20 July 2015

Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Conflict of Interest Rule

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Re: Definition of the Term “Fiduciary;” Conflict of Interest Rule—Retirement Investment

Advice (RIN 1210-AB32)

Dear Sir or Madam:

CFA Institute1 appreciates the opportunity to provide comments to the Department of Labor

(DOL) on its proposed rulemaking to define “fiduciary” (the "Proposal") for purposes of the

Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code ("IRC")

for those providing advice and recommendations to an employee benefit plan, plan fiduciary,

plan participant or beneficiary, individual retirement accounts ("IRA") or IRA owner under

ERISA and the IRC. CFA Institute represents the views of those investment professionals who

are its members before standard setters, regulatory authorities, and legislative bodies worldwide

on issues that affect the practice of financial analysis and investment management, education and

licensing requirements for investment professionals, and on issues that affect the efficiency,

integrity and accountability of global financial markets.

Executive Summary

CFA Institute and its members have long supported the principle of putting the interests of

clients first. Our Code of Ethics and Standards of Professional Conduct, to which all members

must annually attest to adhering, specifically requires members and candidates to "act for the

benefit of their clients and place their clients’ interests before their employer’s or their own

interests.” Thus, it is without qualification that we support the aim of DOL, which we see as

ensuring that clients’ interests are put first and that they receive advice that is impartial,

 1 CFA Institute is a global, not-for-profit professional association of more than 132,000 investment analysts, advisers, portfolio

managers, and other investment professionals in 151 countries, of more than 125,000 hold the Chartered Financial Analyst®

(CFA®) designation. The CFA Institute membership also includes 145 member societies in 70 countries and territories.
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 2

transparent, and allows them to make reasoned decisions about investments and their service

providers.

We support the goal of the Proposal and despite concerns expressed by some industry

participants about the potential for reduced service to certain parts of the retirement investment

market, we believe the Proposal does a good job of accommodating various business models

while still requiring investment service providers (hereinafter “Retirement Advisers”) to act in

their clients’ best interest. We believe that action in favor of a higher standard of care among

those providing personalized investment is long overdue. As described by our members, the

investment industry is moving toward fiduciary-based business models, both as a consequence of

technology and competition among investment service providers. In this sense, the Proposal will

push the industry in a direction where it already is heading, and could be seen as reinforcing

market forces.

It was not without conflict that we have arrived at this conclusion. We’ve heard views about the

Proposal from many CFA Institute members and industry experts. From some the feedback was

strongly supportive as it was seen needed to ensure a fiduciary standard of care was available to

investors most in need of good investment advice. From others, however, we received feedback

that suggested this rule would make investment service providers less willing to provide

retirement services to families and individuals due to the potential legal liability in the court

system, and more general, the costs of compliance. In the end, however, we have based the views

expressed herein on a careful reading of the Proposal together with the best arguments and

insights gleaned from members whose professional standards require they put their clients’

interests first.

However, we continue to have a number of concerns about the complexity of this proposed

rulemaking. We are concerned that this complexity will not only result in high compliance costs

but also increases uncertainty about legal liability among market participants. We believe that

these costs are justified by the benefit of moving to a higher standard and the benefits to

investors. Nonetheless, we encourage added guidance that will more clearly delineate the

responsibilities under the final rule, as well as when legal liability may occur.

Background

ERISA defines a fiduciary to a retirement investment plan as someone who (i) exercises any

discretionary authority or discretionary control with respect to management of such plan or

exercises any authority or control with respect to management or disposition of its assets; (ii)

renders investment advice for a fee or other compensation, direct or indirect, with respect to any

moneys or other property of such plan or has any authority or responsibility to do so; or (iii) has

any discretionary authority or discretionary responsibility in the administration of such plan. The

definition of fiduciary for purposes of the IRC's prohibited transaction rules (applying to IRAs)

is essentially the same.

