Page 2 of 36

services and advice to corporations, institutions and individuals. It has developed an employee 

code of conduct that stresses the primacy of client interests over those of the company or 

individual employees, and has articulated four “Core Values” that guide our business approach, 

the first of which is “Putting Clients First.”2

Morgan Stanley’s wealth management division, Morgan Stanley Wealth Management 

(“Wealth Management”), has approximately 16,000 financial advisers throughout the United 

States servicing approximately 6.6 million wealth management accounts with over $2 trillion in 

client assets. Wealth Management provides services to individual retirement accounts (“IRAs”) 

and qualified retirement plan accounts through both brokerage accounts with transaction based 

pricing (e.g., commissions, selling concessions), and investment advisory accounts where 

customers pay an annual fee based on the value of the assets in the account. Where we act as a 

broker, in addition to transaction execution, we also offer investor education, research and 

personalized information about financial products and services through our financial advisers.

Morgan Stanley’s institutional securities business segment provides financial services to a 

diverse group of corporate and other institutional clients globally, primarily through wholly owned 

subsidiaries, and also conducts sales and trading activities worldwide, as principal and agent, and 

provides related financing services on behalf of institutional investors. Morgan Stanley’s 

investment management business segment offers products and strategies to institutional investors 

worldwide, including corporations, pension plans, endowments, foundations, sovereign wealth 

funds, insurance companies and banks through a broad range of pooled vehicles and separate 

accounts.

II. Summary

Morgan Stanley is comprehensively regulated under the federal securities laws, including 

examination and oversight by the U.S. Securities and Exchange Commission (“SEC”) and the 

Financial Industry Regulatory Authority (“FINRA”). Whether acting in a brokerage or advisory 

capacity, Morgan Stanley must observe high standards of commercial honor and just and equitable 

principles of trade. In accordance with these regulations and our Core Values, Morgan Stanley 

supports the development of a uniform “best interests” of the customer standard applicable to all 

personalized advice about securities to retail customers, regardless of account type. By 

introducing an additional standard of care applicable only to retirement accounts, the Proposal will 

add to consumer confusion and result in regulatory and operational inefficiencies. 

Morgan Stanley respectfully believes that a new, uniform fiduciary standard, promulgated 

by the SEC, is the most comprehensive way to enhance consumer protection across all retail 

account types. If the Department adopts its Fiduciary Proposal before the SEC takes action, it will 

 Management”) is registered as a broker-dealer and investment adviser with the SEC and a member of FINRA and the 

NYSE. Morgan Stanley & Co. LLC is registered as a broker-dealer with the SEC, a member of FINRA and the NYSE, 

and registered as a futures commission merchant with the CFTC.

2 The remaining Core Values are “Doing the Right Thing,” “Leading with Exceptional Ideas,” and “Giving Back.”
Page 3 of 36

exacerbate the current lack of uniformity in fiduciary standards. 3 Thus, Morgan Stanley 

respectfully asserts that any Fiduciary Proposal await (and be consistent with) prospective SEC 

rule making. 

Morgan Stanley strongly agrees with the Department that retirement investors should have 

access to transparent and unbiased investment information. However, in its current form, the 

Department’s Fiduciary Proposal will curtail access to many beneficial services and products 

available to retail retirement investors. That is because, if the Proposal is adopted as written, firms 

and their representatives will become fiduciaries for virtually any retirement plan or IRA 

investment service and will be required to either: (1) comply with a Best Interest Contract (“BIC”) 

Exemption, which we believe is unworkable and which unduly restricts the universe of 

permissible investments (and is not currently available for many retirement plans), or (2) curtail 

investment information provided through existing retirement plan and IRA brokerage options. Of 

course, under the Proposal retirement savers and sponsors of retirement plans could still access 

advice by enrolling in fee based advisory programs that do not rely on the BIC, but these types of 

programs may not be appropriate or cost effective for all consumers. Retirement savers should not 

lose the choice of accessing some level of personalized information and guidance at no additional 

cost when paying transaction fees in a traditional brokerage account as a result of the Proposal. 

If the Department proceeds with the Proposal before SEC rule making, the following 

clarifications and adjustments are critical to make the Proposal practically and operationally 

workable, preserving consumer choice and achieving the consumer protection goals that both 

Morgan Stanley and the Department share. As we detail below in the body of this letter, those 

needed changes include:

• Extending the applicability date of the final rule. Even working diligently, firms will need 

more than eight months from the issuance of the final rule to implement the extensive 

systems, procedural, and contractual changes necessary to comply with the Proposal. We 

therefore request extension of the applicability date until 24 months following the 

publication of the final rule.

• Revisions to the BIC Exemption to make it truly “principles based,” which include: (1) 

clarifying how and when firms and financial advisers may receive differential 

compensation, (2) adopting a feasible disclosure scheme that provides meaningful 

information at the most appropriate time, and which does not result in retirement clients 

getting less timely trade execution than other clients, (3) allowing a full range of 

permissible “Assets,” and (4) clarifying and tailoring the contractual requirements of the 

BIC so that contracts do not have to be entered into before any recommendations occur and 

so that the warranties do not create excessive litigation risk. Without meaningful changes 

to the BIC Exemption, retirement savers will have significantly limited access to the 

 3 In the IRA market alone, the Department’s Fiduciary Proposal could affect more than 34 million individual accounts 

holding over $7.4 trillion dollars. Most consumers who maintain both retirement and non-retirement accounts will not 

want to restrict the IRA portion of their assets to a limited product or service set (such as an advisory flat fee model, 

significantly limited brokerage products and services, or potentially receiving no investment guidance at all). 
Page 4 of 36

transaction based model of obtaining investment education and assistance that many 

consumers currently utilize. 

• Changes to the definition of a fiduciary to ensure that routine sales interactions (including 

responding to Requests For Proposals) and the provision of basic investment-related 

information do not transform a financial institution into a fiduciary, necessitating 

fundamental changes to, and placing limitations on, the ability to provide beneficial 

information, products and services. We have proposed an alternative facts and 

circumstances test that focuses on the reasonable belief of the advice recipient. 

Alternatively, we have suggested specific language changes that include eliminating the 

“specifically directed to” provision and introducing the concept that the advice recipient 

must reasonably rely on a recommendation. In short, in whatever approach is adopted, the 

factual context should indicate a fiduciary relationship rather than a sales relationship.

• Providing a new “carve-out” for rollover discussions that complies with FINRA Notice 

13-45. Notice 13-45 imposes a framework to ensure that rollover discussions are fair, 

balanced and not misleading while at the same time preserving consumers’ access to

information to assist them in making informed choices. In the absence of such a carve-out, 

the BIC Exemption should be revised to address the full array of rollover advice (in 

particular, its application to distribution advice and selecting the rollover vehicle). 

• Revisions to the Principal Transaction Exemption to allow firms to better provide liquidity 

to consumers, which is especially important during market downturns and periods of

market volatility. These revisions include: (1) expanding the exemption to cover 

additional types of debt and some equities, (2) eliminating the requirement for two price 

quotes, and (3) eliminating or clarifying certain terms and conditions (e.g., “moderate 

credit risk” and “sufficiently liquid”). 

• An expanded counterparty carve-out (the “seller’s exception”) that allows financial 

institutions to market services and provide investment information to all markets – large 

employers, small employers, participants in 401(k) plans, and IRAs. 

• A modification to both the BIC and Principal Transaction Exemptions which allows a 

financial institution to rely on the Exemptions for so long as they act in “good faith and 

with reasonable diligence” in their compliance efforts and mitigate any compliance errors 

within a reasonable period upon discovery. This standard was adopted by the 

Department’s 408b-2 regulation, and should similarly apply here in light of the Proposal’s 

complexity and compliance requirements.

These and additional recommended changes to the Proposal are set forth in detail in the 

remainder of this letter. Implementing these critical changes to the Proposal will not undermine 

the Department’s stated goals, but will instead ensure that retirement investors have continued

access to beneficial investment information. We appreciate the opportunity to provide comments 

on the Proposal and look forward to a constructive dialogue with the Department to ensure that 

retirement savers are protected from conflicts of interest and continue to have access to quality 

investment assistance and advice. 
Page 5 of 36

III. The Department Should Refine Its Proposed Definition of Fiduciary

We believe that the Department’s proposed definition of fiduciary is overly broad and 

should be replaced with a facts and circumstances “reasonable belief” standard as described 

below, which will allow for consumer access to basic information and allow financial advisers to 

educate, inform and sell products and services. If the Department does not adopt this proposed 

alternative approach, we believe the changes set forth below (which introduce the concept of 

“reasonable reliance”) must be made to the Department’s functional definition in order to protect 

valid educational, marketing and sales activities. 

Under the Proposal, virtually any conversation or written correspondence with a current or 

prospective client about an investment, a distribution or rollover, or the hiring of an investment 

adviser or manager, could be a fiduciary act since the communication needs only to be 

“specifically directed” to the individual and does not need to be tailored to their particular needs. 

Routinely, such conversations will include general ideas, hypotheticals, suggestions or proposals, 

and there could be some basic understanding that the information may be considered by the client 

or prospect. However, these basic interactions are all that is needed to become a fiduciary under 

the Department’s Proposal – regardless of whether the educational or sales-related information 

serves as a material basis for the consumer’s decision or is in any way individualized to their 

circumstances. 

The implications of this broadened definition are sweeping. Because the BIC Exemption 

may be unworkable to avoid otherwise prohibited transactions, this broadened definition threatens 

to deprive consumers, particularly IRA holders, of basic information or drive them into programs 

and fee structures that may not be appropriate for their investment needs if firms limit or stop 

providing brokerage services. Some examples of valid, routine activities of financial institutions 

and advisers which we are concerned could be deemed to be fiduciary activities under the Proposal 

include:

• Ordinary communications involving any kind of discussion, comparison or identification 

of available investment options, strategies, advisers or managers. For example, a financial 

adviser communicating with a prospective client could become a fiduciary by making 

suggestions about or comparisons between alternative advisory account programs offered 

by Morgan Stanley. 

• The simple act of distributing research reports that analyze particular securities to a large 

group of clients or potential clients might be a fiduciary action since it could be viewed as 

“specifically directed to” the consumer. 

• Presenting a sample 401(k) investment option menu in connection with an RFP response 

for retirement plan services. 

• Responding to a plan participant’s questions about which available investment options 

under their 401(k) plan fit in a particular asset class.
Page 6 of 36

In each case, it is unlikely that a client would be willing to enter into a contract before 

receiving such basic information. We are particularly concerned that, as noted above, even if 

financial institutions were to limit their retirement account offerings to only asset based fee 

advisory programs (that do not require an exemption because conflicts are eliminated through 

offsets or fee credits), merely suggesting those programs to a prospect or existing brokerage client 

could be deemed to be fiduciary advice for which no practical sales exemption is available. None 

of the preceding activities are fiduciary activities under current law, and revisions should be made 

to the Proposal in order to clearly permit these activities and communications to continue, as they 

provide important and necessary information to consumers. 

