February 3, 2011

Via Electronic Mail:

The Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Proposed Definition of Fiduciary Regulation

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, N.W.

Washington, DC 20210

Re: Proposed Definition of Fiduciary Regulation

Ladies and Gentlemen:

Managed Funds Association (“MFA”)1appreciates the opportunity to respond to 

the Department of Labor’s (the “DOL” ) proposed regulation redefining an investment 

advice fiduciary under section 3(21) of the Employee Retirement Income Security Act of 

1974 (“ERISA”). MFA strongly supports the DOL’s goal of protecting benefit plans and 

their participants, and we recognize that imposing fiduciary status on certain service 

providers to plans furthers that goal. We are concerned, however, that the DOL’s 

proposed definition of “fiduciary” may be broader than intended and inadvertently could

capture many market participants that Congress and the DOL have explicitly determined 

should not be deemed fiduciaries under ERISA. As a consequence, we believe that the 

proposed rule could limit options for plans, an unintended, harmful consequence for plans 

and their participants and contrary to the goal of protecting plans. MFA is committed to 

working with policy makers and regulators to achieve smart, effective regulation and we 

respectfully submit our comments on the DOL’s proposed rule in that spirit.

Before discussing the specifics of the DOL’s proposed rule, it is important to note 

that hedge funds and other alternative investment vehicles are a valuable component of 

the investment portfolio for sophisticated investors, including plans. The properly 

managed addition of hedge funds to a portfolio provides diversification, risk 

management, and returns that are not correlated to traditional equity and fixed income 

 

1 MFA is the voice of the global alternative investment industry. Its members are professionals in hedge 

funds, funds of funds and managed futures funds, as well as industry service providers. Established in 

1991, MFA is the primary source of information for policy makers and the media and the leading advocate 

for sound business practices and industry growth. MFA members include the vast majority of the largest 

hedge fund groups in the world who manage a substantial portion of the approximately $1.9 trillion 

invested in absolute return strategies. MFA is headquartered in Washington, D.C., with an office in New 

York.
February 3, 2011

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markets. These are critical benefits that help plans generate sufficient returns to meet 

their obligations. 

The critical importance of hedge funds and other alternative investments as part of 

a plan’s diversified portfolio was noted by Joseph A. Dear, Chief Investment Officer of 

the California Public Employees’ Retirement System, in his written testimony before the 

Senate Banking Subcommittee on Securities, Insurance and Investment on July 15, 

2009.2 In that testimony, Mr. Dear stated that the performance of alternative investments:

translates into substantial value added to the pension fund over a sustained time 

period. It makes realization of our target rate of return feasible. The 

consequences to our beneficiaries, their government employers and taxpayers of 

our not meeting this objective are substantial and real: lower wages, higher 

contribution rates and higher taxes. Can these performance benefits be delivered 

through other investment products? No.

The value that hedge funds add to plan portfolios is also demonstrated through the 

significant investments made by plans and endowments in hedge funds. Plans and 

endowments in every state invest in hedge funds because of the benefits to their 

investment portfolios.

Finally, hedge funds provide one of the best examples of alignment of interests

within the financial community. Because the typical fee structure for a fund includes a 

performance fee whereby the manager receives a share of the total returns the fund 

generates for its investors, hedge fund managers are motivated to produce attractive riskadjusted returns for their investors. Moreover, if hedge funds experience losses, those 

same performance fees do not start again until the fund earns enough in investment 

returns to get back to its earlier levels. These so-called “high water marks,” along with 

performance fees and the lack of any government safety net, explain in large part the 

excellent risk management practiced by the hedge fund industry. For the reasons 

discussed below, we believe that, as drafted, the proposed regulation could have the 

unintended consequence of impairing the ability of plans to invest in hedge funds and 

other pooled investment funds because many funds are not structured in a manner to be 

able to comply with the rules applicable to ERISA fiduciaries. We urge the DOL to 

reconsider aspects of the proposed regulation to avoid this harmful consequence to plans.

