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July 21, 2015
Page 5

In the preamble to the Proposal, the DOL noted that it “does not believe such a carve-out can or
should be crafted to cover recommendations to retail investors, including small plans, IRA owners
and plan participants and beneficiaries. As a rule, investment recommendations to such retail
customers do not fit the ‘arm's length’ characteristics that the seller's carve-out is designed to
preserve. Recommendations to retail investors and small plan providers are routinely presented as
advice, consulting, or financial planning services. In the securities markets, brokers' suitability
obligations generally require a significant degree of individualization. Research has shown that
disclaimers are ineffective in alerting retail investors to the potential costs imposed by conflicts of
interest, or the fact that advice is not necessarily in their best interest, and may even exacerbate
these costs.” The DOL went on to state that “[m]ost retail investors and many small plan
sponsors are not financial experts, are unaware of the magnitude and impact of conflicts of
interest, and are unable effectively to assess the quality of the advice they receive” and that “[i]n
this retail market, a seller's carve-out would run the risk of creating a loophole that would result in
the rule failing to improve consumer protections by permitting the same type of boilerplate
disclaimers that some advisers now use to avoid fiduciary status under the current ‘five-part test’
regulation.”

The conditions of the seller’s carve-out, however, are more restrictive than these goals, more
burdensome than is required to achieve them and will effectively remove entire classes of
investment choices from IRAs, self-directed plan participants and small plans. As proposed, the
seller’s carve-out is subject to the following conditions:

First, the person must provide advice to an ERISA plan fiduciary who is independent of
such person and who exercises authority or control respecting the management or
disposition of the plan's assets, with respect to an arm's length sale, purchase, loan or
bilateral contract between the plan and the counterparty, or with respect to a proposal to
enter into such a sale, purchase, loan or bilateral contract. .

Second, either of two alternative sets of conditions must be met. Under the first
alternative, prior to providing any recommendation with respect to the transaction, such
person must:

(1) obtain a written representation from the independent plan fiduciary that the
independent plan fiduciary exercises authority or control with respect to the
management or disposition of the employee benefit plan's assets (as described in
section 3(21)(A)(i) of ERISA), that the employee benefit plan has 100 or more
participants covered under the plan, and that the independent plan fiduciary will not
rely on the person to act in the best interests of the plan, to provide impartial
investment advice, or to give advice in a fiduciary capacity;


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July 21, 2015
Page 10

research will be detrimental to the plans. As noted by the DOL in issuing PTE 84-14, QPAMs
are established financial institutions which are large enough to discourage the exercise of undue
influence upon their decision making processes. It seems self-evident that an established
financial institution that is large enough to discourage the exercise of undue influence upon its
decision making processes, should also be able to discern the magnitude and impact of any
conflicts of interest, and be able to assess the quality of the advice it receives. Therefore, we
suggest that an additional carve-out for any recommendations given to a QPAM be included in
any final regulation. A QPAM carve-out would permit professional asset managers to continue
to receive information, research and recommendations from their current providers of such
information and would meet the DOL’s stated goal of the Proposal -- to ensure that any advice
recipient is aware of the magnitude and impact of conflicts of interest, and is able to assess the
quality of the advice they receive.

We note that the information and research provided to QPAMs often does not relate to the
purchase, sale or holding of specific assets and therefore may fall outside of the relief provided
by the “seller’s carve-out” or the BIC Exemption!,

We thank the DOL for the opportunity to comment on the Proposal, and hope that these
comments are helpful in the DOLs efforts to craft a final regulation that comports to the intent of
Congress, does not impose unintended limitations on the investment choices available to plans
and IRAs and does not impede the free flow of investment research and information to
professional investment managers.

Respectfylly Submitted,

' The proposed BIC Exemption is a new class exemption from the “prohibited transaction” rules that would

allow certain “investment advice” fiduciaries to receive compensation for services rendered in connection with a
retail retirement investor’s purchase, holding or sale of certain investment products in accordance with the
fiduciary’s advice, if certain protective conditions are met. The BIC Exemption requires contractual
acknowledgment of fiduciary status, commitment to basic standards of impartial conduct, including providing
advice only if it is in the “best interest” of the plan or IRA, and clear and prominent disclosure of conflicts of
interest.


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July 21, 2015
Page 7

same income level in the current year, or has a net worth over $1 million, either alone or together
with a spouse (excluding the value of the person’s primary residence).

