Notice of PCE

49924

Notices

Federal Register
Vol. 73, No. 164
Friday, August 22, 2008

This section of the FEDERAL REGISTER
contains documents other than rules or
proposed rules that are applicable to the
public. Notices of hearings and investigations,
committee meetings, agency decisions and
rulings, delegations of authority, filing of
petitions and applications and agency
statements of organization and functions are
examples of documents appearing in this
section.

DEPARTMENT OF LABOR
Employee Benefits Security
Administration
RIN 1210–ZA14

Proposed Class Exemption for the
Provision of Investment Advice to
Participants and Beneficiaries of SelfDirected Individual Account Plans and
IRAs
Employee Benefits Security
Administration, DOL.
ACTION: Notice of proposed class
exemption.

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AGENCY:

SUMMARY: This document contains a
notice of pendency before the
Department of Labor (Department) of a
proposed class exemption from certain
prohibited transaction restrictions of the
Employee Retirement Income Security
Act of 1974, as amended (ERISA, or the
Act), and from certain taxes imposed by
the Internal Revenue Code of 1986, as
amended (Code). If granted, the
proposed exemption would permit the
provision of investment advice
described in section 3(21)(A)(ii) of the
Act by a fiduciary adviser to a
participant or beneficiary in an
individual account plan or individual
retirement accounts (and certain similar
plans), the acquisition, holding or sale
of a security or other property pursuant
to the investment advice, and the direct
or indirect receipt of fees or other
compensation by the fiduciary adviser
(or any employee, agent, registered
representative or affiliate thereof) in
connection with such transactions. The
proposed exemption, if granted, would
affect sponsors, fiduciaries, participants
and beneficiaries of participant-directed
individual account plans, as well as
providers of investments and
investment advice-related services to
such plans.
DATES: Written comments on the
proposed exemption should be

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submitted to the Department of Labor on
or before October 6, 2008.
ADDRESSES: To facilitate the receipt and
processing of comment letters, the
Employee Benefits Security
Administration (EBSA) encourages
interested persons to submit their
comments electronically by e-mail to [email protected] (Subject: Investment
Advice Class Exemption), or by using
the Federal eRulemaking portal at
http://www.regulations.gov (follow
instructions for submission of
comments). Persons submitting
comments electronically are encouraged
not to submit paper copies. Persons
interested in submitting paper copies
should send or deliver their comments
to the Office of Regulations and
Interpretations, Employee Benefits
Security Administration, Attn:
Investment Advice Class Exemption,
Room N–5655, U.S. Department of
Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210. All comments
will be available to the public, without
charge, online at http://
www.regulations.gov and http://
www.dol.gov/ebsa and at the Public
Disclosure Room, N–1513, Employee
Benefits Security Administration, U.S.
Department of Labor, 200 Constitution
Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Fred
Wong, Office of Regulations and
Interpretations, Employee Benefits
Security Administration, (202) 693–
8500. This is not a toll free number.
SUPPLEMENTARY INFORMATION: This
document contains a notice of pendency
before the Department of a proposed
class exemption from the restrictions of
section 406(a) and 406(b) of the Act and
from the taxes imposed by section
4975(a) and (b) of the Code, by reason
of section 4975(c)(1) of the Code. The
Department is proposing this class
exemption pursuant to section 408(a) of
the Act and section 4975(c)(2) of the
Code, and in accordance with the
procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, August
10, 1990).1 All section references herein

are to sections of ERISA unless
otherwise indicated.
A. Background
Section 3(21)(A)(ii) of the Act
includes within the definition of
‘‘fiduciary’’ a person that renders
investment advice for a fee or other
compensation, direct or indirect, with
respect to any moneys of other property
of a plan, or has any authority or
responsibility to do so.2 The prohibited
transaction provisions of ERISA and the
Code prohibit an investment advice
fiduciary from using the authority,
control or responsibility that makes it a
fiduciary to cause itself, or a party in
which it has an interest that may affect
its best judgment as a fiduciary, to
receive additional fees. As a result, in
the absence of a statutory or
administrative exemption, fiduciaries
are prohibited from rendering
investment advice to plan participants
regarding investments that result in the
payment of additional advisory and
other fees to the fiduciaries or their
affiliates.
With the growth of participantdirected individual account plans, there
has been an increasing recognition of
the importance of investment advice to
participants and beneficiaries in such
plans. Most recently, Congress and the
Administration, responding to the need
to afford participants and beneficiaries
greater access to professional
investment advice, amended the
prohibited transaction provisions of
ERISA and the Code, as part of the
Pension Protection Act of 2006 (PPA),3
to permit a broader array of investment
advice providers to offer their services
to participants and beneficiaries
responsible for investment of assets in
their individual accounts and,
accordingly, for the adequacy of their
retirement savings. Specifically, section
601(a) of the PPA added a statutory
exemption under sections 408(b)(14)
and 408(g) of ERISA. Parallel provisions
were added to the Code at section
4975(d)(17) and 4975(f)(8).4
2 See

1 Section

102 of Reorganization Plan No. 4 of
1978, 5 U.S.C. App. 1 (1996), generally transferred
the authority of the Secretary of the Treasury to
issue exemptions under section 4975(c)(2) of the
Code to the Secretary of Labor. For purposes of this
proposed exemption, references to specific
provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions
of the Code.

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also 29 CFR 2510.3–21(c).
Law 109–280, 120 Stat. 780 (Aug. 17,

3 Public

2006).
4 See PPA section 601(b). Under Reorganization
Plan No. 4 of 1978 (43 FR 47713, October 17, 1978),
5 U.S.C. App.1, 92 Stat. 3790, the authority of the
Secretary of the Treasury to issue rulings under
section 4975 of the Code has been transferred, with
certain exceptions not here relevant, to the
Secretary of Labor. Therefore, the references in this

