The Committee for the Fiduciary Standard 

PO Box 3325 

Falls Church, Virginia 22043 

April 12, 2011 

By email to e-ORI@dol.gov

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Attn: Definition of Fiduciary Proposed Rule, Room N – 5655 

United States Department of Labor 

200 Constitution Avenue, N. W. 

Washington D.C. 20210 

RE: Comments on Definition of Fiduciary Proposed Rule 

Ladies and Gentlemen: 

 This letter is submitted by the Committee for the Fiduciary Standard * to follow 

our March 18 meeting with EBSA staff and officials. In this letter we set out views 

regarding the fiduciary standard, generally, and then address several of the questions that 

either EBSA staff has raised, or have been raised buy commenters. 

Summary 

The fiduciary backdrop against which ERISA was enacted in 1975 and the record 

and independent research on which the proposed rule seeks to modernize ERISA today is 

pertinent. Fiduciary status exists to create an environment where an investor may rely on 

and have confidence in the expertise of an advisor to do only what’s best for the investor. 

The relationship of trust and reliance is based on the advisor adopting the ends of the 

investor as his / her own.** Recent research depicts investors’ greatly disadvantaged 

position against investment professionals; suggests disclosures generally fail to overcome 

this disadvantage; and underscores the central importance of firmly holding advisors or 

brokers accountable for their recommendations and advice. This research reinforces the 

rationale for fiduciary status, consistent with the 1963 Supreme Court opinion in SEC v. 

Capital Gains Research Bureau that recognized fiduciary status in the Advisers Act. 

_______________________________ 

*The Committee for the Fiduciary Standard formed in 2009 to advocate for the fiduciary standard under the 

Advisers Act of 1940 and as represented in the Committee’s five core principles. There are over 800 

investment professionals who are members of the Committee. Additional information on The Committee 

for the Fiduciary Standard and its activities can be found at www.thefiduciarystandard.org. 

** For a full discussion of this view, see, “Arthur B. Laby, “The Fiduciary Obligation as the Adoption of 

Ends,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1124722
1. Introduction 

Fiduciary duties have served vital legal and social objectives for centuries, with 

one party relying on and trusting the expertise and of another party, who holds 

property or manages assets. Fiduciary status exists to mitigate the information 

asymmetry between providers of socially important services that require a high 

level of expertise, such as law and medicine, and individual consumers of these 

services (a) 

Judicial decisions have noted the existence of a fiduciary standard of conduct. In 

1963, the investment adviser’s fiduciary status was explicitly confirmed and the 

special relationship between an investment adviser and its client was recognized 

by the U. S. Supreme Court in SEC V Capital Gains Research Bureau (b). 

This recognition resulted, in large part, because of the legislative history of the 

Investment Advisers Act. The U. S. Supreme Court noted that because of “what 

happened in this country in the 1920s and 1930s” it is essential that “the highest 

ethical standards prevail in every facet of the securities industry.” Also quoting 

extensively from the SEC’s own report, which addressed advisory services, the 

Court explained: 

“The report reflects the attitude – shared by investment advisers and the 

Commission – that investment advisers could not “completely perform their 

basic function – furnishing to clients on a personal basis competent, unbiased, 

and continuous advice regarding the sound management of their investments – 

unless all conflicts of interest between the investment counsel and the client were 

removed. ” (c) 

The scale of information asymmetry between a retail client and investment 

professional guides the nature of the fiduciary duties. The retail client can not 

generally be presumed able to effectively judge the facts and circumstances 

regarding markets, risks, and products, and then make a decision that is truly 

“informed.” The client cannot be expected to effectively second guess an advisor 

or broker any more than a patient can be presumed able to effectively question 

his or her physician. 

Consequently, to preserve the fiduciary standard as meaningful investor 

protection, it is imperative to ensure that the fiduciary advisor is held 

accountable for his investment recommendations. The advisor must not be 

legally permitted to circumvent or otherwise shift this responsibility, the 

fiduciary’s responsibility, to the shoulders of the client and, therefore, transform 

a fiduciary relationship back to an arms length or commercial relationship. In 

light of this imperative, the question becomes whether disclosures and client 

affirmation or consent, by themselves, can be considered investor protection 

tools that uphold the requirements of ERISA. 
2. The Financial Crisis, Former SEC Chairman, Arthur Levitt, Jr., and 

Investor Trust 

Former SEC Chairman Arthur Levitt, Jr. testified before the Senate Banking 

Committee only 26 months ago, in October 2008, (d) about the financial crisis. 

