[13674]
June 25, 2001
TO: PENSION COMMITTEE No. 40-01
INVESTMENT ADVICE AD HOC COMMITTEE No. 2-01
RE: REPRESENTATIVE BOEHNER REINTRODUCES INVESTMENT ADVICE BILL
On June 21, 2001, Representative John Boehner (R-OH), Chairman of the House
Committee on Education and the Workforce, introduced H.R. 2269, the “Retirement Security
Advice Act of 2001” (the “Bill”). The Bill was introduced with 18 cosponsors. The Bill is
substantively identical to H.R. 4747, the investment advice bill introduced by Representative
Boehner last year and approved by the House Subcommittee on Employer-Employee Relations
in July 2000.1 As you are aware, the Bill largely adopts the approach proposed by the Institute.2
The Bill would provide a statutory exemption from ERISA’s prohibited transaction rules
for the provision of investment advice and related transactions. Under the exemption,
“fiduciary advisers,” who by definition would be ERISA fiduciaries, would be permitted to
provide investment advice to employee benefit plans and participants and beneficiaries of such
plans.
I. Scope of Exemption
Under the Bill, the statutory exemption would permit (i) “the provision of investment
advice referred to in section 3(21)(A)(ii) provided by a fiduciary adviser . . . to an employee
benefit plan or to a participant or beneficiary of an employee benefit plan,” (ii) “the sale,
acquisition, or holding of securities or other property (including any lending of money or other
extension of credit associated with the sale, acquisition, or holding of securities or other
property) pursuant to such investment advice,” and (iii) “the direct or indirect receipt of fees or
other compensation by the fiduciary adviser or an affiliate thereof (or any employee, agent, or
registered representative of the fiduciary adviser or affiliate) in connection with the provision of
1 See Institute Memorandum to Pension Committee No. 51-00 and Ad Hoc Committee on Investment Advice, dated
July 20, 2000. See also Institute Memorandum to Pension Committee No. 43-00 and Ad Hoc Committee on Investment
Advice, dated June 27, 2000 (description of H.R. 4747 as introduced by Rep. John Boehner).
2 See Institute Memorandum to Pension Committee No. 19-00 and Pension Operations Advisory Committee No. 18-
00, dated March 17, 2000 (Institute Testimony to House Subcommittee on Employer-Employee Relations on ERISA
Reform). See also Institute Memorandum to Pension Committee No. 17-00 and Ad Hoc Committee on Investment
Advice, dated February 23, 2000 (Institute proposal on investment advice).
2such investment advice.” The Bill includes a parallel exemption under the Internal Revenue
Code from the Code’s prohibited transaction rules.
II. Definition of “Fiduciary Adviser”
The Bill would define “fiduciary adviser” as “a person who is a fiduciary of the plan by
reason of the provision of investment advice” and who qualifies as one of the following entities:
• a registered investment adviser under the Investment Advisers Act of 1940 or applicable
state law,
• a bank or similar financial institution “referred to in section 408(b)(4)” of ERISA,
• an insurance company qualified to do business under the laws of a state,
• a registered broker or dealer under the Securities Exchange Act of 1934,
• an affiliate, “as defined in section 2(a)(3) of the Investment Company Act of 1940,” of
these qualifying institutions, or
• an employee, agent, or registered representative, as “described in section 3(a)(18) of the
Securities Exchange Act of 1934 or section 202(a)(17) of the Investment Advisers Act of
1940,” of the qualifying institutions.
III. Exemption Conditions
To qualify under the statutory exemption, the fiduciary adviser would be required to
satisfy the following conditions.
A. Disclosure Requirements. At the time of or before the initial provision of
investment advice, the fiduciary adviser must provide to the recipient of the advice “a clear and
conspicuous description” of the following:
• “all fees or other compensation relating to such 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 such advice” or the acquisition or sale of securities or
other property,
• “any material affiliation or contractual relationship” of the fiduciary adviser or its
affiliates in such security or other property,
• “any limitation placed on the scope of the investment advice to be provided by the
fiduciary adviser with respect to any such sale or acquisition,” and
• “the types of services offered by the fiduciary adviser in connection with the provision
of investment advice.”
This description may be provided in writing, “including by means of electronic
communication.” In addition, during the 1-year period following the provision of advice or any
subsequent provision of advice, the fiduciary adviser would be required to maintain the
information described above in “currently accurate form for availability, upon request and
without charge, to the recipient of such advice.” Furthermore, the fiduciary adviser must
provide appropriate disclosures in accordance with all applicable securities laws.
3B. Direction of Advice Recipient. Any sale or acquisition of a security or other
property relating to the advice must occur “solely at the direction of the recipient of such
advice.”
C. Reasonable Compensation. The compensation received by the fiduciary adviser
and its affiliates “in connection with such acquisition or sale” must be “reasonable.”
D. Arm’s Length Transaction. The terms of the acquisition or sale must be “at least
as favorable to such plan as an arm’s length transaction would be.”
E. Recordkeeping Requirement. The fiduciary adviser must maintain for a period
of at least 6 years after the provision of advice any records necessary for determining whether
the requirements of the statutory exemption were met. However, a prohibited transaction
would not be considered to have occurred solely because such records are lost or destroyed
prior to the end of the 6-year period due to circumstances beyond the control of the fiduciary
adviser.
IV. Clarification of Employer Role
The Bill would clarify the extent of a plan sponsor’s responsibilities under ERISA if it
engages a “fiduciary adviser” to provide advice under this exemption. Specifically, under the
Bill, a “plan sponsor or other person who is a fiduciary” would not be treated as failing to meet
the requirements of Part 4 of ERISA (which includes the fiduciary duties under ERISA section
404) “solely by reason of the provision of investment advice . . . (or solely by reason of
contracting for or otherwise arranging for the provision of such investment advice)” if (i) the
advice is provided by a fiduciary adviser “pursuant to an arrangement” between the plan
sponsor or other fiduciary and the fiduciary adviser, and (ii) the terms of the arrangement
require the fiduciary adviser to comply with the requirements of the statutory exemption.
Furthermore, the plan sponsor or other fiduciary would have no duty to “monitor the specific
investment advice given by the fiduciary adviser to any particular recipient of such advice.”
The “plan sponsor or other person who is a fiduciary,” however, would be responsible
for the “prudent selection and periodic review of a fiduciary adviser” that it has engaged.
V. Use of Plan Assets
The Bill would clarify that plan assets may be used to pay for “reasonable expenses in
providing investment advice referred to in section 3(21)(A)(ii)” of ERISA.
VI. Effective Date
The Bill would apply to investment advice provided on or after January 1, 2002.
4Copies of the Institute’s press release regarding the Bill, a press release by the House
Committee on Education and the Workforce, and the text of the Bill are attached.
Thomas T. Kim
Assistant Counsel
Attachments
Attachment no. 1 (in .pdf format)