Washington | New York 

1101 New York Avenue, 8th Floor | Washington, DC 20005-4269 | P: 202.962.7300 | F: 202.962.7305 

www.sifma.org | www.investedinamerica.org 

February 3, 2011 

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: 

 The Securities Industry and Financial Markets Association (“SIFMA”) is pleased to provide 

comments regarding the Department of Labor’s (“Department”) proposed regulation under the Employee 

Retirement Income Security Act of 1974, as amended (“ERISA”) that will redefine the term “fiduciary” 

under section 3(21) of ERISA and section 4975(e) of the Internal Revenue Code of 1986, as amended (the

“Code”). We appreciate the opportunity to comment and hope that our comments are helpful to the 

Department as it assesses the impact of the proposal on plans and their participants. We respectfully

request an opportunity to testify at the Department’s March 1-2, 2011 hearing. 

SIFMA believes that the regulation, as proposed, will have unintended consequences. These 

include: 

• The ability of millions of Americans to save for retirement will be adversely impacted. 

Financial institutions will not be able to deliver critical investment tools, information and 

services, or will only be willing to do so at an added cost to IRA account holders and 

retirement plan participants. With the number of self-directed plans and IRAs increasing, it 

is more critical than ever that individuals be provided with low cost tools for retirement 

planning. 

• Costs exceed benefits. We believe that the reasons given by the Department for proposing 

the regulatory change pale when compared to the costs of the proposal. 

• More limited choices. The proposed regulation will limit access to markets, investment 

products and service providers. Limited availability and decreased competition will result 

in higher costs and spreads and adversely impact market efficiency. Service providers and 

counterparties that choose to continue to provide services to, and trade with, plans and 

IRAs will incur a multitude of new costs, much of which will be passed on to clients. 
 2

 Costly litigation resulting from an ambiguous rule and all of the costs of amending client 

agreements, modifying model forms, training of personnel, additional legal and compliance 

resources, and fiduciary insurance will further add costs to plans and IRAs. 

• Investment options will be curtailed. Plans will be prohibited from engaging in swaps, 

restricted in their use of custody, lending, cash management, and futures strategies, and 

limited in their access to alternatives. 

• Higher costs for participant investment education. Under the proposed regulation, the risk 

of failing to meet the requirements of the participant education bulletin has enormous 

consequences, because a small discrepancy will almost certainly cause the service provider 

to be treated as a fiduciary under the “may consider” test. 

• Creates significant uncertainty. The proposed regulation replaces the clarity of the current 

regulation with vague and ambiguous definitions which do not permit service providers to 

know whether, in hindsight, they will be considered fiduciaries and who will be claiming to 

have “considered” their advice. The proposed regulation will make it very difficult to 

determine whether market-makers and futures commission merchants are fiduciaries 

because the proposal does not require a relationship with the plan or IRA or a mutual 

understanding between the parties. 

• Inconsistent with Congressional intent. Section 913 of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act of 2010 (“Dodd-Frank”) requires the SEC to conduct a study 

on the appropriate standard of care for retail accounts and, if necessary, issue regulations 

implementing a uniform standard of care for investment advisers and broker-dealers, 

without requiring changes in the fees and commissions charged these accounts. SEC Staff 

recommended a “uniform fiduciary standard” which is not inconsistent with the current 

regulation defining the term “fiduciary”, especially as the SEC uniform standard would 

permit commission-based arrangements, sale of proprietary products and principal trades, 

and no continuing duty following provision of advice. Staff conducted a detailed cost 

analysis in determining that these activities should be permitted and, consistent with the 

FINRA recommendation, determined that the standard should be business-model neutral 

and flexible to allow different types of compensation arrangements. Both agencies agreed 

that to change the business model would hurt retail accounts. Their conclusions should not 

be ignored. 

• Inconsistent with Dodd-Frank. The proposed changes are inconsistent with the very recent 

framework set forth in Dodd-Frank and the proposed regulations thereunder with respect to 

business conduct standards applicable to the trading of swaps, overturning the careful 

balance that allows financial institutions to deal with plans in derivative transactions. 

• Disrupts capital markets. Trading counterparties will be severely limited because dealers 

will not know whether their affiliates will be deemed fiduciaries. All of the exemptions for 

principal transactions prohibit transactions with anyone who is fiduciary with respect to the 

assets involved in the transaction. The proposed regulation will make it nearly impossible 

to determine whether market-makers are fiduciaries with respect to those assets because it 

requires no relationship with the plan and no mutual understanding between the parties. In 

addition, a futures commission merchant may not be able to provide services to plans and 

IRAs if it is a fiduciary with respect to the assets involved in the transaction. 

• Turns ministerial custodial valuations or pricing services into fiduciary acts. Custodians 

will prohibit plans and IRAs from holding assets which cannot be valued through a third 
 3

party pricing service and such pricing services may be deemed fiduciaries even with 

respect to plans and IRAs with respect to which they have no relationship. Custodians may 

be prohibited from hiring third party appraisers to take on the fiduciary duty because of the 

substantial expense of doing so, or because the securities laws do not permit delegation to a 

third party. The regulation will significantly curtail the choices of the IRAs and plans that 

the Department seeks to protect. 

• Adversely affects the economy. At a time when the economy is making at best a fragile and 

halting recovery, the adverse effects on the capital markets will be significant and capital 

currently invested by plans and IRAs in real estate and private equity will be reduced. 

SIFMA also believes that the reasons cited by the Department for these changes do not warrant the 

limiting affect on plan choices and the very significant cost increases that the rule will cause. Finally, we 

believe the cost analysis which accompanies the proposal is flawed and incomplete. Many of the issues

described herein were not considered by the Department in its cost analysis and where considered, were

seriously underestimated. Finally, the regulation’s economic analysis does not consider the costs on IRAs 

at all. 

SIFMA urges the Department to withdraw the proposal, conduct a comprehensive cost analysis 

and if necessary, repropose a regulation that is more targeted to the abuses it perceives. 

 Respectfully submitted, 

 T. Timothy Ryan, Jr. 

 President and CEO 

cc: Hilda L. Solis, Secretary of Labor 

 Phyllis C. Borzi, Assistant Secretary 

 M. Patricia Smith, Solicitor of Labor 

 
 4

Comments of the Securities Industry and Financial Markets Association 

Proposed Changes to the Definition of Fiduciary 

SIFMA1

 is pleased to provide comments regarding the Department of Labor’s (“Department”) 

proposed regulation under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) 

that will redefine the term “fiduciary” under section 3(21) of ERISA and section 4975(e) of the Internal 

Revenue Code of 1986, as amended (the “Code”). We look forward to working with the Department to 

avoid these results. SIFMA also appreciates the scheduling of a hearing on this important proposed 

regulation and respectfully requests an opportunity to testify at the hearing and to supplement our 

comments in light of the testimony at the hearing. 

We are concerned that the Department has not fully considered the impact of this proposal on the 

ability of individuals to save for retirement. The Department itself has publicly stressed the importance of 

investment assistance in saving for retirement. Americans held $16.5 trillion in retirement assets at the end 

of the first quarter of 2010, accounting for 35% of all household assets in the United States. As of this 

date, the assets in IRAs exceeded $4.3 trillion2

. Mutual funds only account for 45% of the assets in these 

accounts, which means that they hold more than half of these accounts in stocks, bonds and other 

property.3

 The trading costs for these assets will increase dramatically if the proposed regulation is 

finalized in the current form. This proposal could critically impact the ability of these individuals to reach 

a successful retirement, because the financial institutions most able to efficiently deliver investment 

assistance will no longer be willing to do so or will only do so at an added cost to the participant or IRA 

account holder. These institutions are currently able to help participants and IRA account holders invest 

for retirement by providing valuable services without such services giving rise to fiduciary status under 

the current ERISA fiduciary definition. Examples of these important functions are: 

• providing information on available investment tools, services and products; 

• narrowing the platform of thousands of investment options available to these accounts to a 

more manageable number; and 

• providing referrals or recommendations with respect to the selection of third party or 

affiliated investment managers (who themselves are ERISA fiduciaries). 

If these types of interactions cause service provider to become fiduciaries, certain interactions 

would cease altogether, meaning millions of Americans will not have sufficient information to be able to 

invest effectively and meet their retirement goals. This proposal will limit choice and increase costs for 

all plans. We think this result is inconsistent with Congress’ express goals for regulation of broker-dealers 

 

1

The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds 

of securities firms, banks and asset managers. SIFMA's mission is to support a strong financial industry, investor opportunity, 

capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, 

with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association 

(GFMA). For more information, visit www.sifma.org.

2

 Investment Company Institute, Retirement Snapshot, First Quarter 2010.

3

 Investment Company Institute, Research Fundamentals, The US Retirement Market, Second Quarter 2010, p.5. 
 5

in Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“DoddFrank”). Dodd-Frank requires the SEC to conduct a study on the appropriate standard of care for brokerdealers in retail accounts; the study issued by the SEC, which recommends a uniform fiduciary standard, 

notes that it will preserve investor choice while minimizing cost and disruption.4

 We urge the Department 

to reconsider this proposal to ensure that any changes in the current regulation also preserve investor 

choice while minimizing cost and disruption. 

At a minimum, we suggest that IRAs be carved out of the proposal at this time to determine so that 

the Department may fully consider the costs of the proposal on IRAs, and on this form of individual 

retirement savings. The Department has done no cost analysis on IRAs and the additional costs, described 

below, will have a disproportionate affect on IRAs. In addition, the choices that will be foreclosed to IRAs 

have not been fully analyzed under the regulation. 

We further believe that the Department has not fully considered the costs of this proposal on plans 

and IRAs5

 and the manner in which their investment choices will be curtailed, or the costs on plans that 

may be unable to engage in swaps, prime broker their assets, invest in alternatives, obtain futures 

execution and otherwise have their investment choices limited by the proposal. The disruption to the 

capital markets has also not been explored: the additional costs of principal transactions, the restriction on 

use of trading platforms and other venues which improve liquidity and market efficiency, the artificial 

barriers on investments in private equity and real estate. 

