333 South Hope Street

Los Angeles, California 90071-1406

thecapitalgroup.com

July 20, 2015

Filed Electronically

Office of Regulations and Interpretations Office of Exemption Determinations

Employee Benefits Security Administration Employee Benefits Security Administration

Room N-5655 Attn: D-11712

U.S. Department of Labor U.S. Department of Labor

200 Constitution Avenue N.W. 200 Constitution Avenue N.W.

Washington, DC 20210 Washington, DC 20210

Re: RIN 1210-AB32; Conflicts of Interest Rule 

ZRIN 1210-ZA25; Proposed Class Exemption

Dear Sir or Madam:

The Capital Group Companies is pleased to provide comments on the Department of Labor’s 

proposed conflicts of interest rule and best interest contract exemption. Our detailed 

comments are attached; listed below is a summary. 

1. Best interest contract exemption. At Capital, we support a fiduciary or best interest 

standard of conduct for all financial advisors. We are, however, concerned that the 

proposed rules could make it harder for investors to pay for investment advice through 

commissions and other traditional forms of broker-dealer compensation. Unless changes 

are made to strike a better balance between mitigating perceived conflicts of interest and 

preserving commissionable compensation, we believe that many small balance investors 

who currently pay for advice largely through commissions will lose access to 

personalized, human investment advice.

2. Grandfathering. There is no grandfather rule in the proposal for existing investments, 

including mutual fund investments where the shareholder previously paid a commission. 

An advisor cannot even make a hold recommendation during a market downturn, without 

complying with all of the proposal’s requirements. Without an appropriately drawn 

grandfather rule, millions of existing advisory relationships will be disturbed 

unnecessarily. 

3

Comments of The Capital Group Companies

Proposed Conflicts of Interest Rule and Class Exemption

The Capital Group Companies is one of the oldest and largest asset managers in the nation. 

We, through our investment advisory subsidiaries, manage assets in various collective 

investment vehicles and separate accounts. The vast majority of these assets consist of the 

American Funds family of mutual funds, which are widely held in retirement plans and IRAs. 

We are one of the five largest investment managers in participant-directed retirement plans 

and we manage nearly $500 billion in IRA assets for more than 10 million investors.1

 

Capital is the leading low cost active investment manager. Through the decades, and in 

many challenging environments, Capital’s active management has produced superior 

outcomes for investors.2

At Capital, we believe in the value of professional investment advice. There is a stark 

contrast between market returns and the returns realized by investors. Because of untimely 

buying and selling, the average investor captures only a fraction of market gains. However, 

investors who work with an investment advisor representative or a registered representative 

of a broker-dealer (collectively, a “financial advisor”) are more diversified and do better by 

staying invested in market downturns and avoiding the traps of market timing. 3

 

The Department’s proposed conflicts of interest rule could, however, make it harder for 

investors to receive professional investment advice. The proposal would for the first time 

clearly treat broker-dealers and their registered representatives who provide investment 

recommendations to IRA owners as “fiduciaries.” Most significantly, the broader definition 

would trigger application of the prohibited transaction rules of the Internal Revenue Code. 

These rules flatly bar the types of compensation that registered representatives and their 

home offices typically receive for services -- commissions, ongoing service payments from 

mutual funds and revenue sharing. The Department’s proposal includes an exemption that 

would allow broker-dealers to continue to provide advice and receive these forms of 

compensation but only with substantial new conditions. 

At Capital, we support codification of a fiduciary or best interest standard of care for 

registered representatives of broker-dealers. We believe that a best interest standard is 

 1 Pensions & Investments, DC Money Managers (2013); IRA assets and accounts are as of December 

31, 2014.

2 Rekenthaler, “Improving the Odds in Active Management,” Morningstar (October 16, 2014); 

Rekenthaler, “American Funds Keeps Rolling,” Morningstar (January 30, 2014); Yang, “In an Industry of 

Sprinters, American Funds Demonstrates Endurance,” Morningstar (July 25, 2013); see also “Capital 

Idea: The Active Advantage Can Help Investors Pursue Better Outcomes”, American Funds 

Distributors, Inc.,, (April 2014), available at 

www.americanfunds.com/advisor/pdf/shareholder/mfcpwp-028_capidea913.pdf, for a thorough 

analysis of the investment results for the equity-focused American Funds against their benchmark 

indices and other metrics.

3 “Dalbar’s 21st Annual Quantitative Analysis of Investor Behavior”, DALBAR, 2015; Kinnel, “Mind the 

Gap: Why Investors Lag Funds,” Morningstar (February 4, 2013); see also Baden, “In Past Decade, 

American Funds Created Most Wealth,” U.S. News (March 9, 2010).
4

consistent with the way in which the vast majority of registered representatives provide 

investment advice to their clients today. Registered representatives who provide 

personalized investment advice are not mere salesman but rather valued financial advisors. 

Perhaps the most important role that financial advisors play is to serve as a buffer between a 

client’s investment strategy and his or her emotions -- particularly during market downturns 

when the urge to leave the market and “lock in losses” is the greatest. But financial advisors 

also help their clients save more than they would otherwise and customize portfolios to 

investors’ risk tolerance. Many advisors also guide their clients in the development of a 

sustainable retirement income strategy and assist with financial changes following life events 

such as marriage or divorce, birth of a child or death of a spouse or partner. 

We understand the Department’s concern that commissions and related payments made in 

connection with certain investments could in theory encourage registered representatives to 

recommend those investments over other investments. In principle, we have no objection to 

enhanced regulation of these potential conflicts of interest but it is important to strike the 

right balance between mitigating potential conflicts of interest and preserving the beneficial 

aspects of commission-based compensation. Unless the right balance is struck, some 

investors will be forced into fee-based advisory relationships that may cost more than current 

commissionable arrangements. Others -- largely smaller balance investors who are not 

eligible for fee-based advisory programs -- will lose access to personalized, human 

investment advice.

Some have suggested that computerized investment advice solutions (sometimes referred to 

as “roboadvice”) could fill the gap and provide low cost advice to small balance investors. 

But these programs are new and largely untested through market cycles. In particular, it is far 

from clear that investors in such programs will stay invested through market corrections. 

