David P. Bergers

General Counsel

75 State Street

Boston MA 02109

617.423.3644

July 21, 2015

Via Electronic Submission

(Docket ID number: EBSA-2014-0016)

Office of Regulations and Interpretations,

Employee Benefits Security Administration

Attn: Conflict of Interest Rule

Room N-5655

Office of Exemption Determinations

Employee Benefit Security Administration

Attn: D-11712 and D-11713

U.S. Department of Labor

200 Constitution Avenue N.W.

Washington, DC 20210

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

Related Proposed Prohibited Transaction Exemptions (ZRIN: 1210-ZA25)

Dear Ladies and Gentlemen:

LPL Financial LLC (LPL) appreciates the opportunity to comment on the Department of Labor’s

(Department) Proposed Definition of the Term “Fiduciary”; Conflict of Interest Rule–Retirement

Investment Advice and the related proposed prohibited transaction exemptions, and proposed

amendments to exemptions. We hope that the Department finds our comments helpful, and we look

forward to collaborating with the Department to refine the proposals to ensure both that investors are

protected, and that access to brokerage products and services is preserved for the many investors who

benefit from them.

We support the Department’s stated intent to protect investors by requiring financial professionals1

who provide fiduciary investment advice to retail retirement investors to comply with a fiduciary

standard of care. In fact, we and our financial professionals believe that our success depends upon

acting in the clients’ best interests. This is because our financial professionals’ interests are closely

aligned with their clients’ interests. Specifically, the better a financial professional serves his or her

client, the better positioned the client will be to achieve his or her investment objectives, and the more

likely the client will be to stay with the financial professional for the long term.

1 The term “financial professional” is used in this letter to refer generally to individuals who provide financial services,

including investor education, financial planning, investment recommendations, trade execution, and investment advice

to investors, be they registered investment advisers, registered representatives of a broker-dealer, or representatives of

an insurance company, bank, or other financial institution.
2

We also think it is important that financial institutions2and financial professionals address conflicts of

interest and disclose fees and compensation in a meaningful way. By doing so, financial institutions

and financial professionals help investors to achieve better investment outcomes, and to make

informed choices about the types of financial services and financial professionals best suited to helping

them achieve their investment objectives.

Our support for the Department’s stated intention to protect investors is consistent with our long-time,

public support for applying a common fiduciary standard of care to all financial professionals who

provide personalized investment advice to retail clients. Notably, in our 2010 comment letter to the

Securities and Exchange Commission (SEC) regarding its “Study Regarding Obligations of Brokers,

Dealers and Investment Advisers” under Section 913 of the Dodd-Frank Wall Street Reform and

Consumer Protection Act, we stated, “Securities professionals providing the same service to retail

customers should be held to the same standard of care and the same best practices. . . . The focus . . .

should be consumer protection and enhanced transparency to the retail client.”3

We believe that the standard of care can and must be adopted in a way that preserves investor choice

and access to different investment advice models. In particular, many investors benefit from

commission-based brokerage arrangements, and these arrangements should be preserved. We are

encouraged that in this proposal, the Department undertook to reflect the many comments it received

on the 2010 proposal regarding its potential impact on brokerage arrangements, including by

introducing new exemptions intended to “preserve beneficial business models for delivery of

investment advice . . . that would broadly permit financial institutions to continue common fee and

compensation practices.”4

We also believe that continued coordination with other financial industry regulators is critical. These

regulators, including the SEC, the Financial Industry Regulatory Authority (FINRA), state securities

regulators, and state and federal banking and insurance regulators, have developed comprehensive and

rigorous regulatory regimes that govern investment products and services, and have developed their

own rigorous investor protections—including fiduciary standards of care that are rooted in the

common law of trusts and agency. We strongly believe that the rule must be harmonized with other

regulatory regimes—particularly in light of the SEC’s initiative to develop a uniform fiduciary

standard that would apply to personalized advice that broker-dealers and investment advisers provide

to retail investors. Doing so will reduce investor confusion and costs, facilitate compliance, and result

in better retirement savings and investment outcomes for Americans who may not keep all of their

savings in plans subject to the Employee Retirement Income Security Act (ERISA) and individual

retirement accounts (IRAs).5

2 The term “financial institution” is intended to apply generally to registered investment advisers, banks, insurance

companies, registered broker-dealers, and other entities that employ financial professionals, including as independent

contractors.

3 Letter from Stephanie L. Brown, Managing Director, General Counsel, LPL Financial to Elizabeth M. Murphy, Sec.’y,

U.S. Sec. and Exch. Comm’n (Aug. 30, 2010) (addressing comments on File No. 4-606: Study Regarding Obligations

of Brokers, Dealers, and Investment Advisers).

4 Definition of “Fiduciary”; Conflict of Interest Rule–Retirement Investment Advice; Proposed Rule 80 Fed. Reg.

21,928, at 21,929 (proposed Apr. 20, 2015).

5

See also, Exec. Order No. 13563, Improving Regulation and Regulatory Review (2011) (stating that each agency must

“tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives, taking into

account, among other things, and to the extent practicable, the costs of cumulative regulations”).
3

Our comments follow a brief discussion of our unique independent financial professional model, and

are focused on showing how the proposed rule may work in practice. To the extent certain aspects of

the rule may have consequences we do not believe were intended, such as limiting investor choice and

access to brokerage and other services, we propose alternative approaches that may better achieve the

Department’s goals. We also request that certain elements of the proposal be clarified to help us and

our financial professionals better understand, and be able to comply with, the rule’s requirements.

I. LPL’s Independent Financial Professional Model

LPL is a leader in the financial advice market, and as of March 31, 2015, serves $485 billion in retail

assets. LPL is registered with the SEC as both an investment adviser and a broker-dealer. As a dual

registrant, in addition to Department regulation with respect to services to retirement investors, we are

subject to regulation by the SEC for our investment advisory services, and FINRA, the SEC, and the

states for our broker-dealer activities. We provide proprietary technology, comprehensive clearing and

compliance services, practice management programs and training, and independent research to more

than 14,000 independent financial professionals and over 700 banks and credit unions. LPL has been

the nation’s largest independent broker-dealer since 1996. Additionally, LPL supports approximately

4,300 financial professionals licensed with insurance companies by providing customized clearing,

advisory platforms, and technology solutions. LPL and its affiliates have more than 3,300 employees.

Unlike traditional broker-dealers, whose registered representatives are typically employees of the

broker-dealer, our financial professionals are independent contractors and operate their own

businesses. LPL’s mission is to help financial professionals establish successful businesses through

which they can offer independent financial guidance and advice. We support our financial

professionals with branding, marketing and promotion, as well as regulatory review and compliance.

LPL does not sponsor any proprietary products or sell investments from inventory, and we do not have

our own recordkeeping platform for employer-sponsored retirement plans. While we are a registered

broker-dealer and custody many of our financial professionals’ client assets, a significant portion of

client assets are held directly on mutual fund, variable annuity, and other third-party platforms.

Our independent financial professionals build long-term relationships with their clients and

communities across the U.S. by guiding them through the complexities of investment decisions,

retirement solutions, financial planning, and wealth management. The majority of our financial

professionals are small business owners and entrepreneurs, and are primarily located in rural and

suburban areas. Operating as small businesses, our financial professionals often form personal and

long-standing relationships with their clients and communities.

Our financial professionals support approximately 4.5 million client accounts, approximately 2.4

million of which are IRAs and 48,000 of which are ERISA plans held in brokerage relationships.

Together, our financial professionals are responsible for $150.6 billion in brokerage retirement account

assets, and $43 billion in ERISA plan assets in brokerage relationships. Thus, a substantial amount of

our clients’ assets will be affected by the proposed redefinition of fiduciary advice. The rule as

proposed will impact the choice of services that investors will receive, and will likely result in

significant added costs to our financial professionals’ small businesses and our firm. We are

committed to working with the Department to refine the proposal to simplify the rule, reduce

unnecessary burdens, remove inefficiencies, avoid regulatory conflicts, and preserve investor choice,

while ensuring that investors get the protections they deserve.
4

II. Comments on the Proposed Rule

A. Preserve personal financial services relationships and investor choice.

We believe investors should be free to choose and define their relationships with their financial

professionals. This includes choosing: (1) the types and levels of service the financial professional

provides—including when the financial professional acts as a fiduciary, (2) how the investor’s assets

are invested, and (3) how the investor pays their financial professional for financial guidance. Thus,

we believe it is important that, in expanding the definition of fiduciary investment advice to encompass

a broader range of relationships and activities, the rule preserve: (a) the ability of investors and

financial professionals to agree when a fiduciary relationship between them begins and ends, (b) access

to the wide range of asset classes in which investors are legally permitted to invest, and (c) current

compensation arrangements, including variable commission-based fee arrangements.

We note that, once a financial professional is a fiduciary, he or she would generally be subject to a

standard of care under the proposal—whether under ERISA’s standard of care, the best interest

standard required under the proposed exemptions, or the applicable standards under state and federal

law. The applicable standard of care would safeguard investors from investment recommendations and

practices that are not in the investor’s best interests. Particularly in cases where the additional

protections of these standards of care apply, investors should be free to structure and define how their

retirement assets will be invested and how their financial professional will be paid.

1. Investors (including retail investors) and financial professionals should be able

to agree when their fiduciary relationship begins and ends.

In preserving investor choice, it is critical to permit the investor to define the scope of a financial

professional’s role, including the capacity (fiduciary or otherwise) in which he or she serves the

investor. Under both common law and ERISA, an investor may agree to limit the scope of a

fiduciary’s duties.6 We do not believe that the proposed changes to the definition of fiduciary

investment advice should change this long-standing approach.

Investors should be able to choose and define the specific services that the financial professional will

provide. This should be accomplished with clear disclosures and through a meeting of the minds

between the investor and his or her financial professional, including when the financial professional

will be acting as the investor’s fiduciary and when he or she will not. As long as the investor receives

full and fair disclosure of the financial professional’s services and the nature of any conflicts of

interest, the investor should be able to understand the potential conflicts and agree that the financial

6

See BOGERT’S TRUSTS AND TRUSTEES, § 542 (2014) (“Though strictly construed by the courts, exculpatory clauses

have been upheld, subject, however, to certain exceptions based on public policy.”); RESTATEMENT (SECOND) OF

TRUSTS § 70, cmt. d (“[A] trustee’s duties, like trustee powers, may be affected by the terms of the trust.”). Similarly,

the statutory definition of fiduciary under ERISA provides that a person is a fiduciary only “to the extent that” he or

she is acting as such. ERISA § 3(21); see DOL Regs. §2509.75-8, Q: FR-16 (stating that the personal liability of a

fiduciary is limited to the fiduciary functions that he or she performs with respect to the plan); Frank Russell Co. v.

Wellington Management Co., 1998 WL 481230 (3d Cir. 1998) (holding that a corporate management business decision

was not subject to ERISA fiduciary duties).
5

professional is acting in a non-fiduciary capacity.7For example, with appropriate and clear disclosure

that the person is marketing and not acting as a fiduciary providing impartial advice, a financial

professional who is an investor’s fiduciary should be able to sell the investor an additional service or

product without being deemed a fiduciary and violating the prohibited transaction rules.8

As another example, the Department has recognized that a fiduciary and his or her client may limit the

scope of the fiduciary’s duties by contract, including whether the fiduciary has an ongoing duty to

monitor a recommended investment.9 However, the disclosure obligations under the Best Interest

Contract Exemption (BIC Exemption) could be interpreted to require ongoing disclosures even where

the financial professional is no longer acting as a fiduciary. We are concerned that this could cause

clients to mistakenly believe that the financial professional is still providing fiduciary advice and

monitoring the asset, even where he or she did not assume this responsibility. Thus, we recommend

that the rule be clarified to provide that the client disclosure obligations stop when the client

relationship or contract has been terminated.