Congress enacted the Small Business Investment Incentive Act of 1980 (the "Incentive Act")
which, among other things, authorized “the development of a uniform exemption from
registration for small issuers which can be agreed upon among several States or between the
States and the Federal Government.” The Incentive Act also added Section 2(15) to the 1933 Act,
which defined "accredited investor" as one of five enumerated institutional entities or persons
who, on the basis of such factors as financial sophistication, net worth, knowledge, and
experiences in financial matters, or amount of assets under management qualifies as an accredited
investor under rules and regulations which the Commission shall prescribe. As a result of the
Congressional mandate in the Incentive Act, the SEC undertook a general examination of the
exemptive scheme under the Securities Act. In March of 1982, it adopted Rule 501, the current
form of selected parts of which are described above, which provides quantifiable metrics to create
bright-line rules for determining whether investors are sophisticated and capable of fending for
themselves.

To determine a fiduciary’s sophistication based on the number of participants in a plan not only
fails to promote the purpose of the carve-out (namely, to assure that transactions are entered into
by plan fiduciaries that can appreciate the magnitude and impact of conflicts of interest and
effectively assess the quality of the advice they receive), but effectively eliminates any IRA, self-
directed plan or small plan from investments in a private placement. Under the private placement
regime of the 1933 Act, a general solicitation is forbidden in connection with private offerings
under Rule 506. While new rules under the JOBS Act change this absolute prohibition, “quiet”
506 offerings will remain the norm and avoiding general solicitations will remain relevant to a
majority of private placements. The SEC has never drawn a sharp line separating communications
that qualify as general solicitations from those that do not. However, in a line of no-action letters,
the SEC has explained that, if a substantive relationship exists between the offeror and the offeree
at the time the offer is made, it will not find that the offer is a general solicitation. The SEC has
emphasized the temporal element of this analysis: the relationship must be pre-existing.
Questionnaires are frequently used to qualify investors to participate in private placements under
Rule 506. These questionnaires allow prospective investors to speak to their sophistication and
financial wherewithal, and their purpose is to establish a substantive relationship between the
prospective offeror and offeree. Upon receipt of a private offing memorandum, it is common for
potential investors, including plan and IRA fiduciaries, to conduct their own due diligence and ask
questions regarding the investment and the investment manager. Finally, it is customary for the
manager of private investment funds to provide their investors with periodic letters describing the
current state of the private investment fund and their thoughts regarding the general investment
environment.


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July 21, 2015
Page 6

(2) fairly inform the plan fiduciary of the existence and nature of the person's financial
interests in the transaction;

(3) not receive a fee or other compensation directly from the plan, or plan fiduciary for
the provision of investment advice in connection with the transaction (this does not
preclude a person from receiving a fee or compensation for other services);

(4) know or reasonably believe that the independent plan fiduciary has sufficient
expertise to evaluate the transaction and to determine whether the transaction is
prudent and in the best interest of the plan participants (such person may rely on
written representations from the plan or the plan fiduciary to satisfy this condition).

The second alternative applies if the person knows or reasonably believes that the
independent plan fiduciary has responsibility for managing at least $100 million in
employee benefit plan assets. For purposes of this condition, when dealing with an
individual employee benefit plan, a person may rely on the information on the most recent
Form 5500 filed by the plan to determine the value of plan assets, and, in the case of an
independent fiduciary acting as an asset manager for multiple employee benefit plans, a
person may rely on representations from the independent plan fiduciary regarding the
value of employee benefit plan assets under management. In that circumstance, the adviser
need not obtain written representations from its counterparty to avail itself of the carve-
out, but must comply with conditions (2) and (3) above. There is no requirement that the
person relying on the second prong of the seller’s carve-out believe that the independent
plan fiduciary has sufficient expertise to prudently evaluate the transaction.

With regard to this carve-out, it is unclear that the size of a plan (i-e., the fact that a plan has 100
participants) is in any way indicative of the ability of the plan fiduciary to appreciate the
magnitude and impact of conflicts of interest, or their ability to effectively to assess the quality of
the advice they receive, or that a fiduciary needs to manage $100 million of plan assets to be a
sophisticated investor. In this regard, under the Securities Act of 1933, as amended (the “1933
Act”), a company that offers or sells its securities must register the securities with the SEC or find
an exemption from the registration requirements. The 1933 Act provides companies with a
number of exemptions. Certain exemptions permit a company to sell its securities to what are
known as "accredited investors." The term “accredited investor” is defined in Rule 501 of
Regulation D and includes a “plan” within the meaning of ERISA if the investment decision is
made by a plan fiduciary which is either a bank, savings and loan association, insurance company,
or registered investment adviser, or if the employee benefit plan has total assets in excess of
$5,000,000, or, if a self-directed plan, has investment decisions made solely by persons that are
accredited investors. The term also includes a natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable expectation of reaching the


