Occupy the SEC 

http://www.occupythesec.org

 

July 21, 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, 

Occupy the SEC (“OSEC”)1 is pleased with the efforts of the Department of 

Labor, Employee Benefits Security Administration (“DoL”) to address the problems that 

have accompanied the emergence of participant-directed retirement investment accounts. 

These efforts are critical to a fair and robust investment environment and we commend 

the Agency’s generally thoughtful proposal. 

The DoL’s proposed fiduciary rule is a vital change because it reflects a basic 

market reality: investors (and even sponsors and plan employees) believe that 

professionals providing retirement advice have the investor’s best interest in mind. No 

amount of disclosures or disclaimers will change the fundamental trust that investors 

place on advisers. Another unfortunate market reality is that many retirement advisers do 

not uniformly have the investor’s very best interest in mind, for the simple fact that that is 

not legally required under the current suitability standard. A strong fiduciary rule is 

necessary to bridge the gap between investor expectations and the law. 

We write to recommend that the Agency set forth a clear rule that minimizes 

exceptions to the applicability of the fiduciary standard. As explained below, a proper 

understanding of the term “fiduciary” does not countenance the number of exemptions 

crafted by the DoL in the Proposed Rule. The Agency must avoid adopting a Janus-faced 

 

1

 Occupy the SEC (http://occupythesec.org) is a group of concerned citizens, activists, and financial 

professionals that works to ensure that financial regulators protect the interests of the public, not Wall 

Street. 
2

approach that pays lip-service to the heighted fiduciary standard while concomitantly 

imprecating that standard with sweeping exemptions that resurrect the old suitability 

standard. 

The Final Rule should especially safeguard the interests of plan 

participants/beneficiaries and IRA Holders. The rule should also (within the scope of 

existing law) broadly cover entities as investment advisors. The Final Rule should 

harmonize with existing fiduciary requirements while accounting for the unique 

characteristics of the fissured ERISA service provider environment. Ultimately, the rule 

should establish clear standards that facilitate compliance and obviate the need for 

Agency and other enforcement actions for misconduct. 

First and foremost, the Rule must protect investors. In a market characterized by 

lowered returns and risky instruments, plan participants, beneficiaries, and account 

holders are vulnerable to heightened fees and highly-leveraged investments that not only 

threaten the security of individual accounts but also the employment security of 

beneficiaries and IRA holders. The Agency must account for these considerations in 

determining the final structure of the Rule. 

I. Background

The current environment is one in which the dramatic growth in participantdirected funds has unfortunately been coupled with instability and weakness in the global 

environment for investment. These changes are largely linked with the demise of aspects 

of the traditional employment environment such as defined-benefit pension programs and 

employment stability. 

The instability of highly leveraged and otherwise risky investments poses an 

additional, if unpredictable, cost to the performance of funds and therefore justifies 

issuance of a strong fiduciary regulation. As the Agency acknowledges in its Proposed 

Rule, researchers have produced evidence that a reliance on the current framework for 

coverage of financial industry products has resulted in impoverishment of retail investors 

in the retirement account arena. Risky investments have consequences and, in a time of 

submerged investment earnings and prolonged quantitative easing (QE), it may appear 

that these consequences are higher rates of return in the short and medium term. But the 

lesson of the Financial Crisis of 2008 (and, on a smaller scale, the Enron collapse) is that 

regulations must not encourage the growth of highly-leveraged instruments that are 

traded in opaque markets that promise to become illiquid in the event of a downturn in 

asset values. The growth of such instruments only increases the probability of a tail-risk 

event that can devastate investors’ savings. The financial contagion from such an event 

can produce a systemic downturn that even impacts traditionally less-troublesome 

equities. Thus, it must be recognized that allowing free reign to investment advisors can 

result in market-wide misallocations of capital, which in turn can produce weak business 

investments and unstable economies. 

There are concomitant risks for beneficiaries and IRA holders qua workers as this 

system makes earned income unstable and may limit the ability of 401(k) beneficiaries 

and IRA holders to have control over both their workplace earnings and retirement 

savings. It would be inappropriate and sadly ironic for workers’ invested earnings to 

facilitate financial market activities that foment instability and increase the possibility of 
3

a debilitating financial crisis, even as they finance the evisceration of traditional labor 

relationships. 

