E&W Compliance Update -- February 13, 2007
by Jason C. Roberts, Esq.

On February 2, 2007, the Department of Labor (“DOL”) released Field Assistance Bulletin No. 2007-01 (the “Bulletin”) setting forth additional guidance regarding statutory exemptions for investment advice offered to 401(k) participants pursuant to the Pension Protection Act of 2006 (the “PPA”).  This E&W Compliance Update summarizes the Bulletin as it relates to registered investment advisers (“RIAs”) and broker-dealers seeking offer these services.

The Bulletin makes clear that RIAs and broker-dealers must be PPA compliant if their advisers/reps become PPA fiduciary advisers.  Consequently, these firms will be subject to the prudent selection, periodic monitoring, and level compensation requirements of the PPA.  The Bulletin expands upon these terms in the following respects:  

Prudent Selection

The Bulletin significantly broadens the prudent selection requirements contained in the PPA.  It requires the use of an objective process, designed to elicit information necessary to assess the provider’s qualifications, quality of services offered and reasonableness of fees charged for the service to comply with the prudent selection.  The process must avoid self dealing, conflicts of interest or other improper influence.  It must also take into account the experience and qualifications of the investment adviser, including the adviser’s registration in accordance with applicable federal and/or state securities law, the willingness of the adviser to assume fiduciary status and responsibility under ERISA with respect to the advice provided to participants, and the extent to which advice to be furnished to participants and beneficiaries will be based upon generally accepted investment theories.

Periodic Monitoring

The Bulletin requires plan sponsors to review the extent to which there have been any changes in the information that served as the basis for the initial selection of the investment adviser, including whether the adviser continues to meet applicable federal and state securities law requirements, and whether the advice being furnished to participants and beneficiaries is being based upon generally accepted investment theories.

The Bulletin also requires plan sponsors to consider whether the investment advice provider is complying with the contractual provisions of the engagement and examine utilization of the investment advice services by the participants in relation to the cost of the services to the plan.  It directs plan sponsors to monitor and address participant feedback and complaints about the quality of the furnished advice.  To the extent any complaints raise questions concerning the quality of advice, the Bulletin calls for a review of that advice.

Level Compensation

The investment advice exemption created by the PPA requires that the proffered advice be made pursuant to an eligible investment advice arrangement (“EIAA”), which, among other things, requires that any fees (including commissions or other compensation) received by the fiduciary adviser do not vary depending on the investment option selected.  The Bulletin clarifies this level compensation requirement, as it relates to affiliates of the RIA or broker-dealer, by providing that affiliates are subject to the varying fee limitation only to the extent they deemed to be providing investment advice to plan participants and beneficiaries.  Nevertheless, given that firms must ultimately accept fiduciary liability for participant accounts, affiliated RIAs and broker-dealers seeking to enter this market should consider establishing a separate RIA to comply with the level compensation requirements for PPA fiduciary advisers.

For additional information concerning the Bulletin, the PPA or any other compliance-related issues, please contact Jason Roberts by phone at (310) 937-2066 or email at jroberts@edgertonweaver.com.