(2) Firms will need to provide supervision and compliance to monitor the new BICE contracts;

(3) Firms will need to establish policies and procedures to manage their BICE conflicts of interest; and

(4) Compliance and supervision departments will need to monitor and supervise their financial
professionals’ management of their own conflicts of interest under the BICE standard.

These extra compliance and supervision steps will result in increased cost to the financial professional
and his company. In turn, at least some portion of these costs will be passed on to investors. The
Proposal, as a whole, but the BICE procedures in particular, fall considerably short of an objective cost-
benefit analysis that is required of rulemaking of this type. The BICE mandate fails to “strike the right
balance,” and fails to develop a more affordable, less intrusive rule to achieve the same ends, after giving
careful consideration to benefits and costs. In overstating the benefits to the investor, the Proposal
understates the costs to the financial professional, the individual investor and small businesses. Little, if
any, consideration appears to have been given to the financial effect of the Proposal on small retirement
plans and their marketplace.

3. Concerns from a Co-Regulator

The concern that the Proposal will adversely affect investors by financial professionals leaving the
business is not that of Penn Mutual’s alone. It has been raised by Richard Ketchum, Chairman and Chief
Executive Officer of FINRA, who has predicted that the Proposal will likely cause broker/dealers to
curtail, or even discontinue, sales of individual retirement accounts.

Mr. Ketchum has stated that the Proposal provides insufficient workable guidance either to the firm or the
judicial arbiter on how to manage conflicts in most firms’ present business models. While
acknowledging the merit of the Department’s concerns regarding conflicts, Mr. Ketchum believes that
uncertainties stemming from contractual analysis and the shortage of useful guidance will lead many
firms to close their IRA business entirely or substantially constrain the clients that they will serve.°

Mr. Ketchum has stated that the DOL Proposal would create a prejudice against financial products with
higher fees, even if these products are the best recommendation for a client.’

Finally, the contract may not include disclaimers or limitations of liability for violations of the contract, or a waiver
of the investor’s right to participate in a class action.

© Source: Richard G. Ketchum, Chairman and Chief Executive Officer, Remarks From the 2015 FINRA Annual
Conference, Washington, DC (27 May 2015), https://www.finra.org/newsroom/speeches/052715-remarks-2015-
finra-annual-conference.

7 According to Mr. Ketchum:

“While right directionally, | have practical concerns with the Labor proposal in a number of areas. First, the
warranty and contractual mechanism employed by Labor used to address their limited IRA enforcement
jurisdiction, appears to me to be problematic. In one sweeping step, this moves enforcement of these
provisions to civil class action lawsuits or arbitrations where the legal focus must be on a contractual
interpretation. I am not certain how a judicial arbiter would analyze whether a recommendation was in the
best interests of the customer “without regard to the financial or other interests” of the service provider, I’m
not sure, but I suspect, a judicial arbiter might draw a sharp line prohibiting most products with higher

5


the “meeting of the minds” necessary for a binding contract. It is akin to an individual walking into a
store and being required to sign a contract prior to even being allowed to look at the merchandise for sale.
This is simply not the way business is done. We believe the imposition of a contract at the outset of a
relationship will only create doubt and confusion in the mind of the consumer, before he even receives
basic information from a financial professional.

In addition, the BICE contract can, and most probably will, subject a financial professional to the
requirements of the Investment Advisers Act of 1940, inevitably triggering additional fees to investors.
The admission of fiduciary status is likely to cause the broker-dealer to fall outside of the current °40 Act
exception for non-fiduciary, “incidental” advice’ and obligate the financial professional to monitor that
advice on an ongoing basis. This will cause investors to pay additional fees for such monitoring, which
the investor neither expects nor wants to pay.

Finally, there is the problematic scope of the BICE disclosures. The proposed disclosure is so broad that
it could include “spread revenue,” namely earnings by financial institutions in a wide range of products
including bank deposits, corporate bonds, and fixed accounts within both fixed and variable annuity
products. It is virtually impossible for a firm to determine the exact amount of spread revenue it has
earned over any particular period. Also, it will be extremely difficult if not impossible for firms to
identify the total indirect compensation paid by each retirement investor on its platform.‘

b. Compliance Issues

The compliance burdens of the BICE will impact not just the financial professional, but also the firm’s
compliance and supervision departments. While firms perform a number of these functions already, the
will now need to be performed under the new and uncertain standard of Department of Labor fiduciary
review,

Some of the extra tasks companies will need to perform to claim the BICE exemption include, but are not
limited to:

(1) Firms will need to create new contracts for potential investors;>

> The Investment Advisers Act of 1940 (the “40 Act”) specifically excludes registration as an investment adviser
those individuals, companies who provide investment advice that is solely incidental to the practice of their
profession.

