The Committee for the Fiduciary Standard

1

Via email to e-ORI@dol.gov re: RIN 1210-AB32

Office of Regulations and Interpretations July 20, 2015

Employee Benefits Security Administration 

Attn: Conflict of Interest Rule 

U.S. Department of Labor 

200 Constitution Avenue NW 

Washington, DC 20210.

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule -

 Retirement Investment Advice. Document No. 2015-08831, RIN 1210-AB32

Ladies and Gentlemen,

We write in support of the Department of Labor’s Conflict of Interest Rule 

Thank you for the opportunity to comment on the Department of Labor’s Conflict of Interest 

proposal. We appreciate the thoughtful, substantive approach and the intellectual rigor that so 

many individuals have contributed to this effort. In particular, we would like to thank the White 

House and the DOL for making this rulemaking a priority. We appreciate the leadership of Labor 

Secretary Thomas Perez and Asst. Secretary Phyllis Borzi, and their fearless, resolute team. 

Their collective efforts will have an enduring and positive effect on millions of Americans. 

The courage and commitment of the White House and DOL to make these proposed rules a 

priority is vital to helping to ensure that millions of American working and investing for a secure, 

dignified retirement will keep more of their nest egg.

This is especially significant in light of the current environment in Washington – since 2009 but 

in a most acute campaign at this moment – in which insurance and Wall Street special interests 

are attempting to overrun Washington with enormous amounts of money and propaganda to 

fight off the DOL’s proposal, and retain the status quo and the enormous profits to firms at a 

directly correlated cost to retirement investors. The status quo carries with it short- and longterm negative impacts on the American economy. 

Thank you also for covering IRA rollovers and IRA retirement investors in this proposal. This 

vitally important life transition – many retirement investors’ most vulnerable point – needs and 

deserves every aspect of fiduciary duty and care. We appreciate that the DOL has issued a

significant proposed rule covering so many retirement investors, many of whom have not been 

beneficiaries of fiduciary advice. The current rules are ineffective in preventing harm to IRA 

owners and especially that most vulnerable, infrequent decision about whether or not to roll over

retirement plan assets into IRAs. Millions of American retirement investors would, once the 

proposal is effective, have the benefit of advice that is in their “Best Interest” – fiduciary advice.

We also appreciate the continued “special emphasis,” as DOL’s proposal puts it, “on the 

elimination or mitigation of conflicts of interest and adherence to substantive standards of 

conduct as reflected in the prohibited transaction rules and ERISA’s standards of fiduciary 

conduct.”
The Committee for the Fiduciary Standard

2

“The specific duties imposed on fiduciaries by ERISA and the Code stem from legislative 

judgments on the best way to protect the public interest in tax-preferred benefit arrangements 

that are critical to workers’ financial and physical health. The Department has taken great care 

to honor ERISA and the Code’s specific text and purposes.”

We support the elimination of conflicts of interest and mitigating conflicts, by which we mean 

managing unavoidable conflicts of interest in the investor’s favor.

Please call upon us for our individual and collective areas of fiduciary expertise, best practices 

and processes during this vitally important rulemaking.

Sincerely,

Kathleen M. McBride, AIFA®

Chair, The Committee for the Fiduciary Standard, www.TheFiduciaryStandard.org

Accredited Investment Fiduciary Analyst®, CEFEX Analyst

Centre for Fiduciary Excellence, www.CEFEX.org

732.241.4988 kmcbride@FiduciaryPath.com

Members of The Committee for the Fiduciary Standard Steering Group

Clark M. Blackman II, CPA/PFS, CFA, CFP®, CIMA®, AIF® is founder, president and CEO of 

Alpha Wealth Strategies, LLC

Harold Evensky, CFP®, is Chairman, Evensky & Katz and Professor of Practice, Texas Tech

Sheryl Garrett, CFP® is founder of the Garrett Planning Network, a national organization of 

hourly based, fee-only financial advisors.

Roger C. Gibson, CFA, author of the investment classic, Asset Allocation: Balancing Financial 

Risk and founder and Chief Investment Officer of Gibson Capital, LLC

Tim Hatton CFP, AIF®, is Founder and President of Hatton Consulting, author, The New 

Fiduciary Standard

Patricia P. Houlihan, CFP® is President and Owner of Houlihan Financial Resource Group, Ltd.

Deena Katz, CFP®, Associate Professor in the Personal Financial Planning Division at Texas 

Tech University, in Lubbock, Texas. She is also Co-Chairman and a founding partner of 

Evensky & Katz.

Ron A. Rhoades, JD, CFP, Program Director, Financial Planning, Asst. Professor of Finance, 

Gordon Ford School of Business, Western Kentucky University, President of ScholarFi, Inc., an 

investment advisory firm, and President of Ron A. Rhoades, P.A., a law firm.

Ronald W. Roge, MS, CFP®, is a nationally recognized fee-only wealth manager. He is founder, 

Chairman, and CEO of R. W. Roge & Company, Inc.
The Committee for the Fiduciary Standard

3

I. Public Policy on Retirement in America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

i. The Current Retirement Landscape 

ii. Why Fiduciary Advice is A Necessity, not a Luxury

iii. Private Taking of Retirement Investor Assets and Economic Harm

iv. Necessity of Government Response if Status Quo Continues

v. Variation of Retirement Plan Quality, and Captivity in Company Plans

vi. The Privilege of Advising America’s Retirement Investors

II. Public Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 8

i. Safe Zone IRA

ii. Starting Retirement Plans Sooner

III. Comments on DOL Proposal: Definition of the Term “Fiduciary” . . . . . . . . . . . . . . . . 9

Conflict of Interest Rule - Retirement Investment Advice

IV. Impact and Coordination of DOL Rulemaking Across Existing Business Models . . 10

and Regulatory Schemes

V. Titles and Their Impact on Retirement Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

VI. Seller’s Carve Out --- For Very Large Plans Only, If At All . . . . . . . . . . . . . . . . . . . . . 11

i. Not for Individuals

ii. What Constitutes a Very Large Plan?

VII. Carve-out for Service Providers, Recordkeepers and . . . . . . . . . . . . . ... . . . . . . . . . 12

Third-Party Administrators 

i. Plan Alternatives Selection and Monitoring

ii. Selection, Monitoring and Replacement Are Fiduciary Functions – Tibble

VIII. Recommended: A Carve-Out for Information and Data Services . . . . . . . . . . . . . . 14

IX. Education vs Advice . . . . . . . .. . . . . . . . . . . . . . . . 14

i. Use of FINRA Rules for Basis of Education vs Advice

ii. Education or Advice – Help From Other Sources

X. Conflicts and Compensation – The Best Interest Contract Exemption – BIC . . . . . 16

i. The Contract itself

ii. Conflicts and Compensation under BIC

iii. When is Revenue Sharing or Hidden Commissions or Fees in the Interest of Retirement 

Investors?

iv. BIC and Investor’s Best Interest Finding

v. BIC Contract First – Private Right of Action and Class Action

vi. Annuities and the Opportunity for Mischief Under BIC

vii. Investor Cost and Performance Benchmarking

viii. Firm Warranty 

ix. Collective Funds and Other Hard to Compare/Benchmark Assets

XI. SIFMA and FINRA’s “Best Interests” Proposals: Misleading and Wholly Ineffective . 20

XII. Disclosures and Investor and Adviser Behavior: Not What You Would Expect . . . . . . 28

i. Transparency is Necessary But Disclosures Are “Ineffective” and Often, Worse
The Committee for the Fiduciary Standard

4

XIII. Abandoning Retirement Investors if “Forced” to Act in Investor’s Best Interest? . . .30

XIV. IRA Rollovers . . . . . . . . . . . . . . . . . . . . 31

i. Rollovers from 401(k)-Type Plans

ii. Rollovers from Traditional Pension Plans

iii. When a Fiduciary Advises a Plan and a Participant Wants to Rollover

XV. Recommendation: The Fiduciary Interest Contract – FIC . . . . . . . . . . . . . . 34

i. Rollovers as a Separate Fiduciary Engagement

ii. Both Fiduciary and Contractual Legal Protections

XVI. On the Regulation of IRA Rollovers . . . . . . . . . . . . . . . . . 35

XVII. Conclusion . . . . . . . . . . . . . . . . . . 38
The Committee for the Fiduciary Standard

5

I. Public Policy on Retirement in America – The Current Landscape

From a public policy perspective, Americans saving and investing for retirement have been 

forced, without requisite training, into the role of “portfolio manager” for one of the most critical 

elements of financial security – their retirement. This is no small issue. Rather, it is akin to 

asking someone to remove their own appendix, defend himself or herself in court, or interpret a 

complex issue in the tax code. One needs professional and technical knowledge in order to 

practice any of those professional endeavors. In fact, regular individuals are not allowed to do 

any of those things without proper training. 

Yet, we demand that individuals do just that, when making decisions about their retirement 

accounts. 

What was supposed to be an adjunct savings vehicle, meant to supplement an individual’s 

employer pension plan – the traditional monthly payment to the retiree for life, is now, for most 

Americans, the primary vehicle in which to save and invest for retirement. Funding risk, 

investment risk, and distribution risk, all risks formerly borne by the employer, now rest on the 

shoulders of the individual employee. Professional, institutional, pension fund management as a 

responsibility of the employer, is, for most Americans, gone. 

Americans are captive in their employer’s 401(k)-type plan. For some investors, when the plan 

is well run, investment alternatives are high quality and lower cost. But for too many retirement 

investors, the opposite is true – lower quality, high cost investment alternatives dominate, 

undermining American retirement investors’ nest eggs from the start.

As individuals began saving and investing in 401(k)-type and IRA accounts, fund companies, 

banks, brokers, insurance companies and registered investment advisory firms; and 

recordkeepers and third-party administrators (TPAs) benefited from the investment vehicles 

used and/or from the advisory services rendered.

The Employee Retirement Income Security Act of 1974 (ERISA) is the federal law that sets 

minimum standards for most voluntarily established pension and health plans in private industry 

to provide protection for individuals in these plans.

In 1974, when ERISA was enacted, nobody would have predicted that the primary retirement 

investment vehicles in the United States in 2015 would be, rather than traditional pensions, 

these adjunct, side pocket accounts – 401(k)-type and IRA accounts. And nobody could have 

foreseen how the regulations enacted then would be systemically abused or skirted in order to 

cull revenue for firms and individuals who were to be serving retirement investors. 

But the fact remains that many investors in these accounts are being steered into high 

commission and high fee investment vehicles, through the guise of “advice” that is not in the 

investor’s best interest. 

Why Fiduciary Advice Is A Necessity, not a Luxury

Fiduciary law came about because when an individual entrusted their property to another who 

had specialized, professional knowledge that the lay person did not have. The “professional” 

had to care for that property as if it were his or her own. The entrusted property was not to be 
The Committee for the Fiduciary Standard

6

used for the gain of the professional but to be managed in the best interest of the individual. The 

professional could be paid a reasonable amount for the work they did and the knowledge, skill,

diligence and expertise they possessed. But the work they did was required to be in the best 

interest of the individual “entrustor”.

Now, when an individual, who does not possess anywhere near the level of professional 

knowledge that in investment professional does, invests for their retirement, this “fiduciary” 

concept should hold true for the advice they receive. And it does, when a retirement investor is 

serendipitously fortunate enough to receive that advice from a fiduciary. 

But all too often, professionals and companies seeking personal or corporate gain from 

pretending to “advise” retirement investors, (plans, participants, beneficiaries or IRA owners),

have taken advantage of unintended loopholes in ERISA. These loopholes led to systemic 

conflicts of interest that let these professionals to put their own personal or corporate interests 

ahead of the best interests of the retirement investors they were meant to serve.

These are the loopholes that Department of Labor proposes to, and must, close.

"This boils down to a very simple concept: if someone is paid to give you retirement investment 

advice, that person should be working in your best interest," said Secretary of Labor Thomas E. 

Perez. "As commonsense as this may be, laws to protect consumers and ensure that financial 

advisers are giving the best advice in a complex market have not kept pace. Our proposed rule 

would change that. Under the proposed rule, retirement advisers can be paid in various ways, 

as long as they are willing to put their customers' best interest first."

We agree.

Private Taking of Retirement Investor Assets and Economic Harm

With $7.2 Trillion in IRA accounts and another 5.3Trillion in 401(k)-type retirement there is a 

tremendous amount at stake for America’s retirement investors. 

As DOL points out, “A wide body of economic evidence supports a finding that the impact of 

these conflicts of interest on retirement investment outcomes is large and, from the perspective 

of advice recipients, negative.”