We are pleased that the Department has, in its informal comments on the proposed rule, affirmed that

financial professionals and investors (including retail investors) would remain able to define when

fiduciary relationships begin and end, and we request that this will be confirmed and clarified in the

proposed rule. We believe investors benefit from having choices in managing their retirement assets,

and that investor choice can be preserved while adopting standards that protect investors.

2. Investors (including retail investors) should be able to choose to invest their

retirement accounts in any asset they are otherwise legally permitted to hold.

In light of the investor protections afforded by the proposed best interest standard of care, we believe

the definition of assets permitted under the proposed BIC Exemption should be expanded to include

any asset or security investors are otherwise legally permitted to hold or purchase. We understand that

the proposed rule was intended to provide relief for the assets “needed to build a basic diversified

portfolio,” while limiting exemptive relief to those assets that are “relatively transparent and liquid.”10

We are concerned that this limitation will prevent many investors from being able to use investment

strategies in brokerage retirement accounts that are helpful to achieving their investment objectives and

retirement savings goals. We provide several examples below.

7

See Amendments to Form ADV, Investment Advisers Act Release No. 2711 (Mar. 3, 2008), 73 Fed. Reg. 13958 (Mar.

14, 2008) (“[I]investors have the responsibility, based on disclosure they receive, for selecting their own advisers,

negotiating their own fee arrangements, and evaluating their advisers’ conflicts. Therefore, it is critical that clients and

prospective clients receive sufficient information about the adviser and its personnel to permit them to make an

informed decision about whether to engage an adviser, and having engaged the adviser, how to manage that

relationship.”).

8 This analysis is supported by the Department’s regulations under section 408(b)(2) of ERISA. Specifically, in

Example 7, the Department states that a fiduciary to a plan who is a president of a bank that proposes to provide

administrative services to the plan for a fee, would not be viewed as self-dealing where he or she does not take part in

the other fiduciaries’ decision to hire the bank. DOL Reg. § 2550.408b-2(f), Example 7.

9

80 Fed. Reg. at 21,969 (the best interest standard “does not mandate an ongoing or long-term advisory relationship, but

rather leaves that to the parties. The terms of the contract . . . will govern whether the nature of the relationship

between the parties is ongoing or not.”).

10 Id. at 21,967.
6

 Alternative investments are appropriate for many investors covered under the BIC

Exemption. Some non-participant directed plans with fewer than 100 participants, and many

IRAs, hold substantial assets and are managed or held by sophisticated investors who are wellinformed about investment products, strategies, and risks. For example, many professionals,

such as doctors, accountants, and lawyers, establish plans, such as cash balance plans, that are

not participant-directed and cover fewer than 100 participants, but hold tens of millions of

dollars in assets. Further, some IRAs are held by persons who satisfy the asset or income

requirements to qualify as “accredited investors” under the federal securities laws. These plans

and accounts are legally permitted to hold alternative investments, and may benefit from

investment strategies that include them. We understand that the Department believes such

strategies may be available by investing in a registered fund that holds underlying investments

in alternatives, but we note that investing in this way adds layers of costs and complexities, and

limits investor choice.11

 Investors recognize tax benefits by holding certain assets in their retirement accounts. Some

investments, such as certain private funds that invest in real estate and non-traded real estate

investment trusts, produce income that would be taxable if held in a taxable account. Holding

these investments in a retirement account enables an investor to defer tax until the income is

withdrawn from the account. Tax deferral allows investors to save and invest more income for

retirement.

 Investors who are saving for retirement may benefit from holding investments that are not

liquid. Retirement investors generally invest for the long-term, and retirement assets grow

when they are held for the long term. Moreover, managing portfolio volatility is critical to

achieving long-term investment objectives. Illiquid investment products can be helpful both in

helping investors maintain long-term holdings and in managing volatility, and thus are

appropriate to accomplishing many retirement investors’ goals.

In general, illiquid products are structured to compensate investors for sacrificing liquidity.

This compensation, known as the “illiquidity premium”, can come in the form of higher

income, risk-adjusted returns, or overall return premiums over equivalent liquid asset

benchmarks. These products can often be instrumental in lowering the overall volatility of a

portfolio. Further, they can add more discipline to the investment approach because the

investor is forced to realize the full return potential of the asset, rather than liquidating it before

all of the returns are realized. This helps to address the problems of frequent trading and

premature withdrawals, which have been shown to result in smaller retirement nest eggs.

Because of this, we do not believe that holding illiquid assets in brokerage accounts is

inherently harmful to all retirement investors.

Moreover, we note that it appears that the proposed rule has excluded from coverage other asset

types that are relatively liquid and transparent.

 Investors should be able to receive assistance with any asset held in their account as of the

applicability date of the rule. Many investors currently hold assets that would not be covered

under the BIC Exemption’s proposed transition relief. This will result in investors holding

assets not covered by the BIC Exemption in their accounts, and thus will effectively terminate

11 Id.
7

investors’ access to assistance and education with respect to these assets. This would be

harmful to investors.

The examples above are not exclusive and we believe there are currently other assets that are excluded

from the BIC Exemption that benefit investors, and additional assets may be developed in the future.

Because retail investors have many different investment objectives and financial circumstances, we

suggest that assets covered under the BIC Exemption should include any asset or security an investor is

otherwise legally permitted to hold in his or her taxable accounts (e.g., non-traded business

development companies, non-traded REITs, private equity funds, hedge funds, structured products, and

municipal securities). This will both facilitate investor choice, and also ensure that the exemption can

flexibly adapt to cover new investment products that are developed in the future.

The requirement that financial institutions (and their registered representatives) contractually agree to

act in the client’s best interest should offer sufficient protection so that the proposed rule does not need

to define which assets can and cannot be included in a retirement account, particularly where the

financial institution has reasonable policies and procedures in place to protect investors with respect to

particular asset classes. Moreover, federal and state laws and financial institutions’ policies and

procedures already limit and impose specific requirements on investments in many products to

mitigate investor risk. We have included information on these limits and requirements in an appendix

to this comment letter for select examples of assets that appear to be excluded from the BIC

Exemption.

Further, we request that the rule clarify that the proposed definition of fiduciary investment advice

does not apply to any assets held in a client’s account as of the applicability date of any final rule,

unless a financial professional or financial institution recommends making additional purchases of the

same assets. Doing so would address our aforementioned concerns regarding clients holding or selling

assets in their accounts that are not covered under the BIC Exemption after the applicability date.

In addition to the restrictions on assets under the BIC Exemption, we note that the Proposed Class

Exemption for Principal Transactions in Certain Debt Securities between Investment Advice

Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions Exemption) offers relief for

principal transactions involving a limited set of debt securities, and does not cover some securities

commonly held in retirement accounts and traded on a principal basis, such as structured products.

Similar to under the BIC Exemption, investors would have the protection of the best interest standard

of care and federal and state law, and financial institution’s policies and procedures regarding principal

trading. Therefore, we request that the assets that may be traded on a principal basis under the

Principal Transactions Exemption not be limited.

3. Investors should be able to choose to compensate financial professionals

through variable commission arrangements.

As noted above, we appreciate the Department’s statement that it intends the proposed BIC Exemption

to permit common fee and compensation models for broker-dealers and financial professionals who

become fiduciaries under the rule. We believe that this is an important goal, particularly because many

investors benefit from commission-based fee arrangements. Specifically, investors may benefit

financially by paying commissions instead of an asset-based fee for the following reasons:12

12 See K. Damato, “3 Reasons to Pay Commissions, Not Fees, to a Financial Adviser,” THE WALL STREET JOURNAL (Feb.

18, 2015), available at http://blogs.wsj.com/totalreturn/2015/02/18/3-reasons-to-pay-commissions-not-fees-to-afinancial-adviser/. Congress recognized the benefits of commission-based fees by showing its intent to preserve such
8

 Commissions can be less expensive than fee-only advice. This is particularly true for

investors who do not trade very often. In this case, an investor’s investment expenses may be

less if he or she pays a commission for purchasing a security than they would be if the investor

pays an annual account fee that is based on a percentage of the account’s assets.

The SEC and FINRA have recognized that commission-based fees may result in lower

expenses for some investors.13 In fact, the SEC’s Office of Compliance Inspections and

Examinations (OCIE) has included in its examination priorities for both 2014 and 2015 a

review of sales practices related to advisory accounts and potential “reverse churning”,

reflecting concerns that certain advisory accounts lacking trading activity are not the

appropriate vehicles for certain investors.14 We believe the rule may make brokerage accounts

less accessible to retirement investors, which would limit choice and could cause investors to

pay more by investing through advisory accounts.

 Some investors cannot access fee-only advice. Many financial professionals establish account

minimums for fee-only advice because of the higher level of service they offer fee-only clients.

Higher service levels, including such services as ongoing portfolio monitoring and rebalancing,

and more frequent meetings and consultations to discuss client investment objectives and

financial circumstances, come with higher costs and expenses for the financial professional,

including higher demands on the financial professional’s time and resources. A financial

professional may balance these costs against the benefits of providing services to clients with

small account balances. In some cases, the financial professional may make a business

decision not to service these small accounts because the costs and increased liability exposure

may outweigh any potential revenue.

arrangements under section 913 of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of

2010.

13 See, e.g., Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and

Broker-Dealers, at 152 (Jan. 2011) (stating that investors may face increased costs if the broker-dealer exclusion were

eliminated, such as where commission-based accounts would incur lower costs compared to fee-based accounts due to

infrequent trading); NASD Notice to Members 03-68, Fee-Based Compensation (Nov. 2003) (reminding members that

fee-based accounts must be appropriate for customers, considering among other things the cost of the accounts

compared to alternative fee structures available, such as commission-based accounts); Report of the Committee on

Compensation Practices (Apr. 10, 1995), available at https://www.sec.gov/news/studies/bkrcomp.txt (noting

commenters’ views that fee-based accounts can pose higher costs for small and low-activity accounts); Office of

Investor Education and Advocacy, SEC, Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio

(Feb. 1, 2014), available at http://www.sec.gov/oiea/Article/ib_fees_expenses.pdf (demonstrating how fees can impact

investments over time); see also Oliver Wyman, OLIVER WYMAN REPORT: ASSESSMENT OF THE IMPACT OF THE

DEPARTMENT OF LABOR’S PROPOSED “FIDUCIARY” DEFINITION RULE ON IRA CONSUMERS (Apr. 12, 2011), at 21

(stating that “investors would pay an average of 73% to 196% more in direct costs in a fee-based advisory model”).

14 SEC, National Exam Program, Office of Compliance Inspections and Examinations, “Examination Priorities for 2015”

(Jan. 13, 2015), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf;

SEC, National Exam Program, Office of Compliance Inspections and Examinations, “Examination Priorities for 2015”

(Jan. 9, 2014), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.

See also FINRA, “Conflicts of Interest” (Oct. 2013), at 29 (“Depending on the circumstances, fee-based accounts may

be preferable for customers with a fair amount of trading activity or desire for active account monitoring and ongoing

advice. Commission-based accounts may be more cost effective or appropriate for customers with low trading

activity.”).
9

 Some financial professionals only offer commission-based fee arrangements. An investor

may have a relationship with, and trust a financial professional who offers only commissionbased fee arrangements. In this case, the financial professional’s business model may be

structured as commission only because of the clients he or she serves, and the services he or she

offers.