These market conditions require a rule that is clear, free of unnecessary 

exemptions, and simple for participants and beneficiaries to enforce. 2

II. Coverage Under the Proposed Rule

In order to fully protect investors, the fiduciary rule should broadly cover as many 

investment advisers not currently subject to fiduciary duties as possible. It is critical that 

the rule’s definitional terms be set forth to ensure that myriad small providers acting as 

financial advisors are subject to basic requirements of client protection. The rule, in 

addition, should harmonize with fiduciary frameworks in ERISA and the securities and 

commodities laws, while accounting for the unique vulnerabilities of ERISA participants 

and IRA holders, in order to prevent continued evasion of basic investment advisor 

duties. 

In tandem with that broad coverage, the rule should not carve out exclusions from 

coverage based on a misplaced concern for innovation and flexibility. The retirement 

account market is rife with conflicts of interest as well as increasing risks posing 

significant costs to retail investors. A weak fiduciary rule that allows continued 

subterfuge regarding the duties of contractors and subcontractors will only condone the 

very conditions that the DoL has recognized cause losses for retail investors. An 

exception-laden rule may benefit individual firms and actors within the financial industry, 

but would fail to provide any corresponding benefit to the macroeconomy or the financial 

system as a whole. 

In general, we strongly support the rule’s broad requirements that a service 

provider be treated as a fiduciary if the entity provides certain types of investment advice 

to the plan or IRA Holder (and similar retirement vehicles such as Health Savings 

Accounts (HSAs)), under specific conditions, and the provider directly or indirectly 

receives a fee or compensation for that advice. The investment advisor either directly or 

indirectly must also either (1) provide advice under an agreement, arrangement or 

understanding that is “individualized” to or specifically directed to the recipient “for 

consideration” in making investment or management decisions with respect to securities 

or other property of the plan or IRA or (2) represent or acknowledge that it is acting as an 

ERISA fiduciary with respect to the advice. As the Proposed Rule and supporting 

documents make clear, the existing rule fails to account for a retirement marketplace in 

which widely varying services and entities, including consultants, advisors, and 

appraisers, collaborate to provide guidance to sponsors, plan beneficiaries, and IRA 

holders. The new rule finally recognizes the economic reality of fragmented service 

provision and the possibility that evolving identities of providers will not reflect their 

function. 

As the Department of Labor proposes, the revamped rule should cover advice as 

to several events, including recommendations relating to: 

 

2

 While risk mitigation is more aptly the province of other financial regulators, we nevertheless 

stress, that the Agency, in elaborating on the fiduciary requirements of plan advisers, should emphasize that 

heightened risk-taking by advisers may not comport with the fiduciary standard. 
4

a) the acquisition, holding, disposition, exchange, distribution or rollover 

of assets, 

b) the management of assets to be rolled-over or distributed from an IRA, 

and 

c) who will receive a fee or compensation for providing those services. 

In addition, as the DoL proposes, the rule should cover recommendations of professional 

investment advisers or plan managers and appraisals or fairness opinions concerning the 

value of property given in connection with a particular transaction relating to the 

acquisition, disposition or exchange of assets. These are key pressure points at which 

investment advisors have extracted value from retirement accounts without providing any 

corresponding benefit to plan beneficiaries, IRA holders, or even sponsors. A broad 

fiduciary rule will help counteract such undue value extraction. 

Industry advocates may raise concerns that some entities providing limited or 

tangential services will be ensnared in the proposed regulatory scheme with significant 

compliance costs but few benefits. We acknowledge that these concerns may be partially 

legitimate. In a Wild West of advisors profiteering and looting from retail investors, 

however, the current rule establishes a grossly wanting standard, only requiring that 

investment advice serving as a primary basis for an investment decision be regular, 

individualized, and provided pursuant to mutual agreement, arrangement or 

understanding. The current rule fails to cover an important range of circumstances. For 

instances, the DoL ruled as recently as 2005 that the rule excludes from the scope of 

fiduciary duty such core activities as providing a recommendation as to the distribution 

and reinvestment of plan assets.3

 

In order to avoid circumstances in which entities with similar functions may 

plausibly fight coverage under ERISA, the DoL must act to preserve its jurisdictional 

ambit. Key terms such as “advice,” “individualized,” “specifically directed,” “fees,” 

“compensation,” and “recommendation” must be broadly defined to prevent 

gamesmanship in this universe of tangentially connected service providers. We continue 

to be concerned that the terms “individualized” or “specifically directed” advice create a 

loophole in fiduciary applications. For instance, if all employees of the sponsor or 

administrator put all of their money into a risky investment after an option is provided or 

suggested, this act should be accounted as a fiduciary act under Section 3(21) of ERISA. 