In 1975, the DOL adopted regulations—a "five-part test" (the "Test") —for defining the

circumstances when one would be seen as providing investment advice and thus subject to a

fiduciary standard of care. This regulatory definition of what is a fiduciary applied to both

ERISA and the IRC.
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 3

Under the Test, a fiduciary was one that would: (1) render advice to a plan based on the value of

securities or other property, or make recommendations regarding advisability of investing

in/purchasing/selling; (2) do so on a regular basis; (3) would provide the advice pursuant to a

mutual agreement with the plan; (4) in which the advice would serve as primary basis for

investment decisions with respect to plan assets; and (5) in which the advice would be

individualized.

To qualify as a fiduciary, an individual or firm would have to meet all five elements of the Test.

For example, an adviser would not be considered a fiduciary if investment advice were only

provided one time, (thus not on a “regular basis”). And this would be allowed regardless of

whether the advice was a primary basis for an accountholder’s investment decisions or involved

a single, major decision involving a rollover.

The growth of 401(k) plans (which were not anticipated when the regulations were adopted in

1975) and IRAs has spurred the DOL in recent years to reconsider this approach. In particular, it

believes the Test allows many advice providers, including brokers, to circumvent the true

fiduciary standard originally promulgated by ERISA to provide conflicted advice to the

detriment of investors in retirement accounts.

Under ERISA, advisers are held to standards of prudence and loyalty and can be held liable for

breaches of these duties. Thus, the DOL notes that the greatest impact of its proposed Best

Interest standard will be on IRA accountholders, who do not benefit currently from ERISA's

prudence and loyalty standards for retirement advisers. DOL states IRA accountholders also will

gain a private right of action to sue for breaches of this duty.

Moreover, the DOL believes that many broker-dealers do not understand that they are fiduciaries

with respect to such plans, because they do not hold themselves out as registered investment

advisers ("RIAs"). It states, specifically, that “the Proposed Regulation will cover many

investment professionals who do not currently consider themselves to be fiduciaries under

ERISA" or the IRC. We believe investors also are confused as to the standard of care that is

being provided.

Through the Proposal, DOL aims to establish a standard that is true to ERISA’s statutory intent

by narrowing the current definition of a fiduciary, so as to expand the protections afforded to

investors making decisions with respect to retirement assets. At the same time, it notes an

intention to “preserve beneficial business models for delivery of investment advice” that allows

firms “to continue common fee and compensation practices” (including commissions and

revenue sharing). Central to this concept is the proposed Best Interest Contract Exemption

(BICE) that would allow those providing conflicted advice to still receive compensation for that

advice.

Discussion

Under ERISA, a fiduciary must provide impartial advice that is solely in the client’s best interest.

A fiduciary may not accept payment that creates conflicts of interest unless a prohibited

transaction exemption (PTE) provided by the DOL is applicable.

Despite this language, the Test has allowed broker-dealers and other advice providers

(hereinafter Retirement Advisers) to advise retirement plans, individuals, and IRA

accountholders without meeting a Best Interests standard or having to qualify under a PTE.
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 4

Through this Proposal, the DOL attempts to restore the landscape for receiving advice that is

consistent with the statutory language originally contemplated by ERISA.

The Proposal seeks to achieve this by requiring new obligations on those individuals and firms

providing advice or recommendations to employee benefit plans, plan fiduciaries, plan

participants or beneficiaries, or IRAs or IRA owners in the role as fiduciaries under ERISA and

IRC. Notably, the Proposal would extend for the first time a private right of action to IRA

holders to hold Retirement Advisers liable for breach of their Best Interests Standard.

The Proposal also responds to comments received in response to the DOL’s 2010 proposal by

specifically seeking to alleviate (1) concerns about the ability of Retirement Advisers to provide

education without triggering a fiduciary duty; and (2) industry concerns that current advice

providers would lose their ability to retain certain compensation structures in light of a required

fiduciary duty standard.

We recognize that the retirement landscape for individuals has shifted substantially since DOL’s

1975 amendments. Moving toward defined-contribution retirement plans and away from

defined-benefit retirement plans, today’s investors have greater individual responsibility for

understanding their retirement options, planning their futures, and managing their retirement

assets through participant-directed plans, including company-sponsored 401(k) plans and IRAs.