Notably, many of these programs recognize the value of a human advisor and shift away from 

computerized advice alone as investable asset levels rise.4

 That is, it is only the small balance 

investors who are relegated to computerized advice; the larger balance investors get the 

benefit of a traditional financial advisor, including a broader range of financial planning 

services and the personal relationship that keeps savers invested through market cycles. It is 

also far from clear that these programs are cost-efficient for small balance investors.5

 This is 

not to suggest that computerized advice is worthless; it may well be that computerized 

advice will prove to be a valuable contribution to the advice marketplace. But our point is 

that it is misplaced to think these nascent programs are currently viable fee-based 

alternatives to personalized, human advice. 

The importance of access to professional investment advice cannot be overstated. A recent 

economic analysis commissioned by Capital found that, in the absence of a workable best 

interest contract exemption, investors could lose as much as $80 billion over 10 years solely 

as a result of selling out of the market during downturns because they did not have access to 

 4 Two prominent computer-based advisors introduce access to a human advisor when assets under 

advisement reach $100,000 and $500,000, respectively. 

5 Based on a survey of publicly disclosed advisory fee schedules for computer-based advisors, fees for 

a full-service investor with a balance equal to our average IRA balance -- $42,000 -- range from 0.25% 

to 0.95% of assets. 
5

a broker-dealer registered representative.6 And the value of advice is much greater because 

that figure does not capture the other lost benefits conferred by financial advisors, such as 

foregone employer matching contributions or reduced savings, which are less easily 

quantified. 

Unfortunately, it is clear from our conversations with financial intermediaries that the 

proposed best interest contract exemption does not hit the mark. Unless changes are made, 

it is simply going to be much easier for financial advisors to do business on a fee basis; that is, 

pursuant to an arrangement in which the advisor’s compensation is charged separately and 

does not vary based on the investment recommendation provided. Virtually all of our 

financial intermediaries do business in both a fee-based capacity and a brokerage capacity, 

and the majority of registered representatives are also investment advisor representatives.7

 

Without changes, we foresee a dramatic acceleration of the existing trend away from 

commission-based advice to fee-based advice.

We discuss below a number of changes to the proposed exemption that would preserve the 

broker-dealer business model while addressing concerns about conflicts of interest. We then 

focus on the need for a grandfather rule for existing mutual fund investments and phasing in 

the requirements of the best interest exemption. We also respond to the Department’s 

requests for comments on how to operationalize a streamlined exemption for low fee, high 

quality investments and conclude with comments on several other issues. 

The focus of our comments is IRA investors. While the new rule would have a significant 

impact on participant-directed retirement plans, commissions and other forms of differential 

compensation are less prevalent in retirement plans and the greatest impact of a new rule will 

be on IRA investors. 

1. The final regulation should include a workable exemption for commissionable 

investments.

There are good reasons for investors to choose to pay for investment advice through 

commissions. Commissionable investments are buy-and-hold investments. One of the less 

appreciated facts about commissions is that they discourage frequent trading and market 

timing. In fact, the average holding period for a commissionable investment in the American 

Funds is nearly twice as long as the average holding period for a fee-based investment in the 

American Funds.8

 

 6 Litan & Singer, “Good Intentions Gone Wrong: The Yet-To-Be Recognized Costs of the Department of 

Labor’s Proposed Fiduciary Rule” (July 2015).

7 Virtually all of the financial intermediary firms that distribute the American Funds have both a 

commissionable brokerage business and a fee-based advisory business. Every single firm among the 

top 30 sellers of American Funds held on our books offers both brokerage and fee-based solutions. 

More generally, based on Discovery Data as of June 20, 2015, half of all registered representatives of 

broker-dealers are also representatives of investment advisor representatives. 

8 The average holding period over the last three years for commissionable shares (A shares) was 8.9 

years while the average holding period for advisory shares (F shares) was 4.1 years. 
6

For long-term investors, commissions are a cost efficient way of paying for ongoing 

investment advice. Buy-and-hold investors generally pay less for investment advice than 

investors in fee-based arrangements. The exact point at which a buy-and-hold investor pays 

less than a comparable fee-based arrangement depends on a variety of factors, including the 

cost of the fee-based program and investment returns, but there is no question that 

compensating a financial advisor for investment advice through commissions is a reasonable 

choice for many.9

 

This is not to suggest that fee-based arrangements are problematic or that commissionable 

investments are always preferable, but it is to say that the manner in which investors pay for 

advice should be a matter of investor choice. 

The compensation structure for mutual funds that are sold with a commission -- typically 

denominated as A-shares -- is tightly regulated by FINRA and fairly standardized across the 

mutual fund industry.10 Registered representatives are typically compensated for mutual 

fund-related investment services through receipt of a commission and an ongoing service fee 

paid pursuant to the mutual fund’s plan of distribution under Rule 12b-1 (a “12b-1 fee”). 

Ordinarily, the applicable commission is reduced based on the size of the investment -- the 

average commission paid on an American Funds A-share investment in 2014 was 2.28%. The 

annual payments from a fund for service under Rule 12b-1cannot exceed 0.25% of the 

balance of the investment.11 This combination of upfront payment at the time of an 

investment plus a modest ongoing fee aligns with the cost of providing investment advice. 

 9 The chart assumes a one-time investment equal to our average full-service IRA account balance --

$42,000 -- in two different programs. The first is a mutual fund advisory program which charges the 

investor an annual advisory fee of 1.10% of assets. The second is a commissionable program in which 

the investor is charged a 5.0% up-front commission. Mutual fund expenses for both programs were 

assumed to be equal to an annual management fee of 0.30%; however, mutual fund expenses for the 

commissionable program also include a 12b-1 fee of 0.25%. Other mutual fund expenses were 

excluded from the calculation. An annual 5% rate of return was assumed for both programs.

10 See FINRA’s NASD Conduct Rule 2830(d); see also U.S. Securities and Exchange Commission 

“Mutual Fund Fees and Expenses” available at www.sec.gov/answers/mffees.htm. 

11 FINRA rules distinguish between a payment for distribution and a payment for ongoing service. Any 

payment in excess of 0.25% is included in calculating maximum allowable sales loads. 
7

That is, the bulk of the work is done at the time of the initial investment, with ongoing 

monitoring based on life changes and subsequent developments. 