As the Agency recognizes, other commentators have suggested that the application of the 

fiduciary rule is unclear where an entity managing multiple funds provides generic 

suggestions about fund preferences. A broader definitional ambit will empower the DoL 

to winnow out culpable conduct from more benign activity during complex enforcement 

actions involving multiples parties. 

III. Exceptions

In 1928 Judge Benjamin Cardozo famously defined the fiduciary standard as 

follows: 

 

3

 DOL Advisory Opinion 2005-23A (Dec. 7, 2005). 
5

[a] trustee is held to something stricter than the morals of the market place. Not 

honesty alone, but the punctilio of an honor the most sensitive, is then the 

standard of behavior.4

The DoL falls far short of this mandate because the large number of exemptions that it 

has proposed undermine the rule’s vitality. In today’s highly complex financial markets, 

the size or sophistication of an investor (or investor representative) is often irrelevant. 

Purveyors of complicated, Frankenstein-esque financial instruments are privy to insider 

information that is not available to anyone else. As numerous incidents from 2008 have 

revealed, such purveyors have all-too-often exploited that information advantage to the 

detriment of even their most sophisticated “clients.”5

 

The fiduciary standard is needed because it protects retirement investors and their 

representatives from having to fend for themselves. These beneficiaries are not in the 

best position to know if proffered advice is in their best interest – rather, they are entitled 

to expect that it is. The fiduciary standard enshrines that expectation in law. 

Unfortunately, the DoL’s numerous carve outs and exceptions to the proposed fiduciary 

rule undermine the rule in significant ways. 

A. Investment Education Carve Out:

Although, in the abstract, we acknowledge the justification for an investment 

education carve out, in practice there are lingering concerns about the quality of such 

“educational” investment advice. Moreover, we wish to highlight the role that faulty 

information can play in misdirecting investors toward unproven and ideologically-driven 

opinions regarding the putative safety of certain instruments. 

 For instance, the incorporation of the simplistic efficient markets hypothesis into 

“educational” material will likely mislead vulnerable retail investors into believing that 

novel and illiquid markets (or even traditional equity markets) inevitably incorporate all 

available information and are not the product of manipulation or intervention.6

 

It requires a suspension of belief to regard education that is intended ultimately to 

encourage investment as an anodyne exercise in neutral instruction. For example, some 

investments in novel, highly engineered financial instruments are inherently unsafe. We 

urge the DoL to determine that “educational” material touting these risky instruments fall 

outside of the carve-out, as a matter of law.7

B. Counterparty & Swap Transaction Carve Outs:

We understand the impulse to create a fiduciary exemption for arms-length 

contracts involving counterparties and swap dealers. Under current market practice, 

 

4

 Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). 

5

 Even in 2007, before the full impact of the recent financial crisis, the New York Times recognized 

that “[m]any pension plans lack the analytical skills needed to evaluate []investments.” Editorial, Pensions 

and the Mortgage Mess, N.Y. Times, Aug. 7, 2007, at A18. 

6

 See, e.g., Robert J. Shiller, From Efficient Markets Theory to Behavioral Finance, 17 The J. of 

Econ. Perspectives 83-104 (2003). 

7

 Critics may argue that such a limitation may impact the liquidity of esoteric, “innovative” 

financial products. However, it is critical to recognize that, at least in the retirement account arena, certain 

financial activities are so risky or conflicted that it would behoove the DoL to explicitly ban them or to take 

actions that would dramatically reduce trading in such activities. 
6

purveyors of complex swaps must necessarily tout their products as valuable – otherwise 

one suspects that many plan fiduciaries would refrain from buying them given the 

calamitous performance of such products since 2008. However, we wish to emphasize to 

the DoL that the fundamental objective of the fiduciary rule is to protect investors, not the 

bottom line of profit-seeking banks. To understand why the counterparty and swap 

carve-out is flawed, it is useful to consider the fiduciary standards applicable to lawyers 

as a useful analog. 

