Americans for Financial Reform

1629 K St NW, 10th Floor, Washington, DC, 20006

202.466.1885

July 21, 2015

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration 

U.S. Department of Labor 

200 Constitution Avenue, N.W. 

Washington, D.C. 20210

Re: Conflict of Interest Rule, RIN 1210-AB32

Proposed Best Interest Contract Exemption, ZRIN: 1210-ZA25

Dear Sir or Madam:

We are writing on behalf of Americans for Financial Reform (AFR) to comment on the 

Department of Labor‟s (DOL) proposed rules changes to better protect retirement savers from 

conflicted investment advice.1In our view, these proposals represent a critical and long overdue 

improvement of investor protections mandated by the Employee Retirement and Income Security 

Act (ERISA). We support these reforms, with the proviso that the protections currently in the 

rule against possible abuses of exemptions and exclusions must be maintained in full.

ERISA contains powerful statutory protections for retirement savers. Section (3)(21) of ERISA 

designates individuals or entities as fiduciaries to a retirement plan if:

A) They exercise any discretionary authority regarding plan management or assets, or

B) They render investment advice for any fee or other compensation, direct or indirect, 

regarding any moneys or other properties of the plan.

Fiduciaries are personally liable for any losses caused by a breach of their fiduciary duty.

This statutory framework is straightforward and direct, and is clearly intended to apply the 

fiduciary duty broadly. The breadth and force of the statutory framework shows that Congress 

 

1 Americans for Financial Reform is a coalition of more than 200 national, state and local groups who have come 

together to reform the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, 

community, labor, faith based and business groups.
was deeply concerned that retirement investors receive advice that is free of conflicts of interest, 

provided by fiduciary advisors who are required to put the interests of the investor first.

However, in implementing the statute the Department of Labor in 1975 issued regulations that 

placed significant additional restrictions on the application of fiduciary duties to providers of 

investment advice. The 1975 regulation added a five-part test, each prong of which must be 

satisfied before an individual or entity can be considered as giving „investment advice‟ that 

triggers ERISA fiduciary status. The five part test requires that an advisor must (1) render 

advice, (2) on a regular basis, (3) pursuant to a mutual agreement, (4) that the advice will serve 

as the primary basis for investment decisions with respect to plan assets, and (5) that the advice 

is individualized to the particular plan or saver. If even one of these requirements is not met, the 

fiduciary duty protection is not triggered.

This five part test has no apparent basis in statute. Presumably the original intent of the test in 

1975 was related to a desire to exclude merely incidental advice and focus fiduciary protections 

on truly significant advice. This justification was questionable even at that time. But in the forty 

years since the 1975 rule was passed the retirement savings markets have transformed in ways 

that make the five-part test enormously more damaging to worker interests. In 1979, 84 percent 

of workplace retirement plan participants were members of a defined benefit plan managed by 

their employer, and just 16 percent were exclusively dependent on a defined contribution plan

where they made their own investment decisions. Today, the percentages have reversed, with 93 

percent of workplace retirement plan participants members of a defined contribution plan.2

With individual workers more responsible than ever before for their own investment decisions, 

and less protected by larger employer fiduciaries, investment advice that does not meet every 

prong of the five-part test can have a crucial impact on investment choices. Workers may rely on 

investment advice that is provided on a one-time or intermittent basis, or cannot be documented 

as being the primary basis for an investment decision, or is not provided pursuant to a 

demonstrably mutual agreement, without realizing that the DOL permits the provider of such 

advice to prioritize their own interests or financial returns over the interests of the investor.

Such conflicted advice can have an especially devastating effect in the case of lump-sum rollover 

decisions, such as moving retirement savings from a 401-K into an IRA. This can be one of the 

most important decisions a worker will ever make concerning their retirement savings. Yet under 

a 2005 advisory opinion, advice on this decision, even when it includes investment 

recommendations, does not trigger a fiduciary duty.3IRA rollovers are a major part of the 

retirement investment landscape, accounting for an estimated 40 to 50 percent of the new 

 

2 Employee Benefit Research Institute, “FAQ About Benefits – Retirement Issues”

3 Department of Labor Advisory Opinion 2005-23A, December 7, 2005.
monetary flows to investment advisors and brokerages.4

 As such, they are a major contributor to 

profits in the fund management industry, and fund managers are aggressively targeting the IRA 

rollover market.5

A recent GAO report found that conflicts of interest were driving poor advice in the IRA 

market.6The report concluded that:

“much of the information and assistance participants receive is through the marketing 

efforts of service providers touting the benefits of IRA rollovers and is not always 

objective. Plan participants are often subject to biased information and aggressive 

marketing of IRAs when seeking assistance and information regarding what to do with 

their 401(k) plan savings when they separate or have separated from employment with a 

plan sponsor. In many cases, such information and marketing come from plan service 

providers. As we have reported in the past, the opportunity for service providers to sell 

participants their own retail investment products and services, such as IRAs, may create 

an incentive for service providers to steer participants toward the purchase of such 

products and services even when they may not serve the participants best interests.”

