July 17, 2015 

By Email and Courier 

Office of Exemption Determinations 

Employee Benefits Security Administration 

Attention: D–11712 

U.S. Department of Labor 

122 C Street, NW 

Suite 400 

Washington DC 20001 

and 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Attn: Conflict of Interest Rule and Related Exemptions 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Re: Comments regarding ZRIN: 1210–ZA25 and RIN: 1210-AB32 

Ladies and Gentlemen: 

On behalf of the U.S. Securities Markets Coalition,1 The Options Clearing 

Corporation (“OCC”) hereby submits these comments regarding two related proposals 

issued by the Department of Labor (the “Department”): “Definition of Term ‘Fiduciary’; 

Conflict of Interest Rule -- Retirement Investment Advice [RIN: 1210-AB32]” (the 

“Fiduciary Proposal”)2 and “Proposed Best Interest Contract Exemption, Application No. 

D-11712 [ZRIN: 1210-ZA25]” (the “BIC Exemption Proposal”).3 

 

1

 The members of the Coalition (together with OCC) are BATS Options, BOX Options Exchange, Chicago 

Board Options Exchange, International Securities Exchange, NASDAQ Options Market, NASDAQ OMX 

PHLX, NYSE Arca, and NYSE Amex. All of these members are regulated by the Securities and Exchange 

Commission (“SEC”), and OCC is also regulated by the Commodity Futures Trading Commission and The 

Board of Governors of the Federal Reserve. NASDAQ Options Market and NASDAQ OMX PHLX are 

owned by the NASDAQ OMX Group, and NYSE Arca and NYSE Amex are owned by the 

IntercontinentalExchange Group. 

2

 80 Federal Register 21928 (Apr. 20, 2015). 

3

 80 Federal Register 21960 (Apr. 20, 2015). 
2 

In the Fiduciary Proposal, the Department issued a new proposed regulation that 

significantly expands the types of conduct that will cause a person or entity to be 

considered a “fiduciary” for purposes of the Employee Retirement Income Security Act 

of 1974, as amended (“ERISA”), and the prohibited transaction provisions of the Internal 

Revenue Code of 1986, as amended. This expansion goes far beyond the types of 

conduct that would cause a person to be considered a fiduciary under the Investment 

Advisers Act of 1940 and the guidance issued thereunder by the primary regulator for 

investment advisers, the SEC. In the BIC Exemption Proposal, the Department issued a 

new proposed prohibited transaction class exemption entitled the “Best Interest Contract 

Exemption” that is intended to permit certain transactions between a fiduciary and an 

ERISA plan or individual retirement account (an “IRA”).4 While we are concerned about 

the overall direction of the entire proposal by the Department and particularly the concept 

of creating different standards for brokers with respect to retirement and non-retirement 

accounts, our greatest concern on behalf of the Coalition is that the Fiduciary and BIC 

Exemption Proposals would take away the current ability of investors to use exchangetraded (or listed) options in IRA accounts. Accordingly, OCC recommends a 

modification of a specific term of the BIC Exemption Proposal and recommends two 

clarifications to the terms of the Fiduciary Proposal. 

1. Definition of “Assets” for Purposes of the BIC Exemption Proposal 

 A. Summary 

 The BIC Exemption Proposal would permit certain “Advisers,” “Financial 

Institutions,” and their affiliates and related entities to receive compensation for services 

provided to “Retirement Investors” in connection with a purchase, sale or holding of an 

“Asset” by a Plan, participant or beneficiary account, or IRA, as a result of the Adviser’s 

and Financial Institution’s advice. For this purpose, “Asset” is defined as bank deposits, 

CDs, shares or interests in registered investment companies (mutual funds), bank 

collective funds, insurance company separate accounts, exchange-traded REITs, 

exchange-traded funds, corporate bonds offered pursuant to a registration statement under 

the Securities Act of 1933, agency debt securities, U.S. Treasury securities, insurance and 

annuity contracts (both securities and non-securities), guaranteed investment contracts, 

and exchange-traded equity securities.5

 The definition of “Asset” specifically excludes 

any equity security that is a put, call, straddle or other option to buy an equity security 

from or sell an equity security to another without being bound to do so. 

 

 

4

 The Department simultaneously issued another new proposed prohibited transaction class exemption 

intended to permit principal transactions in certain debt securities, and proposed amendments to and partial 

revocations of several existing exemptions currently used by ERISA plans and IRAs to engage in common 

securities trading transactions. These comments do not address such proposals. 