It is axiomatic that a lawyer owes a fiduciary duty to her client.8 There is no 

relaxation of that standard, irrespective of the size or sophistication of the client. 

Moreover, a lawyer cannot represents a client if there is a significant risk that that 

representation will be materially limited by a personal interest of the lawyer.9

 So for 

example, if a lawyer sells title insurance, she may not do so to a client in a real estate 

transaction if there is a conflict of interest. In sharp contrast, the Proposed Rule 

permits a retirement adviser to sell a financial product to its advisee provided that 

the advisee meets certain sophistication standards. Both lawyers and retirement 

advisers render important advice that can have a grave impact on the financial position of 

the client. Why should the bar be set so much lower for financial advisers? The only 

plausible reason – because of the influence of the financial services lobby – is 

unsatisfactory. 

We likewise caution against premising exemptions on an adviser’s or fiduciary’s 

intent or declarations regarding the independence of the parties. Given the abstruse and 

novel nature of instruments like security-based swaps,

10 independence alone is no 

substitute for the precautionary safeguards afforded by the fiduciary standard, the 

application of which would limit overwhelming risk-taking by retail investors (and the 

financial system en masse). 

C. Individual Account Plan Platform Providers & Related Assistance 

Carve Out

Our concerns also extend to the carve-out for individual account plan platform 

providers and related assistance carve outs (although we recognize the independence of 

the parties in this arena). Disclosure and information requirements are inadequate 

safeguards as instruments are often so complicated that it is beyond the ken of plan 

beneficiaries and representatives to understand them. In addition, as we describe in more 

detail below, the rule should require that investment advisers clearly and prominently 

disclose when they are not acting in a fiduciary capacity. 

D. Valuation & Fairness Opinions Carve Out

We object, in part, to the carve-out for valuations and fairness opinions for 

Employee Shared Ownership Plans and certain investment funds as well as valuation 

reports and regulatory disclosure statements. We recognize that the exclusion does not 

cover reports involving assets lacking a generally recognized market or serving as the 

basis upon which the plan makes distributions. However, instead of being the means by 

 

8

 See, e.g., Cox v. Delmas, 99 Cal. 104, 123 (1893). 

9

 See Model Rules of Prof’l Conduct R. 1.7(a)(2) (2009).

10 As we elaborate on below, these instruments have threatened to overwhelm the capabilities of 

investors and regulatory agencies alike. 
7

which employees obtain control and sustainable value, ESOPs often function as simply 

another tool in the financial arsenal of companies focused solely on their stock market 

capitalization (to the exclusion of virtually any other financial or social value). At the 

very least, a requirement to advise employees of appraisal value would allow such 

employees to understand the value of their investments—and perhaps advocate for a 

fairer distribution of income and retirement investment. 

In addition, investment experts point out the excessive risk of strategies that 

concentrate in company stock, sometimes with disastrous consequences for employees.11

ESOPs are an area where the conflicts of interest are often largest. It is unwise to carve 

out such advice. In other areas, the DoL relies on fiduciary obligations to mitigate 

conflicts of interest and increase investor protections. It is prudent to do so for ESOPs as 

well. We recognize that this may well reduce the use of ESOPs but we do not believe that 

would necessarily be a bad outcome for employees. 

The Proposed Rule’s Preamble asserts that “[i]n many cases the most important 

investment advice that an investor receives is advice as to how much it can or should pay 

for hard-to-value assets.” We could not disagree more. Retail investors should be steered 

completely away from hard-to-value assets rather than advised on how much to pay for 

them. Even if investors receives good advice on purchase price, there is no assurance 

that such advice would prove useful in the future when they might desire, or need, to 

dispose of hard-to-value assets. So, it is better if retail investors avoid such securities or 

rely on advisors that they hire themselves. There should be no delay in promulgating a 

rule regarding appraisals and valuations in the context of ESOPs. 

 E. Employee of Plan Sponsors Carve Out: 

The exclusion for employees of plan sponsors appears reasonable so long as 

sponsors themselves continue to face fiduciary duties and/or other means of checking 

abuses of responsibility. 