 Some investors prefer to pay commissions. Some investors want to pay only for investment

assistance they actually use. In a fee-only arrangement, the financial professional is paid a fee

for investment assistance regardless of whether the investor acts on the advice. Some investors

want to manage their own assets and ask for help only with respect to particular investments, or

they want to pay only when they agree with and follow a financial professional’s

recommendation to buy or sell a security (“pay-as-you-go”).

 Proposal may cause broker-dealers to be deemed investment advisers. The proposed

requirement of a written contract in the BIC Exemption may cause broker-dealers to be deemed

investment advisers under the Investment Advisers Act (Advisers Act). As the Department is

aware, in 2007, the SEC proposed an interpretive rule under the Advisers Act that would have

established the principle that broker-dealers that separately contract to provide advisory

services would be deemed to provide investment advice that is not “solely incidental” to their

business as a broker-dealer, and thus could not avail themselves of the broker-dealer exclusion

from the definition of investment adviser in Section 202(a)(11)(C) of the Advisers Act.15

Although it is unclear as to whether the SEC would view the contractual requirements of the

BIC Exemption by themselves as such a separately contracted provision for advisory services,

lack of express guidance, this issue raises the risk that traditional brokerage services provided

under the BIC Exemption would no longer meet the broker-dealer exclusion. Broker-dealers

would be unlikely to rely on the BIC Exemption if it were to cause them to be required to

register as investment advisers and be subject to investment adviser regulation when they are

otherwise providing advice that would be considered incidental to their roles as broker-dealers.

Ultimately, clients would likely incur higher costs or face restrictions on choices if brokerdealers are forced to incur the additional costs of investment adviser status; this appears to be

inconsistent with the regulatory structure currently in place for broker-dealers under the

securities laws.

Though we believe that the Department appreciates the many benefits of, and reasons why an investor

may choose, a commission-based fee arrangement, and that this concern led the Department to propose

the BIC Exemption, we are concerned that aspects of the proposed rule, including conditions of the

BIC Exemption, will make commission-based fee arrangements more difficult if the rule is finalized as

proposed. Specifically, we are concerned that the proposed rule does not provide enough meaningful

guidance as to how financial institutions could comply with the impartial conduct standards and

continue to receive variable commissions based on investment recommendations, and what policies

15 See Interpretive Rule under the Advisers Act Affecting Broker-Dealers, Advisers Act Release No. 2652 (Sept. 24,

2007), 72 Fed. Reg. 55,126, 55,131 (Sept. 28, 2007); see also Certain Broker-Dealers Deemed Not to Be Investment

Advisers, Exchange Act Release No. 51523, Advisers Act Release No. 2376 (Apr. 12, 2005), 70 Fed. Reg. 20,424

(Apr. 19, 2005) (establishing the principal in a prior rule adopted by the SEC, Rule 202(a)(11)-1 under the Advisers

Act). Rule 202(a)(11)-1 subsequently was vacated on other grounds by the D.C. Circuit Court of Appeals. See Fin.

Planning Ass’n v. SEC, 482 F.3d 481, 488, 493 (D.C. Cir. 2007) (holding that the SEC exceeded its authority in

promulgating the final rule by relying on Section 202(a)(11)(F) of the Advisers Act (now 202(a)(11)(H)) to establish a

new, broader exemption for broker-dealers).
10

and procedures a financial institution could adopt to “ensure that individual Advisers adhere to the

Impartial Conduct Standards,” other than policies and procedures that would effectively eliminate

variable commission-based fee arrangements. Further, as discussed later in this letter, we are

concerned that some of the BIC Exemption’s conditions are very challenging to comply with as

proposed.

The BIC Exemption’s impartial conduct standards require that financial institutions and financial

professionals act in the “best interest” of investors to be eligible for relief under the exemption. Under

this standard, the financial institution and financial professionals must act “without regard to the

financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or

other party.”16 Though the preamble indicates that this standard is based on the stringent duty of

loyalty under ERISA, the phrases “without regard to” and “other interests” could be interpreted even

more strictly to preclude financial professionals and institutions from acting in any relationship in

which they may be compensated or receive even non-pecuniary benefits.17 As such, we suggest that

the proposed best interest standard be revised to remove the clause beginning “without regard to” and

to replace it with language that would require that the financial professional put the investor’s interests

ahead of his or her own pecuniary interests and the pecuniary interests of the financial institution.

Moreover, ERISA’s duties of care and loyalty under section 404 and the strict liability provisions of

the prohibited transaction rules under section 406 have long been analyzed as separate obligations. As

such, a violation of one does not always result in a violation of the other. Importantly, if a fiduciary

complies with a prohibited transaction exemption, the fiduciary may technically act under a conflict of

interest, such as by using an affiliated broker under Prohibited Transaction Exemption 86-128, or by

investing client assets in deposits of an affiliated bank under ERISA section 408(b)(4). However, the

fiduciary must still comply with ERISA’s duties of care and loyalty under section 404, so that the

investment must be prudent and solely in the investor’s interests.

Including ERISA-like duties of care and loyalty under the best interest standard as a condition of the

prohibited transaction exemptions combines two obligations that Congress designed to be separate

under the statute. Specifically, the impartial conduct standards blend the ERISA section 404 duties of

care and loyalty with the proscriptive rules against self-dealing under ERISA section 406. Though the

Department states that it intends the BIC Exemption to preserve commission-based fee arrangements,

it is unclear in practice how a financial institution could continue to receive variable commissions

when the BIC Exemption appears to prohibit any consideration of an institution’s financial or other

interests in an investment recommendation.

Further, the BIC Exemption requires financial institutions to warrant that they have adopted policies

and procedures to “mitigate the impact of material conflicts of interest . . . and ensure that individual

Advisers adhere to the Impartial Conduct Standards.”18 The proposal’s five examples of how a

financial institution could satisfy this requirement identify only a small subset of situations where

variable commissions appear to be permitted.

16 80 Fed. Reg. at 21,987 (emphases added)..

17 29 U.S.C. § 1104(A)(1). This duty requires fiduciaries to act “solely in the interests” of the plan and its participants,

and has been strictly interpreted to require fiduciaries to act with “complete and undivided loyalty to the beneficiaries

of the trust,” and with an “eye single to the interests of the participants and beneficiaries.” Donovan v. Bierwirth, 680

F.2d 263, 3 EBC 1417 (2d Cir. 1982); Freund v. Marshall & Ilsley Bank, 485 F.Supp. 629, 1 EBC 1898 (W.D. Wis.

1979).

18 80 Fed. Reg. at 21,970.
11

Specifically, two of the examples are essentially level-fee structures,19 and one is based on independent

computer models. A fourth option would require fee differences to be based on “neutral factors,” and

the fifth option would require any fee differences to align the financial professional’s interests with

those of his or her client. Given the lack of guidance and subjective nature of these latter two

standards, it is unclear how either standard could be administered and supervised in practice. We also

do not believe that the proposed rule provides sufficient guidance on how either example would

support a financial professional receiving different commission amounts in many common scenarios,

such as in the common case of different mutual fund companies offering different commissions for

funds offering similar investment strategies, or where variable annuity providers pay different

commissions for their products.

Finally, as discussed in more detail below, certain conditions of the BIC Exemption will be

challenging to comply with as proposed. If these conditions are not changed, we believe that financial

institutions will have difficulty building and operating successful compliance programs under the BIC

Exemption. We request clarification of the requirements of the impartial conduct standards and

meaningful guidance on how they can be satisfied in the context of common variable commission

arrangements. We specifically request confirmation that variable commission arrangements may

continue in their current form under the BIC Exemption, so long as (1) the contract is subject to a best

interest standard, (2) compensation arrangements and related material conflicts are disclosed to

investors in a meaningful way, and (3) no more than reasonable compensation is received. This is

essential to ensuring that investors can access commission-based services, and that they have options

when choosing their financial professional and how the professional will be compensated.

* * * * *

The remainder of our comments focuses on technical aspects of the proposed rule and exemptions.

B. Recommendations regarding the definition of investment advice and the carveouts.

Our comments in this section address technical aspects of the proposed definition of investment advice

and the proposed carve-outs from fiduciary status.

1. Confirm that selling services and products to investors, including retail

investors, does not create a fiduciary relationship.

We are concerned that the proposed definition of fiduciary investment advice is susceptible to broad

interpretations that could encompass virtually every communication with an investor. Our specific

concern is that financial professionals will not know when their fiduciary relationships start and stop.

Because fiduciaries are subject to high standards of conduct and significant liability for breaches of

duty, it is important that a financial professional and investor know when they are or are not entering

into, or operating within, a fiduciary relationship.

The rule should provide guidance and clarification regarding how and when the fiduciary relationship

commences under the proposal. Specifically, we request guidance that more clearly defines the terms

“understanding,” “specifically directed to” and “recommendation” under the proposal.

19 One example would permit asset-based compensation that does not vary based on investment types, and the other

would permit the financial institution to offset additional compensation received against a level fee for services. Id. at

21,971.
12

Drawing well-defined lines around fiduciary status is particularly critical in the context of selling

products and services to investors. The courts and the Department have long drawn a common-sense

distinction between sales pitches and fiduciary investment advice.20 This distinction should remain

under the proposed rule. For example, it should be clear that a financial institution’s response to a

request for proposals (RFP) is not a fiduciary recommendation, even if its response includes potential

portfolio allocations that identify specific investments. Though the Department has provided a helpful

carve-out for sales to certain institutional investors, this carve-out, by its terms, is not available for

retail investors.

Although we understand that the Department may be concerned that retail investors may be confused

as to when a financial professional is acting as a fiduciary, we believe that within the paradigm of selfdirected investment accounts, the retail investor must be trusted to understand that the financial

professional is not providing fiduciary investment advice when the financial professional clearly and

consistently discloses its capacity and conflicts in the transaction. We also believe that important

information is conveyed to potential investors as part of marketing services that helps investors make

informed decisions about the type of assistance (e.g., financial planning, investment education,

brokerage, or advisory) they need to help achieve their goals, and which financial professional and

financial institution they want to hire. We are concerned that the lack of clarity regarding whether

sales and marketing activities could inadvertently render a financial professional a fiduciary may

inhibit these conversations.

20 See Farm King Supply, Inc. v. Edward D. Jones & Co., 884 F.2d 288 (7th Cir. 1989); Am. Fed’n of Unions, Local 102

v. Equitable Life Assurance Soc’y, 841 F.2d 658 (5th Cir. 1988) (noting that an insurance company does not become an

ERISA fiduciary where it simply urges the purchase of products); see also Leimkuehler v. Am. United Life Ins. Co.,

713 F.3d 905, 911-12 (7th Cir. 2013) (confirming that a provider of annuities does not become an ERISA fiduciary

solely because it selects both funds and their share classes for a menu of investment options offered to 401(k) plan

customers); Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009) (citing Farm King and finding that a company does

not become a fiduciary “merely [by] playing a role or furnishing professional advice” in the selection of funds), reh’g

denied, 569 F.3d 708 (7th Cir. 2009), cert. denied, No. 09-447 (Jan. 19, 2010); Golden Star, Inc. v. Mass Mut. Life Ins.

