July 21, 2015

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration 

U.S. Department of Labor 

200 Constitution Avenue, N.W. 

Washington, D.C. 20210

Re: Conflict of Interest Rule, RIN 1210-AB32

Proposed Best Interest Contract Exemption, ZRIN: 1210-ZA25

Proposed Class Exemption for Principal Transactions in Certain Debt Securities 

between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs, 

ZRIN 1210-ZA25

Ladies and Gentlemen:

We are writing on behalf of the Consumer Federation of America (CFA)1to express our 

strong support for the package of rule changes and exemptions proposed by the Department of 

Labor (DOL) to strengthen protections for retirement savers. The rule proposal addresses a very 

real problem involving self-interested retirement investment advice, curbs industry practices that 

eat into Americans’ retirement nest eggs, and does so in a way that should allow well-meaning 

financial professionals operating under a variety of business models to comply. While a few 

adjustments to the proposal can and should be made to clarify certain requirements and 

streamline or enhance others, this is a strong regulatory package that will help to ensure that all 

Americans who turn to financial professionals for advice about their retirement savings will 

receive advice that puts their interests first and promotes their ability to afford a secure and 

independent retirement. We urge you to move forward without further delay to finalize this 

vitally important rule.

I. Background

A. Loopholes in the Current Rule Expose Retirement Savers to Self-Interested 

Recommendations from Conflicted Advisers.

The Employee Retirement Income Security Act (ERISA) defines as a fiduciary adviser 

anyone who “renders investment advice for a fee or other compensation, direct or indirect, with 

 

1

The Consumer Federation of America is a non-profit association of nearly 300 consumer groups that was 

established in 1968 to advance the consumer interest through research, advocacy, and education.
2

respect to any moneys or other property of such plan, or has any authority or responsibility to do 

so.”2 When rules were adopted implementing ERISA, however, the DOL included a five-part 

test that must be met before an individual is deemed to be giving fiduciary investment advice. 

That five-part test had the effect of significantly narrowing the definition. Of particular concern 

are provisions requiring that the advice be given on a regular basis and subject to a mutual 

agreement between the adviser and the advice recipient that the advice serves as the primary 

basis for the investment decision. 

As a result of this regulatory narrowing of the definition, many financial professionals 

who “render investment advice” to retirement plans and retirement savers “for a fee or other 

compensation” are not covered by ERISA’s fiduciary duty. In particular, broker-dealers, 

insurance agents, and other sales-based advisers have used these loopholes in order to preserve 

their ability to provide services to retirement savers without having to comply with their 

fiduciary obligation under ERISA to act “solely in the interests” of those retirement savers and 

“with the care, skill, prudence, and diligence under the circumstances then prevailing that a 

prudent man acting in a like capacity and familiar with such matters would use in the conduct of 

an enterprise of a like character and with like aims.” The result is that, precisely where the 

conflicts of interest are most intense and the risks to the retirement saver are greatest, the 

protections intended by Congress when it enacted ERISA do not apply.

1. Changes in the retirement landscape since the rules were adopted amplify the risks to 

retirement savers.

Such a restrictive application of the fiduciary standard may have seemed appropriate 40 

years ago, when the rules under ERISA were enacted, but it is indefensible today. Three changes 

in particular have rendered it obsolete. The first is the growing reliance on defined contribution 

retirement accounts in place of traditional defined benefit pension plans. The second is the rise of 

rollovers out of retirement plans as a significant feature of the retirement saving landscape. The 

third is the growing complexity of financial products and financial markets. The combined effect 

of these changes is to render individuals increasingly responsible for making their own 

retirement investment decisions at a time when those decisions are increasingly difficult to make.

When ERISA was enacted, traditional defined benefit pension plans were far more 

common than they are today. Thus, the primary recipient of advice under ERISA at that time 

was likely to be a professional manager of a pension fund. But the retirement market has 

changed dramatically since then. The number of active participants in private-sector defined 

benefit plans declined from 27.2 million in 1975 to 15.7 million in 2012. Meanwhile, the 

number of active participants in private-sector defined contribution plans increased from 11.2 

million in 1975 to 75.4 million in 2012.3 As a result, recipients of advice under ERISA today are 

far more likely to be individual plan participants than they were when the rules were enacted. 

 

2

This obligation is mirrored under the Internal Revenue Code (IRC) for those advising Individual Retirement 

Accounts (IRAs). 

3 U.S. Department of Labor. Employee Benefits Security Administration, Private Pension Plan Bulletin Historical 

Tables and Graphs (December 2014), http://1.usa.gov/Rp8Bwu. 
3

With no particular financial expertise, these individuals nonetheless bear the full weight 

of responsibility for determining how best to save and invest for retirement, and they bear the 

full risks of those investments. It should come as no surprise that many turn to financial 

professionals for advice. But unlike professional pension fund managers, who at least in theory 

can be expected to understand the gaps in ERISA and the difference between a sales and an 

advisory relationship, individual retirement savers typically do not distinguish between true 

fiduciary advisers and those who are regulated as salespeople and take advantage of loopholes to 

escape ERISA coverage for their “advice.” Research has shown, for example, that investors 

typically cannot distinguish between broker-dealers and investment advisers and that many 

investors are unable to tell whether their own financial professional is a broker or an adviser even 

after the differences have been explained to them.4 Additional survey research has found that 

retirement plan participants, like investors generally, do not understand the differences in legal 

obligations among various types of financial professionals and expect all financial advisers to act 

in their best interest.5 

Even as the move toward defined contribution retirement plans accelerated in recent 

years, a hugely profitable new business opportunity emerged, consisting of moving money out of 

those plans and into Individual Retirement Accounts (IRAs). The opportunity arises when 

workers change jobs, something the typical worker is expected to do many times over their 

careers. At that point, a worker who has been saving for retirement through a workplace 

retirement plan must decide whether to leave their money in their existing plan, move it to their 

new employer’s plan (assuming that is in option), roll it over into an Individual Retirement 

Account (IRA), or cash out, which can trigger penalties and tax consequences. The current 

system poses significant challenges for workers who wish to transfer funds between 401(k) 

accounts, according to an analysis by the Government Accountability Office (GAO).6 Workers 

may find it difficult to assess which option would be best for them. Meanwhile, “waiting periods 

to roll into a new employer plan, complex verification procedures to ensure savings are taxqualified, wide divergences in plans’ paperwork, and inefficient practices for processing” 

transfers between employer plans all add to the complexity of the process.7

If the individual looks to a financial professional for advice, chances are high that the 

adviser will recommend a rollover, offer to take care of the paperwork for the transfer, and 

possibly even offer to pay a cash bonus for opening the account. Financial firms that don’t 

manage the 401(k) are eager to capture those assets. After all, even middle income workers who 

save diligently through a 401(k) plan can manage to amass enough of a nest egg to make them 

attractive targets for financial firms. Even the firm that operates the employee’s current 401(k) 

plan may have an incentive to roll them out of that plan and into an IRA if, as is often the case, 

 

4 Hung, Angela A., Noreen Clancy, Jeff Dominitz, Eric Talley, Claude Berrebi and Farrukh Suvankulov. Investor 

and Industry Perspectives on Investment Advisers and Broker-Dealers. Santa Monica, CA: RAND Corporation, 

2008, http://bit.ly/1OrrZ3v. While this research was conducted in the context of securities laws, it is directly relevant 

to the issues raised in the DOL rulemaking. 

5 Brown, S. Kathi, Fiduciary Duty and Investment Advice: Attitudes of 401(k) and 403(b) Participants, AARP 

Research, September 2013, http://bit.ly/1HO5d5f.

6

401(K) PLANS: Labor and IRS Could Improve the Rollover Process for Participants, GOVERNMENT 

ACCOUNTABILITY, OFFICE, March 7, 2013, http://1.usa.gov/1iQFeOR. 

7

Id.
4

they stand to earn more income from those assets when they are invested outside the workplace 

plan.

An IRA rollover may at times serve the interests of the worker. This is most likely to be 

the case when the worker’s money is in a workplace plan with a mediocre selection of 

investment options and the worker is considering rolling over into an IRA at a firm with a strong 

selection of high-quality, low-cost investment options. More often, however, the opposite is 

likely to be the case. Investment fees are typically lowest inside 401(k) plans, where investment 

options are chosen by a plan fiduciary and the plan must be operated exclusively for the benefit 

of participants. No such protections apply in the IRA market. 

Despite the often questionable benefits for retirement savers, rollovers today are 

responsible for moving trillions of dollars out of ERISA plans and into IRAs. Of the 36 million 

households that owned traditional IRAs as of May 2013, 49 percent (or nearly 18 million U.S. 

households) reported that their IRA accounts included rollover assets from another retirement 

plan.8 Among traditional IRA-owning households with rollovers, 34 percent had undertaken a 

rollover since 2010.9 When workers perform a rollover, they often transfer their entire workplace 

account balance, which can be a sizeable sum. According to the ICI, 85 percent of households 

undertaking a rollover since 2010 transferred their entire retirement plan balances into traditional 

IRAs.10 Moreover, 87 percent of new traditional IRAs in 2012 were opened exclusively with 

rollovers.11 And thirteen times as much money was rolled over into IRAs as was directly 

contributed to IRAs in 2011, according to the Employee Benefits Research Institute.12 Bostonbased research firm Cerulli Associates estimates that workers rolled over nearly $358 billion 

from 401(k)s into IRAs in 2013 and that between 2014 and 2018, another $2.1 trillion will 

follow.13 

According to the ICI’s mid-2014 data, the source of information retirement savers most 

commonly turned to in making their rollover decision was a professional financial adviser. 

Advisers were consulted by 61 percent of traditional IRA-owning households that conducted 

rollovers, with half indicating they primarily relied on a financial professional.14

Financial advisers are able to make rollover recommendations based on their own 

interests, rather than their customers’ interests, because the DOL has taken the position that the 

recommendations are generally not fiduciary investment advice under ERISA.15 Among other 

things, they are typically excluded because they constitute one-time advice, albeit the single most 

important investment decision many workers will make. The 2013 GAO report provides 

 

8

Investment Company Institute, 2014 Investment Company Fact Book, A Review of Trends and Activities in the 

U.S. Investment Company Industry, at 139-140, http://bit.ly/1fFwsEk. 

9

Id. at 140.

10 Id. 

11 Investment Company Institute, 2015 Investment Company Fact Book, A Review of Trends and Activities in the 

U.S. Investment Company Industry, at 153, http://bit.ly/1JfuHVf.

12 Mark Shoeff Jr., Navigating 401(k) rollovers, INVESTMENT NEWS, Mar 2, 2014, http://bit.ly/1j0F3LI. 

13 Jason Zweig, Who’s Training Your Retirement Navigator?, THE WALL STREET JOURNAL, February 14, 2014, 

http://on.wsj.com/1hLJxKJ. 

14 Id. at 154-55.

15 DOL Advisory Opinion 2005-23A, http://1.usa.gov/1JO1ggT.
5

alarming evidence of the tactics that financial services firms engage in through the IRA rollover 

process to secure workers’ assets.16 For example, financial firms aggressively encouraged rolling 

401(k) plan savings into an IRA, and did so with only minimal knowledge of a caller’s financial 

situation. They also often claim that 401(k) plans had extra fees and that IRA’s “were free or had 

no fees,” or argued that IRAs were always less expensive, notwithstanding that the opposite is 

generally true. The report also found that investment firms sometimes offer financial or other 

incentives to financial advisers who persuade workers to perform a rollover. While some of these 

practices and the abuses that naturally flow from them could be addressed through better 

enforcement of existing standards, others are precisely the types of abuses best addressed 

through application of the ERISA fiduciary standard to rollover transactions.

Both the shift of responsibility for retirement saving onto workers and the trend toward 

rolling money out of retirement plans into less regulated IRAs have occurred in tandem with a 

dramatic increase in the complexity of financial markets and financial instruments. Retirement 

savers today face a dizzying array of investments ranging from the plain vanilla to the exotic. 

Their options include not only thousands of different mutual funds, but also a wide variety of 

fixed, variable and equity-indexed annuities, ETFs, REITs, auction rate securities, and more. 

Many of these products can have highly complex features and cost structures. Evidence suggests 

that very few retirement savers have the financial expertise necessary to independently assess the 

available options and determine which are best for them.

2. Many retirement savers lack basic financial literacy skills, prompting them to seek 

out financial help and making them vulnerable to bad advice when they receive it.

Extensive research has documented the disturbingly low financial literacy levels among 

Americans. It has been shown, for example, that many adults “do not possess basic knowledge 

of interest rates, inflation or risk, all of which are essential to making well-informed investment 

decisions.”17 Indeed, as researchers working in this area have pointed out, successful investing 

requires financial knowledge beyond the basic financial concepts generally tested for in financial 

literacy surveys. It also requires, for example, an understanding of such topics as “the 

relationship between risk and return; how bonds, stocks, and mutual funds work; and asset 

pricing.”18 Unfortunately, the data here is even less encouraging.

Results of the Financial Capability Survey illustrate the problem.19 To evaluate financial 

knowledge, the survey included “a battery of questions covering fundamental concepts of 

economics and finance expressed in everyday life, such as calculations involving interest rates 

 

16 401(K) PLANS: Labor and IRS Could Improve the Rollover Process for Participants, GOVERNMENT 

ACCOUNTABILITY, OFFICE, March 7, 2013, http://1.usa.gov/1iQFeOR. 

17 Chater, Nick; Huck, Steffen; Inderst, Roman; and Goethe, Johann Wolfgang, Consumer Decision-Making in 

Retail Investment Services: A Behavioural Economics Perspective, November 2010. (Coordinated by Decision 

Technology Ltd with participation by Online Interactive Research Ltd.), http://bit.ly/1RJi4f5. 

18 Lusardi, Annamaria and van Rooij, Maarten, Financial Literacy: Evidence and Implications for Consumer 

Education, November 2009, http://bit.ly/1MCYwT2. 

19 FINRA Investor Education Foundation, Financial Capability in the United States, National Survey—Executive 

Summary, December 2009, http://bit.ly/1JbtPFz. See also, Lusardi, Annamaria and Mitchell, Olivia S., How 

Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness, September 

2009, http://www.nber.org/papers/w15350; and Lusardi, Annamaria and van Rooij, Maarten, Financial Literacy: 

Evidence and Implications for Consumer Education, November 2009, http://bit.ly/1MCYwT2. 
6

and inflation, principles relating to risk and diversification, the relationship between bond prices 

and interest rates and the impact that a shorter term can have on total interest payments over the 

life of a mortgage.” Results ranged from a low of 21 percent correct on a question about bond 

prices to 70 percent correct on a question about mortgages, but “fewer than half of respondents 

(46 percent) correctly answered both a question about interest rates and a question about 

inflation. Less than one-third (30 percent) correctly answered those questions plus a question 

about risk and diversification correctly. And fewer than 10 percent of respondents were able to 

answer all questions correctly.” Moreover, evidence suggests that people overrate their financial 

knowledge. On the Financial Capability Survey, for example, “most respondents gave 

themselves high scores.”

As the recent financial crisis clearly demonstrated, even some of the most sophisticated 

institutional investors (pension fund managers among them) lack the financial acumen necessary 

to accurately assess the risks of the complex and exotic investments available in the market 

today. Further, as evidence from the Senate’s Permanent Subcommittee on Oversight and 

Investigations made clear, more than a few of these institutional investors proved ill-equipped to 

defend themselves against aggressive sales practices that often come at their expense.20 If even 

sophisticated pension managers are unable to protect themselves from unscrupulous sales tactics, 

it stands to reason that ordinary investors don’t stand a chance without the protections afforded 

by a fiduciary duty. This is particularly true in light of the heavy reliance that retail investors 

typically place on the recommendations they get from financial advisers.

Unlike professional fund managers who can reasonably be expected to exert independent 

investment judgment, individual investors are heavily dependent on the recommendations they 

receive from financial professionals. A 2006 CFA survey found, for example, that among 

mutual fund investors who purchased most of their funds from a financial services professional, 

nearly three in ten said they relied totally on that professional’s recommendation without doing 

any independent evaluation of the fund.21 Another 36 percent said they relied a great deal on the 

professional’s recommendation but reviewed some written material about the fund before the 

purchase.22 According to the survey, women were significantly more likely than men both to 

value one-on-one expert advice and to act on that advice without doing any additional research.23

The CFA survey is consistent with other research, including the financial literacy study 

conducted by Securities and Exchange Commission (SEC),24 which has found that investors are 

heavily reliant on their financial adviser both to explain the disclosures they receive and to 

recommend a course of action.25 

 

20 Majority and Minority Staff Report, Permanent Subcommittee on Investigations, U.S. Senate, Wall Street and the 

Financial Crisis: Anatomy of a Financial Collapse, April 2011, http://1.usa.gov/1RJM4HT. 

21 Roper, Barbara and Brobeck, Stephen, “Mutual Fund Purchase Practices, An Analysis of Survey Results,” June 

2006, http://bit.ly/1IicqGD. 

22 Id.

23 Id.

24 Staff of the Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors (As 

Required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act), August 2012. See 

also, Siegel & Gale, LLC, Investor Research Report, Submitted to the Securities and Exchange Commission on July 

26, 2012, http://1.usa.gov/1MfBbss. 

25 See, e.g., IFF Research Ltd, Investment Disclosure Research, prepared for the Financial Services Authority by IFF 

Research Ltd. (November 2006), http://bit.ly/1LmSJ6Z. 
7

Despite the extensive evidence that retirement savers are heavily reliant on the financial 

professionals they turn to for advice, these individuals may nonetheless find it difficult to prove 

that a particular recommendation they received from a financial professional was the primary 

basis for the investment decision they made. It is likely to be even more difficult to prove that 

there was a mutually understood arrangement between the parties to this effect. Unless there is a 

written contract between the parties memorializing such an agreement, it is likely to be 

extremely difficult to prove that any such mutual understanding exists. Moreover, financial 

professionals may protect against that eventuality by providing disclaimers that their 

recommendations do not constitute investment advice and that the investor is responsible for 

making the ultimate investment decision. Alternatively, they may claim that the advice is onetime advice and thus not subject to a fiduciary standard. 

These loopholes in the rule’s definition of fiduciary investment advice are most likely to 

be relied on by broker-dealers and insurance agents whose compensation and business practices 

are most at odds with ERISA’s requirement that advice be rendered solely in the interests of the 

investor. While no one can be considered completely free from conflicts, the sales culture within 

broker-dealer and insurance firms can be intense. For example, although firms often call their 

sales reps financial advisors, they typically pay them based not on how well they do for their 

clients, but on how successful they are in selling investments. Not only do these “advisors” only 

get paid if their customer executes a transaction, but they will often get paid significantly more to 

recommend certain investment products over others. In addition, financial firms may set quotas 

to promote the sale of certain products, base bonuses, payouts or promotions on the adviser’s 

success in meeting those quotas, or otherwise reward advisers for successful sales conduct 

without regard to its impact on customer well-being. 

In light of these intense pressures to sell, the surprise isn’t that some sales-based advisers 

make recommendations that serve their own and the firm’s interests rather than the best interests 

of their customers, but that some do not. As a 2013 Financial Industry Regulatory Authority 

(FINRA) study of broker-dealer conflicts noted, “While the existence of a conflict does not, per 

se, imply that harm to one party’s interests will occur, the history of finance is replete with 

examples of situations where financial institutions did not manage conflicts of interest fairly.”26 

ERISA was designed to protect retirement savers from the bad advice that can result from these 

sorts of conflicts, eroding the nest eggs retirees must rely on for income throughout their 

retirement years. Loopholes in the definition of investment advice have rendered it ineffective in 

providing that protection. 

To sum up, the restrictions on the definition of investment advice under ERISA’s rules 

are at direct odds with retirement savers’ behavior, needs, and reasonable expectations. These 

individuals’ lack of financial sophistication, their heavy reliance on financial professionals, and 

their belief that those professionals will act in their best interest all cry out for the protections of 

a fiduciary standard. But the five-part test in the rule makes it all too easy for sales-based 

financial professionals whose businesses are replete with conflicts to evade that standard. 

Moreover, the DOL’s current policy with regard to rollover recommendations means that the 

single most important investment decision many retirees will ever make, a decision that could 

dramatically affect their ability to afford a secure and independent retirement, is not subject to 

 

26 Financial Industry Regulatory Authority, Report on Conflicts of Interest, October 2013, http://bit.ly/1BgWkQm. 
8

fiduciary protection. The cumulative effect of these policies is that retirement savers are denied 

fiduciary protections when they need them most, when the risks are greatest, and when the 

financial adviser’s conflicts of interest are most intense. This is a situation that demands reform.

B. Existing Regulations Do Not Adequately Protect Retirement Savers from the Harmful 

Impact of Conflicted Advice.

Some have suggested that existing regulations adequately protect retirement savers and 

that the DOL rulemaking is therefore neither needed nor warranted. In making this argument, 

they note that broker-dealers are already “heavily” regulated under state and federal securities 

laws, as well as by FINRA, while insurance agents are already regulated under state insurance 

laws. They suggest that the current “suitability” standard for broker-dealers already incorporates 

a best interest obligation that is adequate to ensure that investors’ interests are protected. And 

finally, they point to recent statements from the SEC and FINRA indicating that they will be 

increasing their scrutiny of practices around rollover recommendations. While increased 

scrutiny is welcome, it is simply not the case that existing regulations can adequately address 

abuses, substitute for a strong DOL rule, or justify denying retirement savers the protections 

Congress intended when it enacted ERISA.

1. Brokers and insurance agents are regulated as salespeople, not advisers.

Despite the fancy titles they adopt, broker-dealer registered representatives and insurance 

agents are salespeople, and they are regulated accordingly. Broker-dealers are regulated under 

the Securities Exchange Act of 1934, state securities laws, and the rules of FINRA. Their 

recommendations to customers are covered both by state unfair and deceptive practices standards 

and FINRA rules requiring them to “deal fairly” with customers. It is as part of their obligation 

to deal fairly with customers that brokers are required to make only suitable recommendations. 

Suitability starts with a “know your customer” rule that requires the broker to use “reasonable 

diligence” to ascertain the “essential facts” about a customer in order to effectively service the 

account and comply with all laws, rules, and regulations. The standard is triggered when the 

broker makes a recommendation about a security or a strategy related to investing in securities. 

The suitability standard for retail investors is seen as having three distinct parts.27 The 

broker must understand the risks and key features of the investment being recommended and 

must have a reasonable basis for believing it is appropriate for at least some customers. The 

broker must also have a reasonable basis for believing the investment is suitable for the 

particular customer to whom it is being recommended based on that customer’s investment 

profile. And, in circumstances where the broker has control of a customer account, it is not 

enough for an individual transaction to be deemed suitable when viewed in isolation. The broker 

must also evaluate a series of transactions to ensure that they are not excessive or unsuitable 

when taken together. 

 

27 Recommendations to institutional investors are treated differently. While the first and third parts of the suitability 

standard outlined here would apply, the broker would not be required to determine whether a recommendation is 

appropriate for that institution if the institution is seen as capable of independently assessing the suitability of the 

recommendation. 
9

Insurance agents, regulated under state insurance laws, are subject to a suitability 

standard when selling fixed annuities that is modeled on, but somewhat weaker than, the FINRA 

standard for broker-dealers.28 Among the most significant differences is the lack of a private 

right of action for violations of the regulation under the insurance suitability standard.29 As a 

result, regulatory action offers the only recourse for victims of unsuitable recommendations. In 

addition, state regulation puts the primary responsibility for determining suitability on the insurer 

and the insurance producer, who would logically be expected to be highly motivated to approve 

the transaction. Moreover, the insurance salesperson is an agent of the insurance company and, 

as such, owes his or her first duty of loyalty to that company, rather than to the customer. And 

courts have found that insurance agents are not generally required to provide advice in the best 

interests of their customers.30

Just as loopholes in the ERISA rules defining fiduciary investment advice enable brokers 

to operate outside its strictures with regard to retirement accounts, gaps in securities laws have 

allowed broker-dealers to offer extensive investment advice in securities accounts without being 

regulated as fiduciary advisers. This results not from gaps in the statutes themselves, but from 

the SEC’s lax interpretation of the application of Investment Advisers Act of 1940 to brokers’ 

advisory activities. Brokers’ exclusion from the Advisers Act turns on whether they receive 

“special compensation” for investment advice and whether they give advice that goes beyond 

that which is “solely incidental to” their brokerage activities. As interpreted and enforced by the 

SEC, however, this solely incidental to exclusion has given brokers free rein to call themselves 

financial advisers, offer services they describe as investment and retirement planning, and market 

themselves as if offering investment advice were their primary function. 

2. Suitability is a weaker standard than fiduciary duty.

Clearly, the suitability standard offers protections that go beyond the caveat emptor of an 

unregulated market. However, it is generally agreed, including by those responsible for 

implementing the rules, that the protections afforded investors under a suitability standard fall 

short of those offered by the full fiduciary standard appropriately imposed on investment 

advice.31 Key differences relate both to the management of conflicts under the two different 

standards and to the difference between a suitable recommendation and one that is in the best 

interest of the customer. 

 

28 Variable annuities are regulated as securities and insurance, while fixed annuities are regulated exclusively as 

insurance.

29 See National Association of Insurance Commissioners, Suitability in Annuity Transactions Model Rule, Section I. 

B.

30 In Sewell v. Great N. Ins. Co., 535 F.3d 1166, 1171 (10th Cir. 2008), the Tenth Circuit held that “absent a special 

relationship between the insured and the insurer's agent, that agent has no affirmative duty to advise or warn his or 

her customer of provisions contained in an insurance policy.” In Emerson Electric Co. v. Marsh & McClellan Co.,

362 S.W.3d 7, 9 (Mo. 2012), the Supreme Court of Missouri held that “[w]hile a broker has a duty to act with 

reasonable care, skill and diligence in procuring insurance ... a broker has no duty to advise the insured about what 

insurance he needs or what insurance to buy unless it specifically undertakes to do so. This Court, therefore, rejects 

Emerson’s claim that brokers have an additional duty to find insureds the lowest possible cost insurance available to 

meet their needs.”

31 Staff Study, U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers, 

January 2011, http://1.usa.gov/1VlB4zw.
10

Management of Conflicts: While the fiduciary duty under the Advisers Act is not as 

stringent as ERISA with regard to management of conflicts, it does at least in theory require 

advisers to seek to avoid conflicts and appropriately manage those conflicts that are unavoidable. 

Neither brokers nor insurance agents are subject to a similar overarching obligation to avoid and 

manage conflicts, although brokers are subject to certain specific restrictions on conflicts such as 

limits on non-cash compensation. This difference between how suitability and fiduciary duty 

treat conflicts could be more significant than it is but for the SEC’s weak approach to 

enforcement. Real management of conflicts ought to entail meaningful limitations on practices 

that can create incentives for advisers to profit at their customers’ expense. Instead, the SEC 

generally appears to default to disclosure as adequate to manage conflicts, even where conflicts 

are clearly avoidable. The agency has adopted this approach even though there is no evidence 

that disclosure is effective in protecting investors from the harmful impact of those conflicts, the 

agency’s own financial literacy study demonstrates that investors don’t know how to make good 

use of the disclosures they receive, and some academic research suggests that investors actually 

experience worse outcomes under a disclosure-based approach to managing conflicts.

Best Interests Standard: Some industry opponents of the rule have argued that there’s no 

need to close gaps in DOL’s definition of fiduciary investment advice since FINRA’s suitability 

standard already requires brokers to act in their customers’ best interests when they recommend 

securities transactions or investment strategies to retail investors. Leaving aside the rather 

obvious point that FINRA rules only apply to securities, and thus by definition cannot substitute 

for a strong DOL rule, this argument simply does not hold water. Despite the similarity in 

terminology, there are significant differences between any best interest obligation implied by the 

suitability standard and a fiduciary duty to act in the best interests of the customer, “without 

regard to the financial or other interest of the broker, dealer, or investment adviser providing the 

advice.”32

That is not to suggest that there hasn’t been progress in recent years to bring the 

suitability standard into closer alignment with the increasingly advisory role brokers have come 

to play. Evidence of that can be seen in FINRA’s latest update of its standard, which applies the 

standard both to hold recommendations and to recommendations of investment strategies, not 

just recommendations of specific transactions.33 In describing the standard, moreover, the release 

references case law indicating that a broker’s recommendations “must be consistent with his 

customers’ best interests” and notes that this “prohibits a broker from placing his or her interests 

ahead of the customer’s interests.”34 

To support this statement, the release cites a number of cases where FINRA or the SEC 

has found brokers in violation of suitability because they put their interests ahead of customers’, 

including “a broker whose motivation for recommending one product over another was to 

receive larger commissions.” However, a closer look at the actual cases reveals that a best 

interest standard is only being cited as a secondary factor in cases that involve more fundamental 

violations of suitability or fraud. The fact that the broker in question put his interests ahead of the 

 

32 This language is taken from Section 913 of the Dodd-Frank Act. 

33 FINRA, Regulatory Notice 11-02, Know Your Customer and Suitability, January 2011, http://bit.ly/1LnB6DU.

34 Id. 
11

interests of his customers helps to explain the motivation behind the misconduct, but it is not the 

primary basis for the regulatory action.

Several of the cases cited involve claims based on the inappropriate sale of B shares of 

mutual funds, where the B shares were more expensive than other share classes for the investor 

but paid higher compensation to the adviser. These arguably come closest to a “best interest” 

case, since they allege that the broker recommended an investment option that was more 

expensive for the customer because it paid him more. However, the suitability claim in these 

cases turns not on the fact that there were better, less costly investment options available that 

could have been recommended, but that the same investment option was available on terms that 

were more favorable to the investor. Moreover, the violations in each case went well beyond 

inappropriate sale of B shares.