The former Chairman was blunt and clear. He said “the unthinkable has 

happened” and called on Congress and the SEC to be “daring.” “The key 

problem plaguing our markets is a total breakdown in trust – in investor 

confidence,” Levitt said. “Investors of all sizes and types have little faith in the 

information they have been given.” 

Blaming a lack of transparency, enforcement and resources as major causes of 

the crisis, Levitt closed his comments stressing that enforcement, with its core 

task to “keep a market functioning,” is vital. He noted, “Enforcement is so 

important because ... its holds people accountable.... (and by doing this) the 

SEC builds the investors’ confidence that someone is looking out for them, 

which, in turn builds market trust. 

“Restoring trust in our markets will require rejuvenating the SEC,” Levitt 

emphasized. “It is the only agency with the history, experience and specific 

mission to be the investor’s advocate. Losing that legacy would be devastating to 

our ability to regulate the markets and restore investor confidence.” 

3. The Fiduciary Relationship is defined by Trust

The fiduciary relationship is based on trust and confidence and premised on the 

fiduciary discharging duties of care, utmost good faith and loyalty, and 

remaining solely responsible for carrying out these duties. Uniquely, in contrast 

to other service providers and product vendors, fiduciaries possess significant 

specialized expertise that investors can not efficiently acquire. This is the basis 

of the “knowledge gap” between the fiduciary and the investor. 

Investors, by virtue of these circumstances – the very circumstances which 

explain why fiduciary duties exist – are reliant on the fiduciary’s expertise. This 

reliance both requires and nurtures the relationship of trust and confidence. This 

trust and confidence allows investors to accept an advisor or broker’s advice and 

accept the risk of allowing the advisor or broker to manage their assets. In so 

doing, investors, by definition, must believe their advisor or broker is 

trustworthy. This is clear. 

It should be equally clear, then, why these investors should not be expected to 

heed disclosure warnings. In fact, heeding disclosure warnings might be 

considered rash or illogical. Heeding disclosure warnings would mean the 

investor has switched from trusting his/her advisor and (usually by) signing a 

contract and handing over assets to the advisor, to distrusting his/her advisor. 
4. The role and effectiveness of disclosures. 

Disclosure “makes up the core of federal securities laws,” Professor Troy 

Paredes wrote (e) in 2003. Professor Paredes pointed out that “(t)wo things are 

needed for federal securities laws to be effective” – information has to be 

disclosed and the consumers of the disclosure “need to use the disclosed 

information effectively.” 

He then observed how “federal securities laws generally assume that investors 

and other capital market participants are perfectly rational, from which it follows 

that more disclosure is always better than less. However, investors are not 

perfectly rational.” Furthermore, Paredes wrote, “To the extent that investors, 

analysts, and other market participants are subject to information overload, the 

model of mandatory disclosure that says that more is better than less is 

incomplete and may be counter productive.” 

Paredes concludes by stating that the tone and conclusions from his article are 

“necessarily tentative” and calls for more research. He also notes, “Ultimately 

we need to understand what investors, analysts, and others do with the 

information in order to craft a disclosure regime that better satisfies the goals of 

federal securities laws.” 

Key Point. Though not stipulated either way, the article’s comments mainly refer 

to commercial, as opposed to fiduciary relationships. The “users of information” 

Paredes refers to – investors (institutional and retail) securities, analysts, brokers 

and money managers – are often outside a fiduciary relationship. While the 

importance of disclosure in federal securities law generally is clear, its direct 

relevance to the role of disclosure in delivering advice to retail clients within a 

fiduciary relationship is not as clear. 

5. Research suggests that investors do not heed disclosure warnings regarding 

conflicts of interest and they generally do not “discount” the “conflicted” 

advice, according to Professor Daylian Cain. 