5

 See Section VIII(c) of the Proposed Exemption. 
3 

B. Recommendation 

 We recommend that the definition of “Asset” be revised in the final version of the 

BIC Exemption Proposal (the “Final Exemption”) to eliminate the inappropriate 

exclusion of exchange-traded options. 

 C. Explanation 

 Equity options have been listed and traded on national securities exchanges (just 

like publicly traded stock) for over 40 years. U.S. options exchanges currently offer 

options on roughly 3,700 individual stocks, exchange-traded funds, and equity-related 

indices. In 2014, some 3.8 billion options contracts on individual equities were traded on 

U.S. options exchanges, with each contract typically covering 100 shares of the 

underlying stock. OCC is the central clearing agency for all such U.S. options 

exchanges, and was designated in July 2012 as a systemically important financial market 

utility by the Financial Stability Oversight Council. 

Individual investors (including IRA account owners) are significant participants 

in the listed options markets. It has been estimated that almost 25 percent of volume (and 

perhaps even more) on U.S. options exchanges is attributable to individual investors. It is 

our understanding from brokers that cater to self-directed investors that IRA account 

owners are increasingly using listed options in their IRA accounts to manage the risk 

associated with owning stock, with the ultimate goal of increasing their retirement 

savings. In this respect, it has been estimated that approximately 15 percent of individual 

investor volume currently comes from IRA accounts. We understand that such firms, 

consistent with their interpretations of applicable regulatory requirements, limit the types 

of options strategies that IRA account owners can use to conservative strategies such as 

selling “covered” call options.6

 In fact, we understand that selling covered calls is the 

most popular options strategy employed in such accounts, and it is widely considered a 

conservative strategy to generate increased investment income from a stock position.7

 We are concerned that many brokers and other service providers to ERISA plans 

and IRAs who are not fiduciaries under current law could be deemed to be fiduciaries 

under the Fiduciary Proposal. It also appears that many transactions relating to the 

trading of listed options by IRAs may become prohibited transactions for which the BIC 

 

6

 An exchange-traded call option is a standardized contract that gives the buyer of such option the right but 

not the obligation to buy 100 shares of the underlying stock at the price specified in the contract at any time 

before the expiration of the option. The call option is considered “covered” if the seller of the option owns 

the underlying shares referenced by the option. The seller of the option receives investment income in the 

form of the premium paid by the buyer for such option. 

7

 See, e.g., Hemler & Miller, The Performance of Options-Based Investment Strategies: Evidence for 

Individual Stocks During 2003-2013, 

http://www.optionseducation.org/content/dam/oic/documents/literature/files/perf-options-strategies.pdf

(“The findings suggest that options-based strategies can be useful in improving the risk-return 

characteristics of a long equity portfolio.”) 
4 

Exemption Proposal would be the only reasonably available exemption. The preamble to 

the BIC Exemption Proposal states that the exemption is intended to apply to 

“investments that are commonly purchased by plans, participant and beneficiary 

accounts, and IRAs.”8 As described above, we believe that listed options are, in fact, 

investments that are commonly purchased by IRAs and can be used as part of a 

conservative strategy to generate increased investment income. Thus, we believe that the 

exemption should be made applicable to transactions relating to the trading of listed 

options. Accordingly, we recommend that exchange-traded options be included in -- 

rather than excluded from -- the definition of “Asset” in the Final Exemption. 

2. Clarification of the Meaning of a Recommendation as to the Management of Plan 

Investments for Purposes of the Fiduciary Proposal 

 A. Summary 

 Under the Fiduciary Proposal, if an adviser or service provider to an ERISA plan 

or IRA makes recommendations as to the management of securities that constitute assets 

of an ERISA plan or IRA, and if certain other conditions are satisfied, the adviser or 

service provider will be considered a fiduciary with respect to such plan or IRA.9

 The 

preamble to the proposed regulation notes that, under this prong of the definition, 

fiduciary acts include individualized or specifically directed advice and recommendations 

on the exercise of proxy or other ownership rights. However, information (such as proxy 

guidelines) that is provided to a broad class of investors without regard to the investor’s 

individual interests or investment policy, and that is not directed or presented as a 

recommended policy for the plan or IRA to adopt, would not rise to the level of fiduciary 

investment advice for purposes of the Fiduciary Proposal.10 

 B. Recommendation 

 We recommend that the final version of the Fiduciary Proposal regulation (the 

“Final Regulation”) clarify that neither the screening by a broker of the owner of a selfdirected IRA account nor the determination by a broker that engaging in listed option 

trading is appropriate for such account owner by itself constitutes a recommendation as to 

the management of plan investments. 

