DOL Advises on Advice

By Nick Curabba

Readers of this blog have no doubt noticed the Department of Labor's latest pieces of regulatory guidance on investment advice (proposed regulations and a proposed class exemption).  The guidance was issued pursuant to a provision in the Pension Protection Act of 2006 (PPA), and bears a resemblance to (although is not as comprehensive as) legislation for which the financial services industry had advocated for at least six years that permits plan services providers to also provide investment advice directly to participants without running afoul of ERISA's prohibited transaction rules.

So far the DOL is winning praise from most parties for both the process used in developing the new guidance, and the substance of the proposed rules.  On process: the Department went out of its way to solicit public comment prior to even issuing proposed rules. Some of that was no doubt due to the statutory requirements to gather information about the feasibility of computer investment models, but the Department expanded that directive to other aspects of the regulations as well.  This kind of collaborative and open process should be a model for future regulatory initiatives, we believe. On substance: with the exception of an overly aggressive (and wholly unrealistic) proposed effective date, because of the open process, there is little in the proposed guidance that came as a great surprise.

That is not to say the guidance is fully without unexpected twists.  One interesting side note is in DOL's report to Congress (also required by the Pension Protection Act) which contains the Department's conclusion on the feasibility of using a computer model advice arrangement to provide advice to owners of individual retirement accounts (IRAs). Had the DOL found that no such model was feasible (because, for example, no model existed that could take account of the entire universe of investment options available to IRA investors), the Department was directed to issue a class exemption permitting investment advice arrangements for IRAs under alternative circumstances.

During the legislative run-up to the PPA, many of us lobbying for this provision believed that the DOL would find no such computer model existed, and therefore we anticipated a class exemption.  The Department departed from the expected route here. They appear to have side-stepped the need to issue a class exemption for IRAs by interpreting the PPA provision narrowly.  Rather than reading the PPA's direction as requiring the DOL to determine if a computer model could take account of all available investment options, the Department saw its role as merely determining if there exists a computer model that can take account of all the assets classes that would make up a prudently diversified portfolio.  It's an interesting (if not overly crimped) analysis and results in a somewhat expeditious availability of prohibited transaction relief to IRA issuers.