July 21, 2015 

Submitted Electronically – e-ORI@dol.gov and e-OED@dol.gov 

Office of Regulations and Interpretations 

Office of Exemption Determinations 

Employee Benefits Security Administration 

U.S. Department of Labor 

200 Constitution Ave., NW 

Washington, DC 20210 

Re: Definition of the Term “Fiduciary” (RIN 1210-AB32); 

Best Interest Contract Exemption (ZRIN 1210-ZA25) 

Ladies and Gentlemen: 

The Investment Program Association (“IPA”) submits the following comments 

with respect to the rule proposed by the U.S. Department of Labor (the “Department”) 

which would define who is a “fiduciary” by reason of providing investment advice for a 

fee or other compensation (the “Proposed Conflict of Interest Rule”1) and the related 

proposed Best Interest Contract Exemption (the “Proposed BIC Exemption”2). The IPA 

appreciates the opportunity to comment on this important regulatory action. 

The IPA was formed in 1985 to provide effective national leadership for the direct 

investment industry. The IPA supports individual investor access to a variety of asset 

classes whose returns have low or negative correlations with the returns from exchangetraded securities and products which invest primarily in exchange-traded securities. 

Many of these investment opportunities have historically been available only to 

institutional investors (the “IPA Products”).3 Included among the IPA Products are 

privately offered real estate private equity funds. The IPA has submitted a comment 

 

1 U.S. Department of Labor, Notice of Proposed Rulemaking, Definition of the Term “Fiduciary”; 

Conflict of Interest Rule – Retirement Investment Advice, 80 Fed. Reg. 21928 (proposed Apr. 20, 2015) (to 

be codified at 29 C.F.R. pt. 2509 and 2510), available at: 

http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=28201. 2 U.S. Department of Labor, Notice of Proposed Class Exemption, Proposed Best Interest Contract 

Exemption, 80 Fed. Reg. 21960 (proposed Apr. 20, 2015) (to be codified at 29 C.F.R. pt. 2550), available 

at: http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?Docld=28202. 3 Returns from asset classes that have low or negative correlations to exchange-traded securities and 

products generally do not move parallel with traded markets. This results in a type of diversification that 

assists in reducing risk resulting from market swings. 
2 

letter concerning certain publicly registered, non-listed investments included among IPA 

Products (the “Public Products Comment Letter”). This letter addresses a category of 

IPA Products which are privately offered – real estate private equity funds (“PE Funds”4). 

These PE Funds are more fully described below. For 30 years the IPA has successfully 

championed the growth and improvement of the IPA Products, which have increased in 

popularity with financial professionals and investors alike. Today, PE Funds function as 

a critical component of effectively diversified investment portfolios and serve an 

essential capital formation function for the U.S. economy. 

The IPA serves the investment community through advocacy, collaboration, and 

education regarding these “direct investments,” and by establishing and encouraging 

enhanced transparency, appropriate suitability screening and use of IPA Products, and 

best practices on the behalf of the investing public.5 

EXECUTIVE SUMMARY 

The IPA’s primary concerns, in connection with the Proposed BIC Exemption, 

relate to two issues: (i) the Department’s apparent substitution of a “legal list” of 

acceptable (and presumably “worthy”) assets in place of its traditional principles-based 

approach; and (ii) the definition of “Assets.” With respect to item (ii), the Department 

has requested comment on the proposed definition of “Assets” and has specifically asked 

that commenters who believe that additional investments should be included in the scope 

of the exemption provide the Department with full descriptions of those products, as well 

as information supporting the position that the products are a “common investment for 

retail investors.”6 

The IPA respectfully submits that the retreat from a principles-based approach to 

a “legal list” of “Assets” available to retirement investors for the purpose of the BIC 

Exemption will stifle product innovation and deny retirement investors the ability to 

access new investment categories, structures and products which may provide enhanced 

financial benefits and/or reduced risks. To avoid the negative consequences of this 

approach, the Department must have the ability and resources to regularly, continually, 

and timely consider and analyze new investment products for inclusion as an Asset, 

which may not be practicable. As a result, the Asset list process will create a category of 

 

4 The IPA supports additional products, but PE Funds are the only products supported by the IPA 

that are discussed herein. 

5 A more complete description of IPA activities can be found in the Public Products Comment 

Letter. 

6 Proposed BIC Exemption, 80 Fed. Reg. 21967. 
3 

investors who are not able to take advantage of market evolutions and improvements. 

The IPA, therefore, believes that the “Asset” list approach should be discarded in favor of 

a principles-based approach. 

The IPA also respectfully submits that if the Department determines to proceed 

with an “Asset” list approach, then PE Funds, as defined and described herein, should be 

included in the “legal list” of “Assets.” This position is supported by the following facts: 

 PE Funds are compatible with the objectives of retirement investors in that 

they can provide superior reliable income, inflation protection, and capital 

growth to preserve the purchasing power of savings during retirement. 

 PE Funds are commonly used securities in the portfolios of retired, 

accredited investors. 

 PE Funds provide retirement investors with access to the same strategy, 

which is used by the nation’s leading public and private pension and 

endowment plans in that they provide portfolio diversification into an 

asset class, real estate, which has historically had a low correlation with 

exchange-traded financial products, thereby reducing portfolio risk and 

increasing risk-adjusted returns. 

 PE Funds provide retirement investors with the opportunity to benefit 

from professional management of direct investments in real properties by 

organizations which have significant experience and expertise in the asset 

class. 

 PE Funds have compensation provisions which are driven by active and 

competitive private equity capital market forces. 

 While they do not issue publicly registered securities, PE Funds are 

nevertheless subject to substantial regulation at the federal and state level, 

which provides significant investor protections. In addition, brokerdealers are subject to extensive requirements relating to due diligence 

reviews and determinations of the merits and suitability of PE Funds for 

individual investors. 

 Under existing regulations, access to PE Funds is limited to investors who 

have the financial resources and knowledge and experience in financial 
4 

and business matters to make fully informed decisions regarding the 

merits and risks of a PE Fund investment. 

 Despite these facts, PE Funds have not been included in the Department’s 

proposed list of “Assets,” making these privately offered and strategically useful 

investments unavailable to qualified IRA investors. The IPA believes that PE Funds7

should be included as “Assets” within the Proposed BIC Exemption either by the removal 

by the Department of a “legal list” of “Assets” or by the inclusion of PE Funds on the 

“legal list.” 

The following pages provide a more in-depth description and details of PE Funds 

and the IPA’s recommendations with respect to the Department’s proposal. 

I. PE Funds Help to Achieve Retirement Investment Objectives 

PE Funds are effective investments to help qualified investors achieve their 

retirement investment objectives. These products: 

 Provide a Range of Strategic Investment Alternatives to Target Individual 

Retirement Plan Needs. PE Funds are not “one size fits all” products, but 

rather provide a broad range of risk and return attributes. This allows for 

the appropriate matching of investor needs and objectives with specific 

products’ attributes, while at the same time providing the more universal 

portfolio benefits described below. The dimensions of PE Fund 

adaptability to individual retirement objectives includes: accessibility of 

alternative real estate asset classes (e.g., land, office, industrial, retail, 

apartment, hotel/hospitality, self-storage, net-lease, and other specialty 

property types); alternative composition of primary investor returns 

running the spectrum from primarily income to primarily capital growth; a 

broad range risk-return attributes (e.g., level of debt financing used to 

increase potential returns, stage of real property operations from under 

development to existing and fully leased), and length of capital 

commitment (e.g., anticipated life of the individual PE Fund typically 

ranging from three to ten years). 