Co., 3:11-cv-30235-PBS (D. Mass. May 20, 2014) (finding that a service provider was a not a fiduciary where it acted

only in a ministerial fashion with respect to the plan menu, and did not exercise its authority to delete or substitute the

mutual funds offered to the plan without either providing any notice of changes or opportunity to reject them, or

allowing the plan to engage a different service provider in the event of a rejection); Santomenno v. John Hancock Life

Ins. Co. (U.S.A.), 56 Employee Ben. Cas. 1131 (D.N.J. 2013) (holding that a plan service provider was not an ERISA

fiduciary with respect to its fees where the fees were negotiated at arm’s length and the fees were fully disclosed, and

that it was not a fiduciary with respect to its selection as an investment option of a particular fund that paid revenue

sharing because it did not have the ultimate authority to determine which investments were included in the plan); Zang

v. Paychex, Inc., 728 F. Supp. 2d 261, 270 (W.D.N.Y. 2010) (citing Hecker and holding that a plan service provider

that offered a menu of investment options to a 401(k) plan was not a fiduciary because the plan had ultimate authority

to reject any changes to the menu); Columbia Air Services Inc. v. Fidelity Mgt. Trust Co., 2008 U.S. Dist. LEXIS

76999 (D. Mass. Sept. 30, 2008) (citing Hecker and following its analysis); Dupree v. Prudential Ins. Co. of Am., WL

2263892 (S.D. Fla. 2007) (finding “it is well settled” that an insurer that performs fiduciary functions for a plan is not a

fiduciary when it sells insurance products and services to the plan, and that the insurer is free to contract with a plan on

an arm’s length basis that does not implicate ERISA’s fiduciary standards); Fechter v. Connecticut Gen. Life Ins. Co.,

800 F. Supp. 182 (E.D. Pa. 1992) (noting that courts refuse to impose fiduciary obligations on insurance companies

that merely sell their products or services to pension plans and do not assume decision-making control over the

administration or disposition of plan assets, and that insurance companies do not become fiduciaries when simply

urging the purchase of their products).
13

We therefore request clarification that a financial professional will not be a fiduciary when selling

products or services to a retail investor where it is clear from the circumstances that the financial

professional is selling or marketing products and services and not acting as a fiduciary.21

Preserving the distinction between marketing and sales pitches and fiduciary advice is essential to

ensuring that many valuable conversations between investors and financial professionals can continue.

For example, if the distinction is not preserved, a financial professional may be reluctant to discuss his

or her services and products, and to offer investors the information they need to decide whether or not

to hire the financial professional to provide investment services.

We note that many financial institutions and financial professionals, including LPL and its financial

professionals, enter into written contracts with investors that define the scope of services, including the

effective date of the services arrangement. We suggest that the rule clarify that, for financial

institutions and financial professionals that have client agreements defining the scope of services,

fiduciary status will not apply until an investor enters into an agreement to hire the financial institution

or financial professional to provide fiduciary investment advice. Doing so would clarify that financial

institutions and financial professionals can market services without being deemed to be fiduciaries.

2. Clarify the scope of the term “recommendation” to be consistent with FINRA

guidance.

Under the proposed definition of fiduciary investment advice, a person may be a fiduciary if the person

provides a “recommendation” as to the advisability of certain transactions.22 The proposed rule

defines “recommendation” as “a communication that, based on its content, context, and presentation

would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a

particular course of action.”23 We are concerned that this definition could be broadly interpreted to

include almost any communication about investment products and services, as well as distribution

options.

21 Please note that the SEC took a similar approach that acknowledged the investor’s ability to understand the differences

between a brokerage account and an advisory account when it adopted Rule 202(a)(11)-1 under the Advisers Act. That

rule, which was later vacated by the D.C. Circuit Court of Appeals on other grounds, allowed broker-dealers to make

available fee-based brokerage accounts without subjecting them to the Advisers Act. See Certain Broker-Dealers

Deemed Not to Be Investment Advisers, Exchange Act Release No. 51523, Investment Advisers Act Release No. 2376

(Apr. 12, 2005), 70 Fed. Reg. 20,424 (Apr. 19, 2005); Fin. Planning Ass’n v. SEC, 482 F.3d 481, 488, 493 (D.C. Cir.

2007) (holding that the SEC exceeded its authority in promulgating the final rule by relying on Section 202(a)(11)(F)

of the Advisers Act (now Section 202(a)(11)(H)) to establish a new, broader exemption for broker-dealers). Among

other things, broker-dealers relying on the rule were required to include the following prominent statement in

advertisements and account agreements: “Your account is a brokerage account and not an advisory account. Our

interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and

our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best

interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore,

our profits, and our salespersons’ compensation, may vary by product and over time.” In a subsequent no-action letter,

the SEC staff contemplated and provided a process for shifting from an advisory relationship to a brokerage

relationship, stating that where a dually registered broker-dealer/investment adviser seeks to terminate an advisory

relationship and assume a brokerage relationship, “[d]isclosure by a broker to a customer should be sufficient to enable

the client to reasonably understand that the broker-dealer/ investment adviser is removing itself from a position of trust

and confidence with its client.” See Securities Industry Ass’n, SEC Staff No-Action Letter (pub. avail. Dec. 16, 2005).

22 80 Fed. Reg. at 21,957.

23 Id. at 21,960.
14

The Department has requested comment on whether it should adopt some or all of the standards

FINRA has developed for determining whether a communication should be viewed as a

recommendation for purposes of FINRA’s Rule 2111 suitability requirements.24 We would support

this approach because FINRA’s numerous regulatory notices, together with litigated decisions,25

provide greater clarity on when an investor could reasonably conclude that a communication would

trigger an advice relationship (i.e., when it is individualized). Adopting FINRA’s guidance would

better harmonize the various regulatory regimes with which financial institutions and financial

professionals must comply.

3. Revise the proposed carve-out for investor education to permit educational

materials to identify particular funds and investments.

We appreciate the Department’s proposal to include a specific carve-out from the definition of

fiduciary investment advice for investment education that is largely based on the Department’s

guidance under Interpretive Bulletin 96-1. We also think it is helpful that the Department has clarified

that its guidance on investment education applies not just to communications with plan participants,

but also to those with plan fiduciaries and IRA account owners.

Nonetheless, we believe it also is essential that financial professionals be allowed to identify specific

investment options in educational materials without taking the risk that doing so will be viewed as a

fiduciary recommendation. For example, the proposed rule would appear to permit educational

materials to provide information about available investment options, and to provide model asset

allocations. However, it seems that both types of information cannot be provided together. Thus, a

financial professional could tell a plan participant how to allocate his or her account among various

asset classes, but could not tell the participant which investment options available from the plan’s

menu fall within the asset classes. For example, a financial professional could provide an investor with

a model asset allocation suggesting allocations of 40% to intermediate term bonds, 20% to large cap

value, 20% to small cap value, and 20% to international. However, the financial professional could not

tell the investor which investment options available from a plan’s investment lineup, or from a

platform of investments available through an IRA, match each of these asset classes. This restriction

would require the participant to make this determination alone in order to implement the asset

allocation.

We are concerned that adding this extra step for participants will needlessly slow the investment

process, and make it more likely that the participant will not make investment elections that

appropriately allocate his or her account assets, thus undermining the benefits of investor education.

We note that many of our financial professionals offer free or low-cost access to helpful investor

education tools that identify specific investment products. If these tools are deemed to result in

fiduciary recommendations, we are concerned that financial professionals will be unwilling to assume

24 Id. at 21,938.

25 See FINRA, Suitability: Additional Guidance on FINRA’s New Suitability Rule, Regulatory Notice 12-25 (May

2012); FINRA, Know Your Customer and Suitability: New Implementation Date for and Additional Guidance on the

Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations, Regulatory Notice 11-02

(Jan. 2011); NASD, Online Suitability: Suitability Rule and Online Communications, Notice to Members 01-23 (Apr.

2001); see also Michael Frederick Siegel, Exchange Act Release No. 58737, 2008 SEC LEXIS 2459, at *21 (Oct. 6,

2008) (finding a recommendation under the facts and circumstances), aff’d in relevant part, 592 F.3d 147 (D.C. Cir.),

cert. denied, 2010 U.S. LEXIS 4340 (2010); DBCC v. Kunz, No. C3A960029, 1999 NASD Discip. LEXIS 20, at *63

(NAC July 7, 1999) (finding that the mere distribution of offering material was not in and of itself enough to constitute

a recommendation), aff’d, 55 S.E.C. 551, 2002 SEC LEXIS 104 (2002).
15

the increased risk of being deemed a fiduciary, and that investors will lose access to these valuable

services. This will particularly affect the ability of our financial professionals to provide meaningful

guidance to participants during plan sponsor meetings that are intended to encourage savings and

investment in the plans.

We suggest that the rule continue to treat materials that identify specific investment products as nonfiduciary investment education as currently provided under Interpretive Bulletin 96-1. We also request

that the rule confirm that a financial professional can provide objective information about investment

options and services, such as fund fact sheets, summary prospectuses, and Form ADV Part 2

brochures, without risk of being viewed as a fiduciary.

4. Clarify that a fiduciary can provide investor education about distributions and

rollover options in accordance with FINRA Regulatory Notice 13-45.

The proposed rule would include recommendations to distribute plan assets, including

recommendations to roll over assets to an IRA, as fiduciary recommendations. This would supersede

the Department’s prior guidance in Advisory Opinion 2005-23A (Deseret Letter) that such

recommendations would not be fiduciary. Many financial institutions, including LPL, have relied on

the Deseret Letter in structuring their services with respect to plan distributions, and have also relied

on guidance from other regulators, including FINRA Regulatory Notice 13-45, “Rollovers to

Individual Retirement Accounts” (Notice 13-45). Notice 13-45 draws a distinction between

recommendations with respect to plan distributions, which it says are subject to FINRA’s suitability

standards, and investor education.

In view of the Deseret letter and FINRA guidance, LPL has adopted policies and procedures that

facilitate our financial professionals’ ability to provide educational information to plan participants

who are eligible for plan distributions. In particular, we have developed materials that provide

participants with information about their four basic distribution options (i.e., keep savings in the

current plan, transfer savings to a new plan, roll over savings to an IRA, or take a cash distribution).

These materials, which are based upon the factors FINRA outlined in Notice 13-45, include a

discussion of the factors that participants need to weigh and consider in making their own decisions

about where to keep their retirement savings, including tax consequences, fees and expenses, available

services, conflicts of interest, distribution options, investment options, creditor protections, and other

factors.

In light of our initiatives to provide participants with helpful education about plan distribution options,

we appreciate that the Department has proposed to expand its prior guidance on investor education to

include education about distributions and rollovers. Because reversing the Department’s guidance in

the Deseret Letter could require financial institutions to substantially change and restructure their

services with respect to distributions, we think it is critical that the rule further clarify the types of

conversations about rollovers and distributions that would be viewed as educational, rather than

fiduciary. We specifically request that the rule confirm that financial professionals can provide

investor education in accordance with FINRA guidance distinguishing recommendations from

education, and explicitly permit financial institutions to provide information on the factors described in

Notice 13-45 without being deemed to be fiduciaries, so long as the financial professional clearly

notifies the participant that he or she is not acting as a fiduciary or a representative or agent of the plan.
16

C. Recommendations regarding the Best Interest Contract Exemption.

As noted above, we appreciate the Department’s intention to provide a flexible exemption to preserve

certain current compensation practices, while at the same time offering enhanced investor protections.

In addition to the concerns we discussed above about whether the BIC Exemption could provide relief

for variable commission arrangements, we have a number of comments regarding technical aspects of

complying with the proposed exemption, which we discuss below.

1. Exemptive relief should not be conditioned upon satisfying the subjective

impartial conduct standards.

We appreciate the Department’s intention to provide financial institutions with flexibility through the

new “principles based” approach to prohibited transactions exemptions. However, we are concerned

that the principles-based approach will require subjective facts and circumstances analyses that will

make it hard for financial institutions to know whether the exemptions’ conditions have been fully

satisfied without a final determination by a trier of fact. We are further concerned that it will be

difficult to document compliance with the subjective impartial conduct standards, which is essential in

being able to prove that an exemption’s conditions were satisfied and that no prohibited transaction

occurred. Thus, we do not think requiring compliance with the impartial conduct standards is

appropriate as a condition of the exemptions.

