In addition, the Department added new conditions into the proposed regulation,
which further narrow the relief provided. Most troublesome in our view is that the
Department added a new condition under the computer model approach, which requires
any computer model to avoid investment recommendations that distinguish among
investment options within a single asset class "on the basis of a factor that cannot
confidently be expected to persist in the future." 75 Fed. Reg. at 9366. This condition
essentially eliminates historical performance as an appropriate criterion in recommending
investment funds within the computer model context, which we do not believe comports
with the operation of virtually all computer models currently offered — whether as part of
an investment advice fiduciary program or as part of a “participant education” program
explicitly endorsed by the Department in Interpretative Bulletin 96-1.

c PTE 84-24 (Affiliated Mutual Funds)

PTE 84-24 provides relief from the prohibition of ERISA section 406(b) for the
sale of shares of a registered investment company (i.¢., a mutual fund) if certain
conditions are met. Specifically, PTE 84-24 exempts (i) the "effecting" of a plan's
purchase of mutual fund shares by the mutual fund principal underwriter or its affiliates,
and (ii) the receipt of sales commissions by the principal underwriter or its affiliates in
connection with sales of shares of the mutual fund. Originally, the Department had
indicated that PTE 84-24 is intended to cover investment recommendations and advice.
47 Fed. Reg. at 14810 (Preamble to PTE 84-24); 42 Fed. Reg. at 32395, 32396 n. 2
(Preamble to PTE 77-9); Labor Department Info. Ltr. to W. Chadwick (Aug. 8, 1980).
However, the Department has limited the scope of PTE 84-24 in important ways.

Affiliated Funds Only: The Department has limited the scope of PTE 84-24 to
affiliated mutual funds only. As such, it cannot be relied on for the purchase and sale of
unaffiliated mutual funds, which is clearly the more common type of offering for both
ERISA plans and IRAs. Labor Department Adv. Op. 80-30A (May 21, 1980).

Fees Covered: Clearly, the exemption covers the receipt of sales commissions.
However, the commissions must be paid to the “principal underwriter.” While the
exemption defines an underwriter to include its affiliates, the Department has raised
questions as to whether a broker's receipt of a commission is covered (rather than the
underwriter's), even where the broker is an affiliate of the principal underwriter.

In addition to commissions, the terms of the exemption should provide relief for
the receipt of various other mutual fund fees, such as investment advisory fees,
shareholder servicing, sub-transfer agent, and revenue sharing payments, because the
exemption provides broad section ERISA 406(b) relief for "effecting" mutual fund
transactions, in addition to providing relief for the receipt of a sales commission.

However, the Department, in a footnote to an advisory opinion on a separate issue
under PTE 84-24, made the following comment that casts doubt on the applicability of
PTE 84-24 with respect to advisory programs:

It is the Department's view that PTE 84-24 would not provide relief for any
prohibited transaction that may arise in connection with any fees or other


programs to comply with these requirements going forward, in the absence of a clear
exemptive path from the Department, we believe that the most fruitful approach is to not
follow the exemptive guidance (especially in the retail/IRA context) but to the advisory
opinions offered by the Department — namely Frost, 7 SunAmerica’ and/or Country Trust’.

Under this approach, as the Department knows, the most logical way to comply
with these issues for retail plans and IRAs is as follows:

e Structure all of the accounts as subject to the Investment Advisers Act (including
anew signed advisory contract, as generally required under such Act), with a
single “wrap” fee covering both advice and transactional charges, which will
likely be a higher direct compensation charge than similarly-situated brokerage
clients currently hold under the existing legal framework (both for the new
advisory services offered as well as the inability for such firms to collect and hold
“indirect” compensation from third parties);

© Prevent all such accounts from trading principally with Morgan Stanley or its
affiliates, given the lack of guidance from the Department on how principal
transactions may be affected in an ERISA fiduciary account (and to the extent
such investments are purchased from a third party broker, such broker would in
fact need to be compensated, probably through an additional charge to the
account); and

e Limit the product offerings that may be held in these accounts to, primarily, open
end mutual funds — limited to no “proprietary” products or other products (fixed
income, structured notes, limited partnerships, ETFs, etc.) unless the precise
levels of compensation received by the broker-dealer in connection with those
products can either be offset against the wrap fee or declined by the broker.