The egregious nature of the violations is perhaps best illustrated by an SEC case, In re 

Epstein,

35 which is among those cited as imposing a “best interest” standard. The case involved 

a broker-dealer, Epstein, who was found to have recommended unsuitable transactions for the 

accounts of twelve customers, many of whom were elderly, retired, and financially 

unsophisticated, with a limited understanding of the applicable fee structures and other attributes

of the funds that Epstein recommended. The suitability violations in the case involved mutual 

fund switching as well as the inappropriate sale of Class B shares of mutual funds. Specifically, 

Epstein was found to have frequently recommended that customers switch from less expensive 

mutual funds to ones with higher expense ratios, often triggering new Contingent Deferred Sales 

Charges (CDSC) that could have been avoided through recommendation of other share classes. 

In some instances, he deprived his clients of the lower expenses to which they would have been 

entitled had they maintained their investments and their mutual fund holdings had been allowed 

to mature into less expensive share classes, sometimes missing automatic conversion by a matter 

of weeks. He also disrupted existing holding periods (or ones that had already phased out) and 

restarted entirely new CDSC holding periods with higher expenses that would run for several 

years, including for elderly customers who might not survive the new holding period. In its 

review of Epstein’s disciplinary proceeding, the Commission stated that, “Epstein’s misconduct 

was egregious....[he] exploited his customers’ vulnerabilities in making recommendations that 

clearly were unsuitable for them.” 

The other cases based on inappropriate sale of B shares also involve violations more 

egregious than a simple failure to act in the best interests of the customer. In the SEC case, In re 

Sathianathan,

36 for example, the broker-dealer Sathianathan was found liable not only for having 

recommended that his clients purchase Class B shares of mutual funds when they could have 

invested in lower-cost Class A shares, but also for recommending that a client, who was an 

inexperienced and conservative investor, purchase mutual funds and warrants on margin using a 

concentrated position in stock as collateral. In another case that the industry cites, In re Belden,

37

the broker-dealer Belden’s recommendation of B shares exposed the investor to tens of 

 

35 In re Scott Epstein, Securities Exchange Act of 1934, Rel. No. 593428, January 30, 2009, 

http://1.usa.gov/1CS3uLq. 

36 In re Raghavan Sathianathan, Securities Exchange Act of 1934, Rel. No. 54722, November 8, 2006, 

http://1.usa.gov/1JsjEbs. 

37 In re Wendell D. Belden, Securities Exchange Act of 1934, Rel. No. 47859, May 14, 2003, 

http://1.usa.gov/1CL9Lc5. 
12

thousands in excess charges on a $2 million purchase. If the investor had purchased A shares, 

the investor’s sales charges would have been waived because of the large size of the investment 

and the investor would have paid 0.75-0.80 percent less per year. Instead, the investor paid 

roughly $52,000 in unnecessary commissions, then paid $84,000 in contingent deferred sales 

charges to exchange the B shares for A shares. Despite the fact that several people he worked 

with said he should put the client into A shares, Belden ignored their recommendations. In his 

testimony, he acknowledged that his motivation for recommending B shares was the higher 

commissions they paid and said that he “couldn't stay in business” with lower commissions. In a 

taped conversation, he said, “I don't deal in A shares.” 

Three other cases cited to suggest that brokers are already subject to a best interest 

standard involve similarly egregious suitability violations. In one case, In re Cody,

38 the brokerdealer Cody recommended to several investors that they invest significant portions of their 

portfolios in the mezzanine tranche (eighth in seniority) of mortgage-backed securities. In a clear 

violation of his obligation under the suitability standard to determine whether the investment was 

suitable first for any investor and then for his specific customers, he made those 

recommendations without an understanding of how asset-backed securities are different from 

conventional fixed income securities, what fundamental factors affect their performance, the 

risks inherent in the securities, or whether the ABS were suitable for any investor, let alone the 

investors who sought his advice. Within months the products’ credit ratings were downgraded 

and the investors lost 55 and 65 percent of their investments respectively. Cody’s violations 

didn’t stop there. For the next several years, Cody also engaged in a pattern of churning, 

generating over $40,000 in commissions in one account and $36,000 in the other, with roughly 

$30,000 of that total going to Cody himself. 

In the second case, In re Daniel R. Howard,

39 the broker-dealer Howard made unsuitable 

recommendations to an 85-year-old man who was in poor health, and whose primary need was 

additional income to pay for his increasing medical expenses. The elderly investor sought 

investments that carried minimum risk, but Howard put him in speculative “house stocks” in 

which the brokerage firm made a market. For seven of the ten months at issue, those speculative 

securities comprised 90 percent of the investor’s portfolio. The average holding period for the 

securities in the investor’s account was about 40 days and, on an annualized basis, the account 

was turned over about 8.5 times. All of these activities were found to be at odds with the 

investor’s stated objectives. After the fact, the broker conceded that his recommendations may 

have been improper, stating: “[In a high pressure atmosphere like the one that existed at Meyers], 

you tend to . . . maybe cross over the line. And you tend to maybe make recommendations that, 

maybe in hindsight, even though you’re tempted to blame other people, and you’re tempted to 

say, well, the client agreed to it or the client authorized it, in the full context that doesn’t justify 

it.”

In the third case, Dep’t of Enforcement v. Bendetsen,

40 the broker-dealer Bendetsen made 

unsuitable recommendations to a woman in her mid-80s who had approximately $1 million in 

 

38 In re Richard G. Cody, FINRA NACD, Complaint NO. 2005003188901, May 10, 2010, http://bit.ly/1VkOgog. 

39 In re Daniel R. Howard, Securities Exchange Act of 1934, Rel. No. 46269, July 26, 2002, 

http://1.usa.gov/1Ly1tWr. 

40 Dep’t of Enforcement v. Bendetsen, Complaint No. C01020025, August 16, 2004, http://bit.ly/1ebly7u. 
13

assets and whose investment objectives were “conservation of capital with stable income” and 

“long term growth of capital -- income secondary.” Despite the fact the investor did not indicate 

that she was interested in engaging in speculative margin and options trading, did not sign a 

margin agreement, and was not eligible to engage in options trading under the firm’s policies, 

Bendetsen nonetheless engaged in a series of speculative short sales and option trades on her 

behalf. As a result of Bendetsen’s complicated trading strategies, the net worth of the account 

decreased from approximately $1 million to approximately $142,000. However, these substantial 

losses were not readily apparent on the investor’s statements because Bendetsen was creating 

and submitting false account statements showing a much better picture. The hearing panel 

reviewing his case found that Bendetsen’s misconduct was egregious and involved a number of 

aggravating factors, including highly speculative trading that exposed his elderly and vulnerable 

client to considerable risk, which resulted in substantial losses, and the fact that he attempted to 

conceal his client’s losses.

While we appreciate the suggestion that brokers should put the interests of their 

customers first, a reading of these cases simply does not support the contention that brokers are 

currently being held to a best interest standard by either the SEC or FINRA. Indeed, these cases 

make the opposite point, calling into question whether suitability is being enforced in a way that 

provides investor protections beyond a basic fraud standard. These do not appear to be isolated 

examples. According to Broker-Dealer Law and Regulation, written by two of America’s 

leading securities authorities, Norman S. Poser and James A. Fanto: “In many, if not most, 

suitability cases, the unsuitable recommendations are accompanied by other violations, including 

failures to supervise, churning, misrepresentations or omissions, and unauthorized trading.”41

Even financial industry participants have generally come to concede that suitability does 

not offer the investor protections of a fiduciary “best interest” standard. Thus, SIFMA has come 

forward with an alternative “best interest” standard that, while it falls well short of a true 

fiduciary standard, takes as its underlying assumption that brokers should be held to a best 

interest standard when making recommendations to retail investors.42 In a recent speech, FINRA 

Chairman and CEO Richard Ketchum also voiced his support for a best interest standard. At the 

same time as he emphasized “the effectiveness and fundamental integrity of the present 

FINRA/SEC regulatory structure for broker-dealers,” Ketchum stated that “the clarity of a ‘best 

interest of the customer’ standard would be an important step forward in encouraging firm 

compliance cultures that translate to consistent actions to place the interests of the customer 

first.”43 Although both Ketchum and SIFMA have stated their support for a best interest standard 

in the context of securities regulation, and have withheld that support in the context of DOL 

rulemaking, the fundamental point is relevant to the DOL rulemaking as well: the standards 

currently being applied to recommendations of brokers and insurance agents are not sufficient to 

constrain conflicts and protect investors from harmful industry practices.

 

41 Poser, Norman S. and Fanto, James A., “Broker-Dealer Law and Regulation,” Aspen Publishers, Fourth Edition, 

Section 19.01, describing results of the authors’ survey of FINRA arbitrations from May 2007 to February 2008.

42 SIFMA, Proposed Best Interest of the Customer Standard for Broker-Dealers, June 2015, http://bit.ly/1M56eog.

43 Richard G. Ketchum, Remarks From the 2015 FINRA Annual Conference, May 27, 2015, http://bit.ly/1IdZWUo. 
14

C. Retirement Savers Suffer Real Financial Harm as a Result of Practices that are Legal 

Under Existing Regulatory Standards.

When financial professionals place their own interests ahead of the interests of their 

customers, those customers suffer real financial harm. Even advice that complies with a 

suitability standard can impose significant, unjustified costs on retirement savers, costs that 

materially reduce their accumulated savings and threaten their ability to afford an independent 

and secure retirement. Putting even an approximate dollar amount on that harm is challenging, 

in part because the same financial firms who demand that regulations be justified based on 

evidence of harm refuse to provide the data that would permit a more complete analysis.44 

Despite these limitations, evidence of the harm suffered by investors, including retirement 

savers, under the existing regulatory standards is extensive. It takes a variety of forms, including 

academic studies, observations of industry practices, and basic market analysis.

Drawn primarily from academic research, the Regulatory Impact Analysis prepared by 

DOL as part of this rulemaking is based on several sound assumptions:

● That financial and other incentives embedded in the business models of broker-dealers 

and insurance agents affect the recommendations they make.

● That one such effect is a tendency among sales-based advisers to steer retirement savers 

into investment options with higher underlying costs and poorer performance than other 

available options.

● That, over the long term, these excess costs and subpar performance materially reduce 

retirement savers’ accumulated savings and, as a result, the income available to them 

during their retirement years.

The Regulatory Impact Analysis draws heavily on a series of academic studies that show 

that conflicted advice tends to lead to eroded returns. Perhaps most telling is a 2009 study by 

Bergstresser, Chalmers, and Tufano which compared returns of mutual funds sold in the direct 

channel and the broker channel between 1996 and 2004. Without factoring in distribution costs 

(loads and 12b-1 fees), the authors found poorer performance for funds in the broker channel in 

three of four categories of funds examined -- domestic equity funds, bond funds, and money 

market funds. Only among foreign equity funds did broker channel funds outperform direct 

channel funds over the period analyzed, and the difference in that case was attributable to the 

performance within a single large mutual fund family. The authors estimated that investors 

suffered $4.6 billion in reduced returns as a result, on top of paying $9.8 billion a year in 12b-1 

fees. They did not estimate the cost of sales loads paid to compensate brokers for their costly 

advice. Another study cited by DOL (Del Guercio and Reuter, 2014) found that broker-sold 

funds underperform direct-sold funds by an average of 1.15 percentage points per year after 

accounting for risk and other factors, which the authors attribute to misaligned incentives in the 

broker-sold market.

 

44 Mark Schoeff Jr., “Industry stiffs DOL on request for IRA data in fiduciary analysis,” Investment News, March 4, 

2012, http://bit.ly/1gJX4nQ. 
15

Extrapolating from these and other academic studies, the DOL Regulatory Impact 

Analysis estimates that IRA investors who receive conflicted advice could lose out on $210 

billion in retirement savings over the next 10 years and nearly $500 over the next 20 years just 

with regard to their mutual fund investments. DOL further estimates that an “ERISA plan 

investor who rolls her retirement savings into an IRA could lose 12 to 24 percent of the value of 

her savings over 30 years of retirement by accepting advice from a conflicted financial adviser.” 

While industry has taken issue with these estimates, we believe they likely significantly 

understate the scope of the problem. After all, the academic research on which they are based 

looks primarily at the portion of the retirement market where transparency is greatest, where 

regulation is most rigorous, and where the available data is most complete. 

A recently released study prepared for the Ontario Securities Commission reaches a 

similar conclusion with regard to both the negative impact of conflicted advice and the need for 

regulatory action to resolve the problem.45 Based on a review of existing research regarding 

mutual fund fees and compensation, the report finds that funds that pay commissions 

underperform funds that don’t pay commissions “whether looking at raw, risk-adjusted or afterfee returns.” It notes, moreover, that the problem is not related simply to commission-based 

compensation. “While there is no doubt that commissions engender biased advice,” the report 

states, “there is ample evidence that other types of compensation can lead to biased advice as 

well (e.g., faster promotion for advisors selling more proprietary products).” The report finds 

“conclusive evidence that commission-based compensation creates problems that must be 

addressed.”

1. Basic market observation provides evidence of investor harm.

Basic market observation leads to the same conclusion: that in many instances today 

investors are advised to purchase investments that are far inferior to other available options, and 

that this is done legally, in compliance with existing securities and insurance regulations. 

Examine the range of investment options that brokers and investment advisers might recommend 

to retail investors – i.e., a particular class of mutual funds or variable annuities – and the vast 

differences in the features of these investment products becomes readily apparent. Otherwise 

similar products may, for example, impose different fees on the investor, or achieve comparable 

investment results with significant differences in volatility, or provide different guarantees, or, in 

the case of variable annuities, offer the investor a greater or lesser degree of choice among 

underlying investment options that are of varying quality. Although all of the options within a 

particular category may be deemed suitable for a particular investor, these differences in features 

can profoundly impact costs, risks and overall performance. Investors are harmed when they are 

encouraged to pay excessive fees, receive substandard performance, or are exposed to 

unnecessary risks because a broker recommended an investment that, while suitable, was inferior 

to other available options. 

Loopholes in the definition of fiduciary investment advice under both ERISA and 

securities laws leave investors vulnerable to this harm. The most readily observable evidence of 

such harm arises out of the significantly different costs imposed by otherwise similar 

 

45 Weinstein, Edwin. Mutual Fund Fee Research, prepared for Ontario Securities Commission on behalf of 

Canadian Securities Administrators, The Brondesbury Group, Spring 2015, http://bit.ly/1Sx83g4. 
16

investments. An adviser operating under a well enforced fiduciary standard must take costs into 

account when determining which investment is best for the customer.46 A broker or insurance 

agent operating under a suitability standard generally does not have to give costs the same 

consideration; they may legally recommend a higher cost option that compensates them better if 

the investment itself is generally suitable. 

When CFA commented on the Securities and Exchange Commission’s Request for 

Information in July of 2013,47 we included an analysis of costs of S&P 500 index funds to 

illustrate the wide range of costs among otherwise virtually identical products and the generally 

higher costs among broker-sold funds. We focused on index funds because they offer the 

cleanest example. While minimizing costs is important in all fund types, there is simply no 

justification for paying high costs in a fund that is designed simply to match the performance of 

an index. 

If you look at data regarding S&P 500 index funds, two things are immediately 

apparently. The large majority of investor assets in funds purchased outside retirement plans48

are held in a handful of very low-cost, direct-marketed funds managed by Vanguard ($139.593 

billion), Fidelity ($58.497 billion), T. Rowe Price ($17.699 billion), and Schwab ($15.446 

billion).49 No single broker-sold fund comes close to matching these funds for level of assets 

under management, and even on an aggregated basis S&P 500 index funds sold by brokers to 

investors outside retirement plans appear to have far fewer assets under management. When 

brokers do sell S&P 500 index funds outside retirement plans, those funds appear to carry higher 

administrative costs than direct-marketed funds, even after the cost of compensating the broker is 

excluded. This is consistent with the findings of the academic research on which DOL’s 

estimate of harm is based.

In conducting our analysis, we erred on the side of understating such costs by subtracting 

all 12b-1 fees from the expense ratio. According to the data provided by Morningstar, net 

expense ratios among the largest direct-marketed funds range from a low of 0.06 percent for the 

Fidelity Spartan 500 Index Advantage fund to a high of 0.29 percent for the T. Rowe Price 

Equity Index 500 Fund. While a few no load funds on the Morningstar list have net expense 

ratios as high as 0.50 or 0.60 percent, most are significantly lower, as one would expect in a 

competitive market where costs are directly related to performance.

A number of broker-sold funds also have competitive administrative fees, once the 

broker’s compensation is subtracted. But others do not. In these cases, the “benefit” the investor 

received from investing through a broker is advice to put their money into an index funds with 

 

46 We focus on the potential impact of a well enforced fiduciary duty because there is little evidence that the SEC 

actually enforces the securities law fiduciary duty in a way that affords investors the full benefits the fiduciary duty 

ought to provide.

47 Letter from CFA Director of Investor Protection Barbara Roper to SEC Secretary Elizabeth M. Murphy regarding 

“Duties of Brokers, Dealers, and Investment Advisers” (File Number 4-606), July 5, 2013, http://bit.ly/1Jslglq. 

(Hereinafter, CFA July 2013 SEC comment letter)

48 Because we conducted this analysis for a comment on a possible SEC fiduciary rule, we focused on funds held 

outside workplace retirement plans, including but not limited to funds sold to IRA investors.

49 This data was supplied by Morningstar, which provided a list of S&P 500 index funds ranked by assets under 

management and excluding share classes sold through retirement plans or to non-retail investors.
17

expenses several times higher than the best available funds. The following are a few examples 

taken from the Morningstar data:

● Investors in the Wells Fargo Advantage Index A pay a maximum front load of 5.75 

percent for an S&P 500 index fund with a current net expense ratio of 0.56 percent (0.68 

gross). That is roughly twice as high as the expense ratio of the highest cost of the large 

direct-marketed funds and ten times the expense ratio of the lowest-cost fund. Investors 

have over $400 million invested in this share class of the fund.50

● Investors hold nearly $600 million in A shares of the J.P. Morgan Equity Index Fund. 

This fund charges a maximum front load of 5.25 percent for a fund with a net expense 

ratio of 0.45 percent (including .25 percent in 12b-1 fees) and a gross expense ratio of 

0.94 percent. 

● A total of about $739 million is invested in a series of State Farm S&P 500 index funds, 

including two A share funds and two B share funds. The bulk of that money (about $564 

million) is invested in the A shares, which have maximum front loads of 3.0 and 5.0 

percent and net expense ratios of 0.77 percent.51

● An even more extreme example is offered by the Rydex S&P 500 Fund. Investors have 

approximately $349 million invested in the largest share class of this fund, which has a 

net expense ratio of 1.5 percent (including 12b-1 fees of 0.25 percent). That is roughly 20 

times the expense ratio on the Fidelity fund and 10 times the expense ratio on the 

Vanguard fund.

There is nothing inherently more expensive about operating a broker-sold S&P 500 index 

fund than a direct-marketed fund (other than the cost of compensating the broker, which CFA 

subtracted from the administrative fee for the purposes of its analysis). Moreover, major market 

players such as Wells Fargo, J.P. Morgan, and State Farm all have a broad enough customer base 

that they should be able to offer a competitive product, if they chose to do so. The logical 

conclusion, therefore, is that the higher fees in broker-sold funds reflect a market where 

competition is based primarily on factors other than cost. Given the singular role that reducing 

costs plays in determining performance in index funds, the pressure to keep costs low would 

arguably be greatest here. Thus, there is every reason to believe that the lack of cost competition 

evident among broker-sold S&P 500 index funds has the same impact on the sale of other types 

of investment products that can be sold on the basis of features other than cost alone. As noted 

by Dr. Michael Finke in the Investment Management Consultants Association (IMCA) comment 

letter on the SEC request for information,52 this lack of cost competition among broker-sold 

funds permitted under the suitability standard may help to explain why broker-recommended 

 

50 Some of these investors may have paid lower than the maximum front load, because of breakpoints for example, 

but we believe the basic point still holds. These investors are paying a premium for questionable advice.

51 Far less money is held in the B shares, which have maximum deferred loads of 3.0 and 5.0 percent and net 

expense ratios of 1.17 (including a 0.65 percent 12b-1 fee) and 1.47 percent (including a 0.95 percent 12b-1 fee). 

This may reflect that expenses of that magnitude are difficult to justify even under a suitability standard.

52 Dr. Michael Finke, “Fiduciary Standard: Findings from Academic Literature,” attached to the letter from IMCA,

July 5, 2013 to the SEC in response to the request for comments on the “Duties of Brokers, Dealers and Investment

Advisers,” http://1.usa.gov/1KgdRZu (hereinafter “Finke Study”).
18

mutual funds significantly underperform direct-sold funds more commonly recommended by 

investment advisers operating under a fiduciary standard.

As the DOL has noted in its Regulatory Impact Analysis, excess fees paid by investors 

who invest based on the recommendation of a conflicted adviser can have a significant impact on 

the long-term savings of retirement savers. The SEC made a similar point when it warned in a 

recent bulletin for investors, “Over time, even ongoing fees that are small can have a big impact 

on your investment portfolio,” reducing returns, shrinking a nest egg, and preventing investors 

from achieving financial goals.53 This impact was vividly illustrated in an October 2013 

Bloomberg Markets Magazine report regarding data filed with the SEC which showed that “89 

percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions, 

and expenses during the decade from Jan. 1, 2003 to Dec. 31, 2012.”54 As the Bloomberg article 

noted, brokers have an incentive to keep clients in managed-futures funds, even when it is not in 

the best interests of the client, because they receive annual commissions of up to 4 percent of 

assets invested and investors pay as much as 9 percent in total fees each year.55

While they are important, excess costs are not the only concern associated with advice 

delivered outside the protections of a fiduciary standard. In our comment letter to the SEC, we 

also looked at ratings of variable annuities by independent analyst Weiss Ratings to help to 

illustrate how factors other than just costs can and should be incorporated in recommendations 

based on a best interest standard.56 While cost is one factor Weiss incorporates into its ratings, it 

also includes the availability of a wide selection of mutual fund subaccounts with good 

performance and the financial strength of the insurance company issuing the annuity. In 

explaining the basis for arriving at its 10 best list, for example, Weiss explained that, “mutual 

fund subaccount performance played an important role in the selection process. After all, a 

variable annuity can have low costs and a strong Financial Strength Rating, while at the same 

time offering only mediocre fund performance.” Lack of fund choice and high surrender fees 

were clearly also major factors in determining which annuities ended up on Weiss’s 10 worst list.

A look at the annuities on Weiss Ratings’ 10 worst list again raises the question of 

whether these funds could even exist in a market where sellers were subject to a best interest 

standard. For example, the list included two versions of the Polaris Preferred Solution annuity, 

offered by SunAmerica. Both of the versions on Weiss’s list included just one fund option, 

which Weiss described as “weak,” and both charged high surrender fees: 9 percent decreasing 

over 9 years for the Bonus Fund and 8 percent decreasing over 4 years for the L shares. A 

separate site, Annuity Digest, listed Polaris Preferred Solution as offering a choice of 50 funds,57

with maximum total expenses of nearly 3 percent, including a maximum mortality and expense 

risk charge (M&E fee) of 1.15 percent.58 According to Annuity Digest, the annuity also imposed 

an 8 percent surrender charge decreasing over 8 years and a maximum commission of 7.5 

 

53 U.S. Securities and Exchange Commission Investor Bulletin: “How Fees and Expenses Affect Your Investment

Portfolio,” February 19, 2014, http://1.usa.gov/1I6rpmm. 

54 David Evans, “How Investors Lose 89 Percent of Gains from Futures Funds,” Bloomberg Markets Magazine, Oct.

7, 2013, http://bloom.bg/1JbuuHh. 

55 Id.

56 See Weiss Ratings Best and Worst Variable Annuities, http://bit.ly/1fhAtOy. 

57 We were unable to determine the reason for the disparity.

58 See Annuity Digest profile of the SunAmerica Polaris Preferred Solution annuity, http://bit.ly/1DqdqH0. 
19

percent. By way of comparison, Annuity Digest lists a number of funds with M&E charges in the 

0.2 to 0.4 range, for example, and a number which charge no commissions and no surrender fees. 

No adviser who was truly motivated by the best interests of his or her customer could justify 

recommending options such as those on the 10 worst list when high quality, lower cost 

alternatives are readily available. 

2. Risks of harm are greatest when workers change jobs or leave the workforce.

Retirement savers are arguably at greatest risk from the harmful impact of conflicted 

advice when they change jobs or leave the workforce to enter retirement and must decide what to 

do with the money they have accumulated in a workplace retirement plan. Even those earning 

relatively modest incomes can suddenly become attractive targets for financial services firms if 

they’ve managed to accumulate twenty or thirty thousand dollars or more in a workplace plan. 

This can be true even for the financial firm that manages the retirement plan if, as is often the 

case, that firm charges higher management fees for funds sold outside the plan than it does on 

plan offerings. With trillions of dollars up for grabs from retirement savers making job changes 

or leaving the workforce, even reputable firms have been shown to engage in aggressive tactics 

to entice workers to move money out of their pensions and 401(k) plans and into IRAs. 

While the ability to siphon trillions of dollars out of workplace plans has been 

enormously profitable for financial firms, it can be significantly less financially advantageous for 

those retirement savers who are persuaded to roll their money out of an ERISA plan and into an 

IRA. Data from the Investment Company Institute (ICI) documents this cost disparity with 

regard to mutual funds. ICI data indicates that, while average-weighted costs of funds purchased 

in IRAs are lower than overall fund costs, the average-weighted costs of funds sold through 

401(k)s are lower still.59 Cost disparities are likely to be even greater for investors who are rolled 

over into a fixed index or variable annuity. Those cost differences can have a major impact on 

long-term investments. 

As noted above, DOL estimates that an investor who rolls her retirement savings into an 

IRA could lose 12 to 24 percent of the value of her savings over 30 years of retirement as a result 

of conflicted advice. That estimate is based on research which indicates significant 

underperformance among broker-sold investments. While industry has taken exception to this 

estimate, it is based on far from the most extreme example. Here again, real world examples 

help to illustrate the nature and extent of the harm that investors can and do suffer as a result of 

conflicted advice.

A recent blog by Joseph M. Belth provides a vivid picture of the kind of abuse that can 

occur.

60

 The blog describes the case of a 78-year-old woman whom he calls Beatrice who was 

persuaded to roll over her retirement accumulation at College Retirement Equities Fund (CREF) 

into an IRA containing a variable annuity issued by Guardian Insurance & Annuity Company, a 

subsidiary of Guardian Life Insurance Company of America. According to Belth’s account, 

which is based in part on an earlier blog by fee-only insurance adviser and actuary Scott Witt, 

 

59 Brian Reid, “Getting the Numbers Right on Investment Advice for Retirement Savers,” ICI Viewpoints, February 

26, 2015, http://bit.ly/1Kg448s. 

60 Joseph M. Belth,”Guardian Life Rectifies an Unsuitable Rollover,” June 22, 2015, http://bit.ly/1JcccFE.
20

Beatrice was paying expenses of just 41 basis points (0.41 percent) on her CREF investment. 

That adds up to roughly $1,350 a year in expenses on her $325,000 balance. In contrast, the 

Guardian annuity her money was rolled into imposed 110 basis points of annual mortality and 

expense charges, 75 basis points of annual investment expense charges, and 20 basis points of 

annual administrative expense charges for a total of 205 basis points (2.05 percent), totaling 

about $6,450 a year. Adding to the cost, the adviser sold 78-year-old Beatrice a rider 

guaranteeing that the eventual lifetime income from the annuity would be enhanced significantly 

if she avoided making withdrawals for ten years. The annual cost of the enhanced lifetime 

income guarantee was 115 basis points, bringing the total cost to 325 basis points (3.25 percent), 

or about $10,650 a year. 

As if that weren’t enough, the adviser rolled over the full $325,000 accumulation in 

Beatrice’s CREF account, rather than the $200,000 she had authorized, in what the adviser later 

claimed was a paperwork error. As a result of that “paperwork error,” Beatrice was forced to 

take required minimum distributions from the annuity in order to avoid draconian income tax 

penalties. Doing so caused her to forfeit the entire lifetime income guarantee for which she was 

paying roughly $4,800 a year. When Beatrice, with the help of Witt, took her concerns to the

company and asked for her investment to be refunded minus a $31,000 surrender charge, the 

initial response from Park Avenue Securities, which employed the adviser who sold Beatrice the 

annuity, was to refuse the claim, saying it found no evidence of wrong-doing on the part of the 

adviser. It noted, among other reasons, that she had received a prospectus and hadn’t asked for a 

refund within the allotted look-back period. It was only after Belth contacted Guardian, 

indicating that he was planning to write about the case on his blog, that the company agreed to 

settle the case on terms that are confidential.

3. Less wealthy, less sophisticated individuals are most likely to be targets of harmful 

practices.

Evidence suggests that less sophisticated and less wealthy investors are most likely to 

suffer the harmful consequences of recommendations that are not based on the best interest of 

the investor. In a comment letter filed by IMCA with the SEC in response to its Request for 

Information, Dr. Michael Finke, a professor at Texas Tech University, cited academic studies 

bearing evidence of this effect:

● A 2012 study found that commission-compensated insurance agents “will consistently 

recommend higher commission products to less sophisticated consumers, leading to 

welfare losses that are greatest among those who can least afford to sustain them.”61

● An earlier study similarly examined financial firms’ “incentive to shroud attributes.”62

The researchers described how producers “will rationally segment the market by level of 

investor sophistication,” with less efficient, more opaque products created to “maximize 

economic rents from less sophisticated consumers” while more competitive products are 

 

61 Finke Study at 6 (citing S. Anagol, S. and H.H. Kim, 2012, “The Impact of Shrouded Fees: Evidence from a

Natural Experiment in the Indian Mutual Funds Market,” American Economic Review, 102(1): 576-593).