Overview

As noted above, MFA strongly supports investment advisers having fiduciary 

obligations to their clients, and we believe advisers that provide investment advice to 

benefit plans as clients should be subject to a fiduciary standard. We believe, however, 

that the proposed regulation potentially extends fiduciary obligations too far by making 

 

2 Available at 

http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=e83f7ca1-

6f94-4854-8aa9-ef0ac11b4bb0.
February 3, 2011

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persons who provide asset valuations to plans, or who are advisers under the Investment 

Advisers Act of 1940 (the “Advisers Act”), fiduciaries under ERISA, regardless of 

whether there is an agreement between the parties. We believe that the language in the

proposed regulation goes far beyond the scope of current law and regulation and could 

make a wide variety of market participants into fiduciaries under ERISA, in some cases 

contrary to explicit determinations made by Congress and the DOL. Further, the 

proposed regulation does not seem to fully account for the costs that these changes could 

impose on plans, and we urge the DOL to consider these potentially significant costs 

before finalizing its rule. As discussed in more detail below, we believe that proposed 

regulation raises the following key issues: 

 the proposed regulation could be interpreted in a manner that is inconsistent with 

Congressional mandates and potentially reverses current law regarding the 

fiduciary status of managers, advisers, and service providers to pooled investment 

funds, even if the DOL did not intend such a result; 

 the language regarding appraisals in the proposed rule goes far beyond the DOL’s

stated concerns and could significantly affect a pooled investment fund’s 

operations;

 the proposed regulation is ambiguous and appears to suggest that any adviser 

could be a fiduciary, regardless of its relationship with a plan; and

 the selling exception is narrowly drafted and could preclude normal fund 

marketing activity.

In light of these concerns about the potentially broad implementation of the 

proposed regulation, we urge the DOL to clarify that general partners, managing 

members, investment advisers, fund administrators, and other service providers to pooled 

investment funds that do not hold plan assets will not be deemed to be fiduciaries under 

ERISA as a result of the rule. We also urge the DOL to consult with the Securities and 

Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission 

(the “CFTC”) on the coordination of standards and requirements among the relevant

statutory regimes, especially in light of recent legislative and regulatory initiatives from 

each of these regulators and the potential effect of this proposed regulation on the capital 

markets. 

Application of Proposed Regulation to Non-Plan Asset Funds

The proposed regulation is not explicitly limited in scope to persons providing 

services to plans and plan asset vehicles. Read literally, the general partner, managing 

member, and adviser to a fund that is not deemed to hold plan assets under ERISA (a 

“Non-Plan Asset Fund”), and persons providing valuation services to a Non-Plan Asset 

Fund, may become a fiduciary under the proposal as drafted. While it is unclear whether 

the DOL intended to include such parties within the scope of the proposed regulation, we 

respectfully submit that such an interpretation would be inconsistent with Congressional 

mandates regarding the imposition of fiduciary obligations on general partners, managing 

members, advisers, and service providers to Non-Plan Asset Funds. 
February 3, 2011

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Congress has spoken repeatedly on when a pooled investment fund holds plan 

assets and, therefore, the manager of a fund should be deemed a fiduciary to the fund. 

We believe that these Congressional determinations -- as well as the existing DOL 

regulations and guidance regarding pooled investment funds -- set appropriate standards 

to determine the scope of entities that should be subject to fiduciary obligations under 

ERISA. As drafted, the proposed regulation could indirectly reverse those Congressional 

determinations by making any person who provides a “recommendation” as to the value 

of an asset a fiduciary, regardless of whether the fund is subject to the fiduciary 

requirements of ERISA, regardless of the intention of the parties, and regardless of 

whether any agreement with the plan exists. The proposed regulation could have that 

result even if the person providing input into valuations with respect to the assets of a 

Non-Plan Asset Fund did not know a plan was invested in the fund.3 

Congress most recently spoke to this issue when it enacted the Pension Protection 

Act of 2006, which amended section 3 of ERISA by adding new subsection (42). New 

section 3(42) provides that “the assets of any entity shall not be treated as plan assets if, 

immediately after the most recent acquisition of any equity interest in the entity, less than 

25 percent of the total value of each class of equity interest in the entity is held by benefit 

plan investors.”4 Section 3(42) of ERISA and the DOL’s regulations clearly demonstrate 

that advisers and service providers to Non-Plan Asset Funds are not fiduciaries to benefit 

plans and, therefore, are not subject to the provisions of section 406 of ERISA.