 

7 The descriptions of the PE Funds included in this comment letter are general in nature. Some 

individual PE Funds may vary from the examples described herein with respect to distribution method, 

structure, compensation arrangements, and regulatory framework. We believe, however, that they are most 

representative of the vast majority of existing PE Funds. 
5 

 Provide Superior Income Distributions. Depending on their primary 

objective, (e.g., income or growth) PE Funds can provide a stable stream 

of income which can sustain lifestyle in retirement. 

 Provide the Potential for Inflation Protection. Inflation is one of the most 

significant risks to retirement income and the purchasing power of 

savings. Unlike bond and fixed income portfolios where the purchasing 

power of invested capital can be eroded by inflation, the asset-based PE 

Funds can provide capital protection through appreciation of the value of 

the real estate assets they own. In addition, to the extent inflation induces 

increases in commercial property rents, the stream of operational income 

received by PE Fund investors can increase, providing another dimension 

of inflationary protection. 

 Avoid Exposure to the Volatility of Traded Securities Markets. By 

investing directly in real properties, PE Funds help investors avoid 

concentrating their portfolios in exchange-traded securities or vehicles 

which invest in exchange-traded securities, and thereby help to reduce the 

volatility and market risks associated with such products in investor 

portfolios. 

Historically, this volatility in exchange-traded securities markets 

has tended to induce retail investors to sell securities at times of declining 

market prices and purchase securities at times of increasing market prices, 

as demonstrated in Morningstar’s Investor Return metric. Although such 

potential volatility goes hand-in-hand with the benefit of total liquidity, as 

described below, achieving the diversification benefit of low correlation 

requires including less liquid investments in retirement portfolios. 

Volatility can be particularly detrimental to retirement investors 

whose retirement portfolios are concentrated in exchange-traded securities 

and products and who have begun regular withdrawals to sustain their 

lifestyles. For these investors, when the value of their portfolio has been 

temporarily depressed due to market volatility while still needing to take 

distributions to sustain their lifestyle, such distributions will represent a 

greater proportion of their retirement savings, thereby reducing the future 

income-generating potential of their retirement savings, and compromising 

their lifestyles. 
6 

 Enable the Assembly of More Effectively Diversified, and Therefore More 

Stable, Investment Portfolios by Retirees. PE Funds are a crucial 

component of a wise retirement, estate and generational planning strategy 

because they are composed of real assets (i.e., land and commercial real 

estate) whose returns tend to have low correlations with returns from 

exchange-traded securities and products comprised primarily of exchangetraded securities. PE Funds provide individual investors with access to 

professionally managed, commercial real estate ownership which for years 

has been a fundamental component of the investment portfolios of 

institutional pension plans and endowments. These institutional investors, 

operating under “prudent investing” principles, have long recognized the 

tenets of Modern Portfolio Theory. This theory, first described by the 

economist Harry Markowitz and subsequently confirmed through 

observation and quantitative analysis, states that investors can achieve 

superior risk-adjusted returns by combining assets that have different risk 

characteristics. This combining of assets can result in a portfolio with less 

risk than the individual assets comprising it, without sacrificing return 

potential. A key determinant of the amount of risk reduction is not just the 

number of assets combined, but more importantly their “correlation.” 

Two asset classes whose returns move in parallel (i.e., when one goes up, 

the other goes up) are said to have a positive correlation; if their returns 

move in opposite directions they have a negative correlation. Markowitz’s 

great contribution to investors’ wallets was his demonstration that 

anything less than perfect positive correlation can potentially reduce risk.8

 Because PE Funds invest directly in real properties rather than 

exchange-traded real estate securities, PE Funds provide retirement 

investors with the opportunity to diversify and stabilize their portfolios of 

exchange-traded investments, and thereby improve their risk/return profile 

in the same way professionally managed institutional pension and 

endowment plans diversify and stabilize their portfolios. These assets 

have historically shown low correlations with financial assets, and, 

therefore, are recognized as effective diversifiers. 

 

8 Burton G. Malkiel, A Random Walk Down Wall Street, p. 190, W.W. Norton & Company (9th 

edition 2007). 
7 

II. Why PE Funds Should be Included on the Department’s Proposed Asset List 

If the Department does not abandon the “legal” Asset list approach in favor of a 

principles-based approach to its proposal, then the IPA submits that PE Funds belong on 

any such list for the following reasons: 

 Optionality to Tailor Product Selection to Investment Objectives and 

Benefits Desired. As previously stated, PE Funds provide qualified 

investors with a variety of real estate product alternatives which can help 

achieve retirement investing objectives by providing current income, 

inflation protection and preservation of purchasing power, capital growth, 

reduced exposure to the negative consequences of traded market volatility, 

and a portfolio constructed in accordance with Modern Portfolio Theory 

and designed to pursue optimal risk-adjusted returns. While suitability 

requirements limit their use to a segment of the qualified investor pool, 

within this segment their use is extremely common. 

 Finite Life. PE Funds do not have an active secondary market. This, 

however, does not mean that PE Funds are fully illiquid. Notably, there is 

a growing market for shares of PE Funds comprised of private equity 

funds that buy interests in other established funds, and there are certain 

segments of the market through which secondary sale liquidity is 

available. More importantly, PE Funds have limited lives (e.g., typically 

three to ten years) and are comprised of multiple real estate asset 

investments that either may be sold individually during the life of the fund 

or at the end of its term. Investors typically receive cash distributions 

upon each realization event, providing a degree of interim liquidity and 

full liquidity at the end of the PE Fund’s anticipated real estate holding 

period. However, the inherently illiquid nature of real properties dictates 

that any real estate investment vehicle designed to provide the portfolio 

benefits of diversification and low correlation with exchange-traded 

financial assets will by its nature have limited liquidity. So, retirement 

investors seeking an optimally diversified portfolio cannot achieve that 

objective without investing in non-listed securities or assets. 

 Alignment of Interests with its Investors. Unlike many other investment 

products, where the fund manager determines the value of assets for 

purposes of calculating the management and performance fees during the 

operational stage of the investment, a PE Fund’s manager receives its 

management fee based on a percentage of an investor’s commitment to the 
8 

fund during the anticipated investment period (ranging from 1% to 2%), 

rather than on an estimated value which has not been realized. Further, in 

a very limited number of programs, if the investment continues beyond the 

anticipated investment period, the PE Fund requires that this management 

fee decline to a lower percentage of remaining invested capital thereafter. 

Likewise, performance fees are based on the PE Fund’s realized gains on 

each of its investments, and are not based on the unrealized increase in the 

value of the fund’s investments. 

 Where performance fees in a PE Fund are calculated on an 

investment-by-investment basis, it is possible that, in the aggregate, the 

partnership’s manager (the general partner) may receive a higher 

percentage of returns than would be determined based on the overall 

performance of the PE Fund (for example, if the interim property sales 

produce gains but the final liquidating property sale is at a loss which 

reduces the overall return from the PE Fund). Typically, such PE Funds 

include a mechanism that provides an additional investor safeguard to 

ensure that performance fees do not exceed the agreed-upon percentage of 

gains. This mechanism, often called a “clawback,” requires the general 

partner to return previously paid performance fees to the investors to the 

extent they represent more than its agreed-upon profit split. 