We recognize that these payment streams could create potential conflicts of interest. But one 

of the more striking aspects of our conversations with financial advisors is how many have 

shared that they will earn more if they move from a commission-based model to a fee-based 

model. In our experience, financial advisors who recommend mutual fund investments in 

commissionable share classes are foregoing revenue they could earn if they establish a feebased relationship. They are recommending a commissionable share class because they 

believe in a buy-and-hold strategy and feel that the commission-based model is more cost 

efficient given the servicing needs of buy-and-hold investors. Without a workable exemption, 

the Department’s proposal could make it difficult for advisors to act in the best interests of 

their clients.

The core challenge in crafting a workable exemption is mitigating the potential conflicts of 

interest created by commissionable compensation -- incentive to churn and differential 

advisor compensation -- without tipping the scale too far in favor of fee-based advisory 

arrangements. The proposed exemption attempts to strike the appropriate balance by 

imposing a best interest standard of conduct, creating a directly enforceable right of action 

against advisors who do not act in the best interests of their clients, requiring conflicts of 

interest mitigation practices and mandating fee disclosure. 

In basic outline, we think the exemption is headed in the right direction. The fundamental 

contours of the proposed exemption are reasonable. However, the devil is in the details and 

the proposed exemption contains elements that are confusing, inflexible and unduly 

burdensome. We discuss below changes to the proposed exemption that are necessary to 

make the exemption workable, preserve access to advice for smaller balance investors and 

ensure that buy-and-hold investors can pay for advice through commissionable investments. 

a. The written contract requirements of the best interest contract should not include 

the proposed warranties.

As the name suggests, the best interest contract exemption requires that an advisor enter 

into a written contract with the IRA owner or, in a rollover, the participant. The contract must 

affirmatively state that the advisor will act in the client’s best interest, put the client’s interests 

first and not make misleading statements. The contract must also affirmatively warrant that 

the advisor will comply with all state and federal laws, adopt appropriate conflicts of interest 

mitigation policies, identify material conflicts of interests and adopt compensation policies 

that eliminate any compensation practices that “would tend to encourage individual 

[advisors] to make recommendations “ that are not in the best interest of investors.

Under the proposal, an investor would have a direct private right of action against an advisor 

who violates either the basic provisions of the contract or the required warranties. The 

Department has, however, largely mirrored the existing enforcement mechanisms that apply 

to registered representatives under FINRA rules.12 That is, the written contract may require 

 12 See FINRA Rule 2268(d)(3), prohibiting member firms from including provisions in arbitration 

agreements limiting the ability of a party to join a class action lawsuit.
8

arbitration to resolve disputes but must not limit an investor’s ability to join a class action 

lawsuit. 

We agree that investors should have a direct means of recourse against an advisor that relies 

on the best interest contract exemption and fails to live up to the best interest, impartiality 

and honesty standards. However, the contractual warranty requirement includes elements 

that invite the plaintiffs’ bar to find opportunities to sue advisors that rely on the exemption. 

As proposed, the warranty provisions of the best interest contract would be contract features. 

Thus, for example, if a registered representative or his or her home office violated state law, 

the representative and the home office would have breached the contract and would be 

subject to class action liability for breach of the best interest contract exemption. It seems 

patently unfair to transform an unrelated state or federal law violation into a class action.

Similarly, the inclusion of a warranty on conflicts of interest mitigation policies, including a 

requirement to eliminate compensation practices that would “tend” to incent certain 

recommendations, would be a windfall to the trial bar. The exemption makes no effort to 

reconcile a best interest standard with commission-based compensation, even though it 

allows broker-dealer firms to receive compensation that varies based on the investment 

recommendation that is made. We believe that broker-dealers and their registered 

representatives will be subject to lawsuits alleging that they failed to act in their client’s best 

interest solely because they recommended a fund that pays commissions or ongoing service 

fees -- the very activity the exemption is intended to facilitate. The exemption will be of little 

value if advisors are subject to liability solely because they availed themselves of the 

exemption. To prove a breach of the best interest standard, an investor should have to claim 

more than that the advisor had a conflict of interest; the investor should have to claim that the 

investment was an imprudent one at the time of the recommendation. 

We appreciate that the proposal makes the warranties a contractual provision but does not 

make compliance with the warranties a condition of the prohibited transaction exemption. 

Thus, a breaching advisor would be subject to litigation risk but not prohibited transaction 

excise tax liability. In effect, the proposal delegates enforcement for the warranty 

requirements to the trial bar rather than the Internal Revenue Service. On balance, we 

believe that any privately enforceable contractual remedy must be tailored to the best 

interest standard and should not extend to the ambiguous and complex warranties. The IRS 

should enforce the warranty requirements, which apply at the firm level rather than the 

individual investor level. 

b. The exemption’s conflicts of interest mitigation requirements are too inflexible 

and would disrupt the existing broker-dealer compensation system.

Another issue is the level of specificity suggested by the proposal with respect to required 

conflicts of interest mitigation policies. We agree that broker-dealers should have policies to 

mitigate as well as disclose potential conflicts of interest. But the proposed best interest 

contract exemption appears to go far beyond any conflicts of interest policy we have 

encountered. It would require enormous changes in the ways in which individual advisors 

are compensated and would fundamentally disrupt the broker-dealer business model. 

As mentioned above, the proposal requires that broker-dealer firms eliminate any 

compensation practices that “would tend to encourage individual [advisors] to make 

recommendations“ that are not in the best interest of investors. The preamble to the best 
9

interest contract exemption provides additional color by describing a series of compensation 

practices that would not run afoul of this prohibition. With only one exception -- where 

differential compensation is justified based on neutral factors such as the difference in time 

and analysis for an investment -- all of the examples involve compensation methods that are 

used to avoid prohibited transactions today, for example, use of an independent third-party 

computer model to provide advice, asset-based fees and fee offsets. Significantly, it is clear 

that firms could not continue paying advisors a portion of the revenue they bring to the firm --

the traditional payout grid. We appreciate the many statements in the preamble that the 

proposal is meant to be flexible and should not be viewed as dictating compensation 

structures. But the fact of the matter is that the proposal clearly reflects a belief that 

prohibited transaction relief should only be granted to the extent individual advisors can no 

longer receive traditional forms of broker-dealer compensation. This distinction --

differentiating between the compensation that can be received by the firm from the 

compensation that can be received by the registered representative -- belies the notion that 

the exemption preserves the broker-dealer business model. 