We believe that the advisory account structure, while providing clients with new and
additional services, all result in enhanced client costs, and more limited client product
choices.

Finally, we understand that Davis and Harman LLP, on our behalf and on behalf
of a group of similarly-situated financial services firms, has engaged Oliver Wyman to
analyze the financial impact on IRA investors of the Proposed Regulation, in response to
the Department’s request for such impact analysis. We hope that the contents of this
study will be useful for the Department to consider in its review of the Proposed
Regulation.

3. Additional Comments Regarding Plan Distributions and Rollovers

” Labor Department Advisory Opinion 97-15 (May 22, 1997).
8 | abor Department Advisory Opinion 2001-09A (December 14, 2001)

° Labor Department Advisory Opinion 2005-10A (May 11, 2005).

10


of PTE 75-1 and "repositioned" the exemption for mutual funds into its own free-
standing exemption. See PTE 75-1, § II(2).

However, a number of uncertainties have surrounded the application of PTE 75-1
with respect to mutual fund transactions that the Department has yet to address.

The Department Revision: When the Department proposed a revision to PTE 75-
1's mutual fund exemption in 2004, it sought "public comments regarding the current
utility of the [mutual fund] exemption in the new paragraph (2)." 69 Fed. Reg. at 23218
(Apr. 28, 2004). The Department's comments suggested that the Department did not
understand the scope of the exemption and was considering restricting its application,
which was borne out at the time by informal comments made by Department
representatives. Moreover, when issuing its final revisions to PTE 75-1, the Department
indicated that the scope of the mutual fund exemption itself is still under review,
implying that it may not, in fact, continue to be available. See 71 Fed. Reg. at 5885 (Feb.
3, 2006).

Principal vs. Agency Transaction: Part II of PTE 75-1 is titled "Principal
Transactions." However, mutual fund sales are not effected as principal transactions (i.e.,
shares are never owned by the broker who sells them to plans). Although still somewhat
unclear, the uncertainty associated with this issue was, in fact, improved when the
Department revised the exemption in 2006 to make clear that the mutual fund exemption
was separate from the exemption related to the purchase and sale of securities.

Fees Covered: Part II of PTE 75-1 covers the receipt of sales commissions, as
well as the actual purchase transaction. See 41 Fed. Reg. 56760, 56761 (Dec. 29, 1976)
(preamble to proposed PTE 77-9). The Department has characterized front-end sales
loads paid by nonproprietary funds as commissions that “may” be covered by PTE 75-1.
Labor Department Adv. Op. 80-30A n.5 (May 21, 1980). However, there is uncertainty
over the other types of fee payments that could be covered, such as shareholder servicing,
sub-transfer agent, and revenue sharing fees. This uncertainty has only been added to by
the Department's opinion (Labor Department Adv. Op. 2000-15) calling into question the
scope of mutual fund fees covered by PTE 84-24.

e. PTE 86-128

Section II(a) of PTE 86-128 provides an exemption from ERISA section 406(b)
for a "plan fiduciary's using its authority to cause a plan to pay a fee for effecting or
executing securities transactions to that person as agent for the plan, but only to the extent
that such transactions are not excessive, under the circumstances, in either amount or
frequency." 51 Fed. Reg. 41686, 41695 (Nov. 18, 1986). This exemption clearly covers
the payment of traditional commissions to brokers that are plan fiduciaries in connection
with securities transaction where the broker acts as agent for the plan. The exemption
does not cover principal transactions.

In one advisory opinion, the Department indicated that PTE 86-128 may provide
relief for a plan fiduciary's receipt of commissions in connection with sales of shares of
mutual funds. Labor Department Adv. Op. 80-30A n.5 (referring to PTE 79-1, which
was amended and restated as PTE 86-128). However, there is significant uncertainty


compensation separate and apart from the commission paid to a principal
underwriter upon a plan's purchase of recommended securities. Thus, PTE 84-24
does not exempt any prohibited transaction arising out of transactions
involving fees paid to a fiduciary service provider with respect to an advice
program which provides specific/individualized asset allocation

recommendations to participants based on their responses to questionnaires.
[Emphasis added.]