We appreciate the DOL’s careful analysis of the abundant data, including, “among other things,

statistical analyses of conflicted investment channels, experimental studies, government reports 

documenting abuse, and basic economic theory on the dangers posed by conflicts of interest 

and by the asymmetries of information and expertise that characterize interactions between 

ordinary retirement investors and conflicted advisers. “

As DOL notes in the preamble to the Fiduciary proposal, the data “consistently points to 

substantial failures in the market for retirement advice, suggests that IRA holders receiving 

conflicted investment advice can expect their investments to underperform by an average of 100 

basis points per year over the next 20 years. The underperformance associated with conflicts of 

interest – in the mutual funds segment alone – could cost IRA investors more than $210 billion 

over the next 10 years and nearly $500 billion over the next 20 years. Some studies suggest 

that the underperformance of broker-sold mutual funds may be even higher than 100 basis 

points, possibly due to loads that are taken off the top and/or poor timing of broker sold 
The Committee for the Fiduciary Standard

7

investments. If the true underperformance of broker-sold funds is 200 basis points, IRA mutual 

fund holders could suffer from underperformance amounting to $430 billion over 10 years and 

nearly $1 trillion across the next 20 years.”

Necessity of Government Response if Status Quo Continues

We note that the DOL has been very conservative in its estimates of the harm to retirement 

investors of current retirement advisory rules, set up for a very different retirement landscape in 

America. 

That shortfall to retirement investors, of $1 Trillion dollars (just in one segment, mutual funds, in 

one retirement vehicle, IRAs) is unworkable and unacceptable. Many well respected thought 

leaders and experts in retirement investing lean toward the higher, 200 basis points per year

underperformance. When you add in other types of investment alternatives in IRAs, such as 

annuities, where the costs to investors are much higher, 4% to 10%, and another 7% to 10% in 

penalties the actual retirement investor shortfall is likely to be much higher.

Add in the impact of conflicted advice in the $5.3 Trillion 401(k)-type retirement accounts, from 

higher than reasonable and often hidden commissions, fees, and backdoor revenue sharing 

payments among banks, brokers, mutual fund companies and insurance companies, and you 

soon have a setting that could easily approach a similar additional shortfall for retirement 

investors over the next 20 years.

One has to ask: If private companies are allowed to continue extracting such a toll from 

retirement investors, and retirement investors would be missing $1 to $2 Trillion from their 

retirement nest eggs, how will these retirement investors get by in retirement? Who will make 

up this shortfall? Would this mean that the federal government would need to engineer a 

bailout plan bigger than we’ve seen over the past eight years because private companies have 

extracted so much from retirement investor’s nest eggs? 

Variation of Retirement Plan Quality, and Captivity in Company 401(k)-type Plans

Since 401(k)-type plans are sponsored by companies, there is an element of serendipity in 

terms of plan quality. Most individuals have no way of examining the retirement plan as they 

take a position at a company, and plan sponsors sometimes change service providers. Though 

plan fiduciaries have fiduciary obligations to the plans and participants, quality and knowledge of 

plan fiduciaries, and plans themselves, varies widely from excellent to very poor. 

As a captive to their company plan a participant may be fortunate to have access to a terrific 

plan, with fiduciary advice to the plan, prudent, high quality, lower cost actively managed and 

very low cost passively managed mutual funds and or ETFs -- or the plan may be at the 

opposite end of the spectrum: high cost, poorly performing, investment alternatives.

Small or startup plans, which have with fewer participants and, at least initially, smaller amounts 

of assets, are particularly vulnerable. They are often subject to very unreasonable fees, and 

often have less knowledgeable plan fiduciaries without adequate fiduciary knowledge, 

processes or training. This often leads to a poorly selected array of plan alternatives for 

participants to choose from, and an uninformed service provider selection process. 
The Committee for the Fiduciary Standard

8

Participants in this kind of plan have no recourse unless they leave the company or retire. If they 

complain to plan fiduciaries, they risk retaliation, as the plan may be “run” by the CFO’s golf 

buddy, for example. 

Public Policy and The Privilege of Advising America’s Retirement Investors

Is it good public policy to allow the continued taking of retirement assets from retirement 

investors, by private corporations, when the long-term effect would be the need to make up that 

shortfall by taxing Americans so that America’s retirees are not impoverished?

Why not avoid this issue by acting now and requiring that all advice to retirement investors be in 

the investor’s best interest? 

It is time for every professional, and every company that has the privilege of advising 

retirement investors, to do so in the investor’s best interest, as a fiduciary. It is good 

public policy. American workers are working hard to save and invest for retirement and they 

expect that the advice they are getting on their retirement investing is in their best interest. 

Let us make it so.

II. Public Policy Recommendations

Safe Zone IRA

Recently, a policy discussion focused on the idea of a safe-zone IRA where participants who are 

captive in poorly run or expensive company 401(k)-type plans could rollover retirement assets 

that are vulnerable to erosion or worse. Ideally it would be federally run, perhaps an arm of the 

government employee Thrift plans, with no penalty for direct transfer in, and no minimum or limit 

on how much could be transferred in or how long they could stay. This is an idea worth 

pursuing.

Starting Retirement Plans Much Sooner

Another idea that is worth serious discussion and inclusion in this or additional rulemaking in 

ERISA is this: Make it easier for parents to start children off with retirement savings when they 

are very young. Whether the vehicle is a very low cost IRA or the ability for 401(k)-type plans 

add spouses and dependents, the idea of compounded growth starting 20-plus years earlier 

than when many adults begin retirement saving is appealing on many levels. One author and 

fiduciary expert, Christopher Carosa, articulates the idea in the article, “What Every 401(k) Plan 

Sponsor and Fiduciary Should Disclose to Employees: How to Retire a Millionaire, (Hint: It’s 

Easier Than You Think.)”

1

																																																												 1

 Christopher Carosa, http://fiduciarynews.com/2014/02/what-every-401k-plan-sponsor-and-fiduciary-should-disclose-to-employeeshow-to-retire-a-millionaire-hint-its-easier-than-you-think/
The Committee for the Fiduciary Standard

9

III. Comments on DOL Proposal: Definition of the Term “Fiduciary”

Conflict of Interest Rule - Retirement Investment Advice

Coverage of IRAs

We are heartened to see DOL using its IRA Rulemaking Authority to cover advice to IRA owners 

under the proposed rules. We know firsthand the harm that, too often, is inflicted on retirement 

investors during the decision whether to roll over retirement savings into an IRA, or when the 

“advice” that is provided on the IRA account investments is not in the investor’s best interest. 

“Advice” that is not in the investor’s best interest is not actually advice. 

Arguments from financial services and insurance company special interests that claim investors 

will not have access to “advice” if non-fiduciary firms are “forced” to provide advice that is in the 

investor’s best interest, have no basis at all. As a point of fact, many firms espousing that line of 

protest are not serving retirement investors with smaller or mid-sized accounts at all. If they 

interact with these investors at all, it is primarily to steer them into the highest cost annuities or 

funds, not to provide advice.

This underscores why the proposed rules that eliminates the current ERISA five-part test of who 

is a fiduciary is so important. If one holds oneself out as an “adviser” (including any of the trust 

engendering titles and/or advertising) one must actually provide bona fide advice that is in the 

investor’s best interest.

The provision for investor recourse via a private right of action (or class action) for IRA owners 

and on rollovers is vitally important to the financial wellbeing of America’s retirement investors.

We agree with DOL: “If one engages in specified activities, such as the provision of investment 

advice for a direct or indirect fee, [or commission] the person engaging in those activities is a 

fiduciary, irrespective of labels.”2

We agree with DOL that the DOL application of fiduciary duty for retirement advice should cover 

anyone who is providing advice to retirement investors, including broker-dealer registered 

representatives, investment advisers and their representatives, financial planners, and 

insurance company agents, representatives, consultants or producers – including any other 

assorted advisory titles that the broad financial industry uses, or may use in future. 

To be clear: We support DOL in providing no carve-out from fiduciary duty when it comes to 

retail investors, including IRA owners, IRA rollovers, plan participants and beneficiaries and all 

but the very largest plans. We expect this will include any company or individual providing 

advice, or financial professionals: brokers, insurance agents, and planners, et al. 

We support inclusion of advice on “other non-ERISA plans such as Health Savings Accounts 

(HSAs), Archer Medical Savings Accounts and Coverdell Education Savings Accounts other 

non-ERISA plans such as Health Savings Accounts (HSAs), Archer Medical Savings Accounts 

and Coverdell Education Savings Accounts, and agree it is appropriate that “these accounts are 

included in the scope of covered plans in paragraph (f)(2) of the new proposal.”3

																																																												 2

 “Definition of the Term “Fiduciary”: Conflict of Interest Rule – Retirement investment Advice p 68 3

 Ibid, p 72
The Committee for the Fiduciary Standard

10

IV. Impact and Coordination of DOL Rulemaking Across Existing 

Business Models and Regulatory Schemes

We appreciate and support the care that DOL has taken to “to understand the impact of the 

proposed rule on firms subject to the securities laws and other federal laws, and to take the 

effects of those laws into account so as to appropriately calibrate the impact of the rule on those 

firms. The proposed regulation reflects these efforts. In the Department’s view, it neither 

undermines, nor contradicts, the provisions or purposes of the securities laws, but instead works 

in harmony with them.” 

We support the care with which the DOL consulted with Treasury and IRS particularly on IRAs

and the DOL’s jurisdiction for rulemaking on IRAs: “The Department has also consulted with the 

Department of the Treasury and the IRS, particularly on the subject of IRAs. Although the 

Department has responsibility for issuing regulations and prohibited transaction exemptions 

under section 4975 of the Code, which applies to IRAs, the IRS maintains general responsibility 

for enforcing the tax laws. The IRS’ responsibilities extend to the imposition of excise taxes on 

fiduciaries that participate in prohibited transactions.14 As a result, the Department and the IRS 

share responsibility for combating self-dealing by fiduciary investment advisers to tax-qualified 

plans and IRAs. Paragraph (e) of the proposed regulation, in particular, recognizes this 

jurisdictional intersection.”

The Committee supports the application of a Best Interest Contract Exemption (BIC) to business 

models that include conflicts of interest that taint advice and cause harm to retirement investors. 

In particular, the Committee agrees that the BIC should require a stringent fiduciary standard 

rooted in ERISA and trust law, as DOL says: “As proposed, the best interest standard is 

intended to mirror the duties of prudence and loyalty, as applied in the context of fiduciary 

investment advice under sections 404(a)(1)(A) and (B) of ERISA. Thus, the “best interest” 

standard is rooted in the longstanding trust-law duties of prudence and loyalty adopted in 

section 404 of ERISA and in the cases interpreting those standards.”

“Accordingly, the Best Interest Contract Exemption provides: Investment advice is in the “Best 

Interest” of the Retirement Investor when the Adviser and Financial Institution providing the 

advice act with 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, without regard to the financial or 

other interests of the Adviser, Financial Institution, any Affiliate, Related Entity, or other party.” 4 

V. The Impact of Titles on Retirement Investors

As we discuss the impact of DOL rules on differing business models, we wish to comment on 

the impact of titles on retirement investors. We agree that any entity that provides advice to 

retirement investors must do so as a fiduciary – in the investor’s best interest, no matter the 

business or compensation model. 

That said, there could be specific improvements to retirement (and other) investor 

understanding as to the type of relationship they have with someone who advises them. 

Therefore we recommend the elimination of titles that convey a relationship of trust and

confidence for any financial professional who is not a fiduciary to all their clients at all times. In 

																																																												 4 DOL Fiduciary Proposal, p34-35
The Committee for the Fiduciary Standard

11

this sense, use of the titles adviser/or, counselor, and any others conveying a relationship of 

trust and confidence would automatically mean one is subject to all of the tenets of a fiduciary 

relationship and that the retirement investor would have, in addition to contractual recourse, 

fiduciary breach recourse in the event of harm.

In this sense, we include both the relationship under a written contract, as well as circumstances 

when no contract is used and advice is provided. (We recommend the practice of always using 

a contract that acknowledges fiduciary duty). 

Financial professionals working with investors every day acknowledge that investors have 

trouble differentiating sales from advice. A recent survey5 of professional intermediaries across 

business models and registration types – broker-dealer, investment adviser and insurance –

indicates that investors are confused about the similar sounding titles financial professionals

use. Most convey a relationship of trust and confidence, although many financial professionals 

are not required to put the interests of investors first, as fiduciaries. 