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Federal Register / Vol. 73, No. 164 / Friday, August 22, 2008 / Notices
Section 408(b)(14) of ERISA provides
that certain investment advice-related
transactions will be exempt from the
prohibitions of section 406 if the
requirements of section 408(g) are met.
Section 408(g) of ERISA requires that
investment advice must be provided by
a fiduciary adviser under an ‘‘eligible
investment advice arrangement’’ that
meets a ‘‘level fee’’ requirement (ERISA
section 408(g)(2)(A)(i)) or a ‘‘computer
model’’ requirement (ERISA section
408(g)(2)(A)(ii)). However, PPA section
601(b)(3)(C) restricts the general
availability of an eligible investment
advice arrangement based on utilization
of a computer model for certain plans
described in Code section 4975(e)(1)
(collectively referred to herein as
Individual Retirement Accounts or
IRAs), unless the Secretary of Labor, in
consultation with the Secretary of the
Treasury, determines that there is a
computer model investment advice
program that may be utilized by an IRA
to provide investment advice to the
account beneficiary which meets the
requirements described in PPA section
601(b)(3)(B).5
On December 4, 2006, the Department
published two Requests for Information
in the Federal Register soliciting
information to assist the Department in
the development of regulations under
ERISA section 408(b)(14) and 408(g),
and in making its determination with
respect to the utilization of computer
models for IRAs. 71 FR 70429; 71 FR
70427. Concurrent with the publication
of this document, the Department
reported to Congress its determination
that there exist computer models that
meet the requirements described in PPA
section 601(b)(3)(B). In addition,
appearing elsewhere in today’s Federal
Register, the Department is publishing
proposed regulations that would
implement the provisions of the
statutory exemption for the provision of
investment advice to participants and
beneficiaries under sections 408(b)(14)
and 408(g), and parallel provisions in
Code section 4975.
This class exemption is intended to
complement the adoption of those
implementing regulations by furthering
the availability of individualized
investment advice to both participants
and beneficiaries in participant-directed
individual account plans and IRA
beneficiaries under circumstances not
encompassed in the statutory exemption
or implementing regulations, as
described below.
notice to specific sections of ERISA should be taken
as referring also to the corresponding sections of the
Code.
5 PPA section 601(b)(3)(C)(i).

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B. Overview of Proposed Class
Exemption
1. General
In general, the proposed class
exemption, like the statutory exemption
and proposed regulations published
thereunder (proposed 29 CFR
2550.408g–1), provides relief from
otherwise prohibited transactions
relating to the provision of investment
advice to the participant or beneficiary
with respect to a security or other
property available as an investment
under a plan or IRA; the acquisition,
holding or sale of a security or other
property available as an investment
under a plan or IRA pursuant to the
investment advice; and the direct or
indirect receipt of compensation by a
fiduciary adviser or affiliate in
connection with the provision of
investment advice or the acquisition,
holding or sale of a security or other
property available as an investment
under the plan or IRA pursuant to the
investment advice.
Unlike the statutory exemption and
proposed regulations, however, the class
exemption would provide relief for
individualized investment advice to
individuals following the furnishing of
recommendations generated by a
computer model or, in the case of IRAs
with respect to which modeling is not
feasible, the furnishing of certain
investment education material. The
computer generated advice
recommendations and investment
education materials are intended to
provide individual account plan
participants and beneficiaries and IRA
beneficiaries with a context for
assessing and evaluating the
individualized investment advice
contemplated by the exemption. Also
unlike the statutory exemption and
proposed regulations, the class
exemption, as discussed below, applies
the fee-leveling limits solely to the
compensation received by the
employee, agent or registered
representative providing the advice on
behalf of the fiduciary adviser, as
distinguished from compensation
received by the fiduciary adviser on
whose behalf the employee, agent or
registered representative is providing
such advice.
2. Scope of Exemption—Sections I and
II
Sections I and II of the proposal
define the scope of the class exemption.
Section I provides that, with respect to
the provision of advice to participants
and beneficiaries of individual account
plans, the restrictions of sections 406(a)
and 406(b) of ERISA and the sanctions

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resulting from the application of section
4975 of the Code, by reason of section
4975(c)(1)(A) through (F) of the Code,
shall not apply to the provision of
investment advice described in section
3(21)(A)(ii) of the Act by a fiduciary
adviser to a participant or beneficiary of
an individual account plan that permits
such participant or beneficiary to direct
the investment of their individual
accounts; the acquisition, holding, or
sale of a security or other property
pursuant to the investment advice; and,
except as otherwise provided in the
exemption, the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser (or any employee,
agent, registered representative or
affiliate thereof) in connection with the
provision of the advice or in connection
with an acquisition, holding, or sale of
a security or other property pursuant to
the investment advice. Section II
provides the same relief with respect to
the sanctions resulting from the
application of section 4975 of the Code,
by reason of section 4975(c)(1)(A)
through (F) of the Code, for investment
advice to beneficiaries of IRAs.
3. Conditions—Section III
General—Paragraphs (a)–(d)
Paragraphs (a) through (c) set forth
general requirements relating to the
arrangements and investment advice
covered by the exemption, without
regard to whether a fiduciary adviser
uses a computer model or levels fees in
connection with the providing of
individualized investment advice.
Paragraph (a) provides that the
investment advice arrangement must be
authorized by a plan fiduciary (or, in the
case of an IRA, the IRA beneficiary)
other than: the person offering the
investment advice arrangement; any
person providing designated investment
options under the plan; or any affiliate
of either. The terms designated
investment options and affiliate are
defined in Section IV, described below.
Paragraph (a) further provides that for
purposes of such authorization, an IRA
beneficiary will not be treated as an
affiliate of a person solely by reason of
being an employee of such person,
thereby, enabling employees of a
fiduciary adviser to take advantage of
the investment advice arrangements
offered by their employer under the
exemption. Paragraph (b) requires that
the provided investment advice be
based on certain generally accepted
investment theories. Paragraph (c)
requires that the investment advice
must take into account information
furnished by a participant or
beneficiary.

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Paragraph (d) of Section III requires
that the fiduciary adviser must provide
advice in accordance with paragraph (e)
or paragraph (f) or both. As discussed
below, paragraph (e) generally requires
the provision of investment advice
generated by a computer model in
advance of providing individualized,
non-computer modeled advice.
Paragraph (f) requires that investment
advice be provided in a manner with
respect to which fees or other
compensation received by an employee,
agent or registered representative
providing investment advice on behalf
of a fiduciary adviser do not vary based
on the investment option selected by the
participant or beneficiary. Paragraph (d)
also permit the provision of investment
advice using a combination of computer
generated advice and fee-leveling.

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Use of Computer Models—Paragraph (e)
Paragraph (e)(1) requires that, prior to
the provision of other investment advice
covered by the class exemption,
participants and beneficiaries must be
furnished with investment
recommendations generated by a
computer model. The computer model
must either meet the requirements of
ERISA section 408(g)(3)(B) and (C) 6 or
meet the requirements of section
408(g)(3)(B) and be designed and
maintained by a person independent of
the fiduciary adviser (and any of the
adviser’s affiliates) and utilize
methodologies and parameters
determined appropriate solely by the
independent person. If the conditions of
section III are satisfied, then the class
exemption provides relief, as described
in sections I and II, in connection with
both the investment advice generated by
the computer model and the noncomputer model generated investment
advice subsequently provided.
In order to satisfy paragraph (e)(1), a
computer model must, at least, meet the
requirements of section 408(g)(3)(B) and
the regulations issued thereunder
6 In general, paragraph (3)(B) of section 408(g)
provides that a computer model under an
investment advice program must apply certain
generally accepted investment theories, utilize
relevant information about the participant, utilize
prescribed objective criteria to provide asset
allocation portfolios comprised of investment
options available under the plan, operate in a
manner that is not biased in favor of certain
investments, and take into account all investment
options under the plan in specifying how a
participant’s account balance should be invested.
Paragraph (3)(C) of section 408(g) requires that a
computer model utilized under an investment
advice program be certified as meeting the
requirements of paragraph (3)(B) by an eligible
investment expert. Proposed regulations being
published in today’s Federal Register provide
further guidance with respect to the computer
model requirements contained in ERISA section
408(g)(3).