62 Finke Study at 7 (citing X. Gabaix and D. Laibson, 2006, “Shrouded attributes, consumer myopia, and

information suppression in competitive markets,” Quarterly Journal of Economics, 121(2), 505-540).
21

simultaneously offered to sophisticated consumers. “Examples of product differentiation 

through opaque characteristics are evident in the mutual fund market.”

● Another study cited by Dr. Finke describes how fund companies use different tactics to 

attract “less sophisticated investors, who fund families attract through marketing, and 

more sophisticated, direct-channel investors who are targeted through higher 

performance.”63

● This is consistent, Dr. Finke suggests, with evidence from a separate academic study 

“that successful mutual funds appear either to gain market share through lower expenses 

or by increasing opaque fees which are then used to incent advisor recommendations.”64

● Finally, Dr. Finke cites research suggesting that the “latitude of recommendation quality 

allowed in a suitability model is particularly troubling when clients are older and have 

experienced cognitive decline that may reduce their ability to perceive self-serving 

recommendations.”65

In other words, while opposition to fiduciary rulemaking is often presented as being motivated 

by concern over the well-being of middle-income retirement savers, the academic literature 

strongly suggests that it is precisely these less wealthy, often less financially sophisticated 

individuals who are most at risk from harmful practices permitted under existing securities and 

insurance regulations and who would benefit most from adoption of a rule closing loopholes in 

the definition of fiduciary investment advice under ERISA.

D. Contrary to Industry Claims, Non-fiduciary Advice is Often Far More Costly than Advice 

from Fiduciary Advisers.

Financial firms that rely on sales-based compensation have argued that, far from 

benefiting retirement savers, closing loopholes in the definition of investment advice could drive 

up the cost of advice, potentially leaving low- and middle-income retirement savers without 

access to the guidance they need to navigate complex investment decisions. Lack of transparency 

around the compensation of sales-based advisers helps to maintain this myth that they offer more 

affordable services than fiduciary advisers. While there are certainly circumstances in which 

commission-based accounts are more affordable, this is far from universally true. 

In assessing the affordability of advisory services, it is important to look at total costs to 

the investor. First, there is the cost of the advisory services themselves. Second, there is the cost 

of the investments recommended to implement the advice. In addition, it is important to consider 

what services the investor receives in return for their payment. When the full costs to the investor 

are computed, the costs of commission-based advice are often higher. In other cases, retirement 

 

63 Finke Study at 7 (citing N.M. Stoughton, Y. Wu and J. Zechner, 2011, “Intermediated investment management,”

The Journal of Finance, 66(3), 947-980).

64 Finke Study at 7 (citing A. Khorana and H. Servaes, 2012, “What drives market share in the mutual fund

industry?” Review of Finance, 16, 81-113).

65 Finke Study at 6 (citing M.S. Finke and T. Langdon, 2012, “The impact of a broker-dealer fiduciary standard on

financial advice,” Journal of Financial Planning, 25(7), 28-37).
22

savers who pay for advice through sales-based fees pay roughly the same amount as is typically 

charged by fiduciary advisers but receive a lower level of service in return for that payment. 

For example, the one percent asset under management fee directly charged by many 

fiduciary advisers is equivalent to the one percent 12b-1 fee indirectly charged by many brokers. 

In return, the broker’s customers get a one-time transactional recommendation with no on-going 

duty of care, but they continue to pay the annual one percent fee for as long as they hold the 

investment. In contrast, the adviser’s customers get ongoing account management and, in many 

cases, comprehensive financial planning for the same one percent annual fee. While the adviser’s 

fees are fully transparent, the broker’s fees are hidden in the expense ratio of the recommended 

investment. This creates the false impression that the broker’s services are more affordable 

when, in fact, the customer is paying the same amount for a lower level of service. If, as the 

evidence suggests is often the case, the broker also recommends funds with higher expenses, 

even after the cost of compensating the broker is subtracted, then the increased cost to the 

investor for non-fiduciary advice are that much higher.

One case where the costs of brokerage services are clearly and unequivocally lower are 

for a buy-and-hold investor who trades in individual stocks and trades infrequently. Here, the 

rock bottom prices available for executing stock trades would be hard to match by an adviser 

charging a typical one percent assets under management fee. This is not, however, a common 

scenario, particularly for smaller savers, since few investors have sufficient assets that they can 

get adequately diversified investing in individual stocks. Moreover, even here where the cost 

benefits of a commission-based accounts are most apparent, some investors may prefer to pay an 

adviser a management fee in return for the on-going portfolio management they would receive 

from a fiduciary adviser.

A far more common scenario is the retirement saver with $5,000 to contribute to an IRA. 

As rule opponents often point out, advisers who charge fees based on assets under management 

would be unlikely to serve this client, but other options would be available. The retirement saver 

could get a recommendation from a broker-dealer, invest the money through a robo-adviser, or 

pay an hourly fee for a recommendation from a fee-only adviser who specializes in serving 

middle income clients. Of these options, the broker-dealer recommendation is likely to be most 

costly, with the magnitude of that increased cost dependent on the particular investment 

recommended. 

A few concrete examples can help to illustrate this point. In each case, we assume a onetime investment of $5,000, a 5 percent annual return, and a holding period of 10 years.

● Assume the retirement saver consults a broker, who recommends A shares of an actively 

managed mutual fund with a fairly standard 0.99 percent expense ratio (including a 0.25 

percent 12b-1 fee). Given the small size of the investment, the saver is unlikely to 

qualify for breakpoints and thus would pay the maximum 5.75 percent front load charged 

by the fund, or $287.50 right off the top. Assuming a 5 percent annual return, that 
23

investor will have paid approximately $850 in total costs and the investor’s balance 

will be approximately $6,950 at the end of 10 years.66

● If that same investor is recommended a lower cost option, with a 0.75 percent expense 

ratio, for example, but the same 5.75 percent front load, the investor will have paid 

approximately $720 in total costs after 10 years, and the investor’s balance will be

approximately $7,120. On the other hand, if the investor is placed in a higher-cost 

alternative, with a 5.75 percent front load and a 1.3 percent expense ratio, the investor 

will have paid approximately $1,020 in total costs, and the investor’s balance will be 

just $6,740.

● In some cases, although they are more appropriate for a short-term investment, a broker 

might recommend C shares, which compensate the broker through a 12b-1 fee (typically 

100 basis points) included in the expense ratio. An investor who purchases C shares with 

no front load but a 1.74 percent expense ratio will have paid approximately $1,020 in 

total costs after 10 years, and the investor’s balance will be approximately $6,850.

● If the saver invests the money through a robo-adviser, the costs would be dramatically 

lower. Using Wealthfront as an example, a retirement saver with $5,000 to invest would 

pay nothing for the advice (Wealthfront advisory services are free for accounts below 

$10,000) and annual expenses of between 0.1 percent and 0.3 percent on the ExchangeTraded Funds (ETFs) in which the money would be invested. Assuming a weighted 

average expense of 0.2 percent and a weighted average bid-ask spread of 0.1 percent, the 

saver will have paid approximately $130 in total costs at the end of 10 years, and the 

investor’s balance will be approximately $7,980.

● Finally, the investor who prefers face-to-face interaction could hire a fee-only planner 

who charges an hourly fee. Assuming the investor pays an hourly rate of $250 for an 

hour of the planner’s time, and the planner structures the investor’s account with the 

same ultra low cost ETFs discussed above (weighted average expense ratio of 0.2 percent 

plus a weighted average bid ask spread of 0.1 percent), the investor will have paid 

approximately $380 in total costs at the end of 10 years, and the investor’s balance 

will be approximately $7,580. 

Thus, a retirement saver could pay significantly different amounts for a one-time $5,000 

investment over 10 years, depending on what advisory services are used. Those costs can range 

from approximately $130 for a robo-adviser to $1,020 for a broker. And, the higher the cost, the 

lower the retirement saver’s ultimate portfolio balance, with the broker-sold funds resulting in 

substantially lower final balances compared to balances that result from working with a roboadviser or fee-only financial planner. 

Retirement savers have even more options when they have larger amounts to invest. 

Consider, for example, the options available to an individual who has just left her job and has 

$100,000 saved in the company 401(k) plan. Often, the individual’s best option will be to leave 

 

66 These examples were developed using the FINRA mutual fund expense calculator and actual funds available in 

the market today.
24

the money in the 401(k), where the plan sponsor is likely to have negotiated access to 

institutional shares with expenses that are lower than those available in the retail market.

 

● Assume, for example, that a worker is paying a 0.58 annual expense ratio on her 401(k) 

investments, which was the average cost of a 401(k) stock fund in 2013, according to the 

Investment Company Institute, and receives a 5 percent annual rate of return. If she 

leaves the money in her 401(k) for 20 years, she will pay approximately $18,400 in total 

costs, and her balance will be approximately $236,200 at the end of that time. 

● Few broker-dealers could match those low costs, yet many if not most would not hesitate 

to recommend that she roll her money over into an IRA. Assume, for example, that the 

broker recommends A shares of the actively managed mutual fund discussed above with 

a 0.99 percent expense ratio. With $100,000 to invest, the investor would qualify for a 

reduced front load of 3.75 percent. At the end of 20 years, the investor will have paid 

approximately $32,500 in total costs and the investor’s balance will be approximately 

$209,500. That’s $14,200 more in fees than the investor would have paid if she’d left the 

money in her 401(k) plan, and it leaves her with $26,700 less in her retirement account.

● Even if the broker recommends A shares of a relatively low-cost actively managed fund, 

with an expense ratio of 0.75 percent, the investor would pay $26,000 in total costs, and 

the investor’s balance will be approximately $220,400 after 20 years. While this is a 

significant improvement, it still would cost the investor approximately $7,600 more than 

she would have paid if she had left the money in her 401(k) and would leave her with a 

total balance that is approximately $15,900 lower than she would have achieved staying 

in the plan.

● If, on the other hand, the broker were to recommend C shares with an expense ratio of 

1.74 percent (including a 100 basis point annual 12b-1 fee), the investor will have paid 

approximately $48,400 in total costs after 20 years, and the investor’s balance will be 

approximately $187,400. That’s nearly $30,000 more in fees than she would have paid if 

she left the money in her 401(k), lowering her account balance by approximately 

$48,900. 

Not every rollover exposes the investor to higher costs, however. A rollover into a 

portfolio of very low-cost no load index funds could save the investor money, particularly if the 

investor is in a 401(k) plan with higher than average costs. So could advice from either a roboadviser or low-cost fee-only adviser.

● Assume the investor uses Betterment, another robo-adviser that puts its clients into a 

portfolio of very low-cost ETFs. Betterment charges a 0.15 percent management fee for 

accounts over $100,000. If it implements through a portfolio of ETFs with weighted 

expenses of 0.2 percent and weighted bid-ask spread of 0.1 percent, the investor will have 

paid approximately $11,500 in total costs after 20 years, and the investor’s balance 

will be approximately $247,000. Thus, the investor who rolls over her 401(k) into an 

account at Betterment could actually save $6,900 relative to what she would have paid in 
25

fees if she left the money in her 401(k), potentially increasing her total balance by 

approximately $10,800.

● An investor who chose to roll over her 401(k) into an IRA based on advice from a 

planner who charges an hourly fee could also potentially reduce her costs and increase 

her account balance. Assuming that the investor pays an hourly rate of $250 per hour and 

spends three hours each year with the planner, and further assuming that the investor 

invests in a portfolio of low-cost ETFs, the investor could expect to pay roughly $15,000 

for the advice over 20 years and $6,720 in fund expenses. If the investor paid for the 

advice out-of-pocket, their total account balance at the end of 20 years would be about 

$255,000. 

As these examples help to illustrate, not only is it possible to offer affordable advice 

under a fiduciary standard, but advice from a fiduciary will often be significantly more 

affordable than non-fiduciary advice when the total costs to the investor are taken into account. 

Finally, we made all these comparisons using fairly standard costs for brokerage 

recommendations. If the broker or insurance agent recommended an annuity, which often 

combine very high commissions with very high annual expenses, the differences in affordability 

of fiduciary and non-fiduciary advice would be that much greater. Small savers who need to 

make every dollar count when saving for retirement would benefit most from a rule that stands to 

reduce excess costs such as these.

E. A Well-designed Rule Can Harness Market Forces to Benefit, Rather than Harm, 

Retirement Savers.

In discussions of the proposed rule, much of the focus has been on how it would change 

interactions between retirement savers and the financial professionals they turn to for advice. Its 

potential to change the way financial professionals make decisions about what investments they 

recommend is certainly a vitally important aspect of the rule proposal. But at least as important is 

the rule’s potential to change the way product sponsors compete, and specifically its potential to 

harness market forces to benefit, rather than harm, retirement savers. Currently, some 

investment product sponsors compete based on cost and quality. This is evident from the fact 

that, in any category of investments you consider, there are options available that offer a high 

quality investment at a highly reasonable price. And some financial advisers, motivated by their 

customers’ best interests, recommend those investments. It is also true, however, that in every 

category of investments, there are options available that offer a low-quality or mediocre 

investment at a very high price. And some financial advisers, motivated by a host of financial 

and other incentives, recommend those options to their customers. They are able to do so legally 

under a regulatory system that requires them to make suitable, but not best interest, 

recommendations.

By imposing a best interest obligation on advisers, and backing it with tough restrictions 

on practices that undermine that standard, the DOL rule proposal has the potential to change the 

terms on which product sponsors compete. Those that currently compete by offering lucrative 

financial incentives to sales-based advisers will have to adapt or risk losing market share under a 

rule that requires investment products to compete based on serving the best interests of the 
26

retirement saver. Those that already offer a high quality investment product at a reasonable price 

would be rewarded. Increased cost competition should help to bring down excess costs across the 

market, and inferior investments that fail to make substantial improvements in quality should 

eventually be culled from the market. That one change has the potential to deliver dramatic 

benefits to investors in the form of reduced costs, reduced exposure to unnecessary risks, and 

improved long-term performance.

II. Conflict of Interest Rule

A. CFA Strongly Supports Proposed Changes to the Definition of Fiduciary Investment 

Advice.

As discussed above, the current regulatory definition of fiduciary investment advice 

includes a five-part test that dramatically narrows the definition beyond what Congress intended 

when it enacted ERISA. This problem is exacerbated by the current staff interpretation that 

rollover recommendations do not constitute fiduciary investment advice under ERISA. The result 

is that services that retirement savers perceive and rely on as advice, including recommendations 

regarding the most important financial decisions many will ever make, fall outside the regulatory 

protections Congress intended to provide when it imposed a strict fiduciary duty on investment 

advice to retirement plans and plan participants. Sales-based advisers, including broker-dealers 

and insurance agents who are not subject to a fiduciary duty under applicable non-ERISA 

regulatory regimes, are able to exploit these gaps in ERISA regulations to make 

recommendations to retirement savers that place their own financial interests ahead of those of 

their customers. All too often, workers’ and retirees’ ability to afford a secure and independent 

retirement is put at risk by conflicted advisers’ recommendations to invest in high-cost 

retirement investments that suffer subpar performance and expose the saver to unnecessary risks. 

A crucial first step to address this problem is to revise the definition of fiduciary 

investment advice under ERISA to bring that definition into better alignment with the statute 

upon which it is based. For the most part, the revised definition proposed by DOL does just that. 

We are particularly encouraged that the proposed rule replaces the five-part test with a functional 

definition of investment advice and that it clearly and unequivocally covers recommendations 

with regard to rollovers. Both are elements we had previously identified as critically important to 

the rule’s effectiveness. Our one concern, discussed further below, is its inclusion of a 

requirement that the advice be provided “pursuant to an agreement, arrangement, or 

understanding that the advice is individualized or specifically directed to the recipient for 

consideration in making investment or investment management decisions regarding plan assets.” 

(emphasis added) Absent further clarification from DOL, we are concerned that this requirement 

could be used by conflicted advisers in the same way that the current “mutual understanding” 

requirement is used to evade their fiduciary obligations to retirement advice recipients. 
27

1. The rule proposal appropriately defines the conduct that would constitute fiduciary 

investment advice.

The proposed rule enumerates four categories of advice that would constitute investment 

advice subject to a fiduciary duty absent a carve-out and if provided in return for direct or 

indirect compensation. They are:

● recommendations regarding the advisability of “acquiring, holding, disposing of 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; 

● recommendations regarding the management of securities or other properties, including 

recommendations as to the management of securities or other property to be rolled over 

or otherwise distributed from the plan or IRA; 

● an appraisal or fairness opinion regarding the value of securities or other property if 

provided in connection with a specific transaction involving the acquisition, disposition, 

or exchange, of such securities or other property by the plan or IRA; and

● recommendation of a person to provide any of these services for compensation.

In addition to requiring that the financial professional be compensated for the advice, the 

definition specifies that the recommendations must be “directed to a specific recipient for 

consideration in making investment decisions.” 

In perhaps the most significant of several improvements in the rule over the original 2010 

proposal, it makes clear that recommendations regarding whether to take a distribution of 

benefits or move money out of a retirement plan would be considered fiduciary investment 

advice, as would advice with regard to how to invest any money that is rolled over or otherwise 

distributed from a plan. As we have noted many times, decisions regarding whether to move 

money out of a retirement plan and how to invest the funds when a rollover is elected are among 

the most important and challenging decisions that retirement savers are likely to face. Those 

who are early in their careers can lose out on tens or hundreds of thousands of dollars in 

retirement savings if they choose unnecessarily costly investments that erode their savings over 

time. Those at or near retirement face even greater risks, since they have little ability to recover 

from mistakes that could materially affect their quality of life in retirement. Moreover, as 

discussed above, this is the point not just of ultimate vulnerability for the retirement saver, it is 

also the point of maximum risk, since it is often the first time average workers and retirees have 

sufficient savings amassed to make them attractive targets for financial advisers eager to profit at 

their expense. It is for this reason that including advice about rollovers and benefit distributions 

in the definition of fiduciary investment advice is of such crucial importance. We applaud the 

DOL for making this important improvement to the rule proposal and urge the Department not to 

waver on this point in the face of self-interested industry lobbying to scale back the scope of the 

rule.
28

2. The revised definition is a functional definition that is consistent with the securities 

law definition of investment advice.

The revised definition is a functional definition that closely resembles the broadly 

inclusive securities law definition of investment advice but without its limitation of applying 

only to securities transactions. It makes the same distinction made under the securities laws 

between generalized information and particularized recommendations.67 It does this, first and 

foremost, by equating recommendations with advice. This equation of recommendations with 

advice is consistent with how financial firms portray themselves and their services, and it is 

consistent with how investors perceive those services. 

It has been many years since broker-dealers routinely labeled their representatives as 

sales reps or insurance companies routinely called their annuities salespeople insurance agents. 

Instead, over the last several decades, broker-dealer registered representatives, insurance agents 

and others have increasingly adopted titles such as “financial advisor,” “financial consultant,” 

and “financial planner” to convey to prospective customers that they offer services that go 

beyond mere sales recommendations. Moreover, these “advisers” typically label their 

recommendations as investment planning and retirement planning and market those services as if 

they were designed to put the customer’s interests first. We first commented on this 

phenomenon in a letter to the SEC in 2000 in which we urged the agency to close the loophole 

that enabled brokers to market themselves as advisers without being regulated accordingly, but 

the practice was at least a decade old at that time.68 PIABA documents similar practices today in 

a report that contrasts financial firms’ advertising practices with their claims regarding their legal 

obligations in arbitration.69 Furthermore, survey after survey has shown that investors do not 

distinguish between the sales recommendations they receive from broker-dealers and insurance 

agents and the advice they receive from fiduciary advisers.70

This approach of equating individualized recommendations with advice is also an 

approach that has received broad support in the context of SEC fiduciary rulemaking. In its 

comment on the SEC’s Section 913 study, for example, SIFMA proposed a definition of 

investment advice that would capture “investment recommendations that are provided to address 

the objectives or needs of a specific retail customer after taking into account the retail customer’s 

specific circumstances.”71 As we noted in a subsequent comment to the SEC, as long as it 

 

67 An investment adviser is defined under the Investment Advisers Act of 1940 as someone who is in the business of 

giving advice about securities for compensation. Any form of guidance or recommendation regarding specific 

securities, classes of securities, the advisability or inadvisability of investing in securities, and even advice about the 

selection or retention of an investment adviser would be considered investment advice under the Act.

68 January 13, 2000 letter from CFA Director of Investor Protection Barbara Roper to SEC Secretary Jonathan Katz 

regarding File No. S7-25-99, Certain Broker-Dealers Deemed Not to be Investment Advisers, http://bit.ly/1Ie0V6U. 

See, in particular, the discussion on pages 7-12.

69 Peiffer, Joseph C. and Lazaro, Christine, “Major Investor Losses Due to Conflicted Advice: Brokerage Industry 

Advertising Creates the Illusion of a Fiduciary Duty,” Public Investors Arbitration Bar Association Report, March 

25, 2015, http://bit.ly/1FW5H7p. 

70 See discussion below under Seller’s Carve-Out.

71 Letter from Ira D. Hammerman, Senior Managing Director and General Counsel, Securities Industry and 

Financial Markets Association, to Elizabeth M. Murray, Secretary, Securities and Exchange Commission, regarding 

Study Regarding Obligations of Brokers, Dealers, and Investment Advisers; Exchange Act Release No. 62577; 

Investment Advisers Act Release No. 3058, File No. 4-606, Aug. 30, 2010, http://1.usa.gov/1LnVQM1. 
29

captures all recommendations that a reasonable investor would view as being intended to address 

their objectives and needs based on a consideration of their circumstances, and all services that a 

broker describes and markets as advisory services, such an approach ought to function 

reasonably well.72

3. FINRA guidance offers a sound approach to determining what constitutes a 

recommendation and, thus, fiduciary investment advice.

In determining exactly what constitutes a recommendation, DOL has looked to guidelines 

issued by FINRA to help brokers determine whether a particular communication constitutes a 

recommendation. While the determination of whether a recommendation has been made will 

always be based on the particular facts and circumstances, we agree with the Department that 

FINRA guidance provides useful standards and guideposts for distinguishing investment 

education from investment advice under ERISA. The most directly relevant portion of the 

FINRA guidance states:

“An important factor ... is whether -- given its content, context and manner of 

presentation -- a particular communication from a firm or associated person to a customer 

reasonably would be viewed as a suggestion that the customer take action or refrain from 

taking action regarding a security or investment strategy. In addition, the more 

individually tailored the communication is to a particular customer or customers about a 

specific security or investment strategy, the more likely the communication will be 

viewed as a recommendation. Furthermore, a series of actions that may not constitute 

recommendations when viewed individually may amount to a recommendation when 

considered in the aggregate.”

This guidance includes four key points that we believe should inform DOL policy with 

regard to what constitutes a recommendation: 

A Call to Action: Inclusion of some form of call to action is key to distinguishing advice 

from education. So, for example, general information about asset allocation would not be 

considered advice; a specific recommendation to invest in a particular fund or set of 

funds in order to achieve a particular asset allocation would be advice. A 

recommendation not to act, not to purchase or sell a particular investment, or not to 

rollover a retirement account balance would also be considered a recommendation under 

this interpretation.

Particularized for a Specific Client: Unless surrounding circumstances dictated otherwise, 

a generally favorable statement regarding a particular investment or type of investment

would not typically constitute investment advice. A statement that the investment would 

be a good option in light of the individual’s particular circumstances typically would 

constitute advice. The fact that the adviser might make the same recommendation to more 

than one client would not contradict the interpretation that the advice was particularized 

if, in each case, the client reasonably believed that the recommendation was directed at 

them and based on their particular circumstances.

 

72 CFA July 2013 SEC Comment Letter, at page 8.
30

Considering Actions in the Aggregate: In considering whether something constitutes a 

recommendation, and thus fiduciary investment advice under ERISA, it may be necessary 

to look at a series of actions to determine whether, taken together, they would reasonably 

be viewed as including a call to action or being particularized to a specific client. 

Reasonable Expectation: An overarching principle of the FINRA guidance is that how the 

communication is likely to be reasonably perceived by the client is of central importance. 

If the client would be likely to perceive a communication as a call to action or as 

particularized to their circumstances, that should be enough to trigger the definition. 

There is the added benefit that adopting an approach consistent with FINRA guidance would 

minimize inconsistencies in regulatory approaches for retirement and non-retirement accounts. 

Should the SEC eventually live up to its pledge to adopt a fiduciary standard for broker-dealers 

when they provide personalized investment advice to retail clients, it would presumably be based 

on a definition of investment advice that closely resembles what DOL has proposed here.

4. DOL should clarify that the stipulation that the advice must be delivered “pursuant to 

an agreement, arrangement, or understanding” does not require mutual agreement.

The rule proposal stipulates two conditions that would determine whether 

communications that otherwise fit the definition of investment advice would be considered 

fiduciary investment advice under ERISA. The first comes into play where a financial 

professional represents that he or she is a fiduciary with respect to the advice. This is simple 

common sense. A financial professional who communicates to clients that he or she is acting as 

a fiduciary must be held to that standard. To do otherwise would be grossly misleading, would 

effectively allow and promote misrepresentations, and would be contrary to principles of 

estoppel. Where no such representation exists, the rule states that, to be considered fiduciary 

investment advice, the advice must be provided “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 recipient for consideration in making investment or management 

decisions with respect to securities or other property of the plan or IRA.” As noted above, we 

believe this provision could be misinterpreted to recreate the “mutual agreement” loophole that 

provides one of the key means by which conflicted advisers evade their fiduciary obligations.

The discussion of the issue in the proposing release strongly suggests that this is not the 

Department’s intention. The release suggests, for example, that this is intended to ensure that, 

“recommendations made to the general public, or to no one in particular,” would not be treated 

as investment advice and thus to address “concerns that the general circulation of newsletters, 

television talk show commentary, or remarks in speeches and presentations at financial industry 

educational conferences would result in the person being treated as a fiduciary.” The release 

goes on to state that, “The parties need not have a meeting of the minds on the extent to which 

the advice recipient will actually rely on the advice, but they must agree or understand that the 

advice is individualized or specifically directed to the particular advice recipient for 

consideration in making investment decisions.” The proposing release provides further 

clarification that, “advisers could not specifically direct investment recommendations to 
31

individual persons, but then deny fiduciary responsibility on the basis that they did not, in fact, 

consider the advice recipient’s individual needs or intend that the recipient base investment 

decisions on their recommendations. Nor could they continue the practice of advertising advice 

or counseling that is one-on-one or that a reasonable person would believe would be tailored to 

their individual needs and then disclaim that the recommendations are fiduciary investment 

advice in boilerplate language in the advertisement or in the paperwork provided to the client.”

While this additional commentary is reassuring, the regulatory language does appear to 

leave the door open to evasion. Use of the term “agreement” by definition suggests some degree 

of mutuality. And, while the release makes clear that advisers could not continue their current 

practice of using boilerplate disclosures to disclaim fiduciary responsibility, it leaves open the 

possibility that some form of non-boilerplate disclosure might suffice. We strongly urge the 

Department to remove any ambiguity on this point and clearly state that, for advice to be 

considered fiduciary investment advice under ERISA, it is enough that a reasonable person under 

the same circumstances would perceive the advice to be particularized or specifically directed to 

them for consideration in making investment or management decisions.

5. The Department should clarify that firms can market their services without 

necessarily triggering the definition of fiduciary investment advice.

Some commenters have raised the concern that firms would not be able to market their 

services without triggering the definition of fiduciary investment advice. While we believe these 

concerns have been exaggerated, there is enough ambiguity on the point to justify a clarification. 

Specifically, the Department should make clear that basic marketing of advisory services does 

not constitute fiduciary investment advice unless it also includes recommendation of a specific 

course of action regarding the advisability of “acquiring, holding, disposing of or exchanging 

securities or other property” or a recommendation regarding the management of securities or 

other properties. This potential to combine marketing and advice is most likely to arise in the 

context of a rollover recommendation, where the recommendation to hire the adviser is 

contingent on rolling money out of a 401(k) and under their management. In such 

circumstances, the rule should make clear that any recommendations included in marketing 

messages regarding whether to rollover assets or how to invest such assets would still be 

considered fiduciary investment advice.

B. CFA Generally Supports the Carve-Outs from the Definition of Fiduciary Advice 

Provided in the Proposed Rule.

The rule proposal provides several carve-outs from the definition of fiduciary investment 

advice. The most significant of these from the point of view of individual retirement savers are 

the education carve-out and the seller’s carve-out, both of which have been significantly 

improved since the 2010 proposal, and the platform provider carve-out. 
32

1. The education carve-out appropriately preserves financial firms’ ability to offer bona 

fide education while ensuring that specific investment recommendations are 

classified as advice.

The Department has long recognized the distinction between general education and 

specific investment advice and both maintains and reinforces that distinction in the current rule 

proposal. As is the case under current rules, the proposal includes an explicit carve-out from the 

definition of fiduciary investment advice for bona fide retirement investor education. By 

incorporating and largely maintaining the education carve-out framework that the Department 

issued in 1996 in Interpretive Bulletin (IB 96-1), the proposal ensures that firms and advisers will 

be able to provide significant amounts of information and materials to retirement investors 

without being subject to a fiduciary duty. At the same time, the Department narrows the current 

policy in one important way: it classes as advice online interactive tools and asset allocation 

models that direct the user to specific investments. We agree that such tools are appropriately 

regulated as advice. At the same time, however, we believe adjustments can and should be made 

to preserve the benefits of such tools while protecting against the risks.