A recent study by Harvard economists used audit techniques to test advice received on IRA 

rollovers, and also found clear evidence that brokers and advisors routinely provided misleading 

and deceptive advice driven by conflicts of interest.7

Conflicts of interest in the investment market create enormous costs for retirement savers. Based 

on a comprehensive review of economic evidence, the DOL‟s Regulatory Impact Analysis 

provides a conservative estimate of losses to investors in the IRA mutual fund market alone of 

$210 billion over the next decade. Losses due to other types of instruments affected by broker 

conflicts of interest, such as insurance and ETFs, would be in addition to that figure. 

 

4 Turner, John and Bruce Klein, “Retirement Savings Flows And Financial Advice: Should You Roll Over Your 

401(K)?”, Pension Policy Center, April 2014. 

5 McKinsey Wealth Management, Asset Management, and Retirement Practice, “Capturing IRA Rollovers: The Net 

New Money Opportunity for Wealth Managers”, McKinsey Consulting, July 2011. McKinsey Wealth Management, 

Asset Management, and Retirement Practice, “Searching for Growth In Asset Management”, McKinsey Consulting.

6 Government Accountability Office, “401(K) Plans: Labor and IRS Could Improve the Rollover Process for 

Participants”, GAO Report 13-30, March 7, 2013.

7 Mullainathan, Sendhil, Markus Noth and Antoinette Schoar, “The Market For Financial Advice: An Audit Study”, 

NBER Working Paper 17929, National Bureau of Economic Research, March 2012. 
In light of these costs, and the large and evident gaps in ERISA fiduciary coverage outlined 

above, it is imperative that fiduciary coverage be reformed. To be effective, any such reform 

must meet several standards:

 Obsolete limitations on ERISA fiduciary coverage such as the „regular basis test‟ and the 

„primary basis test‟ should be eliminated. So should requirements such as a „mutual 

agreement‟ that will be difficult for less sophisticated individual investors to document.

 The rule must cover rollovers of employee retirement plan assets to IRAs as fiduciary 

investment advice. Indeed, all advice related to distributions from a retirement plan 

should be so covered.

 Carve-outs from the investment advice definition must be carefully and narrowly defined.

 Prohibited transaction exemptions must be carefully controlled to ensure that the conflicts 

of interest inherent to prohibited transactions do not lead to violations of the fiduciary 

obligation to put client interests first.

 The fiduciary duty of ERISA-covered advisors must be practically enforceable.

This rule proposal appears to meet the first standard, as it eliminates the regular and primary 

basis tests, as well as the explicit requirement for a mutual agreement. AFR strongly supports the 

elimination of these inappropriate tests, which permit evasion of appropriate fiduciary duties. 

However, the proposal continues to require that in cases where fiduciary status is not explicitly 

acknowledged, advice must be provided „pursuant to a written or verbal agreement, arrangement, 

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

directed to, the advice recipient for...decisions with respect to securities or other properties of 

the plan or IRA‟. We believe that this requirement should be clarified to specify that such an 

agreement or understanding need not be mutual or explicitly spelled out in detail. If the recipient 

of the advice is reasonably led to believe that the advice is specifically directed to him or her and 

applies to plan assets, this should count as an „understanding‟ for the purpose of triggering the

fiduciary duty. The purpose of such a clarification would be to avoid situations where the advisor 

or broker claims that they did not share the client‟s understanding that the advice was 

individualized or intended to apply to plan assets, in order to dispute whether the agreement 

existed. This could in effect reintroduce the requirement for a mutual agreement. It is 

unreasonable to expect a retail investor who may not be familiar with legal details to be 

responsible for documenting proof that an agreement or understanding is mutual and explicit. 
The proposal also meets the second standard, as advice concerning distributions and rollovers is 

explicitly covered as fiduciary investment advice. AFR strongly supports this. Clearly 

distributions and rollovers can be crucial financial decisions affecting plan assets.

