Office of Regulations and Interpretations
July 21, 2015
Page 5

Conclusion

The DOL’s proposed rule would require all financial advisers who are providing retirement
investment advice to serve their client’s best interest rather than their own. This will strengthen
protections for all retirement savers. The proposed rule will benefit working Americans and retirees and is
long overdue.

aK
We appreciate the opportunity to share our views on this important rulemaking. If you have any

questions, or need additional information, please do not hesitate to contact John Keenan at (202) 429-
1232.

Sincerely,

AS

Steven Kreisberg
Director, Department
and Collective Bargai

SK/K:jm


Office of Regulations and Interpretations
July 21, 2015
Page 4

Proposed rule

We strongly support the revised definition of investment advice that closes the most gaping
loopholes in the five-part test. Specifically, the proposed rule will close the “regular basis” loophole that
allows one-time or episodic recommendations to evade the duty. It will also close the “mutual agreement”
and “primary basis” loopholes that allow advisers and their firms to disclaim mutuality through fine print.
It will also update the rule to make clear that rollover recommendations would be covered investment
advice, and therefore subject to fiduciary duties of prudence and loyalty. Advisers giving advice that
investors rely on and believe is in their best interests should be consistent with fiduciary obligations.

We also support the Best Interest Contract Exemption (BICE). We believe this will provide
important safeguards to protect investors from conflicted advice. To qualify for the BICE, advisers and
their firms will be required to contractually agree that any advice and recommendations being given are in
the client’s best interest, without regard to their own financial or other interests. This is very important, as
it puts an enforceable fiduciary duty in place. Additionally, firms will be required to have written policies
and procedures in place to mitigate any harmful impact of conflicts of interest. This is a positive feature,
as it guarantees firms undertake and put in place concrete policies and steps to avoid conflicts, and will be
a reminder that advisers need to act in the best interests of their customers,

One area of concern with the BICE is the proposed allowance in the rule for firms to insert pre-
dispute mandatory arbitration clauses in these consumer contracts. The proposed rule adopts the FINRA
approach to arbitration. We believe arbitration should be a tool that is used voluntarily when both parties
agree to use the process to resolve a dispute, whereas allowing binding, mandatory arbitration could lead
to an opaque process that unfairly benefits the brokerage industry and harms retail investors. Pre-dispute
mandatory arbitration would strip investors of their right to a judge and jury.

We also have a concern with the fiduciary standard applying to persons who “provide the advice
pursuant to an agreement, arrangement, or understanding.” Specifically, we believe that the word
“understanding” is a term that lends itself to ambiguity. Under the five-part test of the 1975 rules, the
“mutual understanding” element was prone to interpretation and often problematic, allowing for
interpretations to establish a fiduciary standard did not exist. We are concerned that “understanding”
could be interpreted in a way to require “mutual understanding” and provide a potential loophole to the
standard.

In terms of financial industry claims that increased costs from proposed rule will cause small
businesses to stop offering retirement plans or small investors to be priced out of the market for
investment advice to the proposed rule, we believe the industry protests too much and that these claims
are exaggerated. In a recent 2015 survey of investment advisers and brokers, 83 percent did not believe
that a fiduciary standard of care would price investors out of the market for investment advice.
Additionally, 91 percent did not believe it costs more to work with fiduciary advisors than brokers. ® This
survey’s results refute the implication that it costs more to work with an adviser under a fiduciary
standard or that smaller investors will be shut out of the market. Indeed, the study shows that there are
already financial intermediaries working with small client investors every day under the standard. There
are market participants who put the client first already providing services to small clients. If some
financial firms claim it will be prohibitively expensive to serve small clients, they will likely lose market
share to those who can, and will, provide advice under a fiduciary standard. Additionally, advisers who
operate under a fiduciary standard save small investors’ money by avoiding conflicted advice that lower
returns. In light of the retirement security crisis facings millions of Americans, small investors need every
dollar of savings they can get to meet their retirement needs.

® Seeking Trustworthy Advice for Individual Investors, fi360, February, 2015, pgs. 31, 34.


Lee Saunders
President

Laura Reyes
Secretary-Treasurer
Vice Presidents

Ken Allen
Portland, OR
Ken Deitz, RN
San Dimas, CA
Greg Devereux
‘Olympio, WA
Danny Denchue
Algory, NY
David R.Fitlman
Homisburg, PA
Michael Fox
Harrisburg, PA
Kathleen Garriton
Letham, NY
Mactie Harrell
Wilicmstown, NJ
Johanna Puno Hester
‘Son Diego, CA
Danny J. Homan
Des Moines, 1A

Melvin Hughes Sr
Houston, TX

Salratore Luciano
‘New Britain, CT

Joho A. Lyall
Worthington, OM
Kathryn Lybarger
Oakland, CA
Roberta Lynch
‘Chicogo, I

Christopher Mabe
Westervile, OH

Glenard S. Middleton Sr
Botumore, MO

Ralph Miller
Los Angeles, CA

Gary Michell
‘Madson, Wi

Victoria €. Mitchetl
NewYork, NY

Douglas Moore J
Sen Diego, CA

Frank Moroney
Boston, MA

Michael Newman
Chicago, H.