Engaging in a non-exempt prohibited transaction can result in severe penalties, including undoing the

transaction, forfeiture of compensation, payment of excise taxes, and reputational damage. Moreover,

financial institutions are required to report non-exempt prohibited transactions to the Internal Revenue

Service. Further, the Department has stated that investors will have a private right of action under the

BIC and Principal Transactions Exemptions. This may result in increased litigation risk, including

potential class action liability.

Subjective standards, such as the best interest standard, are based on facts and circumstances. Though

this gives financial institutions and their professionals flexibility in complying with the exemptions, it

also exposes them to potential strict liability risk and damages based upon a subjective standard that

can be challenged years after the event. Also, it is unclear who will make the determination that the

impartial conduct standards have been satisfied should the actions of a financial institution or

professional be questioned.

We are concerned that requiring actual compliance with these standards as a condition of the

exemptions will create significant uncertainty for financial institutions, resulting in hesitancy about

relying upon the exemptions when structuring their investment products and services. Alternatively,

we suggest that, similar to the approach the Department proposed with respect to the warranties

required under the BIC Exemption, the exemption be revised to require the financial institution to

contractually agree to the impartial conduct standards, but not to require actual adherence to the

standards as a condition of the exemption. Thus, a breach of the impartial conduct standards would

give rise to breach of contract claims, but would not by itself cause a non-exempt prohibited

transaction. In such circumstances, the financial institution would be responsible for losses and

damages resulting from the contractual breach, but not strict liability. This would protect investors by

allowing them to enforce a provision against the financial institution, and permit the financial

institution to have greater certainty with respect to compliance with the prohibited transaction rules.
17

2. Clarify the proposed BIC Exemption to cover services.

The proposed BIC Exemption would cover receipt of compensation for “services provided in

connection with a purchase, sale or holding” of an asset as a result of a financial institution’s advice. It

is unclear based on the proposed language, whether the BIC Exemption covers advice regarding

services. For example, it is unclear whether the BIC Exemption would cover a financial professional’s

receipt of a referral fee for recommending a third-party investment adviser to provide fiduciary

investment management services to a plan or IRA.26 We request revision of the proposed language to

clarify that the BIC Exemption covers compensation received in connection with advice related to

services.

In this regard, we also suggest that the rule clarify how a financial institution may address financial

professional conflicts of interest related to advice on services. Specifically, as discussed above, we

request clarification that financial institutions and financial professionals may receive variable

compensation in connection with their advice under the BIC Exemption. Further, we request

consideration of how the BIC Exemption disclosure requirements would work in the context of

services recommendations. For example, it is unclear how a financial institution would estimate an

assumed rate of return for the transaction disclosure for an investment manager who would provide a

customized asset allocation among various investment options. In such a case, the financial institution

is not recommending a transaction but an investment manager, and the financial institution will not

know specifically how the investment manager will invest the client’s portfolio.

3. Expand the definition of “Retirement Investor”.

As proposed, the BIC Exemption covers compensation received in connection with advice to plan

participants, beneficial owners of IRAs, and fiduciaries of non-participant directed plans with fewer

than 100 participants, but not to fiduciaries of participant-directed plans or plans with more than 100

participants. The BIC Exemption should be revised to expand the definition of “Retirement Investor”

so that a broader class of plans is eligible for relief under the exemption. First, we believe the BIC

Exemption should be available to cover all plans, regardless of the number of participants. We are

concerned that financial institutions will have difficulty establishing and monitoring the 100-

participant threshold for plans on a day-to-day basis, and developing systems and processes to

establish and monitor participant counts will be costly and time consuming. Broker-dealer firms who

provide services for plans on third-party recordkeeping platforms typically do not have ready access to

current participant numbers, and would need to build connectivity with third-party platforms to obtain

this information on a daily basis in order to monitor them. We are also concerned about how a

financial institution would be able to change its compliance procedures where it relied on the BIC

Exemption with respect to an account that later becomes ineligible to be covered because the number

of participants has increased to over 100. We understand that the Department established the 100-

26 We note that referral fee arrangements are already subject to robust disclosure requirements and other investor

safeguards under the Advisers Act. Specifically, Advisers Act Rule 206(4)-3 makes it unlawful for an investment

adviser that is registered or required to be registered under the Advisers Act to pay a cash fee, directly or indirectly, for

client referrals unless the payments are made in compliance with specified conditions. In proposing the rule, the SEC

concluded that, “with appropriate regulatory safeguards, the payment of cash referral fees can be permitted consistent

with the protection of investors.” Thus, the rule establishes a number of conditions, including extensive disclosure and

supervision requirements, that are intended to protect investors from any conflicts of interest that may arise as a result

of an adviser’s referral fee arrangement.
18

participant threshold under the BIC Exemption to align with the same threshold under the seller’s

carve-out, but we are uncertain how a financial institution would be able to qualify for relief under the

seller’s carve-out given that the BIC Exemption requires an affirmative representation that the

financial institution and financial professional are acting as a fiduciaries to the investor. Thus, we

recommend revision of the BIC Exemption to cover any employee benefit plan, regardless of the

number of participants.

Second, the BIC Exemption should be available when providing advice to fiduciaries of participantdirected plans. Fiduciaries of these plans often turn to broker-dealers for assistance in setting up the

investment options to be made available to plan participants through a plan’s investment menu. These

plans, which are often sponsored by small businesses, recognize the benefits to their employees of

providing access to retirement savings vehicles, but do not have the financial resources to engage a

full-service investment adviser or consultant to help in setting up the plan’s investment menu and to

provide ongoing monitoring services.

We are concerned that, if the BIC Exemption is not available when providing advice to such plans, the

ultimate result will be to limit the availability of any investment assistance to fiduciaries of small

participant-directed plans. This result is contrary to the goals of improving the ability of all Americans

to save for retirement. Moreover, we do not understand why the rule would cover advice to fiduciaries

to small non-participant directed plans, but not to fiduciaries to small participant directed plans,

particularly where there is no proposed relief for such plans under the seller’s carve-out.

We understand that relief may be available with respect to plans that are not covered within the BIC

Exemption under the carve-outs from the investment advice definition, but these carve-outs would not

cover all communications or all plans. For example, we understand that the platform carve-out and

investment education carve-outs may cover certain communications with fiduciaries to participantdirected plans. However, neither carve-out would appear to cover a fiduciary recommendation of a

specific investment product to be included on the plan’s menu. The result would seem to be that most,

if not all, assistance to fiduciaries to small participant directed plans could both be fiduciary and

ineligible for relief under a prohibited transaction exemption. We do not believe that this is the

intended result.

Further, precluding financial institutions and financial professionals from relief for advice to these

plans under the BIC Exemption would require the financial institution to develop separate compliance

procedures for advice to fiduciaries of participant-directed plans. Instead, financial institutions should

have the option of relying upon the BIC Exemption for any client. We also think it is important to

cover the broad range of accounts that are plans under section 4975 of the Internal Revenue Code, but

that are not subject to ERISA. This would be consistent with the Department’s goal of more broadly

extending fiduciary standards to communications with retail investors.

4. Streamline the contract requirements.

The logistics of executing a three-party agreement prior to a recommendation presents significant

challenges. We outline these challenges and provide suggestions for streamlining the process below.

First, for current clients as of the applicability date, we and other industry members will need to build

systems to identify which clients may be subject to the BIC Exemption. In many cases, we may not

have data or records needed to make this determination, and we may need to request information from

tens of thousands of clients. Second, we will need to print, mail, receive, process, and retain executed

contracts from current clients. As we noted above, LPL has approximately 2.4 million retirement
19

brokerage clients. If we do not receive an executed contract by the applicability date, it would appear

that we would no longer be able to provide assistance with respect to the investor’s account, which

would harm our clients and potentially leave them without valuable assistance with respect to assets

they purchased prior to the effective date of the rule.

Therefore, we would suggest revision of the contract requirement to permit financial institutions to

unilaterally amend current client agreements to provide the contractual terms required under the BIC

Exemption, and to provide clients with notice of the amendment through use of a negative consent

letter. If a client does not want to continue the relationship, the client could then inform the financial

institution that he or she would like to terminate the agreement. If the client does not respond to the

letter, the amended client agreement would be valid and enforceable against the financial institution.

This negative consent approach would accomplish the Department’s goal of giving investors

contractual rights and making them aware of these rights, without the extra steps and costs of requiring

the investors to sign and return an agreement.27

Second, requiring a signed agreement before a recommendation is given to a new client would be very

challenging. As proposed, the BIC Exemption would require investors to enter into a written

agreement with the financial institution and financial professional before a recommendation can be

discussed (which includes the potential investment products and services to be made available if the

financial professional is hired). Investors will not want to sign a contract with a financial institution

prior to deciding to hire it. This requirement will be disruptive to the investor’s process of learning

about what a financial institution has to offer, and may result in fewer investors receiving any

investment advice. It may also discourage investors from exploring their financial institution options,

knowing this contract requirement will be involved with each institution they contact. We recommend

revision of the BIC Exemption to permit the contract to be signed upon account opening.

Third, we believe that it is unnecessary for both the financial professional and the financial institution

to be parties to the contract and that this requirement creates needless complications and inefficiencies.

It could take significant time to have a new agreement executed by the new financial professional and

the financial institution and investor. During this time, investment assistance would be unavailable.

Similar issues will arise where a team of financial professionals serves an investor’s account, as the

members of the team will change over time. Finally, in cases where a financial professional leaves a

financial institution (e.g., by retiring), but the investor remains and is assigned to a new financial

professional, a new tri-party contract will have to be executed before the new financial professional

can speak to the investor, thereby disrupting the provision of advice to the investor. We recommend

27 We understand the Department has expressed concerns that not all customers actually receive mail from financial

institutions. Broker-dealer firms are subject to Rule 17ad-17 under the Securities Exchange Act of 1934, which

obligates firms to search for lost security-holders. Broker-dealer firms have policies and procedures under this rule to

help confirm whether mail is received, including monitoring and following up on correspondence that is returned from

a customer’s address in their files. We believe these practices mitigate the risk that a customer would not receive

notice of the amendment to his or her contract. Moreover, the Department has approved the negative consent approach

in several advisory opinions and prohibited transaction exemptions. See DOL Adv. Op. 97-16A (May 22, 1997)

(approving negative consent to change platform of mutual funds and increased shareholder servicing and distribution

fees); DOL Adv. Op. 2005-10A (May 11, 2005) (approving negative consent to increase investment management fees);

DOL Information Letter to Robert S. Plotkin, the Assistant Director of Banking Supervision and Regulation, Board of

Governors of the Federal Reserve System (Aug. 1, 1986) (approving negative consent to change fee for sweep

services); PTE 2012-11 (Delaware Charter Guarantee & Trust d/b/a Principal Trust Company), 77 Fed. Reg. 32,673

(2012) (negative consent to fee increases and investment by a collective fund in additional affiliated funds); PTE 2010-

26 (PNC Financial Services Group, Inc.), 75 Fed. Reg. 56,564 (2010) (negative consent to fee increases).
20

revision of the proposed BIC Exemption to permit financial institutions to execute contracts on behalf

of all of the financial professionals who may provide recommendations to the investor, so long as the

contract is enforceable against the financial institution and the financial professional.