The survey asked, “Do you believe the titles “advisor,” “consultant,” and “planner” imply that a 

fiduciary relationship exists?” Overall, 72% of survey participants say these titles imply a 

fiduciary relationship with clients. There is strong agreement across compensation models and 

registration types, including 73% of RIA/IARs, 75% of registered reps, 73% of dually registered, 

and 66% of dually registered-plus insurance respondents. When results are analyzed by 

compensation model, 73% of fee-only, and 69% of fee/commission respondents concur. 

• 96% say clearer differentiation between product providers and advice providers is 

necessary 

• 72% say the titles “advisor,” “consultant,” and “planner” imply that a fiduciary relationship 

exists

VI. Seller’s Carve Out --- For Very Large Plans Only

We agree that the seller’s carve-out should only apply to only very large plans that either have 

an in-house, full time, knowledgeable fiduciary or a contractual relationship with an independent 

fiduciary (with no tie to the seller).

We appreciate DOL’s thought process in not permitting the seller’s carve-out to include 

participant advice, advice on whether to rollover plan assets into an IRA and advice to IRA 

account holders – and we concur.

Very large plans may have the services of full-time or independent fiduciaries who possess the 

prudent expertise and are sophisticated and knowledgeable about their fiduciary duty to the 

plan, participants and beneficiaries, and possess deep knowledge and common sense about 

the kinds of securities that may be offered via the “Seller’s Carve out.” We understand DOL’s 

reasoning for offering the “Seller’s Carve-out.” However we caution that the use of “incidental 

advice” may be taken more broadly by some who advise plans and caution that the terms of use 

should remain very narrow and that the test of whether a plan indeed has a the capable 

expertise in house should be very stringent. 

																																																												 5 2015 fi360 Fiduciary Standard Survey Report, “Seeking Trustworthy Advice,” p 28 

http://www.fi360.com/uploads/media/2015fiduciarysurvey.pdf
The Committee for the Fiduciary Standard

12

In addition, we are mindful of serious fiduciary breaches among very large, multibillion-dollar 

plans, even when it comes to something as simple as monitoring share classes for the 

appropriate institutional class with the most reasonable costs to participants, such as in Tibble v. 

Edison, to cite just one recent example. If DOL proceeds with this carve-out, the effects of harm 

to participants from abuse of the seller’s carve-out may be irrevocable.

What Constitutes a Very Large Plan?

A concern remains on the size of the threshold for plans that may be considered to have 

sufficient in-house or external independent fiduciary knowledge. Is the threshold of $100 million 

in plan assets and 100 participants protective enough? A plan may have $10 million and 400 

participants, and run by plan sponsor personnel with less fiduciary and technical knowledge. Or 

a plan may have $100 million in assets or billions in assets and not have sufficient expertise to 

truly protect participants from an unscrupulous seller. 

We ask that DOL consider lifting the threshold of $100 million, 100 participants to a higher 

threshold, and clarify what will be required of a plan’s fiduciary to ensure they can meet the 

challenge of arms-length sales transactions of what may be complex securities—for the sole 

benefit of the plan. What will be required for considering whether a plan has an in-house or 

outside independent fiduciary? How will DOL ascertain that the plan fiduciary possesses the

plan fiduciary knowledge, as well as investment fiduciary knowledge, (which are quite different 

areas of expertise, in practice) to act solely in the interest of the participants, given the human 

tendency to overestimate one’s skills and competence?

VII. Carve-out for Service Providers, Recordkeepers and Third-Party 

Administrators 

Selection and monitoring of plan investments is crucial to the long-term success of plan 

participants’ retirement goals, as much academic evidence has shown. The recent SCOTUS 

decision in Tibble v. Edison regards the duty to regularly monitor and replace imprudent 

investments as a fiduciary function: “Under trust law, a trustee has a continuing duty to monitor 

trust investments and remove imprudent ones. This continuing duty exists separate and apart 

from the trustee’s duty to exercise prudence in selecting investments at the outset.”

Many plan sponsors do not have prudent experts in-house to develop “objective criteria” for use 

in prudently selecting a plan’s investment offerings. If they need help setting up the criteria they 

may need to engage a prudent expert. There may be overconfidence bias at many plans, or the 

feeling (as there is now in many cases, or we would not have to make this effort) that whomever 

they engage will “take care” of the plan. The “It’s my brother-in-law,” scenario. As we all know, 

that is not a prudent reason or process for choosing a service provider. 

A seller’s carve-out for TPAs and Recordkeeper platforms is not going to provide the prudent 

expert help many plan sponsors will need, and this carve-out could actually harm the plan and 

participants. The plan sponsor will be in the same situation so many plans fall into today: “Help” 

from someone who is not functioning as a fiduciary, and not in the “best Interest of the plan and 

its participants and beneficiaries.” Rather, “help” from a salesperson, in the best interest of their 

platform, not participants and beneficiaries. The fiduciary burden will be on the plan sponsor and 
The Committee for the Fiduciary Standard

13

they will not be prudently serving plan participants if a proposed exemption for TPA and 

recordkeeper platform sales stands as is. We can envision a common scenario in which the 

seller says a lot of plan “customers” need help in developing their “objective criteria” – here is 

what many of them do – and then proceed to steer the plan into products that, again, benefit 

their platform, rather than participants.

Selection, Monitoring and Replacement Are Fiduciary Functions – Tibble

Selection, monitoring and replacement of plan investment alternatives are important fiduciary 

functions; ones which, if done well, can help participants achieve better outcomes, but if done 

poorly or on a conflicted basis can mean participants end up with only or mostly high cost, 

poorly performing investment alternatives, thereby greatly harming participants and 

beneficiaries. 6 7 8

Applying the proposed “Seller’s Carve-out to recordkeepers and third-party administrator (TPA) 

platforms may harm retirement investors. TPAs and Recordkeepers vary greatly in quality, 

motivation and cost. Their platforms of plan investment alternatives vary widely in quality and 

cost, as well. For example, if a platform receives indirect payments such as revenue sharing 

through the investment alternatives on the platform, the inherent conflict of interest could drive a 

platform to only offer higher-cost, poorly performing or more risky investment alternatives that 

increase revenue to the platform – which would come from plan participants.

The ability for a platform to steer plan sponsors into unreasonably high-cost choices that would 

harm plan participants clearly could undermine what DOL has intended in eliminating conflicts of 

interest.

Therefore we would not recommend a Seller’s Carve-out for TPA and Recordkeeper Platform 

providers for investment selection, monitoring and replacement.

Further, we agree with DOL that the proposed “Seller’s Carve-out” for platforms, in which the 

“provider has financial or other relationships with the offered investments and is not purporting 

to provide impartial investment advice,” would be inappropriate for advice to IRA owners, or to 

plan participants or beneficiaries.

																																																												 6 “It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans,” Veronika K. Pool, Clemens Sialm, Irina Stefanescu, 

NBER Working Paper No. 18764 February 2013 http://www.nber.org/papers/w18764

7 “Broker Incentives and Mutual Find Market Segmentation,” Diane Del Guercio, Jonathan Reuter, and Paula A. Tkac, National 

Bureau of Economic Research, http://www.nber.org/papers/w16312

8 “Broker Incentives and Mutual Find Market Segmentation,” Diane Del Guercio, Jonathan Reuter, and Paula A. Tkac, National 

Bureau of Economic Research, http://www.nber.org/papers/w16312
The Committee for the Fiduciary Standard

14

VIII. Recommended: A Carve-out for Information and Data Service 

Providers

There are information and data service providers available to plan sponsors that can help the 

plan sponsor to develop objective criteria for selecting, monitoring and replacing plan investment 

alternatives. When those service providers receive reasonable compensation, with no benefit, 

direct or indirect, from the plan investment alternatives that the plan sponsors choose, we 

believe they should have a seller’s carve-out. 

We recommend that DOL separate information service providers that do not receive 

compensation based on selected investment options, from platforms such as Recordkeepers 

and TPAs that may be compensated in various and sometimes harmful ways according what 

the plan chooses to include in its choices for participants. 

IX. Education Or Advice?

Specific Funds in an Asset Allocation

We appreciate the care that DOL has taken in proposed rules about education versus advice 

with regard to asset allocation and specific investment recommendations from a plan’s 

investment alternatives. 

DOL has asked for comment on whether to use FINRA’s recommendations and rules on what 

constitutes education and what constitutes advice. In the context of DOL’s Fiduciary proposal to 

Eliminate Conflicts of Interest, FINRA’s goal is, as DOL points out, geared for suitability, not 

fiduciary, recommendations. In addition, there is no way to know now how or whether FINRA’s 

own policies on education versus recommendations will change, and what that would mean 

from a fiduciary perspective, especially in light of based on recent FINRA comments in media

regarding DOL’s proposal. 

Therefore, we recommend that DOL not use FINRA’s rules on education vs. advice, but rather 

look at principles on education vs. advice from DOL’s fiduciary perspective, with assistance from 

fiduciary experts, if necessary.

Education or Advice – Help From Other Sources

Now, with many interactive portals and software, it may be possible to show participants a listing 

of where plan alternative investments would fit into an asset allocation, IF there is: 1) more than 

one reasonably priced alternative available for each asset class, 2) there is an array of low cost 

investment alternatives as well, and 3) where there is the ability to have the participant take an 

online risk assessment to ascertain where they fit into the risk spectrum.

(See table below)
The Committee for the Fiduciary Standard

15

For example, if there is an array of risk assessment outcomes, including the typical risk based 

or age based options, there might be an array of choices:

Aggressive, Moderately Aggressive, Moderate, Conservative

For example, an investor whose risk assessment found to be Moderate might see an interactive 

online array, where a retirement plan’s choices looked something like this: 

Moderate Asset allocation

Cash or 

Equiv

Short Term 

Note/Bond

Intermed/ 

Long

Bond

Corp Bd US Eq Internat Eq Emerg Mkt 

Eq

Sectors 

Commod

RE Fds

Low cost 

Index 

option

MM Fd Index Fd or 

ETF

Index Fund 

or ETF

Index 

Fund or 

ETF

Index 

Fund or 

ETF

Index 

Fund or 

ETF

Index 

Fund or 

ETF

Index 

Fund or 

ETF

Index Fd/

ETF and 

active mix

·MM 

·SV Fd

·Index ETF/

·Active 

Fund

·Index/ETF

·Active 

Fund

·Index/ETF

·Managed 

Fund

·Index/ETF

·Managed 

Fund

·Index/ETF

·Managed 

Fund

·Index/ETF

·Managed 

Fund

·Index/ETF

·Managed 

Fund

Active 

Fund

Managers

·Fund

·Fund 

·Fund

·Fund 

·Fund

·Fund 

·Fund

·Fund 

·Fund

·Fund 

·Fund

·Fund 

·Fund

·Fund 

·Fund

·Fund 

> Click on any investment alternative for more information (one pager, prospectus)

> Compare what-if portfolios here to see projected returns and costs over 1, 5, 10 years, risk 

measures and other information.
The Committee for the Fiduciary Standard

16

X. Conflicts and Compensation:

The Best Interest Contract Exemption - BIC

The Contract itself

We applaud DOL’s Best Interest Contract for requiring any person or company that

would receive conflicted compensation to do so only if it is in the retirement investor’s 

best interest, with comprehensive transparency and projected fee vs. performance and risk 

comparisons. Much of this information is available, for example, within investment companies 

that sponsor mutual funds, and they should be called on to provide this already available data in 

forms usable by any entity, or for that matter, any interested investor. 

Business models with non-beneficial, conflicted compensation incent sales behaviors that are 

rarely in the best interest of a retirement investor, but very often serve the interest of the 

companies that share the revenue among themselves or seller’s rep who makes that sale. 

These behaviors are often harmful to the retirement investor.

Conflicts and Compensation under BIC

We appreciate the thought and care with which DOL has accommodated differing business and 

compensation models, as the DOL proposal eliminates many of the conflicts of interest in 

existing rules by which America’s retirement investors accumulate retirement nest eggs. 

The Committee agrees that no advisory or sales entity that has the privilege and 

responsibility of serving retirement investors should be allowed to avoid fiduciary 

status. Further, we agree that the provisions of the BIC contract should be required before 

proceeding, and would appropriately apply to banks, broker-dealers, insurance companies, and 

mutual fund companies and their respective representatives.

We concur with DOL that call-in order-taking aspects of online or discount brokers should not be 

subject to the fiduciary standard, so long as they are truly taking orders and not steering 

retirement investors into particular high cost funds or securities or annuities.