Labor Department Adv. Op. 2000-15A n.4 (Nov. 15, 2000). This footnote on the scope
of PTE 84-24 has called into question whether PTE 84-24 provides any meaningful relief
for affiliated mutual fund transactions. The most literal interpretation of the footnote
would suggest that PTE 84-24 only clearly provides exemptive relief for the receipt of
"commissions" (including sales loads and 12b-1 fees) by principal underwriters, but not
by brokers if they are affiliated with such underwriters. Further, under this interpretation,
no other fees paid by mutual funds would be covered by PTE 84-24, including
management fees or fees paid for administrative services that cannot be characterized as a
commission. Additionally, the exemption would not cover any investment advisory fees
paid by ERISA plans, including asset-based fees, wrap fees or flat fees.

Individual Exemption History: The Department has issued two individual
exemptions that are near clones of PTE 84-24 to Merrill Lynch and Aetna. These
individual exemptions allowed Merrill Lynch and Aetna to offer collective trusts to
ERISA plans and still have relief that covers the sale of affiliated mutual funds to the
same plans. PTE 99-36, 64 Fed. Reg. 52546 (Sept. 29, 1999); PTE 91-67, 56 Fed. Reg.
57680 (Nov. 13, 1991).

After issuing the Merrill Lynch and Aetna exemptions, the Department was asked
to issue similar individual exemptions for other financial institutions. The Department
would not issue the exemptions because of a concern that PTE 84-24 did not cover
formal advisory programs. Instead, it only covered "accidental" or "incidental"
investment advice.

Thus, it is difficult to understand how PTE 84-24, or any of the individual
exemptions passed on by the Department, offers meaningful assurances to brokers trying
to comply with a fiduciary standard given the Department’s prior approaches.

d. PTE 75-1 (Principal Transactions and Unaffiliated Mutual Funds)

Part II of PTE 75-1 exempts purchases and sales of securities in "principal
transactions" between a registered broker-dealer and a plan. Again, the Department has
only extended the general relief afforded under Part II has only extended to the party in
interest prohibitions under ERISA section 406(a) by the Department. As such, there is no
relief for securities transactions where a broker acts as both a fiduciary to the investing
plan and acts as principal in the transaction.

Since its issuance in 1975, Section II(d) of PTE 75-1 provided added relief from
ERISA section 406(b) with respect to "the purchase and sale by the plan of securities
issued by an open-end investment company." In 2006, the Department revised section II


data was incomplete with respect to this analysis. Accordingly, we thought it might be
helpful for the Department to have some additional information as to why we believe the
costs of implementation as well as the client costs — have been seriously understated.

1. Vendor Costs Substantially Understated Based On Prior Regulatory
Estimates

As described in our testimony at the hearing, we would offer our experience to
date in complying with the Department’s various disclosure proposals — notably the Form
5500 disclosure requirements and the upcoming ERISA section 408(b)(2) requirements —
as illustrative of the typical understatement of costs added to the vendors.

For the Form 5500 disclosure effort, we would note that the cost estimates
proposed by the Department were between $14.8 -$15.4 million while crediting benefit
savings to be approximately $98 million.’ With approximately a 2% market share in the
private defined contribution and defined benefit markets, Morgan Stanley alone has
spent, to date, in excess of $17 million dollars of internal and external costs by ourselves
in complying with these particular requirements. If you extrapolate our actual costs to
the industry, it is clear that even under a conservative reading, the costs of
implementation far exceed the benefits.

For the new ERISA section 408(b)(2) fee disclosure requirements, the
construction of various disclosure reports and website offerings to make available direct
and indirect compensation amounts was estimated industry-wide at $54.3-58.7 million.®
Regrettably, we believe our own expenditures, not yet complete, will be a substantial
fraction of what the Department estimates is the total cost. Further exacerbating the
issue, a significant portion of this work may turn out to have been “throw away” work as
the imposition broader “fiduciary” status under the Proposed Regulation will cause
certain exemptions to be unavailable and thus redefine what narrower subset of
compensation types will be permissible going forward.

Based on our prior experience, we believe that the Department's cost estimates
substantially understate the implementation costs of the new fiduciary rules.

2. Additional Client Costs

More importantly, we are sure, from the Department’s perspective, is a clear
understanding of the costs that this change are likely to imposed on ERISA plans and
IRA beneficial owners.

As illustrated above, we believe that to continue offering products and services as
a broker to ERISA-covered defined contribution plans and IRAs, we cannot rely on the
patchwork of incomplete exemptive relief. Thus, in order to appropriate structure

5 72 Fed. Reg. 64710, 64716 (November 16, 2007).
575 Fed. Reg. 41600, 41602 (July 16, 2010).