According to the terms of the education carve-out, the definition of fiduciary investment 

advice will not be triggered as long as an adviser or firm provides to a retirement saver general 

educational information and materials and not a specific recommendation or specific alternatives 

upon which to act. Educational information and materials subject to the carve-out are divided 

into four broad categories: (i) plan information; (ii) general financial, investment and retirement 

information; (ii) asset allocation models; and (iv) interactive investment materials. The proposed 

regulation also states that there may be other examples of information, materials, and education 

services which, if furnished, would not constitute investment advice or recommendations within 

the meaning of the proposed rule. Thus, the types of information that may constitute permissible 

investor education are very broad in scope, reflecting the DOL’s recognition of the importance of 

providing retirement savers with materials that can help them make better informed retirement 

decisions. 

The proposal further makes clear that the education carve-out is available irrespective of 

who provides the information, the frequency with which the information is shared, the form in 

which the information and materials are provided, or whether an identified category of 

information and materials is furnished or made available alone or in combination with other 

categories of investment or retirement information and materials, or the type of plan or IRA 

involved. As a result, the focus of the carve-out is appropriately on the content of the information 

provided rather than the form in which it is presented or its method of delivery. 

In clarifying the line between bona fide education and investment advice, the DOL has 

offered an important change from IB 96-1 with respect to the treatment of certain website tools 

used by financial firms to help savers identify appropriate funds. Many financial firms offer 

website tools that ask retirement investors to provide specific personal information, including 

how much money they want to invest, their investment goals, time horizon, and risk tolerance. 

Based on the personal information that the retirement investor inputs, the saver is provided a 

“model portfolio,” sometimes also referred to as an “Action Plan.” Such “model portfolios” or 

“Action Plans” include various percentages of different asset categories with specific investment 
33

illustrations populating each of the asset categories. For example, an asset allocation model may 

recommend that an investor hold 15 percent of her portfolio in an international value fund, and 

populate the international value category with JPMorgan International Value Fund to illustrate 

how the investor could implement that position. The investor is then presented with the option of 

hitting an “Act Now” button to implement that “model portfolio” or “Action Plan.”

Current policy under IB 96-1 treats these tools as education rather than advice, so long as 

the results are accompanied by a statement indicating that other investment alternatives having 

similar risk and return characteristics may be available and identifying where information on 

those investment alternatives can be obtained. However, the DOL has expressed the concern that, 

even when accompanied by a statement that other investment alternatives are available, the act of 

identifying specific investment alternatives functions as a tailored, individualized investment 

recommendation. Moreover, without adequate protections against potential abuse, these tools 

could be used to effectively steer users to particular investments based on criteria other than the 

best interests of the retirement saver. The GAO identified this as a problem in a 2011 report, 

stating: “For example, although investment education is defined as generalized investment 

information, providers may highlight their own funds as examples of investments available 

within asset classes even though they may have a financial interest in the funds. According to 

industry experts, participants perceive education as investment advice. Thus, participants may 

not understand that the provider is not a fiduciary adviser required to act solely in participants’ 

best interests.”73

We agree with the assessment of both the DOL and the GAO that an investor would 

reasonably view these types of tools, not as general education, but as providing them with a 

recommendation that is specifically directed at them, that is based on their personal 

circumstances, and that is clearly designed to be acted upon. In other words, these tools clearly 

meet the definition of fiduciary investment advice the department has proposed. We also share 

the DOL’s concern that asset allocation models and interactive investment materials could be 

used to steer savers to particular investments without regard to the best interests of the saver. 

Some firms design their interactive tools with care, based on objective criteria and rigorous 

methodologies. As long as the tools are categorized as education, however, there is no 

regulatory mechanism available to ensure that this is the case. Instead, a firm could design its 

model to favor certain investment options whose sale ultimately benefits the firm rather than the 

investor. This concern is especially pronounced in the retail context, where a firm could steer 

retirement investors to proprietary products that enhance the compensation paid to the firm or to 

third-party products that provide the highest revenue-sharing payments to the firm. 

Some industry participants have urged the DOL to withdraw its proposed change to IB 

96-1, arguing that the tools they offer can be useful to retirement investors and the rules would 

inhibit their use. One problem is that, because they constitute online-only advice, the tools do not 

qualify for the best interest contract exemption. While we agree that these tools, if properly 

designed and with appropriate safeguards, can in fact be useful, we disagree with industry’s 

proposed solution. Simply maintaining the status quo does not adequately address the very real 

threat that these tools could be used in ways that are not in users’ best interests. This is of 

 

73 Government Accountability Office, 401(k) Plans: Improved Regulation Could Better Protect Participants from 

Conflicts of Interest, January 2011, http://1.usa.gov/1gJXDy2. 
34

particular concern if they are used in conjunction with rollover recommendations or advice to 

IRA investors more generally. That said, we do encourage DOL to adopt an approach that 

preserves the benefits of these tools while protecting against potential abuses.

In developing an approach to achieve that goal, we think it is appropriate to distinguish 

between the plan and IRA contexts. In the plan context, which is the only context in which IB 

96-1 currently applies, a plan fiduciary has already selected the menu of investment options for 

the plan participants to invest in. That selection process must be made according to a duty of 

prudence and loyalty. As a result, any steering by an asset allocation model would be contained 

within, and therefore constrained by, an already approved menu of investment options. And, as a 

practical matter, because most plans do not have a significant number of investment options for 

each asset category, an asset allocation models’ ability to steer retirement savers to a certain fund 

would likely be further constrained, particularly in the case when only one fund meets each asset 

category. The exception is where the plan includes a brokerage menu, where the plan participant 

has access to a broader universe of investment options. That exception aside, the protections that 

exist within the plan context decrease both the probability and the scope of the harm that asset 

allocation models could cause retirement savers.

However, no analogous protections for retirement investors exist in the IRA context, 

including with regard to rollovers. Because there is no initial narrowing of investment options by 

a fiduciary, asset allocation models would be free to present illustrations using whatever 

investment options benefit the firm designing and implementing the model, regardless of 

whether those options are in the investor’s interests. Should that information qualify as 

education, it would be removed entirely from any fiduciary protections. Doing so would recreate 

the very problem that the DOL is attempting to solve -- allowing firms to make 

recommendations that are reasonably viewed by recipients as investment advice but which aren’t 

subject to appropriate protections. Even cautionary disclosures about the availability of other 

investment alternatives would be unlikely to mitigate the harm that retirement investors would 

experience if asset allocation models were allowed to identify specific investment alternatives 

without being subject to appropriate safeguards. 

We believe the rule can and should be adjusted to preserve the benefits of these tools 

while constraining the risks. Recognizing the important distinctions between the plan and retail 

contexts, one possibility would be to retain IB 96-1 in its current form for use exclusively in the 

plan context and only where there is a limited menu of investment options (i.e., not in 

combination with a brokerage window). A different approach would need to be adopted for the 

retail context. This could include, for example, allowing such tools to be offered in compliance 

with the best interest contract exemption.

We understand, however, that the DOL has expressed a preference for treating equally 

the information that’s provided in the plan and retail contexts. To accommodate this preference, 

one option would be to allow asset allocation models to identity specific investment alternatives, 

but only if all available alternatives within an asset class under the plan or IRA are listed and 

none is preferenced. If this approach were adopted, investors would be unlikely to view the 

tool’s response as a tailored, individualized investment recommendation for action. On the other 
35

hand, the tools would arguably lose much of their value, at least in those circumstances where 

dozens of funds, or more, might be listed in each asset class. 

A different, and in our view better, approach would be to adapt the requirements of the 

Pension Protection Act regarding online tools to fit this purpose. The PPA appears to include the 

essential requirements to ensure that recommendations are based on appropriate criteria. For this 

approach to work, the tools should be permitted to be used either as online only tools or in 

conjunction with advice from an adviser. We encourage the DOL to consider whether this or a 

similar approach could be adopted that would preserve the benefits associated with these tools 

while significantly reducing the risk that they would be misused to steer retirement savers into 

less than optimal investment options.

2. We commend the DOL for proposing a narrow seller’s carve-out that applies only in 

the large plan context, and we urge the DOL to maintain this framework in a final 

rule. 

The rule proposal includes an explicit carve-out from the definition of fiduciary 

investment advice that allows a financial adviser to make sales recommendations to a fiduciary 

of a large employer-sponsored plan without being subject to a fiduciary duty. There are two 

alternative ways in which an adviser can claim relief under the proposed seller’s carve-out, one 

for plans with 100 or more participants and one for plans with at least $100 million in assets. 

● Under the first alternative, an adviser can provide a sales recommendation to a plan 

fiduciary whose plan has 100 or more participants only after the plan fiduciary has 

provided a written representation that he or she will not rely on the adviser to act in the 

plan’s best interests, provide impartial investment advice, or give advice in a fiduciary 

capacity. In addition, the adviser must inform the plan fiduciary of the nature of his or her 

financial interests in the transaction and must know or reasonably believe that the plan 

fiduciary has sufficient expertise to evaluate the transaction. These conditions are 

designed to ensure that the plan participants’ interests are ultimately protected. 

● Under the second alternative, an adviser can provide a sales recommendation to a plan 

fiduciary whose plan has at least $100 million in assets without obtaining the written 

representation required under the first alternative. However, the adviser must still 

comply with the other reasonable conditions, discussed above, that are designed to ensure 

that the plan participants’ interests are ultimately protected.

The DOL’s stated purpose for this carve-out is to avoid triggering fiduciary obligations 

on sales pitches that are part of arm’s length transactions where neither side assumes or expects 

that the financial adviser is acting as an impartial trusted adviser, but where the seller is making 

representations about the value and benefits of proposed deals that might otherwise trigger the 

definition of fiduciary investment advice. Large plan fiduciaries who meet the conditions of the 

carve-out are typically financial professionals whose primary responsibilities are to implement 

and run retirement plans for their employees and who therefore, at least in theory, are likely to 

have sufficient financial expertise and sophistication to protect their own interests. Because of 

their heightened expertise and sophistication, they are likely to understand the nature and costs of 
36

sales-related conflicts of interest. Further, they are likely to be able to effectively identify and 

distinguish sales pitches from advice, and protect themselves and plan participants from the types 

of harm that can result when sales pitches are perceived and treated as advice. They are also 

likely to be able to use different financial service providers’ sales pitches to the plan’s benefit, 

forcing providers to compete for their business. Finally, they are likely to be able to 

independently assess the quality of the sales recommendations they receive and make a final 

judgment that benefits the plan participants. 

Because retail investors and small plan fiduciaries typically do not relate to financial 

professionals in ways that fit the “arm’s length” characteristics that the seller’s carve-out is 

designed to achieve, the carve-out is unavailable for them under the proposed rule. Sales 

recommendations to retail investors and small plan sponsors are often presented as impartial 

advice that they should trust, and retail investors and small plan sponsors often rely on those 

recommendations as advice that they should follow. And, because most retail investors and small 

plan sponsors are not financial experts, they are likely to be unaware of the magnitude and 

impact of sales-related conflicts of interest and unable to protect themselves against those 

conflicts. They are also by and large unable to effectively assess the quality of the 

recommendations they receive and take action based on what is in their best interests. Retail 

investors may be particularly at risk because they lack the protection of having a plan fiduciary 

select an initial menu of investment options from which they can invest. 

We wholeheartedly commend the DOL for taking this approach to the seller’s carve-out, 

which is a significant improvement over the approach proposed by the DOL proposed in 2010. 

The 2010 proposal contained an overly broad seller’s exception that would have allowed 

advisers to claim the exception, and escape their fiduciary obligations, so long as they disclosed 

that they were acting in a sales relationship, that their interests were “adverse” to those of the 

retirement investor, and that their recommendations were not intended to be impartial. W. Scott 

Simon, an ERISA fiduciary expert, described the 2010 seller’s exception as the “fiduciary 

exemption that swallows the rule” by allowing current fiduciaries to “absolve” themselves of 

fiduciary obligations even while making personalized recommendations.”74 Mercer Bullard, the 

MDLA Distinguished Lecturer and Professor of Law at the University of Mississippi Law 

School, raised similar concerns when he wrote: “The basis for finding a fiduciary duty is a 

relationship of dependence, whether through trust, informational disadvantage, relative 

incapacity, or some combination thereof that results in potential overreliance on the fiduciary’s 

advice. Simply knowing that a fiduciary has a conflict of interest changes none of the factors that 

make fiduciary standards necessary. It may even exacerbate the client’s overreliance on the 

conflicted fiduciary’s advice if the candid admission of the conflict engenders even greater, but 

still misplaced trust.”75 The effective result of the 2010 proposed seller’s exception would have 

been to create in the retirement investment advice market the same problem that Congress 

intended to fix in the securities market when it enacted Section 913 of the Dodd-Frank Act, 

which authorizes the SEC to impose a fiduciary duty on brokers-dealers when they provide 

personalized investment advice to retail investors. 

 

74 W. Scott Simon, “The Fiduciary Exemption That Swallows the Rule,” MorningstarAdvisor, May 5, 2011, 

http://bit.ly/1TLZPmX.

75 Mercer Bullard, “DOL’s Fiduciary Proposal Misses the Mark,” MorningstarAdvisor, June 14, 2011, 

http://bit.ly/1Ie1NZh.
37

 Extensive evidence demonstrates that retail investors do not understand either the 

distinction between sales and advice or the differences between various types of financial 

professionals, and that disclosure, even when combined with education, is ineffective in 

eliminating this confusion.76 This is understandable since the sellers routinely call themselves 

“financial advisors” and “financial consultants,” describe their services as retirement planning, 

and market those services as if advice were the primary service being offered. While some object 

to this argument as condescending or paternalistic, the supporting evidence is overwhelming. 

In 2005, for example, the SEC commissioned Siegle & Gale, LLC and Gelb Consulting 

Group, Inc. to conduct focus group testing “to understand how investors differentiate the roles, 

legal obligations, and compensation among ... brokers, financial advisors/financial consultants, 

investment advisers, and financial planners.” The purpose of the study was “to provide feedback 

regarding a proposed disclosure statement developed by the SEC.”77 That study found that 

investors: 

● were generally “unclear about the distinctions” among the various titles;

● were generally unfamiliar with the term investment adviser; and 

● assumed that financial advisors and financial consultants (titles typically adopted by 

brokers) provided “a broader scope of long-term planning advice” than brokers.

Study participants also provided feedback on a proposed disclosure intended to alert investors to 

differences between fee-based brokerage accounts and advisory accounts. In general, according 

to the report on focus group findings, “investors found the statement communicates that 

differences might exist, but did not do enough to explain those distinctions ... As a result, 

investors were confused as to the differences between accounts and the implications of those 

differences to their investment choices.” 

Unable to arrive at an approach to disclosure that was likely to be effective, and 

recognizing “that any future regulatory reform would have to be based on a clearer 

understanding of the industry’s complexities,” the SEC commissioned the RAND Corporation to 

conduct a study that could provide the basis for future rulemaking.78 Among the wide-ranging 

study’s key findings: the once-clear functional distinctions between brokers and investment 

advisers had become blurred, investors found it difficult to distinguish between brokers and 

investment advisers, and they tended to view financial advisors and financial consultants “as 

being more similar to investment advisers than to brokers in terms of services and duties.” Even 

when plain English explanations were provided, focus-group participants struggled to understand 

the differences between a fiduciary duty and suitability standard and “expressed doubt that the 

 

76 See, e.g., Hung, Angela A., et al., Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, 

Rand Corporation, Sponsored by the United States Securities and Exchange Commission, January 2008,

http://1.usa.gov/1nePF0L.

77 Siegel & Gale, LLC and Gelb Consulting Group, Inc., Results of Investor Focus Group Interviews About 

Proposed Brokerage Account Disclosures, Report to the Securities and Exchange Commission, March 10, 2005, 

http://1.usa.gov/1MkdujW. 

78 Id. 
38

standards differ in practice.” Moreover, they expected brokers and advisers alike to act in the 

investor’s best interest. 

A 2010 study commissioned by CFA, AARP, North American Securities Administrators 

Association, CFP Board of Standards and the Investment Adviser Association and conducted by 

ORC/Infogroup found similar results.79 For example, 65 percent of 18-34 year olds and 57 

percent of households with $100,000 or more in household income mistakenly thought that 

“insurance agents” have a fiduciary duty to their clients; 70 percent of 45-54 year olds and 62 

percent of college graduates were incorrect in thinking that stockbrokers are held to a fiduciary 

duty; 76 percent of investors were wrong in believing that “financial advisors” are held to a 

fiduciary duty; 34 percent, including 41 percent of 18-34 year olds and 45 percent of African 

Americans, incorrectly thought that financial advice is the “primary service” offered by 

stockbrokers; and another 27 percent believed that “advice and assistance in conducting 

transactions are equally important services offered by brokers.” Only 29 percent understood that 

the primary service of stockbrokers is to “buy and sell stocks, bonds, mutual funds, and other 

investment products on behalf of their clients, and they give only limited advice that is directly 

related to those transactions.”

Some attribute investors’ lack of understanding of these key concepts to their failure to 

make good use of the disclosures provided to them. And, it is true that many if not most investors 

also are likely to ignore disclosures. For example, the RIA cites the 2008 Rand Study’s 

interviews of representatives of brokerage firms who reported efforts to clearly disclose 

conflicts. Several acknowledged that “investors rarely read these disclosures...[F]or many 

investors, the fact that they were given disclosures was seen as meaningless.”80 However, this 

overly simplistic explanation is undercut by the RAND study findings that investors struggled to 

understand differences in the standard of care even after receiving a plain English explanation 

and that investors were typically unable to tell whether their own financial professional was a 

broker or an adviser even after reading brief fact sheets explaining the differences. This is strong 

evidence that, regardless of what disclosures are provided, retail investors are ill-equipped to 

make informed investment decisions by themselves, including the decision of whom to rely on 

for investment advice. 

Moreover, a 2012 SEC study of disclosure effectiveness included a survey by Siegel & 

Gale that tested both investors’ understanding and use of disclosures.81 Siegel & Gale found, for 

example, that: among online survey respondents who recalled receiving a conflict of interest 

disclosure, just over half reported that they fully understood the potential impact on their 

advisory relationship and only a little over half of respondents who said they understood the 

conflicts of interest fully or even somewhat actually took action to protect their interests. There 

was also confusion about how different advisers charge and the unique conflicts that accompany 

different advisers’ compensation models. When investors’ ability to comprehend actual 

 

79 U.S. Investors & The Fiduciary Standard: A National Opinion Survey, ORC/Infogroup, September 15, 2010,

http://bit.ly/1fMAERB.

80 Id; See also Haziza, Mor and Kalay, Avner, Broker Rebates and Investor Sophistication, Sepetermber 2014, 

http://bit.ly/1LmYXDG. 

81 Siegel & Gale, LLC, Investor Research Report, Submitted to the Securities and Exchange Commission on July 

26, 2012, http://1.usa.gov/1MfBbss. 
39

disclosures was tested, the results were even more troubling. For example, having reviewed a 

sample disclosure that begins as follows, “In addition to sales loads and 12b-1 fees described in 

the prospectus, we receive other compensation...,” just over half (54.8 percent) correctly 

answered a question about whether the firm gets compensation other than sales loads and 12b-1 

fees. After reviewing a sample chart providing information on additional payments the firm 

receives from mutual fund companies, only 31.8 percent indicated they definitely knew what the 

term “annual asset fees” means, and another 46.2 percent indicated they thought they knew what 

it means. But survey respondents were generally unable to determine the significance of the 

information provided. 

The DOL discusses at length in its RIA the extensive academic and empirical evidence 

that strongly suggests that disclosure alone is ineffective at mitigating conflicts in financial 

advice. This includes comprehensive research that retail investors are incapable of adequately 

understanding the implications of disclosed conflicts and factoring that understanding into their 

choice of adviser and investments.82 It also cites to evidence showing that conflict disclosures 

can actually have a harmful impact on investors. Behavioral economists have found for example 

that, even where investors are able to pay attention to and understand disclosures regarding 

adviser conflicts, they still may react to disclosures in ways that “backfire,” thus exacerbating the 

harms that can result from these conflicts.83 For example, they might interpret conflict 

disclosures as a sign of honesty or high professional standing, or feel socially constrained from 

questioning their adviser’s integrity or threatening their livelihood. At the same time, their 

adviser may feel “morally licensed” to pursue his or her own interests over the customers’ 

interests after having warned them of the conflicts. One legal academic who has surveyed the 

literature of broker obligations, conflicts, and disclosure concludes that, “disclosure alone is a 

frail tool with which to attack the many ills that arise from blatant conflicts of interest in the 

financial industry.”84

Based on the extensive academic and empirical evidence, the DOL has rightly concluded 

that a rule that relies on disclosure alone to mitigate adviser conflicts, which is what the seller’s 

 

82 See, e.g., Hung, Angela et al., Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, 

Rand Corporation, Sponsored by the United States Securities and Exchange Commission, January 2008,

http://1.usa.gov/1nePF0L; U.S. Investors & The Fiduciary Standard: A National Opinion Survey, ORC/Infogroup, 

September 15, 2010, http://bit.ly/1fMAERB. See also, Prentice, Robert A., Moral Equilibrium: Stock Brokers and

the Limits of Disclosures, Wisconsin Law Review 2011, http://bit.ly/1MD3JKL; 

Chater, Nick et al., Consumer Decision-Making in Retail Investment Services: A Behavioral Economics 

Perspective, Decision Technology Ltd, November 2010, http://bit.ly/1MfFaVW; Robertson, Christopher Tarver, 

Biased Advice, Emory Law Journal, April 12, 2011, http://bit.ly/1MfFhkC; Burke, Jeremy et al., Impacts of 

Conflicts of Interest in the Financial Services Industry, Rand Corporation, February 2015, http://bit.ly/1MfFjJ9.

These are just a few of the many studies showing disclosure, even when combined with education, is ineffective at 

eliminating investor confusion and adequately curing the harms that result from conflicts of interest. 

83 See, e.g., Cain, Daylian, Loewenstein, George, and Sah, Sunita, The Limits of Transparence: Pitfalls and Potential 

of Disclosing Conflicts of Interest, http://bit.ly/1gJYyP6; Cain, Loewenstein and Moore, Don, The Dirt on Coming

Clean, http://bit.ly/1gJYBu8; See also Chater, supra; Francesca, Gino, Brooks, Alison W., and Schweitzer, Maurice 

E., “Anxiety, Advice, and the Ability to Discern: Feeling Anxious Motivates Individuals to Seek and Use Advice,” 

Journal of Personality and Social Psychology, Vol. 102, No. 3, March 2012, pp. 497-512; Nicholas, Dopuch, King, 

Ronald R., and Schwartz, Rachel, “Independence in Appearance and in Fact: An Experimental Investigation,” 

Contemporary Accounting Research, Vol. 20, No. 1, 2003, pp. 79-114.

84 Prentice, Robert A., Moral Equilibrium: Stock Brokers and the Limits of Disclosures, Wisconsin Law Review 

2011, http://bit.ly/1MD3JKL. 
40

carve-out does, would be ineffective, would yield little or no investor gains, and would therefore 

fail to justify the compliance cost associated with requiring increased disclosure. We agree that 

the research is clear: that investors do not understand the different titles that various financial 

professionals use, various financial professionals’ respective roles and legal obligations, or the 

nature and implications of the different relationships they might have with various financial 

professions, including the potential conflicts of interest that exist in those relationships and that 

disclosure fails to remedy any of these gaps in knowledge. With these significant gaps in 

knowledge that cannot be narrowed, most retail investors are unlikely to have the financial 

sophistication necessary to check the quality of advice, detect adviser misbehavior, and 

adequately protect themselves from conflicts. Absent a reasonable basis for believing that 

investors will be able to identify and protect themselves from conflicted advice, a broad seller’s 

exemption in the retail context simply cannot be justified. 

Similar to retail investors, small plan fiduciaries by and large lack the financial expertise 

and sophistication necessary to fully understand sales-related conflicts of interest and protect 

themselves and their employees’ retirement savings from those conflicts, rendering them illsuited for the seller’s carve-out as well. The typical small business owner is focused on surviving 

and being profitable. While many small business owners want to offer their employees a high 

quality retirement plan, they may not have the time or expertise to properly evaluate their various 

investment options. As a result, they often rely on what they reasonably believe to be objective, 

trustworthy advice from financial professionals. There are many firms in the market today that 

offer advice to small business owners under a fiduciary standard. But in some cases what is 

presented as advice is actually a sales pitch. Indeed, by the industry’s own admission, the small 

plan market is one in which “retirement plans are sold not bought.”85

Industry surveys and advertisements acknowledge the fact that small plan sponsors are 

confused about setting up and running their plans. They emphasize that they are there to help 

navigate the many complicated decisions small employers have to make. For example, a 2012 

survey by Fidelity found that 53 percent of the nation’s nearly six million small businesses may 

not have optimal retirement plans that best fit their needs.86 In addition, Fidelity found that 

“many small business owners are struggling to understand the features and benefits of their 

current retirement plans.” The survey of more than 500 small business owners gauged the 

respondents’ understanding of SEP-IRAs, SIMPLE-IRAs and Self-Employed 401(k) plans, and 

the results highlight the education gap that many small business owners face with regard to their 

current plans. When asked a series of basic questions about their retirement plan features and 

benefits, respondents on average answered just 66 percent correctly. 

In response to its findings, Fidelity published a Viewpoints article outlining the basic 

differences in the various plans in order to educate small business owners about their options.87

In the press release announcing the article, Ken Hevert, vice president of Fidelity Investments, 

 

85 See, e.g., Elaine Floyd, “A Quick Guide to Retirement Plans for Small Business Owners,” Parks Capital, 2012, 

http://bit.ly/1Ly6U7H. See also Five Reasons Small Business Owners Should Establish a New 401(k) Plan, 

PayChex.com, August 12, 2013, http://bit.ly/1fYdeKd; Financial advisor guide to selling small business plans, 

American Funds, June 2015, http://bit.ly/1LybbrV

86 Press Release, “Fidelity® Survey Finds More Than Half of Nation`s Six Million Small Businesses May Not Have 

Optimal Retirement Plans,” February 22, 2012, http://reut.rs/1Kgqcg9. 

87 Retirement plans for small businesses, Fidelity Viewpoints, June 3, 2015, http://bit.ly/1RJz1pR. 
41

highlighted the advisory nature of Fidelity’s services: “To ensure small business owners are in 

the best plan, Fidelity works closely with them to evaluate their specific retirement savings goals 

through one-on-one guidance with our investment professionals and educational content online.”

In the article itself, Fidelity offered its services to small business owners looking for help, 

stating: “But what type of retirement plan is the right fit for your business? There are several 

types to choose from and the options can be confusing.” Hevert was quoted in the article as well, 

indicating that small plan sponsors don’t understand their options, can’t independently determine 

what option is best for their unique circumstances, and need help in making those decisions. 

“Many small-business owners say they want to set up a 401(k) plan because that is the plan they 

are most familiar with...However, after reviewing their situation, small business owners often 

conclude that perhaps another plan type, such as a SEP IRA or a Self-Employed 401(k), may be 

more appropriate,” he said. At the bottom of both the release and the article, Fidelity included the 

standard disclaimer in tiny font: “Although consultations are one on one, guidance provided by 

Fidelity is educational in nature, is not individualized, and is not intended to serve as the primary 

or sole basis for your investment or tax-planning decisions.” 

 Similarly, Raymond James advertises on its website that, “For many business owners, the 

question is not ‘Should I implement a retirement plan?’ Rather, it is ‘Which plan is right for my 

business?’ The choices are many: SEP, profit sharing, 401(k), SIMPLE IRA and defined benefit, 

to name a few. This web page is designed to resolve some of the confusion caused by the wide 

range of choices available to business owners like you....What is the right retirement plan for 

your business? The retirement plans discussed here illustrate that there are a wide variety of 

choices available to you as a business owner. With help from your financial advisor – a 

professional committed to your needs – you can choose the plan that best suits your business 

retirement plan needs and objectives. Of course, we cannot offer legal advice to clients. Before 

implementing any plan, you should consult with your tax and/or legal advisors.”88

In both cases described above, the disclaimers are directly contradicted by an overarching 

message that the financial adviser is there to help the business owner cut through the confusion 

and identify the best option for them. A small business person who doesn’t even know his or her 

basic options when setting up a plan is highly unlikely to understand the implications of such a 

disclaimer. After all, everything else in the presentation is designed to send exactly the opposite 

message -- that the information is individualized and is designed to be acted upon. They are just 

as unlikely, in our view, to understand and appreciate disclosures relating to sales-related 

conflicts.

A 2012 GAO report provides further support for the notion that small plan fiduciaries 

lack the expertise and sophistication necessary to protect against advisers’ conflicts of interest.89 

According to its findings, “Small employers and other stakeholders said that plan options and 

administration requirements are frequently complex and burdensome and discourage some small 

employers from sponsoring a plan. For example, some small employers and retirement experts 

said that the number of plan types and features make it difficult for small employers to compare 

and choose plans. Representatives of a plan service provider said that too many plan options 

 

88 Choosing the right retirement plan for your business, Raymond James, http://bit.ly/1IeaItU. 

89 Government Accountability Office, Private Pensions: Better Agency Coordination Could Help Small Employers 

Address Challenges to Plan Sponsorship, March 2012, http://1.usa.gov/1gK1efq. 
42

overwhelmed small employers, making it more difficult for them to choose a plan and, 

ultimately, less likely that they will sponsor one.”90

The report also found that small employers have trouble understanding and carrying out 

their fiduciary responsibilities, and often rely on professionals for advice about what to do. 

