COMMENTS OF STATE FARM MUTUAL

AUTOMOBILE INSURANCE COMPANY AND ITS SUBSIDIARIES

ON PROPOSED RULES OF DEPARTMENT OF LABOR REGARDING

DEFINITION OF THE TERM “FIDUCIARY,”

PROPOSED BEST INTEREST CONTRACT EXEMPTION,

AND RELATED PROPOSED EXEMPTIONS

July 21, 2015
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TABLE OF CONTENTS

Page

EXECUTIVE SUMMARY ................................................................................................ 1

Key Shortcomings of the Proposal ......................................................................... 2

Harms to Small Investors........................................................................................ 3

Essential Changes to Make the Proposal Potentially Viable .................................. 4

BACKGROUND ON STATE FARM................................................................................ 6

SPECIFIC COMMENTS.................................................................................................... 8

I. The Proposed Rule Would Harm Middle-Income Americans and Small

Businesses............................................................................................................... 8

II. The Proposal Conflicts with Certain Statutory Provisions and the Intent of

Congress................................................................................................................ 13

A. Subjecting IRAs to ERISA Fiduciary Standards Conflicts with

Congressional Intent. ................................................................................ 14

B. Providing a Private Right of Action to IRA Owners for Breach of

Contract in the BIC Exemption Conflicts with the Code. ........................ 16

C. DOL Regulation of Broker-Dealers’ Compensation & Services

Conflicts with the Exchange Act and Creates Conflicts with

Investment Adviser Regulation................................................................. 16

D. The Proposed BIC Exemption Is Not Feasible......................................... 18

III. A Seller’s Exception or BIC Exemption Must Protect Consumers’ Ability to

Access Proprietary Products and Products That Utilize Differing Compensation

Models................................................................................................................... 20

A. There is No Expectation of a Fiduciary Relationship............................... 20

B. There Is No Reason for Different Standards Among Fiduciaries............. 20

C. Proprietary Products Are Valuable to Customers, Especially

Investors with Smaller Amounts to Invest................................................ 21

D. There Must Be a Strong Seller’s Exception.............................................. 21

E. Numerous Improvements Must be Made to the Proposed BIC

Exemption................................................................................................. 22

F. Technical Changes Must be Made to Definition of “Financial

Institution.” ............................................................................................... 23

G. Commission Fee Structures Benefit Customers. ...................................... 24

IV. The Costs of the Proposal Are Understated and the Benefits Are Overstated...... 25

A. DOL’s Cost Analysis is Incomplete. ........................................................ 25

B. The Predicted Benefits of the Proposal Are Overstated and

Misleading................................................................................................. 26

C. DOL’s Estimated Costs of Compliance Are Understated......................... 27
TABLE OF CONTENTS (CONT’D)

Page

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V. A Longer Implementation Period And a More Expansive Grandfathering Clause

Are Required......................................................................................................... 29

A. A Longer Implementation Period Is Critical. ........................................... 29

B. A More Expansive Grandfather Clause is Needed. .................................. 30

VI. DOL Should Consider the Efforts of, and Coordinate With, Functional

Regulators. ............................................................................................................ 31

VII. The Proposal Fails to Address Costs to State Court Systems and the Impact on

State Insurance and Broker Regulation................................................................. 32

ESSENTIAL CHANGES TO MAKE THE PROPOSAL POTENTIALLY VIABLE.... 33

CONCLUSION................................................................................................................. 34

EXHIBIT A....................................................................................................................... 35
EXECUTIVE SUMMARY

In the 93 years since State Farm Mutual Automobile Insurance Company (“State

Farm Mutual”) was founded, there have been very few Acts of Congress, let alone

regulatory rules, that would have a more adverse impact on our ability to help and

support our customers than the recent Department of Labor (“DOL”) Proposal.1 And the

timing could not be worse, as the need for Americans to save for retirement has never

been greater. After careful study, it is our belief that the Proposal falls far short of

encouraging continued confidence among American investors in saving for retirement;

indeed, it would result in reduced access to information, educational materials, and

recommendations for investors and would undermine the ability of consumers,

particularly less affluent consumers, to choose whether to work with a knowledgeable

fiduciary or a non-fiduciary investment professional with whom to discuss their financial

situation and investment options.

The central mission of State Farm Mutual and its subsidiaries (collectively, “State

Farm”) is to help individuals manage the risks of everyday life, recover from the

unexpected, and realize their dreams. Using its exclusive independent contractor agent

business model to market products and services, State Farm has been an industry leader

for decades because of its focus on serving each customer’s needs with personalized

attention. Consistent with this focus, it is a fundamental premise of State Farm that

products and services should be offered that are in the best interest of each customer.

Although the Proposal purports to ascribe to that premise, its provisions would, in fact,

undermine the ability of State Farm and others to serve customers according to their

needs, and would deprive consumers of choices with regard to the nature of investment

guidance they may obtain. Accordingly, State Farm cannot support the Proposal, at least

as it is currently drafted.

1

For purposes of these comments, we use the “Proposal” to refer, collectively, to the following notices

of proposed rulemaking published on April 20, 2015: Definition of Term “Fiduciary”; Conflict of Interest

Rule—Retirement Investment Advice, 80 Fed. Reg. 21,928 (proposed Apr. 20, 2015) (to be codified at 29

C.F.R. pt. 2509-10); Proposed Best Interest Contract Exemption, 80 Fed. Reg. 21,960 (proposed Apr. 20,

2015) (to be codified at 29 C.F.R. pt. 2550); Proposed Class Exemption for Principal Transactions in

Certain Debt Securities between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs, 80

Fed. Reg. 21,989 (proposed Apr. 20, 2015) (to be codified at 29 C.F.R. pt. 2550); Proposed Amendment to

Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions from Prohibitions Respecting Certain

Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers

and Banks, 80 Fed. Reg. 22,004 (proposed Apr. 20, 2015) (to be codified at 29 C.F.R. pt. 2550); Proposed

Amendment to and Proposed Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for

Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies

and Investment Company Principal Underwriters, 80 Fed. Reg. 22,010 (Apr. 20, 2015) (to be codified at 29

C.F.R. pt. 2550); Proposed Amendment to and Proposed Partial Revocation of Prohibited Transaction

Exemption (PTE) 86-128 for Securities Transactions Involving Employee Benefit Plans and BrokerDealers; Proposed Amendment to and Proposed Partial Revocation of PTE 75-1, Exemptions From

Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain

Broker-Dealers, Reporting Dealers and Banks, 80 Fed. Reg. 22,021 (proposed Apr. 20, 2015) (to be

codified at 29 C.F.R. pt. 2550); Proposed Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1, 80

Fed. Reg. 22,035 (proposed Apr. 20, 2015) (to be codified at 29 C.F.R. pt. 2550).
2

The Proposal’s definition of “advice” is overly broad and its definition of

“investment education” is unduly restrictive. The Proposal jettisons current, wellunderstood standards and a substantial body of regulatory guidance for distributing taxqualified investment products offering different levels and types of investment guidance.

The proposed new regime is centered on an ill-defined and impractical application of the

fiduciary standard with almost no objective guidelines, relying instead on future litigation

to define that standard on an unpredictable case-by-case basis.

The Proposal would eliminate the role of “sellers” and transform them into

personal investment advisers. The Proposal would turn currently commonplace means of

communicating information and educational materials into “fiduciary” advice—when

many consumers, particularly middle-income Americans, may prefer to shop for and

purchase investments without incurring separate fees for fiduciary advice (which fees

could significantly consume their investment returns). As a result, if adopted, the

Proposal could cause some providers to retreat from offering needed services outside of

the affluent market—such as providing guidance that is solely incidental to the purchase

of investment products. Combined with the additional regulatory restrictions it imposes

that are likely to make investment products more expensive to provide, the Proposal

would leave consumers less informed and more likely to forego opportunities to make

decisions best suited to their needs.

Due to the proposed rules’ lack of objective guidelines and the litigation risk the

proposed new fiduciary standard presents, the Proposal would make it more difficult for

Americans to obtain guidance for making savings decisions. The Proposal could have the

unintended effect of eliminating valuable investment information channels, thereby

depriving consumers of important information and guidance on tax-qualified investment

products. Those with only modest amounts to invest are likely to be hurt the most.

State Farm believes strongly that a vibrant and competitive market drives

innovation and the provision of better products and services to customers. A healthy

retirement savings market depends in part on a well-informed customer base.

Accordingly, State Farm supports strong and meaningful consumer disclosures,

education, and guidance to help consumers better understand available products and

services. Today, State Farm customers who are considering investing meet with a

registered representative to select a suitable investment under well-established guidelines

and regulatory oversight. The Proposal, however, rather than reinforcing the existing

regulatory framework and beneficially enhancing it, would detrimentally disrupt

customer service by State Farm and other members of an already highly-regulated

industry, and thereby unintentionally deprive consumers of the benefits of multiple

distribution models.

Key Shortcomings of the Proposal

As detailed in the following discussion, the Proposal:

 will, if adopted, harm American consumers—especially small investors

and small businesses—by limiting choices and access to retirement
3

investing services, leading to further under-saving for retirement; and by

imposing added costs, administrative burdens, and excessive and

unproductive risks on providers of tax-qualified products;

 is beyond the authority of DOL and conflicts with Congressional intent

regarding IRAs established outside of the employee-employer

relationship;

 entails a new set of complex requirements, in conflict with existing

guidance, that would constrict services that are already subject to detailed,

extensive regulation and supervision under securities, banking and

insurance laws that protect investors and consumers;

 is costly, impractical, and ignores other solutions that could meet DOL’s

policy objectives without these flaws;

 has not been subjected to a rigorous and objective cost/benefit analysis;

 overstates the predicted benefits of the Proposal and understates the

estimated costs of compliance;

 does not provide a sufficient implementation time period; and

 does not provide adequate grandfathering of existing accounts.

Harms to Small Investors

Among the significant shortcomings of the Proposal, the one of most concern to

State Farm is the harm to middle- and modest-income American consumers. This harm

is so concerning as to merit serious and particular focus by DOL.

 The Proposal, if adopted, will be particularly harmful with respect to

consumers with modest investment accounts—it will be more difficult and

more expensive for many consumers to obtain investment assistance with

tax-qualified products and may ultimately lead to further under-saving for

retirement. The lack of objective standards or guidance in the Proposal

will likely cause broker-dealers and their representatives, insurance

companies and their producers, and others to cease or reduce offering

retirement investment services.

 Consumers likely will be left to seek basic investment education or

guidance from other sources, but registered investment advisers and large

wire house firms typically do not offer separately-managed advisory

accounts to the non-affluent market. Investment advisers will generally

not manage small amounts because the asset-based fee does not generate

sufficient income to offset the substantial cost of providing such service.

