NASAA

NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION,INC.

750 First Street N.E., Suite 1140 

Washington, D.C. 20002

202/737-0900

Fax: 202/783-3571

www.nasaa.org

President: William Beatty (Washington) Secretary: Kathryn Daniels (Ontario) Directors: Joseph P. Borg (Alabama)

President-Elect: Judith M. Shaw (Maine) Treasurer: Michael Rothman (Minnesota) Melanie Senter Lubin (Maryland)

Past-President: Andrea Seidt (Ohio) Ombudsman: Keith Woodwell (Utah) John Morgan (Texas)

Executive Director: Joseph Brady Gerald Rome (Colorado)

 

 

 

July 21, 2015

Via email to e-ORI@dol.gov

Phyllis C. Borzi

Office of Regulations & Interpretations

Employee Benefits Security Administration

Attn: Conflicts of Interest Rule

Room N-5655

U.S. Department of Labor

200 Constitution Avenue

Washington, DC 20210

Re: RIN 1210-AB32 – Definition of the Term “Fiduciary” – Conflicts of Interest Rule –

Retirement Investment Advice, and related proposals published on April 20, 2015 in 

Volume 80 of the Federal Register.

Dear Ms. Borzi,

The North American Securities Administrators Association, Inc. (“NASAA”)1 welcomes

the opportunity to comment on the Department of Labor (“the Department”) Employee Benefits 

Securities Administration’s (“EBSA”) proposed rulemaking defining the term “fiduciary”2“(the 

“fiduciary duty proposal”) and related proposed rulemaking initiatives published alongside the 

fiduciary duty proposal, including the Best Interest Contract Exemptions3(“BIC proposal”) and 

Prohibited Transaction Exemption (PTE) 84-244(“variable annuities proposal,” collectively, “the 

EBSA proposal” or “the proposal” or “the proposed rule”).

The NASAA membership includes all U.S. state securities regulators. U.S. state 

securities regulators have long-standing experience in applying the fiduciary standard of care in 

investment adviser oversight. To this end, NASAA offers the enclosed comments to inform this 

important EBSA regulatory initiative as applied to retirement accounts, which will serve to 

further protect retirement investors, as identified by the proposal. In parallel, NASAA continues 

to advocate for extending the fiduciary duty standard of care currently applicable to investment 

 

1 NASAA is the association of the 67 state, provincial, and territorial securities regulatory agencies of the United 

States, Canada, and Mexico. NASAA serves as the forum for these regulators to work with each other in an effort to 

protect investors at the grassroots level and to promote fair and open capital markets.

2 80 Fed. Reg. 21928 (April 20, 2015). 

3 80 Fed. Reg. 21960 (April 20, 2015). 

4 80 Fed. Reg. 22010 (April 20, 2015).
Ms. Phyllis C. Borzi

July 21, 2015

Page 2 of 8

advisers to broker-dealers, as provided in Section 913 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 (“Dodd-Frank Act”).5 While the EBSA proposal is a 

rulemaking initiative distinct from any U.S. Securities and Exchange Commission (“SEC”), 

rulemaking under its Dodd-Frank Act Section 913 authority, NASAA emphasizes the importance 

of continuing to raise the standard of care available to investors through multiple initiatives. Any 

progress towards an increased duty of care that addresses the problems associated with the 

significant conflicts of interest present in today’s marketplace is a productive step in the right 

direction.

By broadening the definition of investment advice and who is a fiduciary, the EBSA 

proposal would significantly raise the standard of care available to investors in retirement plans, 

or retirement investors. Specifically, the proposal would treat those who provide investment 

advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or 

beneficiary, individual retirement account (“IRA”) or IRA owners as fiduciaries under the 

Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“the 

Code”). NASAA supports the proposed definition of investment advice also extending to IRAs. 

IRAs, a widely used retirement tool today, had only just begun to exist in 1975 when the 

Department promulgated the existing ERISA fiduciary duty regulations, and therefore were 

likely not considered extensively as part of the 1975 rulemaking. NASAA notes the proposed 

definition of fiduciary will extend to IRAs as a result of the parallel structure between Title I of

ERISA and Section 4975(e)(3)(B) of the Code. However, the remedies under each regulatory 

framework differ, despite the parallel structure. While the ERISA Title I provisions generally 

authorize recovery of losses and imposition of civil penalties, the Code can only impose excise 

taxes on persons engaging in the prohibited transactions. As outlined below, explicitly 

preserving remedies available under state securities laws would enhance this unavoidable 

discrepancy between remedies available to IRAs under the Code in comparison to Title I plans.