Furthermore, the broad coverage of the Proposal is particularly troublesome in the 

institutional space. Under the Proposal many ordinary course investment discussions could be 

viewed as “recommendations” and thus as investment advice, such that even discussions with the

sophisticated asset manager of a large plan (which is already protected by ERISA’s rigorous 

fiduciary regime) may need to comply with a carve-out to avoid fiduciary status. Morgan Stanley 

points to the Department’s statement set forth in the Fact Sheet accompanying the Fiduciary 

Proposal that additional protections are not needed for large plans “managed by financial experts 

who are themselves fiduciaries” and are “under a duty to look out for the participants’ best 

interests.” Moreover, the Department acknowledges that such fiduciaries already understand “that 

if a broker promotes a product, the broker may be trying to sell them something rather than provide 

advice in their best interest.” Accordingly, the Department’s own view appears to be that the 

Proposal should not consider such transactions fiduciary investment advice. Rather, conversations 

with such large plans should be presumed not to be investment advice without regard to any 

carve-out.

To best address these concerns about the breadth of the definition, the Department should

refine the Proposal to allow for consumer access to basic information and allow financial advisers 

to educate, inform and sell products and services. Specifically, we suggest that the Department 

delete the currently proposed functional test found in 29 CFR 2510.3-21(a)(2)(ii) and replace it 

with the following –

(ii) Renders the advice in a manner where the advice recipient reasonably believes that 

such person is acting in their best interest in providing such advice and is not acting in an 

educational, marketing or sales capacity. This determination is based on the relevant facts 

and circumstances. Under this clause, relevant factors include the individualized nature of 

the advice provided, the reliance placed on it by the advice recipient and any disclosures 

provided to the advice recipient; however, no single factor shall be determinative. 

This approach addresses the Department’s key concerns about potential gaps under the current 

regulation’s 5-part test. Under this test, a person could still be a fiduciary even if they disclaimed 

fiduciary status, but then acted in a way to create consumer reliance (e.g., provided individualized 

and specific recommendations). It would also cover service providers that make important, 

personalized, “one time” recommendations. But this approach would protect valid educational, 

marketing and sales activities. In addition, adopting this approach would still require a seller’s 

carve-out since the carve-out provides a clear exception from fiduciary status and this test would 

still be appropriately factual.
Page 7 of 36

If the Department does not adopt the alternative approach suggested above, then the 

necessary changes to the proposed functional definition of fiduciary include: (1) eliminating the 

“specifically directed to” prong of the investment advice definition, or, alternatively, limiting its 

application to communications directed to a specific client so as not to pick up general 

communications (e.g., research, market reports and other materials sent to a large client base), and 

(2) adding a requirement that the advice given be “reasonably relied on” by the consumer or a 

“material” factor in the consumer’s investment decision rather than information simply provided 

“for consideration.” Thus, 29 C.F.R. 2510.3-21(a)(2)(ii) would be revised as follows:

Renders the advice pursuant to a mutual written or verbal agreement, arrangement or 

understanding that the advice is individualized to, or that such advice is specifically 

directed to, the advice recipient for consideration and is reasonably relied on or material in 

making investment or management decisions with respect to securities or other property.

In addition, the Department should eliminate the valuation prong of the “covered advice” portion 

of the definition, which is overreaching because it does not even require that a recommendation or 

call to action be made. The Department has already explicitly carved out ESOP valuations from 

this prong, and it is our understanding that ESOPs were the Department’s primary concern behind 

making valuations into “investment advice” in the first instance. It is unnecessary to make an 

unspecified group of benign valuation activities fiduciary actions under the Proposal. At the very 

least, if this prong is retained, then the Department should provide specific examples in the 

definition of what it considers to be the abusive valuation practices at which this prong is directed.

Finally, in response to the Department’s request for comments, Morgan Stanley would 

support using FINRA’s definition of “recommendation” and its related interpretations, provided 

that in any final rule the Department clarify that the term is not applied in a way that is broader than 

the current application by FINRA.

IV. The Department Should Clarify and Expand the Carve-outs from its 

Definition of Fiduciary

Because of the broad definition of fiduciary, even if that definition is modified as described 

above, it is also crucial that the carve-outs be expanded to apply more broadly and to provide 

specific relief for services to small employers and to IRAs. This would be consistent with the 

Department’s original 2010 proposed fiduciary definition. 

A. Counterparties Carve-out 

Limiting the counterparty carve-out to ERISA plans with more than 100 employees or 

fiduciaries that manage more than $100 million in employee benefit plan assets is arbitrary and 

will chill the communication of important basic investment information and valid sales activities 

to small employer plans and IRAs. The Department has cited no evidence that small employers 

and the participants in their plans (many maintained by the professional firms of doctors, lawyers, 

accountants, or consultants) or IRA holders are uniformly unsophisticated and unable to evaluate 

and consent to sales activities. In fact, it is contradictory to assume that such consumers will be 
Page 8 of 36

able to digest and understand the voluminous disclosures required under the Department’s BIC 

Exemption, but will be unable to understand a simple disclosure which explicitly discloses in plain 

English that with respect to a particular transaction, the adviser is merely acting as a seller of 

products or services, and not as a fiduciary. 

The carve-out should be extended and made available to additional parties under a wider 

variety of circumstances. Specific recommendations include:

• The counterparty carve-out should be extended to sales to smaller ERISA plans and to 

IRAs. This is particularly crucial for small employers since there is effectively no small 

employer defined contribution plan relief under the BIC Exemption (i.e., the BIC only 

covers plan sponsors of non-participant-directed plans with fewer than 100 participants). 

In the event the Department is reluctant to broadly extend the counterparty carve-out to all 

ERISA plans and IRAs, there should be, at a minimum, a carve-out for larger IRAs similar 

to the “accredited investor” standard widely used in the financial services industry, and 

defined under the federal securities laws. Under the federal securities laws, securities may 

not be offered or sold unless registered with the SEC or exempted from registration. 

Certain securities offerings that are exempt from registration (e.g., most alternative 

investments) may only be offered to investors who are accredited investors. The primary 

purpose of the accredited investor standard is to protect potential investors from risk by 

identifying investors that have sufficient financial sophistication and resources to 

understand and bear the risks associated with more complex or risky investments. 

Customers that meet this high standard, which include high-net-worth individuals and 

large companies, are given special status under the securities laws. Such sophisticated 

investors should be able to purchase the same assets in their IRAs as they are able to 

purchase in their non-retirement accounts. Finally, another alternative would be to permit 

the extension of the counterparty carve-out to smaller plans and IRAs if such clients 

receive an alert similar to that described in the Preamble to the BIC Exemption as a 

“cigarette warning”-style disclosure. 

• The Department should clarify that the counterparty carve-out applies to the provision of 

all services (the ambiguity is created by the fact that the carve-out focuses on transactions, 

such as sales, purchases, loans and contracts, rather than straightforward services 

arrangements).

• The representations under the carve-out should be required prior to the time the transaction 

occurs, not prior to the time a recommendation is made. This is in line with current 

practice under FINRA and SEC guidance, and we believe comports with the way in which 

clients prefer to do business (e.g., a number of conversations may take place, and then the 

client decides to go ahead with a particular transaction, such that requiring the 

representations before each recommendation would be unwieldy).

• Some investment transactions take place over a period of time. To simplify the carve-out, 

any requirements regarding representations relating to the number of participants and 

assets under management should be met prior to the initial transaction and such obligations 

should not be continuous in nature. 
Page 9 of 36

• The $100 million assets under management standard should be revised to include any type 

of assets under management, rather than be limited to only employee benefit plan assets, 

and lowered to $85 million (the Department’s dollar threshold under its QPAM 

Exemption, which is widely utilized with clients with which the counterparty carve-out 

may also be used). 

• The counterparty carve-out should apply to referral programs. Many financial institutions 

have programs that provide compensation to professionals (e.g., lawyers or accountants) 

for referrals (as regulated by SEC Rule 206(4)-3). Under these programs, an estate 

planning lawyer might refer their client to a financial institution for investment services or 

advice relating to their IRA and other non-retirement assets. Under the Proposal, such 

referrals would likely be considered fiduciary advice because they could be construed to be 

a recommendation of an investment adviser or manager. Yet the referral would not be 

subject to the counterparty carve-out because IRAs are not included. These referral 

programs are beneficial to consumers as they involve recommendations by the consumer’s 

other trusted professionals. Furthermore, they are already regulated by the SEC, which 

requires extensive conflict disclosures to the consumer, but would not be covered by the 

counterparty carve-out, as currently contemplated.

B. Swap Transaction Carve-out 

This carve-out does not sufficiently cover the entities that play a role in bilateral and 

cleared swap transactions such as clearing brokers, IRAs and commingled vehicles (e.g., bank 

collective trusts or hedge funds holding ERISA plan assets). Additionally, the carve-out conflicts 

with recently issued guidance (Advisory Opinion 2013-01A), where the Department indicated that 

clearing brokers would not be deemed fiduciaries to the extent they exercised certain close-out 

rights (provided the underlying transaction was governed by an applicable prohibited transaction 

exemption). Accordingly, Morgan Stanley asks that the Department expand the swap transaction 

carve-out to cover IRAs, pooled funds that hold plan assets, and clearing firms. These expansions 

will better capture the scope of participants currently entering into such transactions and prevent 

service disruption. 

C. Platform Carve-out 

The courts have recognized that constructing and offering an investment product with 

investment options is not a fiduciary act, and we believe the Department should do the same.4

 

Indeed, no financial firm could establish a fiduciary relationship to an ERISA plan or IRA when it 

constructs its products and platforms – there is no relationship with any plan or IRA at that time. 

Creating an “exception” to the definition of investment advice for “platforms” is an indirect way 

for the Department to suggest that merely constructing and offering a platform to defined 

 4 See Hecker v. Deere & Company, 556 F.3d 575 (7th Cir. 2009) (Fidelity not a fiduciary where it merely “played a 

role” in the choice of investment options and plan sponsor retained ultimate authority over which options to include);

Leimkuehler v. American United Life Insurance Co., 2013 WL 1591450 (7th Cir. 2013) (standing alone, insurer’s act 

of selecting funds and share classes for inclusion in investment options menu was not a “functional fiduciary” act 

where provider never exercised right to make substitutions in a way that could give rise to a claim).
Page 10 of 36

contribution plans is fiduciary in nature and requires a carve-out. Even more troubling is that the 

platform carve-out is not applicable to IRAs or self-directed brokerage accounts offered to 

qualified retirement plans. This creates a negative implication that the mere offering of an IRA or 

self-directed brokerage account whereby consumers can invest in a range of common investments 

is somehow a fiduciary function. 

As a result, the platform exception should be significantly reformulated and revised to 

cover additional commonplace circumstances as follows:

• The Department should make clear that it interprets the definition of fiduciary such that 

offering a platform of investments to consumers does not constitute a fiduciary act at all. 

This would mean that the Department would clarify in the Preamble to the final rule that 

the construction of platforms, and their offering to the public, is not investment advice and 

therefore does not need a “carve-out” from the definition of advice. This interpretive 

guidance should be extended to IRAs and self-directed brokerage accounts, many of which 

offer nearly limitless investment opportunities.

• If the Department retains the carve-out approach, then IRA and self-directed brokerage 

account platforms must be included in the carve-out. If not, then it could be impossible for 

financial institutions to avoid fiduciary status for IRAs and self-directed brokerage 

accounts even if they offer non-fiduciary “self-directed/execution only” IRAs/accounts 

(i.e., if any limits are placed on the available universe of investment options, a platform 

may be created). 

Without relief on this fundamental issue, IRA and qualified retirement plan clients may have no 

brokerage services available to them. 

D. Selection and Monitoring Carve-out 

Morgan Stanley believes that the Proposal must allow for the provision to plan fiduciaries 

of a sample 401(k) line-up and educational information about investment selection. Thus, we 

recommend that the Department clarify that the presentation of 401(k) line-ups and related 

education is covered by this carve-out where criteria for identifying funds is specified by the plan 

fiduciary, regardless of who provides the 401(k) line-up and information or whether it is offered in 

connection with making a platform available. 

