July 21, 2015
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Finally, the Department should clarify that even if USAA provides advice that is individualized
or specifically directed to a member, USAA is not a fiduciary unless the investor can substantiate
that he or she relied on the advice and such reliance was contemporaneous with the advice.

Moreover, many of the services provided by USAA, which are primarily designed for individual
investors who invest through IRAs, Coverdell ESAs, and similar arrangements, do not qualify
for the “carve-outs” included in the Proposal. Therefore, USAA requests that the Department
make the following changes to the carve-outs in the Proposal:

a. Extend the platform carve-out to IRA and Coverdell ESA platforms. USAA offers
certain IRA products that contain only a platform of USAA’s proprietary mutual funds
covering a range of assets classes. USAA offers these products as a simple, low-cost,
low-minimum balance retirement savings solution, which enhances the financial security
of our members. Given the number of funds and range of asset classes available on the
platform, we do not believe that a USAA member would reasonably construe the offering
of a platform and the provision of information about the funds on the platform (in
conformance with the requirements of the carve-out) as a recommendation to invest in all
or some of the funds on USAA’s platform. USAA agrees that making an actual
recommendation of which funds on the platform to invest in or how to allocate among the
funds would amount to advice. But, merely creating a platform does not amount to
advice. Without allowing USAA to rely on the platform carve-out, USAA would be
unlikely to offer these IRA products, thus eliminating an important product option for our
members.

b. Include asset allocation models populated with specific mutual funds in the
education carve-out. Any concerns of the Department that asset allocation models
populated with specific mutual funds are used to steer investors into particular funds
could be mitigated if the Department requires that, as set forth in its exposure draft of the
original Interpretive Bulletin 96-1, all investment alternatives (or a reasonable
representative sample of those alternatives) available under an IRA platform with similar
risk and return characteristics must be included in each generic asset class presented in
the allocation model.

3. The Proposal will limit consumer choices by eliminating viable USAA
product and service options.

Under the Proposal, nearly any conversation between USAA and its members in connection with
USAA’s investment products and services could be “investment advice,” therefore, USAA will
have to rely on the BIC PTE, PTE 84-24, or PTE 77-4, which require that USAA and its
representatives act in accordance with the Proposal’s “Best Interest” standard.

The Best Interest standard requires that USAA and its representatives only make
recommendations “without regard to the financial or other interests of the Financial Institution,
any Affiliate or other party...” USAA is concerned that this language may be interpreted by a
court to provide that a financial institution cannot recommend proprietary mutual funds, annuity
and insurance products, investment products and investment services while still acting in the
“best interest” of an investor. While USAA makes nonproprietary investment options available



July 21, 2015
Page 4

d. Electronic signatures. The Proposal requires a signed agreement. The BIC PTE should
be clarified so that a “signature” can be satisfied by physical signature or by negative
consent, electronic digital signature, verbal agreement or some other reasonable
alternative means. In an age where consumers are demanding agility and seamless
experience (¢.g., mobile banking and “robo” advice), a physical signature takes the
industry back in time and does not meet the expectations of consumers. Electronic
signature is especially important for our members who are stationed across the globe in
places where mail may be especially inconvenient or slow.

These changes would allow USAA to continue to serve military members, especially those
requesting advice immediately before a deployment or even while on deployment to a remote
location or war zone.

2. USAA members may not be able to receive important educational information
because the Proposal’s definition of “Investment Advice” is too broad and the
carve-outs are too narrow.

USAA is concerned that the Department’s proposed definition of “investment advice” is so
broad that even basic information or general discussions regarding what products and services
USAA offers will be considered investment advice.