We hope that the comment period and the hearing will shed significant light on the unintended 

costs of the proposed regulation, enabling the Department to conduct a comprehensive analysis of the 

costs associated with the proposal. 6 The Department’s cost analysis notes that it is incomplete and 

concedes that it does not consider the costs to plans; we note that it does not include the costs to IRAs at 

all, or the additional costs associated with the change in the proposed rule that makes any person who

provides a plan with valuation information a fiduciary. These costs must be taken into account. 

We also hope the Department will consult with the Securities and Exchange Commission (“SEC”), 

the Commodity Futures Trading Commission (“CFTC”) and the Financial Industry Regulatory Authority, 

Inc. (“FINRA”) on the coordination of standards and requirements among these statutory regimes, 

especially in light of recent regulatory initiatives from each of these regulators and on the effect of this 

proposed regulation on the capital markets.7

 

 

4

Dodd-Frank Section 913 Study, available on the SEC website at 

http://www.sec.gov/news/studies/2011/913studyfinal.pdf.

5

 Generally throughout this comment, the term “plan” will refer to both plans and IRAs. 

6

 This analysis should include the costs likely to be incurred by service providers and counterparties (which, if history 

is a guide, will be passed on to clients).

7

 As the SEC noted in its comments on the Department’s proposed exemption and section 3(21) regulation, the 

prohibited transactions of ERISA “may require that broker-dealers refrain from trading as principal with employee benefit plans 

to which they provide services. This may have an immediate, wide-spread and detrimental impact on the operation and 

functioning of a significant portion of the United States capital markets, and may serve to restrict the ability of employee 

benefit plan managers to invest plan assets in equity and debt securities. The Commission is greatly concerned about the 

potential severe disruption and dislocation in the capital markets, and the probably concomitant negative impact on employee 
 6

SIFMA urges the Department to withdraw the proposal, conduct a comprehensive cost analysis 

and if necessary, repropose a regulation that is more targeted to the abuses it perceives. This is especially 

true for IRAs, where it appears there has been no cost analysis conducted at all. 

 

Our comments will address SIFMA’s concerns with the specific applications of the change on retail 

and institutional client accounts, the costs of the proposed changes on these clients, and the disruption to 

the markets that the proposed changes may cause. 

1. The Department’s Proposed Changes

The current regulation is straightforward and workable. It requires that advice 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 covers investment products, and not the selection of 

managers or the appraisal of property. Under current law, fiduciaries know they are fiduciaries, and they 

know the identity of the plans and IRAs relying on them. The role of fiduciary is a serious one, 

encompassing duties that are the “highest known to law,” Donovan v. Bierwirth, 680 F. 2d 262, 272, n.8 

(2nd Cir., 1982). It would be inconsistent with these duties for a service provider to be defaulted into this 

role, solely based on status or on one party’s understanding, not shared by the service provider. 

While SIFMA agrees with the Department that if a person identifies himself to a client as a 

fiduciary, he should be deemed a fiduciary, we believe the proposed regulation goes far beyond that point 

and allows IRAs, plans and participants to decide, after the fact, whether the relationship was a fiduciary 

relationship with its attendant responsibilities and prohibited transactions. The new tests are vague and 

subjective, and conducive to later allegations of fiduciary status. As described more fully below, the 

proposed definition relies on status or title, and does not require a plan or IRA to actually have any

relationship at all with an advisor on whom it later claims to be relying. All four tests of the proposed rule 

must clearly be conditioned on an agreement, arrangement or mutual understanding with the plan that the 

service provider is providing recommendations that are individualized to that plan and a primary basis for 

the plan’s decision making. The primary basis test has been used for 35 years and is clearly understood by 

plans and service providers; the Department should not jettison it now, especially in light of the 

Department’s acknowledgement in the preamble that the proposal intends to capture persons that 

significantly influence the decisions of plan fiduciaries and have a considerable impact on plan 

investment. The proposed regulation is written so broadly that virtually everyone who deals with a plan or 

with the investing public will be a fiduciary unless they can prove they are not. 

These “status” determinations, rather than current law function and relationship distinctions, will 

make it more difficult for service providers to structure their businesses in a manner compliant with the 

 

benefit plans and their beneficiaries, which may occur, if, as a result of the present uncertainties concerning the scope and 

application of these provisions of ERISA to the activities of broker-dealers, a substantial portion of the business transacted 

between employee benefit plans and broker-dealers is suddenly terminated or substantially curtailed. . . Thus, to the extent that 

employee benefit plans wish to utilize for execution the largest and best capitalized broker-dealer firms, those plans may be 

limited severely in their ability to buy and sell securities in the substantial segment of the market where transactions primarily 

occur on a principal basis, since many of the same large and well capitalized broker-dealer firms are the leading factors in such 

market”. Letter from Ray Garrett, Jr., Chairman, Securities and Exchange Commission, dated January 9, 1975 (copy attached).
 7

securities and commodities laws and ERISA. If service providers cannot be sure they will not be deemed 

fiduciaries, they will either rearrange their businesses to assume they may be fiduciaries, imposing the 

trading restrictions (e.g., prohibiting all principal trades and potentially agency trades such as futures) and 

costs that accompany that role, or they will limit their dealings with plans or IRAs. Turning all retirement 

accounts into advised accounts, with their associated advisory fee structure, is not likely to benefit plans 

and IRAs, and any benefits suggested by the Department would be unlikely to outweigh these additional 

costs. Making it very difficult for plans and IRAs to identify fiduciaries will make any principal 

transaction prohibited and lead to untoward consequences under other regulatory provisions, such as the 

special disclosure rules required of fiduciaries under the new 408(b)(2) fee disclosure provisions 

applicable to plans. The costs of these consequences will be significant. 

For the reasons described more fully below, counterparties to swap transactions could become 

fiduciaries under the proposed regulation solely on account of the duties that a swap counterparty will be 

required to undertake under the business conduct rules of Dodd-Frank in order to deal with plans; the 

impact on defined benefit plans and plan asset hedge funds will be substantial. 8

 Plans and funds would be 

deprived of an important risk-management tool. For example, defined benefit plans often use interest rate 

swaps to improve the match between assets and liabilities in order to reduce risk. Hedge funds execute 

absolute return strategies using swaps. The capital markets would be thrown into disarray for plans and 

plan asset vehicles, regardless of the intent of Congress and the government agencies responsible for 

regulation of the financial markets. 

a. Advisers Act and “Existing Fiduciary” Status

The Department’s proposed regulation imposes 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 understanding that the 

recommendations are intended as investment advice tailored to the plan. So long as the person (or its

affiliate) is an adviser under the Investment Advisers Act of 1940 (“Advisers Act”) or is already a 

fiduciary under either of the other two statutory tests (i.e., a person with discretion over the management 

of plan assets or a person with discretion over plan administration) (an “Existing Fiduciary”), regardless of 

the forum or the listener base, becomes fiduciary advice.9

 This test does not require that an investment 

adviser or Existing Fiduciary tailor his advice for a particular client, a test that was the hallmark of the 

Department’s contemporaneous regulation defining fiduciary in 1975.10 Nor does it require that the 

 

8

 See 75 FR 80638, December 22, 2010. 

9

 We note that the Advisers Act was enacted in 1940, well before the enactment of ERISA. Neither Congress nor the 

Department indicated that investment adviser status was determinative of ERISA fiduciary status. Further, it was not relied 

upon by the Department in issuing its regulations in 1975. 

10 “Investment adviser” means any person who, for compensation, engages in the business of advising others, either 

directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or 

selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports 

concerning securities; but does not include 

(B) any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his 

profession; 
 8

investment adviser know the identity of the entities relying or even considering the recommendations. 

Plan sponsors, participants and IRA owners solicit many points of view, without undertaking to hire 

anyone to provide the kind of advice that they want and intend to rely on. They do not consider these

casual, informal and background conversations to be fiduciary conversations but they value input from 

many sources to help educate them on potential asset classes, markets, instruments and vehicles, and 

managers.11 If these conversations create liability, Existing Fiduciaries and investment advisers will 

decline to give their views. We believe most plan sponsors and IRA owners will see the absence of this 

information as harmful to their plans and their participants, not protective of them. 

The proposed regulation does not allow plans and their service providers to agree on the scope of 

service and the extent that the plan chooses to rely on the service provider. That agreement between the 

parties is a critical piece of the current rule, and provides certainty and a consistent framework for plans 

and service providers. Plans are accustomed to entering into arrangements, agreeing on price, scope and 

term. The proposed rule eliminates this central part of commercial and trust relationships. We believe 

plan sponsors and IRA holders should have the ability to dictate the terms of their relationships, rather 

than have the Department create a rule under which all of their service providers could be deemed 

fiduciaries. 

The Advisers Act status test and the Existing Fiduciary test are flawed in additional ways. Flatly 

deeming any adviser under the Advisers Act a fiduciary under ERISA subjects all research departments of 

financial institutions to the prohibited transaction rules and to cofiduciary duties, regardless of whether the 

financial institution has any relationship with the plan or IRA and regardless of whether the 

recommendation was intended for the plan or the general public. Market research is widely and freely 

disseminated to the general public. It is untenable to suggest that issuers of such research become 

fiduciaries to any plan or IRA that may receive such research, even if such accounts receive the research 

on the internet, on television or radio, or from third parties. Advisers appear on radio and television 

stations frequently, giving their recommendations and advice about the markets. The proposed regulation 

would make such advisers fiduciaries to every plan listener even though the writer or speaker may have no 

idea who is relying on his advice, and even where it is quite plainly not tailored to the particular plan. The 

same is true of a plan or IRA’s Existing Fiduciary. If he is speaking to the general public, at a meeting or 

on television, or issuing generalized recommendations to all clients, the Existing Fiduciary becomes a

 

(C) any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or 

dealer and who receives no special compensation therefor; 

(D) the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular 

circulation; 

(F) any nationally recognized statistical rating organization, as that term is defined in section 3(a)(62) of the Securities 

Exchange Act of 1934 [15 U.S.C. 78c (a)(62)], unless such organization engages in issuing recommendations as to purchasing, 

selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others. 

