214 Massachusetts Avenue, NE • Washington DC 20002 • (202) 546-4400 • heritage.org

July 20, 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: RIN 1210–AB32, Definition of the Term Fiduciary — Conflict of Interest Rule —

Retirement Investment Advice — Exemptions

Via: e-ORI@dol.gov.

Introduction

I am pleased to provide these comments on the proposed rules regarding the definition of the 

term fiduciary, conflict of interest, retirement investment advice and various exemptions. 

Specifically, these comments are directed at the following seven proposed rules.

1. RIN 1210–AB32 “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule —

Retirement Investment Advice” (34 pages).

2. ZRIN 1210–ZA25 “Proposed Best Interest Contract Exemption” (30 pages)

3. ZRIN 1210–ZA25 “Proposed Class Exemption for Principal Transactions in Certain Debt 

Securities between Investment Advice Fiduciaries and Employee Benefit Plans and 

IRAs” (16 pages).

4. ZRIN 1210–ZA25 “Proposed Amendment to Prohibited Transaction Exemption (PTE) 

75–1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions 

Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and 

Banks” (7 pages).

5. ZRIN 1210–ZA25 “Proposed Amendment to and Proposed Partial Revocation of 

Prohibited Transaction Exemption (PTE) 86–128 for Securities Transactions Involving 

Employee Benefit Plans and Broker-Dealers; Proposed Amendment to and Proposed 

Partial Revocation of PTE 75–1, Exemptions From Prohibitions Respecting Certain 

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

Reporting Dealers and Banks” (15 pages).
6. ZRIN 1210–ZA25 “Proposed Amendments to Class Exemptions 75–1, 77–4, 80–83 and 

83–1” (8 pages).

7. ZRIN: 1210–ZA25 “Proposed Amendment to and Proposed Partial Revocation of 

Prohibited Transaction Exemption (PTE) 84–24 for Certain Transactions Involving 

Insurance Agents and Brokers, Pension Consultants, Insurance Companies and 

Investment Company Principal Underwriters” (11 pages).

Together these rules comprise 121 pages of small type in the Federal Register. They are complex 

and raise complex issues relating to the approximately $14 trillion dollars held in defined 

contribution plans and individual retirement plans in 2014.1It is no wonder that the 

overwhelming consensus of the many comments filed so far is that the public needs more time to 

fully understand the implications of the rules and to provide meaningful comment to the 

Department. The Department should further extend the comment period.

The proposed rules would alter the regulations governing who is deemed to be rendering 

“investment advice for a fee or other compensation” within the meaning of ERISA section 

3(21)(A)(ii)2and Internal Revenue Code section 4975(e)(3)(B) and therefore deemed a fiduciary. 

It substantially broadens the class of persons who would be deemed a fiduciary compared to 

present law.

3

In general, under the proposed rules persons who provide investment advice 

pursuant to an agreement, arrangement, or understanding that the advice is individualized or 

specifically directed to the recipient for consideration in making investment or investment 

management decisions regarding plan assets would be deemed a fiduciary. Various limited 

exemptions are provided.

The Problem Being Addressed

The proposed rules are directed at a legitimate problem. However, the rules define the problem 

incorrectly. Moreover, the contemplated rules are both extraordinarily overbroad and 

economically counterproductive. In their current form, they will harm the investing public, small 

business, the securities industry and those working in the industry and the economy.

The problem, properly defined, is that those selling investments or providing investment advice 

to consumers and small businesses for retirement plans often imply to varying degrees -- or 

forthrightly state -- that they are looking out for the “best interests” of the investor when in fact 

they are not doing so. As discussed in detail below, there is a relatively simple means to remedy 

this problem. The Department could (1) require, in an efficacious manner, that consumers be 

made aware whether the person selling investments or providing investment advice is, or is not, 

in fact obligated to “look out for their best interests” and (2) enforce, in conjunction with other 

relevant agencies,4the existing anti-fraud rules. Or, in a more legalistic formulation, those selling 

investments or providing investment advice should be required to fully and efficaciously disclose 

 

1

See Federal Reserve, Financial Accounts of the United States, Z.1 Release L.117, Private and Public Pension 

Funds, June 11, 2015, p. 93 http://www.federalreserve.gov/releases/z1/Current/z1r-4.pdf. 

