1050 17th Street, NW, Suite 725 ▪ Washington, DC 20036-5514 ▪ 202.293.4222 ▪ Fax 202.293.4223 ▪ www.investmentadviser.org

July 21, 2015

Via Electronic Filing

Office of Regulations and Interpretations

Employee Benefits Security Administration

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, N.W.

Washington, DC 20210

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

Ladies and Gentlemen:

The Investment Adviser Association1appreciates the opportunity to comment on the 

Department’s expanded definition of “fiduciary” in the context of providing investment advice to 

retirement plans or their participants or beneficiaries (the “Proposed Regulation”).2 The IAA’s 

members are investment advisers registered with the Securities and Exchange Commission, and 

as such provide fee-based asset management to their clients as fiduciaries under the Investment 

Advisers Act of 1940 (the “Advisers Act”) and—with respect to their retirement plan clients—as 

fiduciaries under ERISA. 

The IAA has long advocated that financial professionals providing investment advice 

about securities be required to act as fiduciaries in the best interest of their clients. Thus, we 

support the Department’s goal to “better protect[] plans, participants, beneficiaries, and IRA 

owners from conflicts of interest, imprudence, and disloyalty.”3 We fully understand the basic 

concerns underlying the Proposed Regulation that millions of Americans—many of whom lack 

financial expertise—are now responsible for directing their own investments and must “depend 

on investment advice for guidance on how to manage their savings to achieve a secure 

retirement.”4 The Department has expressed particular concern regarding advice to individuals 

on rolling over their retirement assets into an IRA and recommendations regarding investments 

 

1

 The IAA is a not-for-profit association that represents the interests of investment adviser firms that are registered 

with the Securities and Exchange Commission. For more information, please visit our web site: 

www.investmentadviser.org. The terms “investment adviser” and “adviser” throughout our comments refer to SECregistered investment advisers. 

2

 Definition of the Term “Fiduciary;” Conflict of Interest Rule—Retirement Investment Advice, 80 Fed. Reg. 21928 

(Apr. 20, 2015), available at http://www.gpo.gov/fdsys/pkg/FR-2015-04-20/pdf/2015-08831.pdf.

3

 Id. at 21929. 

4

 Id. at 21930.
Office of Regulations and Interpretations

July 21, 2015

Page 2

within an IRA.5 These individual retirement investors deserve to receive advice that is in their 

best interests.

While we support the Department’s goals in this initiative, we have several concerns with 

the Proposed Regulation as drafted. As a preliminary, overarching matter, we are concerned that 

the Department’s position on how to address conflicts of interest appears to be based in part on 

an overly simplistic focus on cost. For example, an option under consideration might encourage 

fiduciaries to limit the range of available investments to low-fee (typically passively managed) 

investment options as a means to address potential conflicts of interest. The Department’s 

approach to a potential streamlined exemption and parts of its economic analysis suggest that it 

intends to promote passive over active management.

As fiduciaries, investment advisers consider a number of criteria about their clients and 

any potential investment recommendations in addition to fees, including client objectives, 

portfolio holdings, strategy, and risk-adjusted performance. The selection of investments and 

investment style should be left to the judgment of investment professionals based on all relevant 

criteria and circumstances related to both the investor and the potential investments. As long as 

the professional is required to act transparently and in the client’s best interest, it is both 

inappropriate and inconsistent with any fiduciary standard that applies to investment advisers 

today, as well as the duty described in the Proposed Regulation, to prescribe what those 

fiduciaries may recommend. 

We also submit a number of comments and recommendations on the substance of the 

Proposed Regulation. Given that investment advisers are ERISA fiduciaries under the current 

definition, the Proposed Regulation for the most part would not affect investment advisers, when 

they provide investment advice to ERISA clients for a fee under an investment management 

agreement. Nevertheless, as drafted, the Proposed Regulation could prematurely attach fiduciary 

status and trigger technical prohibited transactions prior to the establishment of an investment 

advisory relationship. 

We do not believe that the Department intended to attach fiduciary status to fee-based 

investment advisers under these circumstances. Accordingly, we have set forth below a number 

of suggestions to clarify that fiduciary status for such advisers begins only when the adviser has 

established an investment advisory relationship with a specific client and a specific investment 

mandate involving specific assets. In addition, we seek clarification as to how the Proposed 

Regulation would apply to recommendations of SEC-registered investment advisers, the 

provision of services to or marketing conversations with other financial services entities, and the 

operation of the financial reports and valuation carve-out.

 

5

Id. at 21938 (“Advisers to ERISA-covered plans are already required to adhere to the fundamental standards of 

prudence and loyalty, and can be held accountable for violations of the standards. Rather, the primary impact of the 

‘best interest’ standard is on the IRA market.”).
Office of Regulations and Interpretations

July 21, 2015

Page 3

Finally, we recommend an effective date that is at least two years after publication of the 

final rule. The potential implications of the proposal are far-reaching, and investment advisers 

and other plan service providers will need to assess the potential fiduciary status of numerous 

entities. In addition, they will need to put into place systems to implement any resulting changes 

going forward.