* Finally, the website disclosure would require the development of a website that includes specific information

related to every investment available on the financial institution’s platform. This website will require:

° — Significant infrastructure development in order to meet website, point-of-sale, and annual reporting disclosures.

© — Significant record retention requirements relating to (a) website development, (b) initial and ongoing
disclosures, (c) system changes to capture newly required information; and, (d) significant accompanying
training.

$ The cornerstone of the BICE Exemption is the requirement that a written contract contain all of the following:

e Acknowledgement of the Fiduciary and his firm’s fiduciary status.

e Acknowledgement of the Fiduciary and his firm’s commitment to basic standards of impartial conduct.

e Warranties that the firm has adopted written policies and procedures designed to mitigate conflicts of interest
and ensure adherence to standards of impartial conduct.

e Warranties compliance with applicable federal and state laws.

* Disclose of material conflicts of interest (including third party payments) and information about fees.

4


A similar tocsin has been sounded throughout the financial services industry that the Proposal, as drafted,
will drive financial professionals in the small retirement balance marketplace out of business, ultimately
to the harm and detriment of the lower-wealth investor who, more than anyone else, needs their expertise.
As a participant in the financial services industry, Penn Mutual supports the need for more public
education and clear disclosure that actually benefits investors in a meaningful way, rather than an
approach that will in fact harm the intended beneficiaries of the Proposal.

4, The Better Option for Insurers and Their Affiliated Broker-Dealers

The Proposal fails to consider the fact that there already exists regulatory oversight conducted by strong
and effective regulators at the state, federal, and self-regulatory organization levels. Insurers and their
affiliated broker-dealers are already comprehensively regulated by the SEC, FINRA, and state securities
and insurance regulators. Adding another regulator to the mix will prove duplicative and unduly
burdensome. For companies smaller than Penn Mutual and HTK, another level of regulation may well
drive them out of the industry, thereby bringing Mr. Ketchum’s prediction closer to reality.

The better option for the industry would be to allow existing regulators — the SEC and/or FINRA — to
arrive at a definition of “fiduciary” and corresponding regulatory scheme that are both meaningful for
investor protection and workable for securities industry practitioners. FINRA already has promulgated
Rule 2111 (relating to suitability), and Securities Industry and Financial Markets Association (“SIFMA”),
has proposed amendments to the Rule that substantially preserve the traditional compliance regime for
suitability while providing revisions that incorporate the essential concept of the customer’s best interests.
This includes establishing a “best interests standard”, while addressing the critical issue of management
of investment-related fees and material conflicts of interests. In addition, the standard provides for
relevant required disclosures at key points in time, including: account opening; on an annual basis;
through web pages; and updates at times relevant to the broker-dealer and investor.* Moreover, the
SIFMA proposed amendments to Rule 2111 (converting “suitability” to “best interests of the customer”)
offer an implied definition of “fiduciary” that should prove meaningful for investor protection.

We do not argue that the SIFMA proposed amendments to FINRA Rule 2111 mark the end of debate over
“fiduciary duty” applicable to broker-dealers and their registered representatives. However, we do
maintain that the solution to establishing a “best interest” standard should begin and remain with a
proposal that does not unnecessarily restructure the insurance and securities industries. Penn Mutual

financial incentives no matter how sound the recommendation might be. Similarly, I’m not sure how a
judicial arbiter would evaluate which compensation practices “tend to encourage” violations of the
exemption. It would appear likely, however, that firms would be required to demonstrate, at least, that any
higher compensation was directly related to the time and expertise necessary to provide advice on the
product, as specifically suggested by DOL. To say the least, making that case is not a simple proof
standard.”

Source: Richard G. Ketchum, Chairman and Chief Executive Officer, Remarks From the 2015 FINRA Annual
Conference, Washington, DC (27 May 2015), https://www. finra.org/newsroom/speeches/052715-remarks-2015-
finra-annual-conference.

5 SIFMA, Proposed Best Interests of the Customer Standard for Broker-Dealers (Preamble).
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PennMutual

Kevin T. Reynolds
Senior Vice President

Chief Legal Officer
July 20, 2015

Sent via electronic mail to: ori@dol.gov

and first class U.S, mail

Office of Regulations and Interpretations
Employee Benefits Security Administration

Attn: Fiduciary Definition Hearing, Room N-5655
U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Subject: Proposed Department of Labor Revisions
Conflict of Interest Rule Hearing

To whom it may concern:

On behalf of the Penn Mutual Life Insurance Company (Penn Mutual) and its wholly owned subsidiary
broker-dealer, Hornor, Townsend & Kent, Inc., member FINRA/SIPC (HTK), we offer comment on the
Proposed Rule and prohibited transaction exemptions promulgated under Sections 3(21)(A)(ii) and
2510.3-21 of the Employee Retirement Income Security Act (collectively, the “Proposal”). Penn Mutual
and HTK may be referred to individually or collectively as the “Company” throughout this letter.