The expansion of the application of fiduciary duties in this proposal is counterbalanced by a 

large number of carve-outs and exemptions. The range and scope of these carve-outs and 

exemptions show that the DOL has made extensive efforts to accommodate industry concerns 

that current business models are not compatible with a genuine and enforceable fiduciary duty to 

act solely in the client‟s best interests. We would note that the goals of expanding the fiduciary 

duty will not be met unless current business models are changed, and changed significantly. The 

entire thrust of the Regulatory Impact Analysis is that current business as usual results in 

unjustified costs of hundreds of billions of dollars to retirement investors. Given that these costs 

also represent hundreds of billions in revenues transferred to financial services providers, we can 

expect strong efforts to further weaken the rule to protect existing business models and profits. 

While a number of the proposed carve-outs are reasonable and there are a range of protections 

currently included for some of the important exemptions, significant changes in the proposal to 

further accommodate industry concerns threaten to undermine the core objectives of this rule. 

Below, we briefly discuss a number of specific carve-outs and exemptions. We may comment 

further or provide additional detail in the future on other exemptions not covered here or on the 

concerns expressed below.

The proposal excludes information provided as part of arms-length sales transactions from the 

definition of fiduciary advice. We support the limitation of this exclusion to larger plans (100+ 

employees or $100 million+ in assets), as well as the specification that the non-fiduciary role of 

the seller must be disclosed and the seller must have a reasonable basis to believe that the plan 

representative is sophisticated. These qualifications are necessary to ensure that the sales 

exemption will not be used to provide potentially deceptive advice to unsophisticated clients.

The proposal excludes investment education materials from the definition of advice, so long as 

such materials are general and not individualized to recommend a particular product or products. 

In principle we agree that truly generalized investment education should be excluded from the 

investment advice definition. However, we believe it is important to ensure that „educational‟ 

products that result in recommending a specific product as particularly suited to the client‟s 

situation be covered as advice, regardless of any provisos or disclosure that the recommendation 

does not constitute „advice‟ under ERISA. We therefore support the DOL‟s provision that asset 

allocation models that result in particularized recommendations to the client not be counted as 

investment education.
The proposal provides a new prohibited transaction exemption that permits fiduciaries to receive 

compensation that would otherwise be prohibited as creating a conflict of interest, so long as a 

range of carefully specified conditions are met. This „Best Interest Contract Exemption‟ (BICE) 

permits otherwise prohibited compensation so long as the advisor contractually commits to 

giving fiduciary advice in the best interests of the clients, contractually commits to standards of 

impartial conduct, and provides a contractual warranty that it has policies and procedures in 

place to mitigate the impact of conflict of interests resulting from otherwise prohibited 

compensation. We would note that given the voluminous evidence collected in the DOL‟s 

Regulatory Impact Analysis as to the negative effect on investors created by precisely the forms 

of compensation permitted under the BICE, it is crucial that protections under the BICE be both 

extensive and enforceable. The lack of such effective protections will simply result in 

reintroducing through the back door the exact forms of conflict of interest and exploitation that 

the proposal is designed to prevent.

We therefore support the full range of protections required by the DOL to take advantage of the 

BICE, including the specific contractual commitments and warranties related to fiduciary advice 

commitments, impartial conduct, and policies and procedures that support these commitments. 

We also view it as crucial that these contractual commitments be directly enforceable by 

individual IRA owners, plan beneficiaries, and plans through legal action. Limitations on such 

enforcement powers would threaten to turn the required contractual commitments into a mere 

paperwork exercise. Given the significant costs of undertaking legal action, and the welldeveloped body of case law concerning fiduciary duties as well as the likelihood that this case 

law would be further developed as experience is gained with BICE-type contracts, there is every 

incentive for such legal action to occur only in meritorious as opposed to frivolous cases.

We further support the required point-of-sale cost disclosures. Such disclosures should be 

provided before the point that the transaction is finalized, and should be both prominent and 

understandable. These disclosures will of course be enormously helpful to clients seeking to 

understand their investment options. But beyond that, they provide incentives to sellers of 

financial products to conform to fiduciary commitments, as unjustified differences in costs will 

be more evident both to clients and to brokers. Indeed, given the great complexity of 

summarizing bottom-line costs under current investment disclosure regimes, such disclosure 

requirements are likely to increase market efficiency.

However, we do have concerns regarding the potential addition of a „low free streamlined 

exemption‟ to the BICE. Such an instrument-based exemption has some theoretical appeal, and a 

narrow exemption for a carefully limited set of simple instruments could be valuable. But in 

practice its implementation could be very problematic. An overly broad version of such an 

exemption could undermine or even eliminate many of the protections referred to above, 

including some of the most important ones such as the express commitment to a best interest 
standard. It would be ironic if the DOL, having worked to develop a detailed set of restrictions 

on the BICE, then provided a broad exit clause from these restrictions.