I. Background

A. Investment Advisers’ Disclosures to All Clients

The IAA’s members are investment advisers registered with the SEC, and must satisfy 

fiduciary responsibilities to their clients under the Advisers Act. 6 This principles-based 

fiduciary standard applies to all of the adviser’s clients, including ERISA plans and IRA owners. 

We have long maintained that all persons providing investment advice about securities to clients 

(regardless of the level of the client’s sophistication) should be subject to the same high standard 

of care – the well-established fiduciary duty standard under the Advisers Act. This federal 

fiduciary standard requires investment advisers to act in the best interests of clients. The 

Advisers Act and the fiduciary standard provide an extensive framework for conduct and 

compliance, and impute an overarching duty on the part of investment advisers to put the 

interests of their clients first.7

Virtually all IAA members provide investment management services to their ERISAcovered plan and IRA clients on a discretionary basis. Discretionary investment advisers to 

plans are fiduciaries under section 3(21)(A)(i) of ERISA, and must satisfy fiduciary 

responsibilities both under the Advisers Act and under ERISA with respect to the assets they 

manage. Investment advisers that provide nondiscretionary investment advice to ERISA plans 

and IRA owners also are fiduciaries under section 3(21)(A)(ii) and therefore subject to both 

regimes.

In the typical arrangement between an investment adviser and each of its clients, 

including ERISA plans and IRA owners, the parties enter into a written contract that states a 

formula under which the adviser’s compensation will be determined, generally a straightforward 

percentage of the assets under management, typically referred to as a “fee-based” arrangement. 

In addition, all advisers must specifically describe how they are compensated for advisory 

 

6

 This fiduciary duty has been upheld by the U.S. Supreme Court and reiterated by the SEC in various 

pronouncements over the years. SEC v. Capital Gains Research Bureau, 375 U.S. 180 at 186 (1963); see, e.g., In re: 

Arleen W. Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948).

7

 See, e.g., Letter from David G. Tittsworth, Executive Director, IAA, to Securities and Exchange Commission, 

dated July 3, 2013, available at 

https://investmentadviser.org/eWeb/docs/Publications_News/CSCurrent/130703cmnt.pdf (regarding the SEC’s 

consideration of standards of conduct for broker-dealers and investment advisers providing personalized investment 

advice to retail customers). 
Office of Regulations and Interpretations

July 21, 2015

Page 4

services, provide a fee schedule, and describe conflicts of interest along with how they address 

such conflicts. This disclosure appears in Part 2 of Form ADV, a narrative disclosure brochure 

that is required under SEC rules to be provided to a client at or prior to the beginning of the 

advisory relationship.

8

B. Additional Information and Disclosures for ERISA Plans

An ERISA plan generally will issue a request for proposal (RFP) from potential 

investment advisers, often with the assistance of a pension consultant.9 In responding to the 

RFP, advisers provide detailed information about their experience, services and compensation. 

The process often includes a “finals presentation” in which potential advisers participate in 

substantive discussions with the consultant and/or potential client about their proposed 

engagement. After the plan selects an investment adviser through the RFP process, the parties 

extensively negotiate an agreement, typically with the assistance of counsel. The negotiations 

address numerous aspects of the relationship, and the form of agreement is often provided by the 

client, not the adviser. Therefore, clients establishing these accounts are well-versed as to the 

terms of the agreements, which reflect the client’s or firm’s original agreement and any 

negotiated changes to that agreement. The process is typically an arms-length process that more 

closely resembles an ordinary commercial transaction than a fiduciary relationship of trust and 

impartiality.

Beginning in 2012, an adviser’s disclosures to the responsible ERISA plan fiduciaries must 

include the information required under the Department’s rule under section 408(b)(2) of ERISA 

in order to avoid prohibited transaction concerns in the provision of services. These disclosures 

generally must be provided reasonably in advance of entering into the contract and updated 

promptly to reflect any subsequent changes. They must include a description of the services to 

be provided to the plan by the adviser and a description of all direct compensation, either in the 

aggregate or by service, that the adviser reasonably expects to receive in connection with the 

services, as well as other details about the arrangement.10

 

8

 Parts 1 and 2A of Form ADV are filed through the Investment Adviser Registration Depository (IARD) and 

available to the public electronically at http://www.adviserinfo.sec.gov/IAPD/Content/IapdMain/iapd_SiteMap.aspx. 

In addition, Part 2A generally must be provided to clients and prospective clients at the time of or before entering 

into a contract, and must be promptly updated when the information becomes materially inaccurate. Part 2B, which 

also must be provided to clients, requires information about the specific employees giving advice to individual 

clients, including additional information about their compensation, and whether they receive any additional 

compensation, such as a sales award, for providing advisory services.