5. Simplify the transaction, annual, and website disclosures.

We support the Department’s efforts to foster transparent and meaningful disclosures regarding fees

and compensation that financial institutions receive in connection with services to ERISA plans and

IRAs. However, we are concerned that some of the technical requirements of the proposed disclosure

conditions of the BIC Exemption would be very challenging to implement in practice, and would raise

other concerns and expose the financial institution to prohibited transactions for inadvertent and de

minimis errors. Specifically:

 The disclosures require information that is held by a third party. We may not have ready

access to certain information required to be disclosed under the annual, transaction, and website

disclosures. This is particularly the case where one of our financial professional’s client

accounts is held on a third-party’s mutual fund or brokerage platform. In this case, we may not

have ready access to all of the information about assets purchased and sold, fee information, or

information regarding compensation earned with respect to those assets that is needed for the

annual, transaction, and website disclosures. Broker-dealers would have to build the systems to

coordinate with third parties to determine the assets purchased, sold, or held in the last 365

days, as needed for the website disclosure. Because broker-dealers are not currently required to

maintain certain of this information, broker-dealers, as well as the third parties in possession of

the information, would need to develop technology and systems, and incur the related costs, to

transmit, maintain, and accurately report this information.

 The transaction disclosure requires certain assumptions that may mislead investors. The

transaction disclosure requires assumptions regarding rates of return and expenses that could

mislead investors regarding actual rates of return and expenses. It is very difficult to estimate a

future rate of return for a particular investment option, and there is not sufficient guidance

regarding how this may be accomplished. Indeed, both the SEC and FINRA have provided

guidance in multiple contexts regarding the use of assumed rates of return; one of the unifying

themes of this guidance is that, as stated in FINRA Rule 2210(d)(1)(F), “Communications may

not predict or project performance, [or] imply that past performance will recur . . . .” Indeed, in

its comment letter on the proposed rule, FINRA stated that the performance projection

requirements would conflict with FINRA Rule 2210.28

We are also concerned that expense estimates may be misleading because investment providers

may change the fees and expenses associated with particular investment options at any time,

and the proposed rule does not permit costs to be estimated or based upon reasonable

assumptions. Moreover, changes to expenses will need to be continuously updated, which

could result in investors receiving outdated or erroneous information, given that the disclosures

will need to be ready to be furnished at any time. Finally, we note that some investment

options and products raise particular challenges when assuming rates of return and expenses.

For example, how would estimated expenses and assumed rates of return be calculated for a

28 Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA to Employee Benefits Security

Administration (July 17, 2015), at 14-15 [hereinafter, FINRA Comment Letter].
21

managed account that would be customized to an investor’s objectives and financial

circumstances?

 The transaction disclosure may disrupt trading efficiency. The requirement to provide a

detailed transaction disclosure prior to executing a purchase will frequently slow the investment

process, and could cause investors to miss investment opportunities, particularly when making

market sensitive trades, such as in individual equities or fixed income. Investors already have

access to numerous disclosures regarding investment expenses, including summary

prospectuses for registered funds, prospectuses for variable annuities, and trade confirmations.

Adding yet another disclosure is concerning in any market, and is particularly concerning in

volatile markets and in situations where a financial professional makes a recommendation at a

time when there is little time to execute the transaction, such as near the close of a trading day,

or at the end of the year when an investor needs to take a required minimum distribution from

his or her IRA to avoid an excise tax. We are concerned that a broker-dealer may not be able to

meet its best execution obligations under the proposed rule.29

In addition, we are concerned about situations where the disclosure is provided, but the investor

does not execute the transaction immediately (or on the same day with respect to mutual fund

shares). In those situations, the information provided may become stale (such as pricing

information) before the investor returns to confirm and allow the financial institution to execute

the transaction. In order to fulfill its disclosure obligations under the BIC Exemption, it

appears that the financial professional could need to provide this information again, slowing

down the process even further.

 The transaction disclosure will be extremely costly and presents practical issues. To comply

with this requirement, financial institutions would have to build a new technology system that

is tailored to these requirements and that can quickly provide the required information for any

potential investment. The costs to build such systems would be significant. In addition, there

are other practical issues that the rule has not addressed. For example, it appears that the

proposed rule does not reflect how this disclosure would be provided in different scenarios,

such as when a retirement investor is working with a financial professional over the telephone

or when accessing investment information through an interactive website. Similarly, the

proposal does not provide any guidance on how financial institutions should attribute certain

revenue (e.g., revenue sharing, payments for shelf space), which is often attributed to a wide

range of investors beyond retirement investors, and to purchases of mutual funds by retirement

investors. Nor does the proposal permit any assumptions (other than rates of return), such as

with regard to how costs may change over time. We also note that, in 2005, the SEC proposed

29 Under the antifraud provisions of the federal securities laws and under FINRA rules, including FINRA Rule 5310,

broker-dealers have a duty to seek to obtain best execution of customer orders. See, e.g., Newton v. Merrill, Lynch,

Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-270 (3d Cir.); Certain Market Making Activities on Nasdaq,

Exchange Act Release No. 40900 (Jan. 11, 1999) (citing Sinclair v. SEC, 444 F.2d 399 (2d. Cir. 1971). See also Order

Execution Obligations, Exchange Act Release No. 37619A (Sept. 6, 1996), (“Order Handling Rules Release”).

Specifically, FINRA Rule 5310 requires broker-dealers to use reasonable diligence to ascertain the best market for a

security and to buy or sell the security in that market so that the price to the customer is as favorable as possible under

market conditions. We are concerned that delays resulting from the transaction disclosure requirements may interfere

with broker-dealer’s ability to obtain best execution under certain circumstances. We note that FINRA has raised

similar concerns in its comments regarding the proposed Principal Transaction Exemption. FINRA Comment Letter at

17.
22

point-of-sale disclosure requirements for mutual funds, variable annuities, and 529 plans that

have not yet been finalized.30

 The website disclosure may raise privacy and competitive concerns. It appears that the

website disclosure would require disclosure of compensation payable to individual financial

professionals with respect to particular investment options. We believe that this may raise

issues under applicable state privacy laws, and request clarification that compliance with the

website disclosure requirements would not violate other applicable law. We are also concerned

that some financial professionals may choose not to provide services to retirement accounts

rather than have elements of their compensation posted on a public website. Moreover, the

website disclosure may also have the effect of requiring financial institutions to make

proprietary information publicly available. This may have a negative effect on competition in

the financial marketplace. To address these concerns, we suggest that the website disclosure

requirements be revised to permit the use of ranges and to make clear that individual financial

professionals do not need to be identified.

The Department asked for comments on whether a short and direct, plain-English, consumer-warning

disclosure would be effective and less costly than the proposed transaction disclosure.31 We believe it

would. This would particularly be the case where it is accompanied with (1) a disclosure similar to

those required under ERISA section 408(b)(2) in shorter form, either in the contract, or at account

opening that describes the services provided, material conflicts, the range of compensation that may be

received, and (2) a post-transaction disclosure on a confirmation pursuant to the requirements of Rule

10b-10, or an annual disclosure of commissions. We also believe that such a short-form, plain-English

disclosure would effectively convey to investors the importance of considering the expenses and fees

associated with investment options.

We are concerned that retail investors already receive a large quantity of information and disclosures

about investments, and that providing additional information of marginal utility may cause investors

not to make investment decisions, or to make bad investment decisions.32 Though we agree with the

Department that investors should have clear and accurate information about the cost of investments,

we note that for many products this information is currently available in disclosures that are generally

required by the SEC or other regulators, such as summary prospectuses of mutual funds, prospectuses

for variable annuities, and fund fact sheets for bank collective funds. Further, information about fees

30 See, e.g., Point of Sale Disclosure Requirements and Confirmation Requirements for Transactions in Mutual Funds,

College Savings Plans, and Certain Other Securities, and Amendments to the Registration Form for Mutual Funds,

Securities Act Release No. 8544, Exchange Act Release No. 51274, Investment Company Act Release No. 26778 (Feb.

28, 2005), 70 Fed. Reg. 10,521 (Mar. 4, 2005) (to be codified at 17 C.F.R. pts. 239, 240, and 274).

31 Specifically, the Department has asked for comments on an alternative to the transaction disclosure that is described in

the preamble as a “’cigarette warning’-style disclosure”, such as a statement reading: “Investors are urged to check

loads, management fees, revenue sharing, commissions, and other charges before investing in any financial product.

These fees may significantly reduce the amount you are able to invest over time and may also determine your adviser’s

take-home pay. If these fees are not reported in marketing materials or made apparent by your investment adviser,

don’t forget to ask about them.” 80 Fed. Reg. at 21,974.

32 See Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans, 73 Fed. Reg. 43,014,

43,016 (proposed July 23, 2008) (noting that “information that is too detailed may overwhelm participants”); The

ERISA Industry Committee, Letter to Office of Regulations and Interpretations, Employee Benefits Security

Administration re: Fee Disclosure RFI (July 19, 2007); L. Boselovic, “New Regulations to Make 401(k) Quarterly

Statements Even Longer,” Pittsburgh Post-Gazette, (Aug. 30, 2012).
23

and expenses is also available in the participant fee disclosures required under the regulations under

ERISA section 404(a)(5), the service provider fee disclosures required under ERISA section 408(b)(2),

and through the Form 5500 annual report. We are concerned that the three additional disclosures

required under the proposed BIC exemption will just add more to the large amount of information

investors already receive. We remain committed to working with the Department and other regulators

to streamline this information to make it meaningful to and useable for investors.

For example, rather than the detailed cost disclosures, we believe the rule could require a financial

institution to provide at account opening a consumer warning and a short form disclosure that includes

the following information:

 The role of the financial institution (e.g., “What is the Role of a Broker?”)

 The legal standards that apply to brokers (e.g., “What Standards Apply to a Broker?”)

 The broker’s material conflicts of interest related to compensation (e.g., “How May Brokers’

Compensation Affect Their Recommendations and How Do Brokers Address Conflicts of

Interest?”)

 Ranges of commissions and other compensation for the products that the financial professional

may recommend in a table (see below).

 Alternatives to brokerage relationships (e.g., “What Alternatives Are There To a Brokerage

Relationship?”)

The disclosure document could contain a table that lists each investment type a financial institution

may recommend, e.g., mutual fund, equity, variable annuity, and bond. For each investment type, the

table would set out the range of commissions or trails that a financial institution can receive (as a

percentage or a dollar amount), the timing of such compensation (e.g., upfront or ongoing), and

whether the compensation is direct or indirect. Below is an example of such a table.

Investment Timing (Upfront or Ongoing) Range (% or $) Direct/Indirect

Mutual Fund

Equity

Bond

Variable Annuity

A summary of other types of compensation the financial institution or financial professional may

receive would be included as well. We believe such a document would streamline the disclosures

under the rule, giving investors the information that is important to them in an easy to understand

format.

6. Propose a streamlined way to correct inadvertent violations of the exemption’s

conditions.

The proposed BIC Exemption includes many technical and detailed disclosure and other requirements

that present numerous opportunities for inadvertent errors. For example, the transaction disclosure and

annual disclosure will require the financial institution to obtain detailed information from thousands of

product sponsors about costs and expenses, and to assume an estimated rate of return for each product.

It is possible that some of this information will not be entered correctly in the financial institution’s
24

systems or will be outdated, and that, as a result, the transaction disclosures provided to many clients

will contain errors leading to mis-information upon which decisions may be based. Where these errors

are administrative and inadvertent, and the financial institution has acted in good faith, the financial

institution should not automatically lose the exemption and be deemed to have engaged in a prohibited

transaction. Moreover, in light of the Department’s principles-based approach to the BIC Exemption’s

conditions, particularly with respect to the subjective impartial conduct standards, we suggest adoption

of a principles-based approach to the penalties and corrections that could apply if the exemption’s

conditions are not satisfied. Specifically, penalties or corrections should be commensurate with the

severity of the infraction, and not result in strict liability.