Under DOL regulations, when a benefit plan invests in the equity securities of 

another entity that is not registered as an investment company and whose securities are 

not publicly offered, then the assets of that entity are considered “plan assets” for 

purposes of ERISA, unless the “[e]quity participation in the entity by benefit plan 

investors is not significant.”5 The regulation goes on to define equity participation as 

“significant” if, “25 percent or more of the value of any class of equity interests in the 

entity is held by benefit plan investors.”6 

The DOL has issued further guidance supporting this position in Interpretive 

Bulletin 75-2

7

and Interpretive Release 75-3,

8 which indicate a clear interpretation that 

 

3 We think this result would be inconsistent with clear Congressional intent established over the last 25 

years. From 1979 through 1986, the DOL proposed and reproposed regulations defining the circumstances 

under which a pooled fund would hold plan assets. Those proposals were very controversial and were met 

with significant market concern. In response to that concern, in 1985, Congress prohibited the DOL from 

issuing any regulation defining plan assets in the private equity and real estate areas that would require such 

a fund to fall below certain defined thresholds specified by Congress in P.L. 99-272. The 1986 plan asset 

regulation reflected Congress’ intentions and, over the following 25 years, the general partners, managing 

members, advisers, and other service providers to these funds were not subject to the ERISA fiduciary 

rules.

4

29 U.S.C. §1002(42).

5

29 CFR §2510.3-101(a)(2).

6

29 CFR§2510.3-101(f).

7

29 CFR §2509.75-2. In Interpretive Bulletin 75-2, the DOL stated that an investment in an entity such as 

a Non-Plan Asset Fund will not make subsequent transactions between a party in interest and the entity a 

prohibited transaction under section 406. The Interpretive Bulletin continues, “This general proposition, as 
February 3, 2011

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general partners, managing members, advisers, and service providers to Non-Plan Asset 

Funds should be treated similarly to service providers to registered investment 

companies; namely, such service providers should not be considered fiduciaries to a 

benefit plan that invests in the fund. As noted above, in adopting amendments to ERISA 

in the Pension Protection Act, Congress also signaled its clear intention to eliminate any 

burden or cost on pooled funds in which ERISA assets were not significant to avoid the 

imposition of those restrictions on other investors.

It is also important to recognize that, for advisers to pooled investment funds, the 

adviser-client relationship is between the adviser and the fund, not between the adviser 

and specific investors in the fund. This relationship between adviser and fund is a key 

characteristic of pooled vehicles, as distinguished from individual advisory relationships.

This distinction is important from an investor protection perspective because investors in 

private investment funds require, and appreciate the need for, all investors in a pooled 

investment vehicle to receive consistent and uniform treatment. Moreover, an adviser to 

a private investment fund would not be able to manage the fund with a separate fiduciary 

duty to each individual investor in the fund. For example, an adviser would not be able 

to exercise its proxy voting responsibilities on an investor-by-investor basis, as investors 

are likely to have different views as to how they would choose to vote on various issues.

In recognition of this key feature of pooled investment funds, Congress less than 6 

months ago expressly limited the SEC’s authority to define the term “client” by 

prohibiting the SEC from defining the term for purposes of section 206(1) and (2) of the 

Advisers Act to include investors in a private investment fund if the fund has an advisory 

agreement with the adviser.

9 Additionally, section 913 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (the “Dodd-Frank Act”) amends section 211 of the 

Advisers Act to provide a similar limitation that the SEC, when it issues rules under the 

Advisers Act regarding an adviser’s fiduciary duty to customer, may not define 

“customer” to include investors in a private investment fund if the fund has an advisory 

agreement with the adviser. Thus, the Dodd-Frank Act plainly manifests Congress’s 

clear position regarding the fiduciary obligations of an adviser to a private, pooled 

investment fund: the adviser’s client is the fund and the adviser’s fiduciary obligations 

are to the fund, not to individual investors in the fund. Though the Dodd-Frank Act 

specifically focuses on an adviser’s fiduciary obligations under the Advisers Act, we 

believe that the same framework should apply to the determination of an adviser’s 

 

applied to corporations and partnerships, is consistent with section 401(b)(1) of the Act, relating to plan 

investments in investment companies registered under the Investment Company Act of 1940.”

8

29 CFR §29.2509.75-3. Interpretive Release 75-3 provides the DOL’s interpretation of section 3(21)(B) 

of ERISA. In the Release, the DOL states its view that section 3(21)(B) is an elaboration of section 

401(b)(1) of ERISA and Interpretive Release 75-2. Release 75-3 provides elaboration on the principle that 

assets of an investment company should not be deemed plan assets solely because a plan has invested in the 

shares of an investment company. The Release states, “[c]onsistent with this principle, the [DOL] 

interprets this section to mean that a person who is connected with an investment company, such as the 

investment company itself, its investment adviser or its principal underwriter, is not deemed to be a 

fiduciary of or party in interest with respect to a plan solely because the plan has invested in the investment 

company’s shares.”

9

Section 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
February 3, 2011

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fiduciary obligations under ERISA, namely the fiduciary obligation should be at the fund 

level.