The Committee is not keen to encourage the continued use of compensations types with 

imbedded conflicts of interest, such as commissions, 12b-1 fees, revenue sharing of all 

kinds, especially if it is not refunded to a plan for its expenses or refunded to participant 

accounts. We find these conflicted and often hidden payments are frequently engineered to be 

deceptive and misleading. 

One newer version of deceptive revenue sharing, payments from custodians to firms, should 

also be included in this. While not very widespread among independent RIAs, wherever it is 

used, it is a conflict of interest, another cost to the investor, and one that should be avoided or 

fall under a BIC contract. 

Any compensation that is hidden from retirement investors is deceptive, and chances are, more 

expensive than compensation that is fully, comprehensively transparent so that the investor 

understands exactly what they are paying for advice, or investment management, and how 
The Committee for the Fiduciary Standard

17

much is received by any entity and how that may affect the advice the investor receives. The 

burden should be in the advice provider to ensure the retirement investor understands this 

compensation. Of course, under BIC, this would have to be in the retirement investor’s best 

interest.

With regard to conflicted compensation—with 12b-1, rev share, commissions, custodian 

payments, and myriad annuity commissions and fees: the Committee is hard pressed to 

come up with examples of when these would be in the best interest of the retirement 

investor. We are hard put to find examples of retirement investors who would not benefit from 

non-conflicted compensation, in which the adviser is compensated directly by the client, as 

doctors, lawyers, accountants and other professionals are, and does not receive compensation 

or selling inducements from any employer, company, partner, third party service or product 

provider et al, (which always is ultimately paid for by the investor, though the investor seldom is 

aware of that material fact). 

When is Revenue Sharing or Hidden Commissions or Fees in the Interest of Retirement 

Investors?

For example, is it disloyal and inappropriate, under the auspices of advice in retirement 

investors’ best interest, to recommend or sell funds or other products that pay hidden revenue

share? We say yes it is. Even in a retirement plan, when revenue share, if any, must be used 

to defray plan costs (there should be no exemption to this, if revenue sharing, et al 

compensation is permitted at all), plan participants are often unaware of the revenue sharing

arrangement or other hidden commissions or fees. Some commission, expense and fee 

disclosures deliberately obscure what retirement investors pay. Even when retirement investors 

– even plan sponsors – are aware of a third-party arrangement, they are not typically aware of 

the variation of fund expenses for differing share classes or the proportion of the expenses that 

comprises revenue share. Often, this creates a situation in which the lion’s share of fund 

expenses are paid by a small number of plan participants, who don’t realize the impact of their 

choice of plan alternative.

Another issue with hidden compensation such as revenue sharing is the often deliberate lack of 

transparency to the investor. If firms wanted investors to know what they are paying, hidden 

revenue sharing wouldn’t exist. 

BIC and Investor’s Best Interest Finding

If revenue share of any kind is permitted under BIC, it is necessary to have a finding that this is 

in the best interest of the retirement investor, and why that is the case. In order for a retirement 

investor to make any informed choice of a plan alternative (mutual fund, ETF, or any other 

investment choice) that involves commission and/or revenue sharing compensation of any kind, 

full disclosure of the cost to the investor before the purchase, and over time, should be explicitly 

disclosed in a way that ensures the investor understands both the dollar amount and percentage 

of that compensation’s impact, each year and over 5, 10, 15, 20 years.

The Committee agrees with the DOL proposal’s requirements to disclose and ensure investor 

understanding of all costs to the retirement investor and performance data, both historical and 

forward-looking.
The Committee for the Fiduciary Standard

18

BIC Contract First – Private Right of Action and Class Action

The BIC contract, with its private right of action and the ability to form a class will be a strong 

deterrent to wrongdoing, and actionable if an investor is wronged. This is very important and 

beneficial, essential to the retirement investor. The BIC contract exemption wouldn’t be 

necessary if a company or advisory representative did not have a model that contained inherent 

conflicts of interest that incent sales or recommendations that often harm the retirement 

investor. Some firms and groups have commented are that the contract within this exemption 

would be cumbersome to use, however the Committee feels it is a very important, especially 

where there are hidden payments among companies and their representatives. 

Some firms have said the application of a BIC contract is “unworkable” or “unwieldy.” But one of 

the very important points of the BIC Contract is the Contract, and retirement investors’ rights for 

recourse under contract law. What do dissenters propose instead of the contract, that would 

provide the same investor’s right to action and to form a class for class action, if necessary? 

The point of BIC is to permit conflicted types of compensation models to exist and be used in 

the event that it is in the best interest of the investor to do so. If these entities would avoid or 

mitigate the conflicts of interest in their model, they wouldn’t need the BIC contract, although we 

would think that some kind of contract would be in order, as it is with advisers who currently are 

fiduciaries. 

This is a “can’t have your cake and eat it too, issue.” Avoid and mitigate the conflicts, (then 

would need a fiduciary contract), or use the BIC contract and act in the investor’s best interests.

Annuities and the Opportunity for Mischief Under BIC

While compensation would Ideally be commensurate with the amount of time and work involved 

when considering how to advise a retirement investor, we are very concerned that this concept 

will be used to the detriment of retirement investors by sellers of annuities of various kinds, to 

retirement investors. Investors typically do not understand all of the many commissions, fees, 

penalties and other costs involved with annuities, which essentially involve the lock-up and 

return of the investor’s own principal over time. Sales practices are abysmal and misleading in 

the extreme. 

We would like to know more about how the DOL will ensure that annuities are not sold 

inappropriately to so many retirement investors, how DOL will determine what commissions and 

fees are reasonable, when they may be appropriately sold in an investor’s best interest, and 

how DOL might tackle the misleading scare tactics so often used against retirement investors 

who are often pressured into buying these when it is not in their best interest. So in a nutshell, 

how will DOL help ensure that the fraction of appropriate annuity sales, are in fact in the 

investor’s best interest? 
The Committee for the Fiduciary Standard

19

Investor Cost and Performance Benchmarking

Regarding commission or revenue sharing, all-in costs to the investor, it would be extremely 

helpful to the retirement investor to require third-party benchmarking of both performance and 

fees both pre-sale and annually, as this is the only way to truly understand the context of the 

retirement platform or IRA alternatives and whether this is a good recommendation or choice, or 

not.

There are software and data information platforms available that benchmark investor costs and 

performance and would enable retirement investors to do “what if” scenarios with their plan 

choices and see the impact of their choices’ costs and performance to enable them to fine-tune 

their choices. This would greatly help retirement investors to understand the impact of, for 

example, their 401(k)-type plan alternative choices, and their long-term impact on the investor’s 

nest egg for retirement. 

Firm Warranty

BIC’s proviso of a firm warranty in which the firm explains how it is eliminating and mitigating

conflicts of interest is an interesting concept and the Committee requests more information on 

how this would work and be monitored.

Collective Funds and Other Hard to Compare/Benchmark Assets

The Committee agrees in general with the provisions of what types of assets are permitted 

under the BIC. We would lean toward the vehicles on which there is readily available data, for 

transparency, performance and fee benchmarking and the ability to compare similar vehicles. 

Collective funds are often less transparent than mutual funds, for example. They offer different 

share classes, including classes with revenue share and commissions. It is easy to structure a 

CIF to provide fees to adviser, sub-adviser, custodian, and sponsor, making them fee-laden and 

better for the companies offering them than the retirement investor. 

It’s often harder to benchmark fees and expenses as well as performance on CIFs against 

peers. This could cause a run toward them because of their opaque nature, compared with 

mutual funds. If BIC contract users want to use CIFs, there should be a finding as to why this is 

a better option – in the best interest of the retirement investor, than a comparable and readily 

available, reasonable cost mutual fund or ETF. With CIF vehicles, there is often a chance and 

the incentive to add more fees to more entities, eliminating any retirement investor’s advantage 

in owning those.
The Committee for the Fiduciary Standard

20

XI. SIFMA and FINRA’s Recent “Best Interests” Proposals

SIFMA and FINRA, as well as assorted other associations or lobby groups for broker-dealers 

and insurance companies, mutual fund companies and banks, have proposed their own version 

of a standard, which in our view has nothing to do with either a fiduciary standard or a “Best 

Interests” standard. In fact, some opine that what they propose is in the Best Interests of the 

industry rather than the Best Interests of retirement investors. 

On the following pages, with permission, we adopt the language of our esteemed Committee 

colleague, Prof. Ron Rhoades, JD, CFP. Prof. Rhoades is past Chair of The Committee for the 

Fiduciary Standard; Program Director, Financial Planning, and Asst. Professor of Finance, 

Gordon Ford School of Business, Western Kentucky University. Prof. Rhoades is also President 

of ScholarFi, Inc., an investment advisory firm, and President of Ron A. Rhoades, P.A., a law 

firm.

This space intentionally left blank.

 

 

 

 

 

 

 

 

 
The Committee for the Fiduciary Standard

21

“ SIFMA’S AND FINRA’S “BEST INTERESTS” PROPOSALS:

MISLEADING AND WHOLLY INEFFECTIVE

---------------------------------------------------------------------------------------------------------------------

“Goldman's arguments in this respect are Orwellian. Words such as 

‘honesty,’ ‘integrity,’ and ‘fair dealing’ apparently [in Goldman’s eyes] do 

not mean what they say; [Goldman says] they do not set standards; they 

are mere shibboleths. If Goldman's claim of ‘honesty’ and ‘integrity’ are 

simply puffery, the world of finance may be in more trouble than we 

recognize.” – Judge Paul Crotty,

Richman v. Goldman Sachs Group, Inc., 868 F. Supp. 2d 261 (S.D.N.Y. 2012).

-------------------------------------------------------------------------------------------------------------------------------

In just the past couple of months, SIFMA has advanced a “best interests” standard of conduct, as an amendment to

FINRA’s suitability obligation.9 FINRA, in its July 17, 2015 comment letter to the U.S. Department of Labor regarding 

the Conflict of Interest rule proposal and the exemptions relating thereto, also proposes a “best interests” standard. 

Upon close examination it is apparent that the rhetoric emanating from SIFMA and broker-dealer firms regarding the 

“best interests” proposal, and the proposals themselves, are but eleventh-hour attempts to defeat the U.S. Department 

of Labor’s proposed Conflict of Interest Rule. SIFMA and FINRA, by these proposals, seek to deny the imposition of 

fiduciary status upon those who provide investment advice to retirement plans and retirement accounts, and in so 

doing seek to preserve a product-sales-driven “caveat emptor” relationship which is inappropriate for the delivery of 

personal investment advice. It is also apparent that the term “best interests” should not be utilized by either SIFMA or 

FINRA at all, given its understanding for centuries in the context of delivery of trusted advice to mean adherence to 

the fiduciary duty of loyalty.

For example, Richard Ketchum, Chairman and CEO of FINRA, recently summarized the protections for customers 

of brokers, stating that these protections “show that depictions of the present environment as providing ‘caveat emptor’ 

freedom to broker-dealers to place investors in any investment that benefits the firm financially with no disclosure of 

their financial incentives or the risks of the product, are simply not true.”10 However, Mr. Ketchum’s characterization 

of broker-dealer firms’ customers as not being subject to the ancient principle of ‘caveat emptor’11 is largely incorrect; 

by his statement he obfuscates the sales origins and present reality of today’s broker-customer relationships.

Additionally, while certain disclosure obligations are imposed on broker-dealers, these disclosures are often casual in 

nature, do not require the adviser to ensure client understanding of the conflicts of interest and their ramifications, and 

do not require that any proposed transaction wherein a conflict of interest exist remain (even with disclosure and 

informed consent) substantively fair to the client.

I would observe FINRA’s recent support of a new “best interests” standard recently advanced by SIFMA,12

the broker-dealer lobbying organization, grounded upon a weak suitability obligation accompanied by 

somewhat enhanced casual disclosures of additional information to investors, continues 75 years of 

FINRA’s failure to advance standards to the highest levels, as envisioned by Senator Maloney and others, 

and fails to protect individual investors. FINRA’s stated opposition to the Department of Labor’s Conflict 

of Interest rule proposal is further evidence that FINRA serves only the interests of its broker-dealer 

																																																												 9

SIFMA announced a “best interests” proposal in late May 2015, and then provided a “mark-up of existing FINRA Rules that 

outlines the broad contours of how a best interests standard for broker-dealers might be developed as part of the path forward on 

this most important investor protection issue.” Retrieved from SIFMA web site, June 10, 2015.