A key component of the proposed definition of investment advice is that a “recommendation” be
made with regard to the purchase, sale or holding of a security. A recommendation is a
communication that, based on the facts and circumstances, “would reasonably be viewed as a
suggestion that the advice recipient engage in or refrain from taking a particular course of
action.” So applied, this broad definition appears to render USAA a fiduciary subject to the
exemption requirements in situations where USAA, among other things, merely provides
information about its products and services, provides brochures, educational and marketing
materials, and educates members about certain issues. USAA feels strongly that these materials
facilitate the financial security of our members. For example, if USAA includes an article about
annuities in its quarterly publication to members, or sends a marketing piece about IRAs, these
should not be considered advice. Capturing such informational or educational activities will
unnecessarily limit the availability of services to the detriment of our members in situations
when they have no need for the protections afforded by the proposed exemptions. Therefore,
USAA urges the Department to revise the Proposal to clarify the definition of investment advice
so that presenting alternatives or explaining options does not result in a recommendation.

Additionally, under the Proposal, advice must be “individualized to” or “specifically directed to”
the advice recipient for consideration in making investment decisions. USAA members often
turn to USAA representatives for explanations of how financial products work, which then leads
the members to make their own choices. Therefore, in order to allow USAA to continue to help
educate our members, we urge the Department to eliminate the “specifically directed”
requirement. The Department should modify the test so that USAA would not be deemed to be a
fiduciary unless USAA provides advice under circumstances creating a reasonable expectation
on the part of the advice recipient that advice is provided in the interest of the advice recipient.


July 21, 2015
Page 6

to its members, it only provides free advice and tools-based recommendations on proprietary
products and services.

USAA has created a suite of proprietary index and actively managed mutual funds that offer
USAA’s members the opportunity to invest in a broad array of asset classes. These options are
available at a comparatively low cost, and we offer some of these funds to our members at a
lower minimum account balance than is generally available at other mutual fund companies.
Thus, our proprietary products enable members to begin investing early in their careers further
facilitating their financial security. USAA also facilitates the financial security of our members
by offering free advice on our proprietary mutual fund products by member service
representatives who are not paid on commission. We also offer fixed annuity products that offer
our members guaranteed lifetime income and are backed by USAA’s highly-rated and financially
strong insurance companies. Our annuities offer competitive features that are some of the best in
the market. For example, our annuities offer a shorter surrender charge schedule with a
comparatively low fee and our members also are able to annuitize more quickly. Consequently
USAA has designed proprietary products to take into account the lower income status of many of
our service members to be reasonably in their best interests.

It would be a disservice to our members if USAA is prohibited from recommending our
proprietary products and, therefore, eliminating this choice for our members, simply to meet the
Best Interest standard. Therefore, the Best Interest standard in the final regulation should mirror
the language in ERISA section 404.

Equally troubling is the Proposal’s requirement that compensation for representatives offering
only proprietary products be reasonable in relationship to the “specific services” provided to the
retirement investor. This is a significant departure from the total compensation for total services
standard articulated under the BIC Exemption’s general Impartial Conduct Standards. USAA
urges the Department to amend BIC Exemption to remove the “specific services” requirement
under the exemption. Without such a change, USAA may no longer be able to provide advice
and recommendations for proprietary USAA mutual funds without causing a non-exempt
prohibited transaction, because we cannot necessarily determine or calculate compensation in
relationship to the specific services with the required precision. We feel strongly that the free
asset allocation services we provide on our mutual funds is an important offering to enhance the
financial strength of our members, many of whom do not have account balances that are high
enough to receive services like this (free or paid) from other institutions. The Proposal,
particularly the BIC Exemption, will impede USAA’s ability to provide these services.

Based upon the foregoing, the Proposal should be revised to (a) clarify that an adviser can
recommend proprietary products and services only while still acting in the “best interest” of the
investor and (b) eliminate the more restrictive reasonable compensation standard.

4. Conclusion

USAA supports a best interest fiduciary standard when providing investment advice to plan
sponsors, participants and IRA investors as long as individual retirement savers continue to have
choice and access to the products and services they want and need — on their own
terms. Unfortunately, the Proposal will make it even harder for American savers to get the
guidance they need, A rule that effectively bans certain business models will harm investors,


ay

US.