Research by Yale professor Daylian Cain (f) demonstrates how difficult it is for 

consumers to discount conflicted advice. He notes, “Especially difficult in the 

presence of ‘anchoring’ bias ... this bias persists even if the anchors are being 

disclosed as being randomly generated. If people have difficulty ignoring advice 

they know to be random, it seems likely they will have difficulty discounting 

advice that is merely disclosed as coming from a source that ‘may or may not 

have a conflict of interest.’” 
6. Research of investor understanding of investment services and costs suggest 

many investors are uninformed about the services and their costs; they 

appear far more than “confused” about services, providers and costs. 

Independent research of investors’ understanding of investing, investment 

services, service providers and investing costs have widely been characterized to 

suggest that investors are “confused.” However, a closer look at the research 

suggests a different phenomenon may be at play. Researchers Alan Palmiter and 

Ahmed Taha, who reviewed the academic literature on mutual fund investors, 

lament “Fund investors are unaware of the basics of their funds, pay insufficient 

attention to fund costs, and chase past performance despite little evidence that 

high past returns predict future returns.” 

AARP. The 2007 AARP report, “401(k) Participant’s Awareness and 

Understanding of Fees” underscores 401 (k) participants’ lack of awareness of 

plan fees. Key findings: 83% of participants admit “they do not know how much 

they pay for fees and expenses associated with their own plan, while 65% 

reported they pay no fees,... (and) 17% stated they do pay fees.” (g) 

RAND. The SEC’s 2008 Rand Report, “Investor and Industry Perspectives on 

Investment Advisers and Broker Dealers,” is widely cited for revealing that 

investors are unaware of the basic different legal requirements of brokers and 

registered investment advisers. (h)

“Overall, we found that many survey respondents and focus group participants 

do not understand key distinctions between investment advisers and brokerdealers – their duties, the titles they use, the firms for which work, or the 

services they offer.” Rand also reports that investors are generally satisfied with 

the services they receive, and “this satisfaction was often reported to arise from 

the personal attention the investor receives.” Regarding investment expenses, 

“Survey respondents also indicate confusion about fees.” 

 

The Rand report found that 25% of the survey respondents who reported using a 

financial service provider also report that they paid “$0” for advisory or 

brokerage services. 

Envestnet. The more recent Envestnet Fiduciary Standards Study serves to 

reinforce concerns about investors’ understanding of advisors and brokers. (i) 

The report characterizes investors as being “foggy” about brokers’ and advisors’ 

roles and obligations. Of particular note regarding investors’ knowledge of 

investment expenses and broker or advisor compensation, only 15% of investors 

state they can “very well” “assess how your advisor gets paid.” (39% state 

“well” and the 53% state “not too well,” “not well at all”or “don’t know”.) 
That only 15% of investors indicate they understand how (and perhaps by 

implication, what) their broker or advisor is paid suggests there is far more than 

mere “confusion” involved; it suggests a level of “disengagement” (j) from the 

services and service provider. As a point of comparison, the question 

might be asked whether there is any other profession or group of service 

providers where 85% of their clients or customers acknowledge that they do not 

know, “very well,” how much they pay for the services rendered. 

Key Point. These research studies offer insight into the nature of investor 

“misunderstanding,” and the consequent level of investor risk. The level of the 

general lack of awareness of the fees and expenses investors pay for their 

brokerage and advisory services and the prevalence of the belief that these 

services are “free” suggests a picture that should, at minimum, raise red flags to 

the profession and regulators alike. 

7. Investor’s substantial misunderstandings of basic aspects of the business 

relationship with their service provider – suggesting a level of 

disengagement – is separate and apart from investor’s misunderstandings 

of the markets or investing principles and practices. 

Concern about disclosure ineffectiveness and the knowledge gap is not new. As 

Paredes notes, William O. Douglas raised this concern in 1934, stating that 

“those needing investment advice will receive small comfort” from the 

information provided in the registration statement. (k) More recently, the Tully 

Report (l) recognized the limitations of most investors, saying it is a “rare client 

who truly understands the risks and market behaviors of his or her investments.” 

The “knowledge gap” between broker or advisor and investor typically refers to 

markets, investing strategies, practices and the industry jargon used to describe 

them. The Tully Report is the classic expression of this “gap.” However, the 

evidence suggesting investors’ substantial misunderstandings of, or 

disengagement from, the most basic aspect of the business relationship (the costs 

of the service) is additional to and separate from investors being uninformed 

about investing. It is arguable this business relationship “knowledge gap” 

presents even greater client risk than the knowledge gap of investing, generally. 