10 Richard G. Ketchum, Remarks From the 2015 FINRA Annual Conference, Washington, DC (May 27, 2015).

11 BLACK’S LAW DICTIONARY 252 (9th ed. 2009) (defining “caveat emptor” as a Latin phrase meaning “let the buyer beware”); 

see also Matthew P. Allen, A Lesson from History, Roosevelt to Obama – The Evolution of Broker-Dealer Regulation: From SelfRegulation, Arbitration, and Suitability to Federal Regulation, Litigation, and Fiduciary Duty, 5 ENTREPRENEURIAL BUS. L.J. 

1, 20 n.77 (2010) (“Caveat emptor is an old property law doctrine under which a buyer could not recover from the seller for defects 

in the property that rendered it unfit for ordinary purposes. The only exception was if the seller actively concealed latent defects.”).

12 SIFMA provided a “mark-up of existing FINRA Rules that outlines the broad contours of how a best interests standard for 

broker-dealers might be developed as part of the path forward on this most important investor protection issue.” Retrieved from 

SIFMA web site, June 10, 2015.
The Committee for the Fiduciary Standard

22

members, and fails to adequately protect the investing public. Rather than embrace any changes to FINRA’s 

suitability obligation by means of a misleading and wholly ineffective “best interests” standard, I would 

suggest that FINRA should be disbanded and its quasi-government oversight functions of the market 

conduct of broker-dealer firms and their registered representatives should be returned to federal and state 

agencies.

SIFMA has proposed that its “best interests” standard be adopted in lieu of the imposition of fiduciary 

standards of conduct upon brokers who provide investment advice. Yet, SIFMA’s proposed “best interests” 

standard is also a far cry from the significantly enhanced protections afforded to consumers by a bona fide 

fiduciary standard of conduct, as proposed by the U.S. Department of Labor in its “Conflict of Interest” 

rule proposal (April 2015) and as found in existing common law applicable to those in relationships of trust 

and confidence with their clients. SIFMA’s proposed “best interests” standard would – if enacted – deny

consumers, in today’s complex financial world, important protections by keeping individual investors in the 

situation where “caveat emptor” remains the rule for investors, even for those in relationships of trust and 

confidence with individuals and firms who provide personalized investment advice.

SIFMA’s new “best interests” standard is also inherently misleading and deceptive, as the term “best 

interests” is commonly understood by consumers to mean that the advisor is acting on behalf of the 

consumer/investor, keeping the consumer’s interests paramount at all times.13

FINRA’s July 17, 2015 comment letter to the DOL also outlines its version of a “best interests” standard. 

This proposal demonstrates FINRA’s continued inability to substantially raise the standards of conduct of 

brokers to the highest levels, as contemplated by Senator Maloney and others at the time of FINRA’s 

inception (when it was called the NASD). FINRA’s willingness to continue to protect brokers, under the 

shield of an inherently weak suitability standard (whether or not “enhanced” by its “best interests” 

proposal), also confirms the necessity of the U.S. Department of Labor moving forward to impose fiduciary 

status upon investment advisers to ERISA-governed retirement plans and to IRAs, as contemplated by the 

proposed rule.

In the table below I summarize the flaws in SIFMA’s and FINRA’s recent “best interests” proposals and 

demonstrate why SIFMA’s proposed changes to FINRA’s suitability rule do not come even close to the 

protections provided by the fiduciary standard:

																																																												 13 Legal commentators also continue to equate the term “best interests” with the requirement of the fiduciary duty of loyalty. See, 

e.g.:

• Edward J. Waitzer and Douglas Sarr, Fiduciary Society Unleashed: The Road Ahead for the Financial Sector, 69 

Bus.Lawyer 1081, 1090 (Aug. 2014). (“these individuals need to trust that the specialists they rely upon will keep their 

best interests at heart ... Fiduciary law aims to promote this trust. It applies to relationships in which one party, the 

fiduciary, gains discretionary power over another party, the beneficiary, in circumstances where both parties would 

‘reasonably expect’ that the fiduciary will exercise this power in the best interests of the beneficiary”) (Emphasis in 

original; emphasis added.)

• Gold, Andrew S., The Loyalties of Fiduciary Law (December 20, 2013). Philosophical Foundations of Fiduciary Law, 

Andrew S. Gold & Paul B. Miller, eds., Oxford University Press, 2014, Forthcoming. Available at SSRN: 

http://ssrn.com/abstract=2370598 (“Another conception of fiduciary loyalty suggests that the fiduciary must act in the best 

interests of the beneficiary ... This conception can readily be linked to the first conception, given the possibility that the 

rules against conflicting interests are designed to increase the likelihood that a fiduciary will act in the beneficiary’s best 

interests.”) (Emphasis added.)

The influential Restatements of the Law also equate “best interests” or “placing the interests of the principle first” with the fiduciary 

duty of loyalty:

• American Law Institute, Restatement of the Law of Trusts (Third) § 78. (“[A] trustee must refrain, whether in fiduciary or 

personal dealings with third parties, from transactions in which it is reasonably foreseeable that the trustee’s future 

fiduciary conduct might be influenced by considerations other than the best interests of the beneficiaries.”) (Emphasis

added.)

• Restatement (Third) of Agency § 8.01 comment b. (“Although an agent’s interests are often concurrent with those of the 

principal, the general fiduciary principle requires that the agent subordinate the agent’s interests to those of the principal 

and place the principal’s interests first as to matters connected with the agency relationship.”) (Emphasis added.)
The Committee for the Fiduciary Standard

23

A Concise Comparison: Bona Fide Fiduciary Standard vs. SIFMA’s “Best Interests” Proposal

What requirements 

are imposed upon 

the person providing 

personalized 

investment advice? 

Bona Fide 

Fiduciary 

Standard 

SIFMA’s “Best Interest” 

Proposal (as outlined in its 

June 2015 release) 

FINRA’S “Best Interest” 

Proposal (as outlined in its 

July 17, 2015 comment letter) 14 

Who does the financial 

representative represent?

The client. The brokerage firm, and, through the 

firm, various product manufacturers. The 

financial representative functions as a 

“seller’s representative” with no substantial 

allegiance required to the purchaser 

(customer).

The brokerage firm, and, through the firm, 

various product manufacturers. The 

financial representative functions as a 

“seller’s representative” with no substantial 

allegiance required to the purchaser 

(customer).

Does a duty exist upon 

the representative to 

clearly and fully disclose 

all compensation 

received by the person 

providing advice, and by 

his/her firm?

Yes. No. While annual disclosure occurs of “a 

good faith summary of the investmentrelated fees” associated with an 

investment, there is no requirement in 

SIFMA’s proposal that the compensation

of the broker-dealer or its registered 

representative be affirmatively quantified 

and then disclosed. As a result, customers 

will remain uninformed of the precise 

amount of the compensation of the broker 

and its registered representative. Hence, 

the client will not possess the means to 

assess the reasonableness of the 

compensation so provided, and the 

receipt of only “reasonable compensation” 

is a requirement for a fiduciary actor.

No. While annual disclosure occurs of a 

product’s “fees and all related expenses,” 

there is no requirement in FINRA’s 

proposal that the compensation of the 

broker-dealer or its registered representative 

be affirmatively quantified and then 

disclosed. As a result, customers will remain 

uninformed of the precise amount of the 

compensation of the broker and its 

registered representative. Hence, the client 

will not possess the means to assess the 

reasonableness of the compensation so 

provided, and the receipt of only 

“reasonable compensation” is a requirement 

for a fiduciary actor. Why do broker-dealer 

firms resist the fiduciary requirement to fully 

disclosure a material fact – their 

compensation – to their customers? Because 

a large proportion of these customers 

believe that their registered representative 

and brokerage firm is acting gratuitously,15

given broker-dealers’ ability to hide 

compensation from the customers.16

																																																												 14 FINRA states, in its comment letter of July 17, 2015 to the U.S. Department of Labor, that “any best interest standard for 

intermediaries should meet the following criteria:

• The standard should require financial institutions and their advisers to:

o act in their customers’ best interest;

o adopt procedures reasonably designed to detect potential conflicts;

o eliminate those conflicts of interest whenever possible;

o adopt written supervisory procedures reasonably designed to ensure that any remaining conflicts, such as 

differential compensation, do not encourage financial advisers to provide any service or recommend any 

product that is not in the customer’s best interest;

o obtain retail customer consent to any conflict of interest related to recommendations or services provided; and

o provide retail customers with disclosure in plain English concerning recommendations and services provided, 

the products offered and all related fees and expenses.”

15 See, e.g., Study Regarding Obligations of Brokers, Dealers, and Investment Advisers, Rel. No. IA-3058; File No. 4-606 (a.k.a. the 

“Rand Report” of 2008), in which over one-fourth of consumers surveyed related that they paid “$0” for the brokerage or advisory 

services they were provided. Since registered investment advisers are required to provide clients with periodic statements of the fees 

paid, under the requirements of the Investment Advisers Act of 1940 and regulations thereunder, and since the survey included a 

large number of clients of dual registrants (which fosters confusion among titles), it is likely that the survey understates the number 

of customers of broker-dealer firms who hold such firm. I have personally observed many, many customers of brokers who 

believed that their broker provided his or her services “for free” and “without compensation,” and I have never met a customer of a 

full-service brokerage firm who understood all of the ways, or the high amounts, of the compensation received by the broker or the 

brokerage firm. 
The Committee for the Fiduciary Standard

24

What requirements 

are imposed upon 

the person providing 

personalized 

investment advice? 

Bona Fide 

Fiduciary 

Standard 

SIFMA’s “Best Interest” 

Proposal (as outlined in its 

June 2015 release) 

FINRA’S “Best Interest” 

Proposal (as outlined in its 

July 17, 2015 comment letter) 14 

Is there a duty upon the 

representative to ensure 

client understanding of 

material facts, including 

material conflicts of 

interest?

Yes. No. Under SIFMA’s proposal disclosures 

must only be “designed to ensure client 

understanding.” There is no requirement, 

as exists for a fiduciary, that client 

understanding of conflicts of interest, and 

their ramification, actually occur.

No. Under FINRA’s proposal disclosures 

relating to products must only be provided 

to the customer. There is no requirement, 

as exists for a fiduciary, that client 

understanding of conflicts of interest, and 

their ramification, actually occur by means 

of affirmative obligations placed upon the 

registered representative. 

Is informed consent of 

the client required prior 

to the client undertaking 

each and every

recommended 

transaction?

Yes. No. There is no requirement in SIFMA’s 

proposal that the client’s consent be 

“informed” – a key requirement of 

fiduciary law before client waiver of a 

conflict of interest can take place. Nor is 

there a requirement that the client provide 

informed consent prior to each and every 

transaction. Rather, SIFMA would only 

require: “Customer consent to material 

conflicts of interest or for other purposes 

as appropriate may be provided at account 

opening.” Of course, consent “at client 

opening” often involves a customer briefly 

initialing a line, as one of many initials or 

signatures provided in account opening 

forms which are often dozens of pages 

long. The result of SIFMA’s proposal is 

that clients can and will consent to be 

harmed – an outcome which cannot exist 

under a bona fide fiduciary standard. And 

such “consent” will hardly ever be 

“informed.”

No. There is no requirement in FINRA’s 

proposal that the client’s consent be 

“informed” – a key requirement of fiduciary 

law before client waiver of a conflict of 

interest can take place. Nor is there a 

requirement that the client provide 

informed consent prior to each and every 

transaction. Rather, FINRA would only 

require brokers to “obtain client consent” to 

conflicts of interest. Such consent, often 

given with little or no understanding by the 

customer of the broker, creates an estoppel 

defense for the broker, who is in an armslength relationship with the customer. As 

explained in this comment letter, the role of 

estoppel is very limited in fiduciary 

relationships, and much more than “simple 

consent” is required for the fiduciary to 

proceed when a conflict of interest is 

present.