Put simply, this is an enormous intrusion into the manner in which brokerage firms 

compensate their advisors. In a principles-based exemption, firms should have flexibility to 

manage conflicts of interest without intervention in the way in which broker-dealer firms 

compensate their individual advisors. FINRA has already provided the template for such an 

approach and we urge the Department to accommodate a more principles-based, flexible 

approach to conflicts mitigation along those lines.13 

c. The best interest contract exemption should include workable point-of-sale 

disclosure requirements.

As a general matter, we support appropriate disclosure for mutual fund investments at the 

point of sale. However, we support the comments of others in the industry who have pointed 

out that the exemption’s proposed disclosure requirements are unduly burdensome, 

commercially unworkable, and far too much for investors to process. 

Like others, we believe it makes little sense to create an entirely new disclosure regime under 

the best interest contract exemption. Instead, we believe that it makes sense for the 

Department to leverage the existing disclosure requirements of ERISA sections 404(a)(5) and 

408(b)(2). Financial intermediaries recently established systems to meet these requirements 

and it appears that such systems could be extended to IRAs at a lower cost than creating an 

entirely new structure. 

d. The exemption should apply to participant-directed retirement plans.

In addition, assuming that the exemption is made workable, we urge the Department to 

reconsider the scope of the exemption. Registered representatives of broker-dealers are the 

primary source of investment advice for smaller balance individual investors. This is similarly 

true of small business retirement plans. Yet the best interest contract standard is not 

available to participant-directed retirement plans. Without an exemption, we believe that 

fewer small business retirement plans will be started and that many plans will lose their 

 13 FINRA, Report on Conflicts of Interest (October 2013).
10

advisors. For this reason, it is important the final best interest contract exemption apply to 

participant-directed retirement plans. 

e. The exemption should be carefully revised to address technical drafting issues.

We also support the comments of others pointing out the myriad technical issues that arise 

under the best interest contract exemption. The exemption should, for example, be revised 

to clarify that (i) services incidental to a rollover are covered; (ii) the best interest contract 

must be entered into before the first investment, rather than the first recommendation; and 

(iii) the exemption applies to recommendations to hire an investment advisor or investment 

manager.

2. The final regulation should grandfather existing mutual fund investments.

The proposal indicates that the final rule’s compliance date will be eight months after the final 

rule is published. Presumably this means that the new rule will apply to investment advice 

provided after the compliance date. The proposal does not provide any exception, carveout 

or other grandfather provision that would allow existing investors in commissionable mutual 

funds to continue to receive advice from their broker’s registered representative. Instead, 

every investment relationship involving an ERISA plan or an IRA would have to comply with 

the new rule within eight months of its release. 

For commission-based relationships, the lack of a grandfather provision would mean that the 

advisor and the investor have three options: (i) shift to a fee-based advisory relationship; (ii) 

execute a best interest contract that meets the requirements of the new proposed prohibited 

transaction exemption; or (iii) end the advisory relationship. Unfortunately, for smallerbalance investors, we fear that the last option -- converting advised investors to self-directed 

investors or simply ending any relationship with the client -- is the most likely outcome.

Fee-based advisory arrangements are simply not viable for many smaller balance investors. 

The current minimum investment requirements for participation in an advisory program that 

charges asset-based fees are simply too high for many investors.14 And hard dollar fees, such 

as per hour fees or project-based fees, are both uncommon and prohibitively expensive for 

smaller balance investors. It is possible (even likely) that over time new business models for 

providing advice to smaller balance investors will arise but the current landscape does not 

easily accommodate these savers. 

Moreover, even if a particular investor has access to reasonably priced fee-based advice, the 

investor may need to sell his or her current investments prior to moving into the advisory 

relationship, for example, because the existing investments in a transaction-based account 

are designed to make differential payments to the investor’s financial advisor. Thus, even for 

those investors with practical access to fee-based advice, the outcome could be the selling of 

existing funds to convert to cash prior to re-investment in advisory programs and enormous 

investment churn. 

 14 The minimum investment requirements for fee-based advisory programs depend on the type of 

program and the firm. There is significant variation in minimums but mutual fund fee-based programs 

generally have minimums that exceed the $42,000 average size of the IRAs we manage and service.
11

Further, a mass migration of commissionable relationships to the best interest contract 

exemption is simply not practicable within the eight-month time frame contemplated by the 

proposal. There are more than eight million IRAs that are invested in American Funds mutual 

funds that pay a 12b-1 fee. All of these investors would have to affirmatively execute a best 

interest contract in order to stay invested. Even if the exemption is substantially improved, 

financial intermediaries will need to develop new agreements, conflicts of interest policies, 

disclosure systems and websites. Further, these intermediaries will need to train their 

financial advisors and determine how much investment discretion to delegate to individual 

advisors. It may be that broker-dealer home offices choose to retain greater control, for 

example, through investment select lists, under a best interest standard of care. It is difficult 

to imagine that such a shift could be accommodated in an eight-month window. Given the 

risk of turmoil and dislocation, we believe that the final rule begs for a grandfather rule that 

will allow for a more organic transition. 

The closest thing to a grandfather rule in the existing proposal is a provision allowing for the 

receipt of compensation after the compliance date for prior investment advice. But that rule 

does not allow the advisor to provide any advice thereafter, even a recommendation to stay 

invested during a market correction -- the very time in which shareholders most need to be 

encouraged to stay the course. We are doubtful as a practical matter that broker-dealer 

home offices will be comfortable that advisors who are receiving ongoing compensation will 

not provide ongoing advice. The only practical approach to ensuring compliance is to end 

the compensation. Thus, the net effect is that all existing advisory relationships will need to 

be revisited or restructured. 