1221 Avenue of the Americas
New York, NY 10020

Morgan Stanley

April 12, 2011

The Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Proposed Participant Disclosure Regulation

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, N.W.

Washington, DC 20210

VIA Mail and Electronic Delivery (http://regulations.gov)

Re: Proposed Regulation Amending the Definition of Fiduciary —
Additional Comments

Ladies and Gentlemen:

On behalf of Morgan Stanley!, Morgan Stanley & Co. Incorporated”and Morgan
Stanley Smith Barney LLC? (collectively, “Morgan Stanley”), this letter is submitted in

" Morgan Stanley: (NYSE: MS). Morgan Stanley (NYSE: MS) is a global financial services firm that, through its
subsidiaries and affiliates, provides its products and services to a large and diversified group of clients and customers,
including corporations, governments, financial institutions and individuals. Morgan Stanley was originally incorporated
under the laws of the State of Delaware in 1981, and its predecessor companies date back to 1924. Morgan Stanley is a
financial holding company regulated by the Board of Governors of the Federal Reserve System (the “Fed”) under the
Bank Holding Company Act of 1956, as amended (the “BHC Act”). Morgan Stanley conducts its business from its
headquarters in and around New York City, its regional offices and branches throughout the U.S. and its principal
offices in London, Tokyo, Hong Kong and other world financial centers. At December 31, 2009, Morgan Stanley had
61,388 employees worldwide (including employees of Morgan Stanley & Co., Incorporated, and Morgan Stanley Smith
Bamey LLC, which are described in more detail below).

2 Morgan Stanley & Co. Incorporated: Morgan Stanley & Co. Incorporated (“MS&Co”), together with its wholly

owned subsidiaries, provides a wide variety of products and services to a large and diversified group of clients and
customers, including corporations, governments, financial institutions and individuals. Its businesses include securities
underwriting and distribution; financial advisory services, including advice on mergers and acquisitions, restructurings,
real estate and project finance; sales, trading, financing and market-making activities in equity securities and related
products and fixed income securitics and related products including foreign exchange and investment activities.
MS&Co provides brokerage and investment advisory services covering various investment alternatives; financial and
wealth planning services; annuity and insurance products; credit and other lending products; cash management; and
retirement plan services. MS&Co and certain of its subsidiaries are registered with the SEC as broker-dealers, and is a
member of FINRA and the NYSE. MS&Co is also registered as a futures commission merchant with the CFTC, and as
an investment advisor with the SEC. MS&Co is a wholly-owned subsidiary of Morgan Stanley.


approach — that of discouraging discussions about IRAs — is antithetical to Congressional
efforts to facilitate retirement plan consolidations through rollovers.

That does not mean, however, that participants of 401(k) plans will not, in fact,
take distributions when changing jobs — not merely due to their own decision, but also
through the ability of employers to force distributions of small account balances. In our
view, what will happen is that clients, especially with small account balances, will simply
take the distributions and spend them, not save them. This result will, we believe, be
supported in the Oliver Wyman study previously noted in this letter.

Conclusion

Asa final point for the Department’s consideration, and in line with our prior
expressed views, we believe that any issuance of the regulation in final form needs to be
accompanied by contemporaneous, and comprehensive, exemptive relief for the various
types of transactions cited by us and other commentators that goes into effect at the same
time as the new rules.

We are happy to assist the Department in any way that we can in addressing its
concerns while preventing inadvertent, and unanticipated, harm to plan and IRA
participants.

ct! submitted,

William E. Ryan III

Executive Director —
Legal and Compliance (ERISA Law)
Morgan Stanley

12


As we noted in our original comment letter, Morgan Stanley believes that the
guidance issued under Labor Department Advisory Opinion 2005-23A (noting that
rollover assistance and information should not be deemed to be “fiduciary” under ERISA
or the prohibited transaction provisions of the Code is appropriate, and should not be
reversed by the Department. We think this approach continues to be appropriate and
consistent with the nature of plan to IRA (and IRA-to-IRA) rollover decisions by
individuals.

a. Rollover Decisions Are Made By Clients As A Result of Multiple Factors, Not
Merely Investment Selection: In our experience, the decision that a client makes to roll
over his or her ERISA-covered plan account to an IRA is made is much more than just
technically buying or selling a investment in the plan, such as:

© Desire to Consolidate Retirement Assets As A Matter of Administrative
Convenience: As the Department is aware, the average American worker
will be employed by multiple employers during his or her working career,
with the possibility of participating in multiple defined contribution plans
or arrangements sponsored by each employer. Rollovers allow clients to
simplify their recordkeeping — in effect, to pay better attention to their
retirement futures by providing the opportunity to monitor and watch
retirement assets.

e Rollovers Help Mitigate The Issue of “Abandoned Plans”: As the
Department is no doubt well aware through its regional offices, small plan
participants are often at a disadvantage in tracking down retirement assets
held at plans sponsored by prior employers, let alone having any influence
at all upon expanding or changing investment menus or options. This is
even more the case where such employers are either in bankruptcy or are
no longer in business. Plan rollovers help to mitigate these issues.

e Rollovers Allow Plan Participants Access to Features That May Not Be
Offered Through A Particular Plan: These features may include the
ability of a plan participant to convert his or her pre-tax balances into Roth
balances (a valuable feature, but not one that is required to be made
available in plans), as well as take advantage of various IRA distribution
options.

Clearly, IRAs offer greater breadth of investment choices than the standard profit-sharing
plan accounts, but these are not the only reasons that individuals seek information or help
in determining whether or not to take a rollover from a particular plan account.

b. We Believe That By Making All Rollover Conversations Fiduciary, the
Department Will Discourage the Provision of Information, Rather than Encourage It, And
Inadvertently Discourage Retirement Savings: To the extent that conversations
regarding rollovers become fiduciary for providers of IRAs, without an exemption
permitting such conversations to occur without the punitive regime of the Code section
4975 excise taxes, we believe it is logical to view that fewer, rather than more,
discussions will occur about the relative merits of rollovers. We would note that this

11


about the scope of relief that PTE 86-128 affords to the different types of fees paid in
connection with mutual fund transactions.

Fees Covered: It is unclear whether PTE 86-128 covers a fiduciary's receipt of
fees paid from the mutual fund or its agent rather than directly from the plan. This is
because the exemption covers a plan fiduciary who is “using its authority to cause a plan
to pay afee...." PTE 86-128, § II(a) (emphasis added). Indeed, in a case brought by
the Department, the court in Chao v. Linder, 421 F. Supp. 2d 1129 (N.D. Ill. 2006), expressly
rejected arguments that PTE 86-128 could cover a fiduciary's receipt of fees from third
parties in connection with a plan's investment transactions. At issue were fees and
commissions paid by insurance companies to a plan fiduciary in connection with the
plan's investments in variable group annuity contracts. The court held that fees covered
by PTE 86-128 must be paid by the plan itself, stating that —

[iJn looking at the plain language of the exemption it is clear that a
covered transaction is one in which a plan itself pays the fees of the
fiduciary. Defendants neither pointed to nor could we find any indication
in the exemption itself, or in the explanation and history of the exemption,
that PTE 86-128 was intended to cover commissions paid by a third party
to the fiduciary.

Id. at 1138.

Discretionary v. Non-Discretionary Fiduciary Programs: As a final point, we
would also note that Departmental representatives, as recently as last week, could not
confirm the applicability of PTE 86-128 in a non-discretionary advisory context. We
note this only to further observe that it is difficult to structure an approach using the
exemption if its basic availability is called into question.

3. Conclusion

Our comments are not intended to be exhaustive about the types of products, or
exemptive relief, which will be necessary for plans (and IRAs) to continue to invest
through brokers for a wide variety of products. Other commentators, we are sure, will
illustrate those points, but we would be happy to discuss them further with the
Department.

Rather, it illustrates what we believe are the issues that the Department needs to
address before we or other vendors can conclude that even ordinary, mutual fund-based
transactions, can operate under the existing prohibited transaction guidance where the
broker or custodian is held to a fiduciary standard under ERISA. We would submit that
the guidance provided by the Department over the years, as described above, contradicts
the assertions made by Department representatives at the hearing.