9

 The pension consultant may also request the adviser to provide information for the consultant’s database regarding 

the adviser’s qualifications, capabilities, and investment strategies.

10

 Although the 408(b)(2) disclosures are not required to be provided to IRA owners, much of the information 

required under the 408(b)(2) regulation nonetheless is provided to IRA clients in the Form ADV and the investment 

management agreement.
Office of Regulations and Interpretations

July 21, 2015

Page 5

This information generally also must be provided to an individual participant who hires an 

adviser to provide advice concerning the individual’s account within a plan rather than to the 

plan as a whole. Collectively, these disclosures fully inform the client as to the adviser’s 

services and compensation prior to the advisory relationship.

 

II. Role of a Fiduciary: Treatment of Active Management

The Department appears to promote the superiority of low-fee (passively managed) 

investments as compared to higher-fee (actively managed) investments. In the preamble to the 

Proposed Regulation, the Department requests comment as to whether it should propose an 

additional “streamlined” prohibited transaction exemption that would apply to “high-quality, 

low-fee investments” and contain far fewer conditions than the proposed Best Interest Contract 

(BIC) Exemption.11 This concept suggests that the Department favors passive over active 

management, given that lower-fee mutual funds, for example, tend to be those that are indexed to 

a particular benchmark and do not provide active management. In addition, the separate 

economic analysis of the benefits of the Proposed Regulation compares the fees currently paid by 

retirement investors to the fees available in index funds, implying that the Department favors 

passively managed funds.12

We submit that the Department should not base the availability of exemptive relief from 

the prohibited transaction rules on prescriptive limits on the investments available to fiduciaries. 

Doing so puts the Department in the untenable position of substituting its own judgment on 

investments for those of the fiduciary. The selection of investments and management style 

should be left to the judgment of plan fiduciaries and investment professionals based on all 

relevant criteria and circumstances related to both the investor and the potential investments. An 

investment professional considers a number of relevant criteria regarding each investment 

option, including expenses, historical performance data, benchmarks, investment objectives, 

portfolio holdings, turnover, relative risk, and risk-adjusted performance. As long as the 

professional is required to act transparently and in the client’s best interest, it would be both 

inappropriate and inconsistent with the fiduciary duty in the Proposed Regulation and the 

Advisers Act to prescribe what those fiduciaries may recommend. Investment advisers, which 

are fiduciaries under the federal securities laws and ERISA, are in a better position than 

regulators to make these substantive investment decisions.13

 

11

 80 Fed. Reg. at 21948. 

12

 See, e.g., Fiduciary Investment Advice: Regulatory Impact Analysis at 85-86. We also note similar issues in the 

Department’s video accompanying the proposal. See http://www.dol.gov/featured/protectyoursavings/. Such a 

simplistic analysis does not take into account, among other things, the range of retirement clients’ risk tolerances, 

non-retirement assets, and investment horizons.

13

 The Department considered including specific requirements concerning investment theories in connection with its 

regulation on participant investment advice under sections 408(b)(14) and 408(g) in 2010, but correctly concluded, 

based on public comment, that such requirements were not appropriate. See Investment Advice—Participants and 

Beneficiaries, 76 Fed. Reg. 66136, 66141 (Oct. 25, 2011). See also Letter from Karen L. Barr, General Counsel, 

IAA, to the Department of Labor, dated May 5, 2010. 
Office of Regulations and Interpretations

July 21, 2015

Page 6

Further, we maintain that the least expensive option is not necessarily the best option for 

each investor. A variety of approaches and styles can be appropriate components of the mix of 

investments in a retirement client’s portfolio. Active management is unquestionably a generally 

accepted investment strategy. In addition, active management allows more flexibility, as 

appropriate, to hedge, engage in risk management, adjust to volatility or sideways markets, 

respond to interest rate changes, and deliver expert, sub-specialized management in niche 

markets, such as emerging and small-cap markets.14 Conversely, investing solely in passively 

managed funds may not result in better overall performance over time and could lead investors to 

miss opportunities for better risk-adjusted returns or more appropriate diversification.

Accordingly, the Department should not offer an exemption requiring that investments by 

ERISA plans and IRAs be limited to low-fee, passively managed investments. Such an 

exemption may over-incentivize reliance on passive management that may not be in the best 

interests of clients. In addition, the Department’s commentary should not include language or 

analysis that implicitly favors passive management.

III. Scope and Practical Concerns

The Proposed Regulation addresses the prong of the ERISA fiduciary definition that does 

not require discretionary authority or control and is generally inapplicable to discretionary 

investment advisers. The proposal nevertheless raises issues for discretionary and nondiscretionary fee-based investment advisers, already ERISA fiduciaries under the current 

formulation with respect to their existing clients, to the extent that it may be interpreted to create 

a fiduciary relationship under ERISA and the Code before the adviser begins to provide its 

services to the ERISA plan or IRA owner. We do not believe that the Department intended this 

result, given the policy basis for the current proposal.