We agree with the DOL that the current Test does not honor the statutory definition of fiduciary

and has allowed many current Retirement Advisers to avoid the obligations of a fiduciary under

ERISA rules. It has allowed them to give conflicted advice, steer investors into investments that

may benefit the Retirement Advisers to the detriment of clients, and to act in ways that would be

prohibited if they were considered fiduciaries. We strongly support this attempt by DOL to

realign the provisions defining a fiduciary with the original statutory context. This is an

important step in providing retirement investors with the protection they deserve.

CFA Institute strongly believes Retirement Advisers owe a duty of prudence, loyalty and care to

their clients when providing personalized investment advice. As a consequence, we believe these

service providers therefore must put the interests of their clients ahead of their own interests and

the interests of their firms. We believe that the BICE, as described more fully below, goes a long

way toward alerting investors to potential conflicts of interest on the part of their Retirement

Advisers. We also support the approach that the most robust disclosure requirements are

dedicated to advice and transactions that favor proprietary products and those sold from a firm’s

securities inventory. These are appropriate responses to the greater potential for misconduct

arising from such transactions. And we support extending the private right of action to IRA

investors as appropriate to ensure accountability for Retirement Advisers, though, as noted

below, the uncertainty about legal liability is perhaps the greatest threat to the success of the

Proposal.

We support provisions in the Proposal to allow investors to receive general retirement education

and information without triggering a fiduciary standard for the providers of that education. We

believe preserving this advantage for investors is a critical component for creating informed

investors who need such information if they are to make meaningful investment decisions. While

these education and retirement materials would be general and not individualized, they

nonetheless would give investors a starting place for assessing their individual needs.
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 5

In general, we also support the use of various forms of compensations for individuals and firms

providing investment services to their clients. However, many in the industry have helped to blur

the lines between the standards of care that investors should expect from different types of

service providers. For example, investment advisers have been bound by a fiduciary duty as

stipulated in the Advisers Act and as interpreted through common law. Brokers and other nonfiduciary service providers, on the other hand, are bound by a lower, suitability standard, wherein

they are not bound by the standards of prudence, loyalty or care, but by whether a product or

service sold is suitable for a particular investor at a particular time. Confusion over the

distinction between these two types of service providers has blurred, in part because of lenient

regulatory interpretations over how non-fiduciaries refer to themselves. Many use the term,

"Financial Advisors," which we believe has contributed significantly to the confusion among

retail investors about the standards of care owed to them by their investment service providers.

This situation was described in the 2008 study of investor perceptions of investment advisers and

broker-dealers conducted by the Rand Corp. (the "Rand Study").

CFA Institute strongly believes that regulators need to control the terminology used to describe

different investment service providers in order to remedy this type of confusion among investors.

In particular, only those individuals and/or firms that are subject to the fiduciary standards of the

Advisers Act -- and to the fiduciary standards of ERISA -- should be permitted to use terms such

as advisers or advisors as titles or descriptions for what they do. If an individual or firm wishes

to refer to themselves as advisers, then they would be subject to the fiduciary standards of the

Advisers Act and ERISA. Likewise, all service providers who provide individualized investment

advice should have to refer to themselves as advisers and adhere to the fiduciary standards of the

Advisers Act and ERISA.

On the other hand, service providers who wish to be subject to the lower suitability standard --

and, per the Proposal, continue to receive commission-based compensation -- should have to

refer to themselves as "salespersons" to reflect the different standards of care their clients should

expect them to provide. Overall, we don’t believe the Proposal will help to reduce investor

confusion about standards of care. Indeed, it may exacerbate the confusion because salespeople

operating under the BICE in the retirement market may lead their clients to assume they are

providing a fiduciary standard of care when providing advice for other, non-retirement

investments. It is critical, therefore, that the DOL work with the Securities and Exchange

Commission (“SEC”) to develop a harmonized approach to these definitions to add clarity to the

roles of advisers in the non-retirement market to prevent increased confusion.