8. The nature of fiduciary duties correlates with the level of client risk. 

The nature of a fiduciary’s duty in law varies depending on the level of risk of 

the client. This risk level is generally determined by assessing the scope of the 

authority granted the fiduciary and the capacity of the investor to check, monitor 

or control the fiduciary. 

 
The significant investor limitations (noted above) and the associated investor 

risks suggest the nature of the fiduciary relationship between an advisor or 

broker and investor should more closely parallel the relationship of the trustee 

and trust beneficiary as opposed to the principal agent relationship. They should 

be regulated as such. The key rationale for the trustee and trust beneficiary 

model centers on these limitations and the “knowledge gap” that is not the case 

in the principal-agent relationship. (m)

The fiduciary duties required in the advisor-retail client relationship described 

here are the more stringent duties. The burden on the fiduciary to overcome the 

presumption against proceeding with a transaction when a material conflict of 

interest is present is significant. 

As opposed to the fair dealing or suitability standard associated with transaction 

facilitation, the fiduciary standard requires the fiduciary to ensure the client 

understands the potentially detrimental implications of the conflict on the client, 

to obtain fully informed client consent and, critically, to also be able to 

demonstrate that, despite the conflict, the transaction remains fair and reasonable 

and consistent with the client’s best interest. 

9. Concerns expressed to EBSA about the proposed rule should be viewed in 

the context of the essential purpose of fiduciary status and the clear 

limitations of most investors, as revealed by independent research. 

Particular concerns expressed by commenters should be carefully examined. 

Does the concern question the core rationale that fiduciary status exists? Does it 

consider or incorporate the limitations of most investors – or does it assume 

these limitations do not exist? Or, conversely does it identify a circumstance that 

reasonably could create an unintended consequence that would undermine a 

fiduciary duty? 

 
10. Concerns of Increased Costs. Increased costs concerns should only be 

considered to the extent credible research or data is provided to support 

these concerns. Credible analysis and data should also negate the 

presumption that investment expenses may actually decrease under the 

fiduciary standard because excessive investment expenses are considered 

imprudent and a potential fiduciary breach under the fiduciary standard. 

SIFMA expresses repeated concerns that the proposed rule will increase costs 

(see February 9, 2011 letter, March 1 testimony of Ken Bentsen, page 85). 

Among other things, SIFMA points to a presentation it commissioned by Oliver 

Wyman to evaluate the impact of harmonizing the fiduciary and suitability 

standards. While purporting to show that harmonization will increase costs, 

because the underlying study data has not yet been made available to EBSA, it is 

not possible to independently assess the study. (n) 

Further, it appears that one of the challenges SEC staff has faced in analyzing 

certain comments expressing cost concerns is the paucity of quantitative data 

provided to support differing views. For example, a review of the discussion 

provided on the topic of proceeding with a uniform standard, and the section 

addressing “Costs to Retail Investors, Including Loss of Investor Choice” in the 

SEC staff’s study is illustrative. (o) 

The SEC staff’s study recounts comment letters suggesting a new uniform 

standard “might significantly increase costs for broker-dealers, which would 

then be passed on to retail investors, ..... some commenters indicated that 

litigation would increase.... [and this would] increase the cost of insurance for 

the firm,” however, the study notes, “None of the commenters provided any 

quantification of such anticipated costs” (emphasis added.) Further the study 

notes, “Commenters speculated” increased costs would cause many brokerdealers to stop offering certain products; while other commenters countered “the 

costs and impact on investor choice would be de minimis.” 

Further, the staff’s study, as it deals with “potential costs” to retail investors of a 

harmonized standard, noted, “Commenters generally did not address whether or 

how additional harmonization of the broker-dealer and investment adviser 

regulatory regimes would impact investor choice.” The study summarizes, 

“Generally, commenters did not quantify particular costs or even give a range of 

costs they would incur for various potential outcomes.” (p) 

Finally, any credible analysis and discussion of the impact on costs associated 

with practices and procedures due to the fiduciary standard should also consider 

the potential cost savings. There is no debate that, with notable exceptions, the 

suitability standard generally does not require a broker to control investment 

expenses as does the fiduciary standard. As no representatives of the brokerage 

industry disputes this fundamental difference, the question must be asked why 

investment expenses would not be expected to decrease – and not increase -- 

under the pressure of market forces that reflect this duty. 
11. Disclosures do not equal the client best interest fiduciary standard.