For example, the average size of a tax-qualified mutual fund account for a
4

State Farm customer is approximately $22,000. The median tax-qualified

mutual fund account size is approximately $6,500. Investment advisers

will generally not manage such small amounts because the asset-based fee

(typically averaging 1.48% annually for accounts under $100,0002) will

not generate sufficient income (the amount would be $326 per year on an

account of $22,000, and less than $100 per year for accounts of

approximately $6,500). This is why many providers often set minimum

account sizes from $100,000 to $250,000 or above.

 For State Farm customers, overall investment retention and customer

satisfaction is high, turnover is low and investments are held for the long

term. This means that for our customers, using front-end sales loads and

commissions to pay for basic investment advisory services often result in

the most cost efficiency to the customer over the life of his or her

investment. Moreover, during 2014, State Farm had less than 6

complaints per every 100,000 mutual fund tax-qualified accounts.

 The Proposal will reduce the amount of investment education materials

available to consumers. These materials are an efficient and low-cost way

for consumers to learn about investment options. A reduction in these

materials will create an investment information gap for middle- and

modest-income Americans. The reality is that middle- and modest-income

consumers with smaller amounts to invest may not receive any investment

guidance (or may not save at all) unless someone like State Farm—a

proprietary investment product source that provides guidance only of a

general educational nature and incidental to the sale of investment

products—is there to provide it.

Essential Changes to Make the Proposal Potentially Viable

An effort at regulatory reform that is coordinated with functional regulators, more

inclusive of the variety of established delivery models and more supportive of consumer

choice is in the best interest of consumers, industry, and the economy as a whole.

However, in the event DOL moves forward with adoption of the Proposal, changes to the

Proposal must be made in order to make it workable for consumers and not overly

disruptive to the market. In the spirit of positive participation in the DOL’s rulemaking

process, we offer some suggested modifications to the Proposal:

 Adopt a broad seller’s exception that includes non-fiduciary selling

activity as originally contemplated in DOL’s 2010 proposal;

 Preserve DOL Interpretive Bulletin 96-1 in order to allow investors to

receive educational materials as they do today, without establishment of

any fiduciary relationship;

2 Based on data from Strategic Insight (2011).
5

 Make the proposed best interest contract exemption (“BIC Exemption”)3

more workable by:

o Revising the timing for execution of a best interest contract so that

execution is required at the time of the sale of a product, not before

having any discussions;

o Maintaining existing enforcement regimes and not creating a

private right of action for IRAs, to ensure consistency with

Congressional intent and well-established understandings under

current law;

o Providing safe harbors, rebuttable presumptions and other

objective standards so that financial institutions and advisers have

clear guidance as to the behavior the rules are seeking to achieve;

o Deleting the proposed requirement of making recommendations

with respect to “all” asset classes;

o Removing the additional requirements imposed on proprietary

products and clarifying that, if properly disclosed, proprietary

products do not constitute evidence of a violation of the best

interest standard;

o Revising the definition of a “financial institution” to include (i) all

depository institutions, whether or not they have trust powers, and

(ii) all entities within an insurance group that arrange for the

marketing of insurance products;

o Simplifying and reducing the burdens associated with disclosures

required under the Proposal and coordinating new disclosure

requirements with all governing agencies; and

o Preserving the choices that investors have today in determining the

level of service and the fee structure they want, including the

option of commission fee structures;

 Provide an implementation period of at least 3 years; and

 Provide complete grandfathering of all existing tax-qualified product

customers (including ERISA plans and other tax-qualified accounts

maintained at one financial institution but funded with a product from

another financial institution), whether or not new money is added to such a

tax-qualified customer relationship after the implementation date.

3

Proposed Best Interest Contract Exemption, 80 Fed. Reg. 21,960 (proposed Apr. 20, 2015) (to be

codified at 29 C.F.R. pt. 2550).
6

BACKGROUND ON STATE FARM

State Farm Mutual, headquartered in Bloomington, Illinois, is the largest insurer

of automobiles and, through its subsidiaries, the largest insurer of homes and the largest

issuer of individual life insurance policies in the United States. State Farm Mutual is

organized as a mutual insurance company—it does not have shareholders.

State Farm products and services, including insurance, savings, and financial

products and services, are made available through more than 18,000 exclusive

independent contractor insurance agents. Each State Farm agent hires his or her own

employees and conducts his or her business as an independently owned and operated

small business. Over time, State Farm agents, who operate in storefront locations in

metropolitan areas and small and mid-size towns throughout America, generally develop

long-standing ties to the customers in their communities.

State Farm Mutual and its subsidiaries include property and casualty insurance

companies, life insurance companies (State Farm Life Insurance Company and State

Farm Life and Accident Assurance Company), a broker-dealer (State Farm VP

Management Corp. (“SFVPMC”)), an investment management company (State Farm

Investment Management Co.) that manages a family of proprietary mutual funds, and a

federally chartered savings bank (State Farm Bank). State Farm’s business focuses on

serving individuals and families and small business, especially in the middle-market.

State Farm’s customers range from the more affluent to small businesses and low- to

moderate-income customers whose financial services needs are often underserved by

other organizations.

State Farm agents market a wide range of basic insurance and financial services

products to meet the needs of customers in their communities. Such products include

automobile and homeowner’s insurance, life insurance and annuities, long-term care and

disability income insurance, and consumer banking products (including automobile and

home loans and checking accounts). State Farm also offers investment, annuity,

insurance and banking products that generally may be held through tax-advantaged

accounts.4Thus, State Farm’s business model is based on its ability to offer customers

“one stop shopping” for a full range of financial services.

State Farm agents offer insurance products and, since State Farm began offering a

line of mutual fund products in 2001, a great majority of the agents have become

registered representatives in order to serve existing customers with additional financial

services products. Each registered representative agent must undergo substantial training

and sign appropriate agreements with the relevant State Farm entity in order to receive

authorization from State Farm to market those additional products. These agents also

4 References herein to tax-advantaged accounts (and similar terms) generally refer to all types of taxqualified vehicles, including but not limited to plans, tax-sheltered annuities, and all types of individual

retirement accounts and individual retirement annuities (including any related policies). Such terms also

refer to all other types of tax-advantaged accounts affected by the Proposal, including Health Savings

Accounts and Coverdell Education Savings Accounts.
7

must pass qualification examinations and register with the Financial Industry Regulatory

Authority (“FINRA”) as representatives of SFVPMC. They are subject to regulatory

enforcement actions by FINRA and by the Securities and Exchange Commission

(“SEC”) if they violate any of the customer protection and other regulations imposed on

them by law and regulation.

State Farm’s retail mutual funds business has grown organically since 2001 to

reach over $11 billion (both tax-qualified and non-tax-qualified accounts) in assets

currently under management. We have helped build the business through registered

representative agents meeting individually with existing State Farm customers to discuss

how mutual funds can provide the customer with choices to meet his or her particular

retirement and educational savings needs. State Farm products and services are flexible

enough to meet the needs of all investors, from the affluent market to the small investor.

For example, when State Farm mutual funds began offering funds to the public, its

minimum investment was only $250. The minimum has recently been raised to $1,000,

which is still very low compared to the rest of the market. In addition, the minimum

monthly investment is only $50. Thus, these mutual funds are accessible to all investors.

In many cases, our customers do not work with a registered investment adviser—

often because of the relatively small amounts they seek to invest. Indeed, a State Farm

agent may be the first representative to discuss with a consumer the importance and

benefits of beginning to save for retirement and education expenses. State Farm agents

do not offer discretionary trading services or products and do not make investment

decisions on behalf of their customers. The mutual funds products were designed to be

extensive enough to meet the needs of each investor, yet simple enough to be easily

understood by the customer. Since State Farm’s mutual funds were initiated, the strategy

has been to grow organically, to keep a long-term perspective, and to grow with

customers while providing agents with appropriate commission-based compensation

reflecting the complexity of the products and the amount of time, effort and training

required to properly market them. Sales commissions for agents do not vary by the

customer’s fund selection, and customers can make load-free exchanges between funds

within the State Farm family of funds. State Farm has found that a commission-based

model is a cost-effective, easy to understand, and fair way to compensate its agents. A

levelized compensation plan or wrap-fee structure would likely be more expensive for

both the customer and State Farm.

While we recognize there are a multitude of State Farm products that can be used

to fund tax-qualified accounts, many State Farm customers utilize mutual funds to fund

tax-qualified accounts. State Farm has invested a great deal in building a strong suite of

proprietary mutual funds broad enough to fulfill the investment objectives of almost all

investors. In offering its mutual funds to customers, State Farm’s goal is to match the

customer with an investment option that meets his or her needs and objectives. In order

to achieve this suitability goal, State Farm has developed a rigorous process, designed

and implemented in accordance with FINRA regulations, to inform the customer of

investment considerations so that he or she can choose the best option for his or her

individual situation. Suitability is initiated by the agent during the sales process.

Information about the customer is gathered, including risk tolerance, time horizon,
8

financial situation, investment experience, and investment objectives, among other

pertinent information. A suitability review is then performed to ensure the information

gathered matches the recommended investment product.

The above-described suitability process has proven sound by protecting customers

and providing them with valued education and options. To illustrate, even during periods

of significant market volatility and crisis, State Farm’s redemption ratio has been half that

of the industry. In addition, complaint levels are extremely low. Well-defined regulatory

expectations are essential to delivering a cost effective and consistent suitability process

for customers. Automation relating to online resources and ease of transacting business

with us, along with a training program, allow State Farm to provide a consistent customer

experience and for agents to assist customers in their personal investment choices.

In sum, the State Farm mutual funds product offering, as currently structured,

provides a viable and valuable choice to customers to act on their retirement and

education savings needs.5In determining its next steps on the Proposal, we urge DOL to

consider the value to consumers of State Farm’s investment products and services, and

the State Farm business model, in relation to the Proposal’s likely adverse effects

described below.

SPECIFIC COMMENTS

I. The Proposed Rule Would Harm Middle-Income Americans and Small

Businesses.

If adopted, the Proposal will be particularly harmful with respect to middle

income investors. First, by discouraging the commission-based compensation model in

favor of an asset-based model, and increasing compliance costs and legal uncertainty, the

Proposal would adversely affect financial services firms that service smaller investors

and therefore will likely reduce choices for consumers. Second, the Proposal’s

requirements would make it more difficult for many investors to obtain investment

education, information and assistance in connection with tax-qualified products.

Because the proposed fiduciary standard lacks objective criteria, is overly broad

and the definition of education is limited, the Proposal may cause broker-dealers,

insurers, banks, and their respective representatives and others to cease or reduce offering

investment retirement services out of fear of additional liability (i.e., exposure to

litigation, risk of severe excise tax penalties if complex conditions are not satisfied, etc.).

If this occurs, consumers will be left to seek counsel from other sources, such as

registered investment advisers and large wire-house broker-dealers—but these

institutions typically do not offer separately-managed advisory accounts to the nonaffluent market. Moreover, in addition to discouraging firms from serving the nonaffluent market, the Proposal also would hinder market growth. Most start-up mutual

5 Although other State Farm products are also used to fund tax-qualified accounts, mutual fund products

comprise a substantial portion of our customers’ tax-qualified portfolios.
9

fund or financial services companies would view the imposition of this Proposal—given

all of its requirements, high compliance costs, and legal uncertainties—as tantamount to a

barrier to market entry, as it would be extremely difficult to start offering mutual funds or

other new funding vehicles for tax-qualified accounts subject to the Proposal.

