Mark Quinn
nt ( etera’ DIRECTOR OF REGULATORY AFFAIRS

FINANCIAL GROUP

We would also point out that all regulation should be premised on a balancing of the benefits
to the class of individuals whose interests are sought to be protected versus the cost to the
entities that will bear the burden of compliance. In this case, we believe that the benefits to
the investing public are greatly outweighed by the cost to the financial services industry, and
would urge the Department to undertake a more detailed analysis of the real costs before
proceeding with implementation of the Proposal. We would also point out an axiom of
economics: There is no such thing as a free lunch. The costs borne by the financial services
industry in complying with new regulations will ultimately be passed on to consumers of
financial advice in the form of higher fees and other costs. We do not believe that
Department has given sufficient consideration to this fact. The ultimate cost to investors will
greatly outweigh the benefits. This is not in their interest.

4. The Definition of “Fiduciary” in the Proposal is too broad

In its present form, the Proposal would define virtually every form of communication
between financial advisers and retirement savers as fiduciary in nature. This represents a
significant departure from prior rules, and would include communications that should not
reasonably be viewed by either investors or financial advisers as fiduciary in nature. For
example, communications that heretofore have been viewed as educational would be
considered fiduciary advice if they make reference to specific securities. Discussions
between financial advisers and either plan sponsors or participants of 401(k) plans usually
include a discussion of specific investment options, such as mutual funds or group annuity
contracts, as illustrations. It is very difficult for plan sponsors and participants to
understand these options without being able to view specific investments in the context of
their composition and past performance.

We believe that a better and more effective option would be to limit the interactions that
would be deemed fiduciary in nature to communications that recommend that the client
undertake a specific action. A similar provision exists in FINRA Rule 2111, otherwise
known as the “suitability “rule. Rule 2111 requires that any recommendation to purchase,
sell, or hold a security made by a registered representative of a broker-dealer be suitable for
the customer in light of several enumerated factors. A recommendation is defined as a “call
to action” to the customer. If the communications between the customer and the financial
adviser are preliminary and designed primarily to elicit information from the investor about
their circumstances and objectives or to illustrate a possible investment scenario without
suggesting a specific transaction, the client does not have a reasonable expectation that the
adviser is acting as a fiduciary. Communications should not be considered fiduciary in
nature unless they are intended to encourage the client to make a transaction.

5. The Best Interest Contract Exemption (BICE)



Mark Quinn

G& Cetera cme

FINANCIAL GROUP

RY AFFAIRS

advice. If the client has holdings that are not included in the list of permissible assets
under the BICE, the adviser could not rely on the BICE and would be forced to cease
providing advice to the client with respect to those assets. We therefore believe that the
BICE should provide for “grandfathering” of all client accounts and securities holdings in
existence prior to the effective date of any new regulation.

e The BICE contains numerous provisions requiring financial advisers to provide extensive
amounts of information to customers. Included among the required data elements are
point-of-sale and annual summaries of costs and expenses related to each individual
securities holding in a client’s account. In addition, advisers would be required to
provide projections for multiple time periods extending as long as 10 years relating to all
costs and expenses that the client would pay in connection with ownership of each
security.

Client portfolios may contain tens or even hundreds of individual assets. Particularly
with packaged products such as mutual funds and variable annuities, there are multiple
types of expenses attributable to each. For example, a variable annuity contract may
include a fee for insurance features such as death benefits (mortality and expense), fees
for riders such as living benefit payments or guarantees, individual fund management
expenses, selling commissions, revenue-sharing payments, and potentially others. This
raises a number of concerns:

> Financial advisers such as broker-dealers do not currently assemble or maintain all of
the information that would be required. In many cases, they would not have direct
access to this data, and would be forced to construct mechanisms to obtain it from
literally hundreds of sources. A typical broker-dealer that services a retail client base
might offer hundreds of different mutual funds and annuity contracts, each with its
own specific costs and expenses. Firms would be required to deal with hundreds of
different information providers such as mutual fund sponsors and annuity issuers to
obtain this information.