Wealth Management acts as broker of record on many plans which have assets held on a 

third party’s platform, and Wealth Management financial advisers may provide education at both

the participant and plan sponsor level. Unless the carve-out is clarified and is applicable to such 

“broker of record” situations, plan fiduciaries using Wealth Management as the broker of record 

will not be able to seek basic investment education relating to the identification of investment 

products that meet objective criteria or the provision of objective financial data and comparisons to 

independent benchmarks. This would disadvantage small employers which are particularly in 

need of investment information and assistance, and in turn disadvantage their plan’s participants 

who may not have an appropriately constructed fund line-up. 
Page 11 of 36

Finally, this carve-out should be expanded to IRAs as otherwise individual consumers will 

similarly be denied basic investment information such as the ability to have a platform provider 

identify available investment products that meet consumer provided selection criteria. 

E. Valuation and Reporting Carve-out 

If the proposed prong of the basic definition which makes valuations into fiduciary advice 

is not eliminated as requested above, this carve-out should be clarified and expanded such that any 

regularly provided account statement, or statement provided in connection with a distribution, is 

not investment advice regardless of whether it is required by law. In many instances valuations are 

provided for other client service oriented reasons, such as through a financial planning tool or on 

statements which are not specifically produced as required by law. Rendering such statements of 

value as fiduciary in nature seems unnecessary and will reduce the usefulness of such tools to 

clients, without a significant benefit. Clients should be more concerned about the values provided 

for reporting purposes, and the Internal Revenue Service (“IRS”) is already charged with 

monitoring the behavior of firms in connection with required reporting, and has a panoply of 

recently revised rules (i.e., the IRS’ “hard to value asset” revisions to its Form 5498 and 1099-R 

reports) designed to detect and prevent deficiencies in this area.

F. Education Carve-out 

Morgan Stanley appreciates that the Department has proposed to formally extend the 

participant education “safe harbor” set forth in Interpretive Bulletin (“IB”) 96-1 to IRAs. 

However, we are concerned that the new limitation on identifying investment options that fit into 

asset classes will restrict the flow of other factual information that is vitally important to 

consumers. 

For example, as proposed, a call center conversation could not even identify to the 

participant which funds offered under a 401(k) plan fit any particular asset class. Providing asset 

classes without examples, or requiring participants to navigate the internet alone for additional 

information, will not help participants. This basic information should be available so consumers 

can construct a diversified portfolio. Absent this information, the utility of any educational 

materials provided would depend in large part on the individual’s degree of investment 

sophistication. This limitation on identifying investment options also conflicts with the Preamble 

to the Proposal where the Department cites the need for investor help as a cause for its revisiting its 

regulatory definition. The current “safe harbor” under IB 96-1 has operated well for nearly 20 

years, connecting participants with the practical information most individual retirement investors 

seek, without the need to bring a relationship to a full stop in order to insert the contract and 

disclosure regime proposed by the BIC Exemption. 

A further unintended consequence will be the inability of firms to provide any specific 

investment solutions with respect to lifetime income options. The Department is making efforts to 

promote lifetime income options for defined contribution plans, but under the Proposal financial 

advisers would have no ability to suggest appropriate annuities or other payout strategies without 

becoming fiduciaries to plans and having to rely on the complex and costly BIC Exemption, which 
Page 12 of 36

many advisers will avoid unless it is revised. This will frustrate the very behavior that the 

Department wishes to promote.

G. Add a Rollover Carve-out 

The Department should also encourage robust distribution and rollover education and 

information and should provide greater clarity defining the line between distribution and rollover 

education and distribution and rollover advice. Therefore, Morgan Stanley strongly recommends 

that the Department enact a workable rollover sale “safe harbor” based upon FINRA Regulatory 

Notice 13-45. 

Specifically, where a firm follows the principles of Notice 13-45, that discussion should be 

covered by the education carve-out. The FINRA notice imposes a standard of care on rollover 

discussions to ensure that rollover discussions are fair, balanced and not misleading. As Notice 

13-45 acknowledges, although IRAs may entail higher fees, there are other reasons why they are 

desirable to individuals including the services, investments and control they offer. In addition, 

many individuals simply do not want to be connected to their former employer, or to take the 

chance that if that employer goes out of business the plan will be abandoned and the individual will 

lose the ability to access their retirement savings when they need them. As a result, opening an 

IRA may be in the best interest of the participant, despite a potential increase in cost, but firms may 

be unable to provide rollover assistance as any resulting compensation would constitute a 

prohibited transaction. Absent such a “safe harbor” from fiduciary status, firms will be forced to 

try to comply with the BIC Exemption, which currently does not provide a workable framework 

for rollover discussions (in particular, because many of these discussions take place with 

individuals who are not yet clients of the firm, and thus entering into a contract before discussions 

commence is not feasible). 

Without a rollover carve-out, firms may no longer be able to provide important information 

to individuals at a crucial juncture in their retirement savings efforts (i.e., upon retirement or other 

termination of employment), and this lack of information could lead to increased “leakage” from 

the tax-qualified retirement system. The marketing of retirement account products (both IRAs and 

qualified retirement plan self-directed brokerage accounts) and rollovers into retirement accounts, 

and the proactive education that financial advisers provide about their benefits, acts to counter the 

impulse of individuals to take and spend their retirement savings. This impulse can be especially 

pronounced in connection with changing or losing one’s job. Unfortunately, and to the detriment 

of America’s retirement saving and in consequence its future retirees, unless they receive more 

clarity defining the line between education and recommendation, firms may have to curtail their 

activities in this area. 

V. The Department Should Revise the Best Interest Contract Exemption

Morgan Stanley agrees with the Department that the BIC Exemption should be a 

“principles based” exemption that preserves consumer access to existing investment services and 

“broadly permit[s] firms to continue common fee and compensation practices, as long as they are 

willing to adhere to basic standards aimed at ensuring that their advice is in the best interest of their 

customers.” Indeed, Morgan Stanley would support a truly “principles based,” workable BIC 
Page 13 of 36

Exemption that: (1) establishes broad consumer protections, including enhanced disclosure and a 

“Best Interest” standard applicable to IRAs, (2) mitigates conflicts of interest when advice is 

provided, (3) permits the receipt of a range of direct and indirect compensation, but does not 

require “fee leveling” at the Adviser or firm level, and (4) preserves consumer choice by covering 

transactions involving a wide range of “Assets.” 

However, as currently proposed, certain requirements and conditions of the BIC 

Exemption render it practically and operationally unworkable and are inconsistent with a 

“principles based” approach. Importantly, among other issues noted below, the Department 

should clarify that no “wet” signature is needed on contracts under the BIC Exemption for existing 

clients (i.e., firms can re-paper existing client relationships via negative consent), and should 

revise the Exemption so it only requires two parties to the contract, not three. Furthermore, 

changes must occur with respect to the disclosure regime, which currently includes a point of

purchase disclosure requirement that will hinder client execution and will be extremely difficult if 

not impossible to implement, and which departs from the Department’s more workable disclosure 

precedents (e.g., under section 408(b)(2)). Moreover, unless substantially clarified, the BIC 

Exemption could result in Financial Institutions having to completely revise their compensation 

structures to ensure the fee neutrality of the individual Adviser. True Adviser level fee neutrality

and the reformulation of the “reasonable compensation” standard may require fundamental 

changes in the compensation structure of many financial products firms offer, some of which are 

controlled by independent third party product issuers. We are also concerned that the mandated 

contractual warranties expose firms to significant new litigation risks and are duplicative and 

unnecessary as part of a Best Interest standard of care. 

Finally, Morgan Stanley believes that the BIC Exemption and Principal Transaction 

Exemption must be modified so that Financial Institutions can rely on the Exemptions for so long 

as they act in “good faith and with reasonable diligence” in their compliance efforts and correct 

any errors within a reasonable time period after detection. Given the complexity of the 

Exemptions and time frame for implementation, a good faith compliance standard coupled with 

the ability to cure defects upon knowledge of those defects is needed. This concept of good faith 

compliance is found in several Department precedents including regulations for the very recently 

finalized service provider exemption and participant disclosure regulation, and the insurance 

company general account regulation. See 29 C.F.R. § 2550.408b-2(c)(1)(iv)(F)(2), 29 C.F.R. § 

2550.408b-2(c)(1)(vii), 29 C.F.R. § 2550.404a-5(b)(1), and 29 C.F.R. § 2550.401c-1(i)(5). 

Expecting perfect compliance with such complex conditions is unrealistic and should be tempered 

by good faith and cure provisions that encourage firms to use the BIC Exemption and Principal 

Transaction Exemption.

In the absence of changes to address these issues, Financial Institutions will not be able to 

rely on the BIC Exemption. As a result, many IRA owners and plan participants may end up being 

denied access to meaningful investment information they have until now received through their 

brokerage relationship (and only being offered a truly self-directed IRA or retirement plan account 

or paying for advice through a fee based advisory relationship). The result will be less 

information, more cost for certain consumers, and a contraction of the broker-dealer business 

model, all of which runs counter to the intent of Congress as reflected in Dodd-Frank. 
Page 14 of 36

A. Written Contract – Making Compliance with the BIC Workable

The Department should provide guidance that encourages compliance with the BIC 

Exemption by facilitating the ability of Financial Institutions to come into compliance. This will 

benefit consumers. Required changes include:

• The Department should confirm that the BIC Exemption itself does not require a new 

physical “wet” signature of the client to bring pre-existing account contracts into 

compliance. It should be up to the Financial Institution to determine how its existing 

contracts can be modified to create an enforceable obligation between the parties, and if 

such a binding obligation can be done by “notice” and negative consent to a current client 

then it should be permitted. The new contractual provisions and warranties all flow to the 

benefit of the client. Thus, it would actually harm consumers if their firms had to “chase 

them down” and obtain their fresh signatures before they were able to avail themselves of

the protections of the BIC Exemption.

• Currently, client agreements are entered into by the client and the Financial Institution –

Advisers do not sign these agreements. Where a Financial Institution is the provider of the 

product or service (either on its own or through a representative), only the Financial 

Institution needs to be a party. Requiring the Adviser to sign as a party will unnecessarily 

complicate account opening for clients, and will create disruptions in client service upon an 

Adviser’s termination of employment and where a new Adviser serves the same client. 

This problem will be exacerbated by the common industry practice of having teams of 

financial advisers service the same consumer. Clearly, the Financial Institution’s signature 

is all that is needed to establish liability for both the firm and its Advisers. As a result, the 

Department should eliminate the need for the Adviser to sign new or existing contracts. 

(For independent brokers, the opposite should be true – just the Adviser should sign 

without the Financial Institution.) A way to address this practical issue in a way that 

should work for all types of relationships is to merely require the employer service 

provider to be a party to the contract.

• The timing of the contract requirement must be revised. As proposed, the BIC Exemption 

requires contracts to be executed before any advice is given. It is not practical or feasible 

for a financial adviser to persuade a customer to sign a contract before the client knows 

what they might be buying. Instead, contracts should be executed before transactions are 

entered into and can apply retroactively to the time of advice similar to existing suitability 

standards. This is the timing requirement included in the Department’s proposed Principal 

Transaction Exemption, and we urge the Department to include it here. 