Differences in the Governing Statutes

The DOL has stated with regard to the Proposal that it has “aimed to coordinate and minimize

conflicting or duplicative provisions between ERISA, the Code and federal securities laws, to the

extent possible." The DOL also points out the governing statutes do not permit it to make the

obligations of fiduciary investment advisers under ERISA and IRC “identical to the duties of

advice providers under securities laws.” ERISA and the IRC “establish consumer protections for

some investment advice that does not fall within the ambit of federal securities laws, and vice

versa. Even if each of the relevant agencies were to adopt an identical definition of ‘fiduciary’,

the legal consequences of the fiduciary designation would vary between agencies because of

differences in the specific duties and remedies established by the different federal laws at issue.”
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 6

CFA Institute understands that there are statutory differences, and different circumstances and

context in which these standards would be applied, between ERISA, the IRC and the Advisers

Act. We believe this would mean that the principles of loyalty, prudence and care, would be

applied differently by advisers in the different situations overseen by the different statutes. In a

more favorable environment, we would prefer a fiduciary standard that would apply consistently

for retirement and non-retirement investment advice. That is not the market in which we operate,

however, and the different fiduciary standards are a fact of life. Nevertheless, we encourage the

SEC, as the statutory regulator for most of the firms and investment products used in the

retirement market, to work closely with the DOL to reduce the disparities between the different

fiduciary standards.

New Definition of Investment Advice

The Proposal seeks to replace the 1975 Test for determining who is a fiduciary and redefine what

constitutes providing investment advice as:

(1) Providing investment or investment management recommendations or appraisals to an

employee benefit plan, a plan fiduciary, participant or beneficiary, or an IRA owner or

fiduciary, and

(2) Either (a) acknowledging the fiduciary nature of the advice, or (b) acting pursuant to an

agreement, arrangement, or understanding with the advice recipient that the advice is

individualized to, or specifically directed to, the recipient for consideration in making

investment or management decisions regarding plan assets.

Investment Advice is in the “Best Interest” of the investor when the Retirement Adviser and

financial institution providing the advice act with the care, skill, prudence, and diligence under

the circumstances then prevailing that a prudent person would exercise based on the investment

objectives, risk tolerance, financial circumstances and needs of the retirement investor, without

regard to the financial or other interest of the adviser, financial institution, any affiliate, related

entity, or other party.

We strongly support the proposed definitions for investment advice and the DOL's view of the

need for and manner in which the interests of investors are put first.

Activities That Constitute Investment Advice

The types of activities that would constitute “investment advice,” and thus would make a

provider of such advice a fiduciary, include:

• Recommendation to distribute plan assets. A recommendation regarding the advisability

of acquiring, holding, disposing of, or exchange, securities or other property (including

recommendations relating to rollovers/distributions from IRAs); merely providing plan

participants with information about the plan or IRA distribution options will not create a

fiduciary.

• Recommendation as to management of plan assets. A recommendation regarding the

management of securities or property (including recommendations relating to

rollovers/distributions from IRAs). Individualized advice or that which is specificallydirected concerning proxy voting and other ownership rights creates a fiduciary duty. But
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 7

guidelines and other information about proxy voting policies provided to a broad group

of investors would not.

• Appraisals. An appraisal, fairness opinion or statement about the value of securities or

other property when provided in connection with a specific transaction involving

acquiring, disposing or exchanging of the securities or other property by the plan or IRA.

• Recommendation on investment managers or advisers. A recommendation on the

selection of an investment adviser of manager would constitute investment advice.

However, general advice on the criteria to consider when making such selections would

not be a recommendation.

The Proposal makes clear that execution alone at the direction of the plan or IRA owner will not

constitute a fiduciary activity.

In addition to the content of the communication, the manner in which the content is provided,

would be important in the Proposal for determining whether a person providing it is a fiduciary.

In order to be a fiduciary, a person would have to acknowledge that status as a fiduciary under

ERISA with respect to the advice, or give the advice “pursuant to a 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 in making investment or

management decisions with respect to securities or other property of the plan or IRA.”