SEC-registered investment advisers fully recognize their fiduciary status under the 

Advisers Act and ERISA at the time that they enter into investment management agreements 

with their ERISA plan and IRA clients and begin providing investment advice concerning plan 

assets. Prior to entering into the agreement, the client has received the adviser’s Form ADV, 

Part 2A and, with respect to ERISA clients, the disclosures required under ERISA section 

408(b)(2), and has reviewed and agreed to the investment management agreement. To attach 

fiduciary status prior to this time could raise prohibited transaction issues before the adviser has 

provided any services to the client or received any compensation. We submit that additional 

protections and disclosures are not necessary in this context, especially in light of the 

straightforward fee structures typical of such arrangements.

Accordingly, we have set forth below a number of suggestions that would clarify the 

timing of fiduciary status for investment advisers under the Proposed Regulation. We also 

 

14

 See, e.g., discussion of academic studies in Jones, Robert C. and Russ Wermers. 2011. “Active Management in 

Mostly Efficient Markets.” Financial Analysts Journal, vol. 67, no. 6 (November/December 2011).
Office of Regulations and Interpretations

July 21, 2015

Page 7

request clarification concerning (1) recommendations of SEC-registered investment advisers; (2) 

investment advice to financial services entities that are themselves ERISA fiduciaries by virtue 

of providing investment advice; and (3) valuation of plan investments.

A. The Revised Definition of Fiduciary is Overly Broad and Could Cover 

Activities by Investment Advisers Before They Provide Any Services to 

ERISA Clients

The proposed amendments to the definition of fiduciary would include as fiduciary 

activity any “recommendation as to the management of securities or other property.” This 

language could be read to sweep within its scope a “recommendation” that the ERISA client hire 

the adviser to manage securities or other property. More specifically, our primary concern 

relates to the proposed definition of “recommendation” as “a communication that ... would 

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

particular course of action.”15

This language is so broad that a response to a request for proposal (RFP) or other 

presentation to a prospective client could potentially be covered by the definition.16 

Furthermore, the definition could sweep in other types of conversations between advisers and 

potential clients, including casual discussions during the sales process, such as the adviser’s 

provision of “market color.” Even the act of providing information to a plan consultant’s 

database could trigger ERISA fiduciary status, if providing such information to a consultant were 

to be deemed a recommendation to hire the adviser.

Similarly, investment advisers or their affiliates might become ERISA fiduciaries if their 

marketing or wholesaling activities directed to intermediaries are deemed to be 

“recommendations,” under the broad definition of that term, and the intermediary is a fiduciary 

to an ERISA plan or IRA client. As a practical matter, for example, a mutual fund distributor 

will have no way of knowing whether its interaction with an intermediary will contribute to that 

intermediary’s decision to make a recommendation to an ERISA plan or IRA client, and cause 

the distributor to become an inadvertent fiduciary. 

We do not believe this result was intended.17 It would prematurely attach ERISA 

fiduciary status and create technical prohibited transactions that could prevent the advisory 

 

15

 80 Fed. Reg. at 21960 (emphasis added).

16

 We also note that the “recommendation of a person” language in proposed § 2510.3-21(a)(1)(iv) could be 

interpreted to extend to advisers recommending themselves in pre-contract discussions.

17

 We appreciate that the Department responded to concerns expressed in our comments on the Department’s 2010 

proposal that pre-contract discussions should not be covered and that the Proposed Regulation does not 

“automatically assign fiduciary status to investment advisers.” 80 Fed. Reg. at 21932. See Letter from Kathy D. 

Ireland, Associate General Counsel, IAA, to the Department of Labor, dated February 2, 2011. Unfortunately, the 

revised definition has not resolved this issue.
Office of Regulations and Interpretations

July 21, 2015

Page 8

relationship from moving forward. This result would also be inconsistent with the ordinary ways 

in which ERISA plan fiduciaries carry out their responsibilities. For example, ERISA plan 

fiduciaries regularly issue RFPs as part of their fiduciary responsibility to research and compare 

potential investment advisers before selecting a particular manager. We maintain that ERISA 

fiduciary status should not attach if an investment adviser responded to a plan’s RFP by 

discussing the investment philosophy and the types of investments it might recommend if the 

plan were to hire the adviser.18 At this point in time, the adviser would not be “rendering 

investment advice for a fee,” because it would not have established a relationship with the plan, 

and would not receive compensation for this activity.19

The incongruity of characterizing an adviser as an ERISA fiduciary at that moment is 

highlighted by focusing on those who fail to win the plan’s business. Plan fiduciaries typically 

solicit responses to RFPs from multiple advisers in order to compare them. The plan fiduciary, 

however, will not choose all of these advisers to manage plan assets. Only the investment 

advisers with which the plan ultimately enters into investment management agreements should

be ERISA fiduciaries and only at the time that such advisers actually manage the assets. The 

other advisers do not have any relationship with the plan, manage its assets, or receive any 

compensation; therefore, none of the advisers should be considered fiduciaries under ERISA 

prior to the plan’s selection of an adviser.