 Substantial Regulations. As is described in greater detail below, PE 

Funds, and those who sell them, are subject to considerable levels of 

regulation by the U.S. Securities and Exchange Commission (“SEC”), the 

Financial Industry Regulatory Authority (“FINRA”),9 and the securities 

regulators of the states in which those products are sold. While the 

regulations differ to some degree, in general, the regulation of PE Funds 

addresses topics such as a broker-dealer’s thorough, independent due 

diligence obligation to investors with respect to the PE Fund, disclosure 

requirements (e.g., prepare and file a private placement memorandum or 

notice filing with FINRA), and the imposition of investor suitability 

standards (e.g., a requirement that broker-dealers selling the products 

assess the suitability of the products for the investor). 

 Professional Management Expertise. PE Funds are increasingly attracting 

“institutional quality” professional asset management companies with 

 

9 FINRA is an independent self-regulatory organization authorized by Congress to protect investors 

by ensuring that the securities industry operates fairly and honestly. (http://www.finra.org). 
9 

exceptional qualifications in the areas of their asset focus. Due to the real, 

tangible nature of a PE Fund’s assets, its success demands the involvement 

of programmatic managers with significant experience in operating real 

estate assets. 

 Commonality of Private Investment Vehicles. According to an SEC 

study, in 2012, private offerings of securities accounted for $1.7 trillion of 

new capital, while public offerings accounted for $1.2 trillion.10 In this 

regard it is noteworthy that a 2015 study observed that: “Advised 

investors have more diversified portfolios, own twice as many asset 

classes, have more balanced portfolio asset allocations and use more 

packaged products for equity exposure compared with non-advised 

investors.”11 The IPA believes that this greater diversification of asset 

classes and products among advised investors reflects, in part, a significant 

use of private placement products such as PE Funds. 

 The foregoing is especially notable when comparing the size of the 

private offering market to the size of the public offering market with 

respect to certain of the financial instruments that have been designated as 

“Assets” under the Proposed BIC Exemption. For example, in 2012, there 

were 32,989 private offerings which accounted for $903 billion in capital 

raised. During the same period, public debt, which is included as an 

“Asset” (e.g., corporate bonds offered pursuant to a registration statement) 

accounted for 1,473 offerings and raised just under $1.0 trillion in new 

capital. To the extent that commonality was a factor in the Department’s 

determination to include corporate bonds as an “Asset,” privately offered 

instruments compare favorably with respect to commonality.12

III. PE Fund Structure and Purpose 

A PE Fund is an investment vehicle that makes real estate-related investments, 

typically by acquiring and operating real estate assets in the spectrum from land to 

income-producing real estate. PE Funds provide a spectrum of product selection 

 

10 See, Vladimir Ivanov & Scott Bauguess, Securities and Exchange Commission, Division of 

Economic and Risk Analysis, U.S. Capital Raising in the U.S.: An Analysis of Unregistered Offerings 

Using the Regulation D Exemption, 2009‐2012, at 8 (July 2013), available at: 

https://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf. 11 See, Oliver Wyman, The Role of Financial Advisors in the US Retirement Market 11 (Jul. 10, 

2015). 

12 Id. at 9. 
10 

alternatives to enable investors to match the investment to their individual financial 

situations and objectives. The alternatives include the property type(s) which the PE Fund 

acquires (e.g., office, industrial, retail, apartment, hotel/hospitality, self-storage, net-lease, 

other specialty land and property types); geographic location; degree of portfolio 

diversification (from having a single property focus to using a multi-property strategy); 

the composition of primary investor returns intended to be provided by the PE Fund 

(ranging from primarily income to primarily capital growth); risk-return attributes (e.g., 

level of debt financing used by the PE Fund to acquire properties), and the stage (and 

therefore return potential) of real property operations ranging from under development to 

existing and fully leased. 

Typically, but not exclusively, PE Fund investors commit to invest a certain 

amount of money over the life of the fund, and make their contributions in response to 

“capital calls” from the fund’s general partner.13 Because PE Funds typically do not 

retain a pool of uninvested capital, a capital call is made when a potential portfolio 

investment is identified. This process increases the rate of return which investors receive 

compared with a structure where the full amount of the commitment is made up-front. 

PE Funds are finite-life investments that typically intend to fully liquidate within three to 

ten years, as specified in the fund’s offering documents. Depending on the objectives of 

the individual PE Fund, investors will typically receive cash distributions generated by 

the rental of the properties during the period of portfolio operations and then a final cash 

distribution when the properties are sold and the fund liquidates. However, where the PE 

Fund invests in multiple real property assets, investors may receive periodic cash 

distributions from realized investments and income received by the PE Fund. 

IV. Existing Regulation of PE Funds 

Interests in PE Funds are typically offered by means of private placements 

pursuant to an exemption from registration under the U.S. Securities Act of 1933 (the 

“1933 Act”14).15 PE Funds typically rely on Rule 506(b) (and sometimes on Rule 506(c) 

 

13 See, e.g., Staff Report to the Securities and Exchange Commission, Implications of the Growth of 

Hedge Funds, at 7-8 (Sept. 2003) (discussing and contrasting the structure and purpose of private equity 

funds versus hedge funds), available at: https://www.sec.gov/news/studies/hedgefunds0903.pdf. 14 See, e.g., the 1933 Act, available at: http://www.sec.gov/about/laws/sa33.pdf. 15 Offers and sales of most PE Fund interests are exempted under Regulation D (17 C.F.R. § 230.501 

et seq.). Regulation D calls for the electronic filing of Form D with the SEC no later than 15 calendar days 

after the “date of first sale” of their offerings and, in certain instances, periodically thereafter. Form D 

requires the names and addresses of the PE Fund’s promoters, executive officers, and directors, and certain 

details about the offering. See, e.g., Form D and instructions, available at: 

http://www.sec.gov/about/forms/formd.pdf. 
11 

starting September 23, 2013), of Regulation D for their private offering exemption under 

Section 4(a)(2) of the 1933 Act.16 The Rule 506(b) exemption requires the fund to 

comply with the following standards: (a) the fund “cannot use general solicitation or 

advertising to market the securities”, (b) the fund “may sell its securities to an unlimited 

number of ‘accredited investors’17 and up to 35 other purchasers”, (c) “all non-accredited 

investors, either alone or with a purchaser representative, must be sophisticated—that is, 

they must have sufficient knowledge and experience in financial and business matters to 

make them capable of evaluating the merits and risks of the prospective investment”, (d) 

the fund “must give non-accredited investors disclosure18 documents that are generally 

the same as those used in registered offerings”, (e) if the fund “provides information to 

accredited investors, it must make this information available to non-accredited investors 

as well”, and (f) the fund “must be available to answer questions by prospective 

purchasers.”19 

The fund manager and the general partner of a PE Fund are often professional real 

estate management organizations or their affiliates, which, with respect to certain PE 

Funds, may be registered as “investment advisers” under the U.S. Investment Advisers 

Act of 1940 (the “Advisers Act”).20

IMPORTANT NOTE: The term “advisor” in the context of a PE Fund refers to 

the entity which manages and guides the daily operation of the fund. This entity is 

typically a company that specializes in the real estate asset class in which the fund 

invests and is compensated for its services as described herein. This manager of the 

entity should not be confused with the client-facing “financial advisor” who deals 

directly with the investor and provides information and makes recommendations with 

 

16 See, e.g., Rule 506 of Regulation D exemption of Section 4(a)(2) of the 1933 Act, available at: 

http://www.sec.gov/answers/rule506.htm. 17 Under Rule 506 of Regulation D, a PE Fund may sell its securities to what are known as 

“accredited investors.” For example, investors can qualify as accredited investors if their “individual net 

worth, or joint net worth with that person’s spouse, exceeds $1,000,000.” The term accredited investor is 

fully defined in Rule 501 of Regulation D, available at: http://www.ecfr.gov/cgibin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&r=SECTION&n=17y3.0.1.1.12.0.46.