F. Exemption for Broker-Dealers:

The Agency’s decision to retain the broker-dealer exception under circumstances 

where no advice is provided raises some concerns.12 We acknowledge that the text of 

Sections 3(21) and 403 of the Act limits the liability of broker-dealers when following the 

directions of plan fiduciaries, participants, and IRA holders as to participant-directed 

funds. In addition, the SEC may soon be issuing a new rule on fiduciary duties for 

broker-dealers pursuant to the Dodd-Frank Act. However, maintaining one clear source 

of enforcement authority under ERISA has advantages. As the studies that the DoL 

commissioned in preparing for issuance of this rule show, ordinary investors are typically 

unaware of the applicable standard of care or the source of legal authority and 

enforcement. Other agencies also may decline to enforce relatively small claims 

involving retail pension accounts, and so we encourage the DoL to refrain from “passing 

the buck” to another agency. 

 

11

 See, e.g., Mitchell, Olivia S. and Utkus, Stephen P., Company Stock and Retirement Plan 

Diversification, Pension Research Council Working Paper No. 2002-4, available at

http://ssrn.com/abstract=304461. While, as that paper points out, it is possible to employ strategies to 

mitigate that risk, it is unclear that that is done in most ESOP plans. 

12 29 C.F.R. 2510-3(21)(d) (proposed). 
8

G. Best Interest Contract Exemption: 

On its face, the Best Interest Contract Exemption (“BICE”) encapsulates a simple 

and common-sense rule: when it comes to public retirement accounts, any investment 

adviser should put the client’s interest first, ahead of his own. 

While BICE ostensibly approximates the fiduciary standard, elevating the client’s 

interest above all, the BICE is actually inconsistent and unworkable. An adviser who 

puts the client’s interest above all must, a fortiori, be free of any conflicts of interest. But 

the BICE plainly permits a conflict of interest in allowing advisers to enjoy commissions 

and bonuses tied to investments (under certain circumstances). A conflict exists because 

a commission incentivizes the adviser to consider his own interest in addition to the 

client’s, instead of putting the client’s interest first. 

For instance, in some cases, the best long-term advice that an investment adviser 

can give is that the investor should refrain from investing. However, under the BICE, the 

adviser has an incentive to churn the client’s account with the hope of turning a shortterm profit despite market conditions that augur disaster in the future. 

To consider another example, an investment adviser may be weighing two equally 

profitable investment options. The first involves a 5% commission payable by the client, 

while the second involves a 1% commission. Both the 1% and the 5% commission 

figures are “reasonable” in the industry. Since each option involves the same return 

(except for fees), an investment adviser could utilize the BICE to recommend the higher 

commission option, even though it is not in the best interest of the plan beneficiary. 

In its current form, the BICE permits investment advisers to engage in selfdealing to the detriment of clients. The “best interest” of the client requires not just 

disclosing possible deficiencies in a recommended investment strategy but actively 

advising the client against all strategies other than the very best one. 

By allowing investment advisers to have their cake and eat it too, the BICE 

dilutes the proposed fiduciary standard back to the old suitability standard. The Agency 

need not have expended considerable resources in proposing the instant regulation if its 

intention were a mere reaffirmation of the current standard. We exhort the Agency to 

eliminate the BICE and settle upon a simple fiduciary standard, the protestations of 

industry interest notwithstanding. 

H. The Inefficacy of Disclosure: 

The Agency inordinately relies on disclosure as a means to justify various 

exemptions contained in the rule. 

First, disclosure has limited utility where the potential wrongdoer is the party that 

is given the responsibility of providing the relevant information to investors. If an 

investment adviser has engineered a swap deal with the express intention of taking 

advantage of its advisee, it will not meaningfully disclose that fact. Advisers will only 

willingly disclose meaningless or benign information. 