Additional Vendor and Client Costs to IRAs and Small Plans

A second point discussed at the hearing was the economic impact of the Proposed
Regulation on both vendors and the plan clients, and the Department acknowledge that its


the availability of exemptive relief for such breaches. With respect to mutual funds, the
most common investment option for both ERISA defined contribution plans and IRAs,
the Department has consistently cut back on the coverage that these exemptions provide —
as to the types of products, the situations where the relief is provided (often, where the
fiduciary status is “inadvertent,” not intentional, and the types of fees covered.

a. Section 408(b)(2)

ERISA section 408(b)(2) provides a statutory exemption for the provision of
services. The plain language of ERISA section 408(b)(2) indicates it provides relief from
both ERISA section 406(a) and 406(b). Therefore, where a broker provides services to
ERISA plans (i.e., acts as agent rather than principal in effective securities transactions)
and when it transacts principally with an ERISA account as a fiduciary, on its face
section 408(b)(2) would appear to provide relief. However, the Department has issued
regulations and other guidance that limits ERISA section 408(b)(2) to situations that
would otherwise give rise to a prohibited transaction only under ERISA section 406(a)’s
party in interest rules. 29 C.F.R. § 2550.408b-2(a) (acts described in section 406(b) are
"separate transactions" not exempt by section 408(b)(2)). The courts are divided on the
issue, though most side with the Department's view in deference to the issuance of the
regulations. Harley v. Minnesota Min. and Mfg. Co., 284 F.3d 901, 908-9 a Cir. 2002)
(covers section 406(b)); Patelco Credit Union v. Sahni, 262 F.3d 897, 911 (9" Cir. 2001)
(collecting cases).

b. Section 408(b)(14)

A more recent example is provided by the recent ERISA section 408(b)(14)
regulations. ERISA section 408(b)(14), enacted by Congress as part of the Pension
Protection Act of 2006, provides a statutory exemption for investment advice programs,
which broadly covers securities transactions (including mutual funds) and direct and
indirect compensation. Section 408(g) establishes detailed conditions with respect to the
exemption.

The Department's original “final” rule under ERISA section 408(b)(14) construed
the exemption to provide meaningful relief with respect to advice given with respect to
IRAs. See 74 Fed. Reg. 3822 (Jan. 21, 2009). Specifically, the final rule contained a
class exemption permitting "off model" advice, which allowed an advisor to continue to
be responsive to the participant after the provision of computer model-generated advice
or after the provision of investment education materials (where computer model advice
was not feasible).

Proposed Revisions: Since issuing its final rule, the Department issued a series of
delays in its effective date and ultimately withdrew the regulation. The Department has
since issued a revision to the regulations in proposed form. 75 Fed. Reg. 9360 (March 2,
2010). Most notably, the Department removed from the proposal the class exemption
contained in the final rule, notwithstanding the fact that it had initially found the class
exemption met all the criteria of ERISA section 408(a) (administratively feasible, in the
interest of participants, and protective of participants).


Department has proposed. Specifically, the Department suggested that PTE 84-24, PTE
86-128 and PTE 75-1 provide ready relief from ERISA's conflict of interest provisions in
the event that brokers become ERISA fiduciaries due to providing advice to ERISA plans
and IRAs.

We are heartened that the Department feels that the exemptive relief provided is
broad, but we are concerned that this assertion flies in the face of the language of the
exemptions and almost 30 years of interpretative guidance by the Department (formal and
informal). In our view, the Department has sought to interpret broadly ERISA's conflict
of interest provisions. At the same time, the Department has sought to construe narrowly
the potential statutory and class exemptions that might be available in the event a
fiduciary faces a conflict of interest, and has further limited the issuance of individual
exemptions that provide relief from the conflict of interest rules. In order to be useful for
the Department’s review of this subject, we will focus below on common issues arising in
connection with the investment in mutual funds by ERISA-covered defined contribution
plans and IRAs under those exemptions.

i Broad Interpretation of Conflicts of Interest Rule under Section 406(b)

The Department’s regulations indicate that a fiduciary violates the provisions
under ERISA section 406(b) whenever the fiduciary uses its authority, control or
responsibility that makes the person a fiduciary to "cause a plan to pay an additional fee
to such fiduciary." 29 C.F.R. § 2550.408b-2(e). In our experience, and as borne out by
the Department’s litigation positions over the years, the Department generally views the
prohibition of ERISA section 406(b) as absolute, meaning that any ability to affect one’s
own compensation per se violates the law, regardless of whether the transaction is in the
interest of the ERISA plan. The court authority is mixed. Compare, e.g., Leigh v. Engle,
727 F.2d 113 (7" Cir. 1984) (per se) with Bidwell v. Garvey, 943 F.2d 498 (4 Cir.
1991).