 C. Explanation 

 Under FINRA and options exchange rules, before approving a customer’s account 

for trading options, a broker must exercise due diligence to ascertain the essential facts 

relative to the customer, his/her financial situation and investment objectives as well as 

 

8

 See 80 Federal Register at 21967. 

9

 See Proposed Section 2510.3-21(a)(1)(ii). 

10 See 80 Federal Register at 21939. 
5 

his/her investment experience and knowledge; and approval or disapproval of the account 

for options trading must be based upon such information.11 If a broker determines to 

permit the customer to trade listed options, it typically uses “levels” to determine the 

types of options transactions in which the customer may engage. Level 1, the level at 

which customers new to options trading begin such activity, typically authorizes 

conservative options strategies such as writing covered calls. The requirement to conduct 

the screening is based on the rules of FINRA and the options exchanges, not on the 

customer’s individual interests or investment policy, and the determination that the 

customer is eligible for his account to be approved for listed option trading is not 

presented as a recommendation to engage in such trading. Thus, we do not believe that 

either conducting such a screening or determining that a customer’s account may be 

approved for listed option trading rises to the level of fiduciary conduct for purposes of 

the Fiduciary Proposal. Nevertheless, because the standard is broadly stated, it is 

possible that the proposal could be interpreted to provide that such conduct would result 

in fiduciary status. Accordingly, we recommend that the Final Regulation be clarified to 

provide that, absent other fiduciary conduct, neither the screening by a broker of the 

owner of an IRA account nor the determination by a broker that such an owner satisfies 

the requirements to engage in listed option trading constitutes a recommendation as to the 

management of plan assets. 

We believe that it would be entirely inappropriate for compliance with a process 

that is intended to identify customers who have sufficient investment knowledge and 

experience to engage in options trading to result in a conclusion that the broker is a 

fiduciary with respect to that customer as if the broker were making investment decisions 

for the customer. And, assuming the BIC Exemption Proposal is adopted as proposed, 

the result of such a conclusion is that the exemption would be unavailable (because of the 

exclusion of put and call options from the definition of Asset), and even the most 

experienced investors would effectively be prohibited from engaging in transactions that 

they currently find beneficial in self-managing their investments. 

3. Clarification of the Investment Education Carve-Out under the Fiduciary Proposal 

 A. Summary 

 Under the Fiduciary Proposal, certain conduct that otherwise might rise to the 

level of fiduciary status is specifically carved out from the definition of providing 

investment advice. One such exception applies to the providers of investment education 

to a plan, plan fiduciary, plan participant, IRA or IRA owner, provided that the education 

does not include recommendations with respect to specific investment products or 

recommendations on investment, management or the value of particular property.12

 

 

11 See, e.g., FINRA Rule 2360(b)(16)(B). The rules of FINRA and the options exchange are uniform in 

this respect. 

12 See Proposed Section 2510.3-21(b)(6). 
6 

B. Recommendation 

 We recommend that the Final Regulation clarify that the provision of instructional 

models, videos and interactive materials regarding listed option trading qualifies for the 

investment education carve-out to the definition of investment advice. 

 C. Explanation 

 The Fiduciary Proposal and preamble make clear that the provision of specified 

investment educational information and materials (such as investment allocation models 

and interactive plan materials) to a plan fiduciary or IRA owner will not constitute the 

rendering of investment advice if certain conditions are met, such as a requirement that 

the models and materials explain all material facts and assumptions on which such 

models and materials are based.13 It is our understanding that many brokers catering to 

self-directed investors, and particularly on-line ones, frequently make available to the 

owners of options trading accounts instructional models, videos and interactive materials 

relating to such trading. We do not believe that merely making such information and 

materials available to account owners rises to the level of fiduciary conduct for purposes 

of the Fiduciary Proposal. In fact, we believe that the provision of such information is a 

valuable service to the account owners and is very comparable to the provision of asset 

allocation models and other interactive materials. Nevertheless, it is possible that the 

proposal could be interpreted to provide that such conduct would constitute investment 

advice. Accordingly, we recommend that the Final Regulation be clarified to state that 

the provision by a broker of instructional models, videos and interactive materials 

regarding listed option trading qualifies for the investment education carve-out to the 

definition of investment advice, so long as such information and materials do not include 

recommendations with respect to the trading of specific securities or recommendations on 

the investment in, or management or value of, specific securities. 

Thank you for your consideration of this request. If you have any questions 

regarding these matters, please do not hesitate to contact me. 

 Respectfully submitted, 

 Craig S. Donohue 

 Executive Chairman 

 The Options Clearing Corporation 

 

13 See 80 Federal Register at 21955.