Moreover, regulators in other areas have come to understand that disclosure can 

be useless in some cases, especially where the sheer volume of the disclosed material 
9

militates against actual comprehension of risk.13 Even where disclosed information is 

meaningful, the relevant bits of information may be buried in a sea of paper that would 

effectively pre-empt actual comprehension of risk by investors. For instance, in its 

investigation of Citigroup’s Class V Funding III collateralized debt obligation (“CDO”), 

the SEC learned that Citigroup had disclosed to investors in its pitch book and offering 

circular that it had taken a short position in the underlying credit derivative.14 The SEC 

nevertheless continued the investigation, which culminated in a $285 million 

settlement.15

 

Moreover, disclosure is particularly ineffective in illiquid markets because these 

markets typically feature information asymmetries or pricing obscurities. As noted 

above, the Agency itself has recognized the proliferation of hard-to-value assets in 

investment accounts. Advisers dabbling in illiquid markets simply may not have enough 

information to disclose material conflicts-of-interest, even if they have the best of 

intentions. 

Further, even if investment advisers were able to identify and disclose conflicts of 

interest as required by the Proposed Rule’s various exemptions, plan beneficiaries or 

representatives may not be able to appreciate or digest such disclosures. The savviest of 

institutional investors may not have sufficient resources or access to information to verify 

the contents of disclosure documents, especially within the context of highly illiquid 

markets. The example of Long Term Capital Management will demonstrate that even 

sophisticated parties may not be aware of or fully appreciate the risks involved in their 

own activities.16 Many investors simply presume that an adviser’s recommendation is 

reliable, relying on the adviser’s reputation as an information proxy.17

IV. Scope of Fiduciary Rule and Coverage

 We, first, commend the language in the Proposed Rule that makes clear that a 

determination that a party is not a fiduciary does not prevent other enforcement actions or 

the application of the prohibited transaction rules and party-in-interest designation.18 We 

recommend that the Agency issue a final rule that does not just apply existing fiduciary 

requirements but attends to the unique characteristics of the 401(k) and IRA environment. 

In particular, we call for the Agency to require, pursuant to the duty of loyalty, clear 

limits on and disclosure of fees and conflicts. The Agency should likewise mandate a 

duty of care standard that requires more than mere diversification and fund solvency. 

 

13

 See, e.g., Troy A. Paredes, Address at Twelfth Annual A. A. Sommer, Jr. Lecture on Corporate, 

Securities and Financial Law, Fordham Law School (Oct. 27, 2011) (speech given in Securities and 

Exchange Commissioner Paredes's individual capacity). 

14

 Sec. & Exch. Comm’n v. Citigroup Global Markets Inc., SEC Litigation Release No. 22134 (Oct. 

19, 2011). 

15

 Id. The Southern District of New York later rejected the SEC’s application to confirm this paltry 

settlement figure, because such a confirmation would turn the courts into “an agent of oppression.” See 

SEC v. Citigroup Global Markets Inc., Case No. 11 Civ. 7387, slip op. at 15 (S.D.N.Y. filed Nov. 28, 

2011). 

16 See generally Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital 

Management (2001). 

17

 See Andrew T. Tuch, Conflicted Gatekeepers: The Volcker Rule and Goldman Sachs 57 (Apr. 

2011), available at http://www.law.harvard.edu/programs/olin_center/fellows_papers/pdf/Tuch_37.pdf. 

18 29 CFR 1510-3(21)(c) (proposed). 
10

Although we understand the Agency’s interest in applying a clear fiduciary standard that 

borrows from the long-standing principles of trust law, we recommend supplementary 

protections that address the unique condition of the 401(k) and IRA context, which 

include: limited assistance for individual investors, difficulty with enforcement, as well 

as complex and opaque relationships between industry participants. 

 The scope of fiduciary duties for investment advisors as to individually directed

401(k) and IRA accounts should parallel standards under ERISA, the Investment Advisor 

Act and the Dodd Frank Act so as to harmonize regulatory coverage. These requirements 

should transcend the existing FINRA suitability requirements in a way that not only 

facilitates enforcement but prevents known and tail risks. 

 A. Duty of Loyalty: 

We recommend that the duty of loyalty require more than disclosure of fees and 

conflicts of interests but should also limit wasteful contracting or service arrangements. 

These concerns extend to the parameters of existing fee and compensation plans pursuant 

to the Best Interest Contract rule and modifications of existing PTEs. The complexity of 

the marketplace is likely to drive up prices while providing no clear benefit with regard to 

the nature of returns or the quality of services provided.19 The Byzantine structure of the 

current marketplace provides choices that investors cannot fully evaluate. These complex 

and opaque choices may also inhibit effective enforcement of the fiduciary rule with 

regard to the actions of subcontractors. 