D. Comments regarding the Principal Transactions Exemption.

Many of our comments raised with respect to the BIC Exemption discussed above would also apply to

the Principal Transactions Exemption, including the disclosure requirements, impartial conduct

standards, timing of the transaction disclosure, and need for a way to correct inadvertent errors. We

also noted above that we believe the rule should expand relief for a broader range of debt securities,

including structured products. Our additional comments on the Principal Transactions Exemption

follow below.

In general, we believe that the proposed requirements with respect to transactional disclosures are

unnecessarily restrictive and will present several practical impediments to complying with the

requirements. Further, the confirmation disclosure requirements present significant operational

burdens.

1. Allow more flexibility in disclosing information to an investor prior to engaging

in a principal transaction.

As proposed, a financial professional must, prior to engaging in a principal transaction, inform the

investor that “the purchase or sale of the Debt Security will be executed as a Principal Transaction.” In

addition, the proposed Principal Transactions Exemption requires the financial institution to disclose,

prior to engaging in a principal transaction, any available pricing information, including the two quotes

from a ready and willing counterparty, as well as the mark-up or mark-down or other payment that will

be charged to the investor.

We believe brokerage practices should be disclosed to investors. We are concerned that requiring

investor consent, at order acceptance, to the precise manner in which a trade will be executed will be

unnecessarily restrictive in practice, and will reduce trading efficiency. Among the practical concerns

regarding this approach are potential difficulties re-engaging the investor to obtain final consent from

potential price movements subsequent to obtaining the initial consent. Further, finding two prices will

not always be possible and may add time to the transaction, including additional time needed to

determine which securities are similar securities and whether pricing information is available. We

question the utility of this requirement in light of a broker-dealer’s best execution and fair pricing

obligations, as well as with regard to the potential confusion providing this information to retirement

investors may cause. Those retirement investors who are concerned about comparable pricing could

access information through FINRA’s Trade Reporting and Compliance Engine (TRACE) system, with

respect to corporate debt, and the MSRB’s Electronic Municipal Market Access website (EMMA),

with respect to municipal securities.

Particularly, in light of the fact that the Principal Transactions Exemption imposes a best interest

standard of care on fiduciaries who seek to comply with it, we recommend that the rule not require
25

affirmative consent to the specific terms of a principal transaction, but rather allow an investor to

provide oral consent to a principal transaction generally, and then allow the financial institution to

determine whether to execute a trade as principal. Specifically, the proposed requirement should be

revised to require the financial professional or financial institution to provide, orally or in writing: “A

statement that the purchase or sale of the Debt Security may be executed as a principal transaction

between the financial professional or financial institution and the plan, participant or beneficiary

account, or IRA.” Further, the price at which the transaction will be executed should not be required

prior to the completion of the transaction. Under such an approach, the financial professional and

financial institution would remain subject to the best interest standard of care, as well as to obligations

under the federal securities laws, which provide adequate protections addressing principal trading in

various circumstances.

In addition to enhancing our ability to effectively serve investors, this approach may also minimize

compliance burdens, as it is consistent with the approach taken by the SEC in Temporary Rule 206(3)-

3T under the Advisers Act. As you know, that rule, which applies to dually-registered investment

advisers and broker-dealers with respect to non-discretionary accounts, requires only that an

investment adviser that may engage in a principal trade inform the client “of the capacity in which it

may act with respect to such transaction.” The SEC recognized, in adopting this approach, “that in

many instances the adviser may not know whether a particular transaction will be effected on a

principal basis.”33 In addition, FINRA already requires public disclosure of pricing information for

corporate debt securities through its TRACE system (and the MSRB requires such disclosure for

municipal securities through its EMMA website).

2. Mark-up and mark-down disclosures.

The rule requires disclosure of the mark-up or mark-down prior to obtaining consent to a principal

transaction and again on the confirmation. This is a topic on which FINRA and the MSRB have

focused. For example, fair mark-ups and pricing are addressed in FINRA Rule 2121. In addition, the

MSRB and FINRA requested comments on proposed rule changes that would require broker-dealers to

disclose the difference between a reference price and the price to the client for same-day, “retail-sized”

riskless principal transactions.34 These disclosures would serve as an indication of the mark-up or

mark-down in those transactions. These proposals are related to the SEC’s increased focus on price

transparency in the debt markets.35 In its comment letter regarding the Department’s rule proposal,

FINRA recommends that the rule’s requirement for disclosure of mark-ups and mark-downs be

deleted, and that instead the rule require compliance with FINRA Rule 2121 and any FINRA rules that

require the disclosure of pricing information related to principal transactions.36

33 See Temporary Rule Regarding Principal Trades with Certain Advisory Clients, Investment Advisers Act Release No.

2653 (Sept. 24, 2007), 72 Fed. Reg. 55,022, 55,028 (Sept. 28, 2007).

34 See MSRB, Request for Comment on Draft Rule Amendments to Require Dealers to Provide Pricing Reference

Information on Retail Customer Confirmations, Regulatory Notice 2014-20 (Nov. 17, 2014); FINRA, Pricing

Disclosure in the Fixed Income Markets: FINRA Requests Comment on a Proposed Rule Requiring Confirmation

Disclosure of Pricing Information in Fixed Income Securities Transactions, Regulatory Notice 14-52 (Nov. 2014).

35 See SEC, REPORT ON THE MUNICIPAL SECURITIES MARKETS (July 31, 2012), available at

https://www.sec.gov/news/studies/2012/munireport073112.pdf.

36 Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA to Employee Benefits Security

Administration (July 17, 2015), at 16-17.
26

If the Department determines that the rule must require additional disclosure regarding mark-ups and

mark-downs, we recommend an alternative that would be less challenging operationally and costly to

build. Rather than requiring disclosure of the specific mark-up or mark-down, the Department could

require disclosure of the maximum mark-up or mark-down percentage that a financial institution

permits for particular types of securities and a general phone number that would reach an individual at

the financial institution who can provide more information. This type of disclosure would facilitate

investor education and understanding without imposing operational challenges that otherwise would be

present.

F. More than eight months is needed to comply with the rule.

The rule is proposed to become applicable eight months after it is final. We are concerned that this is

not enough time for us to implement and comply with the rule as written. Among numerous other

changes, complying with the rule as proposed will require us to:

 Design, build, and test a website that must be updated quarterly.

 Design, build, and test systems and compliance procedures needed to satisfy the

tri-party contract required under the new exemptions.

 Design, build, integrate, and test systems needed to collect data from LPL and third parties,

process data and report data in real time to satisfy the point-of-sale and annual disclosure

requirements under the BIC Exemption and the Principal Transactions Exemption. We

note that each of these requirements will require us to develop separate systems. For the

transaction disclosure, we will need to develop a system that allows the financial

professional to input the specific investment information so the system can identify and

incorporate the costs, apply the expected rate of return information, and print that

information for, or compile it in another manner that can be transmitted to, the client. The

annual disclosure will require a separate system to track each asset purchased and sold by a

retirement investor in a calendar year, calculate the fees and expenses paid by the retirement

investor, and determine the total amount of all direct and indirect compensation received for

each asset.

 Repaper and obtain client signatures for current clients who will need to be covered under

the BIC Exemption.

 Develop systems to identify and block assets that are not covered under the BIC exemption,

and to inform current clients that we will no longer be able to provide advice to them on

these assets as of the applicability date, and to ensure that third parties that directly hold

client assets have done so as well.

 Redesign our client on-boarding policies, procedures and systems.

 Revise our compliance and supervision procedures and systems, including for exemptions

we currently rely upon that the Department has proposed to change.

The Department has requested input regarding the rule’s implementation period. We are concerned

that, without additional time beyond the eight months, implementing the rule will significantly disrupt

investors’ experiences with our financial professionals, and that our financial professionals may not

have enough time to fully understand and comply with the rule. In fact, we estimated that it could

require at least thirty-six months to fully implement the requirements. We would suggest that the
27

Department consider implementing the rule in phases and would welcome further discussion with the

Department regarding the specific ways in which a phased implementation may be accomplished.

G. The costs of complying with the rule may have been substantially underestimated.

We would encourage the Department to reconsider its cost analysis and to take into account estimates

provided by others commenting on the proposed rule. We believe that important factors may have

been omitted from the Department’s cost analysis, including potential costs associated with changes to

current business models and resulting costs to clients. We believe that it is important that the

rulemaking process be informed by an accurate and comprehensive cost analysis, and so we urge the

Department to review and consider information and analyses it receives regarding its cost analysis.

* * * * *

Thank you for considering our comments on the proposed rule. We note that the Department has

requested comments on 99 technical issues in the proposal. Given time constraints, we have not

addressed many of the Department’s questions in this letter, but we strongly believe that it is important

that these questions, as well as many other technical questions the proposal raises, be answered,

considered, and reflected in any final rule. We would be happy to supplement this letter with

additional information or to further discuss the implications of the proposal with the Department.

The technical issues that remain to be resolved are numerous, and this rule, which has the potential to

affect $17.6 trillion in retirement assets in the United States, will have a significant impact upon

financial institutions, financial professionals, small businesses, plans, and IRAs, and more broadly on

the capital markets and the national economy. LPL is dedicated to ensuring that its financial

professionals have the tools and resources they need to best serve their clients and to help their clients

achieve their retirement goals and other investment objectives. As we stated at the outset, we believe

that all financial professionals should act in their clients’ best interests and that compensation and

conflicts should be disclosed and addressed in meaningful ways. Nevertheless, we also believe that

investors should be free to make choices about the services and products that they will use to achieve

their goals, and that the benefits of any new regulation must be carefully weighed against its costs. We

are concerned that if the rule is finalized as proposed, it may limit many beneficial services our

financial professionals are currently able to provide to retirement investors.

As such, we would strongly recommend that the Department issue another proposed rule prior to

issuing a final regulation. At a minimum, we would recommend that the Department issue a

discussion draft of the final rule and hold focus group meetings with plan sponsors, fiduciaries,

investors, financial institutions, and financial professionals before the rule is finalized. We look

forward to collaborating with the Department on refining the proposal.

Sincerely,

David P. Bergers
Appendix A: Highlights of Investor Protections under Federal and State Law and LPL’s Current Policies and Procedures

Regarding Certain Assets

The table below highlights investor protections under federal and state law and under LPL’s policies and procedures for certain assets.

These assets are examples of assets that may be excluded from the Best Interest Contract and Principal Transaction Exemptions. For

purposes of this appendix, we assume that none of the investments are registered under the Investment Company Act of 1940

(Investment Company Act).