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July 21, 2015
Page 9

exempt bond is inappropriate for the pension accounts, did the market researcher breach the
ERISA standard of care? Under the Proposal, would the researcher be required to know the
clients for which the research would be used or specifically indicate the appropriateness of the
research for ERISA clients in order to meet the prudent man standard of care imposed on
fiduciaries by ERISA? Similarly, if a researcher provides an investment adviser with shoddy
research and the investment manager purchases a security in part based on that research is the
researcher liable to the ERISA client for the losses the plan suffered due to its failure to act in
accordance with ERISA’s prudent man standard of care? Additionally, if an affiliate of an
investment adviser provided an investment adviser with a report regarding CLOs available in the
market, including CLOs that are managed by another affiliate of the investment adviser, would
the delivery of the report be a prohibited transaction?

In 1984, the DOL developed and granted a class exemption for qualified professional asset
managers, PTE 84-14. The essential premise of the DOL for providing broad exemptive relief
from the prohibitions of section 406(a) of ERISA for all types of transactions in which a plan
engages was that investments of plan assets, and the negotiations leading thereto, are the sole
responsibility of an independent professional investment manager. The DOL noted that the
conditions of the exemption for a professional asset manager to be qualified “ensure that entities
serving as QPAMs are established financial institutions which are large enough to discourage the
exercise of undue influence upon their decision making processes.” (See: Application for Class
Transaction Exemption D-11047) Specifically, to be a “qualified professional asset manager” (a
“QPAM”) an entity must be registered with the SEC as an investment adviser, have $85 million in
total client assets as of its most recently completed fiscal year, have shareholder equity in excess
of $1 million and acknowledge in writing it is acting as a fiduciary.

As a fiduciary, a QPAM is responsible for the investments it makes on behalf of its plan and IRA
clients. If a QPAM blindly relies on shoddy research or conflicted information, it will be liable to
make their plan clients whole for any losses the plan suffers on that investment. There seems
little or no benefit to the plans, or their participants and beneficiaries, to impose a second level of
fiduciary responsibility and liability on persons providing advice to a QPAM retained by the plan;
in fact, the likely increase in the cost of such research or reduction in providers of such research
will be detrimental to the plans. As noted by the DOL in issuing PTE 84-14, QPAMs are
established financial institutions which are large enough to discourage the exercise of undue
influence upon their decision making processes. It seems self-evident that an established financial
institution that is large enough to discourage the exercise of undue influence upon its decision
making processes, should also be able to discern the magnitude and impact of any conflicts of
interest, and be able to assess the quality of the advice it receives. Therefore, we suggest that an
additional carve-out for any recommendations given to a QPAM be included in any final
regulation. A QPAM carve-out would permit professional asset managers to continue to receive
information, research and recommendations from their current providers of such information and


SEWARD & KISSEL LLP

ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10004
S. JOHN RYAN TELEPHONE: (212) 574-1200 901 K STREET, NW
PARTNER FACSIMILE: (212) 480-8421 WASHINGTON, DC 20001
(212) $74-1679 ‘TELEPHONE: (202) 737-8833
ryans@sewkis.com_ WWW.SEWKIS.COM FACSIMILE: (202) 737-5184

July 21, 2015

By E-Mail to e-ORI@dol.gov

Office of Regulations and Interpretations
Employee Benefits Security Administration
Attn: Conflict of Interest Rule

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, NW
Washington, DC 20210

Re: Proposed Definition of Fiduciary Rule RIN 1210-AB32
Dear Sir or Madam:

We submit this letter in response to the request of the U.S. Department of Labor (the “DOL”) for
comments on proposed regulations published in the Federal Register on April 20, 2015 (the
“Proposal”). The Proposal is designed to implement a new definition of the term “investment
advice” under Section 3(21) of Title I of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").

Seward & Kissel LLP has a substantial number of clients who would be affected by the adoption
of the Proposal. We respectfully submit the following comments and request that the DOL
consider them before adopting any final regulation. Our comments fall into three categories:

(i) the plain language of the statutory provision does not authorize the DOL’s expansive
definition of “investment advice”, and the legislative history of ERISA confirms that this
definition is not in line with the intent of Congress;

(ii) the stated purpose of the Proposal and the narrowness of the “seller’s carve-out” are not
aligned; and

(ii) an additional carve-out should be provided for advice given to qualified professional
asset managers (“QPAM”s).