NASAA appreciates that the new general definition of investment advice avoids many of 

the weaknesses of the current EBSA framework. Such weaknesses include the narrow definition 

and applicability of the framework. NASAA supports the proposal’s goal to avoid sweeping in 

relationships that are not appropriately regarded as fiduciary in nature and that the Department 

does not believe Congress intended to cover as fiduciary relationships. NASAA also supports 

the Department’s inclusion of new exemptions designed to preserve certain transaction-based 

compensation models as part of its proposal, including the BIC proposal and the proposed 

amendments to existing exemptions to ensure workability. To contribute to the workability of 

the proposed rule, NASAA offers below a few suggestions to enhance the proposal while 

continuing to protect investors and preserving the remedies available to investors outside of 

binding arbitration.

 

5 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
Ms. Phyllis C. Borzi

July 21, 2015

Page 3 of 8

The Importance of a Fiduciary Duty of Care

The proposal is a positive step towards raising the standard of care for retirement 

accounts, though NASAA notes the importance of raising the standard of care for investors on all 

accounts, not solely retirement accounts. The proposal would ensure that many broker-dealer 

relationships currently governed by the suitability standard would become retirement accounts 

under the proposal and, therefore, subject to a conduct standard meant to prohibit conflicts of 

interest. The proposal is appropriate considering the evolution of retirement accounts since 1974 

as well as ERISA’s scope and intent. ERISA is a comprehensive statute and the broad public 

interest in ERISA-covered plans is reflected in ERISA’s imposition of stringent fiduciary 

responsibilities on parties engaging in important plan activities, as well as in the tax-favored 

status of plan assets and investments. 

NASAA has also long advocated for a true, undiluted, fiduciary duty standard applicable 

to broker-dealers when providing investment advice to customers. An important benefit of a 

fiduciary duty regime for investors in general is that the fiduciary duty standard is not 

exclusively a conflicts disclosure regime, but one where the provider of advice must act in the 

best interest of the investor. While disclosing and managing conflicts of interest is a component 

of fiduciary duty, a true fiduciary duty standard also contemplates conflicts that cannot be 

disclosed and are therefore prohibited. To this end, NASAA has continued to emphasize that 

certain significant conflicts of interest must be prohibited, rather than allowed through 

disclosure. To the extent that the Department’s rulemaking will inform other regulatory 

initiatives to raise the standard of care available to investors, NASAA is pleased that the 

Department has designed a rule that is meant to preserve certain traditional compensation models 

while significantly narrowing the exemptions to ensure the protection of investors. 

NASAA also appreciates that the Department has coordinated with the SEC, and would 

encourage continued consultation with the SEC and state securities regulators. Continued 

coordination serves to minimize any confusion that may result on behalf of either investors or 

industry members as the rule is implemented. To this end, NASAA has also sent a comment 

letter to the SEC noting the importance of coordinating with the Department to ensure that the 

standard of care available to investors is a fiduciary standard for retirement accounts, but also for 

non-retirement accounts at broker-dealers. The SEC, under the grant of authority of Section 913 

of the Dodd-Frank Act, has the discretion to ensure that the standard of care that broker-dealers 

owe to customers be raised to a fiduciary standard on all account relationships, with very limited 

carve-outs for commissions and principal transactions. SEC rulemaking can and should occur in 

close coordination with the Department’s rulemaking, though regulatory harmony should not 

delay either the Department’s or the SEC’s rulemaking.

Extending Fiduciary Duty to IRAs Will Result in Greater Investor Protection

The proposal’s extension of the fiduciary duty standard to IRAs would provide 

significant and much needed protection to retirement investors. The Department’s reliance on 

economic evidence supporting a finding of the negative impact of conflicts of interest on 
Ms. Phyllis C. Borzi

July 21, 2015

Page 4 of 8

retirement investment outcomes demonstrates the need for the rule under consideration. The 

Department cites to substantial failures in the market for retirement advice, noting that IRA 

holders receive conflicted advice and can expect the investments to underperform by an average 

of 100 basis points per year over the next 20 years. The proposal seeks to remedy this adverse 

impact on the performance of IRAs with investments from a wide range of products. Products 

held in IRAs can include mutual funds, insurance products, exchange traded funds (ETFs), 

individual stocks and bonds, and other products which are all sold by agents and brokers. 