• The prohibition on contract provisions that limit liability should not extend to limitations 

on punitive or consequential damages. Such limits preserve the consumer’s right to be 

fully compensated for actual losses. Limitations on liability caused by third party acts or 

omissions should also be permitted. Firms should only be responsible for the losses they 

cause.
Page 15 of 36

These changes are necessary in order for the BIC Exemption to be a workable solution. 

Without these changes, the IRA marketplace (and small employer participant-directed plan 

marketplace) will be limited to a “one size fits all” solution that unnecessarily deprives the 

consumer of the ability to pay for brokerage services on a transaction by transaction basis.

B. Written Contract and Warranties – Eliminating or Paring Back Warranties

The BIC Exemption’s requirement that specific provisions be included in a written 

agreement between the Retirement Investor, Adviser and Financial Institution makes the 

Exemption unworkable and must be modified. Chief among the required provisions are that the 

contract include a fiduciary acknowledgement and an agreement to follow the BIC Exemption’s 

Impartial Conduct Standards – which include the Best Interest standard, reasonable compensation 

and an obligation not to mislead the Retirement Investor. In addition, the contract must include 

warranties that the Adviser and Financial Institution will comply with law, have policies and 

procedures designed to identify and mitigate conflicts of interest, and not have compensation 

programs that “would tend” to encourage Advisers to make recommendations that are not in the 

Best Interest of the Retirement Investor. Finally, the contract must disclose Material Conflicts of 

Interest. 

The Department notes that the written contract requirement “is the cornerstone of the 

proposed exemption” and that it creates an enforcement scheme for both ERISA plans and IRAs. 

The BIC Exemption bolsters this notion by prohibiting certain types of contractual provisions that 

could relieve the Adviser and Financial Institution from liability and limiting class actions in court. 

The written contract requirements simply go too far and must be pared back substantially 

in order for the BIC Exemption to be workable. Our comments are as follows5

: 

• No written contract Impartial Conduct Standard (i.e., the Best Interest, reasonable 

compensation, no misleading statements requirements) is necessary or appropriate for 

ERISA plans. ERISA already imposes a statutory fiduciary duty standard on Advisers. A 

contractual Impartial Conduct Standard will create a duplicative standard of care that will 

expose service providers to state and federal claims over the very same conduct – a result 

that ERISA’s exclusive remedy scheme is designed to avoid.

• For IRAs, the Impartial Conduct Standards should be revised and limited to a Best Interest 

standard – the reasonable compensation and misleading statements provisions should be 

dropped because they are already covered by a Best Interest standard. No Adviser could 

act in the Best Interest of the client yet recommend investments that are too costly or lie or 

mislead the consumer, but it is possible that arbitrators and courts will seek to widen the 

already broad duties the Best Interest standard entails. Thus, we are concerned that these 

provisions could lead to additional allegations by plaintiff’s lawyers when all that should 

matter is whether the Adviser acted in the Best Interest of the client. 

 5 These comments should be read to apply to the Department’s proposed amendments to PTEs 75-1, 77-4, 84-24 and 

86-128, which are being amended to include Impartial Conduct Standards.
Page 16 of 36

• Material Conflicts of Interest should be disclosed to consumers, but in a separate document 

rather than the contract. Otherwise, the contract will have to be updated frequently as 

products and services made available to the ERISA plans and IRAs are revised. 

• The warranty provisions should be eliminated as they create the risk of wasteful litigation. 

Indeed, a Financial Institution could have well-trained and supervised Advisers acting in 

the Best Interest of their clients, but the firm would be exposed to class action claims if 

every aspect of the Department’s detailed policy and procedural requirements are not met. 

We think a true “principles based” exemption should focus on protecting consumers by 

requiring Best Interest conduct by the Adviser, but it should not involve a redundant “belts 

and suspenders” approach that results in unnecessary litigation exposure. 

• In no event should these requirements be couched as contractual warranties –

essentially a guarantee of perfect compliance. It would be more appropriate to 

recast the warranties as general exemption conditions and not actionable contract 

provisions. 

• If retained as contractual requirements, the Department should modify the 

“warranty” requirement to a “good faith representation” requirement. As noted, 

this is the same approach that the Department adopted in its substantially less 

complex 408b-2 and other regulations.

C. Fee Neutrality for Advisers 

Fee neutrality should not be imposed upon Advisers. The warranty requirements and 

related Preamble discussion of appropriate Adviser compensation models suggest that the Best 

Interest standard could require that Financial Institutions compensate individual Advisers 

equivalently regardless of the products and services in which the client invests (“fee neutrality”). 

Indeed, each of the five examples highlighted in the Preamble describe examples of compensation 

structures where the individual financial adviser has no meaningful financial conflict of interest 

with the plan or IRA. In addition, the warranty condition itself prohibits any “different 

compensation or other actions or incentives to the extent they would tend to encourage individual 

Advisers to make recommendations that are not in the Best Interest of the Retirement Investor.” 

See 80 Fed. Reg. 21971(emphasis added). 

Virtually any program of compensation that varies at all by type of investment could tend 

to create adverse incentives.6

 For example, many Advisers in the industry earn a flat percentage of 

the compensable revenue that the Adviser generates, regardless of the product sold or its affiliation 

with the Adviser’s Financial Institution (referred to as a “neutral compensation grid”). However, 

different products generate different amounts of compensable and non-compensable revenue to 

 6 Indeed, the Department recognized in commenting on the level fee requirement that applies to individual advisers 

under the section 408(b)(14), saying that “almost every form of remuneration that takes into account the investments 

selected by participants and beneficiaries would likely violate the fee-leveling requirement...” Participant Investment 

Advice Final Regulation and Class Exemption, 74 F.R. 3822, 3826 (January 21, 2009).
Page 17 of 36

the firm. Financial Institutions like Morgan Stanley employ measures to manage conflicts 

associated with such inherent differences in compensation by product, including sales practice 

surveillance and supervision, fee caps and client disclosure. Even with rigorous controls, 

however, virtually every broker-dealer’s current compensation model would be prohibited under a 

broad reading of this standard, which is clearly at odds with the Department’s stated goal of 

“proposing a set of exemptions that flexibly accommodates a wide range of current business 

practices” that “permit firms to continue common fee and compensation practices.” See 80 Fed. 

Reg. at 21929. 

Importantly, the Department has previously recognized that Advisers are able to 

accommodate conflicts of interest while acting in a prudent fiduciary capacity and should continue 

to do so. For example:

The investment advice provider does not recommend investment options that may 

generate for the fiduciary adviser or any employee, agent or registered 

representative, or any affiliate thereof, or any person with a material affiliation or 

material contractual relationship with the foregoing, greater income than other 

options of the same asset class, unless the adviser prudently concludes that the 

recommendation is in the best interest of the participant or beneficiary.... 

See Participant Investment Advice Proposed Regulation 73 F.R. 49896, 49930 (Aug. 22, 

2008).

Furthermore, FINRA has closely scrutinized the compliance regimes of broker-dealers and 

recently published best practices for identifying, mitigating and managing conflicts of interest. 

Broker-dealers with compliance programs following this framework should meet the requirements 

of any truly “principles based” exemption. More specifically, in order to better understand how 

firms manage conflicts of interest, as well as to identify potential problem areas and effective 

practices to manage conflicts, in July 2012 FINRA began a review of conflicts of interest 

management practices at a number of firms (including Wealth Management). The Department’s 

Preamble statements on this aspect of the BIC Exemption appear to be informed by the FINRA 

report which was the result of that review, FINRA’s October 2013 Report on Conflicts of Interest 

(the “Conflicts Report”). 

In the Conflicts Report, FINRA set forth its observations regarding firms’ approaches to 

identifying and managing conflicts of interest in three areas: (1) enterprise-level frameworks to 

identify and manage conflicts of interest; (2) approaches to handling conflicts of interest in 

manufacturing and distributing new financial products, and; (3) approaches to compensating their 

associated persons, particularly those acting as brokers for private clients. Specifically regarding 

compensation practices, FINRA noted the following effective practices to address 

compensation-related conflicts of interest:

• firms avoid creating thresholds in their compensation structures that enable financial 

advisers to increase their compensation disproportionately through an incremental increase 

in sales; 
Page 18 of 36

• firms’ supervisory programs include specialized measures to assess whether financial 

advisers’ recommendations may be influenced by thresholds in a firm’s compensation 

structure;

• firms minimize compensation incentives for financial advisers to favor one type of product 

over another;

• for comparable products, firms refrain from providing higher compensation, or providing 

other rewards, for the sale of proprietary products or products from providers with which 

the firm has entered into revenue sharing agreements;

• firms monitor the suitability of financial advisers’ recommendations around key liquidity 

events in an investor’s lifecycle where the impact of those recommendations may be 

particularly significant (e.g., investor rolls over his pension or 401(k)), and;

• firms adjust compensation for employees who do not properly manage conflicts of interest.

Significantly, FINRA noted its expectation that firms should consider the practices 

described in the Conflicts Report and implement strong conflicts management frameworks. 

FINRA further noted that, given the pervasiveness of conflicts of interest and the potential for 

customer harm, it will continue to assess firms’ conflicts of interest management practices and the 

effectiveness of those practices in protecting customers’ interests (in this regard, FINRA included 

conflicts of interest in its 2015 Regulatory and Examination Priorities Letter). Finally, and 

perhaps most significantly, FINRA noted that if firms do not make adequate progress on conflicts 

of interest management, it will evaluate potential rulemaking in this area. 

Wealth Management’s own compliance program includes many of the effective practices 

cited in the Conflicts Report. Extensive enterprise-level programs are in place to review new 

investment products for potential conflicts prior to distribution. Moreover, Wealth Management

has compensation and supervisory controls in place for financial advisers that identify and mitigate 

key conflicts of interest. These compensation and supervisory controls are subject to review by 

FINRA, and to the extent that FINRA finds any deficiencies, they are noted and remediated as 

necessary.

The Department should clarify in the final BIC Exemption that enterprise-wide programs 

that effectively mitigate conflicts of interest, like Wealth Management’s, meet the requirements of 

the Exemption. Absent this essential clarification, the BIC Exemption will force broker-dealers 

into a “one size fits all” business model that in turn will limit the guidance and options available to 

clients, as further described above.

D. Fee Neutrality for Financial Institutions

The Department should clarify that reasonable compensation does not require the receipt 

of level compensation, including mutual-fund related compensation, at the Financial Institution 

level. If identical fee arrangements are required across thousands of mutual fund complexes and 

other investments, the BIC Exemption will be unworkable for this reason alone. Moreover, the 

Department should clarify this point explicitly so that firms are universally on notice of the BIC 

Exemption’s requirements. 
Page 19 of 36

The BIC Exemption as drafted appears to allow Financial Institutions to receive varying 

levels of compensation for different investments. This is demonstrated by the fact that the 

proposed Exemption includes no conditions or warranties mandating level fees at the firm level. 

The Department makes its intent particularly clear in the Preamble to the BIC Exemption where 

the Department specifically notes –

The Best Interest Contract Exemption ... would provide prohibited transaction relief for 

the receipt ... of a wide variety of compensation forms as a result of investment advice 

provided to the Retirement Investors. ... The types of compensation payments 

contemplated by this proposed exemption include commissions paid directly by the plan or 

IRA, as well as commissions, trailing commissions, sales loads, 12b-1 fees, and revenue 

sharing payments provided by either the investment providers or other third parties to 

Advisers and Financial Institutions. The exemption also would cover other compensation 

received by the Adviser, Financial Institution or their Affiliates or Related Entities as a 

result of an investment by a plan ... or IRA, such as investment management fees or 

administrative services fees from an investment vehicle.... 