11 It is unclear how the Department would define individualized advice. If a plan client asks to see 4 and 5 star mutual 

funds in an asset class, and a broker identifies those 4 and 5 star funds, is that individualized advice? Is the broker a fiduciary 

for having done that factual legwork if he is an adviser, an existing fiduciary or if the client may consider those facts? Is 

Morningstar a fiduciary for having rated the funds? If a plan client asks a broker for a screen of stocks that pay dividends with 

a 5% or more yield, is the provision of a list of stocks that meet that criterion “individualized” advice? Where the standard for 

determining who may be a fiduciary is so broad, it is critical that the Department distinguish between factual information, and 

subjective recommendations. 
 9

fiduciary with respect to that recommendation. If an adviser is managing the assets of a plan, issuing 

widely disseminated research, speaking at a conference, or writing a newsletter to all clients, the 

fiduciary’s affiliated dealer will not take the risk of trading with the plan at all, for fear that its affiliate has 

become a fiduciary for assets of the plan other than those over which it has discretionary authority or 

control. 

 The basic trading exemptions, PTE 75-1 and ERISA section 408(b)(17), require that the dealer or 

counterparty not be a fiduciary with respect to the assets involved in the transaction. Even where the plan 

has its own investment manager or has hired an investment adviser, the dealer who has issued such 

research, chatted with the plan’s ERISA section 3(38) manager, or otherwise disseminated information 

that a plan fiduciary or participant heard, may be a fiduciary under the proposed regulation and ineligible 

for the prohibited transaction relief. Because these dealers will have no idea whether they are fiduciaries 

with respect to a transaction, they will be unwilling to take the risk of trading with a plan or IRA, even 

where that plan has its own fiduciary upon whom it is relying. As the SEC Staff noted in its Dodd-Frank 

Section 913 Study: 

“If the broker-dealer exclusion were eliminated, broker-dealers, as well as investment 

advisers affiliated with broker-dealers, might decide to no longer sell securities as principal to 

retail clients. (Footnote Omitted). If so, they might lose the customers who seek that service to 

advisers that are not affiliated with broker-dealers, and also might lose underwriting revenue to the 

extent that underwriters were selected by some issuers because they could distribute not only to 

institutional customers but also to retail customers. Such loss in revenue could potentially manifest 

itself in increased costs to customers for other services and loss of investor choice, as discussed 

below in sub-Section B.3.”12

 * * * * 

For example, any self-imposed restrictions on selling securities out of firm inventory, as 

chosen by the broker-dealer with the aim of avoiding conflicts of interests and adhering to a new 

standard, may increase costs to retail investors. If, as a result of such restriction, firms decide not 

to sell securities as principal, which can potentially lower the quality of execution of transactions.

As a result of any new conflicts of interest restriction, broker-dealers may stop trading on a 

principal basis in certain securities, such as bonds that are not exchange traded, potentially 

depriving investors of the best possible execution. While that may have less of an impact for 

certain securities (e.g., highly liquid securities such as exchange-traded equities) the debt market is 

 

12 SEC 913 Study, page 151. The SEC 913 Study quotes from a comment letter submitted by FINRA which notes at 

footnote 673: See FINRA Letter, supra note 471 ([B]roker-dealers provide an important liquidity function by buying and 

selling securities from their own account. The Advisers Act prohibits an investment adviser from acting as principal for his own 

account without disclosing to such client in writing the capacity in which he is acting before completion of the transaction and 

obtaining the consent of the client to the transaction. Thus, if the Commission imposes on broker-dealers the identical 

investment adviser application of a fiduciary duty to retail customers, it would force broker-dealers to either cease providing 

investment advice to retail customers or forego one of the defining aspects of the broker-dealers model that significantly 

contributes to market liquidity and efficiency. Both of those repercussions inure to the detriment of retail customers: the former 

would reduce competition for financial services and might deprive customers of continued association with the financial 

professional or firm of their choice; the latter could reduce market liquidity and increase volatility and raise trading costs to 

retail customers). 
 10

a dealer market and the costs associated with purchasing certain securities, particularly less liquid 

securities, as agent, may increase execution costs for some investors, namely those customers of 

broker-dealers who otherwise had maintained inventories of such securities.13

Since ERISA prohibits a fiduciary to a plan from entering into principal transactions with the plan, 

swaps would no longer be available to plans and hedge funds if the swap counterparty’s affiliate has 

provided research to the general public. Principal transactions in securities would be severely curtailed, as 

the SEC feared in 1975.14 Restricting available sources for securities is not in the interest of plans as both 

the SEC in its 913 Study, and FINRA have pointed out.15

 

 The consequence of this uncertainty is that plans and IRAs will be required to deal with smaller 

financial institutions with no research departments and no asset management affiliates, and these smaller 

dealers may have more limited inventory or higher markups. These institutions may be more thinly 

capitalized than the large banks and broker dealers and have less robust legal and compliance 

infrastructure. Limited competition will lead to higher spreads and transaction costs and less efficiency. 

Once again, only plans and IRAs will be forced to pay these additional costs; all other investors will be 

able to utilize the most substantial and creditworthy institutions.16 As noted above, the swaps markets 

may be forced to exclude plans entirely. 

We respectfully submit that this test, as written, is inapposite for the purpose it is proposed – to 

serve as a bright line test to determine who is a fiduciary. We urge the Department to either delete this 

test, or make clear that the test requires (i) an agreement, arrangement or mutual understanding with a plan 

regarding its fiduciary status and (ii) individualized advice, as distinguished from factual information, 

tailored for the particular plan and not prepared for the general public or a service provider’s client base. 

b. Mutual Understanding 

The Department’s alternative test for defining “fiduciary” eliminates the regular basis test, the 

mutual understanding requirement, and the test that requires the advice to be a primary basis on which the 

client will make his or her investment decision. The elimination of these tests will result in a service 

provider becoming an unwitting fiduciary. No longer must the parties agree that the relationship is a

 

13 SEC 913 Study, page 159. The footnote to this observation notes as follows: “According to FINRA, excluding 

convertible bonds and equity CUSIPs, 84% of investment grade corporate bond trades in the secondary market are principal 

trades, and in terms of par value traded, 98% of investment grade corporate bonds in the secondary market are traded as 

principal. FINRA, TRACE Fact Book 2010 Quarterly Table for the third quarter, available at 

http://www.finra.org/Industry/ContentLicensing/TRACE/P085342. According to the MSRB, in 2010 approximately 90.8% of 

municipal bond trades were effected on a principal basis (with the remainder being effected on an agency basis). Letter from 

Marcelo Vieira, MSRB, to Matthew Kozora, U.S. Securities and Exchange Commission, dated Jan. 11, 2011.”

14 See fn. 7, supra.

15 See SEC 913 Study, at pages 151-163.

16 As noted in the cost section, infra, these additional trading costs were not considered in the Department’s cost 

analysis.
 11

fiduciary relationship. If the client “understands,” long after information is provided by a service 

provider, that the relationship is, in retrospect, a fiduciary relationship, even if the service provider 

specifically disclaims that status, the client’s one sided, opportunistic “understanding” carries the day. 

This is true, despite the fact that the client’s one-sided understanding can be manufactured after the fact 

when any trade turns out less successfully than he anticipated. The formulation cannot work nor can it be 

validated. Allowing a plan fiduciary or participant to claim, after the fact, that he “understood” that a 

broker was offering tailored fiduciary advice puts too great of a burden on the fiduciary, unless the 

Department allows brokers and others to have written agreements disclaiming fiduciary status and the 

Department recognizes that disclaimer. 

The elimination of the term “mutual” from the current regulation is particularly troubling. 

Agreements, arrangements and understandings are by definition mutual, suggesting that there are two 

people party to the agreement or arrangement. The most inchoate and subjective of the three terms - 

understanding - is made even more subjective and elusive by dropping the modifier “mutual.” Thus, a 

regulation which should be (and currently is) a bellwether to guide standards of conduct instead becomes 

subjective, where no service provider will have a clear understanding of the expectations of its client. The 

deletion of the word “mutual” will cause significant disruption in the markets, changes in trading patterns 

for asset classes that currently trade on a principal basis and increases in costs to plans and IRAs, just as 

the Department feared in its economic analysis of the regulatory alternatives it rejected. See 75 FR 65275. 

Brokers will not take the risk that they will be later deemed to be fiduciaries, and in violation of the 

prohibited transaction provisions of ERISA and the Code. 

We urge the Department to retain the requirement that any agreement, arrangement or 

understanding be mutual to avoid permitting a much more subjective reading of the regulation. Any 

change in the regulation will be unworkable unless it is based on service provider and client agreement. 

Department staff have said in many forums that the term “mutual” is superfluous and its deletion was 

editorial. In light of that acknowledgement, the term should be reinstated, since most practitioners do not 

see it as superfluous and it can do no harm to reinstate it if indeed, the deletion was merely editorial. 

 

c. Recommendations that “may be considered”

Similarly, the “may be considered” test is too vague and credits even the most casual conversation 

as fiduciary advice. Whenever someone talks, the listener “may consider” the speaker’s words. The “may 

be considered” test is really an “I hear you” test. We urge the Department to consider a test which both 

parties to a conversation understand to be fiduciary advice, such as material reliance, substantial reliance, 

or a significant part of the plan’s decision making process. The “may be considered” test is inconsistent 

with the level of reliance described by the Department in the preamble to the regulation.17 We note that 

this test may well capture every lawyer, accountant, actuary or other consultant that works on an 

investment policy, reviews asset allocations for purposes of an actuarial valuation, or looks at values for 

purposes of an audit. The Department’s preamble specifically excludes these service providers from first 

prong of the regulation’s four prong test; it should exclude these service providers from all four prongs. 