Consistent with this approach, information that is provided by someone not claiming to be a

fiduciary under ERISA or is so general as not to meet the standard for individualized advice will

not necessarily trigger the requirements pertaining to being a fiduciary.

In general, we are supportive of applying the definition of fiduciary duty to recommendations for

plan asset distributions, as well as relating to the management of plan assets. However, we have

difficulties seeing why performing an appraisal on property or assets, or the valuation of

securities or other property should create a fiduciary duty. Value is tangible only when and if two

parties agree to exchange property on the basis of an agreed-upon price that may or may not be

based on an appraisal or valuation. A valuation or appraisal is applicable only at the time it is

given, and may change significantly in the very near term.

Carve-outs from Definition of Investment Advice

The Proposal notes that the definition of investment advice, alone, could cast the net too wide

and capture activities that should not trigger a fiduciary duty. Thus, the DOL is proposing certain

“carve outs” for those who (a) do not specifically hold themselves out as fiduciaries with respect

to the advice or (b) do not provide advice in a way that is individualized or specifically directed

to an individual for use in making investment decisions regarding securities or property in the

plan or IRA. Retirement Advisers who promote themselves as fiduciaries cannot later claim

reliance upon one of the carve-outs.

The carve outs for activities that will not constitute investment advice:

• Arms’ length transactions. Statements or recommendations that are made to a large plan

investor in an arm’s length transaction, when there is not an expectation of fiduciary

investment advice;
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 8

• Employee advice. Statements or recommendations by employees of a plan sponsor to the

plan fiduciary of an ERISA plan, if the employees do not receive additional

compensation for the statements or recommendations;

• Platform providers. Marketing or making available a platform of investment alternatives

to plan fiduciaries for ERISA participant-directed individual account plans;

• Swap transactions. Offers or recommendations to plan fiduciaries of ERISA plans to

enter into regulated swaps or security-based swaps with plans;

• ESOP appraisals. An appraisal, fairness opinion or other statement of value to an ESOP

regarding employer securities, to a collective investment vehicle holding plan assets, or a

plan for meeting reporting and disclosure requirements;

• Investment alternatives. Identifying investment alternatives in keeping with objective

criteria provided by plan fiduciaries of ERISA plans, or providing objective financial data

to such fiduciaries; and

• Education materials. Information and materials that constitute investment or retirement

education.

We generally agree that these proposed carve-outs from what is considered investment advice for

purposes of applying a fiduciary standard are appropriate and workable. We believe the

importance lies in ensuring advice that is tailored to the particular needs of specific investors is

provided under a fiduciary standard of care. The more general advice and services noted in the

carve outs, while important, do not rise to that level.

Investment Education.

The Proposed rule makes clear that Retirement Advisers and others may provide general

education on retirement savings or employment-based plans and IRAs without being seen as

fiduciaries. We believe this provision to be of utmost importance and support the approach.

Moreover, we appreciate that the information and educational materials may address retirement

needs beyond the actual date of retirement.

We agree that investors readily need these types of information in order to consider and prepare

for a retirement future. We further believe that investors must receive information that allows

them to make meaningful investment decisions. As investors have had to become more active in

choosing retirement options and investment vehicles, they have faced a growing need for tools

that allow them to meaningfully direct their future.

We support the extension of this carve-out for general investment education information and

materials to be provided to plan participants and IRA accountholders. We understand that neither

the frequency nor form of these materials or information matters as long as they do not include

advice or recommendations as to specific investment managers, investment products, or the

value of particular securities or property. We also agree with the preclusion of references to

specific products and alternatives on the basis that even when accompanied by statements about

the availability of other products, specific recommendations can easily convey to investors that

the advice is individualized enough to be fiduciary advice.
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 9

In allowing a range of educational information to easily flow to investors, the Proposal groups

this information into five categories: plan information, general financial, investment and

retirement information, asset allocation models, and interactive investment materials, but

confirms that these groups are not exclusive and that other types of information may also be

allowed without constituting investment advice.

Prohibited Transaction Exemptions

The DOL has existing prohibited transaction exemptions (PTEs) that essentially provide safe

harbors for certain actions that otherwise would violate DOL regulations. Thus, particular PTEs

provide specific conditions under which otherwise prohibited activities are allowed.