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applicable to a computer model that
serves as the basis of an eligible
investment advice arrangement under
the statutory exemption and related
regulations (proposed 29 CFR
2550.408g–1(d)(1)). Additionally, unless
the computer model is developed and
maintained by a person independent of
the fiduciary adviser (and its affiliates),
the computer model must be certified,
in accordance with ERISA section
408(g)(3)(C) and related regulations
(proposed 29 CFR 2550.408g–1(d)(2)), as
satisfying those requirements. Thus,
unless the computer model is developed
and maintained by an independent
person, the model must meet the same
requirements, including certification, as
under the statutory exemption and
related regulations. With respect to the
inclusion of independently developed
and maintained computer models under
paragraph (e)(1), the Department opined
in Advisory Opinion 2001–09A (Dec.
14, 2001) (AO 2001–09A) that an
investment adviser providing
investment advice regarding
investments that pay additional fees to
the adviser could avoid prohibited
transaction issues under ERISA section
406(b)(1) and (3) by utilizing computer
methodologies developed, maintained
and overseen by an independent person
to generate the advice provided. This
continues to be the view of the
Department.7 However, as with
investment advice provided under the
statutory exemption, the Department
believes that plan participants and
beneficiaries may want the flexibility to
obtain other investment advice after
receiving computer-generated advice,
and advisers may be willing to offer
such services. Accordingly, paragraph
(e)(1) similarly encompasses
transactions in connection with
investment advice received after
investment advice generated by a
computer model developed and
maintained by a person independent of
the fiduciary adviser and its affiliates.
For purposes of this paragraph, the term
‘‘independent’’ is defined in paragraph
(h) of Section IV. The Department notes,
however, that it continues to believe
that what constitutes ‘‘independent’’ for
purposes of the analysis in AO 2001–
09A is an inherently factual question,8
and that no inferences should be drawn
7 See Field Assistance Bulletin 2007–01 (February
2, 2007).
8 See AO 2001–09A, footnote 11 (‘‘whether a
party is ‘independent’ for purposes of the subject
analysis will generally involve a determination as
to whether there exists a financial interest (e.g.,
compensation, fees, etc.), ownership interest, or
other relationship, agreement or understanding that
would limit the ability of the party to carry out its
responsibility beyond the control, direction or
influence of the fiduciary’’).

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with regard to the effect of the definition
contained in paragraph (h) of section IV
on the analysis in AO 2001–09A.
The general requirement for computer
model investment advice set forth in
paragraph (e)(1) also applies to IRAs,
unless the fiduciary adviser determines
that the types or number of investment
choices available to an IRA beneficiary
reasonably precludes the use of a
computer model meeting of the
requirements of section ERISA
408(g)(3)(B). See paragraph (e)(2) of
Section III. If the fiduciary adviser so
concludes, paragraph (e)(2) of Section III
requires that the beneficiary be provided
certain investment education-type
materials, such as graphs, pie charts,
case studies, worksheets, or interactive
software or similar programs, that reflect
or produce asset allocation models
taking into account the age (or time
horizon) and risk profile of the
beneficiary, to the extent known.
Paragraph (e)(2) also sets forth some
general standards intended to ensure the
reasonableness and objectivity of the
materials furnished. These materials,
like the investment advice generated by
a computer model required under
paragraph (e)(1), are intended to provide
a means by which a participant or
beneficiary may assess the
individualized advice provided by the
fiduciary adviser, taking into account
whether and to what extent the
individualized advice deviates from the
computer generated advice or
education-type materials furnished in
advance by the fiduciary adviser.
Paragraph (e)(3) of Section III requires
that the investment advice provided
does not recommend investment
options that may generate for the
fiduciary adviser, or certain other
persons, greater income than other
options of the same asset class, unless
the fiduciary adviser prudently
concludes that the recommendation is
in the best interest of the participant or
beneficiary and explains the basis for
that conclusion to the participant or
beneficiary. Section III(e)(4), described
below, imposes a specific
documentation requirement with
respect to any such advice. Section
III(e)(3) does not apply to investment
advice generated solely by use of a
computer model described in paragraph
(e)(1)(A) or (B) of section III.
Paragraph (e)(4) of Section III
generally requires that not later than 30
days following the provision of
investment advice under paragraph (e),
the individual providing the advice on
behalf of the fiduciary adviser must
document the basis of any investment
option(s) recommended to a participant
or beneficiary, including an explanation

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as to how such recommendation relates
to the recommendations or information
provided or generated pursuant to
paragraph (e)(1) or, if applicable,
paragraph (e)(2). As an example, in the
case of an IRA described in paragraph
(e)(2) with respect to which a fiduciary
adviser provides several generic asset
allocation portfolios prior to rendering
investment advice, the documentation
required by paragraph (e)(4) must
include explanations as to the asset
allocation portfolio on which the
investment advice is based, including
reasons for its selection or deviation
from those provided, and how the
recommended investments provide the
appropriate asset class exposures
consistent with the portfolio.
Paragraph (e)(4) further requires that
with respect to any investment advice
that recommends investment options
that may generate for the fiduciary
adviser, or certain persons, greater
income than other options of the same
asset class, the individual providing the
investment advice on behalf of the
fiduciary adviser must, not later than 30
days following its provision, document
the basis for concluding that the
recommendation is in the best interest
of the participant or beneficiary. As
with the requirements of paragraph
(e)(3), this requirement does not apply
to investment advice generated solely by
use of a computer model described in
paragraph (e)(1)(A) or (B) of Section III.
Paragraph (e)(5) provides that the
documentation required by paragraph
(e)(4) must be retained in accordance
with the exemption’s record-retention
provision, section paragraph (n) of
Section III, described below.
Use of Fee-Leveling—Paragraph (f)
Paragraph (f) of Section III requires
that any fees or other compensation
(including salary, bonuses, awards,
promotions, commissions or any other
thing of value) received, directly or
indirectly, by an employee, agent or
registered representative providing
advice on behalf of the fiduciary adviser
pursuant to the class exemption do not
vary depending on the basis of any
investment option selected by a
participant or beneficiary. The
Department notes that, in contrast to the
fee-leveling requirement under the
statutory exemption as described above
and interpreted in proposed regulations
being published in today’s Federal
Register, the fee-leveling requirement
under paragraph (f) applies only to the
individual who provides investment
advice. In this regard, the Department is
persuaded that the safeguards provided
for in the class exemption are sufficient
to permit the application of the fee-

