be noted, Roberts added, is that although the prior regulations applied to individual retirement accounts (IRAs) as well as qualified plans, this new legislation does not.
Legislation vs. Regulation
Regardless of the outcomes of the legislation and investment advice legislation, Graff said there were still many retirement plan issues being dealt with in Washington, both by regulatory bodies and the legislators (see “401(k)s to Stay, but Expect Changes“). As for which voice will be more active in the future, Graff said the industry will just have to wait and see what gets through first.
Roberts said the area to watch might be that of fee disclosure, specifically the 408(b)(2) regulations. Congressman George Miller (D-California) who, along with Andrews, recently introduced a new fee disclosure bill (see “Miller, Andrews Introduce 401(k) Fee Disclosure Bill“) has much respect for Phyllis Borzi, who has been nominated for the position of assistant secretary of Labor, Employee Benefits Security, to head the DoL’s Employee Benefits Security Administration (EBSA) (see “Obama Nominates Assistant Labor Secretary, EBSA’). Therefore, Roberts said he expects that if Borzi comes in and wants to pick up those 408(b)(2) regulations, Miller will defer and will let the regulatory agency pursue the fee disclosure initiatives. However, he admitted, he expects that legislation will likely be the answer in the investment advice space.