Consequently, we expect the number of firms offering tax-qualified accounts to shrink

and we do not expect new firms to enter the market.

For State Farm, the uncertainty of the proposed rules threatens the viability and

effectiveness of a process that has proven successful. As noted, State Farm agents run

their own independent small businesses and hire their own employees. If the proposed

rules had been in place when State Farm began offering mutual funds, it is questionable

whether both State Farm and its agents would have chosen to undertake the investment

services they provide, given the risks posed by the proposed rules’ uncertain compliance

standards, litigation-based compliance framework, bias for an open architecture of nonproprietary funds, and the resulting limitations on prospects for business growth. Absent

State Farm’s presence in the market, there would be a significant gap in the retirement

savings of a large segment of more than 400,000 mutual funds customers currently with

State Farm; they might not have received assistance elsewhere and therefore might not

have decided to initiate what has amounted to billions of dollars in savings in taxqualified accounts.

Some have argued that a commission-based model disadvantages investors. But

the reality is that many small investors will simply not receive service unless someone

like State Farm is there to provide it, and a commission-based fee is not adverse to these

investors in this context. To illustrate, the average size of a tax-qualified mutual fund

account for a State Farm customer is around $22,000 and the median tax-qualified mutual

fund account size is approximately $6,500. In fact, 80% of State Farm mutual funds’

investors have an account value of less than $25,000. Investment advisers will generally

not manage such small accounts because the asset-based fee (typically averaging 1.48%

of assets annually for accounts under $100,0006) will not generate sufficient income (the

amount would come to $326 per year on an account of $22,000, and less than $100 per

year for accounts of approximately $6,500) to cover the costs of the product and risk

undertaken. This is why investment advisers often set minimum account sizes from

$100,000 to $250,000 or above. Those investment advisers who do provide services to

small accounts often charge much higher-than-average fees (on a percentage basis). A

fee-for-service investment advice model does not meet the needs of investors with

modest amounts to invest.

For State Farm customers, front-end mutual fund sales loads have proven an

efficient means of providing appropriate products with an appropriate fee. Within State

Farm’s book of business, retention is high, turn-over is low and investments are held for

the long term. For this group, front-end sales loads are economically advantageous.

6 Based on data from Strategic Insight (2011).
10

Although a wrap fee7is less expensive in the short run, a load fee is less expensive over

longer terms. See Exhibit A (attached) for a comparison of a commission-based model to

an assets-under-management (“AUM”) or “wrap fee” model. Accordingly, for our

customers who are saving for retirement (a long-term investment), front-end sales loads

are cost-efficient. Further, because of the investment adviser economic model noted

above, smaller account holders need this option if they are to get human assistance with

their investments. Also, overall satisfaction is high among our tax-qualified mutual fund

customers. Indeed, we experience very few complaints from our mutual fund investors.

During 2014, State Farm had less than 6 complaints per every 100,000 accounts.

Concerns also have been raised about how some companies may be seeking to

“churn” investments in order to generate additional fees. There are already regulations in

place that prohibit such conduct.8 At State Farm, we do not charge our IRA investors any

additional fees for switching from one mutual fund investment to another within the State

Farm family of funds. For example, a State Farm tax-qualified investor with a $6,500

account could switch from a stock fund to a bond fund and there would be no fees

associated with that transfer. This is just one example of the steps State Farm takes to

benefit customers. We have found that such policies contribute to the high retention rates

we have for our customers.

State Farm’s views are buttressed by recent commentary on the effects of the

Proposal. In a recent paper,9noted economists Bob Litan and Hal Singer emphasize the

potential detrimental impact of the Proposal on small investors. Specifically, they

describe the costs of the Proposal as follows:

These costs come largely from (1) small savers losing access to human

financial advisers (because small accounts would become uneconomic to

serve, and expose advisory firms to new liability risks), (2) small savers

being forced into fee-based advisory relationships that cost more than

current commission-based arrangements, and (3) small savers and firms

not being encouraged to save more, take full advantage of employer

matches, or create retirement plans in the first place.10

Litan and Singer go on to find that:

7 A “wrap fee” is a periodic fee based on assets under management that is paid by a customer and covers

both brokerage and investment advisory services, in lieu of separate brokerage commissions and

investment advisory fees.

8

See generally 17 C.F.R. § 240.15c1-7 (implementing the prohibition of the use manipulative,

deceptive, or other fraudulent devices or contrivances under the Securities Exchange Act); FINRA Rule

2111, Supplementary Material .05 (describing the reasonable basis, customer-specific, and quantitative

suitability obligations of broker-dealers).

9 Robert Litan and Hal Singer, Good Intentions Gone Wrong: The Yet-To-Be Recognized Costs of the

Department of Labor’s Fiduciary Rule, Economists Incorporated (July 2015), available at

http://www.ei.com/support-_proposed_fiduciary_rule-roposed-fiduciary_rule/.

10 Id., abstract.
11

The DOL’s Regulatory Impact Analysis (RIA) thus concludes erroneously

that the net benefit of the rule would be roughly $4 billion per year (the

CEA, making related errors, pegs the benefit at $17 billion). A

conservative assessment of the [Proposal]’s actual economic impact—

taking into account the categories of harm noted above that are ignored by

DOL and CEA—finds that the cost of depriving clients of human advice

during a future market correction (just one of the costs not considered by

DOL) could be as much as $80 billion, or twice the claimed ten-year

benefits that DOL claims for the [Proposal].11

In addition, the Proposal could unintentionally eliminate an efficient means of

providing investment guidance incidental to a transaction, which is a low-cost way for

consumers to learn about investment options.12 Many of those who are currently

assisting small investors may find it uneconomical to continue providing this incidental

advisory service. This would occur because the Proposal would retract DOL’s guidance

on investment education—Interpretive Bulletin 96-1.13

Small savers and investors should be educated as to the benefits of saving and

should have choices as to the level of service they can receive. Interpretive Bulletin 96-1

allows the provision of certain educational materials to plan participants and beneficiaries

without the communication being deemed “investment advice” and triggering fiduciary

standards. The Proposal’s definition of “investment advice” is overly broad and sweeps

in almost any discussion regarding the benefits of IRAs and qualified plans and potential

investment options. While there is a carve-out for educational communications, it is too

restrictive. For example, unlike current standards, the linking of specific investment

options with asset allocation models or other materials would be considered “advice,”

and not education. State Farm believes consumers are entitled to full disclosure with

respect to possible investment vehicles and that agents should be able to provide such

disclosures without becoming fiduciaries. Such disclosures help to educate consumers

regarding their options so that they can make more informed decisions. In order to

preserve the sharing of information, which helps to educate and empower consumers, the

treatment of educational communications reflected in Interpretive Bulletin 96-1 should

remain unchanged.

11 Id.

12 A broker-dealer or broker-dealer representative “whose performance of [advisory] services is solely

incidental to the conduct of his business as a broker or dealer and who receives no special compensation

therefor” is not considered an investment adviser, and is therefore not subject to an adviser’s fiduciary

standards. Investment Advisers Act of 1940 § 202(a)(11)(C), 15 U.S.C. § 80b-2(a)(11)(C). See also

Certain Broker-Dealers Deemed Not to Be Investment Advisers, Investment Advisers Act Release No. 2376

(Apr. 12, 2005). For any broker-dealer representative relying on the BIC Exemption, such “solely

incidental” advice would be extremely difficult and perhaps impossible to provide because the BIC

Exemption requires an adviser to provide a more fulsome set of advice than has traditionally been

interpreted to meet this definition of “solely incidental.”

13 Interpretive Bulletin 96-1, Participant Investment Education, 61 Fed. Reg. 29,586 (June 11, 1996)

(codified at 29 C.F.R. § 2509.96-1) (“Interpretive Bulletin 96-1”).
12

Novel technologies, such as on-line “robo-advisers” may be an option for some.

But many savers and investors prefer face-to-face individual contact. Anonymous

websites, phone-tree services and call centers do not meet the retirement savings and

investment needs or preferences of many people, especially older Americans. Investors

should have choices as to the mode of communication through which they receive

investment information, yet the Proposal would have the effect of reducing the options

available.14

Registered representatives of broker-dealers and licensed insurance agents,

including more than 18,000 State Farm agents, are very helpful in numerous ways to

individuals who are planning for retirement. Conversations in the normal course of the

insurance business can lead customers who are not currently saving for retirement to start

investing for their future, even if they have humble financial means. These customers are

not served by most investment advisers, and fee-for-service or percentage-of-AUM

compensation models are neither affordable nor efficient for them. A known

representative/agent in the neighborhood may help keep an investor from making a poor

choice, such as selling his or her investment position after a market downturn. Small

investors may never recover from making such an uninformed decision. Further, as an

investor matures, his or her risk tolerance may change, and the local State Farm agent

will be there if the investor wishes to discuss changes in asset allocation.

If the Proposal were adopted, this efficient means of educating middle-income

consumers would no longer be a viable option. Small investors will be faced with the

dilemma of receiving no advice or seeking advice they cannot afford. As a result,

millions of customers would likely pay more for investment guidance, invest without

obtaining investment guidance and make uninformed choices about tax-advantaged

accounts, or not invest and remain unprepared for retirement. Thus, the Proposal would

effectively shut out from the market the very people it is trying to protect. Without

encouragement, education, support and service from local State Farm agents and similar

14 Forcing investors to rely on less traditional investment advisory models may have many adverse

consequences that are not immediately apparent and which are not considered by the DOL. For example,

Litan and Singer discuss in particular certain weaknesses in the “robo adviser” model:

[T]he decision to stay invested (or not) during times of market stress

swamps the impact of all other investment factors affecting long-term

retirement savings, including modest differences in advisory fees or

investment strategies. “Robo-advice,” which the DOL assumes will

over time replace human advisers who find it uneconomic to serve

small savers under the new rule, cannot effectively perform this critical

role. (An email or text message in the fall of 2008, for example, would

not have sufficed to keep millions of panicked savers from selling, with

devastating consequences for their nest eggs). In effect, the DOL rule

wagers the welfare of millions of Americans on the mistaken notion

that ending commission-based compensation is better for small savers

than assuring them continued access to human financial advice through

an affordable and time-tested model.

Litan & Singer, supra note 9, abstract.
13

financial service providers, Americans’ retirement savings rates may drop, further

exacerbating the country’s savings and retirement income shortfall.