In addition to the “carve outs” from what would be considered the rendering of investment

advice, the Proposal proposes new or amended PTEs are aimed at allowing advisers to continue

engaging in common compensation arrangements. At the same time, certain of these new and

amended PTEs would protect plan participants and IRA accountholders by imposing a Best

Interest standard.

The most significant of the newly proposed PTEs is the Best Interest Contract Exemption. Under

the BICE, advice providers could meet their fiduciary obligations and be deemed as providing

advice in the best interests of clients in cases where otherwise that advice would be seen as

conflicted, and thus prohibited. It also would dramatically change the way Retirement Advisers

who heretofore have not adhered to a fiduciary standard conduct business.

Best Interest Contract

Under BICE, Retirement Advisers could comply with the required fiduciary standard while still

receiving compensation for investment advice in potentially conflicted situations if they comply

with all aspects of the BICE.

To qualify for the exemption, Retirement Advisers and their firms would need to comply with all

of the following conditions:

• They would have to contractually acknowledge their fiduciary status and commit to

adhering to basic standards of impartial conduct;

• They would have to warrant that they will comply with applicable federal and state law

regarding advice;

• They would have to adopt policies and procedures reasonably designed to minimize the

harmful impact of conflicts of interest; and

• They would have to disclose basic information about their conflicts of interest and the

cost of their advice.

Beyond these conditions, Retirement Advisers seeking to qualify for the BICE also would have

to commit to fundamental obligations of fair dealing and fiduciary conduct, meaning to give

advice that is in the customer’s best interest. They would have to avoid misleading statements,

receive no more that reasonable compensation, and comply with applicable federal and state laws

governing advice.

The BICE would be available to Retirement Advisers who provide advice to retail investors,

including plan participants and beneficiaries, IRA owners, and plan sponsors of plans with fewer
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 10

than 100 participants. In keeping with the DOL’s concern about the vulnerability of retail

investors, we agree that this is an appropriate focus on smaller plans with fewer than 100

participants. We agree that plan sponsors of larger plans often are able to provide a broader range

of resources to plan participants.

The BICE is designed to allow individual Retirement Advisers or their firms to provide advice

under otherwise “conflicted” circumstances while continuing to receive otherwise prohibited

compensation (brokerage or insurance commissions, trailing commissions, sales loads, 12b-1

fees, and revenue sharing payments). Other compensation such as investment management and

administrative fees would also be allowed. In all cases, allowable compensation would be limited

to sales of commonly purchased investments, including “assets” defined as bank deposits, bank

certificates of deposit, shares or interests in registered investment companies, bank collective

funds, insurance company separate accounts, exchange-traded REITS, exchange-traded funds,

corporate bonds offered under the 1933 Act, agency debt securities, US Treasury securities,

insurance and annuity contracts, guaranteed investment contracts, and equity securities that are

exchange-traded. The DOL also advises that a number of investments not specifically listed

would be allowed through pooled investment funds, which are covered by the exemption.

Advisers relying on the BICE would have to notify the DOL prior entering into such agreements

with their clients and would have to keep records for six years that the DOL could review on

request. When reliance would begin is unclear under the Proposal and as proposed it would

create uncertainty for Retirement Advisers as to when they need to first enter into the BICE. We

recommend that the Final Rule address this, or that the DOL provide accompanying clarifying

guidance.

Finally, Retirement Advisers could not be subject to policies and procedures designed to make

recommendations not in their clients' best interests. This would include certain compensation

arrangements or incentive programs. The Proposal notes that while not required, a “level-fee”

structure would be one way to comply with this requirement. We also encourage the DOL to

provide additional guidance on the types of practices that would meet these requirements.

We believe that the exemption afforded Retirement Advisers through the BICE serves to require

a fiduciary standard while concurrently allowing various types of compensation arrangements.

This approach allows investors to continue receiving service from an array of providers while

receiving a fiduciary-level of care despite having potential conflicts of interests.