Rollovers and account transfers are an area where state securities regulators routinely see 

abuse, such as in cases where an investor is advised to liquidate a well-balanced portfolio in 

exchange for an over-concentration in a high-fee product. That same fact pattern can occur in 

IRA rollovers. Furthermore, even if a specific IRA rollover may be an adequate transaction for 

the investor, it may not be the transaction in the investor’s best interest. Therefore, NASAA is 

supportive of the greater breadth of application of fiduciary duty that the proposed rule can 

afford, as long as remedies available under the state securities laws are explicitly preserved under 

the proposal. State securities regulators have active enforcement programs that contribute to 

investor protection and would supplement the few remedies available to IRA holders under the 

Code, particularly in contrast with the remedies available to Title I plans.

State securities enforcement programs address both registered and unregistered activities. 

In its most recent report on state securities enforcement activities, NASAA reported that 

investigations conducted by state securities regulators led to nearly 2,200 enforcement actions 

across 51 jurisdictions, including administrative, civil, and criminal actions against 3006 

respondents or defendants.6 Those actions targeted both registered and unregistered activity and 

resulted in state securities regulators levying $71 million in fines and penalties and the ordering 

of $616 million in restitution to investors.7 State securities regulators also took steps to deny 

licenses to bad actors and imposed restrictions on the activities of licensees with significant 

disclosure history. As noted in the most recent report on state securities enforcement activities, a 

total of 169 licenses were denied due to state action, a 36 percent increase in denials over last 

year.8 In addition, 394 licenses were conditioned, a 48 percent increase over last year.9

Adoption of the Proposal Should Include Explicit Acknowledgment of the ERISA Savings 

Clause for State Securities Laws and Enforcement

The proposal notes that enforcement of the fiduciary standard varies depending on the 

type of plan. Specifically, the remedies for IRA plans are limited to excise tax remedies and 

contractual remedies under the BIC. Therefore, it remains important that state securities 

regulators maintain their authority to pursue a registered person who may have engaged in 

violative conduct involving an IRA or other transaction covered by ERISA fiduciary duty. We

 

6 See NASAA 2014 Enforcement Report available at http://www.nasaa.org/wp-content/uploads/2011/08/2014-

Enforcement-Report-on-2013-Data_110414.pdf. 

7

Id.

8

Id.

9

Id.
Ms. Phyllis C. Borzi

July 21, 2015

Page 5 of 8

urge the Department to include language in its final rule that explicitly acknowledges that state 

securities laws are not superseded or preempted in any way and remain subject to the ERISA 

Section 514(b)(2)(A) savings clause.10

Explicit acknowledgement of the savings clause ensures that state enforcement actions 

can supplement the current remedies under ERISA and the Code, which vary by type of plan. 

Participants in plans covered by Title I of ERISA have a statutory right of action to bring suit 

against fiduciaries under ERISA for violation of the prohibited transactions. In contrast, while 

the proposal includes IRAs in terms of extending fiduciary duty to IRAs, the sole statutory 

sanction available under the Code is an excise tax enforced by the Internal Revenue Service. 

The proposal bolsters these remedies for IRA owners through the addition of contractual 

remedies for transactions that include use of the BIC exemption. The proposal essentially 

empowers enforcement of the BIC exemption through the retirement investor, noting “the 

Department intends that all the contractual obligations (the Impartial Conduct Standards and the 

warranties) will be actionable by IRA owners.”11 While NASAA supports empowering the 

retirement investor, state securities regulators know from long-standing experience and active 

enforcement programs that deterrence and enforcement of remedies cannot rest on investors 

alone. 

The ERISA “pre-emption clause” (Section 514(a))12 provides that ERISA supersedes all 

state laws insofar as they “relate to any employee benefit plan,” but acknowledges the 

importance of certain state laws through ERISA's “saving clause” (Section 514(b)(2)(A))13 that

excepts from the pre-emption clause any state law that “regulates insurance, banking, or 

securities.” As the proposal represents a significant regulatory shift, explicit acknowledgement 

that state securities laws are not superseded in any way and remain subject to the ERISA Section

514(b)(2)(A) savings clause is an important and clear indication of the Department’s support for 

state securities regulators’ mission to protect investors who may have engaged in ERISAcovered transactions, such as becoming IRA owners.