S
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9800 Fredericksburg Road
San Antonio, Texas 78288

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

Office of Exemption Determinations
Employee Benefits Security Administration
(Attention: D-11712)

U.S. Department of Labor

200 Constitution Avenue NW, Suite 400
Washington, DC 20210

Re: Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment
Advice (RIN_1210-AB32); Proposed Best_Interest_Contract (BIC) Exemption (ZRIN
1210-ZA25); Proposed Amendment to Prohibited Transaction Exemption (PTE) 84-24
and PTE 77-4

Ladies and Gentlemen:

In the interest of our members — the men and women of the U.S. military and their families —
United Services Automobile Association (USAA)! is pleased to provide our comments to the
Department of Labor Employee Benefits Security Administration (Department) with respect to
the requests for comment on the above-noted proposed rulemakings (the Proposal).

We agree with industry efforts to protect the interests of investors by assuring financial services
companies and their advisers avoid conflicts of interest and act in the best interest of investors.
USAA has a 93-year history of serving the military and their families and has a unique business
model that puts our special customer base first. We have concerns that the Department’s
Proposal will harm our military members by resulting in fewer options for advice and
information, limited investor choice, less acquisition flexibility, as well as more costs for our
members, especially active duty military members. Specifically, as a result of the Proposal: (1)
USAA’s military members may not receive the level of service and convenience to which they
are accustomed from USAA; (2) USAA members may not be able to receive important
educational information; and (3) the Proposal will limit consumer choices by eliminating viable
USAA product and service options that have been developed to serve the needs of our unique
customer base.

Background on USAA

USAA is a membership-based association, which together with its family of companies, serves
present and former commissioned and noncommissioned officers, enlisted personnel, retired

'sUSAA” is used to refer collectively or individually, as the case requires, to United Services Automobile
Association and its applicable affiliates.


July 21, 2015
Page 7

especially our men and women in uniform, by raising their costs, reducing their choices and
restricting their access to guidance and education.

We believe there is a balanced approach where savers can be protected by a best interest standard
and continue to have access and choice in their retirement products, services, and providers. The
proposed rule could provide a reasonable framework for imposing a best interest standard on
financial professionals, but the details matter, and the details of the Proposal simply don’t
work. Asa result, the Proposal would effectively prohibit financial professionals from providing
a broad range of services and advice — even if the advice is in the best interest of their
customers. Low- and middle-income investors will be harmed the most because they are the
ones who rely on the business models that are effectively prohibited under the Proposal.

kA KS

We appreciate the Department’s consideration of our comments. Should you have any questions
or wish further clarification or discussion of our points, please contact James Whetzel, General
Counsel, Financial Advice and Solutions Group at 210-498-4628.

Steven Alan BenWett
Executive Vice President
Chief Legal Officer, General Counsel & Corporate Secretary


July 21, 2015
Page 2

military, and their families. Since USAA’s inception in 1922 by a group of U.S. Army officers,
we have pursued a mission of facilitating the financial security of our members and their families
by providing a full range of highly competitive financial products and services, including
personal lines of insurance, retail banking, and investment products. Our core values of service,
honesty, loyalty, and integrity have enabled us to perform consistently and be a source of
stability for our members and customers, even in the midst of the recent financial crisis.

USAA’s member service representatives offer a wide range of financial and insurance solutions
to our members based upon a member’s needs. To meet the unique needs of our members, we
have developed a multi-faceted approach through which we communicate with our membership.
Although we have branch offices where our members can have an in-person discussion with a
representative, USAA primarily uses telephone call centers to provide a convenient and
centralized location for our members to discuss USAA’s products and services and financial
planning. USAA also utilizes “video chat” and similar technologies so that the members get the
benefit of “in person” meetings despite deployment, which may be thousands of miles away.
Finally, USAA uses internet-based and mobile technology so that members can get some of the
same services (¢.g., advice on asset allocation) that they might otherwise get through in-person,
telephonic or video chat interactions.