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leveling requirement at the individuallevel, rather than fiduciary adviserentity level, without compromising the
availability of informed, unbiased, and
objective investment advice for
participants and beneficiaries.
Disclosure—Paragraphs (g)–(h)
The disclosure provisions set forth in
paragraph (g) of Section III generally
track the disclosure provisions of the
proposed regulations. See proposed 29
CFR 2550.408g–1(g). In this regard,
paragraph (g) of Section III requires that
a fiduciary adviser furnish certain
information, without charge, to a
participant or beneficiary in advance of
the initial provision of investment
advice under the class exemption, and
at least once each year thereafter during
which the adviser provides investment
advice to the participant or beneficiary
under the class exemption.
Pursuant to paragraph (g)(1), a
fiduciary adviser is required to provide
to participants and beneficiaries a
written notification describing: The role
of any party that has a material
affiliation or material contractual
relationship with the fiduciary adviser
in the development of the computer
model described in paragraph (e)(1) or
materials described in section paragraph
(e)(2) of Section III and in the selection
of investment options available under
the plan; the past performance and
historical rates of return of the
designated investment options available
under the plan or IRA to the extent such
information is not otherwise provided;
all fees or other compensation relating
to the 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 the advice or in connection
with the sale, acquisition, or holding of
the security or other property; and of
any material affiliation or material
contractual relationship of the fiduciary
adviser or affiliates thereof in the
security or other property.
The notification also is required to
explain the manner, and under what
circumstances, any participant or
beneficiary information provided under
the investment advice arrangement will
be used or disclosed, and the types of
services provided by the fiduciary
adviser in connection with the
provision of investment advice by the
fiduciary adviser, including, with
respect to an arrangement that utilizes a
computer model pursuant to paragraph
(e)(1), any limitations on the ability of
the computer model to take into account
an investment option that constitutes an
investment primarily in qualifying
employer securities, as provided for in

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proposed 29 CFR 2550.408g–1(d)(1)(v).
This disclosure of limitations on a
computer model’s ability to take into
account investments in qualifying
employer securities parallels a similar
requirement contained in the proposed
regulations under section 408(g)(3)
being published today.9
In addition to the foregoing, the
notification must inform participants
and beneficiaries that the fiduciary
adviser is acting as a fiduciary of the
plan in connection with the provision of
the advice, and that the participants or
beneficiaries may separately arrange for
the provision of advice by another
adviser, that could have no material
affiliation with, and receives no fees or
other compensation in connection with,
the security or other property
recommended to the participant or
beneficiary.
Paragraph (g)(2)(i) provides that the
information furnished pursuant to
paragraph (g)(1) must be written in a
clear and concise manner and in a
manner calculated to be understood by
the average plan participant and is
sufficiently accurate and comprehensive
to reasonably apprise such participants
and beneficiaries of the information
required to be disclosed. Paragraph
(g)(2)(ii) notes that the appendix to
proposed 29 CFR 2550.408g–1 contains
a model disclosure form that may be
used to provide the required notification
of information described in paragraph
(g)(1)(iii). Paragraph (g)(2)(ii) makes
clear that use of the model is voluntary.
However, use of an appropriately
completed model disclosure form will
be deemed to satisfy the requirements of
paragraphs (g)(1) and (2)(i) with respect
to such information.
Paragraph (g)(3) indicates that
required notification may be provided
in written or electronic form.
Paragraph (g)(4) requires that the
fiduciary adviser provide, without
charge, updated information to the
advice recipient concerning any
material change to the information
required to be provided to the advice
recipient under section III(g) at a time
reasonably contemporaneous to the
change in information.
Paragraph (h) requires that the
fiduciary adviser provide appropriate
disclosure, in connection with the sale,
acquisition, or holding of the security or
other property, in accordance with all
applicable securities laws.
9 For a description of computer model limitations,
see proposed regulations published in today’s
Federal Register.

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Policies and Procedures—Paragraph (i)
Paragraph (j) of Section III requires
that the fiduciary adviser adopt and
follow written policies and procedures
that are designed to assure compliance
with the conditions of the exemption.
The Department believes that the
maintenance of such policies and
procedures will help ensure compliance
with the exemption, as well as support
a finding that, for purposes of section
408(a)(1), the exemption is
administratively feasible. In this regard,
the Department notes that, as discussed
below, the auditor engaged pursuant to
paragraph (j) is required to review a
fiduciary adviser’s compliance with its
policies and procedures.

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Annual Audit—Paragraph (j)
The annual audit requirements of this
proposed class exemption generally
track the audit requirements applicable
to investment advice arrangements
offered under the statutory exemption
and regulations issued thereunder,
appearing elsewhere in today’s Federal
Register. See proposed 29 CFR
2550.408g–1(f).
Paragraph (j)(1)(i) of Section III of the
proposed class exemption requires that,
at least annually, the fiduciary adviser
engage an independent auditor to
conduct an audit, and prepare a report
with respect thereto and setting forth its
specific findings, to determine
compliance with the policies and
procedures required under paragraph (i)
of Section III and the requirements of
the class exemption. The auditor, within
60 days following the completion of the
audit, must furnish its report to the
fiduciary adviser and, except with
respect to an arrangement with an IRA,
to the fiduciary that authorized the
investment advice arrangement, as
required under paragraph (a) of Section
III. The audit must be conducted by an
auditor who has appropriate technical
training or experience and proficiency
and so represents in writing to the
fiduciary adviser. Paragraph (j)(2)
provides that for purposes of paragraph
(j)(1), an auditor is considered
independent if it does not have a
material affiliation or material
contractual relationship with the person
offering the investment advice
arrangement to the plan or IRA or any
person providing designated investment
options under the plan or IRA.
Paragraph (j)(1)(ii) contains additional
requirements that apply with respect to
an arrangement with an IRA. Under this
provision, the fiduciary adviser, within
30 days following receipt of the report
from the auditor, as described in
paragraph (j)(1)(i), must furnish a copy