Adoption of the Proposal Should Prohibit Pre-Dispute Binding Arbitration Agreements

NASAA urges the Department to revise the proposal’s endorsement that institutions 

entering into agreements with retirement investors would be able to include pre-dispute binding 

arbitration agreements with respect to individual contract claims.14 We appreciate and agree 

with the Department’s position that waivers for class actions should not be part of the 

 

10 29 U.S.C. 1144(b)(2)(A). 

11 BIC proposal, 80 Fed. Reg. at 21972. 

12 29 U.S.C. 1144(a).

13 29 U.S.C. 1144(b)(2)(A).

14 BIC proposal, 80 Fed. Reg. at 21973:

As proposed, this section would not affect the ability of a Financial Institution or Adviser, and a Retirement 

Investor, to enter into a pre-dispute binding arbitration agreement with respect to individual contract 

claims. The Department expects that most individual arbitration claims under this exemption will be subject 

to FINRA’s arbitration procedures and consumer protections.
Ms. Phyllis C. Borzi

July 21, 2015

Page 6 of 8

agreements, but remain concerned that the regulation would allow the use of binding pre-dispute 

arbitration provisions for individual claims. Prohibiting binding, or mandatory, pre-dispute 

arbitration clauses would ensure retirement investors’ access to the courts, provide an important 

measure of investor protection, and uphold the original purpose of the Federal Arbitration Act 

(“FAA”). If the Department declines prohibiting pre-dispute binding arbitration agreements, 

NASAA urges that the Department consider revising its assent to such agreements by including 

in the adopting release a discussion on these agreements’ inherent conflict with investor choice 

of forum and protection. 

The FAA was enacted in 1925 to honor agreements to arbitrate between mutually 

consenting parties. The “principal purpose” of the FAA was to “require courts to enforce 

privately negotiated agreements to arbitration, like other contracts, in accordance with their 

terms.”15 Form contracts or “contracts of adhesion” where one party offers terms on a nonnegotiated, “take-it-or-leave-it” basis are contrary to the intended purpose of the FAA. 

Unfortunately, these types of agreements are an endemic part of brokerage “form” contracts

between institutions and investors, requiring investors to agree, in advance of any dispute, to 

mandatory arbitration. NASAA has a long-standing position opposing such mandatory predispute arbitration agreements and has supported the Arbitration Fairness Act of 201316 and the 

Investor Choice Act,17 as well as other efforts to curtail these agreements. Investors should not 

be forced into an arbitration forum, but rather should have a choice of forum, whether arbitration 

or the traditional court system. 

NASAA notes that Congress recognized the potential harm to investors raised by

mandatory pre-dispute arbitration agreements when it enacted Section 921 of the Dodd-Frank 

Act. Section 921 provides the SEC with the authority to prohibit or impose limitations on the 

use of mandatory pre-dispute arbitration clauses in broker-dealer and investment adviser 

customer contracts. It is unfortunate that the SEC has not yet exercised this authority, but in light 

of the importance of coordination between the Department and the SEC, the Department could 

take an important step towards investor protection by opposing mandatory pre-dispute arbitration 

agreements as part of the BIC proposal’s requirements for contracts with retirement investors. 

Additional Comments Regarding the Proposal

In addition to the above comments regarding some of the larger policy aspects of the 

proposal, NASAA offers the following comments to enhance the proposal’s application and 

workability.

 Explicit retroactive application of the BIC’s fiduciary obligations once the written contract is 

signed. The BIC proposal notes that the contract is the cornerstone of the proposed 

 

15 Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989).

16 See Letter from NASAA to Representative Hank Johnson (May 20, 2013), available at http://www.nasaa.org/wpcontent/uploads/2011/07/NASAA-Letter-Supporting-AFA-Rep-H-Johnson-May-2013.pdf. 

17 See Letter from NASAA to Senator Al Franken (May 20, 2013), available at http://www.nasaa.org/wpcontent/uploads/2011/07/NASAA-Letter-Supporting-AFA-Sen-A-Franken-May-2013.pdf. 
Ms. Phyllis C. Borzi

July 21, 2015

Page 7 of 8

exemption but, as it is a written contract, it will be signed after the relationship with the 

Adviser and Financial Institution has begun. Account opening is a crucial time to ensure that 

the investor understands the relationship, the type of account, and the long term strategy. 