Because the language in the proposed regulation is drafted so broadly, we are 

concerned that it could be interpreted in a way that is inconsistent with the Congressional 

intent established in these laws, as well as within the DOL’s own regulations and 

guidance with respect to Non-Plan Asset Funds. We are particularly concerned about

any interpretation of the proposed regulation that would make general partners, managing 

members, adviser, and service providers to Non-Plan Asset Funds fiduciaries based on 

the day-to-day activities they provide to Non-Plan Asset Funds. Accordingly, we urge 

the DOL to make clear in any final regulation that nothing in the regulation will cause a 

person to become a fiduciary because of any recommendation regarding the value of the 

Non-Plan Asset Fund or any of its assets.

 

Appraisals

Under current law, pricing services, custodians, and others who provide estimates 

of value generally are not fiduciaries for purposes of ERISA. We understand that the 

proposed regulation is intended, in part, to designate a new category of service providers 

as fiduciaries under ERISA – namely, appraisers and companies that give fairness 

opinions, even in the absence of any arrangement, agreement, or understanding that the 

service provider is providing individualized “advice.” We have already noted our 

concern that the regulation should not apply to general partners, managing members, 

advisers, and service providers to Non-Plan Asset Funds. We also have concerns about 

the proposed regulation’s impact with respect to funds that are deemed to hold plan 

assets, for example, hedge funds that do not meet the 25% test set out in section 3(42) of 

ERISA (“Plan Asset Funds”). 

Effects on General Partners, Managing Members, and Advisers to Plan Asset

Funds

Under the proposed regulation, solely because a Plan Asset Fund sends out 

periodic performance reporting, the fund’s general partner, managing member, and 

adviser may be deemed a fiduciary with respect to the assessment of value to every plan 

investor in the Plan Asset Fund. Such an interpretation would create uncertainty as to 

whether the fees charged on the value of assets would violate the prohibited transaction 

provisions of ERISA. Moreover, uncertainty regarding the scope of this provision could 

create a disincentive for fund managers to provide more comprehensive and frequent 

information to fund investors, a result that is contrary to the goal of protecting plan 

investors.10 

 

10 The proposed regulation contains an exemption for valuations provided for purposes of reporting 

required by ERISA or the Internal Revenue Code. The exemption does not apply if the valuation includes 

assets for which there is not a generally recognized market and which serves as a basis on which a plan 

may make distributions to plan participants and beneficiaries. We believe that this limited exemption 

generally would not apply to the types of valuation information typically provided to investors in pooled 

investment vehicles. 
February 3, 2011

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We believe the broad language in the provision relating to appraisals appears to 

go far beyond any abuse or enforcement issue that the DOL has identified and could have

far reaching costs to plans, funds, and the capital markets. The proposed regulation, as 

drafted, could add significant costs and burdens to plans seeking to invest in pooled 

investment funds without additional protection of plan investors in Plan Asset Funds. 11 

Accordingly, we urge the DOL to consider a more narrowly tailored approach with 

respect to determining which persons that provide valuations to a Plan Asset Fund, and 

ultimately to an investing plan, should be considered a fiduciary. 

Effects on Service Providers to Plan Asset Funds

We note that the DOL’s economic analysis does not include any analysis on the 

proposal’s inclusion of this new category of service providers as fiduciaries. We are 

concerned that it could impose significant costs on or even preclude certain custody, 

prime brokerage, and fund administration agreements typically entered into by Plan Asset 

Funds. For example, the appraisal provision could make it impossible for Plan Asset 

Funds to enter into swaps, to the extent that, the rule makes a counterparty a fiduciary 

when it provides the daily mark required by the Dodd-Frank Act.

12

 This is because, if the 

swap counterparty is deemed a fiduciary, the dealer would be precluded from 

participating in the swap transaction when it is acting as a fiduciary with respect to the 

assets involved in the swap transaction.

Each of the service providers or counterparties that provides information 

regarding the value of an asset also could be a fiduciary under the proposed rule as it is 

currently drafted, which could invalidate their asset-based fee compensation. Thus, this 

provision could affect the compensation of every fund manager and prime broker, 

custodian or fund administrator, as many of the existing agreements likely would violate 

the prohibited transaction provisions of ERISA, if applicable.

13

 Such additional costs to 

Plan Asset Funds would ultimately be borne by investors in the fund, thereby increasing 

the costs to plans that invest in Plan Asset Funds. Faced with potentially prohibitive 

costs or the inability to find suitable service providers in the first place, funds may be 

reluctant -- or even unable -- to take investments from plans, which would greatly limit 

plans’ alternative investments options. The cost to plans of these lost opportunities and 

limited choices could be significant. 