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of the report to the IRA beneficiary or
make such report available on its Web
site, provided, however, that with
respect to availability on a Web site,
such IRA beneficiaries must be provided
information, with the information
required to be furnished pursuant to
section III(g)(1), concerning the purpose
of the report, and how and where to
locate the report applicable to their
account. With respect to making the
report available on a Web site, the
Department believes that this alternative
to furnishing reports to IRA
beneficiaries satisfies the requirement of
section 104(d)(1) of the Electronic
Signatures in Global and National
Commerce Act (E–SIGN) 10 that any
exemption from the consumer consent
requirements of section 101(c) of E–
SIGN must be necessary to eliminate a
substantial burden on electronic
commerce and will not increase the
material risk of harm to consumers. The
Department solicits comments on this
finding. Further, in the event that the
report of the auditor identifies
noncompliance with the policies and
procedures required by section III(i) or
the conditions of the class exemption,
the fiduciary adviser, within 30 days
following receipt of the report from the
auditor, must send a copy of the report
to the Department at the address
provided in the class exemption.
Paragraph (j)(3) provides that, in
conducting the audit required in (j)(1),
the auditor must review sufficient
relevant information to formulate an
opinion as to whether the investment
advice arrangements, and the advice
provided pursuant thereto, offered by
the fiduciary adviser during the audit
period were in compliance with the
policies and procedures required under
paragraph (i) of Section III and the
requirements of the class exemption.
Paragraph (j)(3) also makes clear,
however, that it does not preclude an
auditor from using information obtained
by sampling, as reasonably determined
appropriate by the auditor, investment
advice arrangements, and the advice
pursuant thereto, during the audit
period.
Miscellaneous Conditions—Paragraphs
(k)–(m)
Paragraphs (k)–(m) track provisions of
the statutory exemption and proposed
regulations, appearing elsewhere in
today’s Federal Register. See proposed
29 CFR 2550.408g–1(h). Paragraph (k) of
Section III requires that the sale,
acquisition or holding of a security or
other property on behalf of a plan or
IRA under the exemption must occur
10 15

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solely at the direction of the recipient of
the investment advice. Paragraph (l)
requires that the compensation received
by the fiduciary adviser and affiliates
thereof in connection with the sale,
acquisition or holding of the security or
other property must be reasonable.
Paragraph (m) requires that the terms of
the sale, acquisition or holding of the
security or other property must be at
least as favorable to the plan or IRA as
an arm’s length transaction with an
unrelated party would be.
Record Retention—Paragraph (n)
Paragraph (n) of Section III provides
that the fiduciary adviser must
maintain, in a manner accessible for
audit or examination, for a period not
less than six years after the provision of
investment advice any records
necessary to determine, explain or
verify compliance with the conditions
of the class exemption.
4. Definitions—Section IV
Section IV defines certain terms that
apply for purposes of the class
exemption. In general, the definitions
applied for purposes of the class
exemption comport with the definitions
applied to terms under the statutory
exemption and the proposed
regulations, appearing elsewhere in
today’s Federal Register. See proposed
29 CFR 2550.408g–1(j).
As a threshold matter, this proposed
class exemption would be available only
in connection with investment advice
provided by a fiduciary adviser.
Paragraph (a) defines the term
‘‘fiduciary adviser.’’ This definition
tracks the statutory definition of that
term.
Paragraph (b) defines the term
‘‘registered representative’’ of another
entity to mean a person described in
section 3(a)(18) of the Securities
Exchange Act of 1934 (substituting the
entity for the broker or dealer referred
to in such section) or a person described
in section 202(a)(17) of the Investment
Advisers Act of 1940 (substituting the
entity for the investment adviser
referred to in such section). Paragraph
(c) defines the term ‘‘individual
retirement account’’ and paragraph (d)
defines the term ‘‘affiliate’’ for purposes
of the class exemption.
As with the proposed regulations, the
proposed class exemption, at paragraphs
(e) and (f), respectively, also defines the
terms ‘‘material affiliation’’ and
‘‘material contractual relationship.’’
Paragraph (e)(1) defines a person with a
‘‘material affiliation’’ with another
person as: any affiliate of the other
person; any person directly or indirectly
owning, controlling, or holding, 5

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percent or more of the interests of such
other person; and any person 5 percent
or more of whose interests are directly
or indirectly owned, controlled, or held,
by such other person. The Department
notes that the definition of material
affiliation includes an affiliate, as
defined in paragraph (d) of section IV,
and that, whereas the definition of
affiliate focuses on voting securities
owned, controlled or held, the
definition of material affiliate focuses
not only on the voting interests, but also
on any interest. In this regard, paragraph
(e)(2) defines the term ‘‘interest’’ for
purposes of paragraph (e)(1).
Paragraph (f) provides that persons
have a ‘‘material contractual
relationship’’ if payments made by one
person to the other person pursuant to
written contracts or agreements between
the persons exceed 10 percent of the
gross revenue, on an annual basis, of
such other person. The Department
believes that one person’s receipt of
more than 10 percent of gross revenue
from another person is sufficiently
significant to be considered material.
However, the Department specifically
invites comments on whether the
percentage test should be higher or
lower and, if so, why.
Paragraph (g) defines ‘‘control’’ to
mean the power to exercise a controlling
influence over the management or
policies of a person other than an
individual.
Paragraph (h) of Section IV defines,
for purposes of paragraph (e)(1) of
Section III, the term ‘‘independent’’ to
mean a person that is not an affiliate of
the other person and does not have a
material affiliation or material
contractual relationship with the other
person.
For purposes of paragraphs (a), (g)(1)
and (j)(2) of Section III of the proposal,
paragraph (i) of Section IV defines the
term ‘‘designated investment option’’ to
mean any investment option designated
by the plan into which participants and
beneficiaries may direct the investment
of assets held in, or contributed to, their
individual accounts. However, the term
‘‘designated investment option’’ does
not include ‘‘brokerage windows,’’ ‘‘selfdirected brokerage accounts,’’ or similar
plan arrangements that enable
participants and beneficiaries to select
investments beyond those designated by
the plan.
5. Effect of Noncompliance—Section V
Section V clarifies that the class
exemption will not apply to any
transaction (described in section I or II)
in connection with the provision of
investment advice to an individual
participant or beneficiary with respect