We are particularly concerned given the DOL‟s statement that “there may be no single objective 

way to evaluate fees and expenses associated with mutual funds (or other investments) and no 

single cut-off to determine when fees are sufficiently low” for such an exemption. The 

implication that clear objective standards for the exemption may be impossible to determine 

seems to indicate that the exemption could be complex, technical, and vulnerable to exploitation. 

If any streamlined exemption to the BICE is added, it should be carefully limited and only 

finalized after additional public consultation.

In sum, this proposal as a whole contains a long overdue and extraordinarily valuable expansion 

of the ERISA fiduciary duty to address numerous loopholes that inappropriately limit the 

application of best interest protections. As the Regulatory Impact Analysis indicates, these

uncontrolled conflicts of interest create enormous costs for retirement investors. Yet the rule also 

contains a wide variety of exemptions and exclusions that, if not properly controlled, could 

permit conflicts of interest to continue. We urge the DOL to include appropriate controls in the 

final rule, and to reject attempts to accommodate existing business models that profit through the 

exploitation of conflicts of interest.

Thank you for the opportunity to express our views on this proposal. Should you have additional 

questions on this issue, please contact Marcus Stanley, AFR‟s Policy Director, at 

marcus@ourfinancialsecurity.org or 202-466-3672.

Sincerely,

Americans for Financial Reform
Following are the partners of Americans for Financial Reform.

All the organizations support the overall principles of AFR and are working for an accountable, fair and 

secure financial system. Not all of these organizations work on all of the issues covered by the coalition 

or have signed on to every statement.

 AARP

 A New Way Forward

 AFL-CIO 

 AFSCME

 Alliance For Justice 

 American Income Life Insurance

 American Sustainable Business Council

 Americans for Democratic Action, Inc

 Americans United for Change 

 Campaign for America‟s Future

 Campaign Money

 Center for Digital Democracy

 Center for Economic and Policy Research

 Center for Economic Progress

 Center for Media and Democracy

 Center for Responsible Lending

 Center for Justice and Democracy

 Center of Concern

 Center for Effective Government

 Change to Win

 Clean Yield Asset Management 

 Coastal Enterprises Inc.

 Color of Change 

 Common Cause 

 Communications Workers of America 

 Community Development Transportation Lending Services 

 Consumer Action 

 Consumer Association Council

 Consumers for Auto Safety and Reliability

 Consumer Federation of America 

 Consumer Watchdog

 Consumers Union

 Corporation for Enterprise Development

 CREDO Mobile

 CTW Investment Group

 Demos

 Economic Policy Institute

 Essential Action 

 Green America

 Greenlining Institute
 Good Business International

 HNMA Funding Company

 Home Actions

 Housing Counseling Services 

 Home Defender‟s League

 Information Press

 Institute for Agriculture and Trade Policy

 Institute for Global Communications

 Institute for Policy Studies: Global Economy Project

 International Brotherhood of Teamsters

 Institute of Women‟s Policy Research

 Krull & Company 

 Laborers‟ International Union of North America 

 Lawyers' Committee for Civil Rights Under Law

 Main Street Alliance

 Move On

 NAACP

 NASCAT

 National Association of Consumer Advocates 

 National Association of Neighborhoods 

 National Community Reinvestment Coalition 

 National Consumer Law Center (on behalf of its low-income clients) 

 National Consumers League 

 National Council of La Raza 

 National Council of Women‟s Organizations

 National Fair Housing Alliance 

 National Federation of Community Development Credit Unions 

 National Housing Resource Center

 National Housing Trust 

 National Housing Trust Community Development Fund 

 National NeighborWorks Association 

 National Nurses United

 National People‟s Action

 National Urban League

 Next Step

 OpenTheGovernment.org

 Opportunity Finance Network

 Partners for the Common Good 

 PICO National Network

 Progress Now Action

 Progressive States Network

 Poverty and Race Research Action Council

 Public Citizen

 Sargent Shriver Center on Poverty Law 

 SEIU

 State Voices

 Taxpayer‟s for Common Sense

 The Association for Housing and Neighborhood Development
 The Fuel Savers Club

 The Leadership Conference on Civil and Human Rights 

 The Seminal

 TICAS

 U.S. Public Interest Research Group 

 UNITE HERE

 United Food and Commercial Workers

 United States Student Association 

 USAction 

 Veris Wealth Partners 

 Western States Center

 We the People Now

 Woodstock Institute 

 World Privacy Forum

 UNET

 Union Plus

 Unitarian Universalist for a Just Economic Community

List of State and Local Partners

 Alaska PIRG

 Arizona PIRG

 Arizona Advocacy Network

 Arizonans For Responsible Lending

 Association for Neighborhood and Housing Development NY

 Audubon Partnership for Economic Development LDC, New York NY

 BAC Funding Consortium Inc., Miami FL

 Beech Capital Venture Corporation, Philadelphia PA

 California PIRG

 California Reinvestment Coalition

 Century Housing Corporation, Culver City CA

 CHANGER NY

 Chautauqua Home Rehabilitation and Improvement Corporation (NY)