2

29 U.S. Code §1002(21)(A)(ii). 

3

29 CFR §2510.3–21 — Definition of “Fiduciary.”

4 These would include the SEC, FINRA, the IRS and state tax, securities and insurance regulators – all of whom 

have a role in enforcing anti-fraud statutes with respect to securities transactions in ERISA plans.
whether or not they stand in a fiduciary relationship to the investor and the existing anti-fraud 

laws should be enforced to the extent those selling investments or providing investment advice 

misrepresent their status.

A transaction induced by fraud (misrepresentation) is not voluntary or welfare enhancing in that 

it would not be entered into in the absence of the fraud (or would be entered into at a different 

price). To the extent that those giving investment advice or making securities sales affirmatively 

state that they are looking out for the “best interests” of the investor when in fact they are not 

doing so, such representations are fraudulent. Such misrepresentations are unlawful under 

current federal and states securities laws and would constitute a common law tort.5 Material 

omissions also are barred. Moreover, failure to disclose information is also often deemed 

culpable and would give rise to liability under the securities laws and the common law.6

Addressing these sorts of problems does not require an additional rule. It simply requires the 

enforcement of existing laws.

Suitability Requirement Already Exist and Are Relatively New

Critically, broker-dealers and registered representatives (including insurance agents selling 

investment products) must already comply with FINRA Rule 2111 relating to suitability. That 

rules provides that:

A member or an associated person must have a reasonable basis to believe that a 

recommended transaction or investment strategy involving a security or securities 

is suitable for the customer, based on the information obtained through the 

reasonable diligence of the member or associated person to ascertain the 

customer's investment profile. A customer's investment profile includes, but is not 

limited to, the customer's age, other investments, financial situation and needs, 

tax status, investment objectives, investment experience, investment time horizon, 

liquidity needs, risk tolerance, and any other information the customer may 

disclose to the member or associated person in connection with such 

recommendation.7(emphasis added)

The rule, its supplementary material and additional FINRA guidance then provide detailed 

guidance about how to implement this requirement.8This rule provides a high degree of 

protection to investors although it imposes fewer duties on broker-dealers and registered 

representatives than would a fiduciary duty. It also entails less litigation risk and regulatory risk 

 

5

See, e.g., Securities Exchange Act of 1934 section 10(b) [15 U.S. Code § 78j] (relating to federal securities 

misrepresentation); Section 501 of the Uniform Securities Act (2002) (relating to state securities misrepresentation) 

http://www.uniformlaws.org/shared/docs/securities/securities_final_05.pdf; §525 Liability for Fraudulent 

Misrepresentation, §526 Conditions Under Which Misrepresentation Is Fraudulent (Scienter) and, especially, § 529 

Representation Misleading Because Incomplete and §551 Liability for Nondisclosure, Restatement of the Law, 

Second, Torts, Volume 3 (American Law Institute: 1977) (relating to common law misrepresentation torts).

6

Ibid.

7

FINRA Rule 2111 Suitability 

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9859&print=1. 

8

FINRA Rule 2111 (Suitability) FAQ http://www.finra.org/industry/faq-finra-rule-2111-suitability-faq .
than does a fiduciary duty. Failure to comply with Rule 2111 will result in sanctions and can 

result in the individual or firm in question being barred from the securities industry.

FINRA Rule 2111, although of substantial importance, is relatively recent, having taken effect 

only three years ago in July 2012. Its economic impact is not clear. One thing is clear. The

overwhelming majority of the economic research relied up by the Department9and by the 

Council of Economic Advisors in its report10 predates the application of Rule 2111 and is, 

therefore, largely irrelevant. Investment sales practices have substantially changed. The CEA’s

“finding” that “conflicted advice leads to losses totaling about $17 billion every year for IRA 

investors” is equally invalid.11 The CEA report was cited by Labor Secretary Perez12 and the 

Department in support of the proposed rules.

Multiple Standards and The Securities and Exchange Commission Initiative

The Securities and Exchange Commission (SEC) is also examining this issue. The SEC staff 

released a study that found:

... that investment advisers and broker-dealers are regulated extensively under 

different regulatory regimes. But, many retail investors do not understand and are 

confused by the roles played by investment advisers and broker-dealers. The 

study finds that "many investors are also confused by the standards of care that 

apply to investment advisers and broker-dealers" when providing personalized 

investment advice about securities.13

This rule will exacerbate this confusion by establishing yet another standard and increase the 

already extensive regulation of investment advisers and broker-dealers. It is not at all clear how 

the DOL ERISA fiduciary standard would interact with the various other FINRA, SEC and state 

standards relating to broker-dealers, registered representatives, investment advisors and 

insurance agents. Nor is it clear how the proposed rules will interact with the “uniform 

standards” that the SEC is likely to propose soon.