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to which the conditions of the
exemption have not been satisfied. In
addition, in the case of a pattern or
practice of noncompliance with any of
the conditions, the exemption will not
apply to any transaction in connection
with the provision of investment advice
provided by the fiduciary adviser during
the period over which the pattern or
practice extended.
C. Effective Date
The Department is proposing an
effective date for the proposed class
exemption which is 90 days after the
publication of the final exemption in the
Federal Register.
D. General Information
The attention of interested persons is
directed to the following:
(1) The fact that a transaction is the
subject of an exemption under section
408(a) of the Act and section 4975(c)(2)
of the Code does not relieve a fiduciary
or other party in interest or disqualified
person from other provisions of the Act
and the Code, including any prohibited
transaction provisions to which the
exemption does not apply and the
general fiduciary responsibility
provisions of section 404 of the Act.
Section 404 requires, among other
things, that a fiduciary discharge its
duties with respect to the plan
prudently and solely in the interests of
the plan’s participants and beneficiaries.
A transaction’s qualification for an
exemption also does not affect the
requirement of section 401(a) of the
Code that the plan must operate for the
exclusive benefit of the employees of
the employer maintaining the plan and
their beneficiaries;
(2) If granted, the proposed exemption
will apply to a transaction only if the
conditions specified in the exemption
are met; and
(3) The proposed exemption, if
granted, will be supplemental to, and
not in derogation of, any other
provisions of the Act and the Code,
including statutory or administrative
exemptions and transitional rules.
E. Written Comments
Interested persons are encouraged to
submit written comments on the
proposed exemption. Comments are due
not later than 45 days after the date of
publication of the proposal in the
Federal Register. The Employee
Benefits Security Administration
encourages interested persons to submit
their comments electronically by e-mail
to [email protected] (Subject: Investment
Advice Class Exemption). Persons
submitting comments electronically are
encouraged not to submit paper copies.

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Persons interested in submitting paper
copies should refer to the information
set forth above under ADDRESSES for the
specific information relating to the
delivery comments. All comments will
be available to the public, without
charge, online at http://www.dol.gov/
ebsa and at the Public Disclosure Room,
N–1513, Employee Benefits Security
Administration, U.S. Department of
Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210.
F. Executive Order 12866; Paperwork
Reduction Act
The Department’s full Regulatory
Impact Analysis for the class exemption
proposed herein and rules proposed
under the statutory exemption for
investment advice can be found in the
preamble to those proposed rules
appearing elsewhere in today’s Federal
Register .
G. Proposed Exemption
The Department has under
consideration the grant of the following
class exemption under the authority of
section 408(a) of ERISA and section
4975(c)(2) of the Code, and in
accordance with the procedures set
forth in 29 CFR Part 2570, Subpart B (55
FR 32836, 32847, August 10, 1990).
Section I—Proposed Exemption for the
Provision of Investment Advice to
Participants and Beneficiaries of
Individual Account Plans
The restrictions of sections 406(a) and
406(b) of ERISA and the sanctions
resulting from the application of section
4975 of the Code, by reason of section
4975(c)(1)(A) through (F) of the Code,
shall not apply to:
(a) The provision of investment
advice described in section 3(21)(A)(ii)
of the Act by a fiduciary adviser to a
participant or beneficiary of an
individual account plan that permits
such participant or beneficiary to direct
the investment of their individual
accounts;
(b) the acquisition, holding, or sale of
a security or other property pursuant to
the investment advice; and
(c) except as otherwise provided in
this exemption, the direct or indirect
receipt of fees or other compensation by
the fiduciary adviser (or any employee,
agent, registered representative or
affiliate thereof) in connection with the
provision of the advice or in connection
with an acquisition, holding, or sale of
a security or other property pursuant to
the investment advice, provided that the
conditions set forth in section III below
are met.

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Section II—Proposed Exemption for the
Provision of Investment Advice to
Beneficiaries of Individual Retirement
Accounts
The sanctions resulting from the
application of section 4975 of the Code,
by reason of section 4975(c)(1)(A)
through (F) of the Code, shall not apply
to:
(a) The provision of investment
advice described in section
4975(e)(3)(B) of the Code by a fiduciary
adviser to a beneficiary of an Individual
Retirement Account (IRA) that permits
such beneficiary to direct the
investment of the assets of his or her
IRA;
(b) the acquisition, holding, or sale of
a security or other property pursuant to
the investment advice; and
(c) except as otherwise provided in
this exemption, the direct or indirect
receipt of fees or other compensation by
the fiduciary adviser (or any employee,
agent, registered representative or
affiliate thereof) in connection with the
provision of the advice or in connection
with an acquisition, holding, or sale of
a security or other property pursuant to
the investment advice, provided that the
conditions set forth in section III below
are met.
Section III. Conditions
(a) The arrangement pursuant to
which investment advice is provided to
participants and beneficiaries is
expressly authorized in advance by a
plan fiduciary (or, in the case of an IRA,
the IRA beneficiary) other than: The
person offering the investment advice
arrangement; any person providing
designated investment options under
the plan; or any affiliate of either.
Provided, however, that for purposes of
the preceding, in the case of an IRA, an
IRA beneficiary will not be treated as an
affiliate of a person solely by reason of
being an employee of such person.
(b) The investment advice is based on
generally accepted investment theories
that take into account the historic
returns of different asset classes over
defined periods of time; provided,
however, that nothing herein shall
preclude any investment advice from
being based on generally accepted
investment theories that take into
account additional considerations.
(c) The investment advice takes into
account information furnished by a
participant or beneficiary relating to age,
life expectancy, retirement age, risk
tolerance, other assets or sources of
income and investment preferences,
although nothing herein shall preclude
any investment advice from taking into
account additional information that a
participant or beneficiary may provide.

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(d) The fiduciary adviser provides
advice in accordance with paragraph (e)
or (f), or both.
(e)(1) Except as provided in
subparagraph (2), before providing other
investment advice covered by this
exemption, participants and
beneficiaries shall be furnished with
investment recommendations generated
by a computer model that—(A) meets
the requirements of ERISA section
408(g)(3)(B) and (C); or (B) meets the
requirements of section 408(g)(3)(B) and
was designed and is maintained by a
person independent of the fiduciary
adviser (and any of the adviser’s
affiliates) and utilizes methodologies
and parameters determined appropriate
solely by the independent person,
without influence from the fiduciary
adviser (or any of the adviser’s
affiliates);
(2) In the case of an IRA with respect
to which the types or number of
investment choices reasonably
precludes the use of a computer model
meeting the requirements of section
408(g)(3)(B) of ERISA to generate
investment recommendations, before
providing other investment advice
covered by this exemption, beneficiaries
shall be furnished with material, such as
graphs, pie charts, case studies,
worksheets, or interactive software or
similar programs, that reflect or produce
asset allocation models taking into
account the age (or time horizon) and
risk profile of the beneficiary, to the
extent known. Nothing shall preclude
the furnishing of material, in addition to
the foregoing, reflecting asset allocation
portfolios of hypothetical individuals
with different time horizons and risk
profiles. For purposes of any materials
provided pursuant to this subparagraph
(2): (A) models must be based on
generally accepted investment theories
that take into account the historic
returns of different asset classes (e.g.,
equities, bonds, or cash) over defined
periods of time; (B) such models must
operate in a manner that is not biased
in favor of investments offered by the
fiduciary adviser or a person with a
material affiliation or material
contractual relationship with the
fiduciary adviser; and (C) all material
facts and assumptions on which such
models are based (e.g., retirement ages,
life expectancies, income levels,
financial resources, replacement income
ratios, inflation rates, and rates of
return) accompany the models;
(3) The investment advice provided
does not recommend investment
options that may generate for the
fiduciary adviser or any employee, agent
or registered representative, or any
affiliate thereof, or any person with a