See 75 FR 65266. 

 

17 We note that the preamble 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. 75 FR 65265. These words are a world apart 

from “may consider”.
 12

The concept of a fiduciary requires that the client must be relying on the advice, not just 

potentially considering it, as one might consider the advice of a television reporter or guest, or the paper’s 

“ask an expert” editor. Under the Department’s redefined standard, casual market commentary addressed

to someone else with similar risk parameters, becomes fiduciary advice. 

Nor is there a brokerage exception to this “may be considered” rule, which would recognize the 

Advisers Act provision regarding advice that is incidental to a brokerage transaction, as the current rule 

does. Under the proposed regulation, there is no advice that would not make a person a fiduciary. 

Without such a carve out, even the suitability requirements currently being revised by FINRA and any 

new standards of conduct required by the SEC pursuant to the Dodd-Frank Section 913 study could meet 

the “individualized recommendation” provision of this test. FINRA describes the new rule as follows: 

The proposed new suitability rule, designated FINRA Rule 2111, would require a broker-dealer or 

associated person to have ``a reasonable basis to believe that a recommended transaction or 

investment strategy involving a security or securities is suitable for the customer* * *. This 

assessment must be ``based on the information obtained through the reasonable diligence of the 

member or associated person to ascertain the customer's investment profile, including, but not 

limited to, the customer's age, other investments, financial situation and needs, tax status, 

investment objectives, investment experience, investment time horizon, liquidity needs, risk 

tolerance, and any other information the customer may disclose to the member or associated 

person in connection with such recommendation. 75 FR 52564. 

 The Department’s proposal would deem a broker a fiduciary merely because it is complying 

with industry rules intended to set standards for brokers who are not investment advisers.18 Without some 

clarification, brokers may simply refuse to effect solicited trades for plans if, by calling a client with 

investment ideas and market color, they back themselves into fiduciary status. 

 Again, FINRA’s comments to the SEC for the 913 Study are instructive: 

[T]he Commission should not merely export to broker-dealers the regulatory scheme applied to 

advisers under the Advisers Act or eliminate the broker-dealer exception from that statute. FINRA 

believes those approaches fail to acknowledge the specialized role of broker-dealers as liquidity 

providers, could lessen competition for financial services and deprive investors of valuable 

information, such as research. Instead, the Commission should apply the fiduciary standards to 

broker-dealers in a way that respects the purpose of the enacting legislation and allows for the 

differences between the investment adviser and broker-dealer models. 

FINRA believes it would be a mistake to either (1) impose the investment adviser standard of care 

and other requirements of the Advisers Act to broker-dealers or (2) eliminate the broker-dealer 

 

18 A solicited trade is a trade where the broker has contacted the client and initiated the conversation about a security. 

Solicited trades must be so marked on a broker’s books and records. If the Department is suggesting that all solicited trades 

would render a broker a fiduciary, we urge it to make that reading clear, and ask for comment from the public, as well as from 

the SEC and FINRA.
 13

exclusion from the definition of “investment adviser” under Section 202(a)(11)(C) of the Advisers 

Act. Either of these options would negatively impact the availability of investment advice and 

services for retail customers, reduce competition, reduce competition in the financial services 

market and potentially disrupt existing relationships between retail customers and their brokers. 

Broker-dealers provide an important liquidity function by buying and selling securities from their 

own account. The Advisers Act prohibits an investment adviser from acting as principal for his 

own account without disclosing to such client in writing the capacity in which he is acting before 

completion of the transaction and obtaining the consent of the client to the transaction. [Footnote 

omitted.]. Thus, if the commission imposes on broker-dealers the identical investment adviser 

application of a fiduciary duty to retail customers, it would force broker-dealers to either cease 

providing investment advice to retail customers or forego one of the defining aspects of the brokerdealers model that significantly contributes to market liquidity and efficiency. Both of those 

repercussions inure to the detriment of retail customers: the former would reduce competition for 

financial services and might deprive customers of continued association with the professional or 

firm of their choice; the latter could reduce market liquidity and increase volatility and raise 

trading costs to retail customers.19

 

 The Department’s proposal also will adversely affect the futures markets. The proposed rule 

does not eliminate the safe harbor in 29 CFR 2510.3-21(d) for brokers executing securities trades. That 

exception does not, however, cover futures merchants. Accordingly, any suggestions, array of alternatives 

or recommendations from a futures merchant, such as market, or liquidity, or time of day for the trade, 

regardless of whether the plan is represented by its own third party investment manager, may make the 

futures merchant a fiduciary and its receipt of a commission a prohibited transaction.20

 

 If these changes are finalized as proposed, every plan client has a “put” back to his broker by 

alleging he was a fiduciary after the fact, regardless of their contemporaneous understanding. That 

allegation carries with it violations of the prohibited transaction provisions, with their concomitant costs 

of reversal and excise taxes.21 Few brokers will trade on a principal basis with a plan or IRA and take this 

risk. This would mean that brokers will execute all trades as agent, even where they are not acting as a 

fiduciary and even in the fixed income markets, and as noted above, likely with a small dealer who is 

confident that the plan or IRA has not obtained any information it has generated for other clients or for the 

general public. The effect on price should not be underestimated; small dealers with small inventories 

bidding on a $25,000 bond are unlikely to provide a price as advantageous to the IRA owner as he would

have enjoyed in a bundled transaction from the broker’s inventory or from a large dealer.22 But it is more 

 

19 Letter to Elizabeth M. Murphy, SEC, dated August 25, 2010, available at 

http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p121983.pdf. 

20 PTE 86-128 covers securities but not futures, commodities, currency, etc.

21 The Department’s cost analysis does not consider the costs of exemption applications or the cost 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.

22 We note that the Department suggests that plans and IRAs will receive better service because of this proposed 

change. The preamble notes: “While the improvement in service value that may result from the proposed rule is difficult to 
 14

likely that brokers will decide to provide only fiduciary services, just to have certainty. And this 

consequence with higher fees, more limited choices, more attenuated trading strategies and more limited 

liquidity will not benefit plans, their participants and IRAs. 

Moreover, eliminating certainty and loosening the standards in this fashion will make it nearly 

impossible for financial institutions to set compliance structures, program systems, provide effective

training, or clarify the difference in conduct for their employees. The Department sees enforcement 

through the lens of the abusive cases that come to its attention; the thousands of investment professionals 

and financial institutions see enforcement as the compliance structures they create by setting clear rules, 

providing clear, objective and comprehensible training, establishing guidelines that can be tracked through 

systems and oversight. These latter processes are important to ensuring that the tens of millions of 

retirement accounts are subject to unambiguous rules. A financial institution seeking clear rules would 

either (i) not provide services to, or trade with, plans and IRAs or (ii) agree to be a fiduciary. The first 

option is not in the best interest of plans and IRAs since decreased competition results in higher spreads 

and increased transaction costs. Those service providers that continue to provide services to plans and 

IRAs will be less willing to provide the very information and assistance necessary to assist participants 

and account holders to save and plan for retirement. The second option is also not favorable as financial 

institutions that are willing to agree to be a fiduciary would likely increase costs for the added risk, reject 

smaller accounts and limit the products and services provided. This is precisely the consequence of the 

alternatives that the Department rejected simply because plans would be hurt.23

 

quantify, the Department believes that it has the potential to be very large. If just 10 percent of plans realize a one basis point 

(0.01 percent of plan assets) service value improvement, it would be worth approximately $399 million over ten years using a 

seven percent discount rate and reporting in 2010 dollars. In addition, GAO's study linking undisclosed conflicts with 130 basis 

points of underperformance suggests that value can be improved via service quality as well as price.[Footnote omitted]. Viewed 

in this context, the Department is confident that service value improvement could be substantial as a result of the proposed rule 

and may be economically significant (i.e., exceed $100 million annually).” 75 FR 65273. Thus, if just 10% of plans realize a 

one basis point cost increase (and as noted throughout the comment, it is far likely to be a 100 basis point increase, if not more), 

the cost to plans will be $399 million dollars over ten years, using the same assumptions. 

We respectfully submit that the opposite is true. Brokers and other service providers may choose not to deal with 

these small accounts and the service level will plummet. See also, Oliver Wyman, page 29.

23 As the SEC 913 Study noted, “Eliminating the broker-dealer exclusion could generate direct costs to investors if 

firms changed their pricing structures or eliminated certain account features in response. For instance, to the extent that 

accounts were converted from commission-based accounts to fee-based accounts, investors would become susceptible to higher 

costs in certain circumstances, depending on how the broker-dealers elected to re-price their services. Generally, investors pay 

broker-dealers either an all-in fee for a bundle of account services or pay for services separately. An all-in fee may be an assetbased fee, or commissions (including sales loads that may be supplemented by Rule 12b-1 fees) and mark-ups and markdowns, or a combination of such fees. Investors also may pay separately for services such as, advice, trade execution, and 

custody. To the extent that accounts were converted or transferred from brokerage accounts (e.g., to investment advisory 

accounts or to managed agency accounts at affiliated banks), investors could incur additional direct costs from a changed 

pricing structure, whether the pricing structure remains as an all-in fee or whether investors pay separately for services. If, in 

response to the elimination of the broker-dealer exclusion, broker-dealers elected to convert their brokerage accounts from 

commission-based accounts to fee-based accounts, certain retail customers might face increased costs, and consequently the 

profitability of their investment decisions could be eroded, especially accounts that are not actively traded, e.g., fee-based 

accounts that trade so infrequently that they would have incurred lower costs for the investor had the accounts been 

commission-based. This practice is commonly referred to as ―reverse churning or underutilization. See pp. 152-153. 
 15

d. The Selling Exception

The proposed rule provides an exception for dealers and their agents, so long as they can 

demonstrate that the recipient of the advice knows or, under the circumstances, reasonably should know, 

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 think this exception is too narrowly written. It covers recommendations regarding purchasing 

and selling securities and other property, but does not cover the selling of services. The exception should 

also cover 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. Plans looking to hire new 

service providers ask significant detailed questions about investment approach, investment options and

strategies -- areas where the service provider sees itself as having an edge. They ask to see sample lineups 

of options, of portfolio construction, of access to investment solutions or strategies and appropriate share 

classes. Failure to respond or give detailed answers would eliminate a prospective service provider from 

consideration. Under the proposed regulation, any of these answers may be investment advice, even 

where the plan has its own investment consultant acting as a fiduciary and analyzing responses. 