We urge the Department to include a real grandfather rule for legacy mutual fund 

investments -- one that allows for ongoing advice, including recommendations to stay 

invested. There are sound policy arguments for a grandfather rule. First, as an economic 

matter, the commission paid in connection with the sale of a mutual fund is compensation for 

the transaction as well as a prepayment for ongoing investment advice, for example, 

investment reviews, reallocation decisions, etc. The investor pays a commission equal to a 

percentage of the initial investment and then the mutual fund typically pays the advisor an 

annual amount equal to up to 0.25% of the value of the account. These payments entitle the 

shareholder to ongoing service. Without a grandfather rule, millions of shareholders will 

forfeit their pre-paid right to ongoing advice at very modest cost. 

Consider, for example, a shareholder who paid his advisor a commission in connection with a 

$100,000 rollover into an A share mutual fund. His advisor receives an annual payment from 

the fund equal to 0.25% of the amount invested for ongoing advice. Assume the rule is 

finalized as proposed and the investor and advisor are forced to restructure their relationship. 

If the best interest contract exemption is not attractive and the investor and his advisor 

choose to move to a fee-based arrangement, the investor will lose the benefit of his 

prepayment for future advice and he will be forced to sell his current mutual fund 

investments before the new rule’s compliance date because its ongoing payments would

otherwise result in a prohibited third-party payment to a fiduciary. 

Second, even in the absence of an upfront commission, the lack of a grandfather rule could 

mean increased costs for millions of savers. As discussed above, the ongoing cost of service 

in A share mutual funds is a mere 0.25%. Fee-based arrangements generally cost much 
12

more. Without a grandfather rule, it is likely that the new rule will result in a substantial 

immediate increase in the cost of investment advice for many savers.

Consider, by way of another example, an investor who rolled from an ERISA plan where she 

was invested in American Funds. She rolls $50,000 to an IRA and invests in the same funds. 

Under the American Funds rollover policy, no commission is paid and instead the sole 

compensation the advisor receives is an annual payment from the funds equal to 0.25% of 

the amount invested in the funds. Assume the client is eligible for a fee-based advisory 

arrangement with the investor’s current financial advisor. The cost of the arrangement is 

1.00% annually. The investor’s cost of advice could increase fourfold as a consequence of 

attempting to comply with the new rule. 

Third, from a public policy perspective, allowing advisors to receive an asset-based fee from 

existing mutual fund brokerage accounts does not raise the types of conflicts of interest 

issues underlying the fiduciary proposal. Ongoing compensation of one-quarter of one 

percent (0.25%), typically for fairly small balance investors is very modest, for example, $125 

per year on a $50,000 investment. Such a small amount should not raise the conflicts of 

interest concerns driving the Department’s proposal. A financial advisor is not going to 

recommend that a client stay invested in a mutual fund to receive what is a very modest 

revenue stream. 

We believe that a grandfather rule could be appropriately crafted so that it does not swallow 

the general rule or lock investors into inappropriate investments. First, the grandfather rule 

need not cover existing relationships; it could be limited to existing investments. That is, all 

new purchases could be covered by the new rules. Second, grandfathered investments 

could be subject to the best interest standard, which the Department’s proposal makes 

broadly applicable under a number of different prohibited transaction exemptions. Under a 

best interest standard, an advisor could only recommend that a client stay invested in a 

grandfathered investment to the extent it is in the best interests of the client. Third, we 

believe that a grandfather rule could be limited to payments made out of investment assets. 

In other words, a grandfather rule could prohibit less transparent forms of compensation, 

such as revenue sharing. Under this approach, the maximum amount that a financial advisor 

could receive annually with respect to legacy A share mutual fund investments would be 

0.25% of the investor’s investment -- the amount permitted under FINRA’s NASD Rule 

2830(d). Such a grandfather rule would be incredibly valuable in minimizing disruption from 

the new rule while accomplishing the Department’s goal of shifting to a new model of 

financial advice. 

Two other considerations are worth mentioning. The Department may want to consider 

extending the grandfather to investment exchanges as long as an exchange did not trigger a 

new commission or otherwise increase the advisor’s compensation. In this regard, mutual 

fund families typically provide rights of exchange within the fund family that allow investors to 

exchange mutual fund investments without paying a new commission or otherwise changing 

the advisor’s compensation. Such an approach would accommodate rebalancing programs 

while ensuring that advisors did not have inappropriate incentives to recommend exchanges. 

Further, the Department may want to consider extending the grandfather to periodic

payment programs that were established before the effective date of the new rules. It would 

be a shame if previously established financial plans are disrupted by the new rules. 
13

We believe a grandfather rule along these lines would provide the investor access to 

ongoing investment advice for a very low fee -- generally 0.25% of assets. It would reduce 

investment churn, which would be particularly egregious given the buy-and-hold nature of 

many commissionable mutual fund investments. Most importantly, without an appropriately 

drawn grandfather rule, we believe that millions of existing investment relationships will be 

disturbed. Some investors who previously pre-paid for ongoing advice will have the worst of 

both worlds -- a pre-payment followed by higher ongoing fees, for example, 1% of assets, as 

they are shifted into advisory relationships. Other investors will be orphaned and will 

effectively become self-directed accounts with no advisor to guide them through market and 

life changes. 

To the extent the Department has concerns about the availability of this exemption in 

participant-directed retirement plans, for example, because plans have new participants and 

a long duration, the exemption could be limited to IRA investors. 

It is also worth noting that the Department’s proposal is out-of-step with the approach the 

Financial Services Authority (FSA) took in the Retail Distribution Review (RDR), when the U.K. 

moved to ban commissionable compensation for retail investment advice. The RDR includes 

detailed guidance on the treatment of legacy assets, including the circumstances in which 

advisors receiving “trail commissions” can continue to provide ongoing advice. That 

guidance includes a grandfather rule that allows for recommendations to hold.15 It also 

allows for fund exchanges in limited circumstances and grandfathers systematic investment 

programs. Thus, even in a more stringent regime that fully bans commissionable 

compensation, the U.K. regulators provided a grandfather rule. 

Finally, we believe that this grandfather rule will be effectively limited in both duration and 

scope. Financial advisors will shift larger accounts from commissionable investments to feebased programs, which offer a different suite of services and will represent the investment 

advisory business model of the future. Moreover, investors who are making ongoing 

contributions will be motivated to aggregate all of their investments in one account -- they 

will not want grandfathered and non-grandfathered accounts. The significance of the 

grandfather rule will be to facilitate an orderly transition to the new regime. It will avoid 

disruption for millions of investors, including retired and elderly investors who may find a 

forced transition in their advisory relationship challenging. It will also avoid the orphaning of 

millions of existing smaller balance investors. 