Asset Federal Securities Laws State Laws Highlights from LPL’s Current

Policies and Procedures

Non-Traded

REITs

 Generally registered under the

Securities Act of 1933 (Securities

Act)

 Generally subject to disclosure

obligations under the Securities Act

and the Securities Exchange Act of

1934 (Exchange Act)

 Sales subject to antifraud provisions

and FINRA rules1

 FINRA Rule 2340 and Regulatory

Notice 15-02 establish requirements

for account statement valuations of

non-traded REITS

 FINRA Regulatory Notice 12-03

provides guidance to member firms

regarding the heightened supervision

 Subject to state registration

requirements; many states have

modeled those requirements on the

North American Securities

Administrators Association (NASAA)

Statement of Policy Regarding Real

Estate Investment Trusts, including

prospectus delivery; may impose

limitations related to liquid net worth,

income levels and allocation limits

that clients residing within that state

must meet in order to invest in an

offering

 Broker-dealers subject to state

registration requirements, business

conduct rules related to unethical and

 LPL performs due diligence on a

product before deciding whether to

add it to the list of products approved

for sale by LPL’s financial

professionals

 After the due diligence process,

alternative investment products are

escalated to LPL’s Product Review

Committee (PRC) for discussion and

potential approval for sale by

financial professionals; the PRC

generally considers what disclosures,

suitability considerations,

supervision, and training may be

needed

 LPL financial professionals and

1

See generally Sections 9(a), 10(b), and 15(c) of the Securities Exchange Act of 1934 (“Exchange Act”); Section 17(a) of the Securities Act; FINRA Rule

2010 (Standards of Commercial Honor and Principles of Trade); FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices); FINRA

Rule 2111 (Suitability); FINRA Rule 2210 (Communications with the Public); FINRA Rule 2121 (Fair Prices and Commissions); FINRA Rule 2122

(Charges for Services Performed); FINRA Rule 2210 (Communications with the Public); FINRA Rule 2262 (Disclosure of Control Relationship with

Issuer); FINRA Rule 2310 (Direct Participation Programs); FINRA Rule 3110 (Supervision); FINRA Rule 3120 (Supervisory Control System); FINRA Rule

3130 (Annual Certification of Compliance and Supervisory Procedures); FINRA Rule 3220 (Influencing or Rewarding Employees of Others); FINRA Rule

3270 (Outside Business Activities of Registered Persons); FINRA Rule 5120 (Offering Members’ Securities); FINRA Rule 5310 (Best Execution and

Interpositioning); FINRA Rule 5320 (Prohibition Against Trading Ahead of Customer Orders).
2

Asset Federal Securities Laws State Laws Highlights from LPL’s Current

Policies and Procedures

requirements for complex products,

such as suitability obligations and

training of registered representatives

(see also NASD Notice to Members

03-71; NASD Notice to Members 05-

26)

 FINRA Regulatory Notice 13-18

provides guidance on

communications with the public

about non-traded REITs

 SEC and FINRA conduct

examinations of broker-dealers for

compliance with the federal securities

laws and FINRA rules, and can bring

enforcement actions for violations

thereof

fraudulent practices, and state antifraud provisions with respect to the

sale of securities

 States conduct examinations of

broker-dealers for compliance with

applicable state laws and regulations

and can bring enforcement actions for

unethical and fraudulent conduct

principals (supervisors) must

complete training about this product

type before selling it or supervising

transactions involving it

 Principals perform risk-based

supervision of the sales activities of

financial professionals

 LPL sets guidelines for the percent of

liquid net worth that may be invested

in this product. LPL guidelines vary

by liquid net worth, age, investment

objective, and current alternative

investment holdings.

Non-Traded

Business

Development

Companies

(non-traded

BDCs)

 Type of closed-end fund that may

elect to be regulated as a BDC under

the Investment Company Act

 Subject to disclosure obligations

under the Securities Act (if registered

under the Securities Act), Exchange

Act, and Investment Company Act (if

regulated under the Investment

Company Act), including, for

example, requirements related to

portfolio composition and prospectus

delivery

 If regulated under the Investment

Company Act, subject to certain

affiliated transaction rules

 Subject to corporate governance and

 Non-traded BDCs are subject to state

registration requirements; many states

have modeled those requirements on

the NASAA Omnibus Guidelines,

including prospectus delivery; states

may impose limitations related to

liquid net worth, income levels and

allocation limits that clients residing

within that state must meet in order to

invest in an offering

 Broker-dealers subject to state

registration requirements, business

conduct rules related to unethical and

fraudulent practices, and state antifraud provisions with respect to the

sale of securities

 LPL performs due diligence on a

product before deciding whether to

add it to the list of products approved

for sale by LPL’s financial

professionals

 After the due diligence process,

alternative investment products are

escalated to LPL’s PRC for

discussion and potential approval for

sale by financial professionals; the

PRC generally considers what

disclosures, suitability considerations,

supervision, and training may be

needed

 LPL financial professionals and

principals (supervisors) must
3

Asset Federal Securities Laws State Laws Highlights from LPL’s Current

Policies and Procedures

other provisions of the SarbanesOxley Act of 2002 and the

Investment Company Act (if

regulated under the Investment

Company Act)

 Subject to rules of the securities

exchange if the non-traded BDC is

listed

 Sales subject to antifraud provisions

and FINRA rules1

 FINRA Rules 2310 establishes

requirements for all non-traded

BDCs, and FINRA Rule 5123

establishes special requirements for

non-listed BDCs

 SEC and FINRA conduct

examinations of broker-dealers for

compliance with the federal securities

laws and FINRA rules, and can bring

enforcement actions for violations

thereof

 FINRA Regulatory Notice 12-03

provides guidance to member firms

regarding the heightened supervision

requirements for complex products,

such as suitability obligations and

training of registered representatives

(see also NASD Notice to Members

03-71; NASD Notice to Members 05-

26)

 States conduct examinations of

broker-dealers for compliance with

applicable state laws and regulations

and can bring enforcement actions for

unethical and fraudulent conduct

complete training about this product

type before selling it or supervising

transactions involving it

 Principals perform risk-based

supervision of the sales activities of

financial professionals

 LPL sets guidelines for the percent of

liquid net worth that may be invested

in this product. LPL guidelines vary

by liquid net worth, age, investment

objective, and current alternative

investment holdings.
4

Asset Federal Securities Laws State Laws Highlights from LPL’s Current

Policies and Procedures

Private Equity

Funds & Hedge

Funds

 Generally only available to accredited

investors, as defined in Rule 501 of

Regulation D of the Securities Act of

1933

 Investment advisers to private equity

and hedge funds generally required to

register with the SEC; may also be

required to register as commodity

pool operators with the CFTC and

National Futures Association

 Investment advisers subject to

fiduciary duty and must disclose

material conflicts of interest

 Sales of private equity and hedge

funds are subject to antifraud

provisions and FINRA rules1

 NASD Notice to Members 03-07

addresses sales practice issues when

selling hedge fund interests

 FINRA Rule 5123 requires brokerdealers selling a security in a private

placement to file a copy of the

offering document with FINRA (see

also FINRA Regulatory Notice 12-

40)

 FINRA Regulatory Notice 10-22

provides guidance regarding brokerdealers’ obligations to conduct

reasonable due diligence related to

offerings of private placements

 SEC conducts examinations of

broker-dealers and investment

 State registration may be required for

investment advisers to private equity

funds with assets under management

less than $150 million

 Investment adviser representative

registration may be required

 States retain authority to investigate

and bring enforcement actions with

respect to fraud or deceit against an

investment adviser or person

associated with an investment adviser

 Regulation D does not preempt state

anti-fraud provisions

 LPL performs due diligence on a

product before deciding whether to

add it to the list of products approved

for sale by LPL’s financial

professionals

 After the due diligence process,

alternative investment products are

escalated to LPL’s Product Review

Committee PRC for discussion and

potential approval for sale by

financial professionals; the PRC

generally considers what disclosures,

suitability considerations,

supervision, and training may be

needed

 LPL financial professionals and

principals (supervisors) must

complete training about this product

type before selling it or supervising

transactions involving it

 Principals perform risk-based

supervision of the sales activities of

financial professionals

 LPL sets guidelines for the percent of

liquid net worth that may be invested

in this product. LPL guidelines vary

by liquid net worth, age, investment

objective, and current alternative

investment holdings.
5

Asset Federal Securities Laws State Laws Highlights from LPL’s Current

Policies and Procedures

advisers to private equity and hedge

funds for compliance with the federal

securities and can bring enforcement

actions for violations thereof

 The SEC and CFTC require filing of

Form PF and Form CPO-QPR,

respectively

Structured

Products

 Registered under the Securities Act

 Subject to disclosure obligations

under the Securities Act and the

Exchange Act

 Sales subject to antifraud provisions

and FINRA rules1

 NASD Notice to Members 05-59 and

FINRA Regulatory Notice 09-73

address sales practice obligations in

recommending structured products

 FINRA Regulatory Notice 12-03

provides guidance to member firms

regarding the heightened supervision

requirements for complex products,

such as suitability obligations and

training of registered representatives

(see also NASD Notice to Members

03-71; NASD Notice to Members 05-

26)

 SEC and FINRA conduct

examinations of broker-dealers for

compliance with the federal securities

laws and FINRA rules, and can bring

enforcement actions for violations

thereof

 Subject to state registration

requirements; some states, in

approving registration of a product,

impose limitations related to liquid

net worth, income levels and

allocation limits that clients residing

within that state must meet in order to

invest in an offering

 Many states have modeled

registration requirements on the

NASAA Statement of Policy

Regarding Registration of AssetBacked Securities, including

prospectus delivery

 Broker-dealers subject to state

registration requirements, business

conduct rules related to unethical and

fraudulent practices, and state antifraud provisions with respect to the

sale of securities

 States conduct examinations of

broker-dealers for compliance with

applicable state laws and regulations

and can bring enforcement actions for

unethical and fraudulent conduct

 LPL performs due diligence on

issuers and structures before deciding

whether to add them to the list of

products approved for sale by LPL’s

financial professionals

 After the due diligence process, new

and novel products are escalated to

the PRC for discussion and potential

approval for sale by financial

professionals; the PRC generally

considers what disclosures, suitability

considerations, supervision, and

training may be needed

 LPL financial professionals and

principals (supervisors) must

complete training about this product

type before selling it or supervising

transactions involving it

 Principals perform risk-based

supervision of the sales activities of

financial professionals
6

Asset Federal Securities Laws State Laws Highlights from LPL’s Current

Policies and Procedures

Municipal

Securities

 Antifraud provisions prohibit

misleading statements or omissions in

official statements and ongoing

disclosure

 Rule 15c2-12 under the Exchange Act

imposes requirements on underwriters

regarding initial and ongoing

disclosure

 MSRB rules establish disclosure,

sales practice, and other requirements

for broker-dealers and municipal

securities dealers2

 SEC and FINRA conduct

examinations for compliance with the

federal securities laws and MSRB

rules, and can bring enforcement

actions for violations thereof

 Exempt from registration under state

law, except for the offer and sale of a

security within the state in which the

issuer of the security is located

 Broker-dealers subject to state

registration requirements, business

conduct rules related to unethical and

fraudulent practices, and state antifraud provisions with respect to the

sale of securities

 States conduct examinations of

broker-dealers for compliance with

applicable state laws and regulations

and can bring enforcement actions for

unethical and fraudulent conduct

 LPL has established policies and

procedures reasonably designed to

ensure that fixed income transactions

are executed at the best available

price based on a reasonable

relationship to the prevailing market

price of the same or a similar security

 The policies and procedures include

fair pricing and best execution

guidelines that LPL’s traders must

use in buying and selling fixed

income securities for customers

 Principals perform risk-based

supervision of the sales activities of

financial professionals

2

See generally MSRB Rule G-10 (Delivery of Investor Brochure); MSRB Rule G-11 (Primary Offering Practices); MSRB Rule G-13 (Quotations Relating to

Municipal Securities); MSRB Rule G-14 (Reports of Sales or Purchases); MSRB Rule G-17 (Conduct of Municipal Securities and Municipal Advisory

Activities); MSRB Rule G-19 (Suitability of Recommendations and Transactions); MSRB Rule G-20 (Gifts, Gratuities and Non-Cash Compensation);

MSRB Rule G-21 (Advertising); MSRB Rule G-22 (Control Relationships); MSRB Rule G-30 (Prices and Commissions); MSRB Rule G-32 (Disclosures in

Connection with Primary Offerings); MSRB Rule G-43 (Broker’s Brokers); MSRB Rule G-45 (Reporting of Information on Municipal Fund Securities);

MSRB Rule G-47 (Time of Trade Disclosure).