Commenters expressing trust in disclosures as the central pillar of the 

fiduciary standard actually, and perhaps inadvertently, express their trust 

in an improved suitability or general commercial standard – not the 

fiduciary standard. 

Some commenters express their trust and faith in disclosures as the pillar of the 

fiduciary standard. In the public hearing, Ken Bentsen notes (March 1, page 

120): 

“Whether its in the investment or any other part ... of their daily lives, of – and 

you know, we have operated our markets very much on the basis of a disclosure 

regime and in agreements between two parties.” 

 In the same discussion, Charles Nelson of Great Western Retirement 

Services states (March 1, page 129): 

“We live in a world that is full of business relation conflicts, and that in our 

every day life, we’re engaging in a variety of transactions, whether its for a 

product or a service. And I don’t think this is really all that different, and I 

actually have faith in the American consumer here and... that with good 

disclosure on what their fees might be and contractual arrangements around 

what their services are being provided, that a consumer can make an informed 

decision.” 

Both commenters, in comparing fiduciary status to a commercial transaction 

common in “their daily lives” (Bentsen) or “in our every day life” (Nelson) 

appear to reject out of hand the well established fundamental nature of fiduciary 

status and the centuries-old rationale for its existence. As such, these comments, 

generally, appear to simply make the straightforward case for the suitability 

standard as the standard EBSA should adopt. This conclusion seems consistent 

in Mr. Bensen’s case, when he notes during the hearing “No ... we don’t find a 

lot in it (the proposed rule) that we would be supportive of.” (March 1, page 

110) 

Finally, consistent with this faith in disclosure and the suitability standard, 

Bentsen also expresses the view that based on “the data” investors choosing the 

brokerage - commission business model do so, “it would appear...based on 

price.” (March 1, page 127) No specific underlying data are offered to support 

this conclusion. The significance of this view is that it seems to be inconsistent 

with the independent research findings, noted above, where investors were found 

to be generally very unaware of the costs of their investments. 

 
12. The sales exemption, if allowed, should only be permitted if there is a clear 

and unambiguous written “informed understanding” statement from the 

advice recipient that the seller’s advice is no longer impartial. 

Paragraph ( c ) ( 2 ) ( 1 ) provides that a person will not be considered an ERISA 

fiduciary if that person can “demonstrate that the recipient of the advice knows 

or, under the circumstances, reasonably should know, that the person is 

providing the advice ... in its capacity of a ... seller of a security.” 

This exemption would apply to an investment adviser who is “a fiduciary of the 

plan under section 3 (21)(A)(i) or (111). 

While the Department notes correctly that there is an “inherent expectation of 

impartial investment advice” on the part of advice recipients when there is a 

representation of ERISA fiduciary status, it suggests there may not be such an 

expectation without this representation. Given the general level of investor 

disengagement noted above, and the more specific limitations and potential 

harms associated with disclosures as noted by Professor Cain in our March 18 

meeting, this language appears to allow for an escape of fiduciary duties without 

any understanding of the switched capacity by the advice recipient, much less 

what this switched capacity means. To merely allow a claim that the recipient 

“reasonably should know” the adviser in his / her capacity of a “seller” is to 

allow for rampant misuse. Further to not require any demonstration of a written 

“informed understanding” would be to miss an opportunity to contribute to a 

major step forward in a small but pivotal arena. 

The comments on this proposal are revealing of the misunderstandings of the 

fundamental difference between a sales standard as opposed to the fiduciary 

standard. At its heart, this misunderstanding presumes the standards are very 

similar, and not fundamentally different. This is essentially inaccurate. This is 

inaccurate because the suitability – sales standard permits reps to put the interest 

of the rep and firm above the interest of the plan participant or sponsor. The 

suitability standard does not require reps to be held accountable to control 

investment expenses, to disclose all material conflicts, to disclose all fees and 

expenses, to avoid material conflicts, or to mange any unavoidable conflicts in 

the interest of the investor, get informed consent from the investor, and, if the 

transaction is completed, to still demonstrate the transaction is in the investor’s 

best interest. 