The recent experience with implementation of the regulations under ERISA Section
408(b)(2) is instructive on this point. The information required by those regulations
related only to certain ERISA-covered plans. The BICE would cover literally
millions of IRA accounts and participants, and would require delivery of more
information about a vastly increased number of accounts and transactions. The
effective date for implementation of the regulations under Section 408(b)(2) was
delayed on several occasions, we understand in large part due to logistical difficulties
that financial advisers encountered in acquiring and delivering this information. The
Department has stated an intent to make new regulations under the Proposal effective
8 months after final publication. We believe that this is a completely unrealistic

655 W Bro



£ Mare Cuinn 7 a
& Cetera’ DIRECTOR OF REGULATORY AFFAIR:

FINANCIAL GROUP

broker-dealers that has also been in place for decades. This regulatory framework already
covers the relationship between financial advisers and retail customers. We do not see
anything in the Proposal to convince us that another layer of regulation will provide
additional protection to investors.

3. The Economic Analysis on which the Proposal is based is questionable

The Regulatory Impact Analysis for the Proposal includes references to academic research
which concludes that retirement investors suffer significant economic harm due to the
presence of “conflicted advice” from financial advisers. We believe that the figures set forth
in the Regulatory Impact Analysis are based more on anecdotal evidence than rigorous
research, and should not be relied upon in connection with the adoption of regulations that
will have the far-reaching effects that the Proposal will have. The data cited in the academic
studies that serve as the foundation for the Department’s analysis is speculative, difficult to
measure, and inconsistent with empirical data gathered by independent experts. Much of the
data in the Regulatory Impact Analysis was recently called into question by several
economists during a hearing regarding the Proposal before the United States House of
Representatives Committee on Education and the Workforce. The oral and written testimony
of these experts effectively contradicts the findings in the studies on which the Department’s
Regulatory Impact Analysis relies, including the Department’s assertions regarding the harm
caused to investors by what the Department characterizes as conflicted advice and the need to
take regulatory action in the absence of coordination with the SEC.

In addition to our concerns about the benefits to the investing public, we believe that the
Department’s analysis vastly underestimates the costs that will be incurred by financial
advisers in complying with it. We will offer other specific comments on the Best Interest
Contract Exemption (BICE) below, but we believe that the Department has significantly
underestimated the costs that will be incurred by financial advisers in complying with its
terms. For example, the BICE would require that all clients, including those with long-
standing relationships with their advisers, execute a written agreement prior to the provision
of any further advice regarding their investments. CFG currently has approximately 1
million IRA accounts. The cost of creating these agreements, delivering them to clients, and
gathering the executed copies will be enormous. In addition to the contract requirement, all
financial advisers will be required to accumulate vast amounts of data relating to transactions
qualified plan accounts, including IRAs, and deliver it to clients at both the point of sale and
on an ongoing basis. This will involve development of countless new processes and require
thousands of hours of information technology infrastructure and related programming costs.
We estimate the cost of this effort for CFG to be in excess of $2 million in the first year
alone, and as much as $1 million per year thereafter. CFG is but one of the thousands of
firms that will be forced to incur these significant costs. We believe that the Department’s
estimates of cost to be borne by the financial services industry as a whole is vastly
understated.

mquinn@firstallied.com


&

Mark Quinn

Cetera’ DIRECTOR OF REGULATORY AFFAIRS

FINANCIAL GROUP

The Department has stated its intent to allow financial advisers to maintain their current
business practices and compensation models in adopting the Proposal. Its approach to this is
in the BICE, which would create a class exemption for advisers who receive compensation in
such forms as selling commissions, Rule 12b-1 fees, and revenue-sharing payments from
third parties. Unfortunately, the conditions of the BICE are so onerous that many broker-
dealers will not be able to avail themselves of them without radical changes to their current
practices.