																																																												 16 Information regarding all of the compensation paid by product providers to the brokers is not provided by brokers to their 

customers, except piecemeal and in multiple lengthy documents, such as often 50+ page disclosure statements signed upon the 

opening of accounts, mutual fund prospectuses, and various web site disclosures. Even then, such disclosures are often ambiguous, 

such as “we may receive compensation from” a product provider or (in product provider documents, such as prospectuses) “we 

may compensate a broker.” Indeed, even the author – who is trained in reading legal documents and who possesses a broad and 

deep knowledge of investment products, often cannot discern the sum total of compensation provided to a full-service broker 

resulting from many investments, given that the sum total includes not only commissions and 12b-1 fees, but also payment for shelf 

space, sponsoring of seminars for prospective customers, sponsorship of events at broker-dealer firm meetings, payment of 

brokerage commissions including soft dollar compensation, and other forms of revenue-sharing payments. The disguising of the 

total compensation paid to broker-dealer firms and their registered representatives appears to be a central concern of the brokerdealer community, since if full and complete disclosures were made of the compensation arrangements, the fact of differential 

compensation, and the amounts paid, most customers would likely choose not to be business with the brokerage firm. I have 

observed many a client, once I informed them of my estimate of what they had been paying to their broker-dealer firm over the past 

year, become very angry. Yet, a remedy for their grief is usually not available, as the “suitability” standard does not require that a 

broker-dealer firm receive only “reasonable compensation.” In contrast, the fiduciary standard of conduct requires affirmative 

disclosure to the client of all material facts, which by necessity includes all compensation the fiduciary investment adviser receives, 

stated in terms that are clear, concise and understandable by the client. In addition, the fiduciary standard of conduct requires that 

compensation received be reasonable.
The Committee for the Fiduciary Standard

25

What requirements 

are imposed upon 

the person providing 

personalized 

investment advice? 

Bona Fide 

Fiduciary 

Standard 

SIFMA’s “Best Interest” 

Proposal (as outlined in its 

June 2015 release) 

FINRA’S “Best Interest” 

Proposal (as outlined in its 

July 17, 2015 comment letter) 14 

Must the transaction 

remain, at all times, 

substantively fair to the 

client?

Yes. No. There is only a requirement that the 

transaction be in accord with the client’s 

“best interest” – a new SIFMA-proposed 

standard that is ill defined and which 

remains subject to much interpretation. 

Such interpretations will primarily occur 

through FINRA’s much-maligned system 

of mandatory arbitration. In contrast, the 

fiduciary standard possesses centuries of 

interpretation and application. Under a 

bona fide fiduciary standard, clients are 

unable to waive core fiduciary duties; the 

role of estoppel is quite limited. This is 

enforced by the courts by requiring both 

informed consent of the client and that the 

transaction remain substantively fair to the 

client.

No. There is only a requirement that the 

transaction be in accord with the client’s 

“best interest” – a new FINRA-proposed 

standard that is ill defined and which 

remains subject to much interpretation. 

Such interpretations will primarily occur 

through FINRA’s much-maligned system of 

mandatory arbitration. In contrast, the 

fiduciary standard possesses centuries of 

interpretation and application. Under a 

bona fide fiduciary standard, clients are 

unable to waive core fiduciary duties; the 

role of estoppel is quite limited. This is

enforced by the courts by requiring both 

informed consent of the client and that the 

transaction remain substantively fair to the 

client.

Does there exist a duty 

to properly manage

investment-related fees 

and costs that the client 

will incur at all times?

Yes. No. SIFMA expressly states: “Managing 

investment-related fees does not require 

recommending the least expensive 

alternative, nor should it interfere with 

making recommendations from among an 

array of services, securities and other 

investment products consistent with the 

customer’s investment profile.” These 

caveats leave the door wide open for the 

broker to recommend highly expensive 

products, including products which pay 

the broker more, in which the total fees 

and costs incurred by the customer will 

substantially lower the long-term returns of 

the investor.

No. FINRA does not appear to recognize 

that, under fiduciary law, there is an 

obligation imposed upon the fiduciary to 

ensure that any expenditures of the client’s 

funds, through payment of product-related

fees and costs, be undertaken with close 

scrutiny. FINRA appears to desire that highcost products could still be recommended 

compared with lower-cost products that 

possess nearly the same risk and other 

characteristics. The fiduciary standard of 

due care requires that the client’s expenses 

be controlled and that avoidable expenses 

be avoided. The fiduciary is permitted to 

obtain reasonable, professional-level 

compensation, through agreement with the 

client at the inception of the relationship, 

and with full disclosure of same.

Does there exist a duty 

to properly manage the 

design, implementation 

and management of the 

portfolio, in order to 

reduce the tax drag upon 

the customer’s 

investment returns?

Yes. No. There is no express duty under 

SIFMA’s proposal to properly manage the 

tax consequences of investment decisions. 

Far too often under the suitability 

standard, and under this proposed “best 

interests” standard, customers of brokerdealers have and will possess substantial 

tax drag upon their investment returns that 

otherwise could have been avoided 

through expert advice.

No. Nothing in FINRA’s proposal addresses 

portfolio management. FINRA is mired in 

the ancient practice of providing products 

under the suitability standard. Today’s 

investors deserve expert advice from true 

fiduciaries, not the sale of products which 

generate high profits for the broker without 

proper consideration of how the product fits 

into the client’s overall portfolio.

As seen, SIFMA’s and FINRA’s proposed “Best Interests” standards fall far short of the protections 

afforded by ERISA’s fiduciary standard. The fact of the matter is that Wall Street wants to eat its cake and 

have it too. It wants to be perceived as acting in customer's "best interests," but enjoy the freedom to act in its 

own interests. Wall Street’s new “Best Interests of the Consumer” proposal is, in reality, only “Wall Street’s 

Self-Interest.”
The Committee for the Fiduciary Standard

26

As alluded to in the chart above, by its “Best Interests” proposal SIFMA and FINRA do not turn brokers 

from sell-side merchandizers into buy-side purchaser’s representatives and fiduciaries. Rather, SIFMA’s and 

FINRA’s proposal are nothing more than an attempt to obfuscate into some kind of obscene and confusing 

hybrid between the two. In fact, the enhancement to the inherently weak suitability standard under these 

proposals is extremely modest.

This begs the question – who does the broker under SIFMA’s and FINRA’s proposed “best interests” 

standards represent? This is a key question, for the following is well known in the law:

The characters of buyer and seller are incompatible, and cannot safely be exercised by the 

same person. Emptor emit quam minimo potest; venditor vendit quam maximo potest. 

The disqualification rests ... on no other than that principle which dictates that a person 

cannot be both judge and party. No man can serve two masters. He that it interested with 

the interests of others, cannot be allowed to make the business an object of interest to 

himself; for, the frailty of our nature is such, that the power will too readily beget the 

inclination to serve our own interests at the expense of those who have trusted us.17

It is obvious that under SIFMA’s and FINRA’s proposed “best interest” standards the registered 

representative would continue to act as sellers of products, thereby representing the broker-dealer firm and 

product manufacturers. This is a far, far cry from acting as a fiduciary, and acting as the representative of the 

purchaser. And it fails to achieve a key objective that the U.S. Department of Labor alluded to in its release 

for the BIC exemption: “In the absence of fiduciary status, the providers of investment advice are neither 

subject to ERISA's fundamental fiduciary standards, nor accountable for imprudent, disloyal, or tainted 

advice under ERISA or the Code, no matter how egregious the misconduct or how substantial the losses.”18

The U.S. Department of Labor should reject any proposal from SIFMA, FINRA, or broker-dealer firms, 

or insurance companies, which seeks to advance such a woefully inadequate rule. These are proposals that, 

like the suitability standard today, protect Wall Street, and utterly fail to protect consumers from Wall 

Street’s greed.

Let us not permit Wall Street profess to act in the "best interests" of customers, when any sensible consumer

would conclude that Wall Street's definition of "acting in your best interests" is wholly deceptive to 

consumers. Such fraud19 has no place in government regulatory efforts, nor even in self-regulatory 

organization rulemaking activities. SIFMA’s and FINRA’s proposals should be loudly and firmly rejected by 

the DOL and other policymakers. And the recent embrace by FINRA of SIFMA’s proposal should subject 

FINRA to further scrutiny over whether FINRA’s market conduct regulation of brokers should be 

transferred back to federal and state governments for direct oversight,20 especially when FINRA 

characterizes its proposal as a “fiduciary ‘best interests’” proposal – when it clearly is not.”

																																																												 17 Carter v. Harris, 25 Va. 199, 204 (1826); 1826 Va. LEXIS 26; 4 Rand. 199 (Va. 1826).

18 BIC exemption release at pp. 21962-3.

19 As Professors Angel and McCabe observed: “The relationship between a customer and the financial practitioner should govern 

the nature of their mutual ethical obligations. Where the fundamental nature of the relationship is one in which customer depends 

on the practitioner to craft solutions for the customer’s financial problems, the ethical standard should be a fiduciary one that the 

advice is in the best interest of the customer. To do otherwise – to give biased advice with the aura of advice in the customer’s best 

interest – is fraud. This standard should apply regardless of whether the advice givers call themselves advisors, advisers, brokers, 

consultants, managers or planners.” James J. Angel, Ph.D., CFA and Douglas McCabe Ph.D., Ethical Standards for Stockbrokers: 

Fiduciary or Suitability? (Sept. 30, 2010). (Emphasis added.)

20 I have previously written about FINRA’s seven-decades long failure to live up to the aspirations of the Maloney Act to raise the 

principles of broker-dealers firms to the highest level. See “Disband FINRA,” available at 

http://scholarfp.blogspot.com/2013/07/disband-finra-unabridged-and-with.html. ”
The Committee for the Fiduciary Standard

27

“On the Integration of DOL’s Fiduciary Standard with Other Standards.” 

“Various objections to the DOL’s proposal have been raised in the public sphere that differing fiduciary 

standards may exist, between providing advice to accounts covered by the Conflicts of Interest Rule and 

other types of accounts, and that compliance with differing standards would prove too difficult. This is 

patently false and non-sensible. It has long been understood by providers of services under two different 

standards of conduct that the easiest path to ensure compliance is to simply apply the higher standard to the 

entirety of the relationship.

Indeed, the SEC staff in 2011, following in the footsteps of the Certified Financial Planner Board of 

Standards, Inc.’s professional rules of conduct, explained that the federal fiduciary standard applies to a 

fiduciary adviser’s “entire relationship” with clients and prospective clients.21 In this regard, it must be 

understood that “contract law concerns itself with transactions while fiduciary law concerns itself with 

relationships.”22

While the DOL cannot, through its own regulations, mandate the fiduciary standard applicable to nonERISA and non-IRA accounts, any “dilemmna” posed by the existence of differing standards is easily 

solved, as set forth above. The highest standards applicable to any account should govern the entirety of the 

relationship. This is likely the perception the client will possess, and this solution follows upon accepted 

common law that fiduciary status attaches to relationships, not accounts.

One must wonder why FINRA, in existence for over 75 years, has not incorporated into its conduct rules 

for brokers the requirements of a fiduciary standard, and acknowledge that under certain circumstances 

(e.g., when a relationship of trust and confidence is formed, when de facto discretion exists, etc.) that 

brokers can (and have been, repeatedly) held to be fiduciaries under state common law. If FINRA is 

concerned about the “confusion” that might exist among brokers and their registered representatives about 

varying standards of conduct, the solution for FINRA’s concern is very apparent: (1) simply copy into 

FINRA’s conduct rules the fiduciary standards of conduct under DOL (or other) regulatory regimes; (2) 

specify when such fiduciary standards of conduct apply (easily discernible from the DOL’s proposals, and 

guided by established law in other areas); and (3) instruct the broker and its registered representatives to 

simply apply the highest standard of conduct imposed upon any account or any aspect of the relationship to 

the entirety of the relationship.

Adherence to the highest standard imposed, when differing standards exist, isn’t rocket science. FINRA’s 

protests (and those of the broker-dealer industry associations such as SIFMA and FSI, and those of many 

broker-dealers themselves) should be dismissed as meritless and mere attempts to deny to Americans the 

important fiduciary protections they deserve.”

																																																												 21 Securities and Exchange Commission Staff, Study on Investment Advisers and Broker-Dealers 22 (2011).

22 Rafael Chodos, Fiduciary Law: Why Now! Amending the Law School Curriculum, 91 Boston U.L.R. 837, 845 (and further noting 

that “Betraying a relationship is more hurtful than merely abandoning a transaction.”)
The Committee for the Fiduciary Standard

28

XII. Disclosures and Investor and Adviser Behavior: 

Not What You Would Expect

We applaud the DOL for requiring transparency and disclosure of cost and performance 

projections and comparisons to like investments.

We also are heartened to see that it is not an option to “disclose and waive” best 

interest provisions, or “disclose and harm” – that the best interests of the retirement 

investor are paramount, and not negotiable.

While transparency is crucial, disclosures of costs (and other information) to the investor have 

many unexpected and perverse effects on the investor, and on many well-meaning advisors,

and certainly on salespeople, according to current academic research. 

Disclosures are necessary, but not sufficient to fulfill fiduciary duty. Transparency is 

essential. The adviser needs to avoid the conflicts in the first place, and manage unavoidable 

conflicts in the investor’s best interest – not disclose, proceed, and harm. 