176. 18 See, e.g., Rule 502 of Regulation D (setting forth disclosure and other conditions applicable to 

offers and sales made under Regulation D), available at: http://www.ecfr.gov/cgibin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&mc=true&n=pt17.3.230&r=PART&

ty=HTML#se17.3.230_1502. 19 See, the SEC’s discussion of Rule 506 of Regulation D, available at: 

http://www.sec.gov/answers/rule506.htm. 20 See, e.g., the Advisers Act, available at: https://www.sec.gov/about/laws/iaa40.pdf. 
12 

respect to investments. For purposes of clarity, the IPA will refer sometimes herein to the 

managers of PE Funds as the “External Manager” or “General Partner.” 

V. Distribution of PE Funds 

A. The Typical Distribution Process for PE Funds 

PE Funds are often distributed by broker-dealers that are registered with the SEC, 

FINRA, and the relevant state securities regulatory authorities. The broker-dealer 

personnel involved in sales activities (“registered representatives”) are also regulated by 

the SEC, FINRA, and the applicable state regulatory authorities.21 To a certain extent, 

investment advisers that are registered with the SEC and the relevant state regulatory 

bodies (or that are exempt from such registration) also advise clients with respect to 

investments in PE Funds. 

Depending upon the size of the PE Fund offering, the process of distribution of 

the fund’s securities may involve either a single registered broker-dealer or the formation 

of a selling group of registered broker-dealers. Unlike initial public offerings for 

exchange-traded securities, PE Funds typically conduct offerings of securities which may 

last from 6 to 28 months before closing the offering to new investors. Where a selling 

group is needed, it is formed by a dealer manager, which is a registered broker-dealer. 

As described below, each participating broker-dealer must conduct due diligence on the 

offering and an in-depth suitability analysis. Direct investor contact occurs between the 

registered representatives of the participating broker dealer(s) and their clients, and 

typically not at the dealer manager level or the External Manager/General Partner level. 

Fees charged by broker-dealers relating to the distribution of PE Fund securities 

are generally one-time, up-front fees payable out of gross offering proceeds. These frontend fees include sales commissions, dealer manager fees, and bona fide due diligence 

expenses. These distribution costs for analogous publicly registered investment products 

(e.g., publicly registered, non-listed real estate partnerships and real estate investment 

trusts (“REITs”)) are limited by FINRA to 10% of the gross offering proceeds. Although 

 

21 Broker-dealers registering with the SEC must: (a) file SEC Form BD; (b) become a member of a 

self-regulatory organization (usually FINRA); (c) become a member of the Securities Investor Protection 

Corporation; (d) comply with all applicable state requirements; and (e) any “associated person” (i.e., any 

partner, officer, director, branch manager, or employee of the broker-dealer) must satisfy applicable 

qualification requirements, including passing any required exams and participating in continuing education. 

See, e.g., the SEC Guide to Broker-Dealer Registration; Registration and Regulation of Brokers and 

Dealers, Section 15 of the U.S. Securities Exchange Act of 1934, available at: 

http://www.sec.gov/divisions/marketreg/bdguide.htm. 
13 

no such regulatory limits apply to PE Funds, market forces in the broker-dealer 

community – in large part driven by a recognition of the cost limitations among 

analogous public products -- have tended to drive distribution costs for PE Funds down to 

public product levels.22 The fact that these up-front fees in PE Funds are intended to 

defray the ongoing services of the broker-dealer and its registered representative, during 

the three to ten year life of the investment suggests that these fees compare favorably 

with the annual fees paid by investors to investment advisors based on assets under 

management for a portfolio comprised only of investments on the Department’s proposed 

Asset list over a comparable multi-year holding period. 

B. Federal Regulations Require Thorough Due Diligence and Disclosure 

in Connection with Offers and Sales of PE Funds 

Broker-dealers, whether registered or not, are subject to federal and state 

securities regulations that are designed to protect investors from fraudulent or deceptive 

sales of securities. FINRA imposes upon broker-dealers the obligation to conduct a 

reasonable investigation of the issuer and the securities they recommend in privately 

placed offerings made pursuant to Regulation D.23 As such, a broker-dealer has a duty, 

enforceable under federal securities laws and FINRA rules, to conduct a reasonable 

investigation of the PE Funds that it recommends. Moreover, any broker-dealer that 

recommends PE Funds offered under Regulation D must meet its suitability obligations 

under FINRA Rule 2310 (discussed below),24 and must comply with the advertising, 

supervisory and record-keeping rules of FINRA and the SEC. These rules require that 

broker-dealers conduct due diligence on the products they offer, provide full disclosure, 

provide fair and balanced communications, and assess the suitability of the offered 

products, when dealing with investors. A broker-dealer’s failure to comply with any of 

the foregoing may result in disciplinary actions, fines, and/or referrals to the SEC for the 

violation.25

FINRA describes a broker-dealer’s duty to conduct reasonable due diligence 

when offering or selling a product offered under Regulation D, such as PE Funds, as 

follows: 

 

22 See the IPA Public Products Comment Letter for additional details regarding underwriting costs 

comparisons among public offerings. 

23 See, e.g., FINRA Regulatory Notice 10-22, available at: http://www.finra.org/industry/notices/10-

22. 24 See, e.g., FINRA Rule 2310, available at: 

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=8469. 25 See, e.g., FINRA Sanctions Guidelines, available at: 

http://www.finra.org/sites/default/files/Sanctions_Guidelines.pdf. 
14 

A [broker-dealer] may not rely blindly upon the 

issuer for information concerning a company, nor 

may it rely on the information provided by the 

issuer and its counsel in lieu of conducting its own 

reasonable investigation. While [broker-dealers] 

are not expected to have the same knowledge as an 

issuer or its management, [they] are required to 

exercise a “high degree of care” in investigating and 

independently verifying issuer’s representations and 

claims. Indeed, when an issuer seeks to finance a 

new speculative venture, [broker-dealers] must be 

particularly careful in verifying the issuer’s 

obviously self-serving statements. The fact that a 

[broker-dealer’s] customers may be sophisticated 

and knowledgeable does not obviate the duty to 

investigate. Moreover, in Regulation D offerings 

the SEC advises issuers to provide the same 

information to accredited investors as they are 

required to provide to non-accredited investors, in 

view of the antifraud provisions.26

Furthermore, FINRA sets forth criteria that a broker-dealer should investigate 

regarding the issuer and management of a PE Fund. For example, FINRA states that a 

broker-dealer should inquire into: (a) the success of past securities offerings by the issuer; 

(b) pending litigation with respect to the issuer or its affiliates; (c) any previous or 

potential regulatory or disciplinary problems of the issuer; and (d) the expertise of 

management for the issuer’s business, among other things.27 In fulfilling its due 

diligence obligations, a broker-dealer “may retain counsel or other experts.”28 FINRA 

requires that a broker-dealer verify the qualifications and competence of counsel or 

experts retained to perform an investigation, while bearing in mind that “the use of 

counsel or experts does not necessarily complete the broker-dealer’s investigation 

responsibilities, insofar as a review of the counsel’s or expert’s report may identify issues 

or concerns that require further investigation.”29 In addition, FINRA imposes a duty 

 

26 See, FINRA Regulatory Notice 10-22 (internal citations and quotations omitted). 

27 Id. 

28 Id. 29 Id.
15 

upon the broker-dealer to maintain records of the process and results to “demonstrate that 

it has performed a reasonable investigation.”30

Aside from conducting thorough due diligence of PE Funds and their issuers, 

broker-dealers must also comply with FINRA’s filing requirements for private 

placements. FINRA Rule 512331 requires broker-dealers, selling privately placed 

products, such as PE Funds, in reliance on an available exemption from registration under 

the 1933 Act, to file any private placement memorandum, term sheet or other offering 

documents with FINRA within 15 days of the date of the first sale of securities, or 

indicate that there were no offering documents used.32 Typically, private placement 

memoranda, which comply with Rule 502(b)(2) of Regulation D, contain relevant 

disclosures that allow an investor to weigh the risks involved with an investment and 

make a fully informed decision with respect to the investment. 