We have a number of concerns with the BICE, including the following:

The BICE would require that an investor execute a written agreement prior to any form
of communication with a financial advisor regarding investments. This is simply not
consistent with the expectations of either clients or advisers. An investor arriving at an
initial meeting with an adviser does not expect to be given a complicated, multi-page
agreement regarding a potential relationship with the adviser and asked to execute it prior
to any substantive discussion about their situation or needs. In our view, clients will be
rightly suspicious of such an arrangement, especially since they are not likely to have any
idea whether they wish to engage the adviser at that point. More likely, the client will be
distrustful of the fact that the adviser insists on a contract prior to any sort of preliminary
discussion and will decline to consult with the adviser at all. While we understand and
endorse the desire of the Department to create a best interest standard, we believe that
this provision is more likely to drive clients away from seeking advice of any sort and we
do not believe that this serves their interest. Similar to our comments above regarding
preliminary communications between advisers and clients, we suggest that a written
agreement only be required when there has been a call to action from the adviser to the
client to undertake an investment transaction. The securities industry and clients have
long been accustomed to executing customer agreements at the point of sale, prior to the
execution of any transaction. We believe that this is the more appropriate construct for
any contract requirement.

The BICE requires financial advisers to acknowledge in a written agreement that they are
acting in a fiduciary capacity with respect to all covered accounts. In the preamble to the
Proposal the Department states its view that the law governing fiduciary relationships is
well developed and can be easily applied to these circumstances by the financial advisory
industry. We believe that this is a gross oversimplification. In the United States, the law
relating to the duty of fiduciaries is different in each of the 50 states and under federal
law as well. In the past 20 years alone, Congress has enacted the National Securities
Markets Improvement Act (NSMIA), the Private Securities Litigation Reform Act
(PSLRA), and the Securities Litigation Uniform Standard Act (SLUSA). In adopting
these laws, Congress has expressly recognized that the modern securities industry is
national in scope, and needs a uniform standard across all jurisdictions in order to operate
efficiently and provide the maximum benefit to the largest number of clients. While CFG



Mark Quinn

655 W Broad)

San

FINANCIAL GROUP

timeframe that no financial adviser will be able to comply with. At a minimum, the
effective date for any such provision must be extended to at least 36 months.

> As the SEC and FINRA have long realized, projections of future expenses and
investment performance depend on many variables and are inherently difficult to do
accurately. Especially given the ten-year time period specified in the BICE, the
information provided is likely to be so voluminous, granular, and speculative that it
will be of little or no practical use to investors.

> Investors who have more than a few securities holdings will be deluged with so much
information about the costs and expenses associated with them that the data provided
to them will become meaningless. We agree that investors should be informed about
all aspects of the compensation that advisers earn in connection with the sale of
investments and provision of investment advice. However, breaking this down into
every security owned by every client will be enormously expensive and will not lead
to investor protection benefits that are commensurate with the cost.

Conclusion

CFG has devoted considerable time and effort to review of the Proposal and the outcomes that it
may produce. For the reasons stated above, we have serious concerns about the effect that it
will have on both investors and financial advisers. We are convinced that, despite the good
intentions of the Department, adoption of the Proposal will serve to increase the cost and barriers
to receiving retirement-related investment advice, especially for investors with relatively modest
account balances. This will prove to be counterproductive to the goals of the Department and to
retirement savers. We strongly urge the Department to take these comments into account in
developing any new regulations and preventing unintended consequences.

We welcome the opportunity to work constructively with the Department in refining it’s
understanding about these important issues. If you have questions about anything herein or we
may provide any further information, please do not hesitate to contact me.

, 12th Floor



Mark Quinn

5 W

FINANCIAL GROUP

July 21, 2015

Employee Benefits Security Administration
Office of Regulations and Interpretations
U.S. Department of Labor

200 Constitution Avenue, NW

Room N-5655

Washington, DC 20210

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule —
Retirement Investment Advice
RIN 1210-AB32

Re: Proposed Best Interest Contract Exemption
ZRIN 1210-ZA25

Ladies and Gentlemen:

On April 20, 2015, the Department of Labor (the “Department”) published its notice of
proposed rulemaking regarding the definition of the term “fiduciary” of an employee benefit
plan and related proposed prohibited transaction exemptions (collectively, the “Proposal”). The
Proposal would revise the definition of “fiduciary” for purposes of a plan subject to the
Employee Retirement Income Security Act of 1974 (ERISA) as a result of giving investment
advice to the plan, its participants, or beneficiaries. The Proposed Regulation would also apply
to the definition of a fiduciary of a plan or Individual Retirement Account (IRA) under section
4975 of the Internal Revenue Code of 1986 (the “Code”).

