More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
The U.S. Department of Labor (DOL) announced August 20 two proposed rules under the Pension Protection Act (PPA) designed to make investment advice more accessible for millions of Americans in 401(k) type plans and individual retirement accounts (IRAs).
Brad Campbell, assistant secretary for DOL's Employee Benefits Security Administration (EBSA), told reporters on a conference call that as millions of people in defined contribution plans are making their own investment decisions for retirement, DOL has increasingly "seen the need" for participants and workers to have "access to quality, professional investment advice. That's something that Congress and the Administration have, on a bipartisan basis, said is a good thing."
The Pension Protection Act (PPA) amended the Employee Retirement Income Security Act (ERISA) by adding a new prohibited transaction exemption that allows greater flexibility for participants of 401(k) plans and IRAs to obtain investment advice, the DOL explains in its release announcing the proposed rules. One of the ways in which investment advice may be given under the exemption is through the use of a computer model certified as unbiased, the other is through an advisor compensated on a "level-fee" basis, which means the advisor receives the same compensation regardless of the investment chosen by the participant. Whatever fees the advisor is to receive must also be disclosed.
In December 2006, DOL solicited public comments to determine what expertise and procedures may be needed to certify a computer model under the exemption, and to assist in developing a model form for the exemption's disclosure of advisor fees. During the conference call, Campbell said Congress had asked DOL to study whether "it's feasible to use computer modeling in the context of IRAs," since many IRAs allow participants to invest in almost any security or mutual fund. "We concluded that some IRAs were representing universes of options that could be modeled," he said.
According to DOL, the proposed regulation provides general guidance on the exemption's requirements, including computer model certification, and includes a non-mandatory model form that advisors may use to satisfy the exemption's fee disclosure requirement. In addition, DOL says that "to further the availability of quality, professional investment advice, the department is proposing a class exemption that permits advisors to provide individualized advice to a worker after giving advice generated by use of a computer model."
Comments on the proposals are due by October 6.