July 17, 2015

Office of Regulations and Interpretations

Employee Benefits Security Administration

Attention: Conflicts of Interest Rule

Room N-5655

Office of Exemption Determinations

Employee Benefits Security Administration

Attention: D-11712 and D-11713

United States Department of Labor

200 Constitution Avenue, N.W.

Washington, D.C. 20210

RE: Proposed Conflict of Interest Rule and Related Proposals, RIN-1210-AB32 

Dear Sir or Madam:

The Financial Industry Regulatory Authority (“FINRA”) welcomes the opportunity to 

comment on the Department’s proposed amendments to the definition of “fiduciary” (the 

“Proposed Fiduciary Definition”),1 the proposed Best Interest Contract Exemption (the 

“BICE”),

2 and the proposed Exemption for Principal Transactions in Certain Debt 

Securities (the “Principal Transaction Exemption”)3 (together, the “Proposal”). 

FINRA is the independent regulatory authority of the broker-dealer industry, established 

under the Securities Exchange Act of 1934 and subject to the oversight of the Securities 

and Exchange Commission (“SEC”). FINRA comprehensively regulates the brokerdealer industry by adopting investor protection rules, examining broker-dealers for 

compliance with the federal securities laws and rules of FINRA, the SEC and the 

Municipal Securities Rulemaking Board, and enforcing those rules. 

 1 See Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice; 

Proposed Rule, 80 FR 21928 (April 20, 2015). 

2 See Proposed Best Interest Contract Exemption, 80 FR 21960 (April 20, 2015),

3 See Proposed Class Exemption for Principal Transactions in Certain Debt Securities between 

Investment Advice Fiduciaries and Employee Benefit Plans and IRAs, 80 FR 21989 (April 20, 2015). 
July 17, 2015 | Page 2

In 2014 FINRA conducted 6,800 broker-dealer examinations and took 1,397 disciplinary 

actions that addressed a wide variety of misconduct. We barred 481 individuals from 

association with FINRA-regulated firms, suspended 705 individuals from such 

association, levied more than $132 million in fines, and ordered $32.3 million in 

restitution to customers. 

1. Executive Summary 

The Department of Labor has an important responsibility to protect retirement investors. 

FINRA applauds the Department for raising public awareness about the need to ensure 

that retirement investors can obtain financial advice without being subject to abusive or 

predatory sales practices. The Proposal reflects a sincere effort to respond to 

comments received on the Department’s 2010 proposal. The Department is to be

commended for its readiness to engage in a dialogue with regulators, investors, and 

other interested parties about these issues. 

A. FINRA Supports a Best Interest Standard for Broker-Dealers

FINRA has publicly advocated for a fiduciary duty for years and agrees with the 

Department that all financial intermediaries, including broker-dealers, should be subject 

to a fiduciary “best interest” standard. A best interest standard would align the interests 

of intermediaries with those of their customers; better protect investors by providing a 

more consistent set of obligations across financial service providers; help ensure that 

intermediaries eliminate or manage conflicts of interest; and help ensure that 

intermediaries establish an ethical culture throughout their firms. 

B. Minimum Criteria for a Best Interest Standard

At a minimum, any best interest standard for intermediaries should meet the following 

criteria: 

• The standard should require financial institutions and their advisers4 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. 

 4 The terms “financial institution” and “adviser” will have the same meaning in this letter as in the 

Proposal. 
July 17, 2015 | Page 3

• A best interest standard should apply to both retirement and non-retirement 

accounts. Most investors consider their investment portfolio to include their

assets in Individual Retirement Accounts, employer plan accounts, and nonretirement accounts. This perception is rational because an investment decision 

should reflect the assets in all of those accounts. Imposing disparate standards 

on different accounts would confuse investors because it would conflict with their 

own logical assumption that those accounts will be treated seamlessly within 

their total investment portfolio. 

• FINRA respectfully urges that the federal securities laws serve as the foundation 

of the best interest standard that will apply to broker-dealers. To be successful, 

the standard must build upon existing principles under the federal securities laws

rather than introducing precepts without precedent that will impede the good faith 

efforts of financial institutions and advisers to comply. The federal securities 

laws and FINRA rules comprehensively regulate all aspects of a broker-dealer’s 

business. Among the many requirements imposed are the principles that brokerdealers deal fairly with customers, adhere to just and equitable principles of 

trade, and ensure that recommendations are suitable for customers. Brokerdealers also must establish rigorous systems of compliance and supervision,

which are regularly examined by FINRA and the SEC. 

Using these existing requirements as the core structure of a best interest 

standard would reduce the costs of transitioning to a best interest requirement

and provide assurance that the core structure will be enforced by the SEC and 

FINRA. We recognize that imposing a best interest standard requires rulemaking 

beyond what is presently in place for broker-dealers. We stand ready to work 

with the Department and the SEC to develop this additional rulemaking.

• Sufficient guidance must accompany the best interest standard to ensure that 

financial institutions and advisers will understand what is expected in order to 

comply with the best interest standard. 

• The standard for different intermediaries, especially broker-dealers and 

investment advisers, must be harmonized. Approximately 87% of all investment 

adviser representatives are associated with a broker-dealer and many customers 

hold brokerage and advisory accounts with the same financial institution. The 

standards for the investment adviser and the broker-dealer businesses must be 

harmonized to provide consistent investor protection while reflecting the 

distinctive nature of each business model. 

• Customers must have the ability to recover losses incurred as a result of a

financial institution or adviser’s violation of a best interest standard. The 

Proposal would permit customers to seek recovery of losses through the existing 

arbitration process or through actions in court. 
July 17, 2015 | Page 4

C. The Proposal Does Not Meet Some Minimum Criteria 

The Department should be commended for its efforts to establish a best interest 

standard. The Proposal, however, does not meet some of the minimum criteria for such 

a standard. The Proposal does not sufficiently build upon the existing regulatory system 

under the federal securities laws. The Preamble makes passing reference to the 

comprehensive, well-established system of regulation that the federal securities laws 

impose upon broker-dealers under the oversight of the SEC and FINRA. The Proposal 

does not incorporate existing regulation and introduces new concepts that are fraught 

with ambiguity. We urge the Department to consider that these ambiguities will frustrate 

the ability of a financial institution and advisers to comply with the Proposal. These 

ambiguities will necessitate interpretive guidance on a wide array of issues, which the 

Preamble does not provide. In some respects the Proposal even conflicts with existing 

FINRA rules and securities market trading practices. 