Based on these material differences it is accurate and important to describe the 

relationship in terms that correctly reflect this difference. Terms such as “not 

aligned,” “adverse” “opposed” reflect this difference every bit as much as they 

reflect the difference between two brokers negotiating the final price between 

the seller and the buyer of a home. We suspect commenters would not object for 

a moment to describing opposing brokers in such terms. 
Commenter: “Adverse” is not accurate. One commenter (Nelson, March 1, page 

80, op. cit.) states the term “adverse” is legally not accurate because “federal and 

state laws require financial service providers to take into account the needs of 

their clients.” This reference to the requirement that the recommendation must 

be suitable is consistent with an “adverse” position. Suitability allows the rep. 

very wide discretion that essentially means the minimum requirement permitted 

is that the recommendation can not be unsuitable. This “not unsuitable” 

minimum requirement allows for the sale of many products that, while perhaps 

in the best interest of the firm or rep, are not in the best interest of the investor. 

Commenter: No zero-sum game. Another commenter (q) argues as to why it 

objects to what it calls having a service provider “branding itself a conflicted 

advisor” and the language “adverse” and “not undertaking to provide impartial 

investment advice.” As explained, “In any business built on relationships, sellers 

and buyer both benefit when the buyer feels as though she has received good 

value. As a result, sales relationships are not a zero-sum game ... characterizing 

the seller as adverse is inaccurate. Similarly, if a person is “not undertaking to 

provide impartial investment advice,” the implication is that he or she is in fact 

providing conflicted advice.... It would be far more useful for the seller simply 

to note it is not giving “advice,” but that it is proposing a sale.” 

This commenter seems to seek to redefine the essential nature of a sales 

professional. The best sales professionals are ethical and know their products 

well; product information is imparted as facts and as advice. Within legal and 

ethical bounds of the industry, the best sales professionals also seek to increase 

their sales as they are compensated for doing so. 

That “sales” advice is “conflicted” only suggests that the sales professional 

cannot be objective about products he does not sell. This should be beyond 

debate, and to suggest otherwise should be considered unserious. Second, the 

commenter then suggests “sellers and buyers both benefit when the buyer feels 

as though she has received good value.” (Emphasis added.) This is an excellent 

example as to the material difference between “advice” and “sales,” and why the 

Department is correct in shining a light on this difference. 

While a sales professional seeks (as noted above) to make the customer “feel” 

good; a fiduciary advisor seeks to recommend what is best. The fiduciary 

advisor gains no incremental monetary value for rendering his/her best advice; 

while, in fact, the investor (buyer) may well “feel” very bad after receiving sober 

advice, advice that is in his / her best interest. 
Conclusion. Some parts of the industry seem to believe its’ sales professionals 

who have legal obligations and financial incentives of sales professionals will be 

“advisors” by simply saying they are “advisors.” After many years of calling 

sales professional “advisors”, suggestions now that sales professionals be 

characterized as sales professionals appears to be unsettling to some. 

In the sales exemption, the Department has the opportunity to realign the titles 

and language describing sales professionals as sales professionals with their 

functional tasks, legal obligations and financial incentives. The sales exemption 

provides an excellent opportunity to redraw a sharp line between the role and 

duties of sales professionals representing their firms, and fiduciary advisors 

representing plan participants and sponsors. In so doing, we recommend the 

following: 

The independent research (noted above) regarding investor perceptions of 

investment services suggests many plan participants will not be aware of the 

shifting capacities, and if they are aware, will not appreciate the relevance of the 

fiduciary versus sales capacities. For this reason requiring the sales professional 

to only “demonstrate that the recipient of the advice knows or, under the 

circumstances, reasonably should know, that the person is providing the advice 

... in its capacity of a ... seller of a security” is plainly insufficient. The plan 

participant should be required to affirm in writing that he or she understands the 

shifting capacities and possesses an “informed understanding” of what this 

means. 

13. Fiduciary status today carries enormous responsibility – far greater, in 

terms of the nation’s investible assets, than the responsibility it carried in 

1940 when the Advisers Act was enacted. 