The manner in which the Proposal seeks to elevate a single approach to the sale of

investments and provision of advice, together with the potential liability exposure created

by the Proposal, will have the unintended and undesired effect of deterring investment

professionals and firms from providing consumers valuable educational communications

and access to investment professionals with whom to discuss their individual

circumstances and investment options, and to provide other guidance that is solely

incidental to the sale of an investment. As a result, consumers will be less informed and

more likely to make decisions ill-suited to their needs. At the same time, to account for

the additional regulatory restrictions and the fact that fiduciary advice is essentially

forced upon all consumers, investment products are likely to become more expensive.

The greatest impact of the Proposal will be on those with relatively modest amounts to

invest—an underserved population that needs more options, not fewer, to help them

establish savings and to make informed investment choices.

Finally, if adopted, the Proposal will likely cause some small businesses to lose

the help that they need when setting up retirement plans for the owner and employees.

New and small enterprises frequently need assistance in selecting investment options for

retirement plans. The Proposal would transform the function of educating the employer

about such options into a fiduciary function. This may cause many otherwise perfectly

capable firms and individuals to no longer offer such guidance because of the heightened

risk exposure.

II. The Proposal Conflicts with Certain Statutory Provisions and the Intent of

Congress.

Through the Proposal, DOL is effectively attempting a substantial re-write of the

fiduciary provisions of ERISA15 and the Internal Revenue Code (the “Code”) that have

been in effect for 40 years. By fundamentally altering the settled legal and regulatory

scheme, the Proposal not only will disrupt the provision of a wide range of retirement

investment services and harm investors, but will also run directly contrary to

Congressional intent.16

When ERISA and related provisions of the Code were adopted in 1974, the

following fiduciary-related provisions also were enacted:

 Title I of ERISA, which contains a statutory fiduciary duty, prohibited

transaction rules, and an exclusive enforcement and remedy regime for use

by DOL and plan participants. Employer- and union-sponsored employee

15 Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq. (“ERISA”).

16 Indeed, far from adhering to congressional intent to make tax-favored accounts more widely available

and accessible to a broader range of consumers, the burdens, costs, and legal uncertainties created by the

Proposal would likely diminish the availability of such accounts to consumers.
14

benefit plans (“Employer-Sponsored Plans”) are subject to these ERISA

fiduciary standards.

 Code Section 4975, which contains nearly identical prohibited transaction

rules to those in ERISA and—for purposes of applying those rules—the

same definition of the term “fiduciary.” Unlike ERISA, however, the

Code does not impose any fiduciary duties. The Code’s prohibited

transaction rules are enforced solely by the IRS through excise tax

penalties. Employer-Sponsored Plans and IRAs17 are subject to these

Code-prohibited transaction rules.

As discussed below, the Proposal conflicts with the plain language and structure

of, and the Congressional intent behind, the underlying statutory framework applicable to

IRAs and Plans.

A. Subjecting IRAs to ERISA Fiduciary Standards Conflicts with

Congressional Intent.

The BIC Exemption requires advisers and financial institutions (both as defined

with respect to the BIC Exemption) providing investment-related services to an IRA to

agree, by contract, to be subject to the ERISA fiduciary standard of care. This extension

of ERISA’s fiduciary standards to IRAs through the BIC Exemption is at odds with

Congress’ clear intent. Employer-Sponsored Plans became subject to ERISA’s fiduciary

duty standards upon the enactment of ERISA in 1974. Simultaneously in 1974, Congress

established IRAs, but subjected IRAs only to the Code’s prohibited transaction rules and

not to ERISA’s fiduciary duty standards. It is simply implausible to think that Congress

would condone the application of an ERISA fiduciary duty standard to IRAs, given that

ERISA is inapplicable and the Code itself contains no fiduciary standards for IRAs.

Indeed, in the 40-plus years since Congress created IRAs, Congress has amended

ERISA and the Code many times, but never changed its original decision to exempt IRAs

from ERISA’s fiduciary standards, thus demonstrating its satisfaction with existing law.

Instead, while repeatedly amending ERISA and the Code in various respects, including

by adopting new tax-favored retirement and benefit account savings programs, such as

401(k) plans, SEP and SIMPLE accounts and ROTH IRAs, Congress has intentionally

chosen to continue to exempt IRAs from ERISA’s fiduciary standards.

It is well established that Congress is deemed to be cognizant of the statutory

interpretations of a regulatory agency, and when Congress amends a statute, but leaves

17 Certain types of IRAs may be subject to ERISA because they are created in connection with employersponsored pension plans. Accordingly, for purposes of these comments, they are considered EmployerSponsored Plans and not IRAs. Most IRAs are in no way subject to ERISA. 29 C.F.R. § 2510.3-2(d)

(IRAs not subject to ERISA in the absence of involvement of an employer or union); see also Charles

Schwab & Co., Inc. v. Debickero, 593 F.3d 916, 919 (9th Cir. 2010) (“IRAs are specifically excluded from

ERISA’s coverage.”).
15

provisions that have been subject to such interpretations unaltered, Congress is deemed to

have accepted those regulatory interpretations.

Congress is presumed to be aware of an administrative or judicial

interpretation of a statute and to adopt that interpretation when it re-enacts

a statute without change. . . . So too, where, as here, Congress adopts a

new law incorporating sections of a prior law, Congress normally can be

presumed to have had knowledge of the interpretation given to the

incorporated law, at least insofar as it affects the new statute.18

In light of the numerous amendments to ERISA and the Code since 1975, all of

which are premised on the existing 1975 regulation, it is implausible to surmise that

Congress was unaware of the existing fiduciary standard or the state of the marketplace it

was regulating. Congress, with informed awareness, took no action to change the

statutory definition of the term “fiduciary.” Agencies are not permitted to use their

general rulemaking or definitional authority to override the choices of Congress.19

Because many ERISA and Code provisions overlap, President Carter, through the

Executive Order: Reorganization Plan No. 4 of 1978 (the “Reorganization Plan”),

allocated interpretive and enforcement authority relating to these provisions between

DOL and the IRS. Under the Reorganization Plan, DOL generally has the power to issue

regulations, rulings, opinions and exemptions relating to the fiduciary and prohibited

transaction provisions of ERISA and the prohibited transaction rules the Code (as

discussed above, the Code does not impose any fiduciary duties in respect of IRAs), but

enforcement of the Code’s prohibited transaction rules remains exclusively with the IRS.

The BIC Exemption, however, in effect amends the Code by (i) extending ERISA

fiduciary duties to IRAs and (ii) granting enforcement authority under the Code to the

plaintiffs’ bar. DOL lacks authority under the Reorganization Plan or otherwise to

impose ERISA’s fiduciary standards on IRAs or to allow anyone other than the IRS to

take enforcement actions against IRAs.20

18 Lorillard, Div. of Loew's Theatres, Inc. v. Pons, 434 U.S. 575, 580-581 (U.S. 1978) (citing Albemarle

Paper Co. v. Moody, 422 U.S. 405, 414 n. 8 (1975); N.L.R.B. v. Gullett Gin Co., 340 U.S. 361, 366 (1951);

Nat’l Lead Co. v. United States, 252 U.S. 140, 147 (1920); 2A C. Sands, Sutherland on Statutory

Construction § 49.09 (4th ed. 1973)); see also Texas Dept. of Housing and Cmty. Affairs v. Inclusive

Communities Project, Inc., No. 13-1371, 2015 WL 2473449 (S. Ct. June 25, 2015).

19 See Council for Urological Interests v. Burwell, No. 13–5235, 2015 WL 3634632 (D.C. Cir. June 12,

2015); Am. Bankers Ass’n v. Securities and Exch. Comm’n, 804 F.2d 739 (D.C. Cir. 1986); Bd. of

Governors v. Dimension Fin. Corp., 474 U.S. 361 (1986).

20 Particularly with respect to IRAs that hold insurance products or other investments sold or

recommended by insurance agents, we question whether DOL has considered the comprehensive regulatory

regime in place at the state level governing insurance products and the business of insurance, and the

implications of the Proposal under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, in relation to that

comprehensive regime.
16

B. Providing a Private Right of Action to IRA Owners for Breach of Contract

in the BIC Exemption Conflicts with the Code.

The BIC Exemption creates a private right of action for IRA owners and in doing

so conflicts with the Code and ERISA.21 Congress provided that the Code’s prohibited

transaction rules are enforced exclusively by the IRS. As a result, courts have made clear

that there is no private right of action for a plan participant to enforce the Code’s plan

qualification requirements.22 Further, the Reorganization Plan makes clear that

enforcement power for the Code’s prohibited transaction rules lies with the IRS.

Congress could have created enforcement mechanisms for IRAs similar to those provided

to ERISA plan participants by ERISA Section 502, but it did not. DOL’s creation of a

private right of action as to IRAs would allow the plaintiffs’ bar, rather than solely the

IRS as Congress intended, to police the prohibited transaction rules for IRAs.

The Proposal fails to include safe harbors, rebuttable presumptions or other

defenses for responsible financial institutions. In its current form, the Proposal

effectively serves as a road map for enterprising lawyers to launch class actions against

any provider of retirement products. Even defendants who would prevail in litigation

launched under the proposed rules would bear the high costs of litigation, lost time, and

diverted resources. Most importantly, the costs of defending even meritless litigation will

ultimately be borne by the investing consumers in the form of higher costs inherent in

products and/or a retreat from the market by various participants, leading to fewer

consumer choices. If DOL adopts the Proposal, the BIC Exemption must be revised to

remove the private right of action and to include defenses and other protections, such as

safe-harbors, for advisers and financial institutions.

C. DOL Regulation of Broker-Dealers’ Compensation & Services Conflicts

with the Exchange Act and Creates Conflicts with Investment Adviser

Regulation.

Congress in the Exchange Act has vested in the SEC and FINRA functional

authority to regulate the permissible services, disclosure obligations and compensation

structures of broker-dealers and their registered representatives, and preserved parallel

regulatory authority in the states. Congress has not granted authority to DOL to

functionally regulate broker-dealers or their representatives or to override the transactionbased compensation structures authorized under the Exchange Act for broker-dealers and

21 The BIC Exemption’s creation of a private right of action for participants in Employer Sponsored

Plans also conflicts with ERISA. ERISA provides plan participants with the exclusive and limited

enforcement mechanisms and remedies set forth in Section 502 of ERISA. The Supreme Court has

repeatedly held that “[t]he six carefully integrated civil enforcement provisions found in § 502(a) of the

statute as finally enacted . . . provide strong evidence that Congress did not intend to authorize other

remedies that it simply forgot to incorporate expressly.” Aetna Health Inc. v. Davila, 542 U.S. 200, 209

(2004) (emphasis supplied) (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 (1987)); see also Mass.

Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146 (1985)

22 See Reklau v. Merchants Nat’l Corp., 808 F.2d 628 (7th Cir. 1986) (holding that Section 401 of the

Code does not create substantive rights under ERISA that can be enforced in a private cause of action).
17

their registered personnel in respect of IRAs and plans. Nor has Congress granted

authority to DOL to impose compensation restrictions on broker-dealers for transactions

and investments of IRAs and plans analogous to those that apply to banks under the

Exchange Act. Indeed, Congress expressly preserved in the Gramm-Leach-Bliley Act of

1999 the authority of broker-dealers to be paid commissions and sales loads in respect of

sales to IRAs and qualified plans.23 Most recently, in the Dodd-Frank Wall Street

Reform and Consumer Protection Act of 2010 (“DFA”), Congress directed the SEC to

study potential fiduciary standards and customer disclosures for broker-dealers, but

specified that commissions or other standard compensation structures shall not of

themselves constitute a violation of a broker-dealer’s duty to its customers.24

The SEC and FINRA comprehensively regulate broker-dealers, including

requiring detailed disclosures of conflicts and fees, customer informed consents,

regulation of compensation and fees, and objective suitability requirements which are

enforced with vigor as regards, in particular, IRA accounts.25 The Proposal’s BIC

Exemption would also require providers to supply projected investment costs for periods

of up to ten years, which implicates calculation of projected performance and returns and

thereby runs afoul of SEC and FINRA rules.26 Thus, the proposed fiduciary definition

and BIC Exemption, as currently formulated, exceed the statutory authority of DOL,

conflict with the Exchange Act, and therefore would be void as applied to securities

broker-dealers and their representatives.

The Proposal also creates conflicts with the requirements of the Investment

Advisers Act of 1940 (“Advisers Act”) and state laws that govern investment advisers.

These laws and their associated regulations establish comprehensive registration and

compliance requirements for persons that provide investment advice for compensation.

However, under the Advisers Act, any broker-dealer or broker-dealer representative (who

is already subject to rigorous regulatory oversight) “whose performance of [advisory]

services is solely incidental to the conduct of his business as a broker or dealer and who

receives no special compensation therefor” is not considered an investment adviser.27

23 Under the Exchange Act and SEC regulations, when effecting securities transactions for plans, IRA

and similar accounts, registered broker-dealers and their registered representatives are permitted to receive

transaction-based compensation, while banks and their employees are not. Securities Exchange Act of

1934 §§ 3(a)(4)-(5), 15 U.S.C. §§ 78c(a)(4)-(5); 12 C.F.R. § 218.760; 17 C.F.R. § 247.760.

24 Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 § 913(g), 15 U.S.C. § 78o(k)

(“The receipt of compensation based on commission or other standard compensation for the sale of

securities shall not, in and of itself, be considered a violation of such standard applied to a broker or

dealer”).

25 See, e.g., SEC, Office of Compliance Inspections and Examinations, National Exam Program Risk

Alert: Retirement-Targeted Industry Reviews and Examinations Initiative (June 22, 2015), available at

http://www.sec.gov/about/offices/ocie/retirement-targeted-industry-reviews-and-examinationsinitiative.pdf; FINRA, Regulatory and Examinations Priorities Letter 7 (Jan. 6, 2015), available at

http://www.finra.org/sites/default/files/p602239.pdf.

26 See SEC Rules 34b-1, 156(b)(2), 482; FINRA Rule 2210.

27 Advisers Act § 202(a)(11)(C), 15 U.S.C. § 80b-2(a)(11)(C).
18

The Proposal would undermine this pattern of state and federal regulation. As

just one example, the BIC Exemption requires a firm and its representatives to

contractually warrant, when offering a tax-qualified account, that they are acting as a

fiduciary on behalf of the customer, and that they will provide “advice that reflects the

care, skill, prudence, and diligence under the circumstances then prevailing that a prudent

person would exercise based on the investment objectives, risk tolerance, financial

circumstances, and needs of the Retirement Investor.”28 It is hard to imagine how a

representative or firm can provide such advice, or be contractually held to a fiduciary

standard, while limiting such investment advice to that which is “solely incidental.” As a

result, registered representatives of broker-dealers who provide investment services to

tax-qualified accounts will need to evaluate whether they must register as investment

advisers and pass the appropriate FINRA examination. Given the obstacles to meeting

customer needs, the higher litigation risk, and the costs of regulation over and above

existing oversight by state and federal insurance and securities regulators, products,

education, and advice from many registered representatives will become less available.29

D. The Proposed BIC Exemption Is Not Feasible.

Congress authorized DOL to issue class exemptions from the prohibited

transaction rules only if it finds that the exemption is: (i) administratively feasible; (ii) in

the interests of plans, participants and beneficiaries; and (iii) protective of the rights of

participants and beneficiaries.30 These findings cannot be made for the proposed BIC

Exemption. The BIC Exemption is not feasible and not in the interests of, or protective

of, plan participants.

First, its conditions are vague and without clear standards or benchmarks for

compliance. For example, a firm is to represent and warrant compliance with the rule

and that actions are in the best interest of the customer. Yet there is nothing in the

proposed BIC Exemption to clarify in an objective manner what actions and activities

28 80 Fed. Reg. at 21,984.

29 In the DFA, Congress directed the SEC to conduct a study of the effectiveness of legal or regulatory

standards of care (imposed by the SEC, FINRA, and other authorities) for providing personalized advice

and recommendations to retail customers. The SEC issued a Staff report, Study on Investment Advisers and

Broker-Dealers, in January 2011. The report recommended consistent standards of care between advisers

and broker-dealers. But consistent standards are appropriate only where circumstances and conditions are

the same, and there are fundamental and significant differences between investment advisers and brokerdealers. While the conclusions of the Staff report were challenged by certain Commissioners, the SEC

nonetheless has spent several years in an effort to determine whether and if so, how, to impose a uniform

fiduciary duty on brokers and investment advisers. The amount of time spent on this endeavor does not

reflect a lack of will on the part of the SEC, but evidences the complexity of the task. In this context, we

believe the Proposal is premature and that DOL should allow FINRA and the SEC time to further consider

rulemaking. If DOL continues forward with the Proposal without pausing for meaningful input from

functional regulators, firms will be left to wrestle with one regulator’s standard of care conflicting with

another’s, as well as concerns as to whether a fiduciary representation eliminates the ability to rely on the

broker-dealer exemption from regulation as an investment adviser.

30 See ERISA § 408(a); I.R.C. § 4975(c)(2).
19

would be in the best interest of the customer. A firm cannot, with 100% certainty,

represent and warrant its compliance with standards that are not defined.

The BIC Exemption would effectively require a written contract before a

customer decides to establish a relationship with the provider. An adviser cannot market

any product to a customer in reliance on the BIC Exemption before a written, three-party

contract that complies with all of the BIC Exemption’s onerous requirements has been

entered into by the customer, the adviser and the financial institution. It is hard to see

how this could possibly work in the real world. In no other context is a retail customer

required, by government regulation, to enter into a complex contract with the retailer

before he or she is allowed to learn about what products are for sale. A competitionbased market economy cannot function unless customers can quickly and easily obtain

information about the competing products for sale in the marketplace. This

unprecedented contract requirement at the outset of the relationship with a potential

customer is likely to discourage many Americans from becoming IRA customers at all, to

the detriment of their retirement savings and harming society as a whole by decreasing

retirement savings.

In contrast, if a customer desires information about, or to buy, investment

products available for his or her personal account (i.e., not part of an IRA or other taxqualified plan), an adviser is free, without the requirement of any sort of contract (or

fiduciary concerns), to market to the customer the various financial products available

through the adviser and, subject to the long standing suitability standard, provide

incidental investment advice. If the BIC Exemption is issued, it should delete the

requirement of an executed contract between investor, agent and financial institution

prior to any discussion as well as delete the contractual warranty requirements.

For a class exemption to be feasible, the exemption’s requirements and conditions

need to be clear and objective so that the parties seeking to rely on the exemption can be

certain that a prohibited transaction will not occur. For example, the widely relied upon

exemption under Part I of PTE 84-14 (the Qualified Professional Asset Manager

exemption) contains only objective conditions. By contrast, the subjective nature of

aspects of the BIC exemption calls into question whether the marketplace will accept

reliance on the BIC exemption. An exemption that is not feasible is in no one’s best

interest.

The Proposal is also administratively infeasible because (as described further

below) it will require creation of completely new and expensive disclosure and

documentation systems. DOL has mandated in the BIC Exemption that the financial

institution and/or the adviser make substantial, material disclosure of the fees it charges,

both generally on its website, and specifically with respect to each transaction. These

complicated disclosures will overwhelm the consumer with information and fail any

cost/benefit analysis as they are simultaneously very costly to create and maintain. Any

required disclosures should be simple and include standardized assumptions so they are

easily digested and understood by customers and are not prohibitively costly to provide.
20

The Proposal will also require changes to arrangements with hundreds of

thousands of existing State Farm customers. Explaining the need for all-new paperwork,

and obtaining new physical signatures will be extremely difficult, if not impossible in

many cases. These cost factors, combined with increased litigation risk, will likely

reduce the availability of offerings. This is not in the interests of participants and

beneficiaries.

III. A Seller’s Exception or BIC Exemption Must Protect Consumers’ Ability to

Access Proprietary Products and Products That Utilize Differing Compensation

Models.31

In drafting the Proposal, DOL sought to distinguish between fiduciary investment

advice and non-fiduciary investment or retirement education. In its counterparty carveout provision (the “seller’s exception”), DOL further sought to exempt “sellers” from the

proposed rules where the recommendation is in an arm’s length transaction and there is

no expectation of fiduciary investment advice. However, the Proposal actually sweeps in

many relationships that DOL expressly sought to except out of the guidance, prescribing

a seller’s exception that is extremely narrow and limited to very large benefit plan

situations. For the reasons set forth below, a strong seller’s exception, covering all taxqualified plans and IRAs, is needed.

A. There is No Expectation of a Fiduciary Relationship.

We agree that DOL should apply fiduciary status and standards of conduct in the

context of a relationship where it is commonly understood that the adviser has agreed to

provide advice in the best interest of the customer without regard to the adviser’s own

interests. However, it is not appropriate to treat a seller of financial products as a

fiduciary when all those involved in the transaction understand that neither party expects

or intends a fiduciary standard to apply.

B. There Is No Reason for Different Standards Among Fiduciaries.

Retirement investors do not benefit by applying different standards to plan

fiduciaries based on the size of the plan. Under ERISA, both small plans and large plans

are subject to fiduciary duties and responsibilities. There is no basis for believing that

fiduciaries of small plans are less capable than fiduciaries of large plans at recognizing

those fiduciary duties and responsibilities. Many small plan fiduciaries are as

sophisticated as large plan fiduciaries. Further, application of this rule could result in

“mid-sized” plans moving into and out of the carve-out numerous times based on

employee counts and investment returns. ERISA requires that all plan fiduciaries have or

obtain the same type of financial expertise that DOL uses to support its exception for

large plans. Further, IRA owners should also be responsible for their own decisions or

31 In addition to the specific comments set forth herein, we share the concerns expressed in other industry

and trade association comments regarding the Proposal, including but not limited to the BIC Exemption

and the proposed amendments to PTE 84-24.
21

choose to hire fiduciaries to make such decisions. Therefore, there is no justifiable policy

reason to allow a seller’s exception only with regard to large plans.