Brokers and other service providers may provide information that a plan considers when 

transitioning between managers, such as methods for equitizing cash, principal transactions rather than 

agency transactions, principal bids for the entire portfolio, and currency management issues. In addition, 

brokers provide information that defined contribution plans consider when transitioning between funds on 

the menu, such as black-out periods, plan communications, mapping and QDIAs. All of this information 

would be advice under the proposed regulation. Perhaps plans will be willing to pay for this information 

and hire a consultant; perhaps they will simply have to manage the process on their own. But no broker 

who may be deemed a fiduciary for having provided this kind of information to a plan sponsor and be 

subject to prohibited transactions for any sale or service thereafter will provide it for free. 

Pricing information is another area that brokers are asked to explain – how many affiliated funds 

need to be on the lineup to obtain a particular level of pricing, the pricing variations with fewer affiliated 

funds, use of an ERISA budget and potential allocations of that budget. Brokers are often asked questions 

about competing funds where a stable value fund is in the line-up or how to construct a brokerage window 

so that it will not compete with a stable value fund. Who will answer these questions for plan sponsors? 

If a broker becomes a fiduciary by answering those questions, which products will not be available to the 

plan as a result of that change in status? 

The selling exception must include the selling of services so long as the seller makes clear that the 

information is not being provided in a fiduciary capacity and that the seller may have a financial interest in 

the outcome. The plan must be required to advise the service provider if its reliance on the service 

provider changes so that the service provider can reconsider the services and the relationship. 
 16

We believe that the Department intended to cover all types of property, tangible and intangible, 

including contract rights.24 The exception should make it clear that the exception covers counterparties 

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

bilateral agreements and not securities or property. It should cover lending arrangements, including short 

sales, options, structured products or futures. It should cover other extensions of credit like settlement 

accommodations and overdraft coverage. It should cover contractual rights and the exercise of those 

rights, including on default.25

 

We are also concerned that the exception shifts the burden of proof to the dealer. The cost of that 

burden will be reflected in spreads charged to plans and IRAs. Even if the plan agrees in writing that the 

dealer is acting solely as a counterparty, how often does that writing need to be memorialized in order for 

the counterparty to have reason to believe what the recipient understands? We believe that any 

requirement that the agreements be regularly renewed will cause delays that will harm plans, and will lead 

to expense and confusion which current law avoids. Any change in the regulation should make provide 

that clear and conspicuous disclosure in documents and marketing materials should entitle a service 

provider to the exception. In addition, it should clarify that the exception is available to a service provider 

even if it, or its affiliates, are acting as fiduciaries with respect to other assets of the plan or IRA. 

The exception does not recognize that where a plan or IRA has its own investment adviser, 

fiduciary, or investment professional, that fact should be controlling in whether the plan was relying on (or 

even considering the advice of) its counterparty, as it is in the Dodd-Frank Act with respect to swap 

counterparties dealing with so-called “Special Entities.”26 Counterparties dealing with a plan’s own 

section 3(38) manager should not run the risk of being a “backstop” fiduciary for the plan. 

We are also concerned about the proposed regulation’s use of the term “adverse.” The interests 

between the parties will often not be adverse, for example, where a futures merchant is acting as agent for 

the plan, or in the transition management context, or when a broker is providing referrals for discretionary 

investment management in a manager referral program. A service provider is not adverse to a plan solely 

because it will be receiving a fee or spread in the transaction, especially where the fact of that fee or 

spread is fully disclosed. Moreover, if the SEC changes the standard of conduct for brokers in retail

accounts to require that they act in the best interests of their clients, they will surely be unable to advise 

the client that their interests are adverse. We urge the Department to eliminate the use of the term 

 

24 If this isn’t what the DOL intended, then advice in respect of these investments wouldn’t be covered at all, since the 

investment advice must relate to “securities or other property” under the proposed rule (the same formulation used in the selling 

exception). 

25 Thus, many bilateral agreements have provisions that allow a counterparty to require more collateral or exercise 

certain rights if a particular condition is met. Any views on these conditions by the counterparty could make it a fiduciary 

under the proposed rule.

26 We think it unfortunate that where Congress so recently has focused carefully on how to carefully delineate when a 

party dealing with a plan should be deemed a fiduciary, and adopted bright line tests to guide parties in their dealings so as to 

avoid costly litigation, the Department has chosen to move in a different direction, leaving open the possibility that a plan with 

its own paid adviser will still be able to argue that it “understood” its counterparty to be acting in a fiduciary capacity. Even if

the counterparty prevails in establishing that it gave the plan and its fiduciaries the appropriate warnings, the cost of defending 

these frivolous lawsuits will be significant. 
 17

“adverse” or replace it with the concept that the seller or service provider must make clear it has a 

financial interest in the outcome. 

 

e. The Individual Account Exceptions

 The individual account exceptions should be general exceptions for all plans and IRAs. They 

should apply to services that defined benefit plans receive. Many brokers and insurance companies have 

defined benefit platforms where plans select from a range of investments, receive recordkeeping and 

actuarial services, etc. It makes no sense to deny defined benefit plans such platforms. Nor should 

defined benefit plans be denied investment education, asset allocation information, or asset class trends. 

Defined benefit plan sponsors will be deemed to be receiving fiduciary advice when the service provider 

says the exact same thing that it might have said to an additional participant. Indeed, defined contribution 

plan sponsors and defined benefit plan sponsors, as well as plan participants and IRAs should have the

benefit of both of these exceptions.27

 

We urge the Department to extend the individual account exceptions to IRAs and to all plans, 

including defined benefit plans, plan asset hedge funds and other plan asset investment vehicles. All 

plans receive pared down choices from their service providers as recommendations, or market color or 

factual data. So long as a plan understands that the list of managers, mutual funds, hedge funds, insurers, 

etc, is not intended as individualized investment advice, there is no reason to limit this kind of investor aid 

to participants in a 401(k) plan or to 401(k) plan sponsors. The concepts surrounding Interpretative 

Bulletin 96-1 should apply to conversations with all fiduciaries and participants and beneficiaries. 

We think that it is particularly critical that these exceptions apply to IRAs. Because 29 CFR 

2509.96-1 applies only to ERISA covered plans, and because the Department’s proposal limits the 

investment education exception to individual account plans as defined in section 3(34) of ERISA, service 

providers providing investment education within the meaning of that bulletin will be deemed to be 

providing fiduciary advice if an IRA owner “may consider” the content of the education at all or if the 

broker is a dual registrant. The very same information that is given to a plan participant on the day before 

he rolls his account balance into an IRA becomes fiduciary advice on the day after the rollover. 

Even more perplexing is the Department’s limitation of platforms, menu and marketing to ERISA 

covered defined contribution plans, rather than including IRAs, especially in light of the Department’s 

view expressed in the economic analysis that eliminating “platform” protection would hurt plans. There 

are 12,000 mutual funds available to investors. We see no public policy reason to deny IRAs a smaller

menu that may be helpful in easing the difficulty of making fund selections. We respectfully submit that 

the omission of IRAs from the exception will hurt IRAs, just as the Department understood it would hurt 

plans.28

 

 

27 In fact, the inference in the proposed regulation is that platforms and education to anyone not specifically covered 

by the exception would be fiduciary advice, even though it is very difficult to see how either constitute tailored 

recommendations. 

28 We assume the Department did not intend this omission; we can see no policy reason to deny IRAs the benefit of the 

use of platforms and menus to guide and narrow their investment choices; nothing in the Department’s economic analysis or 

preamble explains the omission.
 18

f. Appraisers

 

 The proposed regulation adds a new category to the definition – appraisers and companies that 

give fairness opinions. The preamble to the proposed regulation notes: 

In this regard, we note that recent Department enforcement initiatives indicate there are a variety 

of circumstances, outside those described in the current regulation, under which plan fiduciaries 

seek out impartial assistance and expertise of persons such as 

consultants, advisers and appraisers to advise them on investment-related matters. [Footnote 

Omitted]. These persons significantly influence the decisions of plan fiduciaries, and have a 

considerable impact on plan investments. However, if these advisers are not fiduciaries under 

ERISA, they may operate with conflicts of interest that they need not disclose to the plan 

fiduciaries who expect impartiality and often must rely on their expertise, and have limited 

liability under ERISA for the advice they provide. 75 FR 65265. 

This provision will have an enormous impact on every custodian used by plans or plan asset 

vehicles.29 The cost for obtaining “current” prices for hard to price assets is very high, without requiring 

these pricing services to become fiduciaries. Our members who use these services for non-publicly traded 

assets, for purposes of completing the IRS Form 5498 for IRAs and Form 1099R for all plans, currently 

pay between $25 per investment to $250 per investment to obtain a value for the tax reporting. At the low 

end, the service confirms value with the pooled fund or issuer. The cost of a more comprehensive 

valuation has been quoted as between $250-375 per name. Other services quote $585 to assess a 

reportable value for each limited partnership and $1300 to assess a reportable value for each closely held 

stock. These are the prices today, and a significant reason for custodians to amend their agreements to 

prohibit the holding of such investments. We believe that the Department’s regulation will only make this 

situation worse. 