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July 21, 2015
Page 8

The Proposal defines “investment advice” broadly as a recommendation as to the advisability of
acquiring, holding, disposing or exchanging securities specifically directed to the advice recipient
for consideration in making investment decisions with respect to securities. Although the
Proposal has provided the seller’s carve-out to exempt arm’s length transactions between
sophisticated parties from the definition of investment advice, as proposed this carve-out would
not cover the private offering to an IRA, a self-directed plan or a small plan. Because private
placements require direct communications between the offeror and offeree, the effect of the
Proposal will be to preclude IRAs, a self-directed plans and small plans from investing in private
placements, including private investment funds and private equity funds. If the DOL does not
wish to abandon modern portfolio theory and retreat to the pre-ERISA days of “legal lists”, it
must adopt the standard developed by the SEC in Rule 501 and either (i) replace the 100
participant and $100 million requirements with an accredited investor requirement or (ii) at a
minimum, include a separate carve-out for plans or IRAs that meet the accreditor investor
standard when investing and holding private placements. As stated above, the accredited investor
determination is currently required by the SEC in private offerings and provides bright-line rules
for determining whether investors are sophisticated and capable of fending for themselves; this
standard is more indicative of a plan fiduciary’s ability to appreciate the magnitude and impact of
conflicts of interest and to effectively to assess the quality of the advice they receive and meets
the purpose of the Proposal without adding administrative burdens, additional investor
representations or eliminating investment choices currently available to professionally managed
plans and sophisticated self-directing plan participants and IRA owners.

QPAM Carve-out

Registered investment advisers currently receive information, research and market data from a
plethora of sources. The scope of this information is as varied as the investment strategies
investment advisers employ and can include proprietary research on companies that the
investment adviser is considering acquiring, due diligence on a prospective acquisition or a
valuation of a portfolio an investment manager is considering purchasing or selling. If the
investment adviser is acting as a fiduciary to a pension plan, under the Proposal, this type of
market research could be considered a recommendation as to the advisability of acquiring,
holding, disposing or exchanging securities specifically directed to the investment adviser for its
consideration in making investment decisions, thereby imposing ERISA fiduciary status on the
provider of the research. The effect of ERISA fiduciary status and liability will be to increase the
cost of such market research and/or limit the availability of such research provided to professional
investment managers serving ERISA clients.

For example, if a market researcher provides a registered investment adviser with a report as to
the value and advisability of buying a municipal bond and the investment adviser purchases those
municipal bonds for one or more of its pension plan clients, assuming the purchase of a tax-


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July 21, 2015
Page 4

circumstances when a person providing advice is effectively exercising discretionary authority or
control over plan assets. The DOL should explain how a recommendation as to the advisability of
acquiring, holding, disposing or exchanging securities or other property provided to a plan or IRA
fiduciary for consideration in making his or her investment or management decisions is a situation
where an adviser is providing the type of investment advice described in the legislative history —
that is, where the consultant or adviser is, in effect, exercising discretionary authority or control
with respect to the management or administration of such plan or exercising some authority or
control regarding its assets.

The marketplace for financial services and pension plan investments has developed in the years
since 1975, and it may be true that the five-part test may now allow advisers, brokers, consultants
and valuation firms that exercise effective control or authority over plan assets to avoid fiduciary
status and ERISA's fiduciary obligations of care and prohibitions on disloyal and conflicted
transactions. The Proposal, however, significantly exceeds the plain meaning of the term
“investment advice” and the Congressional intent as stated in the legislative history of ERISA.
Rather than deeming every recommendation as to the advisability of acquiring, holding, disposing
or exchanging securities or other property, directed to a plan or IRA fiduciary for his or her
consideration a fiduciary act subject to ERISA’s duties, restrictions and liabilities, the DOL’s
proposal should focus on defining those situations where in the existing environment advisers,
brokers, consultants or valuation firms are in effect exercising some authority or control over plan
assets. To do otherwise is to legislate rather than regulate.

Seller’s Carve-out

The Proposal provides a carve-out from the general definition of investment advice for
recommendations provided in connection with an arm's length sale, purchase, loan, or bilateral
contract between an expert plan investor and an adviser.

The DOL stated that the “overall purpose of this carve-out is to avoid imposing ERISA fiduciary
obligations on sales pitches that are part of arm's length transactions where neither side assumes
that the counterparty to the plan is acting as an impartial trusted adviser, but the seller is making
representations about the value and benefits of proposed deals. Under appropriate circumstances,
reflected in the conditions to this carve-out, these counterparties to the plan do not suggest that
they are an impartial fiduciary and plans do not expect a relationship of undivided loyalty or trust.
Both sides of such transactions understand that they are acting at arm's length, and neither party
expects that recommendations will necessarily be based on the buyer's best interests. In such a
sales transaction, the buyer understands that it is buying an investment product, not advice about
whether it is a good product, from a seller who has opposing financial interests. The seller's
invitation to buy the product is understood as a sales pitch, not a recommendation.”