According to the report, “A number of stakeholders indicated that understanding and carrying 

out a sponsor’s fiduciary responsibilities with respect to their qualified retirement plans presents 

significant challenges to some small employers.... Some small employer sponsors found the 

selection of investment fund options for their plans particularly challenging. A small employer 

with a 401(k) plan described the difficulties of selecting appropriate investment options, with an 

appropriate balance of risk, for a workforce that includes younger and older workers. A number 

of small business advocates and retirement experts said that not all small employers have an 

adequate understanding of their fiduciary duties and are not always aware of all their 

responsibilities under the law. For example, a retirement expert said that small employers that do 

not consult with plan professionals often lack the time and expertise to understand complicated 

fiduciary rules under ERISA. One service provider explained that some small employers 

mistakenly believe that all fiduciary responsibilities and liabilities are transferred to a service 

provider when they are hired. Another expert noted that some small employers have an 

exaggerated sense of the liabilities that being a fiduciary carries, and may avoid sponsoring a 

plan out of fear of being sued by their employees.”91

In the report’s recommendations section, stakeholders said more education and outreach 

are needed to increase awareness of plan options and requirements. Officials of a service 

provider to small businesses even stated that, “because clients are generally not aware of the 

retirement plan options available to them, the federal government should provide more education 

and outreach to improve awareness of the plan types available and rules that apply to each.”92 

Our experience suggests, however, that education alone is unlikely to be effective. A far more 

effective solution is to ensure that the advice small business owners receive with regard to their 

plans is delivered under a fiduciary duty and consistent with the best interests of plan 

participants. That is best achieved through the approach adopted by DOL in its revised rule 

proposal of limiting the seller’s exemption to large plans. Again, we appreciate the DOL’s 

willingness to reconsider and revise the applicability of a seller’s carve-out, and we strongly urge 

the agency to maintain this approach in a final rule.

3. The platform provider carve-out should be strengthened to better protect against the 

harmful impact of conflicted payments.

The rule provides a broad carve-out from the definition of fiduciary investment advice for 

service providers, such as recordkeepers and third-party administrators, who offer a “platform” 

or selection of investment vehicles to participant-directed individual account plans. Under the 

terms of the carve-out, the plan fiduciaries would be required to choose the specific investment 

alternatives that will be made available to participants for investing their individual accounts. 

Where that is the case, service providers would not be deemed to be acting as investment advice 

 

90 Id. 

91 Id. 

92 Id. 
43

fiduciaries by virtue of marketing or making available such investment vehicles, without regard 

to the individualized needs of the plan or its participants and beneficiaries, as long as they 

disclose in writing that they are not undertaking to provide impartial investment advice or to give 

advice in a fiduciary capacity. We believe this carve-out does not adequately protect against the 

harmful impact of conflicted payments on the selection of platform menu options.

The selection of plan investment menus is vitally important to plan participants. This 

determines whether they will have high quality, low cost options available to choose from when 

they participate in workplace retirement plans. And that in turn can have a dramatic impact on 

the size of retirement nest egg they are able to amass over a career of workplace retirement 

savings. But research has shown that the payments platform providers receive from mutual fund 

companies and other investment product sponsors, and incentives to promote their proprietary 

products, affect the choices they make regarding selection of investment options for their 

platforms and can do so in ways that is harmful to plan participants. 

A 2011 GAO report raised significant concerns regarding the potential harmful impact of 

third-party payments to plan service providers on selection of investment options by those 

service providers. It states: “Several industry experts we spoke with cited third-party payments, 

also known as revenue sharing, as a potential conflict of interest for service providers involved in 

the fund selection process for a 401(k) plan. ... According to industry experts, revenue sharing is 

a widespread practice among 401(k) service providers. As we have previously reported, revenuesharing payments can be used to offset expenses the plan has agreed to pay and thus be costneutral to the plan. However, ... revenue sharing may, depending on the circumstances, also 

create a conflict of interest if it is not structured to be cost-neutral to the plan and may result in 

increased compensation to service providers. Industry experts we spoke with explained that this 

situation creates an incentive for the service provider to suggest funds with higher revenuesharing payments. Because of these conflicts of interest, the service provider may suggest funds 

that have poorer performance or higher costs for participants compared with other available 

funds.”93 The report noted, moreover, that, “The amount of revenue-sharing payments can vary 

considerably, both across investment funds and within a fund through different share classes. 

Documentation we obtained showed revenue-sharing payments from hundreds of share classes 

of different investment funds that ranged from 5 to 125 basis points (bps). Given this variation, 

EBSA field investigators told us that a service provider might only recommend or include fund 

share classes that pay higher revenue sharing and exclude other fund share classes that pay lower 

or no revenue sharing.”

 

A Pension Research Council Working Paper raises similar concerns with regard to the 

harmful impact of conflicts that arise when mutual fund families acting as service providers in 

401(k) plans display favoritism toward their own affiliated funds.94 The study finds that 

“affiliated mutual funds are less likely to be removed from and more likely to be added to a 

401(k) menu. In addition, fund deletions and additions are less sensitive to prior performance for 

 

93 GAO, 401(k) Plans: Improved Regulation Could Better Protect Participants from Conflicts of Interest, January 

28, 2011, http://1.usa.gov/1gJXDy2. 

94 Pool, Veronika K., Sialm, Clemens, and Stefanescu, Irina. “It Pays to Set the Menu: Mutual Fund Investment 

Options in 401(k) Plans,” Pension Research Council Working Paper, May 2015, http://bit.ly/1MfLygb. 
44

affiliated than for unaffiliated funds.” It finds “no evidence that plan participants undo this 

affiliation bias through their investment choices.” On the contrary, the study finds that “the

reluctance to remove poorly-performing affiliated funds from the menu generates a significant

subsequent negative abnormal return for participants investing in those funds.”

These are precisely the sorts of conflicts of interest that this rule is intended to protect 

against. Moreover, the same concerns that apply to small plan fiduciaries’ ability to assess 

conflicts in the context of a seller’s exemption apply equally with regard to services from 

platform providers. And yet, the platform provider carve-out does not even require that these 

conflicts be clearly disclosed, let alone that they be appropriately constrained. We urge the 

Department to revise the conditions of the carve-out to address these shortcomings. Ideally, any 

third-party payments received by service providers relying on the platform carve-out should have 

to be structured to be cost neutral to the plan. At a minimum, the selection of investment options 

should have to be based on neutral criteria and those criteria should have to be disclosed to plan 

fiduciaries, and any financial incentives to favor certain investment products in the selection of 

menu options should have to be clearly disclosed in a consistent manner. We believe these 

changes are necessary and appropriate to ensure that plan participants have access to the highest 

quality investment options.

III. Best Interest Contract Exemption

By closing loopholes in the definition of fiduciary investment advice, the proposed 

conflict of interest rule expands the population of fiduciary advisers to include many whose 

compensation practices do not comport with ERISA’s strict prohibition on conflicted payments. 

The Best Interest Contract Exemption (BICE) is designed to ensure that financial advisers can 

comply with their fiduciary obligations under ERISA regardless of their business model. It 

achieves this in part by borrowing from securities law principles, in particular replacing ERISA’s 

“solely in the interest” standard with a “best interest” standard that relies on mitigation rather 

than elimination of conflicts. The result is a principles-based rule that is both tough and flexible.

In assessing the rule proposal, we have identified certain fundamental features of the 

BICE that are in our view critical to its effectiveness. Chief among them are the following:

● The protections afforded by the rule must be legally enforceable.

● They must include a fiduciary duty to act with prudence and loyalty and in the best 

interests of the customer.

● That obligation must be backed by meaningful restrictions on industry practices that 

encourage recommendations that are not in the best interest of the customer.

● Compensation must be limited to what is reasonable.

Those features must be included in the DOL’s final rule for the agency to make a proper 

finding under section 408(a) of ERISA that this exemption is in the interests of plans and their 

participants and beneficiaries and IRA owners and protective of the rights of participants and 
45

beneficiaries of plans and IRA owners. While there are areas where we believe adjustments can 

and should be made, we believe the proposed BICE meets this standard. Moreover, additional 

provisions of the BICE – such as the enhanced disclosure requirements and additional 

protections for sales from a limited menu of products – reinforce these central components in 

ways that significantly strengthen the rule.

A. The Protections Afforded by the Rule Must be Legally Enforceable.

If the rule is to achieve its goal of providing meaningful new protections to retirement 

savers, it must include a mechanism by which firms and their advisers can be held legally 

accountable for the investment recommendations that they make to retirement investors in both 

the employee benefit plan and IRA contexts. It is especially critical to create legal enforceability 

in the IRA context, because ERISA’s general fiduciary obligations of prudence and loyalty do 

not currently apply in the IRA context. While the Code’s prohibited transaction rules do apply in 

the IRA context, neither IRA owners nor the Secretary of Labor can bring suit to enforce those 

prohibited transaction rules. And the Internal Revenue Service, which does have enforcement 

authority, does not have the resources to provide effective enforcement of the rule.

The BICE achieves this legal enforceability by requiring that the adviser and the 

adviser’s firm enter into a written contract with the retirement saver prior to providing fiduciary 

investment advice. This written contract must affirmatively state that the adviser and financial 

institution are fiduciaries under ERISA or the Code or both with respect to any investment

advice to the retirement investor, that the adviser and financial institution affirmatively agree to, 

and comply with, impartial conduct standards, and that the adviser and financial institution make 

certain warranties. The contract must also contain certain disclosures, discussed below, and not 

contain any prohibited contractual provisions.

CFA strongly supports the contract requirement of the BICE, which is crucial to 

providing legal enforceability, particularly in the IRA market. We recognize, however, that 

financial firms have raised strong objections to the contract requirement, arguing that, at least as 

currently drafted, the requirement is unworkable. Though some of these concerns appear to be 

greatly exaggerated, others appear to be based on at least a grain of truth. We are therefore open 

to considering alternative approaches as long as the end result is a legally binding obligation that 

includes the key components of the BICE.

One concern raised by industry relates to timing. It has been suggested, for example, that 

customers may not be willing to sign a contract before they are ready to implement a financial 

adviser’s recommendations. This could create a chicken-and-egg dilemma, where the adviser 

can’t get a signed contract in place until they have provided recommendations, and can’t provide 

recommendations until a contract has been signed. In our view, it isn’t absolutely crucial that a 

contract be in place before any advice is rendered, as long as the legally binding agreement 

covering all advice rendered is in place before any investment based on that advice is 

implemented. As part of any such contract, the firm and its advisers must be required to represent 

or acknowledge that they are acting in a fiduciary capacity, that they are legally bound by the 

impartial conduct standards and the warranties in the BIC when their recommendations are 

implemented, and those standards and warranties apply retroactively to cover the 
46

recommendations themselves. Under such an approach, retirement investors would have the 

necessary protections in place when it counts, before they act on any advice they receive.

 

 Another argument put forward by many in the financial industry is that getting contracts 

in place with millions of existing retirement advice customers would be virtually impossible. 

Their argument seems to hinge largely on the fact that millions of retirement savers will simply 

fail to respond to requests to sign contracts. Without their signature, firms would not be allowed 

to provide investment advice pursuant to conflicted compensation models. While we recognize 

that requiring retirement savers to sign the BIC has benefits – primarily that it alerts them to the 

legal protections to which they are entitled – it does not appear to us to be crucial to its 

enforceability. Retirement investors are not the “party to be charged” under the law. Rather, it is 

the firm and the adviser who are bound by the terms in the contract. In this respect, the contract 

should be viewed as unilateral in nature, whereby the recommendation is an offer inviting 

acceptance through performance, and the retirement investors’ implementation of that 

recommendation is the acceptance. Alternatively, we think it could be possible to achieve the 

same result without a written contract between the firm, adviser, and retirement saver. Principles 

of estoppel would dictate that if a firm and its adviser represent they are acting in a fiduciary 

capacity and complying with the impartial conduct standards and the warranties in the BIC, and a 

retirement investor justifiably relies on those representations by implementing the adviser and 

firm’s recommendations to her detriment, the firm and its adviser should be estopped from later 

denying fiduciary status or having made those representations. 

 Given that we do not believe retirement investors would have to sign a legal contract for 

that contract to be enforceable, we think the burdens of getting a legally enforceable document in 

place could be streamlined, particularly for existing customers. Existing customers could be 

mailed a change in terms notice outlining the new obligations the firm would be required to 

undertake under the BIC. As long as no new obligations or restrictions were placed on the 

customer, this approach should be acceptable. For new customers, we believe firms are likely to 

have their own reasons to want to get a contract in place, if only to require the customer to sign a 

pre-dispute binding arbitration clause. Where this is the case, the BIC can and should be 

included as part of the other account opening paperwork the customer is required to sign. Where 

this is not the case, the accommodations suggested above with regard to the timing of the 

contract should be sufficient to address any concerns about getting a contract in place with new 

customers.

The approaches suggested above address situations in which the retirement saver has a 

direct relationship with the fiduciary investment adviser. For retirement plan participants, 

however, the retirement saver may have only an indirect relationship with the adviser through 

their employer. Since servicing contracts in the plan context are between a firm and the 

employer, it should be possible to use that contract as the basis for providing plan participants 

with legally enforceable protections under BIC. For example, instead of requiring all the 

different prospective parties to the contract to sign that contract, the firm could name the 

employees as third-party beneficiaries to the contract. Such an approach could significantly 

reduce the burdens of getting a contract in place. In order to put plan participants on notice that 

they are entitled to legal protections under BIC, they could be provided with a series of written 

representations based on the BIC at the time they open an account or (where they are 
47

automatically enrolled) when they receive their first account statement or other paperwork 

related to the account.

The suggestions provided above are not the sole means of getting a legally enforceable 

agreement in place. We encourage the Department to explore various alternatives to determine 

which provide the best combination of workability and legal enforceability. 

B. The Rule Must Include a Best Interest Standard.

Compliance with the BICE requires adherence to certain specified impartial conduct 

standards when providing fiduciary investment advice. These include, first and foremost, an 

obligation to provide advice that is in the best interest of the retirement investor, but also to 

receive only reasonable compensation in light of services provided and to refrain from making 

misleading statements. Failure to comply with these standards would result in loss of the 

exemption, which helps to ensure that they will be taken seriously by financial advisers who rely 

on the BICE. We strongly support these requirements, which are essential to protect against the 

harmful consequences associated with conflicted advice. The impartial conduct standards, 

discussed here, and the required warranties, discussed below, are essential building blocks that 

reinforce each other, creating a framework of meaningful protections that should help to ensure 

retirement investors’ interests are paramount.

 Best Interest Standard: The rule defines best interest advice as advice that reflects the 

care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person 

would exercise based on the investment objectives, risk tolerance, financial circumstances, and 

needs of the retirement investor. This best interest standard effectively mirrors the ERISA 

section 404 duties of prudence and loyalty, which have provided effective safeguards for plans 

and plan participants for forty years. Importing this proven standard into the IRA market will 

provide retail retirement investors with the same, much needed protections.

Importantly, the proposal makes clear that a recommendation is assessed for compliance 

with the best interest standard based, not on the outcome of that recommendation, but on the 

circumstances prevailing at the time the recommendation is made. Thus, hindsight is irrelevant to 

how a recommendation is gauged. This is both appropriate and directly contrary to claims by 

some in the financial industry that the rule exposes advisers to liability based solely on the 

outcome of their investment recommendations. As the Department notes in the proposing 

release, courts have extensive experience interpreting this standard. In general, they focus on 

whether the fiduciary employed appropriate procedures to investigate the merits of the 

recommended investment. Thus, as discussed above, claims that the standard will expose 

advisers to a flood of litigation have no basis in either the regulatory language or past experience 

of those subject to the same standard.

Finally, the rule requires that the advice be made “without regard to the financial or other 

interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.” 

This “without regard to” language is critically important in the context of conflicted advice, 

because it provides concrete protections against an adviser’s recommending a product based on 

personal financial considerations rather than the interests of the customer. Including this 
48

language as part of the impartial conduct standards should help to rein in common industry 

practices that are designed to pressure or incentivize advisers to recommend products for reasons 

other than the best interests of the investor. It is worth noting that, when members of the brokerdealer community express support for a “best interest” standard, they typically omit this crucial 

language, suggesting that the “best interest” standard they support is one that doesn’t actually 

require meaningful changes in current, often harmful business practices.95 However, this same 

language is mirrored in the securities law concept of a best interest standard for fiduciary 

investment advisers as reflected, for example, in Section 913 of the Dodd-Frank Act. Thus, the 

rule’s best interest standard is consistent with the standard that the SEC would apply if it were 

eventually to adopt rules under its Section 913 authority. It is frankly disingenuous for industry 

groups to state that they support a best interest standard based on securities law principles, then 

oppose the very standard Congress identified as appropriate for this purpose.

C. Compensation Must Be Limited to What is Reasonable.

Another critically important component of the impartial conduct standards is the 

requirement that firms agree that their advisers will not make recommendations in which the 

total amount of compensation anticipated to be received by any adviser, the firm, or its affiliates 

will exceed reasonable compensation in relation to the total services provided to the retirement 

saver. As the DOL makes clear, the reasonableness of the fees depends on the particular facts 

and circumstances. Although many in the financial industry have expressed a significant amount 

of bewilderment about what “reasonable compensation” means, how this standard would be 

applied, and how the industry could comply with it, the reasonable compensation standard is in 

fact well-established in law and in practice.

As the DOL notes, the obligation to pay no more than reasonable compensation is long 

recognized under ERISA and the rules promulgated pursuant to ERISA. For example, ERISA 

section 408(b)(2) allows a plan to pay a party in interest for services rendered if several 

conditions are met, including if “no more than reasonable compensation is paid therefore.”96 In 

addition, ERISA section 408(c)(2) states that nothing shall prohibit plan fiduciaries from 

“receiving any reasonable compensation for services rendered.”97 And, shortly after ERISA’s 

passage, the DOL clarified what constitutes reasonable compensation, stating -- just as it has in 

this proposal -- that it “depends on the particular facts and circumstances of each case.”98

Furthermore, the DOL has reiterated its adherence to the reasonable compensation 

standard repeatedly. For example, in a 1997 Advisory Opinion, the DOL stated that if a plan 

service provider receives a payment from a third party, that payment must be taken into account 

in determining whether compensation paid is reasonable.99 Moreover, in a 2002 Field Assistance 

Bulletin, it stated that ERISA’s fiduciary duties require a responsible plan fiduciary, when 

selecting or monitoring service providers, to engage in “an objective process designed to elicit 

 

95 See, e.g., SIFMA, “Proposed Best Interests of the Customer Standard for Broker-Dealers,” June 3, 2015, 

http://bit.ly/1M56eog. 

96 Section 408(b)(2) of the Act, codified as 29 U.S. Code § 1108 - Exemptions from prohibited transactions, 

implemented through 29 CFR Part 2550.408b-2(a)(2), http://1.usa.gov/1TO66i3. 

97 Section 408(c)(2) of the Act, codified as 29 U.S. Code $1108 –Exemptions from prohibited transactions.

98 Id., implemented through 29 CFR Part 2550.208c-2(b)(1) through 2550.208c-2(b)(4).

99 DOL Advisory Opinion 97-15A (May 22, 1997), http://1.usa.gov/1SxjCEb. 
49

information necessary to assess the qualifications of the provider, the quality of services offered, 

and the reasonableness of the fees charged in light of the services provided.”100

The standard strikes an appropriate balance, helping to discipline excessive costs but not 

requiring the lowest cost option in every instance. Experience in the plan context demonstrates 

that the reasonable compensation standard does not necessarily require the lowest cost option. In 

fact, the DOL confirmed this principle when it provided guidance under ERISA section 

408(b)(2), stating, “a fiduciary need not necessarily select the lowest-cost service provider, so 

long as the compensation or fees paid to the service provider are determined to be reasonable in 

light of the particular facts and circumstances.”101 And, as experience in the plan context further 

demonstrates, there is a wide disparity in the costs that plan sponsors and participants pay for the 

services they receive. This has been documented in research by ICI and Deloitte on retirement 

plans’ all-in costs102 and in a 2006 GAO report that examined the various fees associated with 

401(k) plans.103 According to the GAO report, while the DOL’s “most recent in-depth review of 

fees identified some plans with high fees, it determined that they were not unreasonable or in 

violation of ERISA.”

 It is true that in recent years there has been a growth in private litigation relating to 

various 401(k) fee arrangements, but it is too early to tell what effect those cases will have on 

401(k) plan fees more broadly. Because each of those cases is based on its unique facts and 

circumstances, the results may not offer much clarity. But no one expects courts to require plans 

to adopt the lowest cost option in every circumstance. On the other hand, the court cases are 

likely to have a salutary effect on the market, pushing plans to discipline costs so as to ensure 

that they are meeting the reasonable compensation requirement. Those same dynamics would 

benefit retirement investors in the retail market.

Indeed, the real reason behind industry’s expressed concern over this “reasonableness” 

standard is not that it is too vague, in our view, but that it calls into question certain common 

industry practices that drive up costs to retirement savers. As the DOL states, the reasonableness 

of a fee must be considered in relation to the value of the services being provided. Under 

common industry practices, however, an adviser and the adviser’s firm can be paid vastly 

different sums for providing exactly the same services, depending solely on the particular 

investment recommended. This is an inherent feature of a market in which products compete to 

be sold, not bought, and do so on terms that are favorable to the adviser, rather than the investor. 

The rule would help to rein in such practices by prohibiting advisers and their firms from taking 

outsize payments for recommending certain products that go well beyond the reasonable 

compensation justified by the time spent or the difficulty of the analysis behind the 

recommendation. Similarly, a reasonable compensation standard calls into question the common 

industry practice of receiving on-going compensation for a one-time transaction. How, for 

example, would financial advisers justify a one-time recommendation that a buy-and-hold 

 

100 DOL Field Assistance Bulletin 2002-3 (Nov. 5, 2002), http://1.usa.gov/1Mklwt7

101 Preamble to DOL Regulation Section 2550.408b-2, Section B-1.(g) 

102 Press Release, “Retirement Plan Fees Vary with Plan Size and Diversified Equity Holdings, Deloitte/ICI Study 

Finds,” August 20, 2014, http://bit.ly/1Kgd7Gw. 

103 Government Accountability Office, Private Pensions: Changes Needed to Provide 401(k) Plan Participants and 

the Department of Labor Better Information on Fees, November 2006, http://1.usa.gov/1OhH5rO. 
50

retirement investor purchase mutual fund C shares with a one percent 12b-1 fee for the life of the 

investment, when they provide no ongoing account oversight and have no ongoing duty of care?

Some in the industry have urged the Department to bless existing compensation practices 

as inherently “reasonable,” on the grounds that they do not violate existing securities and 

insurance laws and regulations. We strongly disagree. Failure to rein in these harmful practices 

is just one of the many ways in which securities and insurance regulators have failed to provide 

appropriate protections for consumers and investors. The DOL rule offers a welcome antidote to 

their weak and ineffective regulation in this regard. On the other hand, because this requirement 

does take financial firms into new territory, it may be helpful for the DOL to issue guidance as it 

implements a final rule that provides examples of the types of compensation practices the DOL 

would view as running afoul of the reasonable compensation rule.

D. The Best Interest Standard Must Be Backed Up by Restrictions On Industry Practices that 

Conflict with Customers’ Interests.

The best interest standard is, by its very nature, subject to interpretation. In a business 

model replete with conflicts of interest, there will be overwhelming incentives to try to justify 

recommendations that are suboptimal for the retirement investor, but highly profitable for the 

adviser or the firm. The rule proposal recognizes that the key to making the best interest 

standard real for sales-based advisers is reining in the practices that encourage these advisers to 

act in ways that are not consistent with their clients’ best interests. The reasonable compensation 

and “without regard to” language of the impartial conduct standards should help to achieve that 

goal. But another crucial component is the BICE requirement that financial firms contractually 

warrant that they have adopted written policies and procedures that are reasonably designed to 

mitigate the impact of material conflicts of interest that exist with the provision of retirement 

investment advice. 

To comply, firms must identify material conflicts of interest and adopt measures to 

prevent those material conflicts of interest from causing violations of the impartial conduct 

standards. In addition, the financial institution “must state that neither it nor (to the best of its 

knowledge) its Affiliates or Related Entities will use quotas, appraisals, performance or 

personnel actions, bonuses, contests, special awards, differentiated compensation or other actions 

or incentives to the extent they would tend to encourage individual Advisers to make 

recommendations that are not in the best interest of Retirement Investors.” This requirement, 

even more than the best interest requirement itself, will force firms that rely on the exemption to 

take concrete, meaningful steps to eliminate practices that exacerbate potentially harmful 

conflicts. 

These types of firm compensation policies that reward activities that are harmful to 

clients’ interests are rampant in the market today.104 Below are a few examples, taken from 

firms’ Form ADV Part 2A and other public disclosures discussing affiliated broker-dealer 

activities:

 

104 See, e.g., Various Firms’ Payout Grids, OnWallStreet.com, http://bit.ly/1QcCxbj. 
51

● Wells Fargo: “From time to time, we initiate incentive programs for our Associates, 

including FAs.... FAs who participate in these incentive programs may be rewarded with 

cash and/or non-cash compensation, such as deferred compensation, bonuses, training 

symposiums and recognition trips. Portions of these programs may be subsidized by 

external vendors and/or our affiliates, such as mutual fund companies, insurance carriers, 

or investment advisers. Therefore, FAs and other Associates may have a financial 

incentive to recommend the programs and services included in these incentive programs 

over other available products and services we offer.”105

● Edward Jones: “Internal Incentive Programs – We may o-ffer internal incentive programs 

that may provide financial advisors and branch office administrators with an opportunity 

to earn additional compensation or prizes.”106

● USAA: “In particular, an FAI Representative’s eligibility to participate in certain USAA 

bonus plans is dependent upon his or her individual performance rating which measures a 

variety of factors, including...sales of USAA products and services....FAI Representatives 

may also receive non‐ cash rewards, such as team meals or conference participation, for 

meeting individual and/or team performance goals.”107

● Northwestern Mutual: “Your Representative may also receive bonus, transition, retention 

or other compensation ... in connection with the sales and servicing of various 

investment products. The rate of compensation paid to NMIS registered representatives 

increases if revenue generated from the sales and servicing of various investment 

products and advisory services meets or exceeds certain thresholds. As an agent of NM, 

your Representative accrues production credits arising out of the sale of all risk-based 

insurance products in the aggregate, including annuities that are being serviced by an 

advisory program. NM rewards its agents for achieving certain levels of production 

credits with non-monetary rewards and recognition such as being invited to conferences, 

receiving gifts and being given preferential service by the Home Office.”108

● PNC: “From time to time, PNC Investments initiates incentive programs for its 

employees including FAs [Financial Advisors] or other PNC Investments representatives. 

These programs include, but are not limited to, programs that compensate them for 

attracting new assets and clients or for referring business to our affiliates ... and 

programs that reward FAs or other PNC Investments representatives who meet total 

production criteria. FAs or other PNC Investments representatives who participate in 

these incentive programs may be rewarded with cash and/or non‐ cash compensation, 

such as deferred compensation, bonuses, training symposiums and recognition trips. 

These programs may be partly subsidized by external vendors or our affiliates, such as 

mutual fund companies, insurance carriers or money managers. Therefore, our FAs or 

other PNC Investments representatives and other associates may have a financial 

 

105 Part 2A of Form ADV Firm Brochure for: Wells Fargo Financial Planning Services, at 10, March 2015.

106 Understanding How We Are Compensated For Financial Services, at 2, http://bit.ly/1Vlt0ip. 

107 Part 2A of Form ADV Firm Brochure for: USAA Financial Planning Services Insurance Agency, Inc.,

at 5, April 1, 2015. 

108 Part 2A of Form ADV Firm Brochure for: Northwestern Mutual Investment Services, LLC, at 24, April 1, 2015.
52

incentive to recommend the programs and services included in these incentive programs 

over other available products and services that we offer.”109

● UBS: “Financial Advisors also may receive certain awards based on their production 

amount, length of service with UBS, business mix and net new assets. ... In addition, 

Financial Advisors acting as Insured Solutions Consultants ("ISCs") receive additional 

production credits for the sales of certain insurance products.”110

● Schwab: “In addition, from time to time, one or more categories of our representatives 

may participate in short-term, temporary incentive programs focusing on a particular 

class of products or services, including new accounts and new assets to Schwab. ... 

Certain representatives who demonstrate exceptional performance during the year may 

also be eligible to earn an annual trip through Schwab’s Chairman’s Club, or other 

awards. Schwab may develop additional recognition events or programs from time to 

time.”111

● Fidelity: “Fidelity employees may participate in incentive contests and may earn various 

non-cash rewards based on customer investments in products and services and other 

criteria, including but not limited to the number of referrals for particular programs or 

services that they make or customer investments in certain types of products or services. 

Such reward programs will generally rank representatives or teams against other eligible 

representatives or teams and determine the eligibility for rewards based on that ranking. 

Therefore, representatives may have a financial incentive to offer those programs, 

services or products.”112

While not all such incentive programs would necessarily violate the standards, many would. For 

example, some firms set quotas for the sale of certain investment products and base advisers’ 

bonuses or payouts on their success in meeting quotas. Such practices would appear to be a clear 

violation of the rule proposal. Similarly, firms would be hard pressed to justify continued use of 

contests or other incentives to encourage the sale of particular products or product lines. We 

strongly support such restrictions as a necessary step to help ensure that retirement investors no 

longer receive recommendations that are driven by an adviser’s desire to win a contest or receive 

a bonus, rather than the customer’s financial interests.