To the extent plans will be able to find appraisers who will agree to act as fiduciaries, and thus take 

on the plan assignment, their fees will surely escalate and those fees will be borne by the plans.30 All 

custodians, prime brokers, fund administrators, brokers with custody and clearing brokers will become 

fiduciaries to the extent they value assets each month for statement purposes, even if their only act is to 

choose the pricing service. They risk cofiduciary status if they rely on a price provided by the investment 

fiduciary, fund administrator, general partner, or plan sponsor. The securities laws will not permit a 

custodian to take a client direction (or even a third party direction) with respect to value if that value is 

questionable or stale. This is particularly troublesome for clearing brokers, who have no direct 

relationship with a plan or IRA. We believe it goes far beyond the statute to make a clearing broker, or 

other custodian, a fiduciary to a plan or IRA, where there is no direct relationship with that plan or IRA. 

 

29 Because The Department’s economic analysis does not mention the costs that plans will incur on account of this 

change, we are unable to fully understand the Department’s assessment of the costs and benefits of this change.

30 The following example is illustrative. Assume an IRA owns a $50,000 interest in a real estate fund, which earns 

10% in a given year, or $5000. At today’s vendor pricing, the cost of confirming value for the IRS Form 5498 will cost the 

custodian (or the IRA, if the custodian passes through the cost) between $500 and $1000, depending on the vendor. Thus, 10-

20% of the earnings are currently spent on valuation for IRS annual reporting purposes. Vendors suggest that if they are 

required to act as fiduciaries, the costs would at least double. 
 19

One potential result of the proposed regulation is that such service providers will refuse to provide 

pricing for assets that are not easily priced, or will require the plan sponsor or IRA owner to indemnify 

them. Neither IRAs, plans nor their participants will be better informed or safer because these service 

providers are forced to note that there is no available price for an asset. Because of the “hard to value” 

nature of the assets these appraisers and valuation agents often deal with, they will be deemed to have a 

target on their backs, and as we know from the costs of hiring independent fiduciaries, the fee increases to 

cover fiduciary insurance, the costs of litigation, and the cost of bonding, are dramatic. Where custodians 

refuse to permit such assets to be held in plans and IRAs, and their owners cannot find an alternative, the 

proposed regulation may cause a participant to take a distribution of the asset, if it cannot be promptly 

sold, prematurely taxing the participant and removing the investment from amounts set aside for 

retirement. The net result is a decrease in assets available for venture capital and real estate investment 

and a decrease in retirement savings. 

While the proposed regulation contains a limitation for valuations provided for purposes of 

government reporting, that limitation excludes 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. 

As a result, those who provide values to private equity funds, venture capital funds, or real estate 

alternatives, will, in fact, be fiduciaries if these vehicles are part of a target benefit fund, part of a defined 

contribution plan, or an investment in an IRA or individual account plan. The Department should make 

clear that a general partner of a fund providing a net asset value as an information point, or providing a 

quarterly statement regarding the carrying value of various investments should not be undertaking a 

fiduciary act under ERISA. Any cost analysis must address the effect on the capital markets if custodians 

refuse to allow retirement plans and IRAs to hold these assets, and the venture capital and real estate 

sectors are deprived of this enormous source of capital. We urge the Department to look at the effect on 

the capital markets if venture capital or real estate funds decline to take ERISA and IRA funds because of 

the valuation issues that may make them fiduciaries. The Department was provided an enormous amount 

of data prior to the issuance of the Plan Assets regulation, 29 CFR 2510.3-101 which should provide a 

starting point for the Department to estimate the costs of the proposed change on those sectors. 

As discussed in more detail below, the Department has not considered the cost effect on plans that 

will result from the proposed regulation’s provision that makes all appraisers fiduciaries, regardless of any 

reliance by a plan or participant on the appraisal. We suggest that appraisers will likely reprice their 

services, or decline the assignment, whenever a plan (or plan investor in a fund) is an investor or potential 

investor. Thus, either the price will erode participant retirement savings still further, or the availability of 

the service from established, reputable firms will shrink, leaving in their wake those who may be the least 

able, least experienced and least financially responsible. 

There is no exception for the daily mark requirement under section 731 of Dodd-Frank. That 

section requires a swap dealer to provide a daily mark for the swap, at the request of the plan. The daily 

mark would cause a swap dealer to become a fiduciary. And of course, if the swap dealer is a fiduciary, it 

cannot enter into the swap at all, because of ERISA sections 406(a)(1)(A) and 406(b). 

During the drafting of Dodd-Frank, Congress worked to ensure that the swap counterparty would 

not be deemed a fiduciary if the plan has its own investment professional. This proposed rule will 
 20

eliminate swaps from a plan’s investment choices and the fears of plan sponsors that they will be closed 

out of the swap market will be realized. 

Similarly, plans will be unable to buy 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. The 

appraiser provision goes far beyond any reasonable approach to status of a fiduciary. We understand the 

Department’s frustrations with ESOP valuations but it seems likely that there are other approaches to 

consider, such as amending the prohibited transaction exemptions for ESOPs, and tailoring any changes to 

that type of plan. We believe the Department must keep in mind that there are unintended consequences

of this change: if no appraiser is willing to provide an ESOP appraisal, the plan will be disqualified and 

all participants immediately taxed on their distributed benefits. The Department needs to consider a more 

tailored approach with less harmful, costly, and adverse consequences for plans and their participants. 

g. Other Necessary Exceptions

In addition to broadening and clarifying the selling exception and the education and platform 

exceptions, we urge the Department to consider other necessary exceptions. 

i. Valuation

The exemption for valuations should be modified to make clear that regardless of whether the asset 

is “hard to value,” a custodian does not become a fiduciary for the value it places on the asset. Without a 

clear exemption for ministerial custody valuations, reporting of values will be disrupted and tax reporting 

will be thrown into disarray. Custodians will disclaim a value for any asset for which there is no public 

pricing service, with potential adverse consequences under the Internal Revenue Code. Custodians will

not permit plans and IRAs to hold these assets. Prime brokers will limit their services to plans and plan 

asset vehicles (or potentially even vehicles that have any plan investment). No one will be benefited by 

this change. 

ii. Dodd-Frank and other Laws

We also urge the Department to clearly indicate that any information required to be provided to a 

plan or its independent fiduciary under other laws should not make a service provider a fiduciary under 

ERISA. For example, the proposed rule must have an exception for information required to be provided 

in connection with the offering and sale of swaps under SEC and CFTC rules shall not cause a 

counterparty to be deemed a fiduciary.31 Dodd-Frank requires a swap dealer, when dealing with a plan, 

to: 

• verify that any counterparty meets the eligibility standards for an eligible contract participant; 

• disclose to any counterparty to the transaction (other than a swap dealer, major swap participant, 

security-based swap dealer, or major security-based swap participant) — 

 

31 See Section 731 of Dodd-Frank, Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010).
 21

(i) information about the material risks and characteristics of the swap; 

(ii) any material incentives or conflicts of interest that the swap dealer or major swap 

participant may have in connection with the swap; and 

(iii)(I) for cleared swaps, upon the request of the counterparty, receipt of the daily mark of the 

transaction from the appropriate derivatives clearing organization; and 

(II) for uncleared swaps, receipt of the daily mark of the transaction from the swap dealer or 

the major swap participant; and 

• communicate in a fair and balanced manner based on principles of fair dealing and good faith. 

In addition, when dealing with plans, government entities and endowments (“Special Entities”), a swap 

dealer must: 

• have a reasonable basis to believe that the counterparty that is a Special Entity has an independent 

representative that— 

(I) has sufficient knowledge to evaluate the transaction and risks; 

 (II) is not subject to a statutory disqualification; 

(III) is independent of the swap dealer or major swap participant; 

(IV) undertakes a duty to act in the best interests of the counterparty it represents; 

(V) makes appropriate disclosures; 

(VI) will provide written representations to the Special Entity regarding fair pricing and the 

appropriateness of the transaction; and 

(VII) in the case of employee benefit plans subject to the Employee Retirement Income Security 

act of 1974, is a fiduciary as defined in section 3 of that Act (29 U.S.C. 1002); and ‘‘(ii) before the 

initiation of the transaction, disclose to the Special Entity in writing the capacity in which the swap 

dealer is acting. 

This list is not insubstantial and several of the duties would likely be fiduciary duties under the 

proposed regulation. Without such a clear exception, the Department will eliminate plans from the swaps 

market, a consequence that Congress clearly intended to avoid in Dodd-Frank.32

 

iii. The Plan Has Engaged Its Own Fiduciary

We also urge the Department to consider an exception where the plan or IRA has given investment 

discretion to an ERISA 3(38) manager and has a written agreement with an adviser, bank, insurance 

company or other consultant with respect to the assets involved in the transaction. Where a plan or IRA 

owner has selected its fiduciary, and retained such fiduciary to act with discretion or provide fiduciary 

advice pursuant to a written agreement, the regulation should not impose such duties on others dealing

with that manager or adviser. Broker-dealers speak to advisers and managers regularly; providing 

recommendations, market color, investment ideas or other views to such adviser or manager should not 

 

32 We also respectfully request the Department’s confirmation that the requirement in Dodd-Frank 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 or terminate under Part I(a) of PTE 84-14. 
 22

make the broker-dealer a fiduciary to a plan that has given discretionary control to that adviser or 

manager. 

iv. Non-plan Asset Vehicles

Finally, we think it is very important for the Department to clarify that those who report current 

interests in non-plan asset funds – be it the general partner of the fund or the fund administrator – will not 

be deemed a fiduciary for reporting such values. The 1984 plan asset regulation carefully defines who is a 

plan fiduciary for purposes of investments in pooled vehicles; this regulation should not overturn that 

careful balancing.33

 

 

33 Congress has spoken repeatedly on when a vehicle holds plan assets and when its managers are fiduciaries. With no 

Congressional authorization or analysis from the Department, the proposed regulation would indirectly reverse those rules. 