Similarly, an adviser that already has an established ERISA fiduciary relationship with a 

plan client, or an affiliate of that adviser, may provide general investment-related information or 

commentary on matters beyond the scope of their existing relationship on an ad hoc basis, via 

educational newsletters or client conferences, or may discuss potential future services, 

sometimes as part of the client’s consideration of a number of investment advisers. These 

discussions may take place in the context of client consideration of assigning the adviser an 

additional mandate, adding assets to an existing mandate, or changing investment guidelines.

We note that, although the adviser is an ERISA fiduciary with respect to the plan assets under its 

management, it (or its affiliate, as applicable) would not be an ERISA fiduciary by virtue of 

these activities with respect to other assets of the plan, as provided in paragraph (c) of the 

Proposed Regulation.20

 

18

 In addition, the adviser would not at this point (or in the context of discussing potential additional mandates 

described below) have sufficiently detailed information about the plan’s current investments to provide investment 

advice. 

19

 We also note that an adviser may meet initially with a potential advisory client about his or her investments 

before knowing whether the investments under discussion include ERISA or IRA assets.

20

 Paragraph (c) of the Proposed Regulation (and paragraph (c)(2) of the current regulation), provide that 

A person who is a fiduciary with respect to a plan by reason of rendering investment advice (as defined in 

paragraph (c)(1) of this section) for a fee or other compensation, direct or indirect, with respect to any 

moneys or other property of such plan, or having any authority or responsibility to do so, shall not be 

deemed to be a fiduciary regarding any assets of the plan with respect to which such person does not have 

any discretionary authority, discretionary control or discretionary responsibility, does not exercise any 
Office of Regulations and Interpretations

July 21, 2015

Page 9

The Department has also recognized this concept in the regulation under ERISA section 

408(b)(2), which states that a prohibited transaction under section 406(b)(1) does not occur if the 

fiduciary does not use any of the authority, control or responsibility that makes such person a 

fiduciary to cause a plan to pay additional fees.21 This is the case when an investment adviser is 

pitching future services—it is making a proposal to the plan fiduciary and does not have the 

authority to hire itself. The independent fiduciary makes the decision to engage the adviser. As 

in the RFP example above, the adviser may never manage the additional assets and therefore 

may never receive a fee based on the additional assets. In addition, if hired for the new mandate, 

the adviser would be required to provide new disclosures under section 408(b)(2); therefore, the 

client would be fully informed in advance of any change in fees that would result from the 

additional services.22 The Department should clarify this issue, as set forth below.

1. The Proposal Should Be Amended to Address Pre-Contract 

Discussions

We request that the Department modify its proposal to clarify that fee-based SECregistered investment advisers do not fall within the definition of “fiduciary” under ERISA prior 

to the establishment of a relationship with a specific client under a specific mandate to manage a 

particular account or set of assets as evidenced by an investment management agreement 

(generally, “pre-contract” discussions).23 The Department could accomplish this result in two 

ways. First, it could apply the proposed revisions to the definition of fiduciary only to the types 

of activities to which the proposal is addressed (e.g., commission- and other transaction-based 

 

authority or control, does not render investment advice (as defined in paragraph (c)(1) of this section) for a 

fee or other compensation, and does not have any authority or responsibility to render such investment 

advice.

(emphasis added). As the remainder of this provision notes, the adviser may still be a party in interest and subject to 

co-fiduciary responsibilities with respect to the other plan assets.

21

 In particular, Examples 1 and 4 in 29 C.F.R. § 2550.408b-2(f) conclude that an investment adviser engaging in 

discussions to provide additional services for additional fees or to increase its fees do not raise prohibited transaction 

issues.

22

 29 C.F.R. § 2550.408b-2(c)(v)(B)(1) thus anticipates that services and fees may change during the course of the 

service provider’s contract and requires disclosures of such changes as soon as practicable but generally no later 

than 60 days after the service provider is informed of the change. This protocol suggests that changes to service 

agreements are routine and nothing in the regulation under section 408(b)(2) suggests that such changes raise 

prohibited transaction concerns.