Established in 1847, Penn Mutual is a mutual life insurance company, manufacturing and selling life
insurance and annuity products through multiple financial services organizations, including through our
wholly-owned broker-dealer, HTK. Penn Mutual and HTK are licensed in all 50 states and the District of
Columbia. We are active participants in the financial services industry, distributing securities, insurance,
and annuity products to the public through Penn Mutual’s licensed insurance agents and HTK’s registered
representatives (hereinafter referred to collectively as “financial professionals”).

The Company applauds and fully supports the Department’s efforts to increase protections to investors
and to ensure that financial professionals always act in the best interest of their customers. However, the
Proposal, as presently drafted, has numerous deficiencies that would radically alter the way insurance,
annuities and securities are sold and advice is provided in the financial services, and particularly
retirement, arena. We believe these deficiencies could result in limiting access to essential guaranteed
income products, and advice regarding them, on which our individual and small business customers rely.

Many of our customers are investors with small retirement balances who need quality advice from
experienced financial professionals skilled in the marketplace of securities, insurance, and annuities
products. We are quite concerned about the unforeseen negative consequences of the Proposal on these
customers. We anticipate that the Proposal will substantially complicate the relationship between the
investor and his financial professional, while increasing compliance and related business costs. This
could set into motion an exodus of financial professionals from the small balance retirement marketplace.
Once the individual personal financial professional leaves this market place, companies who service it
will follow suit. In the end, it is the consumer, including small business owners trying to plan for their

The Penn Mutual Life Insurance Company = 600 Dresher Road, Horsham, PA 19044
PH: (215) 956-8989 m Fax: (215) 956-8347 = Reynolds.Kevin@pennmutual.com


respectfully maintains that revisions to the duties and responsibilities of insurance agents and their
registered representatives should be developed and implemented by the current regulatory regime
authorized by Congress and the states.

5. Conclusion

Recent years have witnessed the decline of traditional employer-sponsored pension plans. These plans
are practically non-existent for the Baby Boom generation as they cross the threshold of becoming seniors
and retirees who need income protection through alternative vehicles like annuities and other guaranteed
lifetime income products. The need to save for retirement in 401(k) and other defined contribution plans
as well as IRAs has never been greater.

Annuities serve as an efficient means to convert one’s savings into a “personal pension plan” that can
supplement Social Security and thereby ensure that investors can have a reasonably secure retirement.
America’s life insurance industry is the critical source for manufacturing annuities, and its financial
professionals are the foremost educators regarding these products. Without the benefit of financial
professionals, consumers may delay the tasks of educating themselves about annuities and their value
proposition, not to mention the variety of annuity options. Penn Mutual believes that the Proposal in its
present form will substantially reduce the availability of financial professionals who can provide that
education.

Asa practical matter, implementing a compliance and supervision program overseen by the Department
of Labor would effectively require financial services companies like Penn Mutual and HTK to create new
procedures, technology and personnel dedicated to monitoring and supervising the DOL’s rules, separate
and apart from the SEC, FINRA, and the state securities and insurance regulators. In our view, this is
unnecessary. There already exists a very reasonable proposal for establishing the parameters of fiduciary
responsibility, which is both meaningful for investor protection and workable for financial services
practitioners. The mechanism for adopting and implementing this standard through rule adoption is
available via the SEC and FINRA without adding an additional regulatory authority. Existing SEC /
FINRA codes of conduct can and should be modified towards the goal of arriving at a universal
“fiduciary” standard that is both relevant to insurance and securities products and is in line with actual

practice.

We therefore urge the Department to heed the comments of the numerous participants in the financial
services industry in response to this Proposal and allow the traditional regulators of this marketplace to
craft meaningful solutions. In the alternative, we urge the Department to substantially modify the present
form of the Proposal so that a meaningful and workable Rule can be established for the industry.

Thank you for your consideration of Penn Mutual’s position in this matter.
Respectfully submitted,

fron Jf

Kevin T. Reynolds
Chief Legal Officer


retirement and the retirement of their employees, who will suffer the unintended consequences of the
Proposal.

More specifically, in its present form, the Proposal:

e Will create confusion in the minds of the public about what the word “fiduciary” means, to whom it
applies, and whether the standard of care for a “fiduciary” is absolute, particularly when customers
receive multiple products and services from their financial professionals.

¢ Could cause the investing public to wrongly believe that “low cost is best” in disregard of the market
place reality that commissions help pay for the financial and retirement planning services that
investors want from their financial professionals.