Henry Nicholas
Philp, PA

Randy Perreira
Hono, Ht

Steven Quick Sr
Jndianapols, IN

Lilian Roberts
‘New York, NY

Euidie Rodriguez
New York, NY

Lowrence A. Roehrig
tonsing, MI

Joveph PRugota
Columbus, OH

Eliot Seide
South St Poul, MN

Mary E.Sullvan
‘Albory, NY

Braulio Torres
nPR

Jeanette D.Wynn
Tollohastee, FL

F oasis
nee OO

A
AFSCME

We Make America Happen

July 21, 2015

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

200 Constitution Avenue, N.W.
Washington, D.C. 20210

Re: Conflict of Interest Rule, RIN 1210-AB32
Proposed Best Interest Contract Exemption, ZRIN: 1210-ZA25

Dear Sir or Madam:

The American Federation of State, County and Municipal Employees (AFSCME) is the
largest union in the AFL-CIO representing 1.6 million state and local government, health care
and child care workers, AFSCME members participate in over 150 public pension systems
whose assets total over $1.7 trillion. In addition, the AFSCME Employees Pension Plan is a
long-term shareholder governed by the Employee Retirement Income Security Act (ERISA)
that manages $1 billion in assets for its participants, who are staff members of AFSCME and its
affiliates.

AFSCME is pleased to have this opportunity to comment on the proposed definition of
the term “fiduciary” by the Employee Benefits Security Administration (EBSA) of the
Department of Labor (DOL). We strongly support the DOL’s proposal to require those giving
retirement investment advice to act solely in their client’s best interest. We urge the DOL to
adopt a definition that closes the current loopholes in the definition of investment advice so that
everyone giving retirement investment advice must comply with the fiduciary duty under
ERISA to put the interests of plan participants first. Plan fiduciaries, participants and Individual
Retirement Accounts (IRA) owners need to be sure those providing investment advice are
subject to ERISA’s fiduciary standards.

Current rules are insufficient

We believe requiring advisors to act as fiduciaries is urgently needed and long overdue.
The current rules are insufficient to meet the needs and demands of the modern financial
marketplace. The retirement landscape has changed and is dramatically different than it was 40
years ago. When the fiduciary rule was adopted in 1975, workers and retirees did not need
investment advice, because their retirement savings were being professionally managed and
there were not nearly as many potential conflicts of interests facing professional money
managers. At the time, regulators did not consider how the rule would affect unsophisticated
individual workers and retirees seeking advice about their retirement savings and they did not
foresee the proliferation of investment advisors and investment opportunities.

American Federation of State, County and Municipal Employees, AFL-C1IO
TEL (202) 429-1000 FAX (202) 429-1293 TDD (202) 659-0446 WEB wwwalsemeorg 1625 L Street, NW, Washington, DC 20036-5687


Office of Regulations and Interpretations
July 21, 2015
Page 2

In 1975 there were 105,000 defined benefit pension plans covering over 45 percent of private
sector workers. By 2010, there were approximately 46,000 defined benefit plans covering 14 percent of
workers. During this time the number of workers covered by defined contribution plans has increased
greatly. The number of active participants in private-sector defined contribution plans increased from 11.2
million in 1975 to 75.4 million in 2012, while the number of active participants in private-sector defined
benefit plans declined from 27.2 million to 15.7 million during the same time period.' According to the
Investment Company Institute, 63 percent of U.S. households (or 77 million) reported that they had
employer-sponsored retirement plans, IRAs, or both in mid-2014. Of the $24.7 trillion in assets for
employer-sponsored retirement plans, the largest components of retirement assets were IRA and
employer-sponsored DC plans, holding $7.4 trillion and $6.8 trillion, respectively, at year-end 2014.7

Asa result, the responsibility of saving for retirement and managing retirement savings has been
shifted onto workers, as most workers no longer rely on professionally managed pensions to guarantee a
secure retirement, and the majority of workers participating in a retirement plan today find themselves in
defined contribution plans, such as 401(k)s. And 401(k)s are interconnected with IRAs, as the majority of
money in IRAs comes from rollovers from 401(k)s. The shift from traditional pensions has changed the
responsibility of investment decisions, from professional managers making investment choices in a
defined contribution system, to one where the investment decisions are the responsibility of the
individual. Workers and retirees now must make investment decisions that can be confusing and yet are
critically important. Given this new reality, workers and retirees often rely on investment advice to make
these decisions. Unfortunately, there are loopholes in the 1975 fiduciary standard that allow financial
advisors to give conflicted investment advice. Under current law, the financial professionals that workers
and retirees turn to for investment advice are legally allowed to make recommendations that serve their
own self-interest, at their client’s expense. Although our focus is on the defined contribution system, the
same problem afflicts defined pension systems, but to a lesser degree.