Plan investors will not benefit from these rules if funds are unable to retain 

service providers at a reasonable cost. If service providers involved with the appraisal or 

 

11 We note that this result would be inconsistent with the treatment of fund administrators, prime brokers, 

pricing services, and custodians under other fiduciary regimes. See, e.g., Section 202(a)(11) of the Advisers 

Act, which explicitly excludes custodians from the definition of “adviser.”

12 See page 12 below for a more detailed discussion regarding the potential implications of the proposed 

regulation on dealers who are required to provide marks on derivatives contracts under the Dodd-Frank 

Act.

13 Further, any service providers deemed a fiduciary would need to be bonded, have fiduciary liability 

insurance, and raise their fees in order to cover the cost of potential litigation regarding the values provided 

to Plan Asset Funds.
February 3, 2011

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valuation of a fund’s assets note that there is no available price for an asset, or disclaim a 

price for an asset, it will be far more difficult to strike a net asset value for the fund and 

transact investments and redemptions. There are many examples of such hard-to-value 

assets, including private equity holdings, real estate holdings, and so-called side-pocket 

investments.14 As a result of the increased difficulty in striking a net asset value, 

investors likely would receive less information, less timely information (since it is 

unlikely that funds would go to the expense of hiring fiduciary appraisers for every hard 

to value asset monthly, or even quarterly). Further, because subscriptions and 

redemptions in pooled investment require a determination of net asset value, to the extent 

that net asset values are determined less often, subscription and redemption rights may 

also become less frequent, to the detriment of plan investors.

Other Changes in the Standard

The current regulation requires that, in order for a person providing investment 

advice to be deemed a fiduciary under ERISA, the advice must be provided on a regular 

basis, where there is a mutual agreement, arrangement, or understanding that the advice 

will form a primary basis for the investment decision. It does not cover the selection of 

managers or the appraisal of property. Under current law, individuals are fiduciaries by 

their actions or by properly delegated authority, and not because of mere title, or 

registration under other law. Under current law, individuals know that they are 

fiduciaries and when they are fiduciaries, and they know the identity of the plans relying 

on them. The proposed rule could be interpreted as effectively changing that existing 

standard, which likely will create significant uncertainty for market participants.

In contrast to current law, the DOL’s proposed regulation could impose fiduciary 

status on any person who makes investment recommendations, regardless of whether

those recommendations are individualized, and regardless of whether there is a mutual 

agreement, arrangement, or mutual understanding that the recommendations are 

intended as investment advice tailored to the plan. The language in the proposed 

regulation does not include a requirement that the parties have a mutual agreement or 

understanding regarding the advice being provided. The language in the proposed 

regulation also replaces the standard that the advice be a primary basis on which the 

investment decision will be made, with only the requirement that the plan “may consider” 

the advice. Finally, for persons that are “investment advisers,” as defined in section 

202(a)(11) of the Advisers Act or that are otherwise a fiduciary under ERISA (i.e., a 

person with discretion over the management of plan assets or a person with discretion 

over plan administration), the language does not require that the person provide tailored 

advice to a plan to be a fiduciary. As discussed in detail below, we encourage the DOL 

to modify this new provision by: (i) explicitly reinstating the requirement that the parties 

 

14 For example, a valuation firm may be engaged by a hedge fund manager to fair value assets in a side 

pocket to which a private pension fund investor has exposure. By definition, these investments are hard to 

value and at best, where there is no willing buyer and seller with respect to the investment, any estimate is 

just that: a good faith estimate. If a valuation firm is deemed a fiduciary under the proposed regulation, it 

could be difficult for a fund to find someone willing to provide such an estimate when it may be held liable 

for the estimate.
February 3, 2011

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have a mutual agreement, arrangement, or understanding regarding the nature of the 

advice being provided; (ii) replacing the “may be considered” standard with a 

“significantly influence” standard; and (iii) clarifying the scope of the regulation with 

respect to advice that is not tailored to a plan, so as not to include public communications

made by investment advisers and persons who are otherwise ERISA fiduciaries.

We believe this approach would provide greater certainty to market participants 

as it would establish a clear framework in which service providers and plans can agree on 

the scope of service and the extent to which the plan will rely on the service provider. 