The rule proposal also tackles the use of differential compensation, which is so central to 

the conflicts that can bias sales-based advisers’ recommendations. Specifically, while firms 

could still pay their advisers differential compensation, those differential payments would have 

to be based on neutral and objective factors, such as the amount of time necessary to research 

and implement the investment strategy, and not just on a desire to promote sales of particular 

investments. This would be a significant improvement from the way compensation is currently 

provided, which creates incentives to sell products that are not in retirement savers’ interest. 

 

109 Part 2A of Form ADV Firm Brochure for: PNC Investments LLC, at 8, May 15, 2015. 

110 Part 2a of Form ADV Firm Brochure for: UBS Financial Planning Services, at 10, March 31, 2015.

111 Investment Professionals' Compensation, Schwab, http://bit.ly/1OrXLxv. 

112 Introduction to Representatives’ Compensation, Fidelity, http://bit.ly/1Gw8VLb. 
53

Below are a few examples, taken from firms’ Form ADV Part 2A and other public disclosures 

discussing how compensation policies create conflicts of interest:

● MetLife: “As a result of such additional compensation being paid for the sale of products 

or services to implement the Financial Plan, a conflict of interest arises. In other words, 

the additional compensation gives Financial Planner and MSI an incentive to recommend 

products and services to implement the Financial Plan based on the compensation 

received, rather than on a client’s needs.”113

● Ameriprise: “Ameriprise Financial Services and the financial advisor receive more 

compensation on fund or share classes that pay higher fees. Ameriprise Financial 

Services and the financial advisor generally receive less compensation when the sales 

charge and/or 12b-1 fee is reduced, waived completely, or where there is no sales charge. 

Therefore, there is an incentive for our financial advisors to sell a fund from a load fund 

family or a fund that pays a 12b-1 fee over one that does not ... which may influence 

your financial advisor to recommend certain funds or classes over others.”114

● JPMorgan: “However, our interests may not always be the same as those of brokerage 

clients, as we may be paid both by them and by other parties who compensate us based 

upon what the brokerage clients purchase, and our profits and salespersons’ 

compensation may vary by product and over time.”115

● UBS: “The compensation structure may create financial incentives for Financial Advisors 

to encourage clients to purchase multiple products and service or to choose a method of 

payment for products and services that generate compensation in excess of that for other 

products.”116

● RBC: “The differences in compensation create an incentive for financial advisors to 

recommend products for which they receive higher compensation. ... This will add to the 

overall compensation that we receive and may present a conflict of interest based on an 

incentive to recommend investment products based on the compensation received, rather 

than based on your needs.”117

● Schwab: “Some of these compensation plans are based on revenue Schwab earns from 

clients or from product sales, and Schwab may pay a Schwab representative more for 

selling products or services on which Schwab makes more money.”118

● Fidelity: “As disclosed in this document, representatives who offer certain services may 

receive compensation as a direct or indirect result of your selection of those services. 

 

113 Part 2A of Form ADV Firm Brochure for: Financial Planning Services MetLife Securities, Inc., at 11, January 1, 

2015.

114 Part 2A of Form ADV Firm Brochure for: Ameriprise® Financial Planning Service, at 18, March 30, 2015. 

115 Part 2A of Form ADV Firm Brochure for: J.P. Morgan Securities Portfolio Manager Program, at 37, March 31, 

2015. 

116 Part 2A of Form ADV Firm Brochure for: UBS Financial Planning Services, at 10, March 31, 2015.

117 Part 2A of Form ADV Firm Brochure for: RBC Capital Markets, LLC Financial Planning, at 6, March 31, 2015. 

118 Investment Professionals' Compensation, Schwab, http://bit.ly/1OrXLxv
54

This compensation may be more than what the representative would receive if you 

participated in other programs or services. Therefore, representatives may have a 

financial incentive to offer certain programs or services.”119

Given the pervasiveness of such practices, it should come as no surprise that many 

financial firms have expressed vehement opposition to this component of the rule. In addition to 

making false claims that the rule would prohibit differential compensation entirely, they have 

argued that the restrictions are too vague or unworkable. Even the industry’s self-regulator, 

FINRA CEO Rick Ketchum, expressed the view that the BICE as currently written doesn’t 

“really describe a broker-dealer model that I’m aware of.”120 But that, of course, is precisely the 

point: the regulation is designed to change current practice, not bless it. By suggesting, as 

FINRA does in its comment letter on the rule, that differential compensation should be accepted 

as an unavoidable conflict, FINRA provides a clear an example of why DOL should not defer to 

securities regulators’ “leadership” in adopting an appropriate standard to govern conflicted 

advice.

Indeed, if there is a problem with the rule’s provisions regarding differential 

compensation, it is that they may not go far enough. We are concerned, for example, that 

allowing differential compensation based on neutral and objective factors may implicitly 

condone and encourage the sale of more complex, higher cost products, such as annuities, where 

higher compensation levels could be justified based on the argument that those products take 

more time than other products to explain and understand. We hope that the other requirements of 

the BICE would mitigate the potential abuse that could result from improperly relying on the 

neutral and objective factors language. In our view, however, the only way to ensure that 

advisers are not tempted to rationalize recommending more complex, high cost products is to 

level the compensation that they receive for all of the products that they recommend.

Despite the fact that the proposal is crystal clear that differential compensation would be 

permitted, some industry participants nonetheless have claimed that the only way they could 

ensure compliance with the policies and procedures warranty would be to fee-level at a firm 

level. They have pointed to the examples of broad approaches to compensation structures that the 

DOL has offered to illustrate how firms might satisfy their policies and procedures. While it is 

true that those examples are rigorous, the DOL made clear that they “are not exhaustive, and 

many other compensation and employment arrangements may satisfy the contractual 

warranties.” We also find it ironic that after the DOL provided exactly what the industry asked 

for -- a principles-based approach that provides firms flexibility to accommodate their various 

business models -- many industry participants have argued that they need more and clearer 

guidance regarding how to comply.

Insofar as the industry has gotten one thing right with regard to the policies and 

procedures requirement, fee-leveling at a firm level would be the clearest, simplest, and most 

effective way to root out conflicts. Short of that, however, fee-leveling at the adviser and branch 

manager levels would be the most targeted, bang-for-the-buck approach. Combined with the 

 

119 Introduction to Representatives’ Compensation, Fidelity, http://bit.ly/1Gw8VLb. 

120

 Melanie Waddell, “FINRA’s Ketchum Criticizes DOL Fiduciary Plan,” Investment Adviser Magazine, May 1, 

2015, http://bit.ly/1bT12rH. 
55

rule’s restrictions on using quotas, bonuses, personnel decisions and other factors to incent 

recommendations that are not in a customer’s best interests, such an approach would create an 

appropriate amount of breathing room that would help to insulate recommendations from being 

based on financial incentives that are designed to serve firm revenue goals. 

Some firms already fee-level to varying extents at the adviser level, which suggests it 

would be eminently feasible to expand on this approach. For example, with regard to mutual 

funds, Stifel Nicolaus states in its customer agreement disclosures that its “compensation 

formula does not favor one fund or fund family over another, and commission revenue is paid 

out to your Financial Advisor on the same basis regardless of the fund family, similar to any 

commission revenue received by the firm.”121 Likewise, with regard to insurance products, 

“Stifel’s compensation formula does not favor one insurance company’s products over another. 

All commission revenue is paid out to the Financial Advisor on the same basis.”122 While some 

of those differences in compensation among types of investments may be justified on neutral 

terms, others arguably would not. However, the fact that some firms have successfully adopted 

models that move in this direction suggests that still more could be accomplished if there were 

regulatory pressure to do so.

 We hope that, through the comment process and the Department’s ongoing engagement 

with affected parties, new suggestions will emerge for methods of appropriately constraining 

compensation-related conflicts. If so, we would encourage the Department to provide additional 

guidance regarding acceptable conflict mitigation practices. One thing that should be absolutely 

clear, however, is that the industry’s preferred approach of requiring disclosure and consent to 

material conflicts is grossly insufficient. Such an approach would do nothing to actually change 

the types of firm policies and practices that create and exacerbate conflicts of interest. 

Furthermore, as discussed above in the Seller’s Carve-out section of this letter, extensive 

academic and empirical evidence shows that disclosure is ineffective at best, and harmful at 

worst. Accordingly, the DOL should resist any suggested changes by industry to water down the 

policies and procedures warranty requirement by requiring only disclosure and consent to 

material conflicts of interest.

E. Other Provisions of the BICE Help to Strengthen and Reinforce Its Central, Essential 

Requirements.

While we view the above provisions as absolutely essential to the BICE’s effectiveness, 

we also strongly support other aspects of the proposed rule that help to reinforce these central 

components. These include provisions that limit the types of investments that advisers can 

recommend when they are receiving conflicted compensation, that impose additional 

requirements with regard to recommendations from a limited menu of proprietary products, and 

disclosures designed to better inform retirement investors of the costs of their investments and 

the conflicts that could influence their adviser’s recommendations.

 

121 Stifel Account Agreement and Disclosure Booklet, http://bit.ly/1IehGPw.

122 Id. 
56

1. We support strengthened protections to counteract the significant conflicts associated 

with recommendations of proprietary products and from a limited menu of products.

The conflicts inherent in sales-based advice can be exacerbated when the adviser sells 

from a limited menu of products or sells proprietary products, regardless of whether those 

products are part of a limited menu. To combat the problem, the rule requires a financial 

institution relying on the BICE to make a specific written finding that the limitations do not 

prevent the adviser from providing advice that is in the best interest of retirement investors or 

from otherwise adhering to the impartial conduct standards. Payments received in connection 

with these limited menus must be reasonable in relation to the value of specific services provided 

and cannot exceed the services’ fair market value, a more specific than is otherwise required 

under the reasonable compensation standard. Advisers would be required to disclose the extent 

to which the financial institution places limits on the investment products they are able to offer. 

And, as an added crucial protection, the adviser would have to notify the retirement investor if 

the firm did not recommend a sufficiently broad range of investment options to meet the 

investor’s needs. CFA strongly supports the proposed approach which, while it permits 

recommendations based on a limited menu of products, appropriately protects against the 

enhanced risks associated with that business model.

While some firms recommend only proprietary products, many others sell proprietary 

products alongside non-proprietary products. In many such cases, advisers receive additional 

compensation or other incentives from their firm for selling proprietary products. Even where an 

individual adviser’s compensation is unaffected, advisers may nonetheless be pressured by their 

superiors to sell proprietary products over non-proprietary products, based on firm revenue 

considerations. These incentives can make it exceedingly difficult for advisers to provide 

recommendations that are in retirement savers’ best interests. 

Firms’ ADV Form disclosures illustrate the types of conflicts that may be present when 

they sell proprietary products:

● Wells Fargo: “Products recommended by us may include proprietary products of us or 

our affiliates. You should note that we have an incentive to recommend proprietary 

products because we or our affiliates earn more compensation from the sale of these 

products than from the sale of non-proprietary products.”123

● AXA: “Financial Professionals may receive other compensation and benefits related to 

the sales of proprietary products. Accepting this type of compensation may present a 

conflict of interest in that there is an incentive to recommend investment products based 

on the compensation received, rather than on a client’s needs.”124

 

123 Part 2A of Form ADV Firm Brochure for: Wells Fargo Financial Planning Services, at 10, March 2015.

124 Part 2A of Form ADV Firm Brochure for: AXA Advisors, LLC, at 16, March 31, 2015. 
57

● MetLife: “Thus, your Financial Planner has a conflict of interest when recommending the 

sale of affiliated securities or insurance products as a registered representative or as an 

insurance agent.”125

● Putnam: “Compensation may include commissions based on the successful sale of 

particular Putnam funds or strategies/services. Accordingly, Putnam personnel have an 

incentive to sell Putnam products and services.”126

● Ameriprise: “Ameriprise Financial Services has a financial interest in the sales of 

proprietary products that are manufactured by its affiliates.”127

● USAA: “The revenues of FPS and FAI are primarily derived from the sales and service 

of USAA products and services.”128

● RBC: “This may raise a conflict of interest as we may be incented to recommend the 

RBC Funds over a non-RBC Fund.”129

Given the potential harm to investors when firms sell proprietary products rather than 

superior non-proprietary products, it is appropriate that, before recommending such products, an 

adviser must satisfy all the requirements of the BICE, including those that apply to 

recommendations from a limited menu. These additional requirements are necessary and 

appropriate to protect retirement investors’ interests and ensure that, regardless of the limited 

options their advisers are recommending from, they are still receiving best interest advice and

their particular needs are being met.

2. We support limitations on the types of investments that can be recommended subject 

to conflicted compensation.

The rule proposal restricts the types of investments that advisers can recommend when 

they receive conflicted advice to a group of specific assets listed in the proposed rule. Contrary 

to some industry claims, it does not in any way restrict the types of assets that retirement savers 

can choose to invest in, where they make independent choices about their retirement 

investments, nor does it restrict the types of investments that advisers can recommend when they 

do not receive conflicted payments. The DOL’s stated purpose for this listing approach is 

threefold: first, the list captures those investments that are commonly purchased by plans, 

participant and beneficiary accounts, and IRAs; second, it ensures that the investments needed to 

build a basic diversified portfolio are available to plans, participant and beneficiary accounts, and 

IRAs; and third, the list limits the exemption to those investments that are relatively transparent 

and liquid, many of which have a ready market price. 

 

125 Part 2A of Form ADV Firm Brochure for: Financial Planning Services MetLife Securities, Inc., at 14, January 1, 

2015.

126 Part 2A of Form ADV Firm Brochure for: Putnam Investment Management, LLC, at 23, March 30, 2015. 

127 Part 2A of Form ADV Firm Brochure for: Ameriprise® Financial Planning Service, at 18, March 30, 2015. 

128 Part 2A of Form ADV Firm Brochure for: USAA Financial Planning Services Insurance Agency, Inc.,

at 4, April 1, 2015. 

129 Part 2A of Form ADV Firm Brochure for: RBC Capital Markets, LLC Financial Planning, at 11, March 31, 

2015. 
58

Some in the financial industry have claimed that the list of permissible assets under the 

BICE significantly and inappropriately restricts what advisers can recommend to their clients, 

thus hindering their ability to serve their clients. Despite such claims, however, the list of 

permissible assets that can be recommended pursuant to the BICE is extensive. It includes, for 

example: bank deposits, certificates of deposit (CDs), exchange-listed stocks, mutual funds, 

exchange-traded funds (ETFs), exchange-traded Real Estate Investment Trusts (REITs), 

registered corporate bonds, Treasuries, and annuities. The list of permissible assets does not 

include: private placements, non-traded REITs, private equity, or hedge funds. For a large 

majority of retirement savers, such assets have no place in their retirement accounts. Instead, 

they are traditionally reserved for more sophisticated and wealthier investors, who can sustain 

significant potential losses without jeopardizing their retirement security.130 These assets also 

typically have extraordinarily high fees for investors and, as a result, lofty commissions for 

advisers and their firms. We therefore agree that the increased risks associated with 

recommendations of such investments by conflicted advisers outweigh the limited benefits of 

making them available under the BICE for the small percentage of retirement savers for whom 

they would be appropriate.

 While we commend the DOL for seeking to achieve the vital goals discussed above, the 

DOL correctly notes that many investment types and strategies that would not be considered 

permissible assets if invested in directly can be obtained through pooled investment funds, such 

as mutual funds, which are considered permissible assets. As a result, the list is not nearly as 

limiting as industry opponents have suggested, but it is also vulnerable to being circumvented 

and thus may not offer the protections that the DOL seeks to achieve. For example:

● While an adviser would not be able to recommend purchasing private placements or nontraded REITS under the BICE, the adviser could recommend purchasing a closed-end 

fund holding private placements or non-traded REITS.

● Similarly, while an adviser would not be able to recommend purchasing futures or 

options (i.e. derivatives), the adviser could recommend purchasing a leveraged ETF to 

gain the same type of exposure.

● In addition, municipal bonds are not included in the permissible list of assets, ostensibly 

because most municipal bonds are tax exempt and thus duplicate the tax benefits 

associated with retirement accounts, thus decreasing their benefit and rendering them illsuited for a retirement account. Just as in the other cases, however, an adviser could get 

around this restriction by recommending an open-end municipal bond fund.

These are just a few of the examples that we’ve come up with to circumvent the list. We have no 

doubt clever financial advisers and their firms will think of others. On the other hand, if the 

apparent reasoning for excluding municipal bonds – that they already receive a tax-advantage, 

which effectively reduces the investor’s yield, thus rendering them inappropriate for retirement 

 

130

 According to the industry’s own arguments, such investors are likely to invest through fee-based accounts, 

which would generally be unaffected by the restrictions. 
59

accounts – were to apply to other tax-preferred assets, tax-deferred annuities would also be 

excluded from the list of permissible assets. 

 Because the DOL’s listing approach may not achieve the agency’s goals and is likely to 

result in an intense and interminable lobbying campaign from various product providers to have 

their products placed on the list of permissible assets, we think another approach might be 

warranted. As with other requirements of the BICE, this approach would be principles-based, 

such that for an adviser to recommend a certain asset pursuant to the BICE, that asset must:

● Have an observable market price (transparent pricing);

● Be capable of being sold in the secondary market at or near its fair market value within a 

reasonably short amount of time (sufficient liquidity);

● Be transparent and not excessively complex in structure;

● Have a sufficient track-record to demonstrate its utility;

● Not be excessively leveraged; and

● Not provide a redundant or illusory tax-benefit inside a retirement account.

These principles should apply to both the underlying assets within a pooled investment vehicle 

and to the investment vehicle itself, unless the vehicle provides benefits (e.g., liquid secondary 

market and transparent pricing) absent in the underlying asset. If a firm can’t show why an asset 

its advisers are recommending satisfies these principles, there should be an inference that the 

asset is incapable of satisfying the best interest of any retirement investor. 

 Based on our review of the proposed asset list, almost all of those assets would satisfy the 

principles discussed above. However, depending on what underlying assets comprise certain 

closed-end funds or ETFs, they may not satisfy the principles. For example, if a closed-end fund 

included non-traded REITs, because the underlying assets do not meet the principles, the asset 

should not satisfy the principles. In addition, inverse and triple-leveraged ETFs should not satisfy 

the principles because of their excessive leverage. Furthermore, new, untested products such as 

exchange traded managed funds (ETMFs), should not satisfy the principles because they don’t 

have a sufficient track-record to demonstrate their utility and they do not in fact have the 

transparency that they claim.131 Finally, tax-deferred products, such as annuities, would likely 

have trouble satisfying the “redundant or illusory tax-benefit” restriction. We believe a strong 

principles-based approach, such as the one we have suggested, will better achieve the DOL’s 

goals, while still allowing firms flexibility to recommend a wide variety of products appropriate 

to retirement savers.

 

131 While these funds advertise as having “NAV-based trading,” an investor does not actually buy at the NAV at the 

time of the purchase. Rather, the NAV that the investor is buying (and doesn’t know) is the NAV at the end of the 

day on which the purchase is made.
60

3. Proposed disclosures provide an important supplement to the best interest standard 

and conflict restrictions.

The proposed BICE includes a set of required disclosures designed to provide greater 

transparency around the costs and conflicts associated with retirement investment advice. These 

requirements directly address the problem, discussed above, that many retirement savers (like 

investors more generally) do not understand the costs of either the investments they purchase or 

the services of financial professionals they turn to for advice, do not understand the long-term 

impact of those costs on their retirement savings, and do not understand either the extent or 

nature of the conflicts that could bias the recommendations they receive. While disclosure alone 

is not adequate to ensure that retirement savers can protect their own interests, enhanced 

disclosure can provide a useful supplement to the proposed rule’s other more central protections 

(e.g., best interest standard, mitigation of conflicts). 

Well-designed disclosures can benefit retirement savers in two basic ways. Direct 

disclosures can alert individuals to issues they might otherwise have ignored, in this case issues 

regarding costs and conflicts. To achieve this goal they must provide individuals with the 

information they need, in a form they can understand, and at a time when it is useful to them in

making an investment decision. The less the individual has to do to track down and decipher the 

information, the more likely it is to be effective in supporting informed decision-making. But 

even where individuals do not make good use of direct disclosures, they can still benefit from the 

enhanced transparency that public disclosures provide. Public disclosure can be effective, for 

example, in promoting cost competition that brings down costs even for those who do not make 

cost-conscious decisions. Public disclosure requirements can also cause firms to abandon 

practices that, while legal, are embarrassing in a field that likes to promote an image of 

professionalism and reliability.

The Department’s task in creating effective disclosure is made more challenging by the 

unnecessary complexity of industry compensation practices and by the failure of securities and 

insurance regulators either to rein in harmful conflicts or to adopt effective cost and conflict 

disclosures. Despite those challenges, the Department has proposed a disclosure regime that 

includes both actionable information for individual retirement savers and enhanced transparency 

that should help to bring the forces of market competition to bear to the benefit of all plans, plan 

participants and IRA investors. The proposed disclosure requirements include the following key 

components:

● Website Disclosure

The rule requires that financial institutions maintain a regularly updated and easily 

accessible public website that shows the compensation payable to the adviser, the financial 

institution and any affiliate for services provided in connection with each asset made available to 

plans, plan participants or IRA investors. Disclosures must be provided for each asset made 

available either currently and over the preceding 365 days. All direct and indirect material costs 

must be provided for each asset unless costs are uniform across a class of assets, in which case 

disclosure by asset class would suffice. The compensation may be expressed as a monetary 
61

amount, formula or percentage of the assets involved in the purchase, sale or holding, and the 

webpage must include a version of the information in a machine readable format.

The required website disclosures are key to providing the transparency that can help to 

bring market forces to bear on industry practices. As noted above, even investors who never 

review these disclosures may benefit if the resulting transparency helps to promote cost 

competition in an area – compensation for advice – that has traditionally been opaque and, as a 

result, largely immune to these competitive forces. Moreover, we agree with the Department 

that the requirement that information be provided in machine readable format should make it 

possible for financial information companies to analyze the cost data and provide information 

comparing the practices of different advisers and financial institutions. Individual retirement 

savers and plan fiduciaries alike should benefit from services that help them to evaluate costs and 

compensation practices. 

● Contract Disclosures

The contract mandated under the BICE includes required disclosures with regard to both 

costs and conflicts. Specifically, the disclosures must identify all material conflicts of interest. 

These may be described in general terms as long as the contract also discloses that a more 

specific description of conflicts is available on the financial institution’s website, including a 

web address where the information can be found, and by mail upon request. In keeping with the 

requirement to disclose conflicts, the written contract must indicate whether the financial 

institution offers proprietary products or receives third party payments. Finally, the contract 

must inform the advice recipient that he or she has the right to obtain complete information about 

all of the fees currently associated with the assets in which the account is invested, including all 

of the fees payable to the adviser, financial institution, and any affiliates and related entities in 

connection with such investments.

 SEC focus group research on investors’ disclosure preferences suggest that retirement 

savers would appreciate these upfront disclosures with regard to compensation and conflicts. 

For example, one focus group participant stated: “I think that before you start with them that they 

should be able to disclose what their conflicts are before you even start. I think requiring them to 

initially tell you what the conflicts are would be an easy way to solve it and have it noted.” 

Another stated: “I think at the beginning that you have a dialogue with that person, and then right 

at the time when you’re about to buy something.”132 It is this potential to cause investors to ask 

questions or start a discussion regarding costs and conflicts that is likely to be the primary benefit 

of these contract disclosures.

While we hope that the required contract disclosures will drive advice recipients to ask 

questions and dig more deeply with regard to costs and conflicts, this is far from guaranteed. 

General disclosures of the type anticipated here are often overlooked or ignored, particularly as 

they tend to be written in bland legalese that fails to convey the importance of the information. 

Given the variety of business models among firms likely to rely on the BICE, however, it seems 

impractical to try to overcome this problem by proscribing set disclosures. The requirement that 

 

132 Siegel & Gale, LLC, Investor Research Report, Submitted to the Securities and Exchange Commission on July 

26, 2012, http://1.usa.gov/1MfBbss. 
62

the web address be included with the disclosures should at least help to ensure that retirement 

savers who are interested in researching costs and conflicts do not have to go searching far and 

wide for the relevant information. This requirement to include the web address is essential to the 

disclosures’ effectiveness and should be retained in a final rule.

● Individual Transactional Disclosure

Those who wish to rely on the BICE must also provide detailed cost information in 

advance of any transaction for which they provide fiduciary advice. The disclosure must cover 

the all-in costs of the proposed transaction, including the anticipated costs of the investment for 

1-, 5- and 10-year periods. These costs must be expressed as a dollar amount and must be based 

on the dollar amount recommended by the adviser and reasonable assumptions regarding 

investment performance, which must be disclosed. The disclosures would have to be provided 

“in a time frame that would enable the Retirement Investor to discuss other (possibly less costly) 

alternatives with the Adviser prior to executing the transaction.”

 Requiring pre-sale, dollar amount disclosures of investment costs has long been a priority 

of investor advocates. Although the SEC issued a proposal for point of sale disclosure of mutual 

fund costs during the early years of the Bush Administration, nothing ever came of it. Similarly, 

the SEC has failed to act on the Dodd-Frank Act’s explicit authorization to require pre-sale 

disclosures for investment products and services, even though its own research shows that 

investors prefer to receive information in advance of the sale. The transactional disclosures 

proposed by DOL will help to fill that void by providing retirement savers with actionable 

information at a time when they are most likely to be able to make good use of it.

 The key to providing effective cost disclosure is to report costs in dollar amounts, in a 

form that is, to the extent possible, easily comparable across assets, and to provide the 

information at a point where it can be factored into the investment decision. The DOL rule 

proposal meets all these standards for effective disclosure. First, it requires costs to be disclosed 

not simply as percentages, but as dollar amounts. This is critical to promoting investor 

understanding. Research has shown that the “absolute magnitude effect” – the tendency for 

people to perceive numbers as the absolute value of the quantities inherent in them, and not as 

the actual statistical figures they represent – can affect investors’ perceptions of numerical values 

such as investment returns and, by extension, costs. As researchers who have examined this 

phenomenon explained, this causes a person “to perceive a larger change in their portfolio if the 

return was expressed as 24 percent versus an identical return of 0.24” and to “perceive an even 

larger change if it was expressed in a dollar amount as long as the change was more than $24.”133 

The same is certain to hold true for costs, which are more likely to be understood and less likely 

to be dismissed as insignificant if they are presented as dollar amounts.

 

133 LoMando, Joseph, “Tips 401k Plan Sponsors Can Use to Help Employees Avoid Risk Aversion,” Fiduciary 

News, October 4, 2011. The article discusses several academic papers: “Presenting Investment Results Asset by 

Asset Lowers Risk Taking,” (Anagol and Gamble 2009); “Numerical Information Format and Investment Decisions: 

Implications for the Disposition Effect and the Status Quo Bias,” (Rubaltelli et al., The Journal of Behavioral 

Finance, 2005, Vol. 6, No. 1, 19–26); and “Asset Allocation and Information Overload: The Influence of 

Information Display, Asset Choice, and Investor Experience,” (Agnew and Szykman, The Journal of Behavioral 

Finance, 2005, Vol. 6, No. 2, 57–70).” This information is based on the discussion of Rubaltelli et al.
63

Disclosing costs in dollar amounts also greatly increases the ease of comparison across 

assets and asset classes. This enhanced ability to compare costs is of critical importance, since 

many retirement savers are unlikely to understand without guidance whether a particular cost is 

high or low or somewhere in between. This is true with regard to investment costs, but even 

truer with regard to costs for advice. As discussed above, a significant percentage of investors 

currently believe the advice they receive is provided free of charge. Others know they are 

paying something, but don’t know how much. This has protected financial advisers from the 

cost competition that would come with better disclosure and enable broker-dealers to maintain 

the myth that their services are generally less costly than those of fiduciary advisers. Finally, 

requiring the disclosures to be based on the suggested investment amount will further enhance 

investor understanding.

We are particularly pleased that the Department also proposes to provide disclosures that 

highlight the long-term impact of costs. This will further increase the likelihood that retirement 

savers will factor costs into their investment decision. We have heard some in industry suggest 

that they can’t provide these disclosures without violating FINRA rules, presumably because the 

rule suggests that the firm select (and disclose) a reasonable rate of return in order to calculate 

the long-term costs when making the disclosures. To the degree that this is a genuine concern, 

the DOL can easily overcome it by specifying a rate of return for use in making such 

calculations. This would increase comparability and reduce the risk that firms would use rates of 

return for this purpose that are designed to minimize the cumulative costs. Given the limitations 

in these estimates, it would be important to require that the disclosures make clear that these are 

estimates and that actual costs may be lower or higher. While the resulting information would be 

an imperfect predictor of long-term costs, it would be a significant improvement over the status 

quo.

Finally, in providing pre-sale disclosures, timing is crucial. If the goal is to encourage 

advice recipients to review the information carefully, it is essential that the information be 

provided, not in a flurry of paperwork at the point of finalizing the transaction but rather, as the 

proposed rule requires, with sufficient time for the advice recipient to consider the information 

and factor it into their investment decision. We have long preferred the point of 

recommendation, rather than point of sale, as the appropriate time for such disclosures. 

However, while the rule provides somewhat more flexibility with regard to timing of disclosures, 

it is consistent with the principle of allowing time for consideration and discussion of the 

disclosed information. Because the information is specific to each transaction, it should be 

required to be provided with each transaction, and not simply in limited circumstances, such as 

account opening or rollover.