¢ Overlooks the unique, long-term nature of insurance and annuity products, whose commitments and
guarantees may last for decades.

¢ Would impose significant, redundant and expensive compliance burdens on insurers and broker-
dealers, which will result in an increased cost of services to the consumer.

¢ Creates an unworkable regime of action steps including a contract and “conflicts of interest” warnings
that defy the manner in which the customer and financial professional conduct business, while
ultimately failing to help educate the investor about effective retirement planning.

We therefore respectfully submit this comment letter, highlighted several of our specific areas of concern,
in the hope that the Department will redraft and revise the Proposal from its present form.

1. Expansion of the DOL’s Proposal “Fiduciary” Definition as Applied to “Insurance Affiliated

Broker-Dealers”

The Proposal’s definition of “fiduciary” will replace the DOL’s traditional five-part test.' The new
definition is so broad as to include numerous transactions that were not intended by the statutes or
regulations. The Proposal does not take into account the way insurance companies market and do
business with their customers. Moreover, it appears to assume that a consumer is incapable of telling the
difference between advice and a sales and marketing effort. For example, under the present definition,
“individualized” advice could include information provided in sales calls or a marketing brochure that
merely may have a customers’ name in the salutation. In addition, the advice is not limited to a
contemporaneous transaction, so that it could conceivably be linked to an action taken by an investor
months after the actual advice was rendered, and after market conditions had changed.

The change in definition extends the application of the prohibited transaction provisions of Title 1 of
ERISA to IRAs and variable life and annuities contracts by rescinding the PTE 84-24 exemption for
insurance and annuity contracts transactions. Non-discretionary investment advice provided to IRA.

' Under the new DOL definition, a person will be deemed a “fiduciary” if he: (1) renders investment advice for a fee
or other compensation, direct or indirect; (2) provides investment management recommendations or appraisals to an
employee benefit plan, a plan fiduciary, participant, or beneficiary, or an individual retirement account (“IRA”)
owner; and (3) either (a) acknowledges the fiduciary nature of the advice or (b) acts pursuant to an agreement,
arrangement, or understanding that the advice is individualized to the recipient.


owners involving variable or other annuity contracts that would constitute “securities” under federal
securities laws will no longer be afforded the protection of PTE 84-24. Similarly, PTE 86-128 will
nolonger be available when financial professionals working with IRA owners execute securities
transactions with broker/dealers with whom they are associated.

These deficiencies will have real-life consequences for the consumer and the financial professional alike.”
While Penn Mutual shares the Department’s goal of ensuring that the American investing public receives
advice that is in their best interest, we are concerned that, in its definitions, the Proposal creates risks and
uncertainties for insurers and their financial professionals that may result in less, not more, investment
and annuity information being disseminated to the consumer, At a time when investing consumers need
more education and information, we believe the Proposal will have the opposite effect. We therefore urge
the Department to analyze and revise the key definitions of the Proposal to bring it more in line with the
existing regulatory scheme.

2. An Additional Compliance Regime Without Demonstrable Benefit to the Consumer

We acknowledge the Department’s attempt to mitigate the challenges presented by the new fiduciary
standard by creating the Best Interest Contract Exemption (“BICE”) that would replace PTE 84-24 and
PTE 86-128. However, BICE, as presently conceived, contains numerous flaws.

The requirements necessary to satisfy the BICE exemption are so ambiguous that it would be difficult for
any fiduciary to be certain that he or she was in compliance. For instance, the use and meaning of
“reasonable compensation” is not explained with reference to the BICE. Nor does the BICE take into
account charges assessed to insurance products by insurance companies, which charges include the costs
of guarantees unique to those products.

The BICE is based on the ERISA “prudent man” standard, traditionally a highly litigated and disputed
legal standard. This standard has been referred to by a court as one of the highest duties known in the
law. Yet, financial professionals will now be asked to wade into these uncertain waters, possibly
exposing themselves to regulatory actions and lawsuits.

BICE imposes two incompatible standards of “impartial conduct,” one based on compliance and one
based on contract. The burdens of meeting these two requirements may well result in financial
professionals leaving the retirement marketplace rather than risk the liabilities created by noncompliance.
The end result will be a limitation of consumer choice in finding a financial professional, as less become
available.

a. Contractual Issues

With respect to BICE contractual requirements, the concept is technically unworkable and incompatible
with customer business practices. BICE requires the contract to be signed by the investor and the
financial professional prior to any discussion about the substance of rights and duties of each party or
whether, in fact, the investor wants to work with the financial professional. Such a requirement negates

? For example, the Proposal removes annuities compensation from PTE 84-24 which Penn Mutual believes needs to
be reinserted, because ambiguities will only serve to drive financial professionals out of the retirement market place
to the detriment to the American consumer.