C. Proprietary Products Are Valuable to Customers, Especially Investors

with Smaller Amounts to Invest.

The potential impact of the Proposal on proprietary products is of particular

concern. State Farm offers a wide range of proprietary products such as insurance,

mutual funds, annuities and bank products. These products have been developed to meet

the needs of a wide range of customers. We serve a broad market, including many

customers who are small investors who might not be served by investment advisers

focused on the affluent market. State Farm agents who are registered representatives do

not hold themselves out as independent advisers on the entire universe of potential

investment products. In fact, an exhaustive list of options, even if feasible to develop and

present, would overload many investors and might deter them from investing in a taxqualified product. Moreover, it is easier to train those who are assisting potential

investors with respect to the particulars of a proprietary suite of products. Even

augmenting a proprietary product offering to include a handful of third party products, if

done solely for purposes of compliance with the Proposal’s standards, would not help

consumers when the proprietary product offering, in and of itself, is diverse, competitive,

and meets the desires of customers. Competition should drive retirement service

providers in this regard to offer products they believe are wanted and needed by their

customers.

D. There Must Be a Strong Seller’s Exception.

To properly reflect the parties’ expectations, to treat fiduciaries similarly, and to

preserve consumer access to proprietary products, the Proposal should be revised to

include an expansion of the seller’s exception to include non-fiduciary selling activity as

originally contemplated in DOL’s 2010 proposal,32 and as long recognized by the courts.

As noted by multiple Federal circuit courts, “[s]imply urging the purchase of its products

does not make an insurance company an ERISA fiduciary with respect to these

products.”33 A robust seller’s exception would allow an investor to continue to have a

choice with respect to the level and amount of advice he or she wants, by preserving a

regulatory structure in which a non-fiduciary salesperson will be willing to offer

investment services and affordable options. With necessary disclosures regarding the

terms of offerings, proprietary products would then be preserved as an option.

In the exclusively proprietary product model, it is clear and obvious to consumers

that the agent or company is marketing a company product. The agent’s or company’s

title says it all. When people go into that agent’s or company’s office (or otherwise make

32 Definition of the Term “Fiduciary,” 75 Fed. Reg. 65,263, 65,267 (proposed Oct. 22, 2010).

33 Cotton v. Mass. Mutual Life Ins. Co., 402 F.3d 1267, 1278 (11th Cir. 2005) (quoting Am. Fed’n of

Unions Local 102 Health & Welfare Fund v. Equitable Life Assurance Soc’y, 841 F. 2d 658, 664 (5th Cir.

1988)).
22

contact), they do so because they want to learn about that company’s products, because

they are considering a purchase of that company’s product, or because they want to learn

more about how to protect their family, including saving and investing for future needs

(e.g., education and retirement). The agent or company may share information about a

variety of investment products, including the features of IRAs and annuities. After that

discussion, the customer may invest or the customer may visit with other companies’

representatives to learn about the products offered by those other companies. This is no

different than when a consumer makes other purchasing decisions, such as the purchase

of a home. Providers of proprietary products should not be forced by regulatory

requirement to offer the products of competitors. Buying a product from an agent who

markets only proprietary products means the agent has had thorough training in those

products and is well-prepared to answer questions regarding those products. The agent

and/or a registered representative is unable to address every product in the marketplace,

but instead would provide advice that is incidental to the customer’s specific transaction.

Further, buying through a representative who markets only proprietary products

may mean fewer conflicts of interest with respect to fees. While there may be different

fees associated with different product lines, there is less likely to be differentiation in fees

in products of the same class. For example, at State Farm, while an agent may be paid

more if a customer makes a mutual fund purchase than if the customer purchases a bank

certificate of deposit (due to the differing product complexity), there is generally no fee

difference in an agent’s compensation if the customer buys shares in one proprietary

mutual fund over a different proprietary mutual fund within the State Farm family of

funds.

We agree with DOL that if a representative charges a separate fee for advisory

services, the representative should be held to a fiduciary standard. But unlike an

investment adviser, a registered representative is generally prohibited from charging a

separate fee for any incidental advice regarding proprietary products. The customer pays

the same amount for the proprietary mutual fund in one class regardless of whether the

customer initiates the purchase through a call center, online or through an

agent/representative.

Finally, it should be noted that financial services companies like State Farm work

hard to protect their brands. These companies have a vested interest in standing behind

their proprietary products and understand that their brand’s future depends on effectively

designing, delivering and servicing such products.

E. Numerous Improvements Must be Made to the Proposed BIC Exemption.

If the seller’s exception is not expanded, the proposed BIC Exemption must be

revised. In particular, the additional requirements imposed by the BIC Exemption upon

sellers of proprietary products should be eliminated. Financial institutions and their

agent/representatives offering only proprietary products should be subject to the same

rules as other financial institutions. So long as a financial institution and its registered

representatives or investment advisers offer a broad range of investment options, there

should be no requirement for additional documentation and representations.
23

Under the BIC Exemption, however, financial institutions must make available a

range of assets that is broad enough to enable the registered representative or investment

adviser to make recommendations with respect to all of the asset classes reasonably

necessary to serve the investor’s best interest.34 As a threshold matter, we request that

“all” be deleted. While financial institutions should provide a broad range of asset

classes, they should not be required to offer every asset class. It is not clear how any

institution could market all of the asset classes necessary for every investor.

While proprietary-only models are not expressly prohibited, it is unclear how a

financial institution can be certain that the “best interest” standard in the BIC Exemption

would be satisfied with an investment line-up that includes only proprietary products,

regardless of how broad of a range of investment options are offered. In Section 913 of

the Dodd-Frank Act, Congress made clear that “[t]he sale of only proprietary or other

limited range of products by a broker or dealer shall not, in and of itself, be considered a

violation of” standards of conduct that apply to investment advisers. Nowhere does the

BIC Exemption indicate how a firm could offer only proprietary products and be

confident that it will not be subject to the prohibited transaction excise taxes or can

adequately defend itself in a lawsuit under the private right of action. We believe

proprietary-only business models should be subject to the same requirements as business

models offering a variety of proprietary and non-proprietary products. The additional

requirements for proprietary products should be deleted and the Proposal should be

revised to clarify that, if disclosed, the exclusive sale of proprietary products or services

should not be considered evidence of a violation of the “best interest” standard, consistent

with the Congressional directive of Section 913 of the Dodd-Frank Act. To impose

additional requirements on financial institutions and their representatives who market

proprietary products is unneeded, overly burdensome, and an unreasonable attack on such

business models. Indeed, the Proposal’s BIC “exemption” does not appear to be an

exemption, but rather a conglomeration of conditions that effectively prohibit current,

well-established practices.

F. Technical Changes Must be Made to Definition of “Financial Institution.”

We note that Section VIII(e) of the Proposed BIC Exemption limits the definition

of a “financial institution” in a manner that does not reflect the current variety of

channels through which financial products and services are brought to market. For

example, a company that meets the proposed definition of a “financial institution,” such

as an insurance company, with its representatives and agents, may market the products of

34 It is impractical, if not impossible, for a financial services provider to offer every asset class. Asset

classes might include, among many other possible examples, industry sector funds, country-specific funds

or commodity-focused funds. In contrast, the ERISA Section 404(c) regulations, which generally make

participants in participant directed ERISA plans responsible for their own investment decisions, require

only that the plan make available to participants a menu of at least three investment alternatives from which

to choose, so long as (i) each of which is diversified, (ii) each has materially different risk characteristics,

and (iii) in the aggregate, allow participants, by choosing among them, “to achieve a portfolio with

aggregate risk and return characteristics at any point within the range normally appropriate for the

participant.” 29 C.F.R. §2550.404(c)-1(b).
24

a second financial institution. However, the contractual arrangements that allow for this

marketing frequently are with an entity that is affiliated with the insurance company, but

which does not itself meet the proposed definition of a “financial institution.” In order to

give effect to the intent of BIC Exemption, we request that the definition of a “financial

institution” in Section VIII(e) be revised to include all entities within an insurance group

that arrange for the marketing of financial products. Similarly, the definition of a

“financial institution” in Section VIII(e) should be revised to include banking entities that

do not have trust departments. Many providers, including State Farm Bank, do not have

trust powers or separate trust departments. In order to ensure consistent treatment,

Section VIII(e)(2) should be revised to cover all banks and savings associations.

G. Commission Fee Structures Benefit Customers.

State Farm also notes that the Proposal discourages the use of fee structures other

than level fee structures, even when alternative fee structures would be in the best interest

of the customer. Many alternative fee structures, such as sales loads and commissions,

are entirely appropriate for many customers and products. Investment products use

different fee structures to account for the different benefits they deliver to the consumer,

and the cost of providing the product or service. Because retirement saving is a longterm investment, fee structures should be evaluated over time. Often, when measured

over a period of several years, a sales load or commission proves to be more cost

effective to the customer than a level, ongoing percentage of assets under management

fee. Particularly for small investors, the overall cost of investment is extremely

important. See Exhibit A.

The Proposal assumes that level fee structures, as opposed to sales loads or

commissions, are always better for the customer. SEC and FINRA have recognized that

an array of fee structures can be appropriate for customers depending upon the specific

facts and circumstances at hand (hence, the required suitability reviews).35 Each type of

fee arrangement has its place and time where it works for the customer and where it does

not. The SEC and FINRA require a suitability review of recommendations of level fee

structures to broker-dealer customers to ensure that the customer will benefit in the longrun by the fee structure selected and will not be subject to “reverse churning” (i.e., the

practice of a broker or adviser who is paid an asset-based fee providing minimal services

and conducting too few portfolio transactions over time for the customer’s account to

justify the AUM-based fees).36 Effectively prohibiting a compensation structure that has

35 SEC, Office of Compliance Inspections and Examinations, Examination Priorities for 2015 2 (2015),

available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf;

Daisy Maxey, SEC Targets Reverse Churning by Advisers, WALL ST. J., Feb. 24, 2014, available at

http://www.wsj.com/articles/SB10001424052702304610404579403251590760602; Mary Jo White, Chair,

SEC, Remarks at National Society of Compliance Professionals National Membership Meeting (Oct. 22,

2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370539960588; Press Release,

FINRA, FINRA Reminds Securities Firms Fee-Based Accounts Must Be Appropriate (Nov. 4, 2003),

available at http://www.finra.org/newsroom/2003/nasd-reminds-securities-firms-fee-based-accounts-mustbe-appropriate.

36 Maxey, supra note 35.
25

been in place for decades and served customers well is not the most effective and

efficient way to promote the long-term interest of savers who, in many cases, are better

off paying a sales commission on a transactional basis rather than a significant ongoing

AUM fee, especially when no further service is provided.37 The market has shown that

customers like having a choice of fee structures.