Market participants would be subject to great uncertainty and unknown risk of liability if 

a person can become a fiduciary under ERISA without agreeing to provide tailored 

advice to a plan for its reliance. The uncertainty and potential for a person to 

unknowingly become subject to fiduciary obligations under ERISA is likely to limit the 

investment options for plans as many market participants may simply choose to avoid 

plans (and Plan Asset Funds) rather than potentially being subject to an unknown 

liability. 

 

Mutual Understanding 

The proposed regulation establishes several new tests to determine whether a 

person is a fiduciary to a plan. We have already discussed three of these: persons who 

provide valuations of assets, all investment advisers, and all of a plan’s existing 

fiduciaries. One of the other new tests for defining “fiduciary” eliminates the current

regular basis and mutual understanding requirements, and eliminates the requirement that 

the advice be a primary basis on which the plan will make its investment decision. The 

amended formulation removes certainty and clarity from the definition.

Agreements, arrangements and understandings are by definition mutual -- there 

are two people party to the understanding, agreement or arrangement. The most 

subjective of these three terms – understanding -- is made even more subjective by 

eliminating the modifier “mutual.” We believe the regulations should be based on both 

parties understanding when a person becomes a fiduciary (as under current law). We are 

concerned that eliminating the term “mutual” in this provision creates uncertainty 

whether a plan could elect on its own to make another person a fiduciary. Under these 

circumstances, an unhappy investor could use the definition’s ambiguity to argue that the 

fund’s general partner “advised” it to invest, or a counterparty to a fund trade was a 

fiduciary, and that the trades should be reversed. No service provider will have a clear 

understanding of the plan’s expectations regarding the service provider’s obligations. 

We understand that staff of the DOL considers the elimination of the word 

“mutual” to be merely editorial; however, we believe that there is uncertainty regarding 

whether the amendment could be interpreted as a substantive change. To avoid confusion 

and uncertainty among market participants, we urge the DOL to revise the proposal by 

reinstating the term mutual. 
February 3, 2011

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Advice that “May Be Considered”

Another change to the current rule is that advice need not be a primary basis for a 

plan’s decision making but merely “may be considered.” We respectfully submit that this 

formulation is overly broad because any and all information provided to a plan is 

information that may be considered. As such, this formulation could apply to all 

information conveyed to the plan, regardless of whether it was a recommendation or 

merely factual information and regardless of whether the information was “tailored” to a 

plan or simply descriptive of many plans with certain risk appetites or characteristics. 

The formulation in the proposed regulation would create significant uncertainty and an 

incalculable risk of liability for market participants.15

We note that the preamble to the proposed rule states that the regulation is 

intended to capture persons that significantly influence the decisions of plan fiduciaries 

and have a considerable impact on plan investment. We think that the term “significantly 

influence” would be a more appropriate standard than “may be considered,” particularly 

in light of the DOL’s view expressed in the preamble that this is what the language is 

intended to cover.

16

 We urge the DOL to consider using this language in its test to 

determine when advice should be deemed fiduciary advice.

Tailored Advice

We note that, under the broad language in the proposed regulation, an adviser 

could be deemed a fiduciary of a plan by virtue of information that the adviser provides at 

conferences, meetings open to the public, and research materials made available to the 

public. Under the proposal as it is currently drafted, public recommendations may be 

deemed fiduciary advice, regardless of the forum or the listener base, and in spite of the 

fact that it is not tailored to a particular plan or pursuant to an agreement of the parties. 

The language in the proposed regulation does not even require that the investment adviser 

know the identity of the entities relying on or considering the recommendations. 

As an example of the potential impact of this provision, suppose an adviser issues 

research reports regarding particular markets or types of instruments or makes public 

statements that include recommendations regarding the value of securities. If the adviser 

were deemed a fiduciary to any plan that happened to hear or read the public statements 

by the adviser, then any pooled investment fund managed by the adviser could be off 

limits to every plan that heard or read the recommendations, unless the DOL provided a

prohibited transaction exemption that would allow a plan to invest in a fund managed by 

a fiduciary. Under this scenario, plans could be prohibited from investing in the adviser’s 

funds even if the adviser had no relationship with the plan.

 

15 We respectfully submit that the DOL’s cost analysis does not consider the costs of exemption 

applications or the costs of transaction reversal and excise taxes if a service provider unwittingly becomes a 

fiduciary. Especially in the case of principal transactions, the 15% annual excise tax on the entire principal 

amount involved may be significant.

16 75 FR 65265. 
February 3, 2011

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While the DOL may not have intended this type of far-reaching result, we believe 

that the broad language in the proposed regulation creates uncertainty as to the potential 

scope of recommendations that will be deemed fiduciary advice. Accordingly, we 

encourage the DOL to amend this part of the proposed rule. 