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July 21, 2015
Page 3

The DOL should address the legislative history of Section 3(21) quoted above and describe how
the Proposal’s definition of investment advice meets the plain meaning of the statutory language
and captures those situations where consultants and advisers are “in effect... exercising
discretionary authority or control... regarding [plan] assets”. The Proposal defines “investment
advice” as:

(i) A recommendation as to the advisability of acquiring, holding, disposing or
exchanging securities or other property, including a recommendation to take a
distribution of benefits or a recommendation as to the investment of securities or
other property to be rolled over or otherwise distributed from the plan or IRA;

(ii) A recommendation as to the management of securities or other property,
including recommendations as to the management of securities or other property
to be rolled over or otherwise distributed from the plan or IRA;

(iii) An appraisal, fairness opinion, or similar statement whether verbal or written
concerning the value of securities or other property if provided in connection with
a specific transaction or transactions involving the acquisition, disposition, or
exchange, of such securities or other property by the plan or IRA;

(iv) A recommendation of a person who is also going to receive a fee or other
compensation for providing any of the types of advice described in paragraphs (i)
through (iii); [if]

[The] person, either directly or indirectly (e.g., through or together with any
affiliate) — [providing such advice]

(i) Represents or acknowledges that it is acting as a fiduciary within the
meaning of [ERISA] with respect to the advice described in paragraph (a)(1)
of [the Proposal]; or

(ii) Renders the advice pursuant to a written or verbal agreement, arrangement
or understanding that the advice is individualized to, or that such advice is
specifically directed to, the advice recipient for consideration in making
investment or management decisions with respect to securities or other
property of the plan or IRA.

It would appear that, notwithstanding the DOL’s claim that the statutory language was designed
to cover a much broader category of persons who provide investment advice than is currently
reflected in the five-part test, the existing regulation was a reasonable attempt to define the


Office of Regulations and Interpretations
July 21, 2015
Page 2

The views we express in this letter are our own and do not necessarily reflect those of our clients.

ERISA’s Definition of a Fiduciary

In relevant part, Section 3(21)(A) of ERISA provides that a person is a fiduciary with respect to a
plan to the extent he or she: (i) exercises any discretionary authority or discretionary control
respecting management of such plan or exercises any authority or control respecting management
or disposition of its assets; (ii) renders investment advice for a fee or other compensation, direct or
indirect, with respect to any moneys or other property of such plan, or has any authority or
responsibility to do so; or, (iii) has any discretionary authority or discretionary responsibility in
the administration of such plan.

As noted in the Proposal, “the statutory definition contained in section 3(21)(A) deliberately casts
a wide net in assigning fiduciary responsibility with respect to plan assets. Thus, . . .any person
who renders ‘investment advice for a fee or other compensation, direct or indirect is an
investment advice fiduciary, regardless of whether they have direct control over the plan's assets,
and regardless of their status as an investment adviser and/or broker under the federal securities
laws.” This is axiomatic; however, the Proposal then states that “[w]hen Congress enacted
ERISA in 1974, it made a judgment that plan advisers should be subject to ERISA's fiduciary
regime and that plan participants, beneficiaries and IRA owners should be protected from
conflicted transactions by the prohibited transaction rules. More fundamentally, however, the
statutory language was designed to cover a much broader category of persons who provide
fiduciary investment advice based on their functions and to limit their ability to engage in self-
dealing and other conflicts of interest than is currently reflected in the five-part test.”

While the Proposal makes these and numerous other references to and statements of Congress’s
intent, it does not provide any citations for these statements; nowhere in the Proposal is a
reference or citation to the legislative history of Section 3(21). We note that the Conference
Committee Joint Explanation to ERISA specifically provides the following explanation of the
definition of a fiduciary under ERISA.

While the ordinary functions of consultants and advisers to employee benefit
plans (other than investment advisers) may not be considered as fiduciary
functions, it must be recognized that there will be situations where such
consultants and advisers may because of their special expertise, in effect, be
exercising discretionary authority or control with respect to the management or
administration of such plan or some authority or control regarding its assets. In
such cases, they are to be regarded as having assumed fiduciary obligations within
the meaning of the applicable definition.