Indeed, outside of the investment or benefit plan/IRA context, sales loads,

commissions and other variable fee structures are entirely permissible.38 There is nothing

special about retirement investment that justifies a perception that these fee structures are

problematic when they are perfectly normal and accepted for all other investments. As

discussed above, Congress in 1999,39 and again in 2010,40 specifically preserved

commission and similar fee structures for broker-dealers, including when serving IRA

and Plan accounts. Hence, the Proposal should not disfavor commission-based, non-level

compensation models.

IV. The Costs of the Proposal Are Understated and the Benefits Are Overstated.

A. DOL’s Cost Analysis is Incomplete.

DOL’s cost analysis has grossly underestimated the time and expense individuals

and firms will incur to comply with the Proposal. Indeed, the cost estimates appear to

have been established on the basis of a limited sample of data, both in terms of volume

and breadth, some of which may be irrelevant to the Proposal’s requirements.41

Moreover, although DOL’s analysis contemplates up to a dozen systems, program, legal,

and compliance costs,42 its analysis of potential indirect costs is, at best, cursory. On this

subject DOL concludes, without explanation or reference to empirical support, that it

expects “[the Proposal] to have little effect on access to investment advice.”43

The Proposal suggests that, despite DOL’s current lack of reliable cost-benefit

evidence, the current regulatory impact analysis is sufficient because such evidence will

become available after the proposed rules are implemented. This suggestion is

inconsistent with the requirements of administrative rulemaking and undermines the

central purpose of Executive Order 12866: to require an economic basis for an agency to

37 Based on data from Strategic Insight.

38 See e.g., FINRA Rule 2121; Fair Prices and Commissions (permitting commissions and markups in

securities transactions).

39 Gramm-Leach-Bliley Act § 201, 15 U.S.C. § 78c(a)(4).

40 DFA § 913(g), 15 U.S.C. § 78o(k).

41 DOL, Fiduciary Investment Advice, Regulatory Impact Analysis 160 (Apr. 14, 2015) (“Regulatory

Impact Analysis”) (“[D]ue to the lack of other data sources on which [DOL] could base its cost estimates

for the proposal, [DOL] used estimates submitted by SIFMA, IAA, and Charles Schwab to the SEC in

response to its request to estimate costs.”).

42 See id. at 161.

43 Id. at 175.
26

make an informed decision as to whether and how to finalize proposed rules. A postpromulgation analysis defeats the purpose: a robust and accurate cost-benefit analysis

must accompany proposed rules.

We note that the Supreme Court recently addressed the importance of a robust

cost/benefit analysis to federal agency rulemaking that takes into account all direct and

indirect costs, and reversed an agency rulemaking that failed to do so.44 Although costs

incurred by affected industry participants are an important part of this analysis, the Court

stressed that the analysis an agency must undertake is far broader in scope: “In addition,

‘cost’ includes more than the expense of complying with regulations; any disadvantage

could be termed a cost.”45

It follows that there is a broader range of costs that DOL must consider—in

particular, the cost to Americans, especially those who may be traditionally underserved

by the financial services industry, who will have fewer choices for and less access to

retirement services if industry participants exit the business or decline to enter the

business in the face of increasing compliance costs and regulatory risk. Lack of access

could lead to harmful under-saving and greater reliance by these individuals on already

strained public safety nets.

B. The Predicted Benefits of the Proposal Are Overstated and Misleading.

On the benefit side of its analysis, DOL uses estimates of savings and additional

net returns to investors that are speculative and unrealistically optimistic. Moreover,

DOL’s expectation of savings to investors must be balanced with a careful analysis as to

the likelihood and effect of the withdrawal of services from the market. The preamble to

the Proposal gives only the slightest of nods to that issue:

Some small service providers may find that the increased costs associated

with ERISA fiduciary status outweigh the benefit of continuing to service

the ERISA plan market or the IRA market. The Department does not

believe that this outcome would be widespread or that it would result in a

diminution of the amount or quality of advice available to small or other

retirement savers.46

DOL has not sought to quantify the number, geographic locations, or market

sectors where such small providers may depart the market. State Farm has over 18,000

independent contractor agents who function as small service providers. As discussed in

greater detail below, the Proposal would place very real burdens on these agents and

other financial industry participants. Some firms may find that the burdens “outweigh the

benefit of continuing to service” this market, which in turn could result in significant lost

44 Michigan et al. v. Envtl. Prot. Agency et al., Nos. 14-46, 14-47, 14-49, 2015 WL 2473453, at *6

(S. Ct. June 29, 2015).

45 Id. at *7.

46 80 Fed. Reg. at 21,954.
27

benefits to the investing public. Nor has DOL sought to quantify the benefits that

financial services firms provide to their customers under the current regulatory

framework.47 These benefits, which include starting customers on retirement planning

and saving, and counseling these customers in adverse market conditions, may well be

substantially diminished by the restrictions contained in the Proposal. DOL must seek,

analyze and carefully consider such data before acting on its Proposal.48

Finally, with respect to the substantive basis for undertaking its proposed reforms,

DOL states that investors, most notably IRA investors, “cannot effectively assess the

quality of the investment advice they receive or even the investment results they

achieve.”49 DOL also cites a study by the RAND Institute that found that consumers do

not understand the technical distinctions between brokers and registered investment

advisers.50 Yet, the RAND study also found that despite this purported confusion, the

study’s respondents were largely satisfied with the quality of and the personal nature of

the service provided.51 This level of satisfaction that consumers have with investment

professionals should not be ignored. However, DOL, using its own largely conclusory

analysis as its justification, presumes that consumers are incapable of measuring the

quality of the advice they receive. On the basis of this presumption, DOL appears to

discredit data on consumers’ reported level of satisfaction with the financial professionals

who provide them with advice and services, and even their understanding of the returns

received on their investments. We disagree with this logic and encourage DOL to

produce a well-reasoned assessment of anticipated benefits under the proposed rules

which properly addresses the fact that investors largely are satisfied with current services,

rather than solving for a problem DOL presupposes to exist.

C. DOL’s Estimated Costs of Compliance Are Understated.

In general, among other things, to implement these regulations, a firm will have

to:

47 Litan & Singer, supra note 9.

48 In its press release regarding the withdrawal of its earlier 2010 proposal, DOL stated: “The reproposal is designed to inform judgments, ensure an open exchange of views and protect consumers while

avoiding unjustified costs and burdens. When finalized, this important consumer protection initiative will

safeguard workers who are saving for retirement as well as the businesses that provide retirement plans to

America's working men and women. The decision to re-propose is in part a response to requests from the

public, including members of Congress, that the agency allow an opportunity for more input on the rule.”

Press Release, U.S. Department of Labor, News Release No. 11-1382-NAT (Sept. 19, 2011). DOL also

promised in the press release to “harmonize” its reproposal with rulemakings by the SEC and the CFTC.

DOL did not accomplish what it sought in the reproposal, as the Proposal will create unjustified costs and

burdens and will overshadow and make moot the carefully considered rulemaking efforts of other

regulators.

49 Regulatory Impact Analysis, supra note 41, at 59.

50 80 Fed. Reg. at 21,934.

51 Angela A. Hung et al., Investor and Industry Perspectives on Investment Advisers and Broker-Dealers,

RAND Institute for Civil Justice 87 (2008), available at http://www.sec.gov/news/press/2008/2008-

1_randiabdreport.pdf.
28

 review and assess its current operations;

 determine its abilities and litigation risk appetite;

 revise its compliance structures;

 develop, implement, and maintain new training protocols and associated

systems and retrain thousands of employees, representatives, and agents

on the complex new requirements;

 create new sales literature, including hundreds of print and online

marketing materials;

 revise offering documents;

 create a brand-new, untested “mini-EDGAR” machine-readable website;

 revise compensation systems;

 create all-new supervisory policies and procedures;

 establish new compliance and audit parameters and implement new

training modules; and

 educate millions of customers on the changes, send new documents to

them, meet one-on-one with many of them, and persuade them to sign and

return updated agreements and disclosure acknowledgements.

DOL estimates that it will take approximately 100 hours for a company to update

its computer systems and websites to comply with disclosure and contractual

requirements of the Proposal. This estimate is off by a multiple of at least 1,000. To

illustrate, consider that compensation systems at State Farm are integrated across group

business lines. Each systems change would require a series of underlying adjustments—

including, for example, adjustment to vendor contracts or the development of new vendor

relationships and the purchase, adoption, and maintenance of new software. New

standards will require changes to systems that operate across all lines of business and

across the entire country.

Other expenses would include the costs associated with:

 the development of personalized cost and expense disclosures for each

customer, which will require substantial expenditures and IT systems

programming;

 the commitment of time and resources from multiple business units, such

as agency/sales training, legal, financial operations, mutual funds,

banking, life insurance, internal auditing, risk management, compliance
29

and ethics, and others that will be called upon to implement compliance

with the Proposal;

 extensive, costly revisions to marketing and sales process materials. For

example, we estimate that approximately 700,000 customer accounts will

be impacted under the proposed rules. This would require the updating of

millions of printed marketing materials which contain discussion of

ERISA and non-ERISA plans and arrangements;

 substantive and system-related reforms to training programs. For

example, significant effort will be required to deliver training protocols to

our agency distribution channel, which includes 77,493 total associates—

18,261 agents, 56,620 employees of licensed agents, and 2,612 internal

State Farm employees responsible for carrying out a multitude of internal

functions and company operations. This cost will be in the millions of

dollars; and

 new and ongoing expenses for over 18,000 State Farm agents (not just

those who are registered representatives). Each agent’s business will have

to adopt and continually monitor new procedures to ensure compliance

with the new rules and fiduciary standards.

V. A Longer Implementation Period And a More Expansive Grandfathering

Clause Are Required.

A. A Longer Implementation Period Is Critical.

The Proposal would allow an eight month compliance period for firms to reinvent

business models that have evolved gradually since the enactment in 1974 of ERISA and

the Code’s prohibited transaction rules. Within eight months, firms will also have to

design (or hire consultants to create) machine-readable website data displays that have

never before been required or implemented for any industry. They will also have to

create and execute new contractual arrangements with, and obtain signatures from, tens

of millions of customers throughout the industry (and hundreds of thousands of

customers at State Farm alone). In addition, they will need to create new business and

compensation models compliant with the very complex proposed rules. And these are

just a few of the tasks that will be required—there will be many more.

The proposed eight-month implementation period appears arbitrary and is

inadequate. It is unrelated to any business’ operational realities and it disregards the

effort that will be required in order to avoid disruptions in the ability of financial services

firms to meet customer needs. To illustrate the scope of the work required, consider that

State Farm, with over 18,000 agents and operations spread over the United States, will

likely have to:

 develop new product and services configurations;
30

 obtain approvals for any new product changes from the appropriate

functional regulators;

 create, conform and update account agreements, revise brochures, forms,

and other documentation;

 update computer, compensation, and accounting systems;

 create and implement new compensation structures; and

 develop and conduct training for personnel and implement new policies

and procedures, including oversight and compliance structures.

The Proposal also fails to take into account the substantial lead-time required to

implement complex changes to long-term compensation arrangements that are already in

place between insurance companies and agents and broker-dealers and registered

representatives.