C. Federal Regulations Require Consideration of the Investor’s Best 

Interests 

Federal law and FINRA rules require brokers to “adhere to high standards of 

conduct in their interactions with investors.”33 As a general matter, the suitability 

requirements of FINRA Rule 211134 and of FINRA Rule 231035 mandate that brokerdealers have a reasonable basis to believe that a recommended transaction or investment 

involving securities is suitable for each customer based on reasonable diligence36 into the 

investor’s investment profile. Broker-dealers must believe that the customer has the 

financial ability to meet the commitment of the investment. The suitability obligation 

 

30 Id.

31 See, e.g., FINRA Rule 5123 (noting that certain filing exemptions apply, such as sales to 

investment companies or certain accredited investors, among others), available at: 

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=10753. 32 See, also, Regulatory Notice 12-40 (discussing the requirements of FINRA Rule 5123), available 

at: http://finra.complinet.com/net_file_store/new_rulebooks/f/i/FINRANotice12_40.pdf. 33 See, e.g., Securities and Exchange Commission, Study on Investment Advisers and Broker Dealers 

at 13 (Jan. 2011), available at: http://sec.gov/news/studies/2011/913studyfinal.pdf. 34 See, e.g., FINRA Rule 2111 and FINRA Regulatory Notice 11-02, available at: 

http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element_id=9859&print=1. 35 See, e.g., FINRA Rule 2310 and FINRA Regulatory Notice 10-22, available at: 

http://www.finra.org/industry/notices/10-22 and 

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=8469. 36 For example, broker-dealers have a duty “to conduct reasonable investigation of securities, 

including those sold in a Regulation D offering.” See, e.g., FINRA Regulatory Notice 10-22. 
16 

requires that broker-dealers make an assessment of: (1) reasonable basis suitability, (2) 

customer-specific suitability, and (3) quantitative suitability.37

Reasonable basis suitability means that, based on reasonable diligence, the 

broker-dealer has a reasonable basis to believe that the recommendation is suitable for 

investors. FINRA views the participation of broker-dealers in a securities transaction as a 

representation that reasonable basis suitability has been satisfied with respect to that 

transaction. What constitutes reasonable diligence varies depending on, among other 

things, the complexity of and risks associated with the security and transaction. 

Reasonable diligence must provide the broker-dealer (and employees participating in a 

transaction) with an understanding of the potential risks and rewards associated with the 

recommended security or transaction. 

Customer-specific suitability means the broker-dealer has a reasonable basis to 

believe that the recommendation is suitable for a particular customer, based on that 

customer’s investment profile. Customer-specific information must be obtained and 

analyzed when making recommendations to customers. 

Quantitative suitability means the broker-dealer with actual or de facto control 

over a customer account must have a reasonable basis for believing that a series of 

recommended transactions (even if individually suitable) are not excessive or unsuitable 

in the aggregate in light of the customer’s investment profile. FINRA enumerates several 

factors that might suggest excessive activity, such as turnover rate, cost-equity ratio, and 

the use of in-and-out trading in a customer’s account.38 

VI. PE Fund Fees and Expenses 

The fees and expenses associated with PE Funds can be segregated into two 

distinct categories: (1) fees and expenses associated with the formation of the fund and 

the sale of its securities to qualified investors through financial intermediaries (referred to 

herein as “Offering and Organizational Costs”); and (2) fees and expenses associated 

with the management and operation of the fund and its assets (referred to herein as 

“External Management Costs”). The first category of fees and expenses include 

compensation to the broker-dealers, registered representatives and investment advisers 

who make investment recommendations to investors. The second category of fees and 

 

37 See, e.g., FINRA Rule 2111. 

38 See, e.g., FINRA Rule 2111, Supplementary Material, Section .05 “Components of Suitability 

Obligations.” 
17 

expenses are paid exclusively to External Management or other third parties and are not 

related to the process of recommending investments to individual investors. 

When evaluating the nature and level of fees and expenses for PE Funds, it is 

important to understand the overall structure of the management of the enterprise 

compared with the management of public non-listed and exchange-traded real estate 

investments (e.g., REITs). REITs can be either internally or externally managed. Simply 

put, internally managed entities are operated by employees of the entity and the overall 

costs of management, including the salaries, benefits and incentive compensation of these 

employees, are subsumed into the entity’s reported “general and administrative expense” 

reporting. In contrast, externally managed entities typically have no employees and 

instead contract with a separate company experienced in the asset class to provide 

management services and conduct the day-to-day operations of the entity. The costs of 

such external management are separately reported (typically categorized by the nature of 

the service provided – e.g., acquisitions, asset management, property management, etc.) 

in financial statements as fees paid to the External Manager. 

The determination of which management structure, internal or external, to use is 

made by the issuer. For real estate investment entities, which commence their existence 

by way of private offerings that have not yet raised capital nor made investments, 

external management structures are preferred. They avoid the challenge of attempting to 

attract an experienced management team and incur the associated full overhead expenses 

for a company which has not yet raised capital, acquired a portfolio, or generated 

revenues over which to spread such employment costs. Therefore, PE Funds are 

typically, but not exclusively, externally managed. 

Separate and apart from the Offering and Organization Costs associated with the 

formation of the product and the private offering and issuance of interests in PE Funds 

(which include legal and accounting representation and printing of offering documents, 

among other expenses), there are a variety of fees and expenses charged in connection 

with operation of the PE Fund. 

While not all PE Funds are subject to the same fees and expenses, which may 

vary depending on the specific activities of the PE Fund, examples of the types of fees 

and expenses payable by most PE Funds to the External Manager or other third-party 

service providers include: acquisition fees for the selection, evaluation, structuring, and 

purchase of real estate assets; the reimbursement of expenses incurred in connection with 

the selection, purchase, development, or construction of properties; an asset management 

fee based on a percentage of the cost or value of the PE Fund’s assets; property 

management fees, oversight fees, and construction management fees; a financing 
18 

coordination fee as a percentage of the amount of any original financing or refinancing 

coordinated by the External Manager; a service fee for the provision of administrative 

services to the PE Fund’s investors; disposition fees rendered in connection with the sale 

of PE Fund assets; and performance and incentive fees (sometimes subject to a hurdle 

rate). As earlier noted, there are some conflict ameliorating factors relevant to certain of 

the aforementioned fees.39 Further, as previously described, the fees described above as 

being paid to the External Manager of a PE Fund would typically be paid to the External 

Manager of an exchange-traded REIT or in the form of compensation, benefits and 

related overhead to employees of an internally managed exchange-traded REIT. 