Although the focus of our comments is understandably on mutual funds, we also note that 

there are other types of existing investments for which advice was provided on a 

commissionable basis, for example, variable annuity contracts, where a grandfather rule 

seems entirely appropriate. Without such a rule, millions of investors in IRA annuities could 

incur surrender charges in connection with liquidations as they move to fee-based 

arrangements, not to mention the loss of potential retirement income and other benefits. We 

believe a grandfather rule structured along the lines described above would be appropriate 

for variable annuity contracts.

 15 PS 12/3 Distribution of retail investments: RDR Advisor Charging – treatment of legacy assets 

(February 2012).
14

3. The final rule should phase-in the best interest contract requirements.

As discussed above, the Department of Labor’s proposed effective date is extraordinary in its 

brevity for a change of this magnitude. It will likely result in enormous disruption without 

appropriate transition rules. We believe that one needed aspect of transition is a grandfather 

rule. Another is a phase in of the requirements of the new best interest contract exemption. 

Even if the best interest contract requirements of the final rule reflect the financial industry’s 

concerns, we believe that eight months is simply too little time to allow investment advisors to 

begin utilizing the exemption by the effective date. 

As a threshold, it is clear that it will take time to understand the final rules and determine how 

they impact various segments of the market. The Department provided 90 days for 

comments on the proposal and one can think of that time period as the bare minimum for 

understanding a new rule. We anticipate that the final rule will be even more challenging 

given the impacts of changes. 

We also anticipate that financial intermediaries who elect to rely on the best interest contract 

exemption will not simply graft the exemption onto their existing investment philosophy and 

approach. It is unlikely that broker-dealer firms will allow their registered representatives to 

recommend the same universe of investments that they recommend today. Instead, we 

anticipate that they will seek to minimize perceived conflicts of interest and liability by 

narrowing the investments that are recommended, and types of compensation that are paid. 

At a minimum, given the increased liability associated with a best interest standard of care, 

we anticipate that home offices will exercise greater centralized control over the investments 

that their advisors may recommend, for example, by creating approved lists. But we expect 

even more significant changes. For example, a firm may choose to no longer accept revenue 

sharing payments. Others may choose to work with only a select group of mutual fund 

companies that each pay similar upfront commissions and ongoing service fees. As a result, 

compliance with the best interest contract exemption will be an enormous exercise that will 

involve fundamentally redefining a firm’s approach to investing. 

In addition, virtually every broker-dealer firm will need to restructure the manner in which 

individual registered representatives are compensated. Even if the final exemption provides 

much needed flexibility in terms of approaches to conflicts of interest mitigation, it is clear 

that firms will need to review all of their compensation policies to identify any practice that 

would “tend” to affect investment advice. This could affect much more than sales incentives 

and rewards. Any changes to compensation are challenging and we think it is simply 

unrealistic to expect the financial services industry to fundamentally restructure its 

compensation programs within eight months. 

And there are of course the practical implications of a best interest contract exemption. 

Financial advisors will have to enter into written agreements with every single new investor. 

These contracts will need to be developed and financial advisors will need to be trained to 

understand those contracts. Further, broker-dealer firms will need to make massive 

investments in systems to be able to comply with the best interest contract exemption’s 

point-of-sale and annual disclosure requirements, to say nothing of the website disclosure 

regime. While reliable estimates of the cost and time necessary to effect changes of this type 

are difficult, it is readily apparent that eight months is not practicable.
15

Put simply, the transition contemplated by the proposed regulation is impossible. 

Compliance within an eight-month window would be challenging -- even near impossible --

for new relationships. But the challenge increases exponentially for existing commissionable 

relationships, involving investors of all ages and levels of investment acumen, including 

investors who have not made a new investment in many years. 

We are particularly sensitive to the consequences of a market correction or disruption. If 

history is any guide, there will be a material correction. It would be devastating if such a 

correction occurs during a period in which advisory relationships are in flux. Financial 

advisors are critical to minimizing the risks of market timing and panic selling and a failure to 

carefully navigate the transition to new rules governing investment advisory relationships 

could have long-term negative impacts on retirement adequacy. 

For these reasons, we believe the contract, conflicts of interest and disclosure requirements 

of the best interest contract exemption should be phased in. It should be enough to begin 

by applying the best interest standard of care. These rules should be phased in over a 

lengthy period. Specifically, we believe that the contract, conflicts of interest and disclosure 

requirements of the best interest contract exemption should be phased-in over three to five 

years. 

4. The final rule should clarify that wholesaling activity is not fiduciary investment advice 

and provide a seller’s exemption for retail investors in situations in which it is readily 

apparent that a person is not providing impartial investment advice.

The Department’s initial conflicts of interest rule proposal issued in 2010 included a rule 

indicating that selling activity was not fiduciary investment activity even if the selling included 

an investment recommendation. It is also well-settled in the case law that selling activity is 

not fiduciary activity. We appreciate the Department’s concerns that retail investors are not 

able to effectively distinguish selling activity from fiduciary investment advice in certain 

circumstances, even when accompanied by robust disclosures reflecting that the salesman is 

not providing impartial investment advice. However, we believe that the elimination of the 

seller’s exemption from the 2015 proposal sweeps in certain activities that should not be 

considered fiduciary investment advice.

Capital makes its investments, including the American Funds, available to retail investors 

through financial advisors -- either a registered investment advisor representative or a 

registered representative of a broker-dealer. For that reason, our distribution and sales 

efforts are targeted to professional investment advisors. Our sales representatives are often 

referred to as “wholesalers” because they only sell to professional financial intermediaries. 

We are concerned that under a literal reading of the proposed regulation, wholesalers could 

be considered investment advice fiduciaries and we urge the Department to clarify that these 

types of wholesalers are not fiduciaries. 