The Proposal would impose a best interest standard on broker-dealers that differs 

significantly from the fiduciary standard applicable to investment advisers registered 

under the federal and state securities laws, and it would impose the best interest 

standard only on retirement accounts. This fractured approach will confuse retirement 

investors, financial institutions, and advisers. Below is a depiction of the panoply of 

regulatory regimes that will apply under the Proposal to different accounts served by the 

same financial adviser for a single customer. 

Customer’s Investment Portfolio

Broker-Dealer Accounts Investment Adviser Accounts 

Employer Plan

• BD Rules + 

• ERISA+ 

• BICE/Principal 

Transaction 

Exemption

FINANCIAL ADVISER 

Taxable

• BD Rules

IRA

• BD Rules + 

• Tax Code + 

• BICE/Principal 

Transaction 

Exemption

Employer Plan

• IA Rules + 

• ERISA + 

• BICE (possibly)

Taxable

• IA Rules

IRA

• IA Rules + 

• Tax Code + 

• BICE (possibly)

Proposed DOL Requirements

Potential to have 6 sets of rules for any product
July 17, 2015 | Page 5

The confusion illustrated by this graphic could be easily ameliorated if a harmonized 

best interest standard applied to all of the accounts, retirement and non-retirement, 

investment and advisory and broker-dealer. The customer and financial adviser could 

then properly consider the investment portfolio as a whole, subject to a single, 

harmonized standard. 

D. FINRA Recommends Five Fundamental Improvements to the Proposal

If the Department proceeds with the Proposal, FINRA recommends five fundamental 

improvements. 

• First, the Proposal should be amended to clarify the scope and meaning of the 

best interest standard. 

• Second, the Proposal’s treatment of differential compensation should be 

simplified by offering financial institutions a choice: either adopt stringent 

procedures that address the conflicts of interest arising from differential 

compensation, or pay only neutral compensation to advisers. 

• Third, the Proposal should be based on existing principles in the federal 

securities laws and FINRA rules. In doing so, the Department would help 

remove many of the ambiguities that will frustrate good faith attempts at 

compliance, would avoid conflict with existing rules, and would better ensure that 

the Proposal’s objectives are achieved. FINRA stands ready to engage in 

additional rulemaking to enhance present requirements. 

• Fourth, the Department should streamline the BICE and Principal Transaction 

Exemption (together, the “Prohibited Transaction Exemptions” or “PTEs”) so that 

they only impose conditions that restrict conflicts of interest, and eliminate the 

ambiguous conditions that will not meaningfully address those conflicts. 

• Finally, the Department should clarify the effects of non-compliance with the 

Prohibited Transaction Exemptions and the extent that remedies can be defined 

in the BICE contract.

We urge the Department, at a minimum, to adopt these five recommendations in order 

to ensure that highly-regulated broker-dealers can continue to serve small investors. 

According to a 2011 study, 98% of IRA accounts with less than $25,000 are 

commission-based brokerage accounts.5 Many investors are buy-and-hold customers 

who pay lower fees -- commissions upon purchase – than would be paid as an annual 

percentage of their nest egg. 

 5 See Assessment of the impact of the Department of Labor’s proposed

“fiduciary” definition rule on IRA consumers (Oliver Wyman) (April 2011) at 2. 
July 17, 2015 | Page 6

If the Proposal were adopted as is, many broker-dealers will abandon these small 

accounts, convert their larger accounts to advisory accounts, and charge them a 

potentially more lucrative asset-based fee. They will do so largely because of the BICE 

constraints on differential compensation, the ambiguities in the best interest standard, 

the lack of clarity concerning various conditions, the costs of compliance, and 

uncertainty about the consequences of minimal non-compliance.

The Department should not be sanguine about this result. Robo-advice may provide a 

valuable alternative for some classes of knowledgeable investors, but for many 

customers robo-advice is a poor substitute for a financial adviser who understands the 

customer’s needs and guides the customer through market turbulence or life events. 

And private wealth clients who are converted to advisory accounts may still be 

subjected to conflicted advice, like the peddling of fee-based IRAs for their ERISA plan 

assets. 

2. The Best Interest Standard Should be Clarified

The BICE and the Principal Transaction Exemption would require that a financial 

institution and adviser affirmatively agree to provide investment advice that is in the best 

interest of the retirement investor “without regard to the financial or other interests” of 

the financial institution, adviser, or other party.6 This principle, borrowed from Section 

913 of Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the 

“Dodd-Frank Act”),

7 has not been developed under ERISA or the federal securities laws 

and financial institutions, their advisers and their compliance officers and counsel will be 

forced to anticipate its intended meaning. One could interpret the principle to prohibit 

any investment advice that takes into account the compensation that the financial 

institution or adviser will earn for providing that advice. Since financial institutions and 

advisers are engaged in a business that will earn compensation for their services, they 

would not provide investment advice at all if the customer were unwilling to pay the fee. 

Surely this is not the Department’s intent. 

One could alternatively interpret the principle to prohibit the receipt of compensation that 

varies with an investment recommendation, but this should not be the meaning because 

the BICE is intended to permit this compensation. A third interpretation might be that 

the “without regard to” phrase merely elaborates the term “best interest.” Under this 

interpretation, investment advice may be deemed in the customer’s best interest as long 

as, among other matters, the amount of compensation earned was not a factor in the 

recommendation. It is unclear how a financial institution or adviser would demonstrate 

that the amount of compensation was not a factor in the recommendation.

