even if that financial intermediary is a Plan fiduciary by reason of providing investment advice,
should not be considered investment advice to a Plan.

IV. The Department Should Make Clear that the Proposed Rule does not Extend
Fiduciary Status to an Entity that Markets its Own Products.

The Proposed Rule extends fiduciary status to any person making a recommendation
about acquiring an investment to an employee benefit plan, a plan fiduciary, plan participant or
beneficiary, IRA, or IRA owner in exchange for a fee or other compensation. Read literally, this
could apply fiduciary status to a person marketing his or her own products and cause all sales
activity to be treated as fiduciary activity. This reading of the Proposed Rule is inconsistent with
the longstanding position of the Department and the courts that marketing one’s own products or
services is not a fiduciary activity.

We believe that the Department did not intend such a broad reading, but intended only to
capture those service providers that provide third-party recommendations of products or services
and that receive a fee specifically for providing those recommendations. We respectfully request
that the Department clarify that a recommendation triggering fiduciary status includes only a
recommendation of another’s product or services for compensation, and not the marketing of
one’s own.

Vv. Conclusion

In light of the foregoing, First Trust respectfully urges the Department to both clarify the
scope of the Proposal as requested and revise the BIC Exemption to explicitly provide relief for
compensation generated by recommendations related to Assets that consist of registered
investment companies, such as UITs, that distribute units on a principal basis.

43 See, e.g., American Fed’n of Unions, Local 102 Health & Welfare Fund y. Equitable Life Assurance Soc., 841
F.2d 658, 664-65 (5th Cir. 1988) (simply urging the purchase of its own products does not make an insurance
company an ERISA fiduciary). Consistent with that approach, in its discussion regarding transactions with
fiduciaries in the Department’s regulation on the general statutory exemption for services or office space, the
Department states that an investment adviser retained by a plan that proposes to a plan sponsor to perform additional
portfolio evaluation services for the plan for additional fees is not engaging in prohibited self-dealing because the
investment adviser is not using its fiduciary authority, control, or responsibility to cause the plan to select and pay
for the portfolio evaluation services. 29 CFR § 2550.408b-2(f), example (1).


Company Act prohibits the sale of open-end mutual fund shares and UIT units at any price other
than the current public offering price described in the prospectus (“Retail Price Maintenance”).
Rules promulgated by the SEC under Section 22(d) permit variations in sales loads for particular
classes of investors or transactions. Most UITs waive or decrease the sales load for certain
defined groups of investors. These Retail Price Maintenance rules require the UIT, its principal
underwriter, and its dealers to apply the reduced sales load to all purchasers of units in the
specified class or transactions, which would include, for example, quantity discounts and sales
charge discounts for investors purchasing multiple products. Rules adopted by FINRA also
require adherence to the same Retail Price Maintenance concepts, thus eliminating any issues
related to undisclosed mark-ups and mark-downs that are present with respect to debt securities
traded on a principal basis. All investors purchasing units pay the net asset value of the
underlying assets in the UIT plus the applicable sales charges notwithstanding any principal
transactions along the distribution chain that occurred prior to the investor’s order being filled 2

UITs are an important investment option for Plan investors. A “buy and hold” strategy
helps eliminate emotional investing, reduce costs associated with churning investments and
provide transparency to investors. UITs provide a simple method for Plan investors to own a
diverse basket of securities, professionally researched and screened, with a single purchase.
UITs are designed to fill a variety of investment needs and risk tolerance levels. The fixed
nature of a UIT portfolio gives investors security that they know exactly what they own. In
addition, UITs are liquid investments, redeemable on a daily basis at net asset value. UITs are
commonly purchased by Plans, and Plan investors make up a significant proportion of UIT
investors.

We respectfully request the Department revise the BIC Exemption to provide relief for
compensation generated by recommendations related to Assets that consist of registered
investment companies, such as UITs, that distribute units on a principal basis.

Il. The Department Should Make Clear that the Proposed Rule does not Extend
Fiduciary Status to an Entity that Recommends Products to a Financial Intermediary.

As drafted, the Proposed Rule would extend fiduciary status to persons that provide
investment recommendations or appraisals (with certain exceptions) to an employee benefit plan,
a plan fiduciary, plan participant or beneficiary, IRA, or IRA owner in exchange for a fee or
other compensation. Because the Proposed Rule may extend fiduciary status to persons that
were not previously considered plan fiduciaries, such as many broker-dealers or other financial
intermediaries, unless the Proposed Rule is clarified, it could be read to extend fiduciary status to
an entity that itself recommends or markets products to such financial intermediary, even if such
entity has no direct relationship with a Plan.