The primary vehicles impacted by the Proposal through which we serve our clients are individual
retirement accounts and individual retirement annuities (IRAs) and Coverdell Education Savings
Accounts (Coverdell ESAs). Currently approximately 1.1 million USAA members have nearly
$60 billion in USAA IRA products. Each of these vehicles are complemented by free financial
advice and planning services for our members, many of whom do not have account balances at
levels at which they could receive advice of any kind (free or paid) from other financial services
providers.

USAA’s Recommended Changes to the Proposal

We believe that the Proposal, particularly the BIC Exemption, will significantly limit USAA
members’ choice and access to products as well as increase their costs. USAA has identified
three specific shortcomings of the Proposal that will prevent our members from receiving the
benefits of the Proposal and will make it difficult to achieve our goals of providing our members
with a high level of service and choices at low costs.

1. USAA’s military members may not receive the level of service and convenience
they are accustomed to from USAA as a result of the BIC PTE.

The Proposal would significantly inhibit USAA members, especially active duty military
personnel, from receiving services prior to and during deployment. Active duty and reserve
military personnel are often deployed unexpectedly and on short notice with limited or no
accessibility for extended periods, often precluding them from managing personal finances. To
meet the unique needs of our members, USAA has designed its member services and call centers
to be flexible, convenient and accessible.


July 21, 2015

Page 3

USAA is concerned that several conditions of the Proposal, such as the tri-party agreement
requirement, will make it impossible for USAA to deliver essential services required by our
members, particularly our active duty service members, without processing a non-exempt
prohibited transaction.

USAA recommends several changes to these exemptions.

a,

Insert disclosures in existing documents. We agree that it is important to ensure that
current and prospective account owners of IRAs, annuities, and Coverdell ESAs as well
as plan participants receive the written disclosure required by the proposed BIC
Exemption. However, we believe it is not necessary or beneficial to our members to
require a new document (e.g., the tri-party agreement) to deliver this BIC language.
Existing regulations require delivery of IRA and Coverdell ESA custodial agreements
and disclosure statements to IRA account owners. Therefore, rather than require a
separate document, we urge the Department to allow the contractual requirements of the
BIC Exemption to be added to the applicable IRA custodial agreement and disclosure
statement and for individual retirement annuities, to the IRA disclosure statement. We
feel strongly that including all relevant information in one centralized agreement would
be the most straightforward solution for our members. Delivering multiple documents to
customers related to the same transaction will be confusing and overwhelming and add
unnecessary stress to our service members in times of deployment.

Adopt an “access equals delivery” model. The Department should adopt an “access
equals delivery” standard similar to the accepted practices used by the Securities and
Exchange Commission for delivery of prospectuses. Electronic communication is now
accepted and widely used. We urge the Department to adopt this delivery method for all
disclosures, including annual disclosures, required under the Proposal. Access to
documents via an Internet link also allows for information to be accurate and updated as
appropriate. It allows consumers constant access to documents without having to keep a
physical copy in a file, which is particularly difficult if not impossible for military
members on deployment.

Two-party agreements for call center models. The Proposal requires that the
customer, USAA, and the USAA representative enter into a tri-party agreement. The
proposed tri-party agreement does not provide any additional protections to consumers
when compared with a two-party agreement between the customer and USAA and would
likely increase cost and decrease availability of advice. This is especially true in a call
center model. Unlike some business models that assign a unique registered
representative or annuity salesperson to each customer and compensate on commission,
as discussed above, USAA operates in a call center environment where generally no
single representative is assigned to a member. The Proposal does not consider that in a
call center environment, each time a member calls, he or she will speak with a different
representative and a new tri-party agreement would need to be executed before each call.
Therefore, the Proposal should be amended, so that in the case of a call center model, a
two-party agreement between the firm and the customer, not a tri-party agreement, would
be all that is needed.