23 For the balance of this letter, the term “pre-contract” refers both to discussions before the adviser has a contract 

with an ERISA or IRA client and discussions with an existing client concerning an additional mandate, additional 

assets to be added to an existing mandate, or changes to investment guidelines.
Office of Regulations and Interpretations

July 21, 2015

Page 10

activities that may be confusing to ERISA clients and IRA owners) and not to fee-based 

investment advisory services.24

Second, the Department could address this issue in the carve-outs to the definition of 

fiduciary. According to the preamble to the Proposed Regulation, “carve-outs are for 

communications that the Department believes Congress did not intend to cover as fiduciary 

‘investment advice’ and that parties would not ordinarily view as communications characterized 

by a relationship of trust or impartiality.”25

We submit that the discussions described above as “pre-contract” are not fiduciary under 

a similar rationale—the parties would not ordinarily view such communications as indicating a 

relationship of trust or impartiality. The Department therefore should clarify the non-fiduciary 

nature of these discussions either by modifying the existing “counterparty” carve-out or by 

adding a specific carve-out for pre-contract discussions relating to fee-based investment advisory 

services.

The “counterparty” carve-out in section (b)(1)(i) of the Proposed Regulation in its current 

form does not appear to cover the provision of services, given that it describes a transaction 

rather than the provision of services and uses the term “counterparty,” which is not a term that 

typically applies in the context of a services agreement. To the extent that it may apply, it is 

limited to plans of a certain size and those that hire independent fiduciaries with responsibility 

for managing at least $100 million in plan assets.

We strongly submit that a carve-out for investment advisory services (regardless of 

whether the Department amended the counterparty carve-out or established a new carve-out) 

should not be limited to clients and fiduciaries of a certain size. The carve-out should apply to 

all clients, given that no investment advisory relationship would exist during pre-contract 

discussions, regardless of the nature of the client, and the fees paid under the actual contract 

would be straightforward and fully disclosed. 

2. If Preliminary Discussions Trigger Fiduciary Status and No CarveOut Applies, Then the Department Should Provide a Separate, 

Streamlined Exemption for Such Discussions

To the extent that the Department determines that the amended definition of “fiduciary” 

applies to fee-based investment advisers prior to their providing investment advisory services to 

a client and chooses not to cover such services under a carve-out, then we request that the 

Department develop a streamlined prohibited transaction class exemption that would permit pre-

 

24

 For example, the Department could amend the definition of “recommendation” to exclude pre-contract 

conversations/information by fee-based investment advisers that will be ERISA fiduciaries once hired. We would 

also suggest amending proposed § 2510.3-21(a)(1)(iv) to refer to a recommendation of another person.

25

 80 Fed. Reg. at 21941.
Office of Regulations and Interpretations

July 21, 2015

Page 11

contract or pre-mandate discussions. For example, if the Department determined to apply the 

carve-out to only certain ERISA and IRA clients, then an exemption might be necessary to allow 

pre-contract discussions with respect to the remaining categories of clients. 

We wish to stress, however, that creation of a new exemption would not be the best 

means for the Department to address the issue. The most logical and efficient approach from a 

policy standpoint would be for the Department to address our scope concerns through changes to 

the Proposed Regulation, a revised “counterparty” or seller’s carve-out, or a new carve-out for 

pre-contract discussions. An exemption should not be needed because pre-contract discussions 

are not fiduciary in nature and should not be treated as such.26

The Department has included in its proposal a new prohibited transaction exemption, the 

BIC Exemption, to provide a structure under which those entities that became fiduciaries under 

the proposed amendments could receive commissions and other sales compensation. This 

proposed exemption, however, was not specifically designed to address pre-contract discussions 

concerning investment advisory services and contains a number of conditions that are either 

unnecessary or inappropriate for an advisory relationship.27 As noted in the first section of the 

proposed exemption, it addresses prohibitions under ERISA and the Code against fiduciary 

advisers’ receipt of “compensation that varies based on their investment recommendations,” and 

“compensation from third parties in connection with their advice.”28 Neither of these issues 

arises in the context of pre-contract discussions of fee-based advisory services.

Furthermore, the covered transactions under the proposed BIC Exemption are limited to 

“compensation for services provided in connection with a purchase, sale or holding of an Asset 

by a Plan, participant or beneficiary account, or IRA, as a result of the Adviser’s and Financial 

Institution’s advice.”29 Furthermore, the conditions to the exemption include “transaction 

disclosures,” which require various charts, website disclosures, and information to be made 

available upon request to the Department—all of which relate to the costs of purchasing, selling 

or holding particular assets and not to fee-based advisory services.

Thus, the BIC Exemption would not be appropriate for investment advisers with respect 

to pre-contract discussions of fee-based advisory services. 30 As noted above, a fee-based 

 

26

 Prematurely attaching fiduciary status in pre-contract discussions would raise difficult issues even if prohibited 

transaction relief were available. For example, the application of the prudent-man rule, co-fiduciary responsibility, 

and ERISA requirements would be problematic in this context.

27

 Furthermore, even with respect to sales activities, we believe that the conditions are unnecessarily complex.

28 80 Fed. Reg. at 21983.

29

 Id. at 21984.