80 Fed. Reg. at 21966-67. 

Notwithstanding the clarity of the Preamble, however, we are concerned that the 

Department (or a court or arbitrator) may construe the “reasonable compensation” requirement 

included in the Best Interest standard (see Section II(c)(2)) to require consistency in the fees that 

mutual fund companies and other third parties pay firms. We note that the section only requires 

that the total compensation received by the Financial Institution be reasonable in relation to the 

total services provided to the plan or IRA. This should not be deemed to mandate identical fee 

relationships between Financial Institutions and the thousands of mutual fund companies and other 

third party investment providers. Fees differ for a range of reasons, including the types of services 

the Financial Institution provides to the fund complex, and the relative market power of the parties 

to the agreements. It is critical that the reasonableness of compensation be defined as a market 

based fee in total. This is, of course, consistent with the Department’s own prior guidance, and

that of the courts. See Information Letter to John DiVincenzo (Dec. 9, 1986); Adv. Op. 2002-08A 

(selection of service provider involves assessment of quality of services, reasonableness of charges 

in light of services provided, and cost of comparable services in the market); McLaughlin v. 

Bendersky, 705 F. Supp. 417, 421 (N.D. Ill. 1989) (service provider's costs and profits are 

irrelevant to determining whether compensation is reasonable). 

E. Disclosure

Morgan Stanley strongly agrees that delivering understandable and timely investment 

information about fees and potential conflicts of interest is an appropriate requirement of 

fiduciaries relying on the BIC Exemption. However, as proposed, the BIC Exemption would 

establish an overly complicated and costly point of purchase and annual disclosure regime, along 

with continuous website disclosure, that cannot be implemented by the proposed eight month 

Applicability Date. Instead, the disclosure requirements should be revised to a pre-transaction 
Page 20 of 36

“cigarette warning” and a direction to additional disclosures that build off of the requirements of 

the Department’s existing regulations under section 408(b)(2). 

Under the current Proposal, firms must provide a detailed written disclosure to the 

Retirement Investor prior to the execution of each recommended purchase of an allowable “Asset”

(a “pre-purchase disclosure”). The disclosure must contain the all-in cost and anticipated future 

costs of recommended Assets in a chart. This chart would include the “total cost” to the 

Retirement Investor for 1-, 5- and 10- year periods expressed as a dollar amount, assuming an 

investment of the dollar amount recommended by the Adviser, and reasonable assumptions about 

investment performance, which must be disclosed. Additionally, a webpage must disclose the 

direct and indirect material compensation payable to the Adviser, Financial Institution and any 

Affiliate for services provided in connection with each Asset (or, if uniform across a class of 

Assets, the class of Assets) that a Retirement Investor is able to purchase, hold, or sell through the 

Adviser or Financial Institution, and that a Retirement Investor has purchased, held, or sold within 

the last 365 days, the source of the compensation, and how the compensation varies within and 

among Asset classes. Finally, the Financial Institution must also provide an additional 

comprehensive annual disclosure report detailing the client’s annual fees and direct and indirect 

expenses, and the firm’s and the Adviser’s direct and indirect compensation. 

The information required is so complex that it will likely confuse rather than inform 

consumers, and the requirement of trade by trade pre-purchase written disclosures may delay 

execution of clients’ transactions. 

1. The key difficulties with the Pre-Purchase Disclosures: 

• The written pre-purchase disclosure requirements are operationally complex, costly, and 

may materially disadvantage those retirement consumers who cannot transact until their 

receipt. A majority of Wealth Management’s retirement clients have not authorized 

Wealth Management to deliver documents to them electronically via email and still choose 

to receive disclosure documents and account statements by mail. The requirement to 

disclose transaction-specific information pre-purchase may prevent clients from executing 

their transactions at the price that they intend. It could also potentially even restrict them 

from purchasing the securities that they want, if there is delay caused by the requirement to 

deliver the written disclosure before accepting the client’s order. It should be noted that 

over the past ten years, on average, the S&P 500 moved by more than 1% in a single day

over 65 days within each calendar year. Furthermore, by the time such a detailed, 

client-specific pre-purchase disclosure is able to be prepared in accordance with the BIC’s 

current content requirements, the Asset’s total cost may have changed, requiring new 

disclosures, and this could, in its circularity, cause us to simply be unable to execute 

transactions in certain securities. Finally, clients may receive the disclosures when they are 

no longer in a position to review or respond to them – and thus they may miss out on the 

desired opportunity. 

In this regard, mutual funds are just one example to demonstrate the challenges in 

complying with the current pre-purchase disclosure requirements. For mutual funds, the 

price of the security is not known at the time an order is placed. Rather, the fund is priced 
Page 21 of 36

at the end of the day and all orders received prior to market close receive the ending day 

prices. At the time that at an order is entered, the client may be making a new purchase of 

a specific amount (in which case all that is unknown is the number of shares that the 

amount represents) or could be selling shares and using the proceeds to make a new 

purchase (in which case the sales proceeds and the new purchase amount are not known 

until the close of business). Because of this uncertainty, it is unworkable to provide the 

detailed transaction-specific pre-purchase disclosure.

In addition, most firms’ current systems for delivery of transaction-specific disclosures 

(e.g., confirmation statements, prospectuses) are triggered based on a transaction being 

entered and executed in the firm’s order entry system. As such, firms would need to design 

and build entirely new systems to trigger the delivery of a paper or electronic disclosure at 

a point prior to when an order is entered or processed. 

• The 1-, 5- and 10-year cost information requirement that is based on rate of return 

assumptions is also unworkable and in many cases unnecessary as drafted. Return 

assumptions will need to be made for every single mutual fund, equity security, debt 

security, and other Asset. Every Financial Institution may come up with different return 

assumptions – making cost comparisons across firms impossible and possibly misleading. 

Furthermore, it is unnecessary to require such projections for stocks, bonds, ETFs and 

other investments that only generate transaction based, and not trailing, compensation. 

Moreover, this requirement is also problematic where we act as broker of record with 

respect to a retirement plan held at a third party provider, as plan size and investment make 

up will vary over time, and there is no way to meaningfully predict those changes.

• Finally, the disclosure regime’s emphasis on cost may lead consumers to make decisions 

on that basis alone. While important, cost is certainly not the only component of what 

makes an investment appropriate for a particular client. This focus, especially when 

complicated by the previous point regarding return assumptions, renders the current 

pre-purchase disclosure requirement imprudent.

2. Suggested revisions for the Pre-Purchase Disclosures: 

• The pre-purchase and website disclosure requirements should be revised to a

pre-transaction disclosure that builds off of the requirements of the Department’s 

regulations under section 408(b)(2). A section 408(b)(2) regime would fully inform 

consumers of the services provided and potential conflicts, and would disclose direct and 

indirect compensation, including the identity of the payer of indirect compensation and the 

amount (or formula or estimate) of the indirect compensation.7

 Morgan Stanley would 

 7 Additionally, if private placement investments are permitted under the BIC Exemption, the Department should allow 

firms to provide the disclosure information regarding private placements to customers as part of an offering. Public 

websites are not an option for private placements because general solicitations are generally not permitted for these 

types of investments under the securities laws. Instead, customers should receive the necessary disclosures along with 

the offering materials for any particular private placement in advance of the client’s commitment to purchase the 

private placement. 
Page 22 of 36

support the Department should it choose to move, as contemplated in the Preamble, to a 

“cigarette warning”-style approach to the pre-purchase disclosure. In addition to the 

language proposed in the Preamble (80 Fed. Reg. at 21974), the disclosure could 

specifically refer clients to a website disclosure that tracks the requirements of the 

regulations under section 408(b)(2). Morgan Stanley believes that firms could implement 

policies and procedures to ensure that each client is directed and given time to review the 

information on the website prior to the execution of the client’s first transaction with the 

firm, and through our monthly and quarterly statements, or other written communications, 

be reminded that the information is available for review and that the client should contact 

their Financial Institution or Adviser for more information. 

• In the alternative, the Department should consider working with the industry to create a 

static disclosure piece which describes the various asset classes available in retirement 

accounts, and addresses the issues which the Department believes the public does not 

understand (e.g., the ongoing revenue streams received in connection with mutual fund 

sales). Firms could then tailor this piece to their business models and ensure delivery at the 

onset of a client relationship and on an ongoing basis.

3. Suggestions for the Annual Disclosure Requirement:

• Given existing required disclosures to clients about their investment costs and expenses 

(e.g. client confirmations, mutual fund share class disclosures, prospectuses etc.), coupled 

with the enhanced pre-transaction disclosures recommended herein, the BIC’s annual 

disclosure requirement is duplicative. The annual disclosure requirement should either be 

eliminated or pared back substantially.

• It is unworkable in many instances to produce the required client-specific fee information 

using exact dollar amounts by investment, and the split in compensation between the 

individual Adviser and Wealth Management is simply not currently systemically available 

on an account by account basis. An alternative may be to provide the type of information 

found on a Form 5500 Schedule C to IRA clients who otherwise do not receive such 

reports. Schedule C requires reporting of "indirect" compensation received by plan service 

providers, in addition to the "direct" compensation paid to the service provider by the plan. 

For this purpose, "indirect compensation" includes any compensation received by a service 

provider from sources other than directly from the plan or plan sponsor "in connection with 

services rendered to the plan during the plan year or the person's position with the plan." 

Some examples of reportable indirect compensation described by the instructions to 

Schedule C include fees and expense reimbursement payments received by a person from 

"investment funds," finder's fees, float revenue, brokerage commissions, soft dollars, other 

transaction based fees received in connection with transactions or services involving the 

plan, and "non-monetary" compensation such as gifts and meals. 

• If the annual disclosures are not eliminated then the annual disclosure requirement should 

not apply to any investments to which the Financial Institution or an Adviser has not served 

as a fiduciary. In this regard, it currently appears that the disclosure requirements of the 

BIC Exemption would apply to all assets in a particular IRA, regardless of whether the 
Page 23 of 36

Financial Institution or an Adviser provides advice on those assets or whether those assets 

were brought by the client from another firm to the Financial Institution. Furthermore, in

no event should exact dollar amounts be required to be disclosed for specific investments 

where the Financial Institution is compensated through an asset based fee. Finally, the

Department should clarify that any pre-purchase or annual required disclosures only apply 

to compensation earned by the Financial Institution, its Advisers and its Affiliates, as 

opposed to any party receiving compensation in connection with a particular investment.

F. Scope of the BIC 

There are critical revisions and clarifications to the scope of transactions covered by the 

BIC necessary to “preserve broker-dealer business models” consistent with the Department’s 

stated intent. Changes are needed to accommodate fulsome consumer choice in the type of 

investments available and to cover recommendations in connection with investment or distribution 

strategies. In the absence of such changes to its scope, firms may be unable to comply with the 

BIC Exemption even if the Department adopts other suggested modifications (e.g., to the BIC’s 

disclosure requirements). 