The effects of disclosures are surprising and quite unsettling. Regulators may not be aware 

of the effects even good disclosures have on even well-meaning advisers and investors, 

according to Prof. Dalian Cain, Yale School of Management, in “The Dirt on Coming Clean: The 

Perverse Effects of Disclosing Conflicts of Interest,”23 According to Dr. Cain’s research:

“Conflicts of interest can lead experts to give biased and corrupt advice. Although disclosure is 

often proposed as a potential solution to these problems, we show that it can have perverse 

effects. First, people generally do not discount advice from biased advisors as much as they 

should, even when advisors’ conflicts of interest are disclosed. Second, disclosure can increase 

the bias in advice because it leads advisors to feel morally licensed and strategically 

encouraged to exaggerate their advice even further. As a result, disclosure may fail to solve the 

problems created by conflicts of interest and may sometimes even make matters worse.”

While we understand that, for firms that currently do not provide advice or investment 

management in the retirement investor’s best interests, this transition to advice in the best 

interest of the retirement investor will take time. 

We support the idea of doing away with non-beneficial compensation models over time.

																																																												 23 Cain, Daylian M., George Loewenstein, and Don A. Moore. "The dirt on coming clean: Perverse effects of 

disclosing conflicts of interest." The Journal of Legal Studies 34.1 (2005): 1-25.
The Committee for the Fiduciary Standard

29

Disclosures: Transparency is Necessary But Disclosures Are “Ineffective” and 

Often, Worse

Some of the most recent work on disclosures and their effect on even well-meaning advisers, 

and investors receiving advice after being disclosed to, indicates that the effects are extremely 

perverse, according to Daylian Cain, Yale School of Management. Dr. Cain’s research is 

compelling and it underscores the fact that disclosure is not enough to mitigate conflicts of 

interest or fulfill fiduciary duty to investors. 

A 2013 research paper, “The Burden of Disclosure: Increased Compliance with Distrusted 

Advice,” by Sunita Sah, George Loewenstein, and Prof. Cain, continues work they have led for 

years.24 That research indicates:

“Professionals are often influenced by conflicts of interest when they have a personal, often 

material, interest in giving biased advice. Although disclosure (informing advisees about the 

conflict of interest) is often proposed as a solution to problems caused by such conflicts, prior 

research has found both positive and negative effects of disclosure. We present four 

experiments that reveal a previously unrecognized perverse effect of disclosure: While 

disclosure can decrease advisees’ trust in the advice, it simultaneously increases pressure to 

comply with that same advice. We demonstrate that the increased pressure results from advice 

recipients feeling obliged to help satisfy their advisors’ personal interests when those interests 

have been disclosed. Hence, disclosure can burden those it is ostensibly intended to protect. 

We show that the increased pressure to comply is reduced if (1) the disclosure is provided by an 

external source rather than from the advisor, (2) the disclosure is not common knowledge

between the advisor and advisee, (3) a cooling-off period is introduced, or, (4) the advisee can 

make the decision in private.”

One More Thought on Disclosures

Few put it better than writer James Surowiecki, writing in The New Yorker: “Transparency is well 

and good, but accuracy and objectivity are even better. Wall Street doesn't have to keep 

confessing its sins. It just has to stop committing them.”25

																																																												 24 “The Burden of Disclosure: Increased Compliance with Distrusted Advice,” Sah, Sunita and Loewenstein, George and Cain, 

Daylian M., The Burden of Disclosure: Increased Compliance with Distrusted Advice (December 7, 2011). Sah, S., Loewenstein, G., 

& Cain, D. (2013). The Burden of Disclosure: Increased Compliance with Distrusted Advice. Journal of Personality and Social 

Psychology, Vol 104(2), 289-304. doi: 10.1037/a0030527. SSRN: http://ssrn.com/abstract=1615025 or 

http://dx.doi.org/10.2139/ssrn.1615025

25 “The Talking Cure,” The New Yorker, 12/9/2002, http://www.newyorker.com/magazine/2002/12/09/the-talking-cure
The Committee for the Fiduciary Standard

30

XIII. Abandoning Retirement Investors if “Forced” to Act in Investor’s 

Best Interest?

When any firm or sector in the financial services industry, including less progressive insurance, 

banks, broker-dealers or mutual fund companies, says they will abandon a segment of clients

because they do not want to be “forced” to put the retirement investor’s best interests before 

their own, we have to ask: 

What, exactly, are they doing to retirement investors under the current, conflicted 

system? Would that investor actually be better off elsewhere, with advisers who are already 

serving as fiduciaries to retirement investors?

In a study of broker-dealers in states where a fiduciary duty was imposed by the state, 

Texas Tech University Prof. Michael Finke and Roger Williams University Prof. Thomas 

Langdon found predictions that the fiduciary standard would limit recommendations, 

advice to middle market clients and the range of products, did not come true.

26 They 

note:

“It has been suggested that the imposition of a fiduciary standard on registered representatives 

would result in significant changes in how broker-dealers conduct business by limiting a 

representative's ability to recommend commission investments, provide advice to middle-market 

clients, and offer a broad range of financial products. We take advantage of differences in state 

broker-dealer common law standards of care to test whether a relatively stricter fiduciary 

standard of care impacts the ability to provide services to consumers. We find that the number 

of registered representatives doing business within a state as a percentage of total households 

does not vary significantly among states with stricter fiduciary standards. A sample of advisers 

in states that have either a strict fiduciary standard or no fiduciary standard are asked whether 

they are constrained in their ability to recommend products or serve lower-wealth clients. We 

find no statistical differences between the two groups in the percentage of lower-income and 

high-wealth clients, the ability to provide a broad range of products including those that provide 

commission compensation, the ability to provide tailored advice, and the cost of compliance.”

																																																												 26 Finke, Michael S. and Langdon, Thomas Patrick, The Impact of the Broker-Dealer Fiduciary Standard on Financial 

Advice (March 9, 2012). Available at 

SSRN: http://ssrn.com/abstract=2019090 orhttp://dx.doi.org/10.2139/ssrn.2019090
The Committee for the Fiduciary Standard

31

XIV. IRA Rollovers

Rollovers from 401(k)-type Accounts to IRA Accounts and Conflicts of Interest

The question of whether to rollover assets from a 401(k)-type retirement account to an IRA is 

one of the biggest financial questions a retirement investor will ever face. In a well run plan that 

has competent fiduciary advice and plan management, the advantages of size, (institutional 

share classes, with lower costs) reasonable overall costs, and well chosen investment 

alternatives, there are many good reasons that retirement investor may want to stay in the 

401(k)-type account even if they own several of them.

There are at times, however, reasons it may be in the investor’s best interest to roll out of a 

401(k)-type plan: if the plan is poorly run, has high costs and a poor array of investment 

alternatives; if a retirement investor wishes to consolidate a number of 401(k)s into one IRA for 

administrative ease; or if they desire to move their assets to the care of a fiduciary who is 

managing other assets. In this comment, all the rollovers would be advised by a fiduciary. As 

mentioned earlier, there are many smaller and mid-sized plans in which costs are very high and 

investment alternatives are poor and expensive. 

Rollovers from Traditional Pension Plans

Then there are the surprising examples of rollovers out of traditional pension plans that pay 

monthly income to the retiree for life. One would think that investors would want to hold on for 

dear life to that traditional pension plan.

Here is an example that left us saddened, but not shocked, as this is more common than 

we would have thought. 

David Franklin (not his real name to protect his privacy) had just celebrated his 65th birthday. 

After graduating from college he entered the Navy, achieved the rank of Lieutenant, retired after 

his tour of duty and entered the private sector. Over his successful career he has had, as many 

who are now retiring, a combination of traditional, defined benefit pension plans and 401(k)-type 

plans. Mr. Franklin worked hard to contribute to his 401(k) plans and accumulate a retirement 

nest egg. His resume lists a handful of mostly Fortune 100 companies. Two of the large, very 

stable companies where Mr. Franklin worked had traditional pension plans. He was a 

beneficiary of those multibillion-dollar pension plans, which pay retirees a certain amount every 

month, for life. 

Shortly after his birthday, Mr. Franklin got a phone call from an “adviser” working with one of the 

traditional plans, this investment professional said. He wanted to discuss Mr. Franklin’s

retirement situation. This “adviser” began by asking whether Mr. Franklin was confident he’d 

have enough to live on for the rest of his life. He insinuated that the (Fortune 100) companies 

that ran the traditional pension plans might go out of business, taking his monthly payout with 

them. What would Mr. Franklin do then? He strongly urged Mr. Franklin to take the lump sum 

payout and put it into a “guaranteed” annuity in an IRA at his well-known firm. Sure it would 

pay Mr. Franklin several hundred dollars less every month than the pension plan would, but it 

would be “guaranteed.” He hounded Mr. Franklin until Mr. Franklin did, in fact, rollover one of 

his pension plans into an IRA at that major mutual fund company, ready for that annuity. And 

then Mr. Franklin called a friend. It is too late for Mr. Franklin to reverse his lump sum pension 

payout so he now has to find a way to replace that retirement income. 
The Committee for the Fiduciary Standard

32

While Mr. Franklin will not be taking any more “advice” from that “adviser,” he’s already incurred 

damage. 

This happens every day, to thousands of America’s retirement investors. 

We all, at a certain age, get the invitations to the “dinner” where we can “learn about strategies 

for retirement.” “Are you sure your money will last?” “This is strictly educational. No insurance 

agents or brokers allowed,” -- this from an insurance agent herself. “Sign up for this seminar –

at a local university – where you will learn how to ensure your financial security in retirement! 

Just $69!” Once there, retirees or the soon-to-retire are scared and manipulated into buying 

high cost, low performing annuities that will ensure the seller’s retirement, but not necessarily 

the annuity owner’s retirement.

This practice must stop. 

When a Fiduciary is Advising a Plan and a Participant Wants to Rollover

There is a scenario that has come up dozens of times in conversations with independent 

fiduciaries since the announcement that there would be a proposed DOL rule. It’s a concern 

and frustration voiced by fiduciaries about the current scenario regarding rollovers, and those 

fiduciaries that advise and/or manage plan assets. Here is a typical version of the conversation:

“Our RIA works exclusively with retirement plans. In that capacity, we are the ERISA section 

3(38) investment manager (i.e., a discretionary fiduciary via ERISA section 3(21)(A)(i)) to all our 

plan clients. Some plan participants come to us upon their retirement and want to roll over their 

money and have us manage it. We cannot provide that service for them because we are a plan 

fiduciary and ERISA deems that to be a conflict of interest. 

And yet, an insurance company that’s providing bundled services (e.g., trust, recordkeeping but 

sans investment advisory services since we are the 3(38) solely in charge of the investment 

options) to the plan can waltz in and place participants in lousy investments at four times the 

cost to the “sky’s the limit” cost for what we would charge.

ERISA allows this because the insurance company is not a fiduciary to the plan. That’s a 

fundamentally flawed proposition. Let’s see: with us, participants would get a low cost, broadly 

diversified portfolio and with the insurance or BD side they would likely get expensive, lousy 

(under-diversified, illiquid, et al.) investments. With us, in retirement plan participants could 

even be placed in the exact same portfolio they had in their plan if they wished. Here is a 

narrative from one RIA who works with plan sponsors. 

Since our plan fee – either invoiced directly to the plan sponsor or scraped from participants’ 

accounts and disclosed to them clearly - is so low our fee to manage rollover money (if we 

otherwise could) is a multiple of that, but is still a mere fraction of the fees that would be 

charged by a brokerage firm or insurance company. We’re about as pure as you can get in this 

scenario but still, as seen from the outside, it looks like a conflict. OK, fine, agreed.

What I don’t want to see emerge in a final rule, however, is to give the brokerage firms, 

insurance companies, et al. an edge in the preceding scenario over someone like us. 
The Committee for the Fiduciary Standard

33

In that scenario, ERISA almost guarantees a strange, sub-optimal result for retiring plan 

participants. That’s why – from a cursory glance – I favor the idea of having BIC apply to all 

dually registered RIAs (those wearing two hats) and non-RIAs (Broker Dealers, insurance 

companies) and exempt RIA Fiduciaries (those wearing the one, white hat) from BIC. 

Quite frankly, I’m not even sure that our firm could make all that much money from rollovers. 