One thing that is clear is that the proposed rules will disproportionately harm small firms in the 

securities business and lead to a further concentration in the industry. This is because the cost of 

regulatory compliance does not vary linearly with firm size but instead constitutes a much higher 

share of small firm gross revenues and has, therefore, a disproportionate adverse impact on small 

 

9

See list of studies at Fiduciary Investment Advice, Regulatory Impact Analysis, April 14, 2015 

http://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf. 

10 “The Effects of Conflicted Investment Advice on Retirement Savings,” February 2015, pp. 95-96 

https://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf. 

11 Ibid.

12 Statement of Thomas E. Perez, Secretary of Labor, Before the Health, Employment, Labor and Pensions 

Subcommittee, Committee on Education and the Workforce, U.S. House of Representatives, June 17, 2015 

http://www.dol.gov/ebsa/newsroom/ty061715.html. 

13 “SEC Releases Staff Study Recommending a Uniform Fiduciary Standard of Conduct for Broker-Dealers and 

Investment Advisers,” https://www.sec.gov/news/press/2011/2011-20.htm; “Study on Investment Advisers and 

Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” 

Staff of the U.S. Securities and Exchange Commission, January 2011 

https://www.sec.gov/news/studies/2011/913studyfinal.pdf. 
firm profitability. Some large firm managers are quite blunt about how the tsunami of financial 

regulation serves as a barrier to entry and impedes competition from small, disruptive rivals.14

The Ethics of the Situation

If the “investor advisor,”15 broker-dealer, registered representative or insurance agent makes it 

clear to the investor that the investor advisor, broker-dealer, registered representative or 

insurance agent is not looking out for the “best interests” of the investor, then both parties should 

be free to move forward. In a free society, it is inappropriate paternalism for the government to 

prevent people from making the investments that they judge to be good investment opportunities 

or that they may choose to invest in for reasons other than pecuniary gain such as a personal 

relationship or affinity for the mission of the enterprise. Providing that the seller of the 

investment or advice is honest about their duties or lack thereof toward the investor, the investor 

should be entitled to choose that investment product or make that investment. Similarly, the 

government should not force investors to be subject to the opinions or judgment of fiduciaries 

about what is or is not good for the investor if an investor disagrees. Fiduciaries will often be 

quite cautious in their investment advice and bar investors from making certain investments 

since the fiduciary will be second guessed by regulators in the proposed regime. Citizens, not 

government or government designees (i.e. the new fiduciaries), should be the judge of what is in 

their interest.

A Better Approach

A much better approach to the problem has been outlined by New York City Comptroller Scott 

M. Stringer. His proposal, now being considered by the New York legislature, would require 

non-fiduciaries to confirm both aloud and in writing that:

I am not a fiduciary. Therefore, I am not required to act in your best interests, and 

am allowed to recommend investments that may earn higher fees for me or my

firm, even if those investments may not have the best combination of fees, risks, 

and expected returns for you.

16

Such an approach would ensure that investors understood that non-fiduciaries are not required to 

act in the investor’s best interest but are salespersons. This would inform investors about who 

 

14 Goldman Sachs CEO Lloyd Blankfein, for example, recently said “More intense regulatory and technology 

requirements have raised the barriers to entry higher than at any other time in modern history. This is an expensive 

business to be in, if you don’t have the market share in scale. Consider the numerous business exits that have been 

announced by our peers as they reassessed their competitive positioning and relative returns.” “Regulation Is Good 

for Goldman,” Wall Street Journal, February 11, 2015 http://www.wsj.com/articles/regulation-is-good-for-goldman1423700859?KEYWORDS=Regulation+Is+Good+for+Goldman.

15 Registered investment advisors generally have a fiduciary duty toward their clients but others giving “investment 

advice” in other contexts, including many persons that will be subject to the proposed rule, do not currently have a 

fiduciary duty.

16 “Safeguarding Our Savings: Protecting New Yorkers Through the Fiduciary Standard,” Office of the Comptroller, 

City of New York, March 2015 ; http://comptroller.nyc.gov/wpcontent/uploads/documents/Safeguarding_Our_Savings.pdf; “Comptroller Stringer Urges New State Disclosure Law 

to Protect Consumers,” march 25, 2015 https://comptroller.nyc.gov/newsroom/comptroller-stringer-urges-new-statedisclosure-law-to-protect-consumers/. 
they are dealing with and make it clear that non-fiduciaries are not obligated to look out for the 

best interest of the investor. Even non-fiduciaries, however, are subject to FINRA’s suitability 

requirements.