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material affiliation or material
contractual relationship with the
foregoing, greater income than other
options of the same asset class, unless
the adviser prudently concludes that the
recommendation is in the best interest
of the participant or beneficiary and
explains the basis for that conclusion to
the participant or beneficiary. This
subparagraph (3) shall not apply to
investment advice generated solely by
use of a computer model described in
clause (A) or (B) of subparagraph (1);
(4) Not later than 30 days following
the provision of investment advice
under this paragraph (e), the employee,
agent or registered representative
providing the advice on behalf of the
fiduciary adviser shall document the
basis of any investment option(s)
recommended to a participant or
beneficiary, including an explanation as
to how such recommendation relates to
the recommendations or information
provided or generated pursuant to
subparagraph (1) or (2) of this paragraph
(e); and, with respect to any investment
advice (other than generated solely by a
computer model described in clause (A)
or (B) of subparagraph (1)) that
recommends investment options that
may generate for the fiduciary adviser or
any employee, agent or registered
representative, or any affiliate thereof,
or any person with a material affiliation
or material contractual relationship with
the foregoing, greater income than other
options of the same asset class, the basis
for concluding that the recommendation
is in the best interest of the participant
or beneficiary;
(5) Any documentation required by
subparagraph (4) of this paragraph (e)
shall be retained in accordance with
paragraph (n) of this section.
(f) Any fees or other compensation
(including salary, bonuses, awards,
promotions, commissions or any other
thing of value) received, directly or
indirectly, by an employee, agent or
registered representative providing
advice on behalf of the fiduciary adviser
pursuant to this exemption (as
distinguished from any compensation
received by the fiduciary adviser on
whose behalf the employee, agent or
registered representative is providing
such advice) do not vary depending on
the basis of any investment option
selected by a participant or beneficiary.
(g)(1) The fiduciary adviser provides,
without charge, to the participant or
beneficiary before the initial provision
of investment advice under this
exemption, and at least once each year
thereafter during which the fiduciary
adviser provides investment advice to
the participant or beneficiary, written
notification: (i) Of the role of any party

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that has a material affiliation or material
contractual relationship with the
fiduciary adviser in the development of
the computer model described in
paragraph (e)(1) of this section or, if
applicable, the materials described in
paragraph (e)(2) of this section, and, to
the extent applicable, in the selection of
investment options available under the
plan, (ii) of the past performance and
historical rates of return of the
designated investment options available
under the plan or IRA to the extent such
information is not otherwise provided,
(iii) of all fees or other compensation
relating to the 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 the
advice or in connection with the sale,
acquisition, or holding of the security or
other property, (iv) of any material
affiliation or material contractual
relationship of the fiduciary adviser or
affiliates thereof in the security or other
property, (v) of the manner, and under
what circumstances, any participant or
beneficiary information provided under
the arrangement will be used or
disclosed, (vi) of the types of services
provided by the fiduciary adviser in
connection with the provision of
investment advice by the fiduciary
adviser, including, with respect to an
arrangement that utilizes a computer
model pursuant to paragraph (e)(1), any
limitations on the ability of the
computer model to take into account an
investment option that constitutes an
investment primarily in qualifying
employer securities, as provided for at
29 CFR 2550.408g–1(d)(1)(v), (vii) that
the fiduciary adviser is acting as a
fiduciary of the plan in connection with
the provision of the investment advice,
and (viii) that a recipient of the advice
may separately arrange for the provision
of advice by another adviser, that could
have no material affiliation with, and
receives no fees or other compensation
in connection with, the security or other
property;
(2)(i) Such notification must be
written in a clear and conspicuous
manner and in a manner calculated to
be understood by the average plan
participant and shall be sufficiently
accurate and comprehensive to
reasonably apprise such participants
and beneficiaries of the information
required to be disclosed; (ii) the
appendix to 29 CFR 2550.408g–1
contains a model disclosure form that
may be used to provide the notification
of information described in paragraph
(g)(1)(iii). Use of the model disclosure
form is not mandatory. However, use of

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an appropriately completed model
disclosure form will be deemed to
satisfy the requirements of paragraphs
(g)(1) and (2)(i) with respect to such
information.
(3) Such notification may, in
accordance with 29 CFR 2520.104b–1,
be provided in written or electronic
form.
(4) At all times during the provision
of advisory services to the participant or
beneficiary pursuant to this exemption,
the fiduciary adviser provides, without
charge, accurate information to the
recipient of the advice concerning any
material change to the information
required to be provided to the recipient
of the advice at a time reasonably
contemporaneous to the change in
information.
(h) The fiduciary adviser provides
appropriate disclosure, in connection
with the sale, acquisition, or holding of
the security or other property, in
accordance with all applicable
securities laws.
(i) The fiduciary adviser adopts and
follows written policies and procedures
that are designed to assure compliance
with the conditions of this exemption.
(j)(1) The fiduciary adviser—
(i) at least annually, engages an
independent auditor, who has
appropriate technical training or
experience and proficiency and so
represents in writing to the fiduciary
adviser, to (A) conduct an audit, and
prepare a report with respect thereto
and setting forth its specific findings, to
determine compliance with the policies
and procedures of paragraph (i) of this
section and the requirements of this
exemption, and (B) within 60 days
following the completion of the audit,
furnish its report to the fiduciary
adviser, and, except with respect to an
arrangement with an IRA, to the
fiduciary who authorized the
arrangement pursuant to which
investment advice under this exemption
is provided; and
(ii) with respect to an arrangement
with an IRA—(A) within 30 days
following receipt of the report from the
auditor, furnishes a copy of the report
to the IRA beneficiary or makes such
report available on its Web site,
provided that such beneficiaries are
provided information, with the
information required to be disclosed
pursuant to paragraph (g)(1) of this
section, concerning the purpose of the
report, and how and where to locate the
report applicable to their account, and
(B) in the event that the report of the
auditor identifies noncompliance with
the policies and procedures required by
paragraph (i) or the conditions of this
exemption, within 30 days following