The Department of Labor’s fiduciary proposal treats certain investment-related 

recommendations given to a “plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA 

owner” as fiduciary recommendations. Many of the investment advisors that our wholesalers 

market to will be plan fiduciaries -- in fact, if the proposal is finalized as proposed, virtually all 

of our financial intermediaries will be considered fiduciaries. Read literally, investment 
16

recommendations made to financial intermediaries who are fiduciaries could be considered 

fiduciary advice itself. There are arguments that this is either not intended or not covered 

because the recommendation is not “individualized to” or “specifically directed to” the advice 

recipient, namely the plan, participant or IRA owner. Similarly, it seems likely an untenable 

rule since it creates a “daisy chain” effect that could turn individuals far removed from a plan 

or IRA into fiduciaries. But we believe there is sufficient ambiguity that the final regulation 

should be clarified.

We believe the final rule should clarify that recommendations made to a third-party 

investment advisor -- whether acting in a 3(21) nondiscretionary or 3(38) discretionary 

capacity -- are carved out of the definition of fiduciary investment advice if the third-party 

advisor is either a registered representative of a broker-dealer or registered investment 

advisor representative. A simple approach that focuses on whether advice is provided to a 

professional investment advisor, not the plan or IRA owner, strikes a better balance between 

cost and benefit than a sophisticated advisor rule. 

We also believe that there is a category of selling activity to retail investors that may fall within 

the technical definition of fiduciary investment advice but that should be carved out of the 

definition. Consider an American Funds associate who meets with a small plan along with a 

third-party financial advisor and tries to sell the American Funds Target Date Retirement 

Series to the plan. Under the Department’s proposal, the associate and the associate’s 

employer, Capital Group, would be considered an investment advice fiduciary if he or she 

recommends the American Funds Target Date Retirement Series. Such an analysis is 

nonsensical. While we can appreciate the Department’s concerns about the ability of retail 

investors to distinguish between selling activity and investment advice as well as questions 

about the efficacy of disclosure, the proposed rule throws out the baby with the bathwater by 

failing to include any seller’s exemption. There are undeniably circumstances where it is 

obvious that a person is engaging in selling activity. 

We believe that the final rule should include an exception for selling conversations where it is 

readily apparent that the financial professional is not providing impartial investment advice. 

In particular, we believe that a seller’s exception can be crafted that excludes selling 

conversations in which the only investments that can be recommended are managed by an 

affiliate of the employee’s employer and the investor is not paying a fee for investment 

advice, that is to say, the only indirect compensation is revenue from the investment. Such an 

exception could be accompanied by required disclosure, for example, disclosure that the 

individual is not providing impartial investment advice and can only recommend proprietary 

investment products. In this context, concerns about the efficacy of disclosure are misplaced.

5. The final regulations should not include a streamlined exemption for high quality, low 

fee investments.

The proposed fiduciary regulation includes an extensive discussion of a possible “low fee, 

high quality” streamlined exemption for mutual funds that would serve as an alternative to the 

best interest contract exemption. We cannot help but view the discussion in the preamble of 

a low fee, high quality exemption as a reflection of the misguided notion that rank-and-file 

savers should be invested in index funds. And, regardless of style of investment 

management, we simply do not see an administrable way to “operationalize” an exemption 

based on high quality, low fee investments.
17

a. A streamlined exemption that preferences index funds over actively-managed 

funds would be misguided.

The assumption in the preamble seems to be that index funds are better for small retirement 

savers and therefore public policy should nudge investors in that direction. We appreciate 

that, on average, active managers beat the benchmark only about half the time. But the fact 

is that not all active managers are average. As the chart below shows, some active managers 

have a long record of generating superior investment results after fees relative to indexes --

results that translate into hundreds of thousands of dollars more in accumulated retirement 

savings for individual investors. In this context, it is plainly sound public policy to facilitate 

these choices and not to inhibit or inadvertently preclude access to active investment 

management by new regulations.

The chart shows the results net of fees for an investment of $10,000 in three kinds of funds 

since the inception of the Vanguard S&P 500 index fund in 1976.16 Over the nearly 40 years 

since the inception of the S&P index fund, an investment in the American Funds produced a 

90% larger nest egg for retirement than a comparable investment in the index fund. 

Vanguard and American Funds are two of the largest low-fee active managers of mutual 

funds in the country. With life-changing results like these over long time periods, it is hard to 

imagine on what theory public policy would prefer index funds rather than continue to make 

these and similar actively-managed funds from other managers available to small retirement 

savers. To deny small investors such choices risks materially undermining their retirement 

security.

 16 The bottom gray line shows the Vanguard S&P 500 index fund; the black line shows the results of the 

same investment in the 16 Vanguard actively managed funds that are benchmarked against the S&P 

500; and the top blue line shows the results for the seven U.S. equity American Funds that are 

benchmarked against the S&P 500. 
18

b. It is not possible to operationalize an exemption that focuses on low fees, high 

quality investments or both.

There is an entire advisory industry built around identifying high quality investments. It is 

simply not possible to replace this function -- the role of the advisor -- with a simple and 

administrable metric or set of metrics. 

An exemption focused on fees is clearly misplaced, except as a useful predictor of investment 

results net of fees. It is investment results net of fees that drive retirement outcomes. Small 

differences in results over long-periods can have an enormous impact on retirement 

adequacy. 

We also question whether it is possible to define low all-in fees. Fees depend greatly on 

investment objective. Consider, for example, style box driven investing in which asset 

allocation is made to different asset classes, for example, domestic equity, international 

equity, government bonds. Each of these asset classes has different fees. And, even if one 

defines low-fee by reference to the asset class, for example, top quartile of developing 

markets funds, it can be very difficult to classify funds based on these style-box driven 

classifications. By way of example, we manage a mutual fund that provides exposure to 

developing markets by investing in companies based in developed markets that do 

substantial business in developing markets. This fund can be alternatively viewed as a 

developing markets fund or developed markets fund. 

Moreover, an approach that focuses on asset classes would reflect a fundamental judgment 

about investment style. It would represent an implicit choice, for example, of style box-driven 

investing rather than objectives-based investing. In objectives-based investing, the goal is to 

achieve the investor’s objective. An investor could have a goal of growth or of capital 

preservation. The investments that have low fees viewed from this perspective could be very 

different investments than ones that have low fees from a style-box perspective. 