While we would like to believe that this result is unintended, the clear language of the proposed regulation would make 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 any agreement between them. The 

proposed regulation would have that result even if the person providing input into values for a pooled fund did not know a plan 

was invested in the pooled fund. Nothing in ERISA (or any other law) permits or requires this result. 

We are very concerned that without proposing the amendment of the Department’s long-standing plan asset rules, and 

without assessing the cost of changing these rules or otherwise demonstrating why the rule should be changed, this proposal 

would effectively reverse course and cause the managers of non-plan asset vehicles and the custodians, prime brokers, and 

valuation personnel that deal with them to be fiduciaries. This result is unsupported by the Department’s enforcement 

difficulties, or indeed by any of the issues it raises in the preamble to the proposed rule and the economic analysis that 

accompanies the proposed rule. We urge the Department to make clear that the proposed rule does not apply in any way to 

nonplan asset funds. 

If, on the other hand, this result was intended, we think it is inconsistent with clear Congressional intent over the last 

25 years. From 1979 through 1986, the Department 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 Department 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 and other service providers to these funds were not subject to the ERISA fiduciary rules on account of the 

internal workings of the funds. 

 Similarly, in the Pension Protection Act just a few years ago in 2006, Congress added section 3(42) to ERISA to 

reinforce the 25% test for plan asset funds, and excluded public plans from the calculation, effectively overturning the 

Department’s attempt to broaden the application of ERISA to pooled funds, solely because of their public plan investors. In 

our view, that amendment signaled Congress’ 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. Section 3(42) reflects Congress’ intention 

that general partners and other service providers to these “under 25%” funds were not subject to the ERISA fiduciary rules on 

account of the internal workings of the funds. 

 In addition, less than 6 months ago, Section 406 of the Dodd-Frank Act provides the Commission with broad authority 

to define, by rule, terms in the Advisers Act. However, it expressly limits the Commission’s authority to define the term 

“client” by prohibiting the Commission from defining the term for purposes of Section 206(1) and (2) to include investors in a 

private investment fund if the fund has an advisory agreement with the adviser. Section 913 of the Dodd-Frank Act amends 

Section 211 of the Advisers Act to provide a similar limitation, such that, to the extent the Commission issues rules under the 

Advisers Act regarding an adviser’s fiduciary duty to customers, the Commission may not define “customer” to include 

investors in a private investment fund if the fund has an advisory agreement with the adviser.33 Thus, in Dodd-Frank, Congress 

took a consistent position regarding funds: where the adviser’s client is the fund, the adviser has no duty to the individual 
 23

h. Clarification of the Fee Language

We also request the Department’s clarification of the fee language in the proposed regulation. 

While it tracks judicial decisions for the most part, the last sentences of the section provide as follows: 

“The term fee or compensation includes, for example, brokerage, mutual fund sales, and insurance sales

commissions. It includes fees and commissions based on multiple transactions involving different parties.” 

The latter sentence is not explained in the preamble, and we would appreciate some examples of the 

conduct and fee arrangements that the Department is addressing. 

2. Effect on Retail Accounts 

We have already mentioned the concern that brokers simply will not deal with IRAs and plans for 

all the reasons given thus far. We have also mentioned the likelihood that hedge funds, private equity 

funds, real estate funds, and other alternative funds may be unwilling to take IRA assets, despite the fact 

that normal tax investment education would suggest that these investments are appropriate, if not most

appropriate, for tax advantaged retirement accounts. Assuming a broker does choose to deal with a plan 

or IRA as a fiduciary, the Department would need to alter a variety of prohibited transaction exemptions 

to support this business. 

 With some changes, PTE 75-1 will permit such plans to deal with market makers who are 

fiduciaries, and to buy mutual funds that are not affiliated with their broker fiduciary. With some changes, 

PTE 86-128 will permit the broker fiduciary to execute transactions as agent, and to engage in agency 

cross trades but will not permit the fiduciary to execute transactions involving deposits, currency, futures, 

or any property other than securities. With some changes, PTE 77-4 will permit the broker fiduciary to 

recommend its affiliated open end mutual funds or affiliated bank deposits but there is no exemption that 

would allow it to receive trailers, fees or commissions from the mutual fund if the fund is purchased on an 

agency basis. 

There is no exemption that would permit the plan to purchase currency from the broker fiduciary. 

Thus, small amounts of currency which previously were purchased at favorable rates from the broker will 

be purchased in small odd-lots from third parties at likely unfavorable rates. Similarly, there is no

exemption that would permit the plan to purchase deposits on unaffiliated banks. A very popular program 

for cash sweep, the so-called deposit sweep program, which sweeps idle cash to bank deposits so that all 

 

investors in the fund. All of this authority consistently stands for the proposition that where a fund does not hold plan assets, 

the adviser or general partner does not have fiduciary duties to the underlying investors. 

This proposed regulation is inconsistent with these three laws, as well as within the Department’s own regulations. 

After notice and comment, the Department issued regulations in 1986, prompted by a Congressional mandate, to make sure that 

real estate and private equity funds that met the requirements of the regulation, were not covered by ERISA. With no 

suggestion that anything about the 1984 plan asset regulation was wrong, no longer relevant, an enforcement issue for the 

Department, or unprotective of participants and beneficiaries, the Department proposes to reverse that regulation without notice 

and comment by proposing that any person who values an investment, or an asset within a fund, becomes a fiduciary. The 

Department should not modify or reverse the plan assets regulation through this proposal, especially where that regulation was 

specifically mandated by Congress.
 24

deposits are covered by FDIC insurance, would be prohibited. Under such a program, the broker receives 

a spread from the interest paid. As a fiduciary, it would not be able to receive that fee, so clients would be 

foreclosed from this alternative. Another alternative for cash sweep is the free credit balance, where the 

broker pays interest on idle cash in the account. Because the free credit balance program is a use of plan 

assets, a fiduciary may not permit a plan or IRA account to participate in the program. Therefore, plans 

and IRAs will be presented only with a money market fund cash sweep alternative. Given recent 

economic turbulence, one can understand why investors (including IRA owners and Keogh plan owners) 

would desire and benefit from unlimited FDIC insurance coverage. In today’s market, the very low rate

of interest generally available on cash will fall to almost imperceptible returns for plans and IRAs, unless 

the Department provides exemptions for such programs. 

PTE 84-24, the class exemption that covers sales of mutual fund shares and insurance products, 

will need to be significantly revised because counterparties may be fiduciaries because they or their 

affiliates are advisers and have circulated research.34

 

Another product that brokers sell to IRA owners is annuities. In light of the Department’s focus on 

retirement income options, we urge the Department to confirm that PTE 84-24 would remain available to 

fiduciaries who provide investment advice for a fee and would cover sales of affiliated and unaffiliated 

annuities as well as any compensation received by an affiliated insurance company, affiliated money 

managers of variable annuity subaccounts, and any revenue sharing, commissions or other fees paid to the 

broker fiduciary. 

Unless changes are made to PTE 75-1, these clients will be unable to engage in short sales or trade 

on margin because the prohibited transaction exemptions do not permit fiduciaries to extend margin credit 

to plans. There is similarly no exemption that would permit a broker fiduciary to cover overdrafts or

provide settlement accommodation for failed trades (and indeed, no settlement accommodations at all) 

because no exemption exists for broker-dealers to extend credit where it is acting as a fiduciary.35 Thus, 

unless the Department grants new exemptions, plans and IRAs, unlike all other investors, will be 

foreclosed from markets and transactions that the Department determined in 1975 were appropriate for 

plans. 

All of the consequences described above assume the most likely case: that brokers will assume 

that the risks and costs of being retroactively deemed a fiduciary are too great and this class of accounts 

must be treated as fiduciary accounts. But what if a broker decides it does not want to provide fiduciary 

services. How will it revise its practices to comply with the law? First, it is likely that these retail plan 

and IRA accounts will be foreclosed from purchasing securities except on an unsolicited basis. That 

 

34 There is significant confusion regarding the sale of 3rd party and affiliated mutual funds under PTE 75-1, 84-24 and 

86-128. If the Department finalizes the proposed rule without change, all of these exemptions will require revision. Indeed, 

without clarification regarding how these exemptions apply to mutual fund sales under current law, it may be impossible for 

brokers to determine the impact of this regulation on their business models. We believe any economic impact assessment 

would be incomplete without an assumption as to whether brokers would be able to rely on these exemptions for sales of 

affiliated and 3rd party mutual funds.

35 Without an immediate exemption for settlement accommodations in these accounts, trading will simply cease in 

these accounts for the same reason raised with the Department in 1975.
 25

means no calls from one’s broker, alerting the client to a particular move in the market, a trend in an 

industry, a new equity or bond issue. Second, when the client asks for information and suggestions for all 

of its assets, including its retirement assets, the broker will simply decline to provide any asset allocation 

or other information with respect to these accounts and will advise the client in writing that it is treating 

the client’s assets as if the retirement accounts did not exist. Third, brokers may well limit the products 

they are prepared to sell plans: perhaps only equity and debt securities on an agency basis.36 Fourth, 

certain products and services may be sold at a higher cost to account for the higher compliance and 

regulatory costs. In addition, brokers may provide only asset-based advisory services, which may not be 

the optimum alternative for a buy and hold retirement account. 