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receipt of the report from the auditor,
sends a copy of the report to the
Department of Labor at the following
address: Investment Advice Class
Exemption Notification, U.S.
Department of Labor, Employee Benefits
Security Administration, Room N–1513,
200 Constitution Ave., NW.,
Washington, DC 20210;
(2) for purposes of subparagraph (1),
an auditor is considered independent if
it does not have a material affiliation or
material contractual relationship with
the person offering the investment
advice arrangement to the plan or IRA
or any designated investment options
under the plan or IRA;
(3) for purposes of the audit described
in subparagraph (1), the auditor shall
review sufficient relevant information to
formulate an opinion as to whether the
investment advice arrangements, and
the advice provided pursuant thereto,
offered by the fiduciary adviser during
the audit period were in compliance
with the policies and procedures of
paragraph (i) of this section and the
requirements of this exemption;
provided, however, that nothing in this
subparagraph shall preclude an auditor
from using information obtained by
sampling, as reasonably determined
appropriate by the auditor, investment
advice arrangements, and the advice
pursuant thereto, during the audit
period.
(k) The sale, acquisition or holding of
a security or other property on behalf of
a plan or IRA occurs solely at the
direction of the recipient of the
investment advice.
(l) The compensation received by the
fiduciary adviser and affiliates thereof
in connection with the sale, acquisition
or holding of the security or other
property is reasonable.
(m) The terms of the sale, acquisition
or holding of the security or other
property are at least as favorable to the
plan or IRA as an arm’s length
transaction would be.
(n) The fiduciary adviser maintains,
in a manner accessible for audit or
examination, for a period not less than
six years after the provision of
investment advice under this
exemption, any records necessary to
determine, explain or verify compliance
with the conditions of this exemption.
Section IV. Definitions
(a) Fiduciary Adviser—means, with
respect to a plan, a person who is a
fiduciary of the plan by reason of the
provision of investment advice
described in section 3(21)(A)(ii) of the
Act by the person to the participant or
beneficiary of the plan and who is—

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(1) Registered as an investment
adviser under the Investment Advisers
Act of 1940 (15 U.S.C. 80b–1 et seq. )
or under the laws of the State in which
the fiduciary maintains its principal
office and place of business,
(2) A bank or similar financial
institution referred to in section
408(b)(4) of the Act or a savings
association (as defined in section 3(b)(1)
of the Federal Deposit Insurance Act (12
U.S.C. 1813(b)(1)), but only if the advice
is provided through a trust department
of the bank or similar financial
institution which is subject to periodic
examination and review by Federal or
State banking authorities, or
(3) An insurance company qualified
to do business under the laws of a State,
or
(4) A person registered as a broker or
dealer under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.), or
(5) An affiliate of a person described
in any of clauses (1) through (4) above,
or
(6) An employee, agent, or registered
representative of a person described in
clauses (1) through (5) above who
satisfies the requirements of applicable
insurance, banking, and securities laws
relating to the provision of the advice.
(b) Registered Representative—a
registered representative of another
entity means a person described in
section 3(a)(18) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity for
the broker or dealer referred to in such
section) or a person described in section
202(a)(17) of the Investment Advisers
Act of 1940 (15 U.S.C. 80b–2(a)(17))
(substituting the entity for the
investment adviser referred to in such
section).
(c) Individual Retirement Account or
IRA means—(1) an individual
retirement account described in section
408(a) of the Code; (2) an individual
retirement annuity described in section
408(b) of the Code; (3) an Archer MSA
described in section 220(d) of the Code;
(4) a health savings account described in
section 223(d) of the Code; (5) a
Coverdell education savings account
described in section 530 of the Code; or

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(6) a trust, plan, account, or annuity
which, at any time, has been determined
by the Secretary of the Treasury to be
described in any preceding
subparagraph of this paragraph [i.e., (1)
through (5) above].
(d) Affiliate—unless specifically
provided otherwise, an affiliate of
another person means—
(1) Any person directly or indirectly
owning, controlling, or holding with
power to vote, 5 percent or more of the
outstanding voting securities of such
other person;
(2) Any person 5 percent or more of
whose outstanding voting securities are
directly or indirectly owned, controlled,
or held with power to vote, by such
other person;
(3) Any person directly or indirectly
controlling, controlled by, or under
common control with, such other
person; and
(4) Any officer, director, partner,
copartner, or employee of such other
person.
(e) Material Affiliation—(1) a person
with a ‘‘material affiliation’’ with
another person means—
(A) any affiliate of the other person;
(B) Any person directly or indirectly
owning, controlling, or holding, 5
percent or more of the interests of such
other person;
(C) Any person 5 percent or more of
whose interests are directly or indirectly
owned, controlled, or held, by such
other person.
(2) For purposes of subparagraph
(e)(1) of this section, the term ‘‘interest’’
means with respect to an entity—
(A) The combined voting power of all
classes of stock entitled to vote or the
total value of the shares of all classes of
stock of the entity if the entity is a
corporation;
(B) The capital interest or the profits
interest of the entity if the entity is a
partnership; or
(C) The beneficial interest of the
entity if the entity is a trust or
unincorporated enterprise.
(f) Material Contractual
Relationship—persons have a ‘‘material
contractual relationship’’ if payments
made by one person to the other person

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pursuant to written contracts or
agreements between the persons exceed
10 percent of the gross revenue, on an
annual basis, of such other person.
(g) Control—means the power to
exercise a controlling influence over the
management or policies of a person
other than an individual.
(h) Independent—for purposes of
section III(e)(1), a person is
‘‘independent’’ of another person if it is
not an affiliate of the other person, and
does not have a material affiliation or
material contractual relationship with
the other person.
(i) Designated Investment Option—
means any investment option
designated by the plan into which
participants and beneficiaries may
direct the investment of assets held in,
or contributed to, their individual
accounts. The term ‘‘designated
investment option’’ shall not include
‘‘brokerage windows,’’ ‘‘self-directed
brokerage accounts,’’ or similar plan
arrangements that enable participants
and beneficiaries to select investments
beyond those designated by the plan.
Section V. Noncompliance With Terms
of the Exemption
This exemption shall not apply to any
transaction (described in Section I or II
of this exemption) in connection with
the provision of investment advice to an
individual participant or beneficiary
with respect to which the conditions of
this exemption have not been satisfied.
In addition, in the case of a pattern or
practice of noncompliance with any of
the conditions of this exemption, the
exemption shall not apply to any
transaction in connection with the
provision of investment advice provided
by the fiduciary adviser during the
period over which the pattern or
practice extended.
Signed at Washington, DC, this 15th day of
August, 2008.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits
Security Administration, Department of
Labor.
[FR Doc. E8–19273 Filed 8–21–08; 8:45 am]
BILLING CODE 4510–29–P

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