Exceptions

The Selling Exception

The proposed rule provides an exception for persons, or their agents, selling 

securities or other property.

17

 It only applies if the person “selling” can demonstrate that 

the recipient of the advice knows -- or reasonably should know under the circumstances -

- that such person (a) is providing the advice or making the recommendation in its 

capacity as counterparty, agent, or appraiser; (b) has interests that are adverse to the 

interests of the plan or its participants or beneficiaries; and (c) is not undertaking to 

provide impartial investment advice. 

We are concerned that the exception may not adequately cover the marketing 

activities of pooled investment funds, such as hedge funds. We recommend that the DOL 

revise the exception to cover explicitly the selling of services and investment products. It 

should not be limited to counterparties, agents, or appraisers since a fund and its 

investment adviser are not likely to qualify as any of the above. The DOL should also 

make clear that the exception covers the selling of services, regardless of whether the 

client is a “new” client or whether the client is already receiving services from the service 

provider, fiduciary, or otherwise. As part of routine due diligence, plans ask significant,

detailed questions about investment approach, investment options, strategies, and other 

areas when deciding whether to make an investment in a particular fund. Under the 

proposed regulation, any of these answers could be later categorized by an unhappy 

investor as investment advice, even when the plan has its own investment consultant 

acting as a fiduciary that analyzes responses from many different funds. A fund’s 

marketing activities should not create the basis for a fiduciary relationship with a plan 

because such a result would hamper the flow of information that a fund provides when 

potential investors are conducting due diligence. 

Furthermore, the selling exception in the proposed rule requires that the seller 

warn the plan that its interests are adverse. We urge the DOL to revise the proposal to 

delete the term “adverse.” In our view, it should be sufficient if the marketer makes clear 

that it is providing marketing services for the fund, and not impartial investment advice. 

 

17 The exception reads as follows: “For purposes of this paragraph (c), a person shall not be considered to 

be a person described in paragraph (c)(1) of this section with respect to the provision of advice or 

recommendations if, with respect to a person other than a person described in paragraph (c)(1)(ii)(A), such 

person can demonstrate that the recipient of the advice knows or, under the circumstances, reasonably 

should know, that the person is providing the advice or making the recommendation in its capacity as a 

purchaser or seller of a security or other property, or as an agent of, or appraiser for, such a purchaser or 

seller, whose interests are adverse to the interests of the plan or its participants or beneficiaries, and that the 

person is not undertaking to provide impartial investment advice.”
February 3, 2011

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We would have no objection if there were a requirement that the marketer state that it has 

a financial interest in the outcome. 

The exception should also make clear that it covers counterparties (including 

valuation agents who provide valuations for both parties and not just the dealer) in swaps, 

which are bilateral agreements and may not be securities or property.18 The selling 

exception should also cover a variety of lending and credit arrangements, which are 

extensively used by pooled investment funds.19 Without appropriate exceptions, fund 

access to these products could be limited, as prime brokers, lenders, and borrowers may 

determine that the exception is not sufficiently broad. Finally, it should cover contractual 

rights and the exercise of those rights, including on default. To the extent that a bilateral 

agreement allows a counterparty to require more collateral or a counterparty or issuer to 

exercise certain rights if a particular condition is met, the exercise of rights could be 

deemed fiduciary recommendations. Fund counterparties, as well as those from whom 

funds buy structured products may refuse to deal with any Plan Asset Fund because of 

the risk that the counterparty could be deemed a fiduciary. That would be a harmful 

result for fund investors and potentially limit the investment options for plans.20 

The Dodd-Frank Act

In addition to broadening and clarifying the selling exception, we urge the DOL to 

create an exception for any information required to be provided to a plan or its 

independent fiduciary in connection with the offering and sale of swaps under section 

731 of the Dodd-Frank Act and related SEC and CFTC rules. Without such an exception, 

the disclosure that a swap dealer makes to a Plan Asset Fund may cause the dealer to be a 

fiduciary, and invalidate the swap transaction as a prohibited transaction under section 

406(a)(1)(A) and section 406(b) of ERISA. 21 Without a clear exception, the DOL’s 

proposed regulation could eliminate plans and many pooled investment funds from the 

swaps market, a consequence that Congress clearly intended to avoid in the Dodd-Frank 

Act.22 Congress also clearly intended that a swap counterparty would not be deemed an 

adviser or fiduciary if the plan has its own investment professional. Despite that clear 

distinction, the proposed rule could eliminate swaps from a fund’s investment choices if 

 

18 We note that section 731(h) of the Dodd-Frank Act requires the SEC and the CFTC to impose business 

conduct standards on major swap participants and swap dealers, which may address the DOL’s concerns 

about protecting plan investors involved in derivatives markets.