Issues relating to the scope which need to be addressed include:

1. Covered Assets, Activities & Compensation:

• The BIC Exemption should not be limited to certain approved “Assets.” Such limitation

needlessly restricts consumer investment choice and is unnecessary given the other 

comprehensive consumer protections contained in the Exemption. The Department should 

consider substituting its often used phrase “securities or other property” for the term 

“Asset.” Under the current Proposal, many investments that are utilized by consumers are 

not included in the list of permitted Assets. These include alternative investments (e.g., 

hedge funds and private equity funds), options, municipal bonds, structured products, 

futures contracts, precious metals, and foreign equities, foreign bonds and foreign

currencies. Furthermore, the treatment of UITs, a common retirement account investment, 

seems unclear. Yet, the Department has consistently eschewed a “government approved 

list” of investments and under its recognition of modern portfolio theory, the Department 

has acknowledged that there is and can be a role for derivatives and other forms of 

sophisticated investments.8

 Furthermore, the Department’s approved list of Assets cannot 

possibly keep up with the evolution of investment options (e.g., what happens when the 

“next ETF” or other “next generation” product comes along and is not a permissible 

“Asset”?). So long as a Best Interest standard, coupled with a reasonable enforcement and 

 8 IRAs are prohibited from investing in any work of art, rug or antique, metal or gem, stamp, most coins, and any 

alcoholic beverage under the Internal Revenue Code section 408(m). However, in general the Department has 

embraced modern portfolio theory, which holds that individual investments will not be considered per se prudent or 

imprudent, but will be evaluated in light of the whole portfolio of investments that the plan holds. See e.g., Preamble 

to Reg. 2550.404a-1 at 44 F.R. 37255 (June 26, 1979). Indeed, the Department has acknowledged the role that 

derivatives may play in a plan’s investment. See Adv. Op. 2013-01A. Defining approved Assets using a narrow list of 

“common” investments is a departure from the Department’s guidance and would even be a departure from the Code’s 

prohibited investment list.
Page 24 of 36

oversight scheme, is in place, no restrictions should be placed on what assets are covered 

by the BIC. Investors should be able to construct retirement portfolios that contain a 

diverse range of assets if they are appropriate and in the best interests of the particular 

client, and the exclusion of certain investments could result in unnecessarily 

disadvantaging retirement accounts.9 Moreover, an unintended result of this restrictive 

definition is that consumers may indirectly invest in assets that would otherwise be 

excluded under the definition (e.g., derivatives) by investing through a permissible mutual 

fund or ETF wrapper, which will increase the consumer’s cost of these strategies (i.e., it 

would be cheaper to do this directly but they are being forced to do so indirectly at a higher 

cost as they have to pay for the wrapper). 

• The BIC Exemption also needs to be clear that it covers the fees for services that are 

collateral to the investment advice provided pursuant to the Exemption (e.g., 

recordkeeping, custody, account maintenance).

• The BIC should be available for “riskless principal” transactions, which are functionally 

similar to agency transactions. 

2. Covered Parties:

• Often plan sponsors are not the ones making investment decisions. Therefore, the BIC 

Exemption should be clarified to cover advice directed to all fiduciaries of covered plans, 

such as trustees and investment committees for example, and not just plan sponsors. 

• The BIC Exemption should also be available for advice to sponsors and fiduciaries 

(including trustees) of small and large employer participant-directed plans. Including

advice to small employer participant-directed plans in the BIC is crucial since they 

currently are also not eligible for the counterparty carve-out. As proposed, small 

employers have essentially been “carved-out” of the opportunity to receive both sales 

pitches and investment selection assistance. As noted above with respect to platform 

investment selection and monitoring, the negative impact on clients will be especially 

pronounced for “held-away” business (i.e., where Wealth Management is the broker of 

record with respect to plan assets which are held on another financial institution’s 

investment platform). 

• We also recommend that the BIC Exemption be expanded to cover large plan sponsors of 

over 100 participants to avoid a bifurcated compliance model. Otherwise firms will be 

vulnerable to “foot faults” and operational difficulties in monitoring whether the plan 

participant number fluctuates over or under 100 participants. 

3. Recommendation of Strategies:

 9 For example, alternative investments are often incorporated into an investor’s portfolio as a diversification and risk 

management strategy because they can help lessen the correlation of a traditional portfolio to the stock market, 

potentially reducing the effects of market volatility.
Page 25 of 36

• The application of the BIC Exemption to distribution and rollover conversations should be 

clarified. It appears that once amounts are rolled into an IRA, a firm can rely on the 

Exemption to apply to the Adviser’s recommendations on how to invest amounts rolled 

over. However, the BIC should be clarified to state that if its terms are followed it can also 

apply to the distribution advice itself and the advice on where the rollover should go (e.g., 

an IRA offered by the firm). As noted with respect to the rule itself, it seems unlikely that 

individuals will want to sign a contract prior to receiving that preliminary advice, and thus 

without relief, both within and outside of the BIC context, individuals may no longer be 

able to receive guidance with respect to a crucial rollover decision. 

• The BIC or other appropriate exemption should be clarified to allow for the 

recommendation of Advisers and managers. Recommending an Adviser or a 

discretionary manager – including the Adviser’s own firm – is investment advice under 

the Proposal and thus would seemingly require either the counterparty carve-out or 

reliance on the BIC Exemption. In the context of sales presentations, this appears to 

contradict the Department’s regulations at 29 CRF 2550.408b-2(f), examples (1), (3) and 

(4). If the person making the recommendation receives a fee (e.g., a portion of a wrap fee) 

then that person likely needs exemptive relief. However, a recommendation of a manager 

or Adviser should necessarily be subject to different disclosures and reporting than the 

recommendation of the purchase of a security or property under the BIC, and should not 

require the prior execution of a contract. The “cigarette warning”-style approach 

described in the Preamble, in combination with an explicit disclosure that the Adviser 

receives compensation in connection with the recommendation of a manager or Adviser,

should suffice to inform and protect consumers (both inside and outside of the BIC 

Exemption). No annual reporting would be necessary or useful to the consumer.

4. Clarification of Application to Discrete Activities:

• The BIC Exemption should be clarified to make clear that where the Financial Institution

and Adviser do not provide advice, and merely carry out a direction from the client, 

compliance with the BIC Exemption is unnecessary. In other words, that the BIC need 

not be relied upon to execute a client’s self-directed purchase or sale transaction within an 

account which would otherwise be “BIC compliant,” or to implement a client’s 

independent decision to open an account. All of the conditions of the BIC Exemption 

should be revised accordingly (e.g., clarifying that the warranty, disclosure and data 

retention requirements do not apply to transactions in Assets where the Financial 

Institution or Adviser did not provide advice). Otherwise, clients may be forced to open 

up additional “execution only” accounts, potentially at additional cost (e.g., account 

maintenance fees).

• The BIC Exemption similarly needs to clarify whether and to what extent one time 

investment advice requires a Financial Institution to engage in ongoing compliance with 

the BIC Exemption. In our view, a simple account opening disclosure and a Best Interest 

standard should be sufficient for such limited engagements, even if the underlying 

investment pays the firm an ongoing fee for investment management or distribution. 
Page 26 of 36

G. Disclosure to the Department and Recordkeeping

Morgan Stanley does not object to the general requirement to maintain data necessary to 

demonstrate compliance with the BIC Exemption. However, Morgan Stanley strongly feels that 

no trade secret or proprietary business information should be available to the Department in order 

to document Exemption compliance. Typically this information must undergo legal review and 

could be subject to protections that ensure its non-disclosure to the public. As such, we 

recommend that this provision be clarified such that no trade secret or proprietary information is 

required to be maintained or disclosed to the Department under this section. 

H. Data Request Available to the Department

We respectfully submit that the requirements of Section IX – Data Request (i.e., to create 

and maintain Inflow, Outflow, Holdings and Returns information) are burdensome and 

unnecessary given the other protections afforded by the BIC Exemption, including the contractual 

obligations, Impartial Conduct Standards, warranties and the resulting private rights of action; the 

provision of meaningful disclosures directly to the Retirement Investor; and the requirements of 

Section V - Disclosure to the Department and Recordkeeping, which provides an abundance of 

information for the Department to monitor compliance. Therefore, we request the elimination of 

this section of the BIC Exemption. 

I. Pre-Existing Transactions Exemption

Morgan Stanley strongly objects to imposing conditions on continued relief for 

investments that occurred prior to the applicability of the new Proposal; in particular, the condition 

that no advice be given after the Applicability Date on assets purchased prior to the Applicability 

Date. If the original transaction was not prohibited, there should be no ongoing conditions 

imposed. In fact, by requiring that no additional advice be given, the Financial Institution would 

not be acting in an investment advice fiduciary capacity and would not need to rely on the 

Exemption. Furthermore, requiring that no advice be given will harm consumers as they will lose 

access to the investment-related information provided via their brokerage relationship and force 

the consumer to choose a new, potentially more costly, advisory relationship if they need 

assistance with their plan and/or IRA accounts. This was not the bargain when they began their 

relationship with the Financial Institution and it should not be forced upon them now. 

In addition to permitting advice, no restrictions on assets (i.e., no “Asset” limitation)

should be imposed for pre-existing assets. Otherwise, non-conforming assets must be removed

from the account prior to the Applicability Date. This may not be possible without the client 

providing written consent and may not be feasible without causing the client to incur a loss. As a 

result, we believe that such subset of assets must be subject to the proposed grandfathering 

suggested above (i.e., they remain subject to the rules in effect prior to the Applicability Date). 

Finally, we ask that the Department clarify that firms do not need to rely on the 

Pre-Existing Transactions Exemption if they provided no advice or recommendations with respect 

to pre-existing assets. No conditions should be imposed on assets currently held by a Financial 

Institution if it was directed to acquire such assets for our client, or the assets transferred in from 
Page 27 of 36

another firm (i.e., we provided no advice or recommendations on the appropriateness of those 

assets), but those assets are held in an account which would otherwise comply with the BIC 

Exemption. 

In sum, we believe that all assets purchased prior to the Applicability Date of the regulation 

should be subject to the rules in effect before the Applicability Date. If these modifications are not 

made, then we request that transitional relief be granted to liquidate pre-existing positions for cash 

without the advice related to such liquidation requiring compliance with all of the contract and 

disclosure conditions of the BIC Exemption. At the very least this transitional relief must be 

available for liquidation of investments that do not meet the definition of Assets under the BIC 

Exemption. 

VI. The Principal Transaction Exemption for Debt Securities Should be Expanded

Morgan Stanley supports the creation of a principal trading exemption. As discussed 

below, being able to conduct principal transactions in a timely and cost effective manner provides 

important liquidity benefits to our customers – benefits that are especially critical in market 

downturns. We are concerned that if the BIC Exemption is not made workable many IRA and 

qualified retirement plan clients will move away from transaction based brokerage accounts to 

advisory programs where as a practical matter firms would not be able to provide advice or 

recommendations on principal transactions. Even if, as a threshold matter, the BIC Exemption is 

reformed, we are concerned that the proposed Exemption for Principal Transactions in Certain 

Debt Securities (the “Principal Transaction Exemption” or “Exemption”) is not workable as a 

result of the limited scope of the Exemption and the conditions it imposes on Financial Institutions. 

As a result, Retirement Investors would have diminished access to products, liquidity, and 

competitive pricing, ultimately harming the very Retirement Investors the Department is seeking 

to protect. We urge the Department to expand the scope of the Exemption to additional securities 

and to modify key conditions that make the Exemption as proposed unworkable. In doing so, we 

urge the Department to consider the critical liquidity role that Financial Institutions play in the 

marketplace, and the comprehensive existing SEC, FINRA and MSRB rules that govern these 

transactions. 