We’ve never done them, plus in plans where the sponsor doesn’t kick out participants when 

they retire, it’s usually better for participants to stay invested since the costs (low because we’re 

in charge of the investment options) are so much lower. But the insurance or broker-dealer side 

will (almost) always counsel leaving a plan and investing in their current super-duper annuity, et 

al.

In this area, then, I’m not so much concerned about lining my own pockets as I am about 

keeping the wirehouses, et al. from (richly) lining theirs. I cannot tell you how it pains me to see 

a participant who has built a tidy portfolio (due in part to our firm’s efforts in placing only low 

cost, broadly diversified portfolios on a plan’s investment menu) and then having to watch that 

poor participant, upon rolling over at retirement, get fed to the circling sharks out there because 

we cannot help her/him due to the fact that we’re a fiduciary to the plan. If a retiring participant 

doesn’t want to invest and manage their own money in retirement, then honestly, (under the 

current scenario) what choices do they really have other than the sharks?”

This situation is emblematic and identical to many other cases that fiduciaries have discussed 

with us these past six months. Here you have the already expert fiduciary that is abiding by

current DOL rules, but the participant has a frustratingly bad outcome. 

The Committee appeals to DOL to find an answer to this scenario that does not involve the 

participant being “thrown to the wolves.” 

We have one suggestion: The Fiduciary Interest Contract - FIC
The Committee for the Fiduciary Standard

34

Recommendation: The Fiduciary Interest Contract -- FIC

The Fiduciary Interest Contract would replace the BCI contract in instances where an 

independent, fee-only RIA, is advising a plan participant on a rollover (not fee based, fee-only –

paid only by the investor on an all costs fully disclosed basis – (not affiliated with any brokerdealer, insurance company, no income tied to any investment or insurance offering, etc.) This 

could apply whether that RIA is advising the plan or not. 

The FIC contract has several benefits to the investor that the BIC does not:

1) Consultation on the rollover is treated as a separate, fiduciary advisory engagement from 

any ongoing work, to ascertain IF it is in the investor’s best interest that to rollover.

2) The advice whether to rollover or not is fully fiduciary, and the investor has a brief FIC 

contract to that effect, with the requisite discussion of rollover alternatives, pros and cons 

and the inherent conflict of a rollover. 

3) The investor is protected by both fiduciary law and contractual law and their inherent 

rights to take action.

4) IF the finding is made that it is in the retirement investor’s best interest to rollover, that 

ends the rollover engagement and a new, fiduciary RIA – retirement investor contract is 

made.

To explain in more detail, we include below the IRA Rollovers portion of the DOL comment of 

our Committee colleague, Prof. Ron Rhoades, JD, CFP. Here now, is Prof. Rhoades’ comment:
The Committee for the Fiduciary Standard

35

“On the Regulation of IRA Rollovers” 

“When undertaking a rollover from an ERISA plan to an IRA account, a great deal of care must be 

undertaken. This requires any fiduciary adviser to possess a great deal of knowledge of the many factors and 

tax rules which come into play, in order to ensure maximum benefits to the individual client. In addition, a 

rollover into an individual IRA account often involves a much higher level of service provided to the 

individual investor, during and following the rollover process; as a result of this differing level of service and 

the lack of economies of scale which are often present in the defined contribution space, the compensation 

for individual accounts is higher. Accordingly, this results in a potential prohibited transaction, even for feeonly independent registered investment advisers.

Any fiduciary adviser providing advice on an IRA rollover should fully understand, and be able to apply, the 

often-complex tax and other considerations that may affect the decision, including but not limited to:

(1) the availability under many qualified retirement plans (QRPs) to undertake distributions 

commencing at age 55, rather than the age 591⁄2 requirement imposed upon IRAs;

(2) the existence and best methods for undertaking a series of substantially equal periodic 

payments from traditional IRA accounts using the 72(t) election;

(3) the 2-year-from-inception restriction on distributions from SIMPLE IRA accounts;

(4) the ability to distribute appreciated employer stock from certain QRPs and receive long-term 

capital gain treatment upon its later sale, under the technique commonly referred to as “net 

unrealized appreciation”;

(5) the most tax-efficient manner to design, implement and manage a client’s entire portfolio, 

which might consist of QRPs, traditional IRAs, Roth IRAs, nonqualified annuities, life 

insurance cash values, taxable accounts, 529 college savings plans accounts, HSA accounts, and 

other types of accounts, generally, in order to best secure for the client the likely attainment of 

the client’s objectives;

(6) the ability to undertake due diligence on the investment options within a QRP account, 

including but not limited to the potential availability of guaranteed investment accounts (and the 

risks and characteristics of same, including the reduced exposure to interest rate risk which 

might be present);

(7) the restrictions which exist on the availability of foreign tax credits and/or deductions for 

foreign stock funds held in certain types of accounts;

(8) the best manner to minimize future potential income tax liability for both the clients and the 

client’s potential heirs, including the role of stepped-up basis;

(9) the availability of tax-managed or tax-efficient stock mutual funds in taxable accounts;

(10)the marginal rates of tax (federal, state and local) which might be imposed upon ordinary 

income and long-term capital gain income, and qualified dividend income, both in the current 

year and in future years;

(11)the ways to avoid realization of short-term capital gains and long-term capital gains;

(12)the harvesting of losses in accounts and how such losses may offset either various types of 

capital gains or ordinary income (up to certain annual limits);
The Committee for the Fiduciary Standard

36

(13)whether Roth IRA conversions should be considered, and if so when and to what extent, 

whether separate Roth IRA accounts might be established during conversions for different 

investment assets, and whether re-characterizations might take place thereafter;

(14)whether distributions might be undertaken to generate additional ordinary income, in order to 

mitigate the effect in any year of the alternative minimum tax;

(15)the increased amount of premiums for Medicare Part A which might result should the 

client’s/clients’ modified adjust gross income exceed certain limits;

(16)the effect of additional income resulting from QRP or IRA distributions, or from other 

investment-related income, on the taxation of social security retirement benefits;

(17)the interplay between the timing of taking social security retirement benefits, income tax 

itemized vs. standard deduction strategies, the receipt of various forms of income, and the 

taking of QRP or IRA distributions, given the various marginal income tax rates the client is 

likely to possess, then and in the future, for both federal and state tax purposes;

(18)the ability to take investment advisory fees from certain types of accounts, the best methods to 

allocate fees and pay them from various types of accounts, the potential for deductibility of fees 

when paid from certain types of accounts, and avoidance of prohibited transactions which 

might otherwise result if fees for non-investment advisory services are incorrectly paid from 

QRP or IRA accounts;

(19)the ability to delay QRP distributions past age 701⁄2 in certain circumstances, for certain clients;

(20)the availability of lifetime annuitization options for a portion of any QRP or IRA, both inside 

the QRP and in a rollover IRA, including an evaluation of the single life, spousal (with and 

without reduced benefits to the survivor), term certain, and combinations of the foregoing, and 

including further an evaluation of the possible use of CPI adjustments in the annuity contract to 

keep pace with increased spending needs, and including further the possible use of a staggered 

approach to annuitization, and including further the available of deferred annuities with payouts 

commencing at later ages, and including further the risks and return characteristics of certain 

annuities, the costs and fees associated with same, the possible applicability of premium taxes, 

the various riders which might be employed and their costs and benefits and limitations; and

(21)the best method to ensure asset protection of the rollover IRA, such as by segregating it from 

contributory IRA accounts.

As to broker-dealers, dual registrants, and insurance agents, the DOL’s requirements for the BIC 

exemption (with modifications, as suggested above) seem wholly appropriate. The DOL might seek, in its 

issuing release, to remind fiduciary advisers of the need for a high degree of competence when planning for 

IRA rollovers and the extensive knowledge required to provide advice on proper structuring of investment 

portfolios to best secure the client’s retirement income needs over the long term or to meet other objectives 

of the client.

However, for independent registered investment advisers, who are not affiliated with any broker-dealer and 

who receive no third-party compensation (i.e., compensation from providers of investment products or 

insurance products), the requirements of the BIC exemption (especially as to the requirement of no 

discretion) seem inapplicable. These “fee-only” registered investment advisers already agree to adhere to 

the tough “sole interests” standard found under ERISA and the prohibited transaction rules when providing 

ongoing investment advice. The conflict of interest that occurs is only in whether to undertake a rollover to 
The Committee for the Fiduciary Standard

37

an IRA, where the fees paid by the client will be higher than those in the qualified retirement plan account, 

such higher fees reflective of a higher level of service provided.

Hence, I suggest that the DOL promulgate a new prohibited transaction exemption for advice provided 

with respect to rollovers from an ERISA-covered retirement plan to an IRA account. This prohibited 

transaction exemption would be applicable only to independent registered investment advisers who receive 

no cash payments from any broker-dealer or insurance company. Under this prohibited transaction 

exemption the following requirements would be imposed, over and above the fiduciary requirements 

already imposed under ERISA and the various requirements of the SEC and state securities administrators:

1) That the independent investment adviser fully disclose to the client the difference in the 

amount the client would pay in the estimated total fees and costs if client continued in the 

client’s current qualified retirement plan account versus the recommended rollover IRA, 

expressed both as a percentage of the amount invested and as a dollar amount (estimated in 

good faith);

2) That the independent investment adviser fully disclose to the client that the client has other 

options, including self-managed IRA accounts, and that some options will possess lower fees 

and costs; and

3) That the independent investment adviser fully disclose to the client that the higher the total fees 

and costs associated with investments and the delivery of investment advice, the lower the 

return of the investor, on average, and that such lower returns can significantly affect the size of 

the investment portfolio over the long term.

Again, this exemption would be limited to independent fee-only registered investment advisers – i.e., those 

who receive no payments from broker-dealer firms, insurance companies, or investment product 

manufacturers. Upon the sunset of the BIC exemption, as suggested above, it would be anticipated that all 

providers of rollover IRA advice would be able to adhere to the “sole interests” requirements of ERISA and 

its prohibited transaction rules, under this new proposed prohibited transaction exemption.

Since this would be a new PTE, and it is relatively straightforward, I believe that this PTE could be 

proposed and finalized under the normal timeline for agency rulemaking. There would be no need to delay 

the rulemaking process for the DOL’s Conflicts of Interest Rule and for the BIC exemption and other 

exemptions the DOL has proposed, simply as a result of the promulgation of this new, simple and limited 

exemption.”
The Committee for the Fiduciary Standard

38

In Conclusion

We’ve heard from some companies or parts of the financial services and insurance industries

that there will be “fewer product alternatives” for retirement investors. If this means that the more 

conflicted, higher cost, more harmful “products” will be unavailable -- because they are 

inappropriate when advising in the best interest of retirement investors – it can’t happen soon 

enough.

The Committee believes that any firm can arrange its model to place the investor’s best 

interests before their own, and control and reveal all costs to the investor.

The Committee for the Fiduciary Standard’s Five Core Fiduciary Principles:

• Put the client’s best interests first;

• Act with prudence, that is, with the skill, care, diligence and good judgment of a professional;

• Do not mislead clients--provide conspicuous, full and fair disclosure of all important facts;

• Avoid conflicts of interest;

• Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

We applaud the courage and tenacity of the White House and Department of Labor in proposing 

the Definition of the Term Fiduciary – Conflict of Interest Rule – Retirement Investment Advice. 

We stand ready to act as a resource as you go forward. We especially commend your 

steadfastness in the face of immense and formidable opposition. And we wish to help in any 

way with this rulemaking to ensure that advice to the millions of Americans that are working hard 

and investing for retirement is, indeed, in their best interests.

Respectfully submitted,

Kathleen M. McBride, AIFA®, Chair 

The Committee for the Fiduciary Standard, www.TheFiduciaryStandard.org

POB 492

Rumson, NJ 07760

732.241.4988 kmcbride@FiduciaryPath.com

About The Committee

The Committee was formed in June 2009 by an all-volunteer group of investment professionals 

and fiduciary experts, just as policymakers and industry leaders were reviewing the 

repercussions of the financial crisis, to advocate that all investment and financial advice be 

rendered as fiduciary advice and meet the requirements of the five core fiduciary principles. The 

Committee’s work is pro bono.

The Committee's goal is to advocate for the authentic fiduciary standard. The Committee seeks 

to help inform and nurture a public discussion on the fiduciary standard. Its objective is to 

ensure that any financial reform regarding the fiduciary standard, 1) meets the requirements of 

the authentic fiduciary standard, as presently established in the Investment Advisers Act of 

1940, or ERISA, and 2) covers all professionals who provide investment and financial advice or 

who hold themselves out as providing financial or investment advice, without exceptions and 

without exemptions. www.TheFiduciaryStandard.org