Further, the Department has given specific guidance that a fiduciary providing
investment advice with respect to the investment of plan assets would violate ERISA
section 406(b) because the amounts that may be paid to the fiduciary or its affiliates may
vary. See Labor Adv. Op. 2001-09A (Dec. 14, 2001). We are concerned that the
Department’s expansive view of the fiduciary conflicts rule should guide how any service
provider should view the availability of exemptive relief for potential fiduciary self-
dealing transactions. We believe this is only prudent and that it is appropriate to view
this both from an interpretative, as well as a litigation perspective, given that the
Department noted that one of the primary reasons articulated for the re-proposal of the
fiduciary “investment advice” definition is its ability to bring successful fiduciary breach
cases before the courts involving ERISA-covered plans.

2. Narrow Interpretation of Statutory and Class Exemptions

In reviewing how the Department has chosen to interpret the various statutory and
class exemptions, we believe that the record reflects that the Department’s perspective on
the importance of broadly interpreting any potential fiduciary breach colors its views on


response to the U.S. Department of Labor’s (“Labor” or the “Department”) request for
additional comments to the proposed fiduciary regulation published on October 22, 2010
(the “Proposed Regulation”). At the March 1-2 hearings on the Proposed Regulation,
the Department asked for any supplemental comments on the Proposed Regulations to be
filed with the Department by April 12,2011. We appreciate the opportunity afforded by
the Department to add to the record with respect to this important initiative.

Our comments focus on the following areas of concern. The first, raised by
representatives of the Department at the hearing, is the assertion that, even if brokers
were deemed to be “fiduciaries” through the provision of advice, virtually all of the
transactions currently engaged in by plans covered by the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”) and IRAs subject to the requirements of
Internal Revenue Code section 4975 (the “Code”), are covered by existing prohibited
transaction exemptions (“PTEs”). The second is that, notwithstanding the Department’s
lack of information with respect to the true costs to plans and IRA owners of the
Proposed Regulation, the Department has concluded that the Proposed Regulation is
nonetheless beneficial. Third, we would like to expand on our views with respect to the
Department’s request on the advisability of revising its view, expressed in Advisory
Opinion 2005-23A, that rollover conversations are not “fiduciary” for purpose of ERISA
and the Code.

We believe the Department should address all of these areas (as well as the
numerous comments raised in the record), before making any final determination on the
Proposed Regulation.

Availability of Prohibited Transaction Exemptive Relief For Fiduciary Brokerage
Transactions

At the hearings, various Department officials suggested that securities brokers
could rely on a series of ERISA class exemptions to mitigate the risks of becoming
ERISA fiduciaries under the expanded definition of investment advice that the

J Morgan Stanley Smith Barney LLC: Morgan Stanley Smith Barney LLC (“MSSB”) is a wholly-owed subsidiary of
Morgan Stanley Smith Barney Holdings LLC (“Holdings”), which is 51% owned indirectly by Morgan Stanley and
49% by Citigroup Inc. (NYSE:C). MSSB and its subsidiaries offer a wide variety of financial products and provide
financial services to a large and diversified group of clients, financial institutions and individuals. MSSB’s businesses
include financial advisory services, sales and trading in fixed income securities and related products, including foreign
exchange and investment activities and new issue distribution of fixed income, equity and packaged products. MSSB
provides clients with a comprchensive array of financial solutions, including MSSB products and services, and
products and services from third party providers, such as insurance companies and mutual fund families. MSSB offers
brokerage and investment advisory services covering various investment alternatives; financial and wealth planning
services; annuity and insurance products; cash management; and retirement plan services. MSSB is a leader in wealth
management with over 130 years of experience consisting of over 17,300 financial advisors and 822 brokerage
locations around the U.S. MSSB is a broker-dealer and investment advisor registered with the SEC and a member of
FINRA and the NYSE, The MSSB combined businesses operate on a worldwide basis as “Morgan Stanley Smith
Barney.”

* Definition of the Term “Fiduciary,” 75 Fed. Reg, 65263 (Oct. 22, 2010) (the “Proposed Regulation”),