VII. Liquidity of PE Funds

PE Funds do not have an active secondary market. This, however, does not mean 

that PE Funds are fully illiquid. Notably, there is a growing market for shares of PE 

Funds comprised of private equity funds that buy interests in other established funds, and 

there are certain segments of the market through which secondary sale liquidity is 

available. As previously indicated, PE Funds have limited lives (e.g., typically three to 

ten years) after which the real estate asset(s) are sold and the proceeds are distributed to 

investors. Where the PE Fund is comprised of multiple real estate asset investments, 

properties may be sold individually during the life of the fund or at the end of its term. 

Investors typically receive cash distributions upon each realization event, providing a 

degree of interim liquidity and full liquidity at the end of the PE Fund’s anticipated real 

estate holding period. 

The fact that PE Funds do not offer the full liquidity associated with products, 

such as mutual funds, is a critical reason why they should be included in retirement 

portfolios. As retirement accounts are generally designed for long-term holding, there is 

no reason why a less liquid investment would be per se improper. In fact, the lack of 

immediate liquidity discourages “churning” and “market timing” and further reduces the 

investments’ correlation to the stock market, all enhanced features and characteristics of a 

long term, patient retirement planning perspective. 

Further, the inherently illiquid nature of real properties dictates that any real estate 

investment vehicle designed to provide the portfolio benefits of diversification and low 

correlation with exchange-traded financial assets, whether it be an institutional separate 

account or comingled fund, or a PE Fund, will, by its nature have limited liquidity. So, 

retirement investors seeking an optimally diversified portfolio cannot achieve that 

 

39 See, section II. 
19 

objective using solely exchange-traded REITs or mutual funds which invest in exchangetraded REITs and real estate companies. 

Finally, as previously observed, the potential portfolio volatility which, of 

necessity, accompanies portfolios of directly or indirectly owned exchange-traded 

securities, which, therefore, are subject to the vagaries of the traded markets, can force 

investors who are taking retirement plan distributions to effectively liquidate their 

investments at times of depressed market conditions, thereby jeopardizing the future 

income-generating potential of their retirement savings and compromising their lifestyles. 

VIII. Additional Bases for the Department to Include PE Funds in the Exemption 

A. The Department Should Discard the Legal List of “Assets” 

A list of “Assets” will deprive investors of choice and will render the Department 

unable to easily adapt to market changes. New investment products are continually 

introduced to the market. It is not feasible to expect that the Department will have the 

means or ability to regularly and continually consider and analyze new investment 

products for inclusion as an Asset. As a result, the Asset list process will create a 

category of investors who are not able to take advantage of market evolutions and 

improvements. Further, this will result in those investors being precluded from seeking 

the same return available to other investors or from being able to diversify their 

investment portfolios on the same basis as other investors. This outcome could both 

lower returns and increase risk through lack of portfolio diversification—the exact 

opposite of the Department’s objectives. 

Some of the emerging products supported by the IPA demonstrate this precise 

principle. PE Funds, for instance, share many of the same structural qualities as -

exchange-listed real estate investment trusts, but have not yet captured the same level of 

market interest. IPA believes that it is only a question of time and that a list of approved 

“Assets” would effectively hamper the development of this product. Given the evolution 

of various investment products over the past decades, placing artificial restrictions on 

what options are open to IRA investors seems designed to tamp down market growth and 

limit options for investors. Further chilling the availability of licensed, regulated, and 

supervised professional advice to these very investors is facially inconsistent with the 

Department’s goals. 

In the Proposed BIC Exemption, the Department emphasized that it intended to 

adopt a “principles-based” or “standards-based” approach that “would flexibly 

accommodate a wide range of current business practices” while minimizing conflicts of 
20 

interest.40 Yet while the Proposed BIC Exemption is designed to accommodate a wide 

range of compensation, and to be adaptable over time to market changes in the way 

investment advisers are compensated, the Department abandoned a principles-based 

approach when it came to the types of assets covered by the exemption. By proposing a 

fixed list of acceptable “Assets,” the Department chose to freeze in time the types of 

investments that may be offered to retail retirement investors. We urge the Department 

to reconsider the “legal list” approach, which is inconsistent with the history of ERISA 

and modern trust law. We urge the Department instead to adopt a flexible, principlesbased approach to the types of assets to which the BIC Exemption applies and to allow 

retail retirement investors to continue to invest in PE Funds. 

Until the early 1940s, many states required trustees to select investments from a 

statutory list of supposedly safe investments (a so-called “legal list”). Painful experience 

from the Great Depression showed, however, that virtually no investment is immune 

from risk, and that even the safest bonds and traditional investments could become 

worthless.41 Legal lists failed to adapt to changing economic and business conditions, 

and reflected the since-discredited assumption that past performance is a reliable 

predictor of risk. As a result, the legal lists tended to prohibit relatively safe investments 

in companies with an arguably risky past but a stable future, while permitting investment 

in more risky companies with a stable past but risky future. This history led the drafters 

of Restatement (Third) of Trusts to conclude that “knowledge, practices, and experience 

in the modern investment world have demonstrated that arbitrary restrictions on trust 

investments are unwarranted and often counterproductive.”42

The modern trend of fiduciary investment principles was driven in part by 

dissatisfaction with poor investment performance in legal list jurisdictions, and in part by 

a large body of academic research that resulted in what is known as modern portfolio 

 

40 Proposed BIC Exemption, 80 Fed. Reg. 21961. 

41 See, e.g., Edward C. Halbach, Jr., Trust Investment Law in the Third Restatement, 27 Real Prop. 

Prob. & Tr. J. 407 (1992) (summary of the background, development,t and criticism of traditional trust 

doctrine regarding investments, plus an overview of modern portfolio theory and other modern 

developments, from the Reporter for the Restatement (Third) of Trusts); H. Bines, Modern Portfolio 

Theory and Investment Management Law: Refinement of Legal Doctrine, 76 Columbia L. Rev. 721 (1976) 

(describing the disastrous performance of “legal list” portfolios during the Great Depression in comparison 

to more flexible prudent man jurisdictions). 

42 Restatement (Third) of Trusts, Ch. 17, Investment of Trust Funds (Introductory Note, Edward C. 

Halbach, Jr., Reporter); see, also, Edward C. Halbach, Jr., Trust Investment Law in the Third Restatement, 

supra; Jeffrey N. Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule, 62 N.Y.U.L. 

Rev. 52 (1987); B. Longstreth, Modern Investment Management and the Prudent Man Rule (1986). 
21 

theory.43 Modern portfolio theory demonstrates that portfolios of risky (i.e., more 

volatile) stocks can be combined in such a way that the portfolio as a whole could be less 

risky than the individual stocks in it.44

ERISA was the first legislation to apply modern portfolio theory to fiduciary 

standards of investment, and has been an influential landmark in the development of 

modern fiduciary law.45 The Department can justifiably be proud of the leading role 

ERISA has played in applying flexible and modern principles to the investment duties of 

fiduciaries. In this regard, perhaps the most significant development beyond the adoption 

of ERISA itself was the express reliance on modern portfolio theory in the final 

regulations under Section 404 of ERISA: 

[I]t is the Department’s view that an investment reasonably 

designed—as part of the portfolio—to further the purposes 

of the plan, and that is made upon appropriate consideration 

of the surrounding facts and circumstances, should not be 

deemed to be imprudent merely because the investment, 

standing alone, would have, for example, a relatively high 

degree of risk . . . . Accordingly . . . “appropriate 

consideration” shall include a determination by the 

fiduciary that the particular investment or investment 

course of action is reasonably designed, as part of the 

portfolio for which the fiduciary is responsible, to further 

the purposes of the plan, taking into account the risk of loss 

 

43 See, e.g., Edward C. Halbach, Jr., Trust Investment Law in the Third Restatement, supra; H. Bines, 

Modern Portfolio Theory and Investment Management Law: Refinement of Legal Doctrine, supra; John H. 