Economic Analysis

The proposed rule will affect a tremendous number of securities professionals. Over 11,000 

investment advisers are registered with the SEC.

17 In addition, there are more than 275,000 stateregistered investment adviser representatives and more than 15,000 state-registered investment 

advisers. The Commission and FINRA oversee approximately 5,100 broker-dealers. Registered 

representatives number about 638,000.18

The Department’s economic analysis contains three very serious errors of gross magnitude. Any 

of these three errors is likely to make the proposed rules’ costs exceed their benefits. Considered 

together, the costs certainly exceed the benefits.

First, as the Department acknowledges, a transfer from industry to investors is not a social 

welfare gain – it is simply a transfer of resources. Ergo, in a cost benefit analysis it should not 

count as a social welfare gain when balanced against the costs. Yet that is precisely what the 

Department does.

Second, the Department engages is the serious fallacy of thinking that the securities industry can 

incur a large reduction in revenue and yet maintain the same level of services to its clientele. 

This is simply not going to happen. The revenue to pay the employees providing the retirement 

account and investment advice services must be generated or the firms will not be able to 

profitably provide the services. If a business cannot profitable provide a service, then it will not 

do so. Ergo, one of two things will happen. Other types of fees will be charged to investors or 

transactions will not occur. To the extent that new, substitute fees of a different nature but 

permissible under the new rules are charged, some and perhaps all of the alleged benefits of the 

rules will evaporate. The higher compliance costs, however, will remain. And there is every 

reason to believe that they have been grossly underestimated.19 If instead of alternative fees 

being imposed, the transactions simply do not occur then that means that a great many retirement 

plans will often not be established, savings will decline and the retirement income of the 

American public will be diminished. This does constitute a social welfare loss.

Third, as discussed above, the overwhelming majority of the economic research relied up by the 

Department20 and by the Council of Economic Advisors in its report21 predates the application of 

 

17 “Study on Investment Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act,” Staff of the U.S. Securities and Exchange Commission, January 2011, p. iii 

https://www.sec.gov/news/studies/2011/913studyfinal.pdf

18 About FINRA http://www.finra.org/about

19 See U.S. Chamber of Commerce Comment Letter of May 20, 2015 for a long list of items either underestimated 

or not taken into account. http://www.dol.gov/ebsa/pdf/1210-AB32-2-00116.pdf. 

20 See list of studies at “Fiduciary Investment Advice, Regulatory Impact Analysis,” April 14, 2015 

http://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf. 

21 “The Effects of Conflicted Investment Advice on Retirement Savings,” February 2015, pp. 95-96 

https://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf. 
Rule 2111 and is, therefore, largely irrelevant. The CEA’s “finding” that “conflicted advice leads 

to losses totaling about $17 billion every year for IRA investors” is equally invalid.22 Although 

Rule 2111 is mentioned in the legal discussion in the proposed rule and in the discussion in the 

Regulatory Impact Analysis incorporated by reference, Rule 2111 is entirely disregarded in the 

quantitative economic analysis in the proposed rules.

The proposed rules are likely to have an adverse impact on small businesses and on low and 

moderate income individuals The substantial risks and costs of being a fiduciary will make it 

much less likely that securities professionals will choose to provide services to low and moderate 

income individuals and small businesses. The regulatory and litigation risk of assuming the role 

of a fiduciary and the difficulty in being adequately compensated for both this risk and the cost 

of providing the services will make it unattractive to service small accounts. Thus, the rule will 

harm precisely the people it purports to help.

The proposed rules are likely to have an adverse impact on small broker-dealers and other 

independent securities professionals. This is because the cost of compliance with regulations 

does not vary linearly with size but instead constitutes a much higher share of small firm gross 

revenues and has, therefore, a disproportionate adverse impact on small firm profitability. The 

cost of initial and continuing compliance will disproportionately harm small firms, serve as an 

additional barrier to entry, impede competition from small, disruptive rivals and foster further 

concentration in the financial services industry.

The proposed rule should be withdrawn.

Sincerely,

David R. Burton

Senior Fellow

The Heritage Foundation

 

22 Ibid.