We respectfully request that the Department clarify that the Proposed Rule does not
extend fiduciary status in such a manner and that recommendations to a financial intermediary,

2 We note that the same legal protections under Section 22 of the Investment Company Act apply regardless of
whether the principal transaction is a “riskless principal” transaction. For this reason, we believe it would be
reasonable and appropriate for the BIC Exemption to cover all principal transactions in units or shares of registered
investment companies governed by Section 22 of the Investment Company Act.


If there is any additional information or assistance that First Trust can provide to the
Department in connection with the Department’s consideration of the comments and issues
raised in this letter, please let us know.

Sincerely,



LFirst Trust

July 21, 2015
VIA ELECTRONIC MAIL to e-ORI@dol.gov and e-OED@dol.gov

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

Attn: Conflict of Interest Rule (RIN 1210-AB32) and Proposed Best Interest Contract Exemption
(ZRIN 1210-ZA25)

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Ladies and Gentlemen:

This letter responds to the request by the Department of Labor (“Department”) for
comments on the Department’s proposed regulations on the definition of the term “fiduciary,”
Conflict of Interest Rule--Retirement Investment Advice (the “Proposed Rule”),! the Proposed
Best Interest Contract Exemption (the “BIC Exemption”),? the proposed exemption for principal
transactions (“Principal Transaction Exemption”)? and the related amendments to existing
prohibited transaction exemptions* (collectively, the “Proposal”). We appreciate the opportunity
to comment on the Proposal and related questions raised by the Department.

1. Introduction

First Trust Portfolios L.P. (“FTP”) and First Trust Advisors L.P. (“FTA”) (collectively,
“First Trust”) are privately-held companies that provide a variety of investment products and
services. FTP is a registered broker-dealer and a member of the Financial Industry Regulatory
Authority (“FINRA”), and FTA is a registered investment adviser with the Securities and
Exchange Commission (“SEC”).

First Trust has been in the investment management business since 1991 and currently
employs over 580 employees. First Trust offers a range of investment product sponsorship and
investment advisory services, with collective assets under management or supervision of
approximately $118 billion, as of June 30, 2015. First Trust serves as sponsor, distributor,

180 Fed. Reg, 21928 (Apr. 20, 2015).
2.80 Fed. Reg. 21960 (Apr. 20, 2015).
2.80 Fed. Reg. 21989 (Apr. 20, 2015).

480 Fed. Reg. 22004 (Apr. 20, 2015); 80 Fed. Reg. 22010 (Apr. 20, 2015); 80 Fed. Reg, 22021 (Apr. 20, 2015); 80
Fed. Reg. 22035 (Apr. 20, 2015).

First Trust Portfolios L.P. * 120 E. Liberty Drive * Wheaton, Illinois 60187 + www.ftportfolios.com


administrator, and/or investment adviser to 5 mutual fund portfolios, 9 exchange-traded funds
consisting of 95 series, 15 closed-end funds, and over 1,680 unit investment trusts (“UITs”).
Each First Trust fund is registered with the SEC as an investment company under the Investment
Company Act of 1940 (“Investment Company Act”).

First Trust offers a broad range of UITs designed to provide a cost-effective way to own a
professionally selected and diversified portfolio. Since 1991, more than $280 billion in gross
assets have been deposited in First Trust UITs. First Trust markets the UITs to financial
institutions which, in turn, offer the UITs to their retail clients; these retail clients may hold
investments in UITs in employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), and plans subject to the Internal Revenue Code of
1986, as ,amended (“Code”), including individual retirement accounts (“IRAs”) (collectively,
“Plans”).?

First Trust appreciates the Department’s desire to protect Plan participants and IRA
owners from conflicts of interest by Plan fiduciaries. However, as discussed further below, we
are concerned about certain technical issues in the Proposal that have the, likely unintended,
impact of excluding advice regarding UITs from coverage under the BIC Exemption. We also
request clarification that the scope of the Proposal is not such that it would extend fiduciary
status to an entity that markets its own products, or that markets or recommends investment
products to financial institutions that serve as intermediaries with Plans in cases where the entity
marketing the product has no direct interaction with the Plan.