Here, a retirement investor may receive advice about the various types of retirement 

accounts, including differences between these accounts with regard to commissions, tax 

consequences, and fee structure. Retroactive application of the fiduciary standard prior to the 

written contract being ratified would be analogous to the attorney-client confidentiality and 

privilege rules in the majority of states, where discussions leading up to the decision of a 

client to retain an attorney are nevertheless covered by obligations of confidentiality and 

privilege. The BIC proposal should be revised to note that the provisions of the written 

contract cover the relationship with the retirement investor retroactively. 

 Investment and retirement education. NASAA appreciates that the fiduciary duty proposal 

includes a carve-out for the provision of investment education information and materials. 

NASAA especially appreciates the proposal’s equal application of this carve-out to 

information provided to plan fiduciaries as well as information provided to plan participants 

and beneficiaries and IRA owners, including equal application to participant-directed and 

other plans. While this type of investment and retirement education is important for 

investors, this type of education differs from the unbiased investor education that federal and 

state securities regulators provide. Therefore, while it is appropriate for the Department to 

provide guidance on what constitutes education in comparison to advice, allowing some 

specificity within educational materials may provide a service to retirement investors. Such 

specificity should be balanced, however, with requiring materials to prominently note that 

they are part of the marketing process of a plan and could present biases or conflicts. 

 Narrow exemptions. NASAA supports the general narrowing of exemptions contemplated in 

the proposal, including the amendment in the variable annuities proposal that would revoke 

relief for insurance agents, insurance brokers, and pension consultants to receive a 

commission in connection with the purchase by IRAs of variable annuity contracts and other 

annuity contracts that are securities under federal securities laws. Revoking this exemption 

through application of the BIC exemption provides an important measure of investor 

protection. NASAA has identified problems in the sale of variable annuities as a persistent 

threat to all retail investors.18 The regulatory and investor protection issues surrounding 

variable annuities have been documented over the years in regulatory warnings, 

governmental enforcement actions, private lawsuits, and media accounts.

19

 The problematic 

sales practices surrounding variable annuities include: (1) misrepresentations about the 

annuities’ liquidity; (2) unsuitable sales to customers for whom a variable annuity’s long 

 

18 See NASAA Enforcement Report (Oct. 2012), available at http://www.nasaa.org/wpcontent/uploads/2012/10/2012-Enforcement-Report-on-2011-Data.pdf; see also NASAA Enforcement Report (Oct. 

2011), available at http://www.nasaa.org/wp-content/uploads/2011/08/2010-Enforcement-Report.pdf. 

19 See Comment Letter from Karen Tyler, NASAA President and North Dakota Securities Commissioner regarding 

the SEC’s Proposed Rule That Would Subject Certain Equity-Indexed Annuities to Regulation Under the Federal 

Securities Laws (Sept. 10, 2008), available at http://www.nasaa.org/wp-content/uploads/2011/07/29-

NASAA_Comment_Letter_on_SEC_Proposed_Rule_151A.pdf.
Ms. Phyllis C. Borzi

July 21, 2015

Page 8 of 8

timeline is inappropriate; (3) lack of disclosures about steep surrender charges; (4) lack of 

disclosures about commission structures; and (5) lack of choices for customers, as firms 

usually sell only a limited number of variable annuity products. Several state securities 

regulators have brought enforcement actions involving the offer and sale of variable 

annuities.

In closing, NASAA reiterates its support towards the Department’s important goal of 

enhancing the standard of care available to retirement investors, including those who invest 

through IRAs. The proposal is an important step in raising the standard of care available to 

retirement investors and paves the way for additional regulatory initiatives to raise the standard 

of care for investors in general. NASAA particularly urges the Department to explicitly preserve 

remedies available under state securities laws, as they would serve to enhance the more limited 

remedies available under ERISA and the Code. NASAA is also pleased to have an opportunity 

to comment on other aspects of the proposal, such as arbitration agreements and investment 

education. 

Should you have any questions regarding the comments in this letter, please do not 

hesitate to contact Joseph Brady, NASAA’s Executive Director, at jb@nasaa.org, or A.Valerie 

Mirko, NASAA’s Deputy General Counsel, at vm@nasaa.org, or 202-737-0900.

 Sincerely yours,

William Beatty

NASAA President

Washington Securities Administrator