We recognize that the introduction of the BICE is intended to preserve the business models of

commission-based service providers. By using the BICE, DOL reasons, Retirement Advisers

would have flexibility to determine how to comply with the standards in light of their particular

businesses. Plan participants and IRA owners would be ensured fair dealing and pay only

"reasonable" compensation while not having to endure misleading statements from their

Retirement Advisers. The principles-based approach of this PTE would avoid prescriptive rules

and rely on the commitment of commission-based Retirement Advisers to provide advice in the

best interests of retail investors, the plan, and/or IRA owners.

While we appreciate the intent of the BICE, we have a number of concerns about the complexity

of the BICE process that will impede its effectiveness, as well as impose compliance costs that

may be unnecessary under a simpler approach. The complexity of what is required for complying

with the BICE has only increased the concerns about potential liability and accompanying legal
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 11

costs. To the extent that the DOL can in its final rules more clearly define the parameters of

using BICE and when liability may attach, we believe this approach will become more palatable

to Retirement Advisers and help assuage the concerns relating to increases in litigation.

We are also concerned about the requirement that advisers must notify the DOL in advance of

creating an agreement reliant upon a BICE. While we are under the belief that advisers are

required only to provide notification to DOL, we don’t believe it is appropriate to put paperwork

ahead of implementation of an investment program. At the very least, we believe notification

should occur concurrently with implementation of the plan rather than prior to its adoption. We

also suggest clarification that the Retirement Adviser can take certain steps, such as preliminary

conversations with investors generally relating to engagement, before having to execute a BICE.

Disclosure Requirements

The Proposal recognizes that some Retirement Advisers and their firms limit the products

available to investors to those that will generate third-party income or are proprietary products.

Retirement Advisers taking that approach could still receive compensation by relying on the

BICE, and meeting additional conditions. In particular, before offering products to investors, the

firm would have to make a written statement that the limitations do not prevent the Retirement

Advisers from acting in the client’s best interests. And when the limited menu of options would

not meet an investor’s needs, the Adviser would have to notify the Investor of that circumstance.

We support the enhanced disclosure requirements mandated for Retirement Advisers who limit

their offerings to products that generate income for the advisers or to proprietary products. These

products may or may not be the best options for investors, but the potential for selling

instruments that are not be in the best interest of clients is sufficiently great to warrant greater

care and disclosure.

Compensation Disclosures

The Proposal would limit the payments received to the fair market value of the services provided

by the Retirement Adviser. Retirement Advisers using the BICE would have to provide a Web

page showing the compensation that they could receive in relation to each asset that it makes

available to the investor, or that has been sold within the last 365 days; the source of the

compensation, and how it varies among asset classes. In addition, Retirement Advisers would

have to provide individual annual disclosure statements to each investor within 45 days of year’s

end showing the asset purchased or sold and its price; the total fees and expenses paid by the

individual, plan account or IRA with respect to each asset; and the total dollar amount of

compensation received during the period relating to that asset.

The BICE itself would contain a number of disclosures, including the identity of any of the

Retirement Advisers' conflicts of interest (and reference to the advisers’ Web sites), notification

that investors have a right to obtain complete information about fees relating to its investments,

including fees payable to the Retirement Advisers (their firms and related entities), and whether

their Advisers’ firms offer proprietary products or receive third-party payments with respect to

those investments.

We believe these disclosures would be critical to help investors understand the potential conflicts

that could affect a Retirement Adviser’s approach with respect to investors’ assets, and affect an

investor's decision about whether to work with a an Adviser. While the Retirement Adviser
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

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ultimately would have to apply the Proposal's Best Interest approach to potentially conflicted

situations, these disclosures would enable investors to be informed about those conflicts. This is

central to maintaining the investor’s trust and strengthening market integrity.

Under BICE requirements, Advisers would have to provide “point of sale” disclosures to

investors before execution of transactions. This information would be provided through a chart

for each asset recommended the “total cost” for 1-, 5-, and 10- year periods, based on the dollar

amount investment recommended by the Adviser and on reasonable performance assumptions.