IL. UITs Should be Included in the BIC Exemption on the Same Basis as Other
Registered Investment Companies.

Like open-end mutual funds and closed-end funds, UITs are registered under, and
governed by, the Investment Company Act, and the rules and regulations promulgated
thereunder. UITs are professionally selected pooled investment vehicles in which a portfolio of
securities is selected by the sponsor and deposited into the trust for a specified period of time,
usually ranging from 12 months to as many as 25 years. Generally, UITs follow a “buy and
hold” strategy. A UIT typically will make a “public offering” for a specific time period.
Investors purchase units of the trust, which represent an undivided ownership interest in the
assets held in the UIT. Units of a UIT are sold through a network of underwriters and dealers
and generally trade on a principal basis at a price based on net asset value of the underlying
securities plus an applicable sales charge. Although units of a UIT are purchased from the UIT

Although First Trust generally does not sell directly to retail clients, it may be available in some cases to answer
questions or provide additional information directly to a retail client regarding certain investments, in a marketing
capacity.

© Section 4 of the Investment Company Act categorizes investment companies into three basic types: face amount
certificates, unit investment trusts, and management companies which include open-end mutual funds and closed-
end funds. Although most exchange traded funds (“ETFs”) are registered as open-end mutual funds, there are also
popular ETFs that are actually registered as UITs with SEC. These UITs include SPDR S&P 500 ETF Trust (ticker
symbol, “SPY”), SPDR S&P MidCap 400 Trust (ticker symbol, “MDY”) and PowerShares QQQ Trust (ticker
symbol, “QQQ” and formerly known the “NASDAQ 100 Index Tracking Stock”). In addition, variable annuity and
variable life insurance separate accounts are typically also registered as UITs with the SEC.


sponsor on a principal basis, these principal transactions are typically “riskless principal”?
transactions to fill orders placed by investors.8 As further discussed below, these purchases by
investors are subject to strict rules to assure uniform prices are paid by all investors.2. Units are
redeemable every day at net asset value.

We understand that the Department intends to limit the BIC Exemption to provide relief
for otherwise prohibited compensation generated by investments only if such investments are of
certain types commonly purchased by Plans. In this connection, the Department defined the
“Assets” that can be sold under the exemption to include only such commonly purchased
investments, including shares or interests in registered investment companies. However, Section
I(c)(2) of the BIC Exemption excludes principal transactions from coverage under the BIC
Exemption-2 In a footnote in the preamble to the BIC Exemption, the Department indicates that
it “does not view a riskless principal transaction involving mutual fund shares as an excluded
principal transaction.”!! However, it is not completely clear whether this statement covers all
types of registered investment companies, including UITs. Further, the exception for riskless
principal transactions is not explicitly included in the BIC Exemption provisions. Therefore,
although UITs, as registered investment companies, would be included within the definition of
“Asset” under the BIC Exemption, we are concerned that fiduciaries seeking relief under the BIC
Exemption may be precluded from obtaining that relief for the distribution of UITs.

UITs do not raise the same types of issues, such as those related to mark-ups and mark-
downs of debt securities that trade on a principal basis, that the Department is concerned would
not be addressed by the safeguards under the BIC Exemption. Fees charged to investors for the
purchase of units in a UIT primarily include a sales charge. Because of the fixed character of a
UIT portfolio, ongoing trustee and sponsor fees are minimal, and there is no ongoing investment
advisory fee. UITs are subject to the same pricing requirements and restrictions under Section
22 of the Investment Company Act as open-end mutual funds. Section 22(d) of the Investment

2 FINRA defines “riskless principal” as a trade in which a member, after having received an order to buy (sell) a
security, buys (sells) the security at the same price, as principal, in order to satisfy the order to buy (sell). In order to
qualify for riskless principal trade reporting, the rule requires that the trades be executed at the “same price”
(exclusive of a markup or markdown, commission equivalent, or other fee).

8 In certain cases, a broker may hold units of a UIT in its inventory for later distribution to investors. In such cases,
the broker may assume some risk with respect to the principal transaction. Regardless of whether the transaction is
a “riskless principal” transaction or not, all investors purchasing such units pay the net asset value of the underlying
securities at the time of purchase plus any applicable sales charges as disclosed in the prospectus.

2 Many UIT sponsors, however, will maintain a secondary market, which allows unitholders to sell them back to the
sponsors and allows other investors to buy UIT units from the sponsors.

19 Although the Department has simultaneously proposed an exemption for principal transactions, the Principal
Transaction Exemption would apply only with respect to certain debt securities and would be inapplicable to
principal transactions in UITs. 80 Fed. Reg. 21989 (Apr. 20, 2015). In addition, the relief proposed under the
proposed amendments to Prohibited Transaction Exemption 86-128 for so-called “riskless principal” transactions
involving open-end investment companies may not be available for UITs and, regardless, would not be available for
a non-discretionary “investment advice” fiduciary. 80 Fed. Reg. 22021 (Apr. 20, 2015).

4 80 Fed. Reg. at 21968.