30

 Further, the BIC exemption is too narrow with respect to the range of investments (defined as “Assets”) that feebased fiduciaries may appropriately employ. ERISA and IRA clients should have access to information concerning 

the full range of investments.
Office of Regulations and Interpretations

July 21, 2015

Page 12

investment adviser already provides its services subject to a “best interests” fiduciary duty and 

pursuant to a written investment management agreement; therefore much of the rest of the 

proposed BIC Exemption would be unnecessary in this context.

Rather than trying to apply the BIC exemption in this context, the DOL should create a 

separate exemption that takes into account and, where necessary and not duplicative, builds on 

the extensive disclosures already provided by investment advisers during the period prior to their 

entering into investment advisory contracts with their clients. The conditions to such an 

exemption could include requirements to provide Form ADV and 408(b)(2) disclosures to both 

ERISA clients and IRA owners (as well as the proposed text of the investment management 

agreement) prior to the execution of the investment management agreement. 31 Such an 

exemption should make clear that it is permissible for advisers to include the 408(b)(2) 

disclosures in their Form ADV disclosure brochures, as this will be more manageable for both 

advisers and their clients.

Similarly, the proposed BIC Exemption would not appear to cover recommendations of 

registered investment advisers, including through referral programs and managed accounts.32

These arrangements are already subject to the disclosure and fiduciary obligations under the 

Advisers Act, including its best interest standard. The Department should design a modified BIC 

exemption tailored to such arrangements, that could include the “best interests” standard as well 

as fee structures that mitigate conflicts.

B. Provision of Advisory Services to Other Fiduciaries

In addition to their services as asset managers to ERISA and other clients, SEC-registered 

investment advisers (or their affiliates) may provide non-discretionary advisory services to other 

financial services entities, some of which might be fiduciaries under ERISA. These services 

could include opinions, model portfolios, recommendations, and other advice that the entity may 

utilize, as it sees fit, in providing services to its ERISA clients. 

Under the current regulation, fiduciary status for investment advice is based upon 

providing advice to a plan. The Proposed Regulation, however, would expand this to include 

advice to plan fiduciaries; therefore, advisers to financial services entities might trigger fiduciary 

 

31

 Another potential model for such an exemption could be the final regulation on investment advice to participants 

and beneficiaries under sections 408(b)(14) and 408(g). This model may be analogous in that fee-based investment 

advisers’ compensation is level regardless of the specific investments chosen for the client, and the required 

disclosures in the existing participant investment advice regulation could be tailored to this context. 29 C.F.R. § 

2550.408g-1.

32

 Managed accounts are often referred to as “wrap” accounts that combine investment management with brokerage 

commissions for one asset-based fee. Investment advisers that are compensated under a wrap fee program for 

sponsoring, organizing, or administering the program, or for selecting, or providing advice to clients regarding the

selection of, other investment advisers in the program must provide their wrap fee program clients a separate 

brochure describing the program (Appendix 1 of Form ADV, Part 2A).
Office of Regulations and Interpretations

July 21, 2015

Page 13

status even though such entities would not need the protections that the proposal is designed to 

provide. We urge the Department to either except this type of advice from the definition of 

fiduciary or to create a carve-out, for the reasons discussed below.

For example, in certain wrap fee arrangements, investment advisers provide nondiscretionary advisory services in the form of generic model portfolios (“model providers”) to 

the program sponsor or an overlay portfolio manager for its use in managing client accounts. 

The program sponsor or overlay manager generally has investment discretion and is therefore a 

fiduciary under ERISA with respect to plan and IRA clients. In this context, the model 

provider’s only client is the financial services entity, the model provider only has contractual 

privity to the entity, and the model provider does not individualize its advice to a specific ERISA 

plan or IRA owner. Because the program sponsor or overlay manager already serves as an 

ERISA fiduciary with respect to the plan or IRA, we believe that imposing fiduciary 

responsibility on the model provider would not provide any additional protections to these 

clients. Furthermore, it is not clear how adviser model provider would be able to comply with 

ERISA’s fiduciary responsibility provisions with respect to such underlying clients; indeed, it 

has no information about them (including their identities).

We recommend that the Proposed Regulation be revised to add a carve-out for this and 

similar situations in which an adviser provides investment advice to another financial services 

entity. For example, the Department could except from the definition of fiduciary, or create a 

specific carve-out for, investment advice to a financial services entity where the advice is not 

individualized to a specific ERISA plan or IRA owner. 