In addition, disclosure of the cost of advice should include all compensation, 

direct and indirect, that an adviser may receive. The DoL regulations, finally, should 

require that advisers clearly and prominently disclose when they are not acting in a 

fiduciary capacity. 

 B. Duty of Care:

 The duty of care should extend not only to diversification and general evaluation 

of fund solvency but also to consideration of the particular investment instrument at 

issue. The existing statutory and regulatory standard, we recognize, does include 

language regarding risk, diversification, liquidity, and projected investment return in light 

of funding objectives of the plan.20 However, even this broad this language does not 

account for transformations in the investment environment for vehicles such as mutual 

funds, which have long been perceived as stable investments. As the Supreme Court has 

ruled with respect to other fiduciary duties under ERISA, fiduciary duties should 

encompass monitoring management decisions and investment strategy over time and not 

be limited to mere allocation and distribution decisions.21 The nature of the sponsor, 

beneficiary, or IRA holder and its ability to weather a downturn are all important 

considerations. 

 

19 Robert Hiltonsmith, The Retirement Savings Drain - The Hidden Cost of 401(k)s, White Paper, 

Demos Organization (2012). 

20 29 U.S.C. s. 1104(a)(1)(B) (2012); 29 C.F.R. s. 2550.404a-1(b)(1) – (2) (2012). 

21

 Tibble v. Edison Int’l, 575 U.S. ____ (2015) (remanding for determination of whether contours 

of fiduciary duty and the common law of trusts demonstrated a violation of continuing duty to monitor and 

remove imprudent investments); 29 C.F.R. s. 2509.75-8. 
11

We also recommend as core investment considerations whether there exists a 

stable and liquid market for trading in the particular instrument, and the degree of 

leverage present in the product or strategy. Even in the absence of conflicts or improper 

fees, the financial advisor must evaluate whether the complexity of the 401(k) or IRA and 

relationships with contractors will limit returns for beneficiaries and IRA holders. 

The investment advisor should also account for whether the nature of the 

investment plan or IRA (including assets and beneficiaries) makes more probable that the 

fund will not be able to redeem assets in the event of a catastrophic event. The Global 

Financial Crisis of 2008 and individual events such as the Enron collapse22 provide 

strong evidence of the severe effects that such an event could have on retirement income. 

V. Risks for Workers & Industrial Policy

Investment plans cause uncertainty for ordinary investors in at least two ways. 

First, the duty of care must encompass the possibility that the investment or strategy will 

create a heightened probability of a specific event or global tail risk that will affect IRA 

holders’ and beneficiaries’ job security and hamper their ability to supplement retirement 

income. The last concern is especially heightened in the arena of employment-based 

retirement accounts (and ESOPs) where there may be a contradiction between heightened 

returns and the long-term health of the business and security of stakeholders such as 

employees. 

But the problem pertains to the allocation of middle-income retail investors’ 

income in instruments and industries that lead to an insecure environment not only in 

terms of systemic financial risk but also in terms of employment security and economic 

allocation. While this dynamic may not be intuitive, it is a fundamental problem with the 

current low-growth environment for retail investors. Ironically, the call for allowing 

investors to handle greater risks follows a decline in private defined benefit pensions and 

employer-directed funds and a concurrent trend toward unstable employment and 

insecure retirement funds.23

 

Commentators have criticized the investment of employees’ pensions in highreturn instruments and public companies that have eliminated jobs. Those investments 

contribute to a world of high-equity returns that are the result of eliminating productive 

parts of enterprises and workforces in order to maximize short-term returns. At the 

minimum, the Final Rule should protect the particular employees who risk losing their 

own jobs, particularly through poorly managed ESOP programs. The global problem is 

that by allowing for employees’ assets to be directed toward those public companies 

whose rates of short-term returns are heightened without accounting for externality 

effects on industry and labor, investment policies help create a financialized version of 

the market economy in which productive assets are taken in order to produce little of 

 

22

 In re Enron Corp. Sec., Derivative & ERISA Litig., 284 F. Supp.2d 511, 555 (S.D. Tex. 2003) 

(setting forth numerous violations of fiduciary duties following actions that resulted in large-scale 

destruction of employee retirement wealth). 