This pre-sale timing of disclosures, while it has been resisted in the past by industry, 

enjoys strong support among investors. The SEC Financial Literacy Study states, for example, 

that: “Generally, retail investors prefer to receive disclosures before making a decision on 

whether to engage a financial intermediary or purchase an investment product or service.”134 For 

example, asked about their preference regarding delivery of compensation information, 71.3 

percent of survey respondents indicated that they want to receive information on how they will 

 

134Siegel & Gale, LLC, Investor Research Report, Submitted to the Securities and Exchange Commission on July 

26, 2012, http://1.usa.gov/1MfBbss. 
64

pay for services before they begin the relationship. They made it clear, moreover, that they want 

some time to think about the information. Among those who said they want the information 

prior to beginning the relationship, just under a third said they want it at least a day or two in 

advance (32.7 percent) and four in ten (40.8 percent) said they want it at least a week before they 

begin the relationship. 

The Department asks whether a “cigarette style” warning would be as effective as but 

less costly than actual cost disclosures. While such a warning would certainly be less costly than 

the proposed cost disclosures, it would also be significantly less effective. Experience tells us 

that investors are far less likely to go in search of information than they are to read information 

that is provided to them directly. Indeed, there is no evidence that these sorts of generic 

warnings have any meaningful impact on investor behavior. We would strongly urge the 

Department against adopting this far inferior approach. Retirement savers deserve real, 

actionable information about their investment costs, not boilerplate warnings.

● Individual Annual Disclosure

The proposal backs up its requirement for pre-sale disclosure with a requirement that the 

adviser or financial institution provide annual cost disclosures to advice recipients covering the 

costs and compensation associated with all assets purchased or sold by the plan, plan participant 

or IRA investor over the previous year. The disclosures must: list the price at which each asset 

was bought or sold; must include a statement of the total dollar amount of all fees and expenses 

paid with respect to each asset purchased, held or sold during the applicable period; and must 

include a statement of the total dollar amount of all compensation received by the adviser and 

financial Institution, directly or indirectly, from any party, as a result of each asset sold, 

purchased or held by the plan, participant or beneficiary account, or IRA, during the applicable 

period. 

 While the pre-sale disclosures regarding long-term costs would necessarily be estimates, 

the mandate to provide annual disclosures would provide an opportunity to provide greater 

clarity around the actual costs paid by the retirement saver. As such, although our priority is 

ensuring that retirement savers get good cost information before they invest, the annual cost 

disclosures would serve as a useful supplement to the pre-sale disclosures. 

 We have no doubt that industry will suggest, with regard to both the pre-sale and the 

annual cost disclosures, that it is either not possible or too costly to provide the desired 

information. But any difficulty in providing these disclosures is driven by the complexity of a 

compensation system that seems at times to have been adopted with the express purpose of 

obscuring the costs of financial advice. The disclosures could provide an additional secondary 

benefit if the obligation to disclose drove industry to simplify its unnecessarily complex 

compensation practices.

4. CFA supports the rule’s data request.

A final condition of the BICE is that it requires firms that rely on the exemption to 

maintain certain data for six years. We strongly support the data request as essential to the 
65

Department’s ability to assess the impact and effectiveness of the rule. Financial firms have 

created a Catch 22 when it comes to adopting regulations designed to improve consumer and 

investor protections. First, they demand that regulators justify their rules based on a thorough 

economic analysis. As the DOL knows from direct experience, the firms then refuse to provide 

the data that would support a robust economic analysis. When the agency produces an economic 

analysis based on available data, they then cite the data limitations to suggest that the analysis is 

insufficiently rigorous or otherwise lacks merit, using their own highly selective and skewed data 

to refute it. The only way regulators can protect against such practices is to build data requests 

into their regulations, ensuring that they will have access to the information they need to 

accurately assess and monitor the effectiveness of their regulatory efforts. The rule’s data 

request should go a long way to addressing these concerns.

5. Industry complaints about the workability of the rule should be taken with a grain of 

salt.

Before the Department released its revised rule proposal, the industry’s key argument 

against the rule was that it would make it impossible for financial professionals who receive 

conflicted payments to serve this market because it would prohibit all conflicted payments. And 

they maintained that argument even in the face of repeated pledges by DOL officials that they 

intended to adopt PTEs to permit commissions and other forms of transaction-based 

compensation. Had concern about their ability to earn conflicted payments been the real issue, 

release of the BICE should have put that argument to rest. Instead, industry has simply adjusted 

the rhetoric around their campaign to have the rule withdrawn. Their new mantra is that the rule 

is “unworkable” and that it will let loose a flood of litigation, with the ultimate effect that it will 

force advisers who receive conflicted payments to abandon this market. Neither argument holds 

water, as we discuss in further detail below. Even in those few instances where their concerns 

have at least some basis in reality, there is nothing industry groups have raised with regard to the 

workability of the rule that couldn’t easily be addressed through the rulemaking process. That is, 

after all, what the rulemaking process is for. Instead, this line of argument allows firms to 

oppose the rule without acknowledging that their real fear is that it would force them to change 

practices that are highly profitable for them, though considerable less beneficial for their clients.

a) There is no basis for industry claims that the rule will lead to increased litigation.

Industry has seized on the BICE’s contract provision, which provides a means for holding 

firms and advisers legally accountable, to argue that the rule will “unleash a flood of litigation.” 

While it is true that retirement savers with meritorious claims should find it easier to recover 

their losses if the rule is adopted, there is simply no basis for the claim that the rule would lead to 

an upsurge in litigation. To suggest that it would ignores not only the high cost of pursuing 

claims, and the particular difficulty of pursuing class action lawsuits, but the plain language of 

the rule itself. 

Perhaps the most extreme of the claims with regard to litigation risk is that financial 

professionals will be vulnerable to lawsuits anytime their customers lose money on an 

investment they recommended or make less money than they could have made had they invested 

differently. This is patently absurd. There is no evidence that investment advisers who are 
66

subject to a best interest standard under securities laws face such claims. Indeed, the rule 

proposal poses even less of a threat of such litigation than the securities law best interest 

standard, since it does not automatically impose an ongoing duty of care on ERISA fiduciaries. 

Only where the adviser agrees by contract to provide ongoing account oversight would he or she 

have to monitor the recommendation to ensure that it continues to serve the best interests of the 

customer. Absent such an agreement, there would be no ongoing duty under the proposed rule 

and thus no basis for a claim. Moreover, compliance with the standard would be determined 

based, not on the outcome of the recommendation, but on whether an impartial expert would 

view the recommendation as having been made in the best interest of the customer in light of 

prevailing circumstances at the time of the recommendation. Customers who wish to bring a 

case based solely on the outcome of the investment would be unlikely to find an attorney willing 

to represent them. Because of the unlikelihood of success, attorneys whose pay typically depends 

on the outcome of the claim would have no incentive to take such a case. 

With equally little basis in fact, some opponents of the rule have suggested that the 

provision prohibiting advisers from forcing customers to sign away their right to participate in 

class action lawsuits represent a broad new expansion of liability. In reality, however, this 

provision merely reaffirms existing FINRA policy under the securities laws, which already 

prohibits broker-dealers from placing any such limitations on customer rights. There are two 

main reasons to believe class actions will remain the rare exception, rather than the rule. The first 

is that very few cases will lend themselves to class treatment. The second is that even cases that 

lend themselves to class treatment face significant barriers. 

Claims based on violation of fiduciary duty turn on whether the recommendation was in 

the best interest of the customer. That is a very fact-specific determination that will differ for 

each customer based on his or her personal situation and needs. However, an attorney seeking to 

certify a class must prove commonality of the harm suffered throughout the class. As a result, the 

vast majority of claims based on violation of fiduciary duty simply will not lend themselves to 

class treatment and will continue to be brought as individual claims in arbitration. 

Moreover, class actions face daunting procedural barriers that often prevent such actions 

from moving forward. First, a judge must approve of the formation of a class and allow the 

named plaintiff to bring the action on behalf of the class. For this to occur, a representative 

plaintiff must prove commonality of harm among class members, that the class is so numerous 

that it is impracticable to bring suit otherwise, that the claims or defenses of the named plaintiff 

are typical of the claims or defenses of the class, and that the named plaintiff will fairly and 

adequately represent and protect the interests of the class.

135 Most classes seeking money 

damages also require a judge to find that issues common to the class members predominate over 

issues affecting individual members and that a class action is superior to other available methods 

of adjudicating the controversy.136 If a class manages to clear these hurdles and is certified by a 

judge, a defendant can appeal the court’s decision, which can tie up the case and increase costs 

for a named plaintiff and his or her attorneys.137 The appeals process can delay, and often cripple 

 

135 Fed. R. Civ. P. 23(a). 

136 Fed. R. Civ. P. 23(b)(3).

137 Fed. R. Civ. P. 23(f).
67

the progress of a class action, turning it into a battle of attrition where the party with the most 

resources (usually the defendant) wins. 

As a practical matter, smaller firms simply do not have a big enough client base to make 

class treatment worthwhile. Instead, the most likely class action target under the proposed rule 

would be a large firm that, in clear violation of the rule, adopts policies and practices that 

encourage their advisers to provide conflict-ridden retirement investment advice. For example, a 

large firm that continued to use quotas and bonuses to encourage the sale of in-house products 

across its IRA platform could be vulnerable to class action litigation. Similarly, a large firm 

could face class action litigation if it relied on the best interest contract exemption to engage in 

widespread sale of products that are clearly not permitted under that exemption, such as nontraded REITS. These are precisely the sorts of situations where class actions provide an 

appropriate and effective mechanism to hold firms accountable for compliance with the rule. 

For the reasons noted above, most claims brought under the rule proposal are likely to be 

individual claims. Because the DOL’s proposal specifically allows firms to include pre-dispute 

binding arbitration clauses in their contracts, the vast majority of these claims will likely be 

heard in the industry-run FINRA arbitration forum rather than in court. Although arbitration is 

promoted as providing an inexpensive alternative to court, the costs are sufficient to deter even 

small meritorious claims, let alone the frivolous claims industry argues are a threat under the 

DOL rule proposal. For example, a combination of filing fees, discovery costs, expert witness 

fees, hearing session fees, and costs for a court reporter can easily add up to $30,000 before 

attorney’s fees, according to attorneys who are familiar with the system. Most attorneys work on 

a contingency fee, which means they agree to front a significant portion of the litigation costs in 

return for receiving reimbursement and a percentage of any recovery. Cases have to be worth 

their time, effort, energy and resources, otherwise they aren’t going to invest in them. As a result, 

they have little if any incentive to take cases unless they expect to win and to win an award 

sufficient to cover the considerable costs of bringing the claim. Alternatively, an attorney can 

charge by the hour. That can add up very quickly to tens of thousands of dollars in legal bills that 

all but the wealthiest claimants will be unable to afford. If, despite these deterrents, an investor 

brings a frivolous claim, that investor may be responsible for paying the other side’s attorneys 

fees, possibly amounting to an additional tens of thousands of dollars. 

Furthermore, real-world evidence demonstrates that concerns about the industry’s claims 

regarding excessive litigation risk are drastically overblown. Investment advisers are fiduciaries 

under the securities laws and thus subject to a best interest standard, yet they do not face an 

outsize liability risk. Many broker-dealers are dually registered as investment advisers and are 

thus accustomed to operating in a fiduciary capacity, with regard to fee-based or discretionary 

accounts for example. Moreover, a leading claim brought against broker-dealers in arbitration 

(regardless of whether they are dually registered as advisers) is violation of fiduciary duty, often 

based on a claim that the broker held out as providing on-going account management and then 

failed to do so. Despite this broad fiduciary exposure, FINRA’s own dispute resolution statistics 

show quite convincingly that these broker-dealers are not exposed to excessive litigation risk. In 

each of the past three years, for example, between 1,873 cases and 2,216 cases that involved 

breach of fiduciary claims were filed.138 While significant, this is nowhere near the “flood of 

 

138 FINRA, Dispute Resolution Statistics, http://bit.ly/1ebKRGF. 
68

litigation” that the industry claims is likely to occur if brokers are subject to a fiduciary duty 

under ERISA. 

We’ve heard these same, baseless industry arguments before, when it was suggested for 

example that fee-based accounts should be regulated as advisory accounts. The broker-dealer 

industry claimed that they’d be subject to excessive litigation risk, costs would increase for

customers, and they would no longer offer fee-based accounts to investors. Here are just a few 

examples of the claims the industry made, which bear an uncanny resemblance to the claims they 

are making today regarding the DOL’s proposed rule.

● According to the law firm Morgan Lewis, “The combination of the views expressed in 

the adopting release and the media focus on these accounts may expose broker--dealers to 

heightened litigation risk for fee--based accounts if they elect to continue to offer these 

accounts absent additional regulatory relief.139

● According to Chip Roame, head of Tiburon Strategic Advisors, a California-based 

industry research and consulting firm, “This is definitely increasing their reps’ liability. 

...We’re going to see firms losing more and more lawsuits.”140

● Ira Hammerman, General Counsel of what was then the Securities Industry Association, 

which became SIFMA, stated that, “Converting fee-based brokerage accounts to advisory 

accounts “would likely work to the disadvantage of customers, who, as a result, could 

face increased costs or who could lose their chosen forms of brokerage accounts to the 

extent their broker-dealer determined not to continue to provide those forms of accounts 

rather than effect such conversion [to advisory accounts].141

● Marc E. Lackritz, president of the Securities Industry Association stated that, “Placing 

broker-dealers that offer fee-based brokerage accounts to their clients under an additional, 

and wholly unnecessary, layer of regulation could have severely limited the availability 

of these popular accounts.”142

● In another letter by Hammerman: “The forced closure of this brokerage pricing avenue 

would be a major loss of client choice and a significant diminution in both pricing and 

account management flexibility that clients have come to expect and enjoy.”143

This is a mere snapshot of the claims that were made suggesting that regulating fee-based 

accounts as advisory accounts would lead to increased liability and cost investors access to 

valued services. Although the SEC bowed to industry pressure, their position was later 

 

139 Morgan Lewis Securities Industry FYI, “Implications of the D.C. Circuit’s Decision Vacating Rule 

202(a)(11)­1,” April 6, 2007, http://bit.ly/1CSrDSb.

140 Susan Konig, Managers Learn To Live Without “The Merrill Lynch Rule,” WealthManagement.com, 

http://bit.ly/1VlhJyp. 

141 Letter from Ira D. Hammerman, Senior Vice President and General Counsel, Securities Industry Association, to 

the SEC, February 7, 2005, http://1.usa.gov/1DqoYdi. 

142 FPA Mulls Action After SEC Ruling, Financial Advisor, http://bit.ly/1CLoXpF.

143 Letter from Ira D. Hammerman, Senior Managing Director and General Counsel, SIFMA, to the SEC, June 27, 

2007, http://1.usa.gov/1fhDmPb
69

overturned in court. Since the U.S. Court of Appeals for the D.C. Circuit ruled in 2007 that feebased accounts are advisory accounts, none of the parade of horrors that the broker-dealer 

industry predicted actually occurred. In fact, the number of fee-based accounts and the level of 

assets in fee-based accounts at broker-dealers have grown dramatically. Cerulli Associates found 

that, even after the broad market declines of 2008, the client assets in non-discretionary advisory 

accounts rose by almost 75 percent from approximately $329.6 billion at the end of the 

conversion process in 2007 to $574 billion in the third quarter of 2012.144 Meanwhile, the level 

of fees charged to customers for this service model at the major national firms has stayed flat or 

decreased since 2007. In short, DOL should recognize that the industry has a long record of 

crying wolf in this regard and should not give such claims credence that they simply do not 

deserve. 

One over-looked aspect of the rule proposal is its potential to reduce litigation by 

reducing predatory practices. In a recent letter to members, FINRA’s Ketchum noted that firms 

could significantly reduce their compliance problems and regulatory risks if they would put the 

interests of their customers first.145 By requiring firms to take concrete steps to eliminate 

practices that encourage bad conduct, the rule proposal achieves what FINRA only suggests. 

Moreover, it would not only require firms and advisers to put customer interests first, it would 

also require firms to eliminate the practices that encourage advisers to act in ways that are not in 

the customer’s best interest. By reducing the incentives to steer clients into inferior investment 

options, the rule should reduce abusive conduct. As a result, firms that take seriously their 

obligation to mitigate conflicts and put the interests of customers first should see their liability 

risks reduced as a result of the better outcomes they achieve for clients. 

While there is no reason to believe the proposed rule would increase the amount of 

litigation, it should improve the ability of those with meritorious claims to recover losses 

sustained as a result of abusive retirement investment advice. As a recent study by the Public 

Investors Arbitration Bar Association documented, the same financial professionals who 

routinely market themselves as objective advisers putting their customers first immediately drop 

that pose in arbitration and deny any such obligation. Because the rule proposal would force 

financial professionals who receive conflicted compensation to sign a contract in which they 

acknowledge their duty to give fiduciary advice, plaintiffs would no longer have to prove that a 

fiduciary relationship existed. Instead, it would be enough to show a violation of the standard, 

rather than that the standard applies. 

Financial professionals who take advantage of retirement savers’ trust should be held 

accountable for their abusive conduct. The rule proposal provides that accountability without 

posing any credible threat of excessive litigation or frivolous claims. Industry claims to the 

contrary are simply scare tactics designed to cover for their real concern, which is that they 

simply do not want to be legally accountable for putting the interests of their customers first.

 

144 As referenced in the Financial Planning Coalition letter to the SEC, Cerulli Associates, Cerulli Quantitative 

Update: Advisor Metrics, Exhibit 1.02 (2012).

145 FINRA, 2015 Regulatory and Examination Priorities Letter, January 2015, http://bit.ly/1F8782M.
70

b) Where justified, concerns about the rule’s “workability” can be addressed through 

relatively minor revisions to the rule proposal.

While much of the industry’s argument that the rule is unfounded consists of little more 

than overblown rhetoric, there are three issues that industry has raised that are based on at least a 

grain of truth.146 All can easily be addressed through technical corrections or clarifications.

First, as currently drafted, the rule does not permit financial firms and advisers who 

receive conflicted payment to provide advice to plan sponsors who are acting on behalf of 

participant-directed plans with fewer than 100 participants. This results from the fact that advice 

to such plans does not qualify for either the Seller’s Carve-out or the BICE. Employers would 

still be able to receive advice from fiduciary advisers who do not receive conflicted payments. 

And those who are willing to take on some responsibility for selecting investment options will be 

able to receive non-fiduciary services under the Platform Providers Carve-out. However, there 

may be small employers who prefer, for whatever reason, to receive fiduciary advice from a 

financial firm receiving conflicted compensation. The answer is not, as industry suggests, to 

make the Sellers Carve-out universally available. A better approach is to expand the BICE to 

cover investment advice provided to sponsors who are acting on behalf of participant-directed 

plans.147

Second, some industry participants have claimed, we believe mistakenly, that the BICE is 

unavailable for rollover recommendations. Their claim hinges on the strange reasoning that “the 

exemption applies to advice relating to the purchase, sale, or holding of certain assets,” and that 

such an “asset-based approach means that the exemption does not apply to distribution or 

rollover advice.”148 A rollover necessarily requires the sale and purchase of assets, and so long as 

the assets being recommended are those that the DOL deems permissible, we see no reason why 

rollover recommendations should not be covered by the BICE. To the extent the Department 

believes any clarification would be helpful in dispelling this misunderstanding, however, we 

encourage you to provide that clarification.

Third, as discussed above, questions have been raised about the timing of the contract and 

the best way to implement that requirement, particularly with regards to plan participants and 

existing customers. While we believe the legal enforceability provided by the contract 

requirement is central to the rule’s effectiveness, we remain open to approaches that would 

create added flexibility around the timing and mechanisms for implementing that contract so 

long as they do not dilute or diminish the legal enforceability of the fiduciary obligations.

There have also been some questions as to whether registered investment advisors (RIAs) 

who recommend rollovers to their customers should be required to claim relief under the BICE 

 

146 A fourth issue that has been raised under the mantra of workability -- the question of whether firms could market 

their services without triggering a fiduciary duty -- is addressed above in the section of the letter devoted to the 

definition of fiduciary investment advice.

147 See supra Seller’s Carve-out discussion explaining why small plan fiduciaries’ general lack of financial expertise 

and sophistication renders them ill-suited for the Seller’s Carve-out. 

148 Kent Mason, “Department of Labor’s Re-proposed Definition of a Fiduciary Widely Prohibits Personalized 

Investment Assistance Even if the Assistance is in the Customer’s Best Interest,” Davis and Harman, LLP, April 20, 

2015, http://bit.ly/1JbLXiI. 
71

or another applicable PTE. We believe they should. The recommendations that they make affect 

their own compensation, and therefore pose a conflict of interest. For example, if a client rolls 

over a $250,000 account to the RIA and the RIA charges one percent per year for assets under 

management, the RIA stands to make $2,500 per year on the client.

149 In contrast, if the client 

does not roll over her account, the RIA will make nothing. As a result, the RIA’s 

recommendation to roll over poses an acute conflict that would trigger a prohibited transaction 

that must be adequately protected to ensure that the recommendation is in the client’s best 

interest. Assuming the conflicted rollover transaction meets the requirements of the BICE, the 

RIA would need to claim relief for only that transaction, as his compensation would afterwards 

revert to a largely unconflicted payment model. With this analysis in mind, to the extent an RIA 

provides a recommendation relating to taking a distribution, the BICE should apply. 

IV. Principal Transactions Exemption

The rule proposal includes an exemption to permit investment advice fiduciaries to sell 

certain fixed income (debt) securities to retirement plans and IRAs out of their inventory. 

Because advisers who sell out of inventory may be able to dictate unilaterally the price that 

investors pay and charge them more than is appropriate, enhanced protections are necessary to 

ensure the transactions being recommended and executed aren’t disadvantageous to retirement 

investors.

A. Principal Trading Poses a Risk of Abuse that Warrants Enhanced Protections.

Principal trading creates opportunities for advisers to take advantage of their clients. The 

classic and perhaps clearest example is when an adviser “‘dump[s]’ unmarketable securities or 

securities that the adviser believes may decline in value into a customer’s account.”150 However, 

as we have noted in several comments to the SEC on the matter, “While [dumping] might have 

been the primary potential abuse that principal trading created in simpler times, the potential for 

abuse arising from principal trades today is far broader and more varied than mere dumping. 

Advances in technology, speedier transactions, increased market volatility, more diverse trading 

platforms and other factors have brought benefits to the markets while also presenting more, and 

more complex, opportunities for principal trading abuses.”151

 

149 This hypothetical assumes the RIA does not receive any third party payments. However, there is a growing wave 

of RIAs who do receive such payments. See, e.g., Mason Braswell, Custodians payments to RIAs for fund picks 

raise eyebrows, Investment News, June 26, 2015, http://bit.ly/1eerBJ0. In the case in which an RIA receives third 

party payments, they should be required to continue claiming relief under the BICE, as their conflicts are no 

different than broker-dealers’ or insurance agents’, and we find the SEC’s approach to this issue, requiring mere 

disclosure, insufficient to protect retirement investors’ interests. 

150 SEC Proposed Rule: Temporary Rule Regarding Principal Trades With Certain Advisory Clients, Release No. 

IA-3893; File No. S7-23-07, http://1.usa.gov/1I7aJve..

151 September 17, 2014 Letter from Barbara Roper, Director of Investor Protection of Consumer Federation of 

America, to Securities and Exchange Commission Secretary Elizabeth Murphy, http://1.usa.gov/1OhNOSA; See 

also November 30, 2007 letter from Mercer Bullard, Founder and President of Fund Democracy, and Barbara 

Roper, Director of Investor Protection of Consumer Federation of America, to Securities and Exchange Commission 

Secretary Nancy M. Morris, regarding File No. S7-23-07, http://1.usa.gov/1RJM3ng. 
72

Debt securities are among the investments most commonly sold to investors on a 

principal basis. This is partly due to the fact that certain debt securities, including corporate 

bonds, are seen as less liquid than stocks, which is itself a result of a lack of standardization 

among products.152 Another contributing factor is a regulatory inconsistency in disclosure 

requirements that creates an incentive for firms to execute trades in a principal capacity. Under 

SEC Rule 10b-10, a firm is required to disclose on its customer’s trade confirmation the 

transaction costs the customer paid for stock transactions, regardless of whether the firm 

executed the transaction in an agency or principal capacity. However, for bond transactions, a 

firm is only required to provide the customer’s transaction costs on its customer’s confirmation if 

the firm executed the transaction in an agency capacity. Thus, if a broker-dealer arranges a bond 

trade for a customer on an agency basis, the broker must disclose the transaction costs he or she 

paid, reflected as a commission. However, if a broker-dealer arranges a bond trade for a 

customer on a principal basis, the dealer has no duty to disclose the transaction costs the 

customer paid, reflected as a markup or markdown. Thus, a firm can treat functionally equivalent 

transactions differently depending on how it chooses to characterize the transaction.153

Given this regulatory inconsistency, which allows firms to choose whether their clients 

receive confirmation disclosure of the costs they are paying, it is hardly surprising that firms 

execute virtually all customer fixed income securities transactions in a principal capacity. This 

allows firms to effectively withhold information from their clients that their clients would find 

useful. Consequently, firms are able to charge more than they otherwise would if they provided 

that cost information to their clients. More broadly, this disclosure loophole has helped to foster 

a market structure that preferences the trading of debt securities on a principal, rather than an 

agency basis. The result is an antiquated, over the counter, dealer-driven fixed income market 

that benefits the bond dealers who have an informational advantage over their customers.

Theoretical and empirical evidence suggests that, as a result of the opacity in fixed 

income markets, financial intermediaries are able to extract rents from their less sophisticated 

retail customers by charging them what appear to be excessively high transaction costs in fixed 

income markets. The price discrepancies further suggest that there are not sufficient protections 

designed to ensure that principal trades are executed in the best interests of investors, much less 

designed to ensure that principal trading abuses are rooted out. SEC Commissioner Michael 

Piwowar arguably has done more than anyone in recent years to highlight the ways in which 

retail investors have been harmed in fixed income markets. In 2007, Piwowar astutely observed: 

“Bond markets have been notoriously opaque....The lack of transparency in the bond markets 

has allowed market professionals – including sophisticated investors, brokers and dealers – to 

obtain vast sums of money from unsophisticated investors and taxpayers.”154 It is inevitable that, 

as a result of the market opacity, retail investors are unaware of instances in which principal 

trades with their broker-dealer were not in their best interests.

 

152 See Remarks by SEC Commissioner Daniel M. Gallagher, A Watched Pot Never Boils: the Need for SEC 

Supervision of Fixed Income Liquidity, Market Structure, and Pension Accounting, March 10, 2015, 

http://1.usa.gov/1OrRW2Y.

153 The SEC adopted Rule 10b-10 in 1977. Commissioner Piwowar has referred to this issue as an opportunity to 

“pick low hanging fruit.” Remarks by SEC Commissioner Michael S. Piwowar, Advancing and Defending the 

SEC’s Core Mission, January 27, 2014, http://1.usa.gov/1Ien0lP.

154 Piwowar, Michael S., Corporate and Municipal Bonds, Securities Litigation and Consulting Group, Inc., 2007,

http://bit.ly/1CwCN9V.
73

A 2007 paper by Piwowar, Harris, and Edwards examined corporate bond transactions in 

2003 and found that the average effective spread on a $20,000 corporate bond trade was 1.24 

percent of the price, making it the equivalent of over two months of the total annual return for a 

bond with a 6 percent yield to maturity.155 Putting that cost in perspective relative to today’s 

interest rates, it is equivalent to almost 5 months of the total annual return for a bond with a 3 

percent yield to maturity. In comparison to a similar-sized equity trade, Piwowar, Harris, and 

Edwards found that this cost would be equivalent to an effective spread of 52 cents per share. 

The researchers also found that trading costs decrease dramatically with trade size, meaning that 

retail investors generally pay substantially more than institutional investors to trade a bond. This 

is in stark contrast to equity markets, in which retail investors generally pay lower transaction 

costs than institutional investors to buy and sell stocks due to the lower price impact of trading 

smaller amounts.

B. Current Regulatory Efforts, While Helpful, are Insufficient to Ensure Transactions are in 

Retirement Investors’ Best Interests.

FINRA currently has efforts under way both to increase post-trade transparency of 

markups and to enforce its 5 percent markup policy, which is designed to require firms to buy 

and sell at prices that are fair and reasonable. In July 2002, Transaction Reporting and 

Compliance Engine (TRACE) began requiring bond dealers to report transaction data in U.S. 

corporate bonds in near real-time to what was then the National Association of Security Dealers 

(now FINRA), which made that transaction data available to the public for free. While overall 

bond trading costs have fallen as a result of increased price transparency, the evidence suggests 

that those benefits have not been noticeable for all investors. According to SEC Commissioner 

Piwowar, while institutional and sophisticated investors have seen their bond trading costs fall, 

retail investors’ trading costs remain high. This is likely because institutional and sophisticated 

investors know that TRACE exists, know how to access the information on the site, and know 

how to interpret the transaction information that they find in order to gauge whether they are 

paying fair prices. Most retail investors, on the other hand, likely do not know TRACE exists 

and, even if they did, are not in a position to use the website with any reasonable degree of 

expertise. As a result, they likely are not able to realize the benefits that TRACE can offer.

FINRA has recently proposed to provide certain markup disclosures for same-day trades 

directly to retail investors, which marks an improvement over the status quo. The information 

that would be provided to retail investors would no doubt put them in a better position to 

understand the costs they are paying and to assess whether those costs are reasonable. However, 

while disclosure is an essential investor protection tool that can increase the likelihood that 

investors make more informed choices, disclosure alone will not effectively mitigate the risks to 

retirement investors posed by excessive markups in fixed income markets.