Mutual fund fees are also challenging because they often represent an apples-to-oranges 

comparison. Index funds typically do not include the cost of investment advice in their 

expense ratios; instead, the advisory fee is externalized. In contrast, many actively-managed 

funds include the cost of investment advice in their expense ratios, for example, the ongoing 

service fee of 0.25%. It makes little sense to distinguish low fee funds based on whether one 

fund internalizes investment advisor compensation while another externalizes it. 

Perhaps most importantly, an exclusive or disproportionate focus on fees would be 

fundamentally inconsistent with existing fiduciary law which recognizes that fees should not 

be considered in isolation. 

We appreciate that the discussion of a possible exemption is not for low-fee only mutual 

funds, but also for ones that are high quality. But we are similarly concerned that identifying 

high quality mutual funds in an objective and simple manner is simply an intractable 

problem. There is no independent observable data point that points to quality. Quality is 

entirely dependent on investment objective. An investor may be near retirement and have 

little appetite for risk of loss, particularly one that gives rise to sequence of returns risk near 

the commencement of drawdown. In that context, an investment option that prioritizes 
19

managing downside risk may be appropriate but its investment results are likely to lag other 

funds for that reason. 

One conceivable approach would be to rely on third-party rating services, such as 

Morningstar and Lipper. These firms currently rate mutual funds using a comprehensive suite 

of criteria, including investment results, fees, firm stability, manager tenure, etc. But this 

brings up a number of issues. It first raises a question about whether the ratings would only 

be relevant at the time of purchase or whether there would be an ongoing requirement. It 

would also concentrate enormous power in the hands of a few agencies and the reasoning 

underlying a particular rating would be largely opaque given the subjective nature of the 

rating process. Many of these agencies also subscribe to certain theories of investing. The 

Department of Labor, if it chose to employ this approach, would effectively bless these 

investment theories to the exclusion of others. In other words, the Department could be 

perceived as inappropriately distorting the marketplace by picking “winners and losers.” 

Finally, we note that the Department and other federal agencies have already learned of the 

risks of relying on commercial third party agencies, for example, the credit rating agencies, 

and we believe that a return to such an approach would be misguided. 

6. The final regulations should include an exemption for subtransfer agency payments 

made by mutual funds to IRA platform providers.

Financial intermediaries, including broker-dealers and platform providers, have largely 

moved away from maintaining individual accounts that are held on the books of the fund 

complex. Instead, intermediaries maintain aggregated (“omnibus”) accounts on the books of 

the fund complex with the intermediary maintaining individual accounts, such as participant 

or IRA accounts, on their books. The omnibus account holder in turn performs many of the 

common transfer agency functions the mutual fund would otherwise perform, including, for 

example, trade and settlement activities, account maintenance and periodic statement 

production. The mutual fund is relieved of the corresponding transfer agency expense and 

commonly compensates the omnibus account holder with subtransfer agency fees. That is, 

fees paid from the fund reflect the transfer agency work that is being done by the financial 

intermediary and would otherwise be performed by the fund’s transfer agent.

Under the conflict of interest proposal, unless an advisor is relying on the best interest 

contract exemption, it appears that subtransfer agency payments would be prohibited to the 

extent that a fiduciary investment advisor has a material interest in an omnibus account 

provider, for example, an affiliation.17 Absent the best interest contract exemption, for 

example, a broker-dealer would no longer be able to collect subtransfer agency payments 

with respect to omnibus accounts holding IRA assets. The notion is that a fiduciary 

investment advisor has a prohibited conflict of interest because in theory the advisor has an 

incentive to recommend a fund that pays subtransfer agency fees over other investments or 

that pays greater subtransfer agency fees. Thus, such amounts would, absent an exemption 

or offset program, be prohibited. 

 17 There are a number of theories justifying the receipt of subtransfer agency fees today, e.g., PTE 75-1, 

Part II, and PTE 86-128.
20

In contrast, however, it appears that subtransfer agency payments to third-party platforms 

that hold funds omnibus where the platform provider does not have an affiliated fiduciary 

investment advisor (or a material interest in such an advisor) would be permitted.18 In such 

an arrangement, the introducing broker is clearly a fiduciary advisor but the clearing 

broker/platform provider will typically have no relationship with the end client. 

This convoluted landscape for subtransfer agency payments makes little sense. Either 

subtransfer agency payments should be exempt from the prohibited transaction rules or all 

subtransfer agency payments to IRA platforms should be prohibited. It does not make sense 

that some platforms would have a competitive advantage over other platforms or that the 

treatment of third-party platforms would be opaque. 

The notion that subtransfer agency fees may create an incentive for financial advisors to 

recommend some funds over other funds misapprehends the relationship between the 

individual advisor and his or her home office. Subtransfer agency fees are only payable to 

the extent fees are used to pay for transfer agency services that would otherwise be 

performed by the fund’s transfer agent. The fund’s independent directors have a fiduciary 

duty to ensure that subtransfer agency fees are only used for legitimate fund expenses of this 

sort. Correspondingly, we have never heard of a firm that takes into account subtransfer 

agency revenue in determining advisor compensation. That is, the individual financial 

advisor has no economic incentive to recommend a fund that has a higher subtransfer 

agency fee rate over another fund. These are not, for example, payments that are taken into 

account in firm’s payout grid. 

We believe the better approach is to exempt subtransfer agency payments as long as the 

fund boards reasonably determine the fee is paid for transfer agency services. Such an 

approach would ensure that funds are able to pay for reasonable transfer agency services 

that would otherwise be performed by the funds. It would also ensure that all platform 

providers are treating equally. 

 18 The matter is not entirely free from doubt because the proposal includes an exception indicating 

that the mere offering by a recordkeeper of a 401(k) platform of investments is not considered a 

fiduciary recommendation. The proposal does not include a comparable carve-out for IRA platforms 

and, in the preamble to the proposal, the Department indicates that it considered and rejected a 

comparable carve-out for IRA platforms. The preamble explains that the carve out for 401(k) but not 

IRA platforms is due to the lack of an independent fiduciary in the IRA context and the possibility that 

platform marketing may rise to the level of a recommendation. Nonetheless, notwithstanding the 

negative inference created by the 401(k) platform carve-out, it is difficult to view the offering of an IRA 

platform as fiduciary investment advice under the general definition of advice.