We believe requiring point of sale disclosures exceed what is needed and places undue burdens

on Retirement Advisers. If the goal is to provide investors with information on costs of

investment options, the DOL could require disclosure in a more feasible and less-complicated

format. For example, providing disclosure at or before completion of the transaction would be

sufficient. A “Surgeon General”-type warning to investors about costs and fees, as noted in the

Proposal, would be sufficient to put investors on notice.

Other PTEs

The Proposal would allow Retirement Advisers to recommend and sell certain fixed-income

securities directly from their own inventories in accordance with the exemption’s consumerprotection conditions. While each investor's circumstances would be different and we support the

ability of investors to buy instruments that they feel are most suited for their particular

circumstances, we question this PTE given that retirement plans have many other options that

would give such plans more diversified exposure to the fixed-income market without having to

worry about pricing for illiquid instruments. Moreover, as these markets become increasingly

illiquid, investors will have difficulty finding indicative quotes as to the value of these

instruments. At the very least, then, we believe these instruments should adhere to the same

disclosure and standards of care required of other instruments that are sold from firms’ own

inventories or are sold on a principal basis.

Of particular interest to us is the DOL’s consideration of a PTE that would contain less stringent

requirements than the BICE. This PTE would provide for a more streamlined approach for

advisers who offer certain high-quality investment products such as transparent mutual funds that

carry lower fees, on the theory that they would present less potential for conflicts of interest.

We recognize the justification for a streamlined system with fewer conditions that would

continue to safeguard investors' interests. We understand that this PTE would reduce the

potential for conflicts by requiring high-quality and low-cost investment options. This approach

would not require adherence to many of the contractual commitments in the BICE and would

provide a viable alternative to Retirement Advisers who may not have the resources to comply

with the BICE. Finally, this provision would go toward striking a reasonable balance between

doing what’s right for investors and managing the compliance costs of advisers.

We have concerns about the potential for abuse under this PTE, specifically as it relates to the

type of investments exempted. We recognize that index funds may be included in this category

of exempted instruments and while each investors' circumstances will be different, index funds

often provide acceptable investment options for many investors. Nevertheless, low-cost is a

relative consideration, as an index fund that carries a 70-basis point fee is relatively high-cost

when compared with similar funds of reputable and experienced firms who charge less than 25
Comment Letter to DOL

Re: Definition of Fiduciary

20 July 2015

Page 13

basis points for similar products. Again, a PTE in this instance would not ensure investors of a

fiduciary standard of care and could lead to less-than-optimal outcomes for investors.

Private Right of Action

The proposal would grant IRA account holders a private right of action to bring suits to allege

violation of an adviser’s fiduciary duty with respect to their accounts. This new provision would

replace arbitration as the only avenue for redress for such investors.

We believe this is a positive development. Retirement investors should be entitled to hold

Retirement Advisers accountable for breaches of their Best Interest duty.

Effectiveness

The DOL proposes to make definition of fiduciary effective eight months after its adoption.

Given the extensive change in policies, procedures, and contract provisions that these new

regulations would impose on certain service providers, we suggest a longer time phase-in period

for Retirement Advisers to come into compliance. We think this is particularly necessary if the

BICE is adopted substantially in the form proposed.

Conclusion

We appreciate the goal of the DOL to impose a more robust fiduciary standard for those who

provide advice to investors relating to their retirement. We believe this to be a particularly

crucial issue, given the importance of the investment decisions and the investor’s right to rely on

advice that that is provided with the investor’s best interests in minds. We support the Proposal

as an important step toward this goal.

Should you have any questions about our positions, please do not hesitate to contact Kurt N.

Schacht, CFA at kurt.schacht@cfainstitute.org or 212.756.7728; or Linda Rittenhouse at

linda.rittenhouse@cfainstitute.org or 434.951.5333.

Sincerely,

/s/ Kurt N. Schacht /s/ Linda Rittenhouse

Kurt N. Schacht, CFA Linda L. Rittenhouse

Managing Director, Standards and Director, Capital Markets Policy

Financial Market Integrity CFA Institute

CFA Institute