Langbein & Richard A. Posner, Market Funds and Trust-Investment Law, Yale Law School Faculty 

Scholarship Series (1976); John H. Langbein & Richard A. Posner, Market Funds and Trust-Investment 

Law II, Yale Law School Faculty Scholarship Series, Part I (1977) (describing the evolution of trust law, 

evidence for the notion that modern investment theory may be superior to conventional trust investment 

structures and has served as evidentiary backing for modern reforms in trust law and the investment duties). 

44 A good general discussion of modern portfolio theory can be found in Burton G. Malkiel, A 

Random Walk Down Wall Street, Ch. 8 (9th edition 2007). 

45 See, W. Brantley Phillips, Jr., Chasing Down the Devil: Standards of Prudent Investment Under 

the Restatement (Third) of Trusts, 54 Wash. & Lee L. Rev. 335 (1997) (describing how the passage of 

ERISA prompted the modernization effort of the third Restatement and uniform state laws on prudent 

investment); Samuel D. Cheris, Making Responsible Investment Decisions in Light of the Prudent Person 

Rule, 14 Est. Plan. 338 (1987) (describing how Congress adopted ERISA after hearing extensive testimony 

to the effect that traditional interpretations of prudence were too restrictive when applied to employee 

benefit plans). 
22 

and opportunity for gain (or other return) associated with 

the investment or investment course of action.46

Most important to the present discussion, the Department emphasized that its 

approach to prudent investing reflected a conscious decision to depart from legal lists and 

other traditional, restrictive applications of trust law: 

[T]he Department does not consider it appropriate to 

include in the regulation any list of investments, classes of 

investment, or investment techniques that might be 

permissive under the “prudence” rule. No such list could 

be complete; moreover, the Department does not intend to 

create or suggest a “legal list” of investments for plan 

fiduciaries. 

The preamble to the proposed regulation stated (as does 

this preamble) that the risk level of an investment does not 

alone make the investment per se prudent or per se

imprudent.47

The impartial conduct standards embodied in the BIC Exemption were designed 

to mirror the ERISA duty of prudence, combined with the duty of loyalty.48 It would be a 

mistake (and more than a bit ironic) to require broker-dealers in the retail retirement 

market to adhere to ERISA’s standard of prudence while at the same time preventing 

them from considering investment products which, under the Department’s own prudence 

regulations, they may be required to take into account in serving the best interests of their 

customers. Moreover, the Department’s list would invariably – and in all likelihood 

quickly – suffer the same fate as the legal lists of the past, falling behind ever-changing 

market conditions, failing to adapt to new products and advances in knowledge, and 

consequently relegating the BIC Exemption to the margins of the retail marketplace: 

Trust investment law should reflect and accommodate 

current knowledge and concepts. It should also avoid 

 

46 44 Fed. Reg. 31639 (June 1, 1979), reprinted in CCH, Pension and Employee Benefits, Vol. 3, par. 

24,038 (2015) (footnote omitted). 

47 Id.

48 Proposed BIC Exemption, 80 Fed. Reg. 21970. 
23 

repeating the mistake of freezing its rules against future 

learning and developments.49

However, the “Assets” list does exactly the opposite. It explicitly does act to 

create by regulation a list of investments that are or are not appropriate. The list places 

the Department in the position of weighing which investments represent a suitable level 

of risk and which ones do not, as well as dictating the limits by which certain investors 

can access investment products in order to diversify their portfolios. 

Finally, we would like to point out that in the preamble to the BIC Exemption, the 

Department said that it expects the best interest standard to be interpreted by courts in 

light of forty years of judicial experience with ERISA’s fiduciary standards.50 However, 

if the Department insists on inserting a legal list into the BIC Exemption, and thereby 

departing from a core principle of ERISA, it would virtually assure that interpretation of 

the best interest standard will diverge over time from otherwise applicable ERISA 

fiduciary standards. 

B. If the Department maintains the “legal list” it should add the Real 

Estate Private Equity Funds to that list. 

If the Department determines that a return to the “legal lists” of the past best 

serves the purposes of the Regulation and the BIC Exemption, IPA respectfully requests 

that the Department include the PE Funds on that list. As noted above, PE Funds are 

common, indeed ubiquitous, in the retirement investment marketplace and commonly 

included in many investor portfolios, providing access to investment opportunities once 

only available to wealthy investors, as well as diversification and protection against 

market volatility. To accomplish IPA’s request in the most clear manner possible, IPA 

suggests that the list of “Assets” be amended to include “privately placed real estate 

private equity funds.” 

The other terms and conditions of the BIC Exemption are already robust and 

flexible enough to protect retail investors, regardless of the product type. For example, if 

a recommended investment has different characteristics than “Assets” on the current list – 

such as less liquidity, lack of a public market, or different fee structure – those 

characteristics would have to be disclosed and taken into account by the adviser in order 

to the meet ERISA’s fiduciary obligations, and the stringent best interest standard and 

 

49 Restatement (Third) of Trusts, Ch. 17, Investment of Trust Funds (Introductory Note, Edward C. 

Halbach, Jr., Reporter). 

50 Proposed BIC Exemption, 80 Fed. Reg. 21970. 
24 

other conditions of the BIC Exemption. Certainly, not all investments would be in the 

best interest of all retail investors, but the investment adviser’s newly imposed fiduciary 

status combined with the conditions of the exemption already require the adviser to 

consider those factors before making a recommendation. Since the conditions of the 

exemption are both flexible and demanding, the Department need not attempt to 

determine in advance which assets are appropriate to particular retirement investors, or 

under what circumstances. 

Moreover, the definition of “Adviser” in the exemption already requires 

compliance with applicable federal and state securities laws and licensing requirements 

with respect to the covered transaction. Thus, for example, any additional disclosure 

requirements or suitability standards of FINRA or other regulatory authorities with 

respect to PE Funds are effectively incorporated into the BIC Exemption.51 

Consequently, the exemption is flexible enough to accommodate different types of 

investments on the “Asset” legal list. At a minimum this should favor the inclusion of PE 

Funds on the legal list. 

A comparison of some of the items on the list of “Assets” with the PE Funds 

illustrates some of the deficiencies of relying on a pre-established list of products, as 

opposed to providing a list of factors (and perhaps some baseline criteria) that industry 

participants can take into account in deciding for themselves whether a product complies 

with their fiduciary duties under the BIC Exemption and Conflict of Interest Rule. While 

the Department has expressed some concern about the liquidity of retirement 

investments, it has nevertheless included products on the legal list which impose 

penalties if the investor wishes to exit the investment early. To the extent that externally 

managed PE Funds invest in securities, their fund managers are subject to the fiduciary 

duties imposed upon investment advisers under the Advisers Act. Like any of the 

“Assets” that are sold by a broker-dealer or investment adviser (as defined by the 

Advisers Act), including corporate bonds, exchange traded funds and interests in 

registered investment companies, those selling the PE Funds are also subject to the basic 

FINRA-imposed suitability and disclosure requirements (in the case of brokers)52 or the 

Advisers Act-imposed fiduciary standards (in the case of investment advisers). Any 

justification or authority the Department has for including some investment products as 

“Assets” while excluding others, such as the PE Funds, is far from clear. 