As a starting point, the Principal Transaction Exemption only applies to a limited list of 

products, which we believe will either preclude Retirement Investors from purchases and sales of 

numerous non-exempted securities altogether, or force these investors to transact in such securities 

in a more expensive and less efficient manner. With respect to those limited products currently 

permitted under the Exemption, Financial Institutions may be unable to continue to purchase or 

sell those products on a principal basis since the conditions imposed render the Exemption 

practically unworkable. These products may not be available to Retirement Investors through 

other market makers or participants at competitive prices or at all, which could materially impair 

liquidity for investors when seeking to buy or sell securities. In addition, the Principal Transaction 

Exemption is not drafted to fit into the existing regulatory and interpretive framework, which 

already imposes investor protection rules and policies related to pricing, execution and suitability 

of transactions that apply when Financial Institutions like Morgan Stanley act as principal or 

provide investment assistance. Rather, the proposed Exemption would subject Financial 
Page 28 of 36

Institutions to inconsistent and incompatible regulatory standards, some of which are impossible to 

comply with for the reasons discussed below. 

Set forth below are Morgan Stanley’s recommended revisions to the Principal Transaction 

Exemption. We believe that these changes will serve the best interests of Retirement Investors and 

the marketplace at large. We begin by providing you with some background information on the 

role Morgan Stanley plays as liquidity provider to the fixed income markets, generally, and 

Retirement Investors, specifically. In this context, we discuss the consequences of restricting the 

role of a liquidity provider, which will result from the Proposal. Next, we outline the various 

FINRA and MSRB rules on transaction execution, pricing and suitability that comprise the 

existing regulatory framework governing Financial Institutions. It is against this background that 

we set forth our recommendations for revisions to the Principal Transaction Exemption. 

A. Impact on Investor Liquidity 

We respectfully do not believe the Principal Transaction Exemption adequately accounts 

for how the fixed income marketplace operates, with a substantial number of debt cusips often 

traded by a relatively small number of Financial Institutions. One should not assume that 

Retirement Investors can turn to third party financial institutions to purchase or sell their securities. 

These other firms may be unable to provide liquidity on favorable pricing terms or at all if, for 

example, the firm does not make markets in the security in question or is facing balance sheet or 

risk constraints. As a result, like other investors, Retirement Investors often rely on their 

broker-dealer to be willing and able to purchase or sell securities when the investor needs or wants 

to transact, and in particular in times of distress or when illiquid securities are involved. 

Morgan Stanley, acting through its Wealth Management and institutional securities 

businesses, is one of the largest firms participating in the fixed income markets across product 

types and market conditions and routinely trades fixed income securities acting as a principal with 

its clients. These principal trades include trades with its Retirement Investors for which it is not a 

fiduciary. The ability of Retirement Investors to access liquidity on both the bid and offer side of 

the market is particularly critical in periods of market distress, dislocation or increased volatility. 

This is true now more than ever as market participants’ balance sheets are constrained due to 

regulatory considerations and the cost of regulatory capital, with the result being diminished 

liquidity across product types in what was already a less liquid market (i.e., compared to equities). 

If Morgan Stanley and other liquidity providers are effectively compelled to act only in an agency 

capacity as a result of the Proposal, then investors may be unable to liquidate their positions in a 

declining market – the time most critical to them – or if they are able to do so, it may be delayed 

and at considerably worse execution quality. 

As a result, if Morgan Stanley becomes a fiduciary to almost all of these investors - as 

could be the case under the Proposal - then the Principal Transaction Exemption must be expanded 

and simplified so as to allow Retirement Investors continued access to products and liquidity at 

competitive pricing. 
Page 29 of 36

B. The Existing Regulatory Regime Governing Broker-Dealer Pricing, Execution and 

Suitability is Robust 

When considering the Principal Transaction Exemption, specifically the proposed new 

pricing standards,10 it is important to take into account the fact that the fairness of broker-dealer 

pricing of securities, including fixed income securities, is highly regulated by FINRA and the 

MSRB.11 Under the current regulatory and interpretive framework, broker-dealers are subject to 

best execution and fair pricing standards under various FINRA and MSRB rules. FINRA Rule 

5310 (best execution), for instance, imposes an obligation on broker-dealers to use reasonable 

diligence to ascertain the best market for a subject security (excluding municipal securities) so that 

the resultant price to the customer in the transaction is as favorable as possible under prevailing 

market conditions. Further, FINRA Rule 2121 imposes a fair pricing obligation on broker-dealers 

in connection with transactions effected on a principal basis and restricts the amount of mark-up or 

mark-down a broker-dealer may charge from the prevailing market price. With respect to 

municipal securities, MSRB Rule G-18 (effective December 7, 2015) will subject broker-dealers 

to best execution obligations similar to those under FINRA Rule 5310. MSRB’s best execution 

rule will be in addition to MSRB’s fair pricing rule (MSRB Rule G-30), which requires 

broker-dealers to exercise diligence in establishing the market value of the security and the 

reasonableness of the compensation received in the transaction (such FINRA and MSRB rules and 

interpretive guidance thereunder concerning fair pricing, mark-ups/mark-downs and best 

execution are collectively referred to herein as “Pricing and Execution Rules”). 

Firms like Morgan Stanley are required to have robust controls and policies and procedures 

to ensure compliance with applicable Pricing and Execution Rules. Among other controls, 

Morgan Stanley has developed a series of reports that compare its fixed income executions against 

third party executions reported through FINRA’s online reporting system, Trade Reporting and 

Compliance Engine (“TRACE”) or MSRB’s Real Time Transaction Reporting System (“RTRS”), 

as well as Morgan Stanley’s own executions with other parties. These reviews are performed by 

Wealth Management’s Risk Department, which is independent from the business. Wealth 

Management will adjust trade prices if such reports identify trade executions that do not comply 

with Pricing and Execution Rules or otherwise satisfy the firm’s pricing policies and controls. The 

Wealth Management Best Execution Committee provides additional oversight, examining quality 

of execution, among other responsibilities, in light of regulatory obligations. The Compliance unit 

monitors the performance of certain oversight reviews. Finally, FINRA actively surveils reported 

executions for compliance with the applicable Pricing and Execution Rules and brings actions to 

enforce such Rules. Moreover, investors have access to reported trade prices on TRACE and 

MSRB’s Electronic Municipal Market Access System (“EMMA”) as an additional layer of 

protection and transparency against which their executions may be validated.

 10 See Section II(c) (2), “The Adviser and Financial Institution will not enter into a Principal Transaction...if the 

purchase or sales price of the Debt Security (including the mark-up or mark-down) is unreasonable under the 

circumstances” and Section III(d), Pricing.

11 While municipal securities do not provide tax benefits to retirement accounts, in certain market conditions they may 

be an appropriate investment. Moreover, certain municipal securities are taxable and are likely to be purchased by 

retirement accounts.
Page 30 of 36

In addition, it is important to note that FINRA and MSRB impose suitability obligations on 

broker-dealers when recommending securities (see FINRA Rule 2111 and MSRB Rule G-19, 

collectively, “Suitability Rules”). Firms maintain policies and procedures to comply with 

Suitability Rules and often utilize additional controls, such as minimum eligibility rules or 

maximum concentration requirements tailored to individual investors’ risk tolerance and 

investment objectives, as part of the financial adviser’s suitability review and determination.

Among the policies maintained by Wealth Management is a policy that prescribes which investors 

can be solicited to purchase which corporate and municipal instruments and in what concentration 

levels. The policy establishes categories of instruments largely based on credit ratings and sets 

client eligibility guidelines for each category according to the investors’ risk profile. 

The Fair Pricing and Execution Rules and the Suitability Rules are part of a 

well-established regulatory framework that serves to protect investors, including Retirement 

Investors. On this basis, Morgan Stanley believes that the Department should consider the 

standards from the Fair Pricing and Execution Rules and the Suitability Rules when establishing 

the contours of the Principal Transaction Exemption in lieu of new and potentially conflicting 

standards or substantial limitations on status quo principal trading. 

C. Recommended Revisions to the Principal Trading Exemption

In light of both the nature and function of the fixed income markets, as well as the equity 

markets, and the substantial existing regulatory controls on pricing, execution and suitability

discussed above, the following changes should be made to the Principal Transaction Exemption in 

order to preserve Retirement Investor access to liquidity and quality executions in financial 

instruments in which these accounts have traditionally invested.

• The types of fixed income products available under the Exemption should be expanded to 

include high yield debt, convertible bonds, securities issued by non-U.S. entities 

(including, without limitation, emerging market and foreign currency denominated 

securities), securities whose issuers are not organized as corporations, and instruments that 

are exempt from registration under the Securities Act of 1933 (the “Act”) such as 

certificates of deposit, commercial paper, bank notes issued under Section 3(a)(2) of the 

Act and municipal securities. In addition, Financial Institutions should be permitted to 

execute principal transactions in securities issued by affiliates. Morgan Stanley sees no 

basis for limiting access to principal transactions to the limited class of debt securities set 

forth in the Exemption and contends that existing regulatory requirements protect 

Retirement Investors as they protect other non-Retirement Investors transacting in these 

securities. For those fixed income products not covered by the Principal Transaction 

Exemption, Retirement Investors may receive inferior pricing or may be unable to transact 

in the products since Morgan Stanley’s prices cannot be made available alongside third 

party prices, if any.

• The conditions relating to “moderate credit risk” and “sufficiently liquid” are ambiguous 

terms that should be eliminated since the Principal Transaction Exemption imposes a broad 

Best Interest standard of conduct and remedial scheme for IRAs. Investors should not be 

precluded from holding higher credit risk or less liquid products in retirement accounts 
Page 31 of 36

where such products are appropriate for the investor. Excluding these securities from the 

Principal Transaction Exemption harms Retirement Investors by eliminating competitive 

prices and a source of liquidity from major market participants, thereby reducing 

competition and increasing the likelihood of poor execution quality for Retirement 

Investors, or by rendering such instruments completely unavailable. As noted above, 

principal transactions in these securities remain subject to applicable Pricing and 

Execution Rules, as well as Suitability Rules and controls which are tailored to investor 

risk tolerance and investment objectives. These rules and controls should be adequate to 

protect Retirement Investors in the same way they protect non-Retirement Investors. 

• The Principal Transaction Exemption should be expanded to include equities and preferred

securities that are included within the scope of Regulation NMS promulgated by the SEC. 

These are the most liquid and transparent of markets where registered market makers are 

required to provide continuous two-sided quotes, markets are fully consolidated enabling a 

national best bid and offer (“NBBO”) for each security to be calculated and disseminated, 

trades are reported and compensation disclosed. Execution quality is readily discernable 

and enforced. Trade executions are compared to the NBBO and those executions at prices 

inferior to the NBBO are reviewed and adjusted when appropriate. As with fixed income 

securities, orders in equities and preferred securities are subject to regular and rigorous 

reviews by the Wealth Management Best Execution Committee. Furthermore, market 

centers are required by Regulation NMS to publicly and regularly disclose prescribed 

information related to execution quality and each broker-dealer is required to disclose 

prescribed information related to its order routing practices. See 17 CFR 242.605 and 606. 

While much trading in the equity markets is done on an agency basis, broker-dealers and 

their affiliates should not be precluded from acting as principal where doing so would 

satisfy the firm’s obligations under applicable Pricing and Execution Rules that adequately 

protect Retirement Investors.

• The pricing standard under the Principal Transaction Exemption should be aligned with the 

applicable Pricing and Execution Rules. Specifically, Financial Institutions should be 

required to use reasonable diligence to ascertain the best market for the subject security so 

that the resultant price to the customer in the transaction is as favorable as possible under 

prevailing market conditions. As mentioned above, firms have rigorous controls in place 

to meet their obligations under applicable Pricing and Execution Rules, and imposing a 

new standard under the Exemption would create confusion and impose significant costs 

without attendant benefits due to the adequacy of existing requirements and controls. 