C. Valuation Activities

The Proposed Regulation would add to the definition of fiduciary certain valuation 

activities in connection with specific transactions “involving the acquisition, disposition, or 

exchange” of securities or other property, subject to a carve-out in proposed subsection (b)(5)(iii) 

for valuations provided solely for purposes of compliance with reporting and disclosure 

requirements.33 

The application of the Proposed Regulation is unclear, however, as to the status of routine 

information provided to plans and plan fiduciaries in addition to the information included in the 

carve-out. For example, advisers to funds may provide quarterly statements and performance 

reports to all fund investors, including ERISA plans. As a threshold matter, such information 

does not appear to fall within the proposed definition of fiduciary, because it is not provided in 

connection with a transaction. In carving out statements of value “solely for purposes of 

 

33

 80 Fed. Reg. at 21958. We appreciate the Department’s response to the concerns raised by the IAA in its 2011 

comment letter about the provision of valuation services directly to funds by adding the carve-out in proposed 

subsection (b)(5)(ii). Our current concerns relate to information provided to parties other than the funds, particularly 

plans and plan fiduciaries.
Office of Regulations and Interpretations

July 21, 2015

Page 14

compliance,” however, the Proposed Regulation suggests that other routine statements of value 

might fall within the definition, even though they do not relate to a specific transaction. This 

limitation could discourage advisers from providing information to ERISA plan clients other 

than that specifically required.

This issue could arise in a number of circumstances. For example, we are concerned that 

this language could be interpreted to attach fiduciary status to investment advisers providing 

investment advice to non-plan-asset vehicles in which ERISA plans invest, if they provide 

valuation information beyond that required under statute or regulation to the plans that invest in 

the fund. 34 This language also could raise uncertainty in the context of a separately managed 

account under which the adviser manages the assets of a single plan, if the adviser provided 

quarterly statements and performance information. Similar issues would arise if the plan’s 

custodian, rather than the adviser, had valuation responsibilities under the arrangement, but the 

adviser provided input to the custodian as to the value of certain holdings in connection with 

quarterly statements provided to the plan.

We submit that the Department should clarify the scope of both the fiduciary definition 

and the valuation carve-out, and their inter-relation. Specifically, the Department should clarify 

that providing routine valuation information, regardless of whether it is required information, is 

not covered by the definition of fiduciary, in order to allow investment advisers to provide such 

information without triggering fiduciary status. Under this formulation, the carve-out in 

subsection (b)(5)(iii) would not be necessary.

IV. Transition Issues

Given the far-reaching changes that the final rule may produce and the continued 

uncertainty under the proposal concerning exactly which types of activities by investment 

advisers might be covered, the effective date of the proposed changes should be further extended 

to at least two years after publication of the final rule. This is necessary in order for advisers and 

other ERISA fiduciaries to assess the impact of the new rule, not only with respect to themselves, 

but also as to the plans’ other parties in interest, especially in the context of prohibited 

transactions. Certain prohibited transaction exemptions, such as the statutory exemptions in 

sections 408(b)(15) (relating to certain block trades) and 408(b)(17) (relating to service 

providers), include conditions requiring that the party in interest in the transaction not be a 

fiduciary. The final rule, therefore, in broadening the universe of ERISA fiduciaries, could 

automatically limit the applicability of these and other exemptions that currently allow various 

transactions.

 

34

 Under the Department’s regulation defining plan assets, a collective investment vehicle with less than 25% in 

assets from benefit plan investors does not hold plan assets for purposes of ERISA; therefore, an adviser to such a 

fund generally is not a fiduciary to the plans that invest in such a vehicle. 29 CFR § 2510.3-101(f)(1).

 
Office of Regulations and Interpretations

July 21, 2015

Page 15

Until the regulation is finalized, and clarification is provided on the issues raised in this 

letter, as well as issues affecting other service providers, plan fiduciaries and the financial 

services industry will not be able to assess its impact fully. Furthermore, after the regulation is 

finalized and clarified, plan fiduciaries will need time to apply the rule to their existing 

relationships and arrangements. Among other things, plan fiduciaries will need to identify new 

ERISA fiduciaries, and, in some cases, their affiliates.35 Plan fiduciaries also should be given 

sufficient time to identify fellow fiduciaries in light of their co-fiduciary responsibilities under 

section 405(a) of ERISA. Finally, the final regulation will likely require data collection and 

conforming changes to service providers’ systems; therefore, the effective date should recognize 

that service providers will require sufficient lead-time to work with their technology 

professionals to effect the required changes after they are identified. 

V. Conclusion

We appreciate the opportunity to provide our views on these issues. Please do not 

hesitate to contact the undersigned if we may provide additional information or clarification 

regarding these matters. 

Respectfully submitted,

-s- Kathy D. Ireland

Kathy D. Ireland

Associate General Counsel

cc: Phyllis C. Borzi, Assistant Secretary, EBSA

Judy Mares, Deputy Assistant Secretary, EBSA

Timothy Hauser, Deputy Assistant Secretary for Program Operations, EBSA

Joe Canary, Director, Office of Regulations and Interpretations, EBSA

Fred Wong, Office of Regulations and Interpretations, EBSA

Luisa Grillo-Chope, Office of Regulations and Interpretations, EBSA

Lyssa Hall, Director, Office of Exemption Determinations, EBSA

 

35

 See, e.g., ERISA section 408(b)(17).