This record of investor limitations and disengagement – a record that has not 

been questioned by any credible independent authority -- simply underscores the 

vital mission of fiduciary status today for the 50% of households investing, 

indirectly or directly, in the market. This fiduciary mission is, arguably, far more 

vital today than was the fiduciary mission when first established under the 

Advisers Act of 1940, when only 1% to 2% of the households invested. 

For this reason alone, any revisions as to how fiduciary is defined and applied 

under ERISA should be made such that advisors and brokers remain solely 

accountable to plan sponsors and participants for the quality of their advice. 
14. Closing Summary 

The essence of the fiduciary relationship is trust, founded on confidence and 

reliance that the advisor or broker only acts in the best interest of the client, and 

is solely responsible for his decisions and recommendations. In Capital Gains, 

the Supreme Court found the Advisers Act aimed, in the wake of the scandals of 

the 20s and 30s, to reestablish this standard and this required, according the 

Court, removing “all conflicts of interest between the investment counsel and the 

client.” 

While the essence of the fiduciary relationship is trust founded on confidence 

and reliance, two commenters generally critical of the proposed rule compare the 

fiduciary standard to the standard in business transactions. In so doing they 

appear to matter-of-factly affirm their support for the commercial suitability 

standard as the appropriate standard to be adopted by EBSA. 

 

Additionally, separate new research suggests the depth of investor 

disengagement regarding the costs of investment services is material. Thus when 

a conflicted relationship exists, the risks to clients are significant and merit the 

highest fiduciary level of obligations available. 

Moreover, even if disclosures were shown to be effective in some instances, (the 

Committee has seen no party or group offer evidence during this current debate 

that disclosures are effective), a disclosure regime on its own should still be 

rejected to address conflicts of interest. Reliance on casual disclosures, alone, is 

the opposite of reliance on the fiduciary professional’s recommendation, and 

negates the very purpose of the fiduciary standard. 

There are two clear and distinct visions of the meaning and vitality of the 

fiduciary standard as it addresses conflicts of interest. One vision is offered by 

both the Court in Capital Gains and former SEC Chairman Arthur Levitt. Their 

views speak to the importance of 1) rigorous enforcement as key to investor 

trust and confidence, and 2) the vital mandate that conflicts be “removed.” The 

other vision speaks of “disclosures” and of allowing “retail customers” ... “make 

informed choices,” and the importance of “customer consent” being attained in a 

“pragmatic way.” We submit the first view is superior and upholds the same 

fiduciary principles that have anchored fiduciary law for centuries. 

The Committee for the Fiduciary Standard is comprised of leaders in the 

advisory industry who are prepared to provide any assistance to the Department 

as it addresses this critical issue. 
Sincerely, 

Knut A. Rostad 

Knut A. Rostad 

Chairman 

Copies to: 

Chairman Mary L. Schapiro 

Commissioner Luis A. Aguilar 

Commissioner Kathleen L. Casey 

Commissioner Troy Paredes 

Commissioner Elisse B. Walter 

Contact Information: 

Knut A. Rostad 

The Committee for the Fiduciary Standard 

P. O. Box 3325 

Falls Church, VA 22043 

703-821-6616 x 429 

Notes 

a. For a general discussion of the role of the fiduciary from an historic perspective 

see, Blaine F. Aikin, Kristina A. Fausti, “Fiduciary: A Historically Significant 

Standard.” 

For a discussion of the rationale for fiduciary law, see “Fiduciary Duties of 

Brokers-Advisers-Financial Planners and Money Managers,” Tamar Frankel, ___ 

 

b. 375 U. S. 180. 

c. Id at 184. 

d. Testimony of Arthur Levitt, Jr., Senate Banking Committee; Washington DC 15 

October 2008 – Submitted to the Record 

e. Troy Paredes, Associate Professor of law, “Blinded by the Light: Information 

Overload and its Consequences for Securities Regulation” 

f. For a detailed treatment of this subject, see, 
Conflicts of Interest: Problems and Solutions from Law, Medicine and 

Organizational Settings (with D.A. Moore, and G. Loewenstein, and M. 

Bazerman, eds.), Cambridge University Press, 2005. 

Also, see: "The Dirt on Coming Clean: The Perverse Effects of Disclosing 

Conflicts of Interest" (with G. Loewenstein and D. A. Moore), Journal of Legal 

Studies, January, 1-25, 2005. 