• Firms should not be required, and may not be able, to provide additional information 

related to the amount of mark-up or mark-down beyond disclosures required by applicable 

securities rules. The mark-up or mark-down on a transaction includes not only the 

financial adviser’s compensation (e.g., sales credit) but also any spread that may have been 

charged or, for inventory positions, any profit or loss incurred, by the trading desk. While 

the sales credit component is known, the calculation of any desk profit or loss on the trade 

is not readily determinable, for example, because securities in inventory may have been 

acquired at different times with different cost bases, or the position may be hedged along 

with many other positions such that the hedge cost allocable to the particular position is not 
Page 32 of 36

readily known. Moreover, depending on how it is calculated, the amount of any mark-up 

or mark-down can change between the time of the Exemption’s required disclosure and the 

time of execution based on changes in the prevailing market price. Making matters more 

challenging, there is no NBBO or exchange marketplace for fixed income securities as 

exists for equity securities, and therefore, broker-dealers cannot look to a single established 

price that can be used to calculate a firm’s mark-up or mark-down on any given 

trade. Accordingly, should the Department proceed with some requirement to disclose 

mark-up or mark-down, firms would need considerable guidance on methodology given 

the complexity around making such calculations. Finally, any disclosures prescribed by 

the Department could conflict with disclosures required by applicable SEC, FINRA and 

MSRB rules and proposals.

12

• The requirement that two other counterparties provide pricing is not workable and should 

be eliminated. The two-quote requirement is inconsistent with current market structure 

and applicable FINRA requirements, which instead impose a more flexible diligence 

standard. Firms may not be able to obtain two quality quotes, but may, for example, be 

able to establish the prevailing market value of the security by reference to similar 

securities or financial benchmarks. Given the substantial number of fixed income cusips, it

is not always the case that there are multiple market makers. For example, an investor may 

hold an illiquid security which only Morgan Stanley may stand to purchase. In that 

instance, there may not be two available quotes. In situations where a firm can obtain two 

quotations, there is no assurance that the quotes will be at reasonable levels, as could be the 

case if the quote provider is not a market maker. Quotes could be “throw away” (or worse 

predatory) and offer little value and should not be considered in the pricing of a security. 

Moreover, firms like Wealth Management operate “open architecture” platforms where 

offerings from third parties are displayed in a “stack” along with Wealth Management’s 

internal prices for viewing by its financial advisers and traders who execute at the level 

representing the best execution. Traders also have access to prices through alternative 

trading systems or “ATS’s” and other electronic communication networks or “ECN’s” in 

order to perform diligence necessary to establish the price of the securities in trades with its 

customers. Furthermore, absent a centralized platform across firms to review quotes, 

imposing a requirement on each Financial Institution to obtain and review two quotes is 

impracticable at best and will delay or prevent execution. As a result, the two-quote 

requirement may adversely affect the price at which the security can be purchased and lead 

to a circularity with respect to disclosures (as described above with respect to the BIC 

Exemption), increase costs, and narrow the universe of securities for which the Principal 

Transaction Exemption is available. 

• Syndicate transactions should be permitted under the Principal Transaction Exemption. 

Syndicate offerings are heavily regulated and utilize robust offering documents which 

disclose the compensation to the underwriter and the features and risks of the security, 

among other items. Further, fixed price offerings have the added benefit of uniform 

pricing across all investors. Finally, these securities may be more expensive or unavailable

 12 We note that both FINRA and the MSRB have proposed rules that would require additional confirmation disclosure 

of the price differential between “paired trades.” See FINRA Notice 14-52 and MSRB Regulatory Notice 2014-20. 
Page 33 of 36

in the secondary market, so retirement account clients may be disadvantaged by not 

receiving access to primary market offerings. 

• The exemption requires that the contract affirmatively state that the Adviser and Financial 

Institution are fiduciaries “with respect to any investment recommendation to the 

Retirement Investor regarding Principal Transactions.” We recommend that the 

Department clarify that Advisers and Financial Institutions are required to affirmatively 

agree that they are fiduciaries only with respect to: 1) those recommendations which 

render an Adviser and Financial Institution a fiduciary under the Proposal; and 2) the 

transactions that are subject to the fiduciary recommendation and not any other 

transactions of the investor. 

Morgan Stanley urges the Department to adopt the above-listed suggestions in amending 

the Principal Transaction Exemption, which is unworkable as proposed and operates to the 

detriment of the very investors it is designed to protect. In doing so, the Department should look to 

the existing regulatory and interpretive framework around pricing, execution and suitability of 

transactions in setting standards that are compatible and not in conflict with the current state of 

operations in the marketplace. Unless changes are made to address these issues as well as those 

issues discussed above, Financial Institutions will not be able to avail themselves of this exemption 

for the benefit of their retirement account clients. This will result in Retirement Investors having 

diminished or no access to the products or liquidity to which they are accustomed today. As a 

consequence of the Proposal, Retirement Investors will be forced to purchase and sell fixed 

income and other products outside of the Principal Transaction Exemption on what may well be a 

more expensive or limited agency basis or through a self-directed brokerage account where they 

cannot receive investment assistance from a financial adviser. 

VII. Potential Streamlined Exemption Should be Approached Cautiously

Morgan Stanley believes that the Department’s focus should be to make the Proposal 

workable rather than adding another exemption at this time. The Department sought comments on 

whether it should propose a streamlined exemption for certain “high quality,” low fee investment 

products. The Department did not propose any specific approach because of their acknowledged 

difficulty in designing the exemption. 

Although additional exemptive relief for low cost products may have some appeal and role 

in the marketplace, we are concerned that such an exemption might restrict consumer choice. 

Firms may seek to rely on a less complex and costly exemption rather than comply with the BIC 

Exemption even though many consumers may prefer to be in potentially more expensive actively 

managed mutual funds that could have returns that exceed benchmark for passively managed or 

index offerings that might fit the exemption. It is well established that cost is not the sole criteria 

when investing and higher costs can be offset by the opportunity for greater returns, credit quality, 

and other relevant factors. See 29 C.F.R. § 2550.404a-1(b); Braden v. Wal Mart Stores, Inc., 588 

F.3d 585, 596, n.7 (8th Cir. 2009) (acknowledging that higher fee funds could be chosen for 

“higher return, lower financial risk, more services offered, or greater management flexibility” and 

holding a fiduciary would not breach its duties simply because “cheaper investment alternatives 

exist in the marketplace”); Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009) (“[N]othing 
Page 34 of 36

in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund 

(which might, of course, be plagued by other problems).”). In any event, at this time Morgan 

Stanley believes that the Department’s priority should be to work with the industry to make the 

Proposal workable. 

VIII. Coverage of Insurance Products Under Multiple Exemptions

The Proposal will make it difficult for consumers to access beneficial insurance products.

Historically, financial advisers have been able to offer fixed and variable annuities to ERISA plans 

and IRA holders without the risk of being a fiduciary. Under the Proposal, firms would have to 

rely on multiple exemptions that will significantly raise compliance burdens and costs. Coverage 

for sales will vary depending upon both the type of product and the type of purchaser. For 

example, the sale of registered insurance products (i.e., variable annuities) to IRAs would be 

covered only by the BIC Exemption, but sales of similar products to fiduciaries of small employer

participant-directed plans would not be covered by the BIC Exemption, and would be covered only 

under Class Prohibited Transaction Exemption 84-24, which, under the Proposal would be 

amended to include a new Best Interest standard. 

While most of the issues outlined earlier in this letter apply equally to annuities, there are 

unique complexities associated with complying with the proposed BIC Exemption for annuity 

sales. These complexities will discourage financial advisers from offering insurance products, 

including products that have beneficial features such as lifetime income features – a policy goal 

that the Department is seeking to promote. Specific concerns relating to annuity sales include: 

• Complying with the requirements to disclose acquisition, ongoing and disposition costs at 

the time of a sales presentation will be impractical. Annuities are sold with a myriad of 

optional riders and features with varying costs and benefits (including lifetime income 

options offered with variable annuities). It will be impossible to provide cost disclosures 

for every combination of the underlying funds and for each optional feature across the wide 

range of annuities offered through Financial Institutions. The result will be fewer products

and less consumer choice as distributors of insurance products necessarily will be forced to 

severely limit their offerings. Furthermore, overemphasizing the legitimate cost of lifetime 

income guarantees could cause consumers to devalue the obvious benefits of these 

products.

• Many of the data elements that the Proposal will require broker-dealers to collect and 

disclose are not standardized among insurance companies or the DTCC. Despite numerous 

efforts among broker-dealers, insurance companies and the DTCC since 2007 to establish 

an industry data utility to collect and disseminate uniform, up to date variable annuity 

information—those efforts have failed because of difficulties and insurmountable hurdles 

in obtaining accurate data on older products, rapid innovation of new products and a lack of 

common/uniform technology. Without this functionality, firms such as Wealth 

Management will not be able to comply with the data request requirements of the BIC 

Exemption.
Page 35 of 36

• There are a number of product features that are unique to annuities such as the ability to 

internally transfer investment sub-account allocations from one sub-account to another,

and the ability to make additional payments to an annuity after the initial sale. The 

Proposal would present difficult, if not impossible, operational obstacles to the continued 

utilization of these features which have been standard product features in the annuity 

industry for decades.

• The Department should also clarify that the Proposal does not apply to a client continuing 

to hold an annuity issued prior to the availability of the BIC in a brokerage IRA or other 

retirement account. Although numerous transitional issues have been noted above, the 

problems for annuities are more pronounced as these assets by their nature more often 

require ongoing guidance after their purchase, whether for the reallocation of underlying 

investments or the exercise of rights available under the contract that arise after issuance.

Generally speaking, without substantial changes to the BIC Exemption, annuities that offer 

the promise of lifetime income protection will simply not be available to IRAs since they would 

not be sold through the BIC Exemption and could not be offered on either a purely self-directed 

basis or through an advisory program. Wealth Management does not believe that variable 

annuities could or should be offered on a completely self-directed basis given the complexity of 

the products and the consumer’s need for education and assistance. Indeed, consumers who have 

no access to guidance concerning their annuity may elect to surrender it in favor of another 

arrangement, potentially triggering surrender changes that impact their retirement savings.

Furthermore, Wealth Management and many other firms currently do not offer variable 

annuities through advisory programs because the annuity products generally are offered on a 

commission basis and do not have an appropriate share class for use with fee based advisory

programs. In fact, the few annuity products that have been designed for use with fee based 

advisory programs are designed for tax efficiency rather than for guaranteed income and may not

generally be appropriate for tax-favored accounts like IRAs. The current universe of annuities 

designed for use with fee based advisory programs generally do not offer robust optional benefit 

features and guarantees that support lifetime income as are available through traditional 

commission based accounts.

Therefore, legacy variable annuity products should continue to be covered by Class 

Prohibited Transaction Exemption 84-24.

IX. Conclusion

Morgan Stanley appreciates the opportunity to comment on the Department’s 

Proposal. Our firm’s Core Values embrace putting clients first. We believe that the Department 

and Morgan Stanley share many common goals, and that a “best interest” standard should govern 

our relationships with retail consumers, including retirement investors. We also support clear and 

understandable disclosure, and strong controls and systems to identify and manage potential 

conflicts of interest.