19 Examples of such arrangements include short sales, options, structured products, futures, settlement 

accommodations and overdraft coverage.

20 We note a somewhat curious potential consequence of this rule. The disincentives in this proposal -- the 

lack of certainty, the narrowness of the selling exception, the “inadvertent fiduciary” status which could 

limit fund access to dealers and products -- could have the result of fewer funds that will take plan money 

after the fund reaches the 25% limit and fewer non-plan investors willing to invest in a fund that is subject 

to ERISA. 

21 It is unclear whether the SEC and CFTC rules will look through a pooled vehicle, under the special entity 

rules. 

22 We also respectfully request the DOL’s confirmation that the requirement in the Dodd-Frank Act that a 

counterparty make a determination that a plan’s independent fiduciary is or is not experienced and qualified 

will not make it a fiduciary under the proposed regulation and will not constitute the power to appoint 

under Part I(a) of PTE 84-14. 
February 3, 2011

Page 13 of 14

the dealer becomes a fiduciary to a Plan Asset Fund solely by providing information

required by the Dodd-Frank Act.23

The Proposed Regulation’s Definition of Fees

The proposed rule defines fee for the first time in language that is not entirely 

clear. The proposed definition of fees in the proposed regulation includes the following 

language: “It includes fees and commissions based on multiple transactions involving 

different parties.” This sentence is not explained in the preamble, and we are concerned 

that the language could be interpreted to require aggregating many unrelated transactions 

resulting in fiduciary status for unwitting service providers. It is critical for market 

participants to fully understand the scope of new or changed requirements in regulatory 

proposals. Accordingly, we encourage the DOL to provide some examples of the fee 

arrangements that the proposal is addressing and allow a further period for public review 

of and comment on those examples.

Summary of Adverse Effect on Plans that Invest in Private Pooled Investment 

Funds

As described above, without significant changes to or clarification of certain 

provisions in the proposed regulation, private pooled investment funds with plan 

investors could be subject to significant restrictions, many of which we believe are 

unintended consequences of the proposed regulation. General partners, managing 

members, advisers, and other service providers to Non-Plan Asset Funds could be 

deemed fiduciaries under the proposed regulation, despite a clear Congressional mandate 

that such entities not be deemed fiduciaries under ERISA.

Plan Asset Funds may not be able to engage in swaps, solely because the duties 

imposed by the Dodd-Frank Act could make dealers fiduciaries under the DOL’s 

proposed regulation. 24 The trading partners available to Plan Asset Funds could be 

significantly restricted because of uncertainty whether research or market color provided 

by an adviser or an affiliate of the adviser is deemed to be fiduciary advice.

Plans may be limited in their ability to invest in hedge funds, private equity funds,

and real estate funds as general partners and advisers seek to avoid fiduciary status and 

appraisers may refuse to provide services to funds if plans are investors in those funds. 

Normal marketing activities to plans could be hampered by advisers seeking to avoid 

fiduciary status because of their selling activities. 

 

23

 We note that the same issue arises with structured notes or other investment products where the issuer is 

required to provide a daily value and take action when a particular value is reached and encourage the DOL 

to consider an appropriate exception for these transactions. 

24 Prime brokers also may refuse to provide services for funds, forcing these accounts off of efficient 

platforms for trading, cash management, lending and other services. Because all of these services require 

that the prime broker not be a fiduciary, prime brokers will weigh carefully whether the proposed rule will 

cause their services to be deemed fiduciary services.
February 3, 2011

Page 14 of 14

Conclusion

On behalf of its members, MFA respectfully urges the DOL to reconsider its 

proposed changes to the definition of fiduciary regulation, reassess its economic analysis, 

and repropose the regulation or clarify the scope of the regulation, particularly with 

respect to pooled investment funds and the general partners, managing members, 

advisers, and other service providers to those funds. We respectfully request an 

opportunity to testify at the DOL’s hearing on March 1, 2011, and request that the public 

record remain open for comments on the regulation until at least thirty days after that 

hearing.

If you have any questions regarding any of these comments, or if we can provide 

further information with respect to these or other regulatory issues, please do not hesitate 

to contact Stuart J. Kaswell or me at (202) 730-2600.

Respectfully submitted,

/s/ Richard H. Baker

Richard H. Baker

President and CEO