The implementation time period should be at least three years to enable completion of

this work. We note that other federal agencies have allowed significantly longer periods

than DOL has proposed for implementation of complex new rules.52 The effective date

prescribed in the Proposal fails to take into account the hundreds of thousands of hours

that will be necessary for any large financial institution to perform these tasks. Further,

the effective date should be at the start of a fiscal year in order to provide a clean break

with respect to changes to procedures and changes to compensation arrangements, some

of which may span the full calendar year.

B. A More Expansive Grandfather Clause is Needed.

If the proposed rules are adopted, they should provide for complete

grandfathering of all existing tax-qualified product customers (including ERISA plans

and other tax-qualified accounts maintained at one financial institution but funded with a

product from another financial institution), whether or not new money is added to such a

52 See, e.g., Institutional Eligibility Under the Higher Education Act of 1965, as Amended; Delay of

Implementation Date, 79 Fed. Reg. 35,692 (June 24, 2014) (providing a nearly five-year implementation

deferral for Department of Education rule); Prohibitions and Restrictions on Proprietary Trading and

Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 79 Fed. Reg. 5536

(Jan. 31, 2014) (deferring effective date of the Volcker Rule to five years after enactment and three years

after 2012 statutory effective date specified in 12 U.S.C. § 1851(c), with subsequent deferral of compliance

for preexisting investments through July 21, 2017); Disclosure for Asset-Backed Securities Required by

Section 943 of Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 Fed. Reg. 4489 (Jan. 26,

2011) (deferring compliance with SEC rule by municipal issuers of asset-backed securities for four years);

Press Release, Federal Trade Commission (“FTC”), FTC Extends Enforcement Deadline for Identity Theft

Red Flag Rules (May 28, 2010), available at https://www.ftc.gov/news-events/press-releases/2010/05/ftcextends-enforcement-deadline-identity-theft-red-flags-rule (announcing the FTC’s three-year deferral of

enforcement of a rule adopted in 2007); see also Money Market Fund Reform; Amendments to Form PF,

79 Fed. Reg. 47,736 (Aug. 14, 2014) (deferring compliance date with SEC rule for over two years).
31

tax-qualified customer relationship after the implementation date. State Farm has entered

into hundreds of thousands of account and investment agreements with customers that

apply to tax-qualified retirement vehicles. State Farm has also entered into thousands of

contracts with independent contractor agents, which would be affected by the Proposal.

Each one of those contracts would be drastically affected if the Proposal were approved

and applied retroactively. We question the legality of retroactively changing the terms of

hundreds of thousands of existing contracts, all of which were legally negotiated and

executed in a manner fully consistent with federal and state laws.

If a complete grandfathering provision for all existing tax-qualified product

customers is not adopted, firms will be required to fundamentally change the nature of

their customer relationships involving existing tax-qualified accounts. In many cases,

customers have paid an initial sales charge with an understanding that they would have

access to additional investment advice for those purchases without incurring additional

fees. For example, a customer nearing retirement may want advice on how to re-allocate

his or her investments in order to match a changing risk profile. In the current

environment, the registered representative would provide the customer with the advice

without receiving any significant additional compensation. Without a comprehensive

grandfather provision, it will be more costly for firms to provide advice to these

customers and, as a result, may charge a fee for such services or reduce access to such

advice. Clearly, this result is not in the best interest of the customer.

Further, the limited grandfathering clause in the Proposal for existing agreements

with respect to the conditions of the proposed BIC Exemption would require that

companies and their representatives or agents provide no “advice” to an existing account.

The term “advice” is so broadly defined that it effectively precludes, before a contract is

signed, all communications—oral or written—with the customer as to his or her existing

accounts, or even responding to the most basic of customer questions about existing IRA

investments. This will not serve the best interests of the customer. It is also hard to

imagine how an agent could document, for purposes of compliance, that he or she did not

provide “advice” during a conversation with a customer. A complete grandfathering of

existing tax-qualified product customers is necessary to avoid extreme disruptions to

communications between customers and agents, and to allow agents to demonstrate

compliance.

VI. DOL Should Consider the Efforts of, and Coordinate With, Functional

Regulators.

DOL’s concerns regarding the financial security of American retirees are

legitimate. But DOL must recognize that the Proposal could effectively result in many

small investors receiving no advice at all and cause many people to ignore or postpone

retirement saving.

This is not to say that cost savings cannot be realized in tax-advantaged retirement

accounts, or that the interests of providers and investors cannot be more closely aligned.

As noted earlier, the SEC has been working on the issues related to the appropriate

standard of care for broker-dealers and investment advisers pursuant to the authority
32

granted under the Section 913 of the DFA. The SEC, as the regulator of investment

advisers and broker-dealers, continues to focus on the complex task of determining

proper standards of care. We believe the most efficient and effective method of

constructing a cohesive framework for additional consumer protection is one that

includes the coordinated efforts of all relevant agencies.

DOL must also consider how proposals advocated by the Securities Industry and

Financial Markets Association (SIFMA) would change the suitability standard that

currently applies to broker-dealers and their registered representatives with a best interest

standard. Interested parties have also called for bipartisan legislation to establish a best

interest standard, with workable rules that maintain access to investment assistance for

low- and middle-income individuals and small businesses. Coordination with other

regulators and consideration of the positions of other interested parties would also

identify other potential solutions the Proposal omits, such as requirements for more clear

and consistent disclosure practices that would better serve investors without threatening

to disrupt the provision of services. In any case, State Farm would welcome the

opportunity to work with DOL, the SEC, and FINRA in a collective effort on standards

of care related to tax-qualified accounts.

VII. The Proposal Fails to Address Costs to State Court Systems and the Impact on

State Insurance and Broker Regulation.

The Proposal does not adequately address its federalism implications. As

required by Executive Order 13132,53 a proposing agency must provide to the Director of

the Office of Management and Budget a federalism summary impact statement. The

statement must describe the extent of the agency’s prior consultation with state and local

officials, summarize their concerns and the agency’s position, and state the extent to

which the concerns of state and local officials have been met.

Executive Order 13132 was issued in furtherance of the Unfunded Mandates

Reform Act, of which one of the stated purposes is “to end the imposition, in the absence

of full consideration by Congress, of Federal mandates on State, local, and tribal

governments without adequate Federal funding, in a manner that may displace other

essential State, local, and tribal governmental priorities.”54 Notwithstanding the certain

interference with state insurance and securities regulatory programs, and the costs and

impositions to state court systems of litigation over the BIC Exemption, DOL has

dismissed any possibility of federalism implications, stating that it has “no implications

for the States or the relationship or distribution of power between the national

government and the States.”55

53 Exec. Order No. 13132, 64 Fed. Reg. 43,255 (Aug. 10, 1999).

54 2 U.S.C. § 1501 et. seq. (1995).

55 80 Fed. Reg. at 21,956.
33

ESSENTIAL CHANGES TO MAKE THE PROPOSAL

POTENTIALLY VIABLE

As described above, an effort at regulatory reform that is coordinated with

functional regulators, more inclusive of the variety of established delivery models and

more supportive of consumer choice is in the best interest of consumers and small

businesses. However, in the event DOL disagrees and determines it should move

forward independently with the Proposal, we strongly believe that certain changes are

essential to make the proposed rules practicable and workable without undue disruption

of the retirement investment market. Specifically, any final rules would be viable only if

they were to:

 Adopt a broad seller’s exception that includes non-fiduciary selling

activity as originally contemplated in DOL’s 2010 proposal;

 Preserve DOL Interpretive Bulletin 96-1 in order to allow investors to

receive educational materials as they do today, without establishment of

any fiduciary relationship;

 Make the proposed BIC Exemption more workable by:

o Revising the timing for execution of a best-interest contract so that

execution is required at the time of the sale of a product, not before

having any discussions.

o Maintaining existing enforcement regimes and not creating a

private right of action for IRAs, to ensure consistency with

Congressional intent and well-established understandings under

current law;

o Providing safe harbors, rebuttable presumptions and other

objective standards so that financial institutions and advisers have

clear guidance as to the behavior the rules are seeking to achieve;

o Deleting the proposed requirement of making recommendations

with respect to “all” asset classes;

o Removing the additional requirements imposed on proprietary

products and clarifying that, if properly disclosed, proprietary

products do not constitute evidence of a violation of the best

interest standard;

o Revising the definition of a “financial institution” to include (i) all

depository institutions, whether or not they have trust powers, and

(ii) all entities within an insurance group that arrange for the

marketing of insurance products;
34

o Simplifying and reducing the burdens associated with disclosures

required under the Proposal and coordinating new disclosure

requirements with all governing agencies; and

o Preserving the choices that investors have today in determining the

level of service and the fee structure they want, including the

option of commission fee structures;

 Provide an implementation period of at least 3 years; and

 Provide complete grandfathering of all existing tax-qualified product

customers (including ERISA plans and other tax-qualified accounts

maintained at one financial institution but funded with a product from

another financial institution), whether or not new money is added to such a

tax-qualified customer relationship after the implementation date.

CONCLUSION

State Farm appreciates the opportunity to provide these comments to DOL, and

further appreciates DOL’s objective of protecting retirement investors. As we have

explained in our comments, we believe the current Proposal is unworkable as a practical

matter, and the anticipated effects of this particular Proposal run counter to DOL’s

desired objectives. We urge DOL, rather than moving forward with the Proposal, instead

to engage in a collaborative and considered effort involving multiple functional

regulators, the financial services industry, and consumer stakeholders. State Farm is

prepared to participate in such a collaborative effort, and to provide the benefit of our

experience and point of view to those similarly concerned about providing financial

security to all Americans.
35

EXHIBIT A

The chart above illustrates ‘Investor Costs by Sales Method’ using the State Farm median account

size of $6,500 and a range of holding periods. The average State Farm mutual fund shareholder

holding period is longer than the industry average.

Please refer to the chart and note the following points:

1. In looking at only year 1 investor costs, it would appear that the commission-based2

method is more expensive than the wrap fee3 method ($342 vs. $99).

2. However, in looking at the longer 8-year and 10-year cumulative investor costs, the wrap

fee method is actually much more expensive than the commission-based method.

i. For the 8-year cumulative period, wrap fee method expenses are 2.0 times more

expensive than the commission based method ($981 vs. $491).

ii. For the 10-year cumulative period, wrap fee method expenses are 2.4 times more

expensive than the commission-based method ($1,306 vs. $546).

3. Notably, during year 4, the wrap fee method begins to be more expensive for the investor

($433 vs. $398).

1 Both methods assume 6% annual market growth on original investment amount; no additional contributions; and

similar underlying fund expenses (excluding 12b-1 fees).

2

State Farm front-load commission at $6,500 is 5.0%; costs also include 0.25% annual 12b-1 fee.

3 Based upon data from Strategic Insight, the industry average wrap fee at all investment levels is 1.10%, while the

industry average wrap fee for amounts below $100,000 is 1.48%.