 Chicago Community Loan Fund, Chicago IL

 Chicago Community Ventures, Chicago IL

 Chicago Consumer Coalition

 Citizen Potawatomi CDC, Shawnee OK

 Colorado PIRG

 Coalition on Homeless Housing in Ohio

 Community Capital Fund, Bridgeport CT

 Community Capital of Maryland, Baltimore MD

 Community Development Financial Institution of the Tohono O'odham Nation, Sells AZ

 Community Redevelopment Loan and Investment Fund, Atlanta GA

 Community Reinvestment Association of North Carolina

 Community Resource Group, Fayetteville A

 Connecticut PIRG

 Consumer Assistance Council

 Cooper Square Committee (NYC)
 Cooperative Fund of New England, Wilmington NC

 Corporacion de Desarrollo Economico de Ceiba, Ceiba PR

 Delta Foundation, Inc., Greenville MS

 Economic Opportunity Fund (EOF), Philadelphia PA

 Empire Justice Center NY

 Empowering and Strengthening Ohio‟s People (ESOP), Cleveland OH

 Enterprises, Inc., Berea KY

 Fair Housing Contact Service OH

 Federation of Appalachian Housing

 Fitness and Praise Youth Development, Inc., Baton Rouge LA

 Florida Consumer Action Network

 Florida PIRG

 Funding Partners for Housing Solutions, Ft. Collins CO

 Georgia PIRG

 Grow Iowa Foundation, Greenfield IA

 Homewise, Inc., Santa Fe NM

 Idaho Nevada CDFI, Pocatello ID

 Idaho Chapter, National Association of Social Workers

 Illinois PIRG

 Impact Capital, Seattle WA

 Indiana PIRG

 Iowa PIRG

 Iowa Citizens for Community Improvement

 JobStart Chautauqua, Inc., Mayville NY

 La Casa Federal Credit Union, Newark NJ

 Low Income Investment Fund, San Francisco CA

 Long Island Housing Services NY

 MaineStream Finance, Bangor ME

 Maryland PIRG

 Massachusetts Consumers' Coalition

 MASSPIRG

 Massachusetts Fair Housing Center

 Michigan PIRG

 Midland Community Development Corporation, Midland TX

 Midwest Minnesota Community Development Corporation, Detroit Lakes MN

 Mile High Community Loan Fund, Denver CO

 Missouri PIRG

 Mortgage Recovery Service Center of L.A. 

 Montana Community Development Corporation, Missoula MT

 Montana PIRG

 New Economy Project

 New Hampshire PIRG

 New Jersey Community Capital, Trenton NJ

 New Jersey Citizen Action

 New Jersey PIRG

 New Mexico PIRG

 New York PIRG

 New York City Aids Housing Network
 New Yorkers for Responsible Lending

 NOAH Community Development Fund, Inc., Boston MA

 Nonprofit Finance Fund, New York NY

 Nonprofits Assistance Fund, Minneapolis M

 North Carolina PIRG

 Northside Community Development Fund, Pittsburgh PA

 Ohio Capital Corporation for Housing, Columbus OH

 Ohio PIRG

 OligarchyUSA

 Oregon State PIRG

 Our Oregon

 PennPIRG

 Piedmont Housing Alliance, Charlottesville VA

 Michigan PIRG

 Rocky Mountain Peace and Justice Center, CO 

 Rhode Island PIRG

 Rural Community Assistance Corporation, West Sacramento CA

 Rural Organizing Project OR

 San Francisco Municipal Transportation Authority

 Seattle Economic Development Fund 

 Community Capital Development

 TexPIRG

 The Fair Housing Council of Central New York

 The Loan Fund, Albuquerque NM

 Third Reconstruction Institute NC

 Vermont PIRG

 Village Capital Corporation, Cleveland OH

 Virginia Citizens Consumer Council

 Virginia Poverty Law Center

 War on Poverty - Florida

 WashPIRG

 Westchester Residential Opportunities Inc.

 Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI

 WISPIRG

Small Businesses

 Blu

 Bowden-Gill Environmental

 Community MedPAC

 Diversified Environmental Planning

 Hayden & Craig, PLLC

 Mid City Animal Hospital, Pheonix AZ

 UNET