 

51 See, e.g., FINRA Rule 2111 and Rule 2310, discussed above at section V. B. and C. 

52 Of course, broker-dealers selling certain of the financial products currently included as “Assets” 

may be subject to additional federal and state regulatory obligations. 
25 

IX. Other Suggestions to Make the BIC Exemption More Workable 

A. The Department should reconcile its use of “best interest” with the 

existing guidance regarding ERISA’s fiduciary obligations in order to 

avoid inconsistent and confusing interpretations. 

In the preamble to the Conflict of Interest Rule, the Department states that the 

best interest standard “is not intended to add to or expand the ERISA section 404 

standards of prudence and loyalty as they apply to the provision of investment advice to 

ERISA covered plans”, but is instead intended to apply existing ERISA standards of 

prudence and loyalty to the IRA market.53 Similarly, the preamble to the Proposed BIC 

Exemption provides that the best interest standard is intended to mirror the ERISA duty 

of prudence, combined with the duty of loyalty.54 Yet the language of the best interest 

standard does not exactly mirror the standards of prudence and loyalty from ERISA 

section 404. While we understand that the Department believes that its departures from a 

literal blending of the duties of prudence and loyalty are simply uncontroversial glosses 

on those duties under existing law, it is not reasonable to expect that the differences in 

language between ERISA section 404 and the best interest standard will not lead to 

different meanings in the hands of courts and litigants. Accordingly, if the Department 

truly intends for the best interest standard to mirror the duties of prudence and loyalty 

under ERISA, it should do so directly by using the same words, or through a cross 

reference to the duties of loyalty and prudence under ERISA. Any additional explanatory 

gloss, such as “based on investment objectives, risk tolerance, financial circumstances 

and needs” of the investor, and “without regard to the financial or other interests” of the 

adviser and related parties, should be covered in the preamble or through examples, 

rather than in the text of the best interest standard itself. 

B. The Department should clarify the use of typical revenue sharing 

payments. 

The preamble to the Proposed BIC Exemption states that the Department intends 

for the BIC Exemption to facilitate the continued use of types of fees and compensation 

common in the retail market, including brokerage commissions, 12b-1 fees, and revenue 

sharing payments. One of the conditions of the exemption is that a financial institution’s 

policies and procedures must not authorize compensation or incentive systems that would 

tend to encourage individual advisers to make recommendations that are not in the best 

interest of retirement investors. The final BIC Exemption should make clear – through 

 

53 Proposed Conflict of Interest Rule, 80 Fed. Reg. 21938. 

54 Proposed BIC Exemption, 80 Fed. Reg. 21970. 
26 

safe harbors or examples  that such common forms of compensation, by themselves, do 

not “tend to encourage” advisers to make recommendations that are not in the best 

interest of investors or otherwise fail to meet the best interest standard. 

C. The Department should re-evaluate the timing of the contract 

requirement between investor and investment adviser. 

We are also concerned that the requirement that the adviser enter into a written 

contract with the retirement investor prior to making a recommendation is impractical. 

Given the breadth of the concept of a “recommendation” under the Conflict of Interest 

Rule, advisers may be unwilling even to talk to a retirement investor without first 

requiring the potential investor to sign a written contract. Prospective investors may well 

be intimidated or generally put off by an adviser requiring them to sign a detailed 

contract at the beginning of their first conversation. 

Moreover, the prior-to requirement could encourage some advisers to preface 

their introductory conversations by stating that they are speaking to the investor only with 

respect to her non-IRA or non-plan accounts, bringing out the contract only if the 

investor later says she wants to invest from her IRA. Either way, the prior-to rule leads 

to unintended results. 

We believe that the written contract requirement should be revised to require a 

written contract prior to the receipt of any compensation to which the BIC Exemption is 

intended to apply. In that way, if the contract satisfying the exemption isn’t in place 

before the compensation is received, the compensation would not be covered by the 

exemption. But advisers and potential investors would be free to have preliminary 

conversations without the need for a written contract. This would also eliminate any 

confusion about when the adviser is providing advice and when she may just be 

providing investment education that does not require the adoption of fiduciary status. 

D. The Department should expand the “seller’s carve-out” to include 

sophisticated IRA and 401(k) plan investors. 

The rationale for providing a seller’s carve-out for large plans in the Conflict of 

Interest Rule should be extended to sophisticated plan participants and IRA owners. A 

participant or IRA owner with a large balance, or with substantial assets or income, 

should be able to understand after basic disclosure that a broker or other sales 

representative is selling a product, and that there is no reasonable expectation of a 

fiduciary relationship. At some level of account balance or other measure of 

sophistication, a plan participant or IRA owner should – subject to similar disclosure 
27 

obligations – be treated the same as a large plan for purposes of a carve-out from the 

Conflict of Interest Rule. 

Conclusion 

PE Funds are an investment category which can provide important benefits to 

retirement plan investors, including income, inflation protection and capital growth to 

preserve the purchasing power of savings during retirement. The conceptual basis of PE 

Fund investing resides in Modern Portfolio Theory and derives from the historically low 

correlation between directly owned real estate assets and exchange-traded securities. PE 

Funds provide individual investors with access to the same diversification strategy used 

by the nation’s leading public and private pension and endowment plans to increase riskadjusted returns from retirement portfolios. As an investment category, PE Funds 

provide a range of strategic real estate investment strategies to address the needs and 

objectives of individual retirement plans, and are a commonly used tool in the portfolios 

of accredited investors. 

The controls and requirements imposed upon those who distribute PE Funds and 

upon the products themselves (e.g., SEC and FINRA guideline requirements as to the 

suitability, disclosure, and due diligence of both the offering and the issuer) provide a 

high standard of investor protection. Importantly, existing regulations already limit PE 

Fund investing to accredited investors and those with the financial sophistication and 

experience to evaluate the risks and merits of any individual PE Fund. 

PE Funds provide liquidity via a finite holding period, at the end of which the true 

value of the investment is realized by all investors in the PE Fund. Limited interim 

liquidity is a necessary attribute of investing in real properties, an asset class which is 

inherently illiquid. Yet, such relative illiquidity is necessary to provide the portfolio 

benefits of diversification and low correlation with exchange-traded financial assets. An 

optimally diversified retirement portfolio cannot be constructed using solely exchangetraded REITs or mutual funds which invest in exchange-traded REITs. Including PE 

Funds or other forms of direct real estate investment in a portfolio of exchange-traded 

financial assets constitutes “prudent” investing, and the definition of “Assets” should not 

deny accredited investors access to these commonly used funds. 

For all of the reasons set forth above, the IPA urges the Department to revise the 

Proposed BIC Exemption in order to include PE Funds within the scope of the BIC 

Exemption either by doing away with a legal list of “Assets” or by adding the PE Funds, 

as defined above, to that list. We appreciate your time and attention in ensuring that 
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retirement investors are provided with the broadest array of investment options, while 

taking all reasonable measures to avoid conflicted advice.

Respectfully submitted,

Kevin Shields

Chairman, Investment Program Association