The Proposal would greatly expand the number and categories of individuals who are
deemed fiduciaries for purposes of ERISA. As discussed in more detail below, we believe that
this is unwarranted and will lead to a number of negative and unintended consequences.

Cetera Financial Group (CFG) appreciates the opportunity to comment on this important
proposal. We strongly support a uniform fiduciary standard of care that would be applicable to
all professionals providing personalized investment advice to retail clients. However, the
current Proposal is based on several flawed assumptions and creates a new regulatory regime
that is too complex, too cumbersome, and far too costly to manage. The Proposal will make it
significantly harder for consumers to receive high-quality, personalized retirement advice. In

Broadway, 12th Floor



655 W Bre

Mark Quinn

Cetera’ DIRECTOR OF REGULATORY AFFAIRS

FINANCIAL GROUP

supports a requirement that financial advisers act in the best interest of their clients, we
believe that any such rule needs to be carefully drawn in order to prevent inconsistent
application. Both the BICE and the Proposal should set forth a clear definition of the
scope of the obligations of an investment advice fiduciary, and not leave that
determination to the courts in 50 different jurisdictions.

The BICE would limit access to entire classes of investment products. The Department
has stated its’ view that investments recommended to retirement savers must have an
appropriate degree of transparency, liquidity, and marketability. It goes on to list asset
types that would meet these standards, and specifically excludes a number of investment
options.

In establishing the list of “permissible” assets, the Department is doing a disservice to
both customers and financial advisers. Indeed, we believe that by limiting the types of
assets that advisers may recommend to clients, the Department is inadvertently
sabotaging its own attempt to ensure that advisers act in the best interest of those clients.
There is a great deal of academic research regarding returns on various asset classes that
are illiquid or lacking in immediate marketability. Much of this research indicates that
there is an “illiquidity” premium that attaches to such investments, and allows investors
who do not need or desire immediate marketability to earn greater returns by investing in
them. This is particularly significant in the context of investing for retirement, where
most investors have multi-decade investment time horizons. The very nature of tax-
qualified accounts is such that the funds stay invested for very long periods of time and
are withdrawn on a predictable schedule. Liquidity is generally a desirable feature in any
investment, but it comes with a cost. Investors should be allowed to make this tradeoff if
they choose.

We also understand and agree with the Department’s desire for transparency in retirement
investments. This has been a fundamental principle in securities law for more than 75
years in the United States. However, there is already a very well developed disclosure
regime for securities that are registered with the SEC, and which provides for the very
transparency that the Department seeks. We submit that the Department can accomplish
its aims simply by requiring that securities that are recommended by financial advisers
relying on the BICE be registered with the SEC under the provisions of the Securities Act
of 1933.

Under the current version of the Proposal, the definition of “fiduciary” would change as
of the effective date for any new regulation. At that time, many financial advisers would
immediately need to rely on the BICE in order to continue to provide advice to their
clients with respect to existing securities holdings. This creates a number of unfortunate
and, we believe, unintended consequences. For example, it would require financial
advisers to obtain a written agreement from the client before providing any further

12th Floor



Mark Quinn

&& Cetera pcr

FINANCIAL GROUP

particular, we are concerned that providing services to clients with small account balances will
become cost-prohibitive if the proposal is adopted in its current form, thus decreasing investor
access to retirement advice.

While CFG cannot support the Proposal as currently written, our goal is to
constructively engage with the Department to help ensure that the Proposal does not adversely
impact access to retirement advice, and we believe that there are better ways to achieve the
goals of investor protection that guide the Department in this effort. Our comments below will
address various concerns with the Proposal and in some instances offer alternatives that will
serve to further protect investors.