Still another area of concern for retail accounts is futures trading. Because the broker-dealer 

exception in current law and unchanged in the proposed rule does not cover futures merchants, no futures 

merchants will execute trades for plans without additional exemptive relief. In addition, since PTE 86-

128 only covers securities trades and not futures trades, the client’s broker will be unable to execute the 

trade itself or through an affiliate. Plans and IRAs will find it more difficult to invest in futures because 

the futures merchant may become a fiduciary solely by providing market information and no exemption 

would then exist for its commissions. While exchange-traded funds may be a reasonable substitute in 

some markets, they may not be available in all markets. Finally, these accounts will be unable to invest in 

affiliated closed end funds, hedge funds, limited partnerships, venture capital and real estate operating 

companies or other commingled grantor trusts, even if the valuation issues described above do not 

foreclose plan investment in these vehicles without additional exemptive relief. And while not free from 

doubt, the proposal can be read to prohibit brokers providing services to plans to help the plan pick a 

recordkeeper, trustee or insurer, if the broker’s affiliates are in those businesses, in the absence of 

exemptive relief. 

3. Effect on Institutional Accounts 

As described earlier in our comments, without significant changes in the regulation, plans may be 

forced out of the swaps market, solely because the duties imposed by Dodd-Frank will make dealers 

fiduciaries under the Department’s regulations. The trading partners and other service providers available 

to plans will be significantly restricted because of the fear that research or market color is deemed to be 

fiduciary advice. The free exchange of ideas, strategies, peer initiatives and introduction to new managers 

will come to a halt, as everyone considers the possibility of becoming a fiduciary. Market color from the 

dealer or other service provider will be significantly curtailed, if provided at all. Plans may be limited in 

their ability to invest in hedge funds, private equity funds and real estate funds as general partners seek to 

avoid fiduciary status and appraisers refuse to provide services if plans are involved. 

Prime brokers may refuse to provide services for plans and plan asset funds, forcing these accounts 

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

 

36 Many broker dealers provide liquidity and best execution to retail customers by acting as principal in securities 

transactions. This is a cornerstone of the equity securities markets and a basic equity market-maker assumption that many 

broker-dealers perform. Broker-dealers also provide substantial liquidity and best execution by acting as principal in the fixed 

income markets. See, in this connection, the Department’s preamble to its principal transaction relief in PTE 75-1. If retail 

retirement account customers lose access to this liquidity, their execution costs will increase and markets will lose a significant 

source of liquidity. These costs should be considered in the Department’s economic analysis.
 26

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. This is particularly an area where 

the most sophisticated plan sponsors and fund managers should be able to agree that they are not, and will 

not be relying on the prime broker for fiduciary services. Similarly, with respect to other information and 

educational services provided by service providers to sophisticated plan sponsors, such as information on 

investment strategies like liability driven investing, plan sponsors should be able to agree that they are not, 

and will not be, relying on the service provider for fiduciary advice in connection with such information. 

As noted above, billions of dollars of capital are invested by plans in hedge funds, private equity 

funds and real estate. The proposed rules relating to appraisals and valuation alone will cause funds to 

reconsider plan investment. The result may be significantly reduced capital in these markets, at a time 

when those reductions would harm the current economic recovery. This provision also appears to reverse 

the plan asset regulation which defines which funds are deemed to hold plan assets, as well as create an 

inconsistency with section 3(42) of ERISA, just recently enacted in the Pension Protection Act of 2006, 

and the Congressional mandate in 1982 that required the Department to provide an exception for real 

estate and private equity funds. 

The proposed regulation will also have unintended effects on cash and electronic trading platforms 

where a dealer is interposed as principal, if that dealer is unsure whether he is a fiduciary to any trading 

plan. Plans may be foreclosed from using such platforms, which will create significant inefficiencies and 

reverse a trend toward more automated and liquid markets. 

 

 Plans often purchase structured notes or other products in order to obtain a market exposure more 

efficiently. Those notes often give the issuer calculation agent duties which could make the issuer a

fiduciary and invalidate the sale and holding of the note. This is still another example of the unintended 

consequences of the proposed rule. 

4. The Department’s Stated Reasons for the Change 

 The Department suggests that the change in the regulation is necessitated by “significant changes 

in both the financial industry and the expectations of plan officials and participants.” 75 FR 65265. While 

there have been many changes in financial products and institutions over the last 35 years, none have 

altered the way securities brokers and dealers provide services to their clients. The comments on the

Department’s proposed regulation 35 years ago describe a “one on one” relationship by these plan service 

providers through which plan fiduciaries and IRA owners learn about available investment alternatives,

market color, asset allocation theory and lifetime income options. Concededly, there has been a shift

away from defined benefit plans in the last 35 years; however, defined benefit plans rarely use investment 

advice fiduciaries but instead, give managers discretionary control. We respectfully submit that the same 

topics discussed in 1975 form the basis for conversations between brokers and their clients today, 

regardless of whether the conversations relate to a defined benefit plan or a defined contribution plan or an 

IRA, and regardless of whether the participant in the conversation is a plan fiduciary, a plan participant 

with respect to his or her individual account, or an IRA owner. There may be more products, and more or 
 27

different institutions and different methods of communications, like email and the internet, but these

nonfiduciary conversations are little changed over the last 35 years. 

The comments made in connection with the current regulation in 1975 raise these same issues in a 

very similar factual context – small plans, dependent for their market information on brokers, without

advisory relationships. The comments are remarkably similar to those we make today: in the small plan 

universe, people depend for their market information and investment ideas on brokers who are providing

this information incidentally to the brokerage relationship. If that relationship is required to be a fiduciary 

relationship, either costs will increase for those plans to accommodate the relationship or access to the 

information will decrease. 

See, for example, the comments of Hazelhurst & Associates addressing the need for as objective a 

standard as possible (“We feel that there may be considerable misunderstanding, possibly subject to 

retroactive interpretation. . .”). On the inclusion of a test that automatically made a person a fiduciary if it 

had discretionary control over other assets of the plan, commenters pointed out that such a test was 

inapposite. See, for example, the comments of Sullivan & Cromwell (“The alternative requirement of 

discretionary control to buy and sell plan assets contained in subsection 1(ii)(A) of the proposed 

regulation is not relevant to the meaning of investment advice, as that term is used in Section 3(21)(A)(ii) 

of the Act. Congress specifically provided in Section 3(21)(A)(i) of the Act that a person would be a

fiduciary with respect to a plan if he had discretion to buy and sell plan assets; and as a separate category, 

provided in Section 3(21)(A)(ii) that a person would become a fiduciary if he were paid to render 

investment advice to the plan. Accordingly, section 2510.3-21(c)(1)(ii)(A) should be eliminated from the 

definition of ‘investment advice’ since it has no bearing on the meaning of the key terms which would 

define a fiduciary under Section 3(21)(A)(ii) of the Act – ‘investment advice’ and ‘fee or other 

compensation, direct or indirect’.”). 

The Sullivan & Cromwell comment also pointed out that the Department’s exemption for agency 

trades, Part I of PTE 75-1, implicitly recognizes that a broker might be able to furnish “advice, either 

directly or through publications or writings, as to the value of securities, the advisability of investing in, 

purchasing or selling securities or the availability of securities or of purchasers or sellers of securities or of 

any analyses or reports concerning securities, economic factors, or trends or the performance of accounts’ 

without being a fiduciary to a plan, unless he renders such advice ‘under circumstances which make [him] 

a fiduciary’.” As we do today, the comment points out that the Department must preserve the concept that 

securities advice made available to the public at large, or a broker’s entire client base or some large 

segment thereof, whether or not for a fee, is not fiduciary advice, unless the Department is prepared to 

endanger the “access to general market and economic information which brokers may otherwise be 

unwilling to provide for fear they would be fiduciaries to plans”. 

That comment goes on to point out that the regulation will be impractical to apply if the broker 

unilaterally has to determine his fiduciary status based on vague concepts. The comment specifically 

points to the agreement, arrangement or understanding language which requires both parties to reach an

understanding. As we do today, commenters pointed out that service providers who may be retroactively

“understood” to have fiduciary responsibility, with all of the prohibited transactions that entails, may 

choose not to service the market using the business construct that existed well before ERISA and has 

consistently existed, under the Department’s regulations, since that time. 
 28

On the subject of valuation, Sullivan & Cromwell’s comment suggested that the Department 

should adopt the language from the interim PTE 75-1 exemption that fiduciary investment advice does not 

include the performance of valuation, custodial or other functions incidental to the conduct of a broker’s 

securities business (which the Department did adopt in 1975). The same point can be made today. 

See also the comments of Dean Witter: 

Routine executions of securities transactions and providing general research 

information to customers should not be equated with “investment advice”. The inclusion of 

advice as to “the availability of securities or other property” in the definition of 

“investment advice” reaches activities vital to market executions. The possession of this 

kind of information is one of the intangible elements that provide a customer with the best 

execution. This is particularly true in larger transactions where speed in execution often 

determines the ability to get a desired price as either a buyer or seller. Such information, 

when provided by the broker or dealer in the conduct of his business as such and without 

special compensation, should not be included in any definition of “investment advice”. 

Research generally made available to customers as an investment tool and for 

which no special fee is charged should likewise not be included in the definition of 

“investment advice”. This information might not otherwise be available to persons trying 

to do business in the securities markets. Inequality of access to full information is a prime 

concern of the various securities laws and the extensive securities regulatory system we 

have in this country. Employee benefit funds should have as full access to investment 

information as any other investor. 

 

 Even Philip A. Loomis, an SEC Commissioner at the time, in approving the 1975 formulation of 

the regulation, noted the regulation properly permits brokers to provide advisory services without 

becoming fiduciaries. The comments of Merrill Lynch were consistent with this point of view. (“Keogh

plans and other small plans normally do not employ a professional investment manager, but rather, look to 

one or more broker-dealers to generate research and investment ideas for the plans’ assets. Brokerdealers, in recommending securities transactions to plans (as well as to all other customers) are generally 

obliged to tailor their advice to the particular needs of the plan. Of course, the