Investing is complex, and investors need advice they can trust

Investing is not a simple task for most Americans. According to a report on financial literacy by
the Library of Congress, American investors do not understand basic financial concepts, such as
compound interest and inflation; lack essential knowledge about concepts such as the meaning of stocks
and bonds; and lack essential knowledge about investment fraud and the importance of investment costs
and expenses. Workers and retirees face a myriad of choices and decisions in an area where they do not
have sufficient financial and investment expertise to make informed decisions.

‘U.S. Department of Labor. Employee Benefits Security Administration, Private Pension Plan Bulletin Historical
Tables and Graphs (June 2013), p. 9,

? 2015 Investment Company Fact Book, Investment Company Institute, pgs. 137, 139.

3 Financial Literacy among Retail Investors in the United States, Library of Congress, December 30, 201 1, pgs. 5-6.


Office of Regulations and Interpretations
July 21, 2015
Page 3

Most people find themselves ill-equipped to navigate the complex choices they now face, so they
rely on advisers for help. Investors are confused on whether a fiduciary standard applies in their
relationships with financial intermediaries, and a majority trust that the advice they will be given will be
in their best interest. According to a 2008 Rand Corporation survey of investors’ beliefs about different
financial service professionals, investors do not have a clear understanding about the distinction between
broker-dealers and investment advisers and their different levels of fiduciary responsibility.* A 2010
survey found that 76 percent of investors believe that financial advisors are held to a fiduciary standard.*
According to a 2014 investor survey, 70 percent of investors have confidence that financial advisors and
brokers are looking out for their best interests. The same survey found a 72 percent of investors rely on
financial planners, advisors and brokers for their investment advice. ° So investors believe the advice they
are getting from financial advisors is in their best interest, and the majority rely on advisors for advice for
making investments.

Conflicted advice seriously harms investors

A major problem with the current DOL fiduciary definition is the narrow definition application of
the “fiduciary” standard. Under the current regulation, for advice to constitute “investment advice,” an
adviser who is not a fiduciary under another provision of the statute must meet a five-part test for that
advice to fall under the fiduciary standard. Under the five-part test, the fiduciary rule does not apply to
one-time or periodic advice, and it only applies when there’s a “mutual agreement” that the advice will be
the “primary basis” for the investment decision. The five-part test provides loopholes for advisers to
provide conflicted advice. Conflicted advice occurs when an advisor receives payments based upon
decisions a client makes. The conflict occurs when financial advisers are compensated through fees or
commissions that depend on clients’ actions. Such fee structures are obvious conflicts of interest. What
may be the best recommendation for a worker or retiree may not be the best for the adviser’s
compensation.

Conflicted advice leads to lower investment returns, leading to serious harm for workers and
retirees. Numerous studies show workers and retirees are losing thousands of dollars in much needed
retirement income as a result of this conflicted advice. According the White House Council of Economic
Advisers (CEA), savers receiving conflicted advice earn returns roughly | percentage point lower each
year, and CEA estimates the aggregate annual cost of conflicted advice to retirees is $17 billion each year.
The CEA report also cites numerous studies showing that conflicted advice results in lower returns for
savers and higher compensation for advisers. The CEA report finds that retirees who receive conflicted
advice on how to invest their IRA at retirement will lose an estimated 12 percent of their savings. In the
five years since the passage of Dodd-Frank, investors have lost more than $80 billion. The DOL’s
Regulatory Impact Analysis looking at the costs of conflicted advice upon IRAs estimates that retirees
would lose between $210 billion and $430 billion over 10 years, and nearly $500 billion to $1 trillion
over 20 years.’ Put bluntly, the current system allows the financial industry to quietly rob retirees of their
hard earned savings.

* Angela A. Hung, et al., Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, Rand
Corporation, Sponsored by the United States Securities and Exchange Commission, January 2008.

5 U.S. Investors & The Fiduciary Standard - A National Opinion Survey, ORC/Infogroup, September 15, 2010, p. 5.
62014 Main Street Investor Survey, Center for Audit Quality, pgs. 10, 16.

7 Fiduciary Investment Advice Regulatory Impact Analysis, Department of Labor, April 14, 2015, p. 98.