Cetera Financial Group

Cetera Financial Group (CFG) is the corporate parent of 10 broker-dealers and 4
Registered Investment Advisers (RIAs). These firms have a combined total of more than 9,000
investment professionals, all of whom are registered representatives of one or more of our
broker-dealers. The majority of these individuals are also Investment Adviser Representatives
(IARs) of one or more RIAs, and provide financial advice and services to more than 1 million
customers, with total Assets under Administration in excess of $230 billion.

The vast majority of the CFG client base consists of individual investors. The average
client has a substantial portion of their investable assets in qualified retirement accounts such as
IRAs or employer-sponsored defined contribution plans such as 401(k) plans. A significant
percentage of our clients are self-employed professionals or small business owners. One of their
primary goals is funding their retirement, since most of them do not have pensions or other
employer-sponsored defined-benefit pension plans. For the most part, our representatives
engage with their clients on a holistic basis, and provide them with broad-based financial
services covering all aspects of their financial well-being. This often includes tax or estate
planning and offering of life insurance or other risk protection products in addition to traditional
securities brokerage and asset management services. The average tenure in the securities
industry for our representatives is more than 20 years, with client relationships on average longer
than 10 years. Our representatives are, in the true sense of the word, trusted advisers who
provide advice covering the spectrum of financial issues over the course of their client’s lives.

CFG has comments regarding a number of provisions in the Proposal. For ease of
reference, we have separated them into sections, set forth below.

1. CFG Supports a Uniform Fiduciary Standard



Mark oui -
& Cetera’ DIRECTOR OF REGULATORY AFFAIRS

FINANCIAL GROUP

CFG supports a uniform fiduciary standard of care applicable to all professionals providing
personalized investment advice to retail clients. While broker-dealers and RIAs are already
subject to well-developed regulatory and enforcement regimes designed to protect investors,
we recognize that the differing standards of care applicable to broker-dealers and RIAs may
lead to unnecessary client confusion. We believe that CFG is well-situated to provide input
on such a standard because the majority of our representatives are dually-registered as both
registered representatives and IARs, and provide both brokerage and investment advisory
services to middle-class Americans.

We support a uniform standard of care that is designed to address the same investor
protection goals that the Department seeks to address in the Proposal. However, we would
go astep further by adopting this standard for advice regarding all investments, not just those
made in connection with retirement savings. We strongly encourage the Department to work
with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory
Authority (FINRA) on developing this standard jointly and in a unified manner. We believe
that this would reflect the Congressional intent expressed in section 913 of the Dodd-Frank
Act, which granted the SEC authority to evaluate the effectiveness of existing standards of
care and promulgate a uniform standard of care for broker-dealers and investment advisors.
Congress expressly stated that any such uniform standard should be reflective of the varied
business models and regulatory regimes imposed on each of these entities. We believe that
any rulemaking by the Department prior to SEC rulemaking would contradict Congressional
intent and lead to inconsistent standards, creating unnecessary compliance burdens for
financial advisors, increasing costs for investors, and producing a regulatory regime that is so
complicated that it will serve primarily to confuse the very investors it is designed to protect.

The uniform standard of care should define the duty of care that an adviser owes to the client
and the duty to identify, disclose, and mitigate conflicts of interest. It should specifically
include an obligation to disclose all sources of compensation to the adviser. We submit that
the Proposal goes far beyond what is necessary to meet these objectives. Indeed, it identifies
certain business models that the Department deems free from conflicts of interest while
imposing onerous and unjustified restrictions on others.

2. A comprehensive regulatory regime covering advice to investors is already in
existence.

The CFG firms are all registered as broker-dealers and as such subject to regulation by the
SEC, FINRA, and all 50 states. This regulatory scheme includes a robust and ongoing
system of examinations, disclosure, and enforcement by each of these agencies. Several of
the CFG broker-dealers are dually-registered as RIAs, and therefore subject to an additional
layer of regulation and oversight by the SEC and the 50 states. The federal securities laws
have been in existence for 75 years, and are well developed and understood by both investors
and financial advisers. FINRA has a comprehensive system for ongoing monitoring of