 

g. See http://assets.aarp.org/rgcenter/econ/401k_fees.pdf

h. See http://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf

i. See http://www.thefiduciaryopportunity.com/

j. To suggest only that investors are confused, in light of the investor views 

discussed here, is to consider the research data in a very narrow sense, and is to 

understate what appears to be investors’ misunderstandings with their service 

providers. It is true that investors “confuse IAs from BDs.” But this confusion is 

not the only issue. 

A dictionary definition of “confuse” serves to suggest that the investor behavior 

noted here extends beyond what is typically associated with confusion. The 

definition of confuse includes “perplex,” “bewilder,” or “to fail to distinguish.” 

As examples, of using confuse or confusion in a sentence, these definitions offer, 

for example: “He always confuses the twins.” Or, “Try not to confuse the papers 

on the desk.” (See Dictionary.com) 

The scale of investor unawareness of fees, expenses and compensation reflects 

such a fundamental “gap” that it seems far more appropriate to associate this 

phenomenon as an indicator of disengagement more than of confusion. Examples 

of definitions of disengage include: “To release or become released from a 

connection,” or, to “detach,” disconnect” or “uncouple.” (See Dictionary.com for 

further examples.) 

By only suggesting that investors are confused, and by continually applying the 

label of investor confusion to what we observe of investor conduct and views, we 

may be subtly framing the circumstances far more positively than the evidence 

actually warrants. In doing so, we may be understating the gravity of investors’ 

misunderstandings of investing and their advisor or broker. 

k. Paredes \ supra note (e) at 14. 

l. See: http://www.sec.gov/news/studies/bkrcomp.txt

m. For a discussion of the varying scope of fiduciary duties, see: Tamar Frankel, 

Fiduciary Law, 71, Calif, L. rev. 795 (May 1993) 
Also, Professor Deborah DeMott, Duke Law School, David F. Cavers Professor 

of Law notes regarding agency law and advisory relationships: 

“Agency law is not a good starting point for analyzing advisory relationships 

because the recipient of the advice ... necessarily relies on the advisor's greater 

expertise, and lacks the realistic ability to monitor how the adviser formulates its 

recommendations. This is especially so when the recipient of advice is an 

individual (non-institutional) client, even more so when the advisor is the client's 

sole source of advice. Additionally, agency at its heart is about relationships in 

which an actor represents a principal in interactions with third parties (by acting 

"on behalf of" the principal), which isn't the same thing as furnishing advice. 

 

Separately, agency law itself requires consent by the principal to conduct that 

would otherwise breach the agent's fiduciary duties. The agent bears the burden of 

showing that such consent has been obtained. to be effective, a principal's 

"consent" must be informed as to facts "that would reasonably affect the 

principal's judgment," a standard that is not satisfied by blanket consents that lack 

specificity, such as "consent" to an agent's use for its own purposes or those of 

third parties of information furnished by the principal to the agent. Agency law 

differentiates between "general or broad language purporting to release the agent 

in advance from the agent's fiduciary obligation" and consent by the principal "to 

specific transactions or to specified types of conduct ...." See Restatement (Third) 

of Agency sec. 8.06, cmt. b ("a broadly sweeping release of an agent's fiduciary 

duty may not reflect an adequately informed judgment on the part of the principal; 

if effective the release would expose the principal to the risk that the agent will 

exploit the agent's position in ways not foreseeable by the principal at the time the 

principal agreed to the release.") 

n. Standard of Care Harmonization: Impact Assessment for SEC, October 2010. 

The presentation suggested cost impacts of the uniform standard on its member 

firm customers. Analysis was offered in this presentation from SIFMA members 

that it is claimed suggests fee-base accounts are more costly to investors than are 

brokerage accounts. However, due to the lack of access to the underlying data 

itself, it is not possible to independently analyze the study data and draw 

conclusions about how it should be interpreted. Also, it should be noted here that 

both SEC and EBSA staff have requested SIFMA to provide the underlying data 

such that the presentation could be independently assessed. To date, to our 

knowledge, the underlying data has not been provided by SIFMA. 

o. SEC Staff Study on Investment Advisers and Broker Dealers, see page 159. 

p. See discussion beginning on page 146. 

q. See Groom Law Group, February 3, 2011 comment letter.