 

155 Edwards, Amy, Harris, Lawrence and Piwowar, Michael, “Corporate Bond Market Transaction Costs and 

Transparency,” Journal of Finance 62, 1421-51 (2007), http://bit.ly/1Bb6y0y.
74

Similarly, FINRA recently has engaged in zealous enforcement of its 5 percent markup 

policy,156 and has even instituted proceedings against firms for excessive markups and markups 

that are significantly below the 5 percent threshold.157 Furthermore, FINRA has recognized that, 

since the policy was first instituted in 1943, advances in information and communication 

technologies, and member firms’ front and back office technologies, have significantly reduced 

execution costs.158 As a result, 5 percent is significantly higher than the average markup, 

markdown or commission currently charged by most member firms in customer transactions. 

Despite these efforts, FINRA may not be catching all instances of excessive markups. According 

to a recent Wall Street Journal article, “Bond-pricing service DelphX LLC found more than 60 

transactions between October and November featuring markups above Finra’s guideline. One 

broker paid 21 cents on the dollar for $50,000 of bonds from now-bankrupt oil and gas concern 

Endeavor International Corp., when four minutes earlier it had charged an investor 25.1 cents for 

the same amount of the same bonds, earning a 19.52% markup.”159

Thus, while we commend FINRA’s efforts to improve the fixed income market structure 

generally, they are insufficient to ensure retirement investors’ best interests are being protected 

when their fiduciary adviser buys from them or sells to them fixed income instruments on a 

principal basis.

C. The DOL Has Proposed a Sensible Framework to Protect Retirement Savers from 

Principal Trading Abuses.

Given the constraints of the market structure and the SEC’s apparent lack of appetite to 

fix even the most basic deficiencies in this market, we sincerely appreciate the DOL’s efforts to 

mitigate the potentially severe conflicts of interest that exist for principal transactions. Unlike the 

anemic approach to principal trading regulation under securities laws, which is premised on the 

faulty notion that investors can make an informed choice about engaging in principal 

transactions if they are provided with prior notice, the DOL’s approach does not rely exclusively 

on disclosure and consent. Instead, it incorporates concrete safeguards to prevent principal 

trading abuses.

First, we agree that, as with the Best Interest Contract Exemption, there must be a legally 

enforceable mechanism to hold advisers and their firms accountable for abuses. This includes 

 

156 See, e.g., Press Release, “FINRA Fines Oppenheimer $675,000 and Orders Restitution of More Than $246,000 

for Charging Unfair Prices in Municipal Securities Transactions and for Supervisory Violations,” December 9, 2013, 

http://bit.ly/1TMfLp9; Press Release, “FINRA Fines StateTrust Investments $1 Million and Orders $353,000 in 

Restitution for Charging Unfair Prices in Bond Transactions,” June 26, 2013, http://bit.ly/1Dqr0KA; Press Release 

“FINRA Sanctions David Lerner Associates $14 Million for Unfair Practices in Sale of Apple REIT Ten and for 

Charging Excessive Markups on Municipal Bonds and CMOs,” October 22, 2012, http://bit.ly/1MDksgU;

Press Release, “ FINRA Fines Citi International Financial $600,000 and Orders Restitution of $648,000 for 

Excessive Markups and Markdowns,” March 19, 2012, http://bit.ly/1OhP6wW; Press Release, “FINRA Fines 

Morgan Stanley $1 Million and Orders Restitution of $371,000 for Excessive Markups and Markdowns,” November 

10, 2011, http://bit.ly/1Gw02Bb 

157 Lisa Abramowicz, Bond Markups as Low as 3% Said Excessive to Finra in Trading, Bloomberg, May 16, 2014, 

http://bloom.bg/1TMgree

158 FINRA Regulatory Notice 13-07: Markups, Commissions and Fees, January 2013, http://bit.ly/1TMgAOK. 

159 Katy Burne and Aaron Kuriloff, Regulators Want Data on Bond-Trade Fees, Wall Street Journal, January 13, 

2015, http://on.wsj.com/1SxqZeT. 
75

acknowledging fiduciary status with regard to the investment recommendation regarding 

principal transactions; contractually committing to adhere to standards of impartial conduct when 

providing advice regarding principal transactions; and complying with the warranty 

requirements. The DOL should make clear that in addition to complying with these requirements 

when providing advice about principal transactions, advisers and firms must also comply with 

these requirements when executing principal transactions. Thus, in addition to the advice 

regarding principal transactions, the actual transactions that flow from that advice that must 

reflect the retirement savers’ best interest. Further, the DOL should clarify that, as part of the 

warranty requirement, firms must develop policies and procedures that are specifically designed 

to detect, deter, and prevent disadvantageous principal transactions for retirement savers.

Second, the list of assets that may rely on the principal trading exemption is appropriately 

narrow and limited to the types of securities that are most likely to be held in retirement accounts 

and least likely to be subject to principal trading abuses. This includes Treasury securities, 

agency debt securities, and registered corporate debt securities. Thus, municipal securities cannot 

claim relief under the exemption. This is appropriate, in our view, since these securities are 

notoriously involved in principal trading abuses.160 Furthermore, at least in the case where they 

are tax-exempt, their tax benefit results in decreased interest and all income distributed from an 

IRA is still taxable, regardless of the fact the interest was tax-exempt when earned. These factors 

render municipal securities ill-suited for retirement accounts in most circumstances. In addition, 

more complex and exotic types of debt, such as collateralized debt161 and private placements, are 

also appropriately outside the scope of the exemption.

Next, the proposal requires that the debt securities being bought and sold pursuant to the 

exemption possess no greater than moderate credit risk and have sufficient liquidity such that the 

securities can be sold at or near their fair market value within a reasonably short period of time. 

We believe that these additional protections beyond the list of permissible assets will ensure that 

the securities being traded on a principal basis have a strong likelihood of meeting their financial 

obligations and trade in sufficiently liquid markets so that the fairness of the security’s price can 

be ascertained and evaluated. As a practical matter, these protections are highly unlikely to 

constrain principal trading in Treasury securities and agency debt securities. Treasuries and 

Ginnie Mae securities are backed by the full faith and credit of the U.S. Government and are 

therefore considered to possess the lowest credit risk of any securities. Similarly, agency debt 

 

160 See, e.g., FINRA enforcement actions, Press Release, “FINRA Fines Oppenheimer $675,000 and Orders 

Restitution of More Than $246,000 for Charging Unfair Prices in Municipal Securities Transactions and for 

Supervisory Violations,” December 9, 2013, supra; Press Release, “FINRA Sanctions David Lerner Associates $14 

Million for Unfair Practices in Sale of Apple REIT Ten and for Charging Excessive Markups on Municipal Bonds 

and CMOs,” October 22, 2012, supra; Press Release, “FINRA Fines Morgan Stanley $1 Million and Orders 

Restitution of $371,000 for Excessive Markups and Markdowns,” November 10, 2011, supra; See also Researchers 

at Securities Litigation & Consulting Group found that investors paid $10.6 billion in markups across $2.5 trillion 

worth of municipal bond trades since 2005, more than half of which were excessive. See also Lawrence Harris and 

Michael Piwowar, Secondary Trading Costs in the Municipal Bond Market, Journal of Finance 61, 1361-1397 

(2006), http://bit.ly/1J3owpC; Erik R Sirri, Report on Secondary Market Trading in the Municipal Securities 

Market, July 2014, http://bit.ly/1xuslwC. 

161 See, e.g., FINRA enforcement actions against David Lerner Associates (excessive markups of collateralized 

mortgage obligations) supra; Press Release, “FINRA Expels APS Financial, Bars Former President and Former 

Broker for Targeting an Elderly Investor with Fraudulently Excessive Mark-ups,” December 29, 2010, 

http://bit.ly/1ebRrgi (excessive markups in collateralized mortgage obligations and collateralized debt obligations).
76

securities other than Ginnie Mae have what is widely considered to be an implicit guarantee that 

the U.S. government will not allow these agencies to default on their obligations. As a result, 

agency debt securities have minimal credit risk. In addition, there is a large and active secondary 

market for Treasuries and agency debt securities, which provide investors dependable liquidity.

Theses creditworthiness and liquidity protections would however affect the extent to 

which the exemption can be used for corporate debt securities transactions. We view this as a 

feature, not a bug, in the proposal. This is because, while many corporate debt securities trade in 

highly liquid markets and have a strong likelihood of meeting their financial obligations (and 

therefore a low likelihood of default), there are also many corporate debt securities that have a 

substantial credit risk and that are thinly traded, making them extremely difficult to value 

objectively. Securities that are difficult to value are, in our view, more likely to be securities that 

an adviser may be attempting to dump on his clients. As such, the potential for abuse rises with 

the difficulty of determining whether the transaction was fair. The proposal provides important 

safeguards against these risks by imposing creditworthiness and liquidity constraints.

We recognize that the DOL is limited in several ways in how it approaches a proper 

framework to gauge a security’s credit risk. This is due to the Dodd-Frank requirement to 

remove all references to credit ratings from all federal statutes and regulations,162 and financial 

regulators’ failure to create any substantive metrics by which to assess credit risk.163 We think 

that the DOL has done the best it can to set an appropriate creditworthiness standard given these 

inherent limitations.

One question we have is who would be responsible for making these creditworthiness 

and liquidity determinations. The release cites to the SEC’s rule eliminating credit rating 

references for Business and Industrial Development Companies (BIDCOs),164 but the context in 

which creditworthiness and liquidity determinations are made in that environment is different. A 

BIDCO has a board of directors that is ultimately responsible for those decisions, with the board 

often delegating the day-to-day decision-making to a fund manager. An adviser who 

recommends to an investor that she engage in a certain principal trade for a specific security is 

unlikely to have the financial sophistication and time necessary to conduct a proper credit 

analysis, short of depending exclusively on credit ratings or the adviser’s firm’s dictates. We 

therefore think that it would be helpful to require that the firm have policies and procedures in 

place detailing how credit risk and liquidity assessments are being made and ensuring that they 

are based on objective, verifiable standards.

 

162 Dodd-Frank Act Section 939A, Review of Reliance on Ratings.

163 See, e.g., April 25, 2011 Letter from Dennis Kelleher, CEO of Better Markets, to the SEC, References to Credit 

Ratings in certain Investment Company Act Rules and Forms, http://bit.ly/1CSw8vW(standards used are “overly 

vague and must be more detailed and concrete”). See also October 14, 2014 letter from Micah Hauptman, Financial 

Services Counsel of CFA, to the SEC in the money market mutual fund context, http://1.usa.gov/1If88FU; and also 

April 25, 2011 Letter from Barbara Roper, Director of Investor Protection of CFA to the SEC in the money market 

mutual fund context, http://bit.ly/1HEK1wX (objecting to the elimination of references to credit ratings without 

providing objective limits on securities that money market funds could invest in, or proving any guidance on the 

factors, beyond credit ratings, that boards would have to consider in arriving at their assessments of credit risk).

164 SEC Final Rule, Purchase of Certain Debt Securities by Business and Industrial Development Companies 

Relying on an Investment Company Act Exemption, Release No. IC-30268; File No. S7-07-11, 

http://1.usa.gov/1HLAban. 
77

Next, regarding the pricing requirements, we strongly support a process that requires an 

adviser and his firm to articulate not only the reasonableness of a proposed principal transaction 

but also why a proposed principal transaction is in the retirement investor’s best interests relative 

to available alternatives. With these goals in mind, we support the intent behind the requirements 

that 1) the adviser and firm reasonably believe that the price at which the security is executed is 

at least as favorable as a transaction that is not a principal transaction and 2) the price be at least 

as favorable as prices provided by two ready and willing counterparties.

However, we are concerned that these requirements may not result in executions that are 

truly advantageous to investors. Regarding the first requirement, it is our understanding that the 

vast majority of fixed income trading occurs on a principal basis, and therefore there may not be 

a non-principal transaction price available for comparison. Therefore, we encourage the DOL to 

consider amending the first requirement to require comparison with transactions on both a 

principal and non-principal basis. This would help to protect against the risk that firms only 

execute these trades in their principal capacity and thus escape scrutiny under the first 

requirement.

Regarding the second requirement, we can envision a scenario in which broker-dealers 

have a tacit understanding with other firms whereby the firms providing quotes never do better 

than the initial quote. Any such agreements could be difficult, if not impossible, to detect and 

more difficult still to prove. If all the firms are executing the transactions in principal capacities, 

then the first requirement would not act as a backstop protection to the second, and there may be 

an opportunity for principal trading abuse. Therefore, we encourage the DOL to consider 

amending the second requirement to require advisers and their firms to cite current market data 

and articulate why the proposed principal transaction is both reasonable and in the retirement 

investor’s best interests relative to other available alternatives. 

Near real-time market data is available on FINRA’s TRACE and would provide the basis 

for assessing the costs and benefits of a proposed transaction. For example, the adviser could 

examine recent trading of the same security that the adviser recommends executing and, based 

on that security’s recent pricing, propose a price that is fair and reasonable. Assuming no 

changes have occurred in the market from the time the last trade occurred until the 

recommendation was made, the proposed price should be extremely close to the last trade price. 

If there hasn’t been recent trading in the same security that the adviser recommends to use as the 

basis for comparison, the adviser could first find a similar security for which there is a viable 

price reference, then propose a price based on that reference security. In this instance, the adviser 

would have an affirmative obligation to prove why the characteristics of the reference security 

are similar enough to the actual security being transacted such that using the reference security is 

warranted. We think that forcing an adviser to cite near real-time market data to articulate why 

the proposed principal transaction is not only reasonable but also why it is in the retirement 

investors’ best interests will offer significant protections against the risk that advisers and firms 

will recommend and execute principal transactions that are disadvantageous to retirement 

investors.

Finally, we support the DOL’s proposed pre-transaction, confirmation, and annual 

disclosure. As we’ve stated previously, disclosure is necessary but it is not sufficient to protect 
78

retirement savers from principal trading abuses. It is worth reiterating one technical point with 

regard to confirmation disclosures. The proposal requires a financial institution to provide a 

written confirmation of the principal transaction “in accordance with Rule 10b-10 under the 

Securities and Exchange Act of 1934 that also includes disclosure of the mark-up, mark-down, or 

other payment to the Adviser, Financial Institution or Affiliate in connection with the Principal 

Trade.” As discussed above, Rule 10b-10 does not require transaction disclosures to be provided 

on a customer’s confirmation if the broker-dealer is acting in its principal capacity, which would 

likely mean that retirement investors will not receive useful confirmation disclosures.

However, FINRA has recently proposed to require firms to disclose on their customer 

confirmations the price to the customer, the price to the member of a transaction in the same 

security, and the differential between those two prices for same-day retail-sized (100 bonds or 

less or bonds with a face value of $100,000 or less) trades.165 If adopted, this proposal would 

effectively require “riskless principal” transaction markups and markdowns to be disclosed. 

According to FINRA’s release, its proposal would capture a significant part of the market. Using 

data from the third quarter of 2013 for corporate bonds, FINRA has observed that over 60 

percent of retail-size customer trades had corresponding principal trades on the same trading 

day.166 And so, while not a complete solution, a substantial part of the market would receive 

useful confirmation disclosures.

Perhaps the DOL could take advantage of FINRA’s proposed rules to require heightened 

confirmation disclosure of pricing information in fixed income securities transactions more 

generally. The rule could achieve this first by stating that, if the FINRA disclosure rules for 

same-day trade transactions are finalized, in addition to complying with Rule 10b-10, firms 

would be required to comply with FINRA’s rule where the requirements of the rule are met. 

Where the requirements of the FINRA rule are not met, they would be required to provide 

markup and markdown disclosure requirements based on the amount in excess of or reduced 

from the “prevailing market price,” as defined by FINRA Rule 2121 and Supplementary Material 

.02 thereunder. FINRA’s definition of “prevailing market price” should only be used as a 

fallback option, however, as it allows firms to effectively set the “prevailing market price” they 

charge or pay for a security in relation to the markup or markdown they charge, thus 

undermining the purpose of fair and accurate pricing information that these disclosures are 

supposed to provide.

In sum, we appreciate the DOL’s proposed approach, as it does not rely exclusively on 

disclosure and consent to protect investors’ interests and instead incorporates concrete 

safeguards to prevent principal trading abuses. With a few minor technical adjustments, as 

discussed above, the rule can create an effective framework for ensuring that principal trades are 

conducted on terms that are truly in retirement investors’ best interests.

 

165

 FINRA Regulatory Notice 14-52, Pricing Disclosure in the Fixed Income Markets, FINRA, November 2014, 

http://bit.ly/1JbS7iN.

166 Id. 
79

V. Conclusion

With this revised rule proposal, the Department of Labor has achieved what many 

thought to be impossible. It has produced a principles-based rule that strengthens protections for 

retirement savers but does so in a way that would enable financial firms operating under a variety 

of business models to comply. The continued opposition of many brokerage, insurance, and 

mutual fund companies should help to make clear that, too often, these sales-based advisers’ 

claim to support a best interest standard is superficial at best. That support quickly evaporates at 

the suggestion that they might have to make more than trivial changes to current practices in 

order to come into compliance. 

Those who want to give lip service to support for a best interest standard while 

maintaining the status quo often argue that securities regulators should take the lead in 

developing such a standard. There are any number of reasons why this is a ridiculous suggestion 

on its face. It is DOL, not the SEC or FINRA, that has exclusive authority to write rules 

implementing ERISA, and only DOL has authority to write rules governing advice to retirement 

plans. Moreover, while securities play an important role in the retirement market, it is not 

exclusively a securities market. Insurance also plays an important role, and some of the most 

troubling abuses relate to other, more exotic investments, such as gold and art. A DOL standard 

can cover the entire universe of retirement investment advice; a securities-based standard cannot. 

Even more fundamental than these jurisdictional questions, however, is the fact that 

federal securities regulators have an abysmal record of dealing with the complex issues that are 

the subject of the DOL rulemaking. In the late 1980s and early 1990s, for example, when 

broker-dealers faced growing competition from financial planners on one side and discount 

brokers on the other, the SEC and FINRA’s precursor, the NASD, showed greater concern for 

protecting the full service broker-dealer business model than for protecting investors. It was 

during this era that the agency adopted policies that permitted brokers to rebrand their sales force 

as advisers, market themselves as advisers, and offer financial planning and other clearly 

advisory services all while claiming their “solely incidental to” exemption from the Investment 

Advisers Act. Time and again, NASD argued off of industry’s talking points in defending this 

anti-investor regulatory approach.

For at least 15 years, investor advocates have been urging the SEC to reverse this tide by 

requiring broker-dealers to comply with a fiduciary standard when providing personalized 

investment advice. We have identified this as the single most important step the agency could 

take to improve protections for retail investors. It is only recently that the SEC and FINRA have 

voiced support for rulemaking, and it is far from clear from their statements on the issue how far 

they are willing to go to deliver the protections investors want and need. For example, despite 

external and staff studies supporting rulemaking, a clear authorization from Congress in the 

Dodd-Frank Act, and statements of support from the current and two preceding SEC chairs, the 

agency still has not produced a rule proposal, let alone a final rule, and cannot count on broad 

support among the commissioners for rulemaking. The best interest standard outlined by FINRA 

in its comment letter and in an earlier speech by CEO Rick Ketchum (discussed in greater detail 

below) is missing crucial components of a comprehensive, pro-investor standard.
80

The SEC’s failure to adopt a fiduciary standard for brokers when they provide investment 

advice is symptomatic of its broader failure to adopt strong protections for retail investors. 

Indeed, even where a fiduciary duty applies under the Investment Advisers Act, the agency 

shows little inclination to enforce it effectively. Under the Commission’s approach to 

enforcement, the best interest obligation is rarely brought to bear, and conflicts are almost always

handled through disclosure rather than more meaningful mitigation. It appears that it is precisely 

this toothless enforcement that industry has in mind when it purports to embrace a best interest 

standard. And it is this poor enforcement of the fiduciary standard FINRA appears to be 

referring to when it suggests that DOL’s proposed best interest standard “differs significantly 

from the fiduciary standard applicable to investment advisers registered under the federal and 

state securities laws.”167

The SEC’s record regarding regulation of conflicts of interest is no better. Despite years 

of entreaties from investor advocates, the agency has done nothing to rein in even the most 

egregious of the conflicts of interest that pervade the brokerage industry. Five years after the 

Dodd-Frank Act mandated that the agency examine compensation practices and conflicts of 

interest among broker-dealers and investment advisers, the agency has shown no sign of 

undertaking any such study, let alone acting on the Dodd-Frank Act’s authorization to 

“promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and 

compensation schemes for brokers, dealers, and investment advisers that the Commission deems 

contrary to the public interest and the protection of investors.” FINRA, which has at least 

studied the issue, has offered nothing but voluntary “best practice” guidance in response. 

Even with regard to disclosures -- the “solution” regulators so often offer when they are 

unwilling to take more meaningful action -- the SEC’s record of inaction is the same. Here 

again, investor advocates have been pushing for pre-engagement disclosures for brokers and presale disclosures of key information, including costs and conflicts, for investment products for 

close to two decades. Although the SEC issued a proposal for point-of-sale mutual fund 

disclosure in the early years of the previous administration, it was withdrawn in the face of 

industry opposition. A proposal to reform 12b-1 fees suffered a similar fate when industry raised 

objections. Language in the Dodd-Frank Act mandating a pre-engagement disclosure document 

for brokers and authorizing pre-sale disclosures for investment products have produced nothing 

in the way of concrete proposals, despite a staff study showing a clear investor preference for 

pre-engagement and pre-sale disclosure. 

Finally, while the Dodd-Frank Act authorized the SEC to adopt rules to ban or restrict the 

use of pre-dispute binding arbitration clauses in brokerage contracts, the agency has failed to act 

on this authority. Had the agency acted, the Department might have had options other than 

permitting such clauses in the BIC. Investors would have been better served by an approach that 

preserved their full range of options for resolving disputes.

 

167 July 17, 2015 letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, to the Office of 

Regulations and Interpretations and the Office of Exemptions Determinations, Employee Benefits Security 

Administration, Department of Labor, regarding “Proposed Conflict of Interest Rule and Related Proposals,” RIN1210-AB32. 
81

There is no question that DOL’s job in drafting this rule would have been easier had 

securities regulators provided a strong model for the Department to follow. Unfortunately, on 

issue after issue over the years, federal securities regulators have either backed down in the face 

of industry pressure or sided with industry and against investor advocates regarding the need for 

reform. This same tendency has been very much in evidence in FINRA’s response to the DOL 

fiduciary rule proposal, including both remarks delivered by FINRA CEO Rick Ketchum168 and 

FINRA’s recently filed comment letter on the rule proposal. Both echo inaccurate industry 

claims regarding the confusion that investors would suffer if the DOL adopted a standard that 

differed from securities law standards and the threat that industry might desert this market if 

forced to comply. Indeed, the speech and the comment letter taken together call into question 

FINRA’s oft repeated support for a fiduciary standard that is at least as robust as the standard 

articulated in the Dodd-Frank Act. And both offer the existing securities standards that investor 

advocates have found so abysmally inadequate as the model that DOL should follow in adopting 

rules under ERISA.

FINRA starts by suggesting that a “fractured approach,” in which DOL applies a different 

standard under ERISA than applies under securities laws, “will confuse retirement investors, 

financial institutions, and advisers.”169 In assessing the validity of this concern, it is important to 

note that an investor who does business with a broker-dealer today might simultaneously have a 

commission account, where recommendations are subject to a suitability standard, a fee-based 

account, where recommendations are subject to an Advisers Act fiduciary duty, and a selfdirected account, where no duty applies as no advice is rendered. That same investor might 

purchase insurance products through that adviser in his or her capacity as an insurance agent 

under a different standard still. FINRA expresses no concern that investors (or financial 

institutions or advisers) might be confused about the duty that applies to a particular conversation 

between the investor and his adviser under this array of standards. It is only DOL’s proposal to 

adopt a fiduciary standard under ERISA, apparently, that creates unacceptable confusion. 

FINRA’s critique ignores the fact that Congress intentionally set a higher standard under 

ERISA for investment advice to tax-advantaged retirement accounts than the standard it set 

under securities laws. These higher standards are justified to ensure that tax subsidies are not 

siphoned off by conflicted advisers giving self-serving advice. FINRA’s critique also ignores the 

much more damaging confusion that would arise if different standards applied to 

recommendations regarding different types of investments within retirement accounts. But that 

is the inevitable result of prioritizing a consistent set of standards across different types of 

accounts over a consistent standard for all products sold within retirement accounts. Of course, 

the real confusion arises from the fact that investors already assume they are receiving fiduciary 

advice. Securities regulators have done nothing to address that problem in the 15 years that 

advocates have called for reform. With its proposal to adopt a securities law solution to an 

 

168 “Remarks From the 2015 FINRA Annual Conference,” by Richard G. Ketchum, FINRA Chairman and Chief 

Executive Officer, May 27, 2015, http://bit.ly/1If97FQ. 

169 July 17, 2015 letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, to the Office of 

Regulations and Interpretations and the Office of Exemptions Determinations, Employee Benefits Security 

Administration, Department of Labor, regarding “Proposed Conflict of Interest Rule and Related Proposals,” RIN1210-AB32. 
82

ERISA problem, FINRA has nothing to suggest to address this confusion except a call to keep 

waiting in the hopes that securities regulators will finally find the wherewithal to act.

Those who still hope, as we do, that securities regulators will ultimately act to adopt a 

fiduciary standard for brokers -- as a supplement to and not a substitute for DOL action -- should 

draw little comfort from FINRA’s description of the key elements of such a duty. Here again, 

FINRA echoes industry talking points when it calls for a “best interest” standard that is not only 

weaker than the standard proposed by DOL, but weaker than the standard mandated by Congress 

in Section 913 of the Dodd-Frank Act. Specifically, FINRA’s proposed standard (like the 

standard proposed by SIFMA) would not include the crucial component that advice be delivered 

“without regard to the financial or other interest of the broker, dealer, or investment adviser 

providing the advice.” 

In a bizarrely twisted argument, even as it calls for a common standard for all securities 

accounts, FINRA uses SEC’s failure to act under its Dodd-Frank authority to argue against 

DOL’s adoption of this same standard for investment advice under ERISA. Its comment letter 

states: “This principle, borrowed from Section 913 of Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 (the “Dodd-Frank Act”), has not been developed under ERISA 

or the federal securities laws and financial institutions, their advisers and their compliance 

officers and counsel will be forced to anticipate its intended meaning. ... Since financial 

institutions and advisers are engaged in a business that will earn compensation for their services, 

they would not provide investment advice at all if the customer were unwilling to pay the fee. 

Surely this is not the Department’s intent.” This is an obtuse reading of the rule proposal, and 

the Dodd-Frank language, raising serious questions about FINRA’s appetite and ability to 

effectively enforce any fiduciary standard, whether adopted under ERISA or under Section 913 

of the Dodd-Frank Act.170

The FINRA comment letter is replete with similar examples of FINRA’s defense of the 

status quo. Perhaps most glaring is its proposed treatment of differential compensation. As 

discussed above, this is the conflict at the heart of the broker-dealer business model that most 

directly encourages brokers to make recommendations that serve their own financial interests 

rather than those of their clients. While FINRA purports to support a fiduciary duty that requires 

brokers to “eliminate conflicts whenever possible,” it specifically mentions differential 

compensation as a conflict that should instead be addressed through “written supervisory 

procedures” designed to ensure that compensation differences don’t affect recommendations. 

But FINRA itself has argued elsewhere that it “is unclear how a financial institution or adviser 

would demonstrate that the amount of compensation was not a factor in the recommendation.” 

Presumably, it would be equally difficult to prove that it was a factor. In short, this is a 

prescription for maintaining harmful current practices, in which firms are permitted to reward 

advisers financially for advice that is not in their customers’ best interest, all while giving lip 

service to a best interest standard that reluctant regulators are unlikely to enforce.

The message that comes through in both the Ketchum speech and the FINRA comment 

letter is that FINRA disputes the implication in the Council of Economic Advisers study, the 

 

170 Ketchum made a similar argument in his earlier speech, in which he called into question FINRA arbitrators’ 

ability to resolve claims based on this standard.
83

DOL’s regulatory impact analysis, and the rule proposal itself that the SEC and FINRA’s current 

regulatory approach is fundamentally inadequate and exposes retirement savers to harm. This 

lack of complacency about the status quo is, of course, precisely what investor advocates find so 

refreshing in the DOL’s proposal. Indeed, the beauty of the Department’s proposed approach, in 

our view, is precisely this: that it recognizes that imposing a best interest standard without also 

requiring changes to practices that encourage and reward advice that is not in the customer’s 

interest is unlikely to deliver meaningful new protections to retirement savers. 

Retirement savers who are struggling to fund an independent and secure retirement need 

financial advice they can trust. Today, neither our securities regulations nor the rules under 

ERISA provide that assurance. Instead, both sets of regulations expose retirement savers to selfserving recommendations from conflicted advisers who are free to recommend products based on 

their own financial interests rather than those of their customers. The DOL proposal -- which 

combines a best interest standard with meaningful restrictions on the practices that undermine 

that standard -- offers significant progress toward addressing this problem. We can only hope 

that the SEC will eventually follow the Department’s lead and craft a similarly strong and 

effective rule for non-retirement accounts. But in a nation that faces a retirement crisis, and with 

DOL ready to act, we cannot afford to wait. We therefore urge you to move forward without 

further delay to adopt a final rule based on the eminently sound regulatory approach proposed 

here.

Respectfully submitted,

Barbara Roper

Director of Investor Protection

Micah Hauptman 

Financial Services Counsel