23 DAVID WEIL, THE FISSURED WORKPLACE, passim (2014); David H. Webber, The Use & Abuse of 

Labor’s Capital, 89 NYU Law Rev. 2106 (2014) (comparing the use of public pensions to requirements 

under ERISA) [SSRN-id2380661]. 
12

social value, while destroying the stability of employment and associated benefits such as 

retirement accounts. 

Investment advisors, like other players in the financial services industry, generate 

an environment of growing systemic financial instability. As financial instruments and 

strategies continue to evolve, the potential exists for plan sponsors, plan beneficiaries, 

and IRA holders alike to be confronted with investment instruments and strategies that 

are almost entirely unfamiliar and present unknowable tail risks. 

Of course, industry advocates will champion innovation in the marketplace in 

parallel with innovation in productive industries. Yet even to the degree that there is a 

legitimate basis for high-risk strategies and instruments involving ordinary beneficiaries, 

it owes to an environment where continuing financial and equity crises in Puerto Rico, 

Greece, and China are emblematic of heightened risks and are coextensive with lower 

and/or unpredictable returns. This contagion emerges, in part, from the environment of 

unchecked investment in highly-leveraged instruments such as Residential Mortgage 

Backed Securities that existed prior to the Financial Crisis of 2008. Allowing investment 

advisors to seek heightened returns for individuals without consideration of the systemic 

risks of their actions helps perpetuate these systemic factors and contradicts the policies 

behind the Dodd-Frank Act.24

 

Agencies such as the DoL are not impervious to a lack of foresight about novel 

financial sector risks. There often is no pertinent data or pattern of performance 

regarding novel financial strategies and “innovations” that can produce even an 

unreliable prediction of instrument performance or tail risk events.25 The Agency should 

adopt this precautionary principle in determining how to safeguard the interests of 401(k) 

sponsors and beneficiaries and IRA holders, and also to help address systemic risk 

concerns that are more directly within the purview of the Federal Stability Oversight 

Council. 

Ultimately, investment in high-risk instruments and strategies can intensify the 

possibility of employment loss and financial catastrophe. More generally, the practice can 

result in economic misallocation in financialized products and corporations with an 

emphasis on short-term returns. A weak fiduciary rule, then, not only impoverishes 

investors but impairs the businesses, and ultimately, the economy on which workers 

are reliant for earnings. It would be especially troubling if the DoL’s fiduciary rule 

facilitated the growth of these pernicious investment strategies despite their wellpublicized failures. 

The duty of care, therefore, must encompass an evaluation of the risks, leverage, 

and liquidity associated with a particular instrument or strategy. It must account for loss 

of returns or control in the event of complexity and reliance on multiple contractors to 

deliver investment advice. It must include an evaluation at all junctures, including in 

 

24 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, H.R. 4173 

(2010)). 

25

 See, e.g., Darryll Hendricks, Evaluation of Value-at-Risk Models Using Historical Data, Fed. Res. 

Bank of New York Economic Policy Review (April 1996) (noting incongruities between VaR modeling 

and actual conditions). VaR risk measurements often suffer from foundational failures, especially in light 

of changed conditions. See Taleb, Nassim Nicholas, Canetti, Elie R.D. , Kinda, Tidiane, Loukoianova, 

Elena & Schmieder, Christian, A New Heuristic Measure of Fragility and Tail Risks: Application to Stress 

Testing (August 2012) IMF Working Paper No. 12/216, available at http://ssrn.com/abstract=2156095. 
13

rollover and allocation decisions, of the vulnerability of the 401(k) plan or IRA holder to 

downturn and loss of employment as well as the availability of plan redemption. 

VI. Conclusion

In summary, we thank the Agency for taking an important step towards raising the 

standard of conduct applicable to retirement account advisers, and we encourage it to 

promulgate an undiluted Final Rule that vindicates the promise of the fiduciary standard. 

Anything less would put future retirees at risk. 

Thank you. 

Sincerely, 

/s/ 

Occupy the SEC 

Neil Taylor 

Josh Snodgrass 

Akshat Tewary 

et al.