 6 See BICE Section II(c)(1), 80 FR at 21984, and Principal Transaction Exemption Section II(c)(1), 80 FR 

at 22002. 

7 See Section 913(g), Dodd-Frank Act (authorizing the SEC to require broker-dealers to ”act in the best 

interest of the customer without regard to the financial or other interest of the broker [or] dealer ...

providing the advice”). 
July 17, 2015 | Page 7

The “best interest” standard also demands that the financial institution and adviser act 

prudently. The prudence standard might be interpreted to require the financial 

institution and adviser to provide ongoing advice to the customer, to alert the customer 

to market events or other circumstances that may affect the prudence of the customer’s 

holdings, and to recommend changes to his investments. The BICE Preamble states 

that, “[t]he terms of the contract, along with other representations, agreements, or 

understandings between the Adviser, Financial Institution and Retirement Investors, will 

govern whether the nature of the relationship between the parties is ongoing or not.”8 

Nevertheless, we understand that ERISA plan fiduciaries must comply with a prudence 

standard that requires ongoing monitoring of this nature. While some broker-dealers 

provide different levels of monitoring, most commission-based broker-dealers do not 

charge for ongoing monitoring of their customers’ accounts. Moreover, the Dodd-Frank 

Act would not impose such a duty on broker-dealers.

9

 Indeed, frequent suggestions to 

the customer that the portfolio be changed might expose a broker-dealer to allegations 

that it is churning the account. 

Another question is whether “best interest” requires the financial institution and adviser 

to recommend the investment that is “best” for the customer. Recent remarks suggest 

that the Department believes that it may.10 Fiduciaries must use their best judgment 

when they provide financial advice, and the question of which investment meets that 

standard in a particular case will depend upon many factors, including the customer’s 

investment objectives and risk profile, the various components of a specific product, and 

its risk correlation to other assets in the customer’s portfolio. Reasonable and qualified 

financial advisers may reach different conclusions about which factors are more 

significant and which product best meets the criteria that the financial adviser believes 

are most relevant. Fiduciaries generally are not required to discern or recommend the 

“best” product among all available for sale nationwide or worldwide. Investment 

advisers, for example, are required to recommend suitable investments, not the “best” 

investment available to the customer. A requirement to recommend the “best” product 

would impose unnecessary and untenable litigation risks on fiduciaries. Such a 

standard would conflict with the Proposal itself, which permits, and even requires, a 

 8 The Principal Transaction Exemption Preamble contains similar language. See BICE Preamble, 80 FR

at 21969, and Principal Transaction Exemption Preamble, 80 FR at 21995-21996.

9 See Section 913(g), Dodd-Frank Act (“Nothing in this section shall require a broker or dealer or 

registered representative to have a continuing duty of care or loyalty to the customer after providing 

personalized investment advice about securities.”).

10 Secretary Perez has stated:

If you’re an adviser operating under a suitability standard, once you narrow the options down to 

those that are suitable, you can recommend the one that is most lucrative for you – even though 

that might mean a lower return for the client. Under a best interest standard, you would need to 

choose the one that is best for the client. 

Remarks by U.S. Secretary of Labor Tom Perez at the Brookings Institution, The Hamilton Project, Forum 

on Promoting Financial Well-Being in Retirement (June 23, 2015).
July 17, 2015 | Page 8

financial institution and adviser only to offer a limited group of investments to their 

customers.11

At a minimum, in order to address the ambiguities of the best interest standard, we 

respectfully recommend that the Department (1) delete the “without regard to” phrase or 

provide clear guidance on its meaning under as many scenarios as possible, in each 

PTE, (2) clarify that the best interest standard does not require that a financial institution 

or adviser prove that they recommended the ”best investment” , (3) clarify in the rule 

text that no ongoing duty exists under the prudence standard in the PTEs, and (4) add a 

new paragraph (g) to Section II of the proposed PTEs: 

(g) Monitoring. The contract describes whether or not the Adviser and Financial 

Institution will monitor the Retirement Investor’s investments and alert the 

Retirement Investor to any recommended change to those investments and, if 

so, the frequency with which the monitoring will occur and the reasons for which 

the customer will be alerted.

This contractual language would indicate to the retirement investor whether the financial 

institution and adviser will monitor the account. We emphasize, however, that in 

addition to this suggested language for the contract, the Department should clarify that 

the “best interest” standard itself does not impose such an ongoing duty. 

3. The Approach to Differential Compensation Should be Simplified 

The BICE and the Principal Transaction Exemption would require an adviser and 

financial institution to warrant that they do not use forms of compensation, including 

“differential compensation,” or other “actions or incentives” that “would tend to 

encourage individual Advisers to make recommendations that are not in the Best 

Interest of the Retirement Investor.” Both PTEs seem to permit a financial institution to 

receive differential compensation subject to certain conditions. The BICE appears to 

permit the payment of differential compensation to advisers if it “would not encourage 

advice that runs counter to the Best Interest of the Retirement Investor (e.g., differential 

compensation based on such neutral factors as the difference in time and analysis 

necessary to provide prudent advice with respect to different types of investments would 

be permissible).”12 The Principal Transaction Exemption also appears to contemplate 

the payment of differential compensation to advisers, but uses language different than 

the BICE, which creates confusion.13

The BICE is made more perplexing by the statement in the Proposal that it 

contemplates compensation such as trail commissions, 12b-1 fees, and revenue 

 11 See BICE Section IV(b), 80 FR at 21985-21986 and BICE Section VIII(c), 80 FR at 21987.

12 See BICE Section II(d)(4), 80 FR at 21984.

13 See Principal Transaction Exemption Section II(d)(4), 80 FR at 22002.
July 17, 2015 | Page 9

sharing.14 None of these forms of differential compensation are easily demonstrated to 

be based upon “neutral factors such as the difference in time and analysis necessary to 

provide prudent advice with respect to different types of investments.” The treatment of 

differential compensation paid to advisers is thus complex and confusing. 

We respectfully recommend a more straightforward treatment of differential 

compensation to advisers. The Department should offer financial institutions a choice: 

either implement stringent procedures to address conflicts of interest from the payment 

of differential compensation to advisers, in which case differential compensation may be 

paid to them, or pay advisers only “neutral” compensation without those procedures. 

The Department should offer this choice for principal and agency transactions, and 

should provide guidance on the types of stringent procedures that would permit the 

payment of differential compensation. 

We therefore suggest that the Department replace Sections II(d)(2)-(4) in the BICE with 

the following language, and make conforming changes to the Principal Transaction 

Exemption (new text is underlined; deleted text is bracketed):

(2) The Financial Institution has adopted written policies and procedures 

reasonably designed to identify and mitigate [the impact of] Material Conflicts of 

Interest and ensure that its individual Advisers adhere to the Impartial Conduct 

Standards set forth in Section II(c). 

(3) If the Financial Institution or (to the best of its knowledge) any Affiliate or 

Related Entity pays any form of compensation to Advisers that varies based on 

the Assets that they recommend, including payouts based upon commissions, 

trail commissions or 12b-1 fees, ticket charge discounts, awards, or product 

contests, and not solely on neutral factors such as the difference in time and 

analysis necessary to provide prudent advice, then the written policies and 

procedures described in paragraph (2) must be reasonably designed to ensure 

that such Advisers only make recommendations that are in the Best Interest of 

the Retirement Investor. These policies and procedures must include 

procedures to mitigate, to the extent practical, the effects of these forms of 

compensation on an Adviser’s choice of Asset, to supervise the 

recommendations made by those Advisers, to promptly detect possible 

recommendations that may not be in the Best Interest of the Retirement Investor, 

and to take prompt and appropriate action concerning any recommendation that 

is found to have not been in the Best Interest of the Retirement Investor. 

The procedures that the Department suggests might include those that some brokerdealers have adopted in order help ensure compliance with FINRA rules and the federal 

securities laws. The procedures suggested by the Department might, for example, 

require financial institutions to:

 14 See BICE Preamble, 80 FR at 21967.
July 17, 2015 | Page 10

• Establish a committee to consider whether new products are appropriate for the 

firm’s customers, especially new products that pay higher compensation. 

• Establish a comprehensive system to supervise the recommendations by all 

advisers. 

• Ensure that no adviser participates in any revenue sharing from a “preferred 

provider,” nor earns more for the sale of a product issued by a “preferred 

provider” or a proprietary product than for other, comparable products, and that 

the adviser discloses to customers the payments that the financial institution and 

its affiliates have received from a preferred provider or for a proprietary product.

 

• Establish thresholds in the compensation structure that will require increased 

supervision of advisers that have approached the thresholds.

• Monitor an adviser’s recommendations to determine whether products or 

services for which the adviser receives higher compensation are being sold 

improperly.

• Penalize advisers by reducing compensation, based on the receipt of customer 

complaints or indications that conflicts are not being carefully managed. 

• Develop metrics for behavior (e.g., red flags), compare an adviser’s behavior 

against those metrics, and base compensation in part on them.

The procedures also might include methods to reduce the disparity of compensation 

among different products -- without imposing a perfectly neutral compensation system: 

• Some broker-dealers use “product neutral” compensation grids to reduce 

incentives for their financial advisers to prefer one type of product over another. 

Under this system, a financial adviser receives the same percentage of the gross 

dealer concession (GDC) no matter the product sold. The broker-dealer also 

may monitor recommendations of its financial advisers to determine whether any 

tend to be concentrated in high GDC products. 

• In the context of mutual fund and variable annuity sales, some broker-dealers 

use “fee-capping” to reduce incentives for a financial adviser to favor one product 

family over another for comparable products. For example, a broker-dealer may 

cap at 4% the GDC for emerging market equity funds. This cap would eliminate 

incentives for a financial adviser to favor an emerging market equity fund that 

paid a higher GDC than the 4%.

. 

The Department also suggests policies and procedures that seek similar goals in the 

BICE Preamble.15 We would be pleased to work with the Department to develop 

 15 See BICE Preamble, 80 FR at 21971-21972.
July 17, 2015 | Page 11

guidance concerning other procedures or to develop FINRA rulemaking that would help 

the Department achieve these goals. By incorporating existing procedures and FINRA 

requirements the Department would better ensure that management of conflicts of 

interest are subject to FINRA examination and enforcement. 

By providing financial institutions with a choice of either paying differential 

compensation to advisers subject to strict procedures, or paying them “neutral” 

compensation, the Proposal would better ensure that financial institutions may pay their 

advisers without exposing their customers to major risks from conflicts of interest that 

arise from differential compensation.

4. The Proposal Should Build Upon Existing Principles in the Federal 

Securities Laws and FINRA Rules

In our experience, financial institutions are best able to develop successful compliance 

procedures in response to new standards when regulatory expectations are clear and

the standards are derived from existing requirements that they understand. 

Unfortunately, the Proposal establishes principles that employ imprecise terms with little 

precedent in the federal securities laws or, in many cases, ERISA. In some respects 

these principles even conflict with FINRA rules. In order to better ensure that financial 

institutions, their advisers, and their compliance officers and counsel understand the 

contours of the best interest standard, we respectfully recommend that the Department 

incorporate well-understood terms and established principles from the federal securities 

laws and FINRA rules or directly rely on federal securities laws and FINRA rules, 

whenever possible. We provide examples below, and we would be pleased to explore 

other ways in which these terms and principles can be incorporated into the Proposal. 

A. Example: Definition of “Recommendation”

The Proposed Fiduciary Definition would define investment advice to include a 

“recommendation as to the advisability of acquiring, holding, disposing or exchanging 

securities or other property.”16 The Proposal defines “recommendation” as “a 

communication that, based on its content, and presentation, would reasonably be 

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

particular course of action.”17 The Preamble requests comment on whether the 

Department should adopt FINRA’s standards for “recommendation” under FINRA Rule 

2111.18 

Rule 2111 generally requires that a broker-dealer and a financial adviser “have a 

reasonable basis to believe that a recommended transaction or investment strategy 

 

16 See Proposed Fiduciary Definition § 2510.3-21(a)(1)(i), 80 FR at 21957. 

17 See Proposed Fiduciary Definition § 2510.3-21(f)(1), 80 FR at 21960.

18 See Proposed Fiduciary Definition, 80 FR at 21938.

.
July 17, 2015 | Page 12

involving a security or securities is suitable for the customer.” The meaning of 

“recommendation” for purposes of the suitability rule has been developed over decades 

of guidance and enforcement. The question of whether a recommendation exists in a 

particular situation depends upon the facts and circumstances, but FINRA has 

articulated several guiding principles that are relevant to the determination.19 For 

instance, a communication’s content, context and manner of presentation are important 

aspects of the inquiry. An important factor in this regard is whether – given its content, 

context and presentation – a particular communication reasonably would be viewed as 

a “call to action” (i.e., a suggestion that the customer take action or refrain from taking 

action regarding a security or investment strategy). In addition, the more individually 

tailored the communication is to a particular customer or customers about a specific 

security or investment strategy, the more likely the communication will be viewed as a 

recommendation. Furthermore, a series of actions that may not constitute 

recommendations when viewed individually may amount to a recommendation when 

considered in the aggregate. It makes no difference whether the communication is 

initiated by a person or a computer software program. Through this guidance, together 

with myriad published decisions and practical experience with the rule for nearly 80 

years, broker-dealers and their financial advisers, compliance officers and counsel

generally understand the meaning of this term. 

Reliance on these well-established concepts concerning the meaning of 

“recommendation” would remove the ambiguities that arise from the use of the term in 

the Proposal. It would better ensure that broker-dealers and their financial advisers, 

compliance officers and counsel correctly determine when they will be providing 

investment advice under the new fiduciary standard. Accordingly, FINRA respectfully 

recommends that the Department incorporate the meaning of “recommendation” from 

FINRA Rule 2111 into the Proposal. 

The proposed amendments to the definition of “fiduciary” also define investment advice 

to include “a recommendation as to the management of securities or other property.”20 

It is unclear from this language what activities the term “management” is meant to 

cover. The Preamble more clearly explains that the intent of this provision is to “include 

advice and recommendations as to the exercise of rights appurtenant to shares of stock 

(e.g., voting proxies).”21 We suggest revising this provision to more closely reflect the 

Department’s intent.

Therefore, we respectfully recommend that the Department revise the definition of 

“recommendation” in proposed Rule 2510.3-21(f)(1) to read as follows (new text is 

underlined):

 19 See, e.g., FINRA Regulatory Notice 12-25 (May 2012); Regulatory Notice 11-02 (Jan 2011); Notice to 

Members 01-23 (April 2001).

20 See Proposed Fiduciary Definition § 2510.3-21(a)(1)(ii), 80 FR at 21957.

21 See Proposed Fiduciary Definition, 80 FR at 21939.
July 17, 2015 | Page 13

(1) (i) “Recommendation” means a communication that, based on its content, 

context, and presentation, would reasonably be viewed as a suggestion that 

the advice recipient engage in or refrain from taking a particular course of 

action.

(ii) With respect to a Financial Institution or Adviser that recommends a 

transaction or investment strategy involving a security or securities, 

“recommendation” shall have the same meaning as in Financial Industry 

Regulatory Authority (FINRA) Rule 2111 (Suitability) or any successor rule, as

interpreted by FINRA.

We also recommend amendments to proposed Rule 2510.3-21(a)(1)(ii) concerning the 

“management” of securities or other property, as follows (new text is underlined; deleted 

text is bracketed):

(ii) Advice or a recommendation as to the [management of] exercise of rights 

appurtenant to securities or other property, including [recommendations as to 

the management of] securities or other property to be rolled over or otherwise 

distributed from the plan or IRA;

B. Example: Suitability Obligation

A suitability standard is imbedded in the fiduciary duty of an investment adviser under 

the Investment Advisers Act of 194022 and the Proposal implies that it would be an 

element of the best interest standard. The PTEs thus state that financial institutions and 

advisers must provide advice that is based on the retirement investor’s “investment 

objectives, risk tolerance, financial circumstances, and needs” – precisely the type of 

criteria that determine whether an investment adviser’s recommendation is suitable 

under the Investment Advisers Act fiduciary duty and whether a broker-dealer’s 

recommendation is suitable under FINRA Rule 2111.23 

 

22 The SEC staff has stated:

As fiduciaries, investment advisers owe their clients a duty to provide only suitable advice. This 

duty generally requires an investment adviser to determine that the investment advice it gives to a 

client is suitable for the client, taking into consideration the client's financial situation, investment 

experience, and investment objectives. Investment Advisers Act Release No. 1406 (March 16, 

1994).

General Information on the Regulation of Investment Advisers, www.sec.gov (Division of Investment 

Management).

23 See BICE Section II(c)(1), 80 FR at 21984, and Principal Transaction Exemption Section II(c)(1), 80 FR 

at 22002.
July 17, 2015 | Page 14

We recommend that the Department make explicit its incorporation of a suitability 

element into the best interest standard. This change would facilitate customer 

enforcement of the best interest standard in many cases. Often the best interest 

standard will be violated because the recommended product was illiquid, presented 

excessive risk, or otherwise was inconsistent with the retirement investor’s financial 

needs or condition. Including a suitability standard would simplify the customer’s 

complaint in these cases and would provide adjudicators with a specific, well 

established basis upon which to find that the financial institution or adviser violated the 

best interest standard. It also would better ensure that an important element of the best 

interest standard is subject to FINRA examination and enforcement. While the 

suitability standard would not be the exclusive set of principles with which a financial 

institution and adviser would have to comply, it would simplify the inquiry for retirement 

investors and adjudicators in many cases. 

In order to clarify that the Impartial Conduct Standards includes a suitability obligation, 

we respectfully recommend that the Department revise Section II(c)(1) of the BICE (and 

make consistent changes to the Principal Transaction Exemption) as follows (new text 

is underlined):

The Adviser and the Financial Institution affirmatively agree to, and comply with, 

the following:

(1) When providing investment advice to the Retirement Investor 

regarding the Asset, the Adviser and Financial Institution will provide 

investment advice that is in the Best Interest of the Retirement Investor 

(i.e., advice that reflects the care, skill, prudence, and diligence under 

the circumstances then prevailing that a prudent person would 

exercise and that is otherwise suitable 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 or any Affiliate, Related Entity, or 

other party);

 

We also recommend conforming changes to the definitions of “Best Interest” in the 

Proposal.

C. Example: Projections of Performance 

Section III(a)(1) of the BICE would require, prior to the execution of the purchase of a 

recommended Asset, that an Adviser furnish a chart that provides the total cost to the 

plan, participant or IRA holder, of investing in the Asset for one, five and ten-year

periods expressed as a dollar amount, assuming an investment of the dollar amount 

recommended by the Adviser and “reasonable assumptions about investment 

performance, which must be disclosed.” This requirement conflicts with FINRA Rule 

2210, which generally prohibits broker-dealers from including projections of 

performance in communications with the public. Moreover, the meaning of a 
July 17, 2015 | Page 15

“reasonable assumption” about investment performance is unclear. Without 

standardized methods of calculating the total cost, meaningful comparisons between 

alternative investments will be impossible. 

We respectfully recommend that the Department eliminate the requirement to provide 

projections of performance as a basis for the estimation of future cost. We suggest that 

the Department substitute language based upon the instructions to Form N-1A, the 

SEC’s form for mutual fund registration.24 Item 3 requires a fee table in the registration 

statement, including an example that is meant to help investors compare the costs of 

investing in the registered fund with the cost of other funds. This example assumes a 

$10,000 original investment, a 5% annual return, and redemption of all shares at the 

end of one, three, five and ten year periods. The example must state that actual costs 

might be higher or lower. 

The hypothetical nature of the example is apparent and the use of a 5% assumed rate 

of return should not mislead investors into believing that it is a projection of future 

returns. If the Department were to take a similar approach, then a retirement investor 

would have information concerning the cost of its investments in dollar amounts without 

being misled by projections that FINRA Rule 2210 is intended to prevent. Moreover, 

this approach would build upon existing regulatory requirements, reducing the likelihood 

of confusion concerning what is expected under this provision. 

D. Example: Two-Quote Requirement

Sections III(d) and IV(a)(2) of the Principal Transaction Exemption would require that 

before each transaction, a retirement investor receive a statement that includes price 

quotes for the same or a similar debt security from two ready and willing counterparties 

that are not affiliates of the adviser, apparently in order to demonstrate that best 

execution was obtained. The market for debt securities can vary significantly depending 

on the specific fixed income product. For example, some fixed income securities may 

trade frequently, be highly liquid and have transparent, accessible and firm quotations 

available, while others do not have public quotations or frequent pricing information 

available, and may trade infrequently. Some fixed income securities that are less liquid 

also are highly fungible, meaning that they trade like other, similar securities, and the 

pricing in these similar securities can be used as a basis for determining prices in the 

original security. 

Given this significant variation in trading characteristics across fixed income securities, 

FINRA is concerned that a strict application of a minimum quotation requirement is not 

practical. A specific debt security may not have been traded recently and expected 

interest rate movements, concerns about credit risk associated with the issuer, or other 

factors may have affected its value. A reference price for a “similar” debt security may 

be unavailable. Moreover, the requirement to obtain the two quotes may delay 

execution of the transaction and could affect the price that the retirement investor 

eventually pays. 

 24 See Form N-1A Part A: Information Required in a Prospectus, Item 3. 
July 17, 2015 | Page 16

Rather than applying a minimum quote standard, we respectfully recommend that the 

Department replace the two quote requirement with a standard that would permit 

transactions that meet the requirements of FINRA’s best execution rule (Rule 5310). 

This rule uses a “facts and circumstances” analysis by requiring that a firm dedicate 

reasonable diligence to ascertain the best market for the security and to buy or sell in 

such market so that the price to the customer is as favorable as possible under 

prevailing market conditions. A key determinant in assessing whether a firm has met 

this reasonable diligence standard is the character of the market for the security itself, 

which includes an analysis of price, volatility, and relative liquidity. 

Rule 5310 also addresses instances in which there is limited quotation or pricing 

information available. The rule requires a broker-dealer to have written policies and 

procedures that address how the firm will determine the best inter-dealer market for 

such a security in the absence of pricing information or multiple quotations and to

document its compliance with those policies and procedures. For example, a firm would 

be expected to analyze pricing information based on other data, such as previous 

trades in the security, to determine whether the price to the customer is as favorable as 

possible under prevailing market conditions. If pricing information related to that 

security is unavailable, a firm may also consider previous trades in a similar security, if 

that security and those previous trades constitute a reliable basis for comparison. 

Although a firm should generally seek out other sources of pricing information or 

potential liquidity when little or none is otherwise available, which may include obtaining 

quotations from other sources (e.g., other firms with which the broker-dealer previously 

has traded in the security), in other instances obtaining quotations from multiple sources 

could adversely affect execution quality due to delays in execution or other factors.

Accordingly, we suggest that Section III(d) be amended to add the following sentence to 

the end of this section: 

An Adviser or Financial Institution will not be required to obtain price quotes from 

two ready and willing counterparties that are not Affiliates provided that the 

purchase or sale of the Debt Security complies with the requirements of FINRA 

Rule 5310 (Best Execution and Interpositioning) or any successor rule, as 

interpreted by FINRA. 

E. Example: Disclosure of Markups and Markdowns 

Section IV(a)(2) and Section IV(b) of the Principal Transaction Exemption would require

pre-transaction and confirmation disclosure of the markup, markdown or other payment 

to the adviser, financial institution or affiliate in connection with the principal transaction. 

Broker-dealers already are subject to FINRA’s markup policy under Rule 2121, which 

prohibits a broker-dealer from entering into a transaction with a customer “at any price 

not reasonably related to the current market price of the security.”25 Moreover, FINRA 

 25 In 1994 the SEC solicited comment on a proposal to require mark-up and mark-down disclosure on the 

customer confirmation for riskless principal transactions. The proposal was not adopted and the federal 
July 17, 2015 | Page 17

recently solicited comment on a related initiative that would bring additional pricing 

transparency to customers through the customer confirmation.26 

We respectfully recommend that the requirement for disclosure of markups and 

markdowns be deleted from Section IV(a)(2) and Section and IV(b) and that the 

following language be added to Section IV as a separate condition:

Markups and Markdowns. The Adviser and Financial Institution comply with the 

markup policy of FINRA Rule 2121 or any successor rule and to any applicable 

FINRA rules concerning the disclosure of pricing information related to principal 

transactions, as interpreted by FINRA. 

We also suggest addition of the following at the end of the first sentence in Section 

IV(a)(2): 

(if applicable).

F. Example: Definition of “Reasonable Compensation”

The BICE would require the financial institution and adviser to affirmatively agree that it 

will not recommend an investment if the total amount of compensation anticipated to be 

received in connection with the purchase, sale or holding of the investment “will exceed 

reasonable compensation in relation to the total services” provided to the retirement 

investor.27 The Principal Transaction Exemption would require that the purchase or 

sales price of debt securities not be “unreasonable under the circumstances.”28 The 

meaning of “reasonable” or “unreasonable” compensation for purposes of these 

provisions is unclear. For example, the Department has not stated whether a brokerdealer may consider the compensation that is normally charged in the broker-dealer 

industry for similar transactions in determining whether compensation is “reasonable.” 

Even if such a comparison is permissible, the parameters of the comparison are 

undefined. Which products would provide the basis for comparison? The comparison 

may be particularly difficult when analyzing the reasonableness of compensation related 

to a “hold” recommendation. 

We respectfully recommend that the Department incorporate existing FINRA rules that 

are familiar to broker-dealers, their advisers, and their compliance officers and counsel. 

NASD Rule 2830(d) imposes specific caps concerning investment company securities 

that broker-dealers may sell. Since mutual funds are commonly found in IRA accounts 

 

securities laws do not require that a confirmation statement include the amount of the markup or 

markdown, nor do they require pre-transaction disclosure.

26 See FINRA Regulatory Notice 14-52 (November 17, 2014).

27 See BICE Section II(c)(2), 80 FR at 21984.

28 See Principal Transaction Exemption Section II(c)(2), 80 FR at 22002.
July 17, 2015 | Page 18

and employer plans, reliance on these caps would best ensure that the compensation 

received by financial institutions and advisers is reasonable. FINRA Rule 2121 requires 

broker-dealers to charge only fair prices and commissions. FINRA Rule 2122 requires 

broker-dealers to impose only reasonable charges for their services. 

We respectfully recommend that the Department add the following language to the end 

of Section II(c)(2) of the BICE and the Principal Transaction Exemption: 

, provided that an Adviser or Financial Institution will be deemed to have 

complied with this condition if the recommendation complies with FINRA rules 

concerning the reasonableness, type and amount of compensation or fees, as 

interpreted by FINRA. 

5. The PTEs Should be Streamlined to Address Specific Conflicts 

FINRA respectfully recommends that the Department ensure that the conditions in the 

BICE and the Principal Transaction Exemption address the conflicts of interest 

presented by differential compensation and principal transactions, and that the 

Department eliminate those conditions that will not incrementally strengthen the PTEs 

by mitigating those conflicts in a meaningful way. The PTEs are designed to permit, 

subject to conditions, legitimate business activities that otherwise would constitute 

prohibited transactions under ERISA or the Internal Revenue Code. Some conditions 

would not incrementally mitigate the conflicts of interest given the other conditions in the 

PTEs. Moreover, these unnecessary conditions often employ terms with imprecise 

meanings that will be difficult for financial institutions, compliance officers and advisers 

to interpret without extensive guidance from the Department. 

For example, the BICE would require a financial institution to maintain a public webpage 

that discloses material compensation “payable” to the financial institution, its advisers 

and affiliates for services in connection with each retirement asset, the source of 

compensation, and how it varies among assets. Much of this information would not be 

useful even to a customer of the financial institution, who will not hire most of the firm’s 

advisers and who may not purchase many of the assets that are listed. Disclosure of 

this nature would not meaningful reduce, mitigate or eliminate any of the conflicts that 

arise from the payment of differential compensation given the existing requirements of 

the BICE.

Similarly, the limitation of permitted assets seems unjustified for the full range of 

retirement investors. We agree that conflicts of interest can arise with respect to the 

differential compensation paid for the sale of some products. Nevertheless, these 

conflicts should be addressed through the policies and procedures and other conditions 

of the PTEs, not by limiting the choice of investments available to all retirement 

investors. As a final example, the BICE and the Principal Transaction Exemption would 

require a financial institution and adviser to affirmatively warrant that they and their 

affiliates “will comply with all applicable federal and state laws regarding the rendering 

of investment advice, the purchase, sale and holding of the Asset, and the payment of 
July 17, 2015 | Page 19

compensation related to the purchase, sale and holding of the Asset.”29 Compliance 

with the law by a financial institution or adviser is a reasonable expectation, but it need 

not be related to the conflict of interest that arises from the receipt of differential 

compensation or from principal transactions. 

While these conditions do not address the conflicts of interest, they do create ambiguity. 

The Department will be called upon to answer a host of interpretative questions. What 

types of compensation is “material” and “payable”? What types of laws are the subject 

of the warranty? When does a law regard the rendering of investment advice? Must 

the warranty to one customer cover violations of laws applicable to the investment 

advice provided to other customers? 

FINRA respectfully recommends that the Department streamline the PTEs by 

eliminating those conditions that do not incrementally address the conflicts of interest at 

issue in a meaningful fashion. By way of example, we recommend that the Department 

eliminate Section II(d)(1) of the BICE and the Principal Transaction Exemption, Section 

III(c) of the BICE, and the limitation on permitted assets.

30 We would be pleased to 

discuss proposed changes concerning the other conditions that create ambiguity 

without meaningfully addressing the conflicts of interest. 

6. The Effects of Non-Compliance and the Remedies Should be Clarified

Financial institutions and advisers may avoid relying on the PTEs if the effects of noncompliance, even for minor infractions, are ambiguous. Moreover, it is unclear whether 

the parties to the BICE contract may designate the remedies that will be available in the 

case of a breach. 

A. Effects of Non-Compliance 

The consequences of non-compliance with the PTEs are unclear. The BICE Preamble, 

for example, states that “the exemption is not conditioned on compliance with” the 

warranties concerning compliance with law and adoption of policies and procedures.31 

We are uncertain, however, whether the BICE or the Principal Transaction Exemption 

 29 See BICE Section II(d)(1), 80 FR at 21984, and Principal Transaction Exemption Section II(d)(1), 80 FR 

at 22002.

30 If the Department determines to retain Section II(d)(1), then at a minimum the Department should 

clarify that this warranty only covers compliance with applicable federal and state laws as they apply to 

the retirement investor that is a party to the contract, as follows:

(1) The Adviser, Financial Institution and Affiliates will comply with all applicable federal and 

state laws regarding the rendering of investment advice to the Retirement Investor, the 

purchase, sales and holding of the Retirement Investor’s Asset, and the payment of 

compensation related to the purchase, sale and holding of [the] such Asset;

Similar changes would have to be made to Section II(d)(1) of the Principal Transaction Exemption.

31 See BICE Preamble, 80 FR at 21970.
July 17, 2015 | Page 20

are conditioned on the warranty concerning differential compensation and other 

arrangements that would tend to encourage recommendations that are not in the 

customer’s best interest. The Preamble implies that this warranty is considered to be 

part of the “policies and procedures” warranty, in which case the exemption might not 

be conditioned on compliance with that warranty.32 On the other hand, the warranty 

itself states that it “does not prevent” the financial institution from paying advisers 

differential compensation that is neutral.33 This language implies that failure to comply 

with the terms of the warranty would “prevent” the financial institution from paying 

differential compensation, apparently because it would constitute a prohibited 

transaction under ERISA. 

Moreover, it is possible that a financial institution or adviser operating in good faith that 

fails to meet a specific requirement would be deemed to have engaged in a prohibited 

transaction in violation of ERISA. We respectfully recommend that the Department 

clarify that the receipt of differential compensation by a financial institution or adviser or 

the execution of a principal transaction that failed to comply (1) with all aspects of the 

warranties or to provide all of the disclosures required by the BICE and the Principal 

Transaction Exemption or (2) in an insignificant way with a condition of a PTE, would 

not by itself constitute a prohibited transaction in violation of ERISA. For example, the 

Department could add a new provision to the BICE and the Principal Transaction 

Exemption that provides:

Notwithstanding any other provision to the contrary, the availability of this 

exemption is not conditioned upon compliance with the warranties required by 

Section II(d) or providing the disclosures in Section II(e) and the failure to comply 

with any term, condition or requirement of this exemption will not result in the loss 

of the exemption if the failure to comply was insignificant and a good faith and 

reasonable attempt was made to comply with all applicable terms, conditions and 

requirements. 

We also recommend that the Department provide guidance on the types of failures that 

would be considered insignificant. They might include the following (to the extent that 

the Department determines to adopt the relevant conditions): 

• Minor errors in transaction or annual disclosure, including errors in calculating 

total costs;

• Inadvertent exclusion of an asset from the annual list required to be provided to 

each retirement investor; and

• Inadvertent problems with the required webpage disclosure, such as 

unavailability of the webpage for a period of time for technical reasons.

 32 See BICE Preamble, 80 FR at 21970-21971.

33 See BICE Section II(d)(4), 80 FR at 21984.
July 17, 2015 | Page 21

B. Remedies

The BICE would establish a private right of action for breach of contract, without 

indicating what remedies should be made available to the customer. Could the financial 

institution include a liquidated damages provision in the contract, limiting the amount of 

recovery available to the customer? Could the customer demand rescission rights for 

the securities that have been sold, in which case the contract would effectively 

constitute a “put” or a guarantee on all transactions that it covers? We respectfully 

recommend that the Department clarify how much latitude the financial institution and 

the customer have in drafting provisions in the contract related to the available remedies 

and damages for breach of contract. We suggest that financial institutions should not 

be permitted to include a provision for liquidated damages, but that they should be 

allowed to preclude a right of rescission. The Department could revise Section II(f)(2) of 

the BICE to read as follows (new text is underlined): 

(f) Prohibited Contractual Provisions. The written contract shall not contain the 

following:

* * *

(2) A provision under which the Plan, IRA or Retirement Investor waives or 

qualifies its right to bring or participate in a class action or other 

representative action in court in a dispute with the Adviser or Financial 

Institution, or agrees to an amount representing liquidated damages for 

breach of the contract; provided that the parties may agree to limit 

damages to an amount equal to the return an investor would have earned 

from an investment that met the best interest standard at the time of the 

recommendation and the return that the investor actually earned, and to 

preclude the right to rescind any transaction the rescission of which is not 

otherwise contemplated by federal law. 

* * *

Thank you again for the opportunity to comment on the Proposal. FINRA would be 

pleased to discuss any of our comments in this letter or other issues related to the 

Proposal, at the convenience of the Department staff. 

Sincerely,

Senior Vice President and Corporate Secretary

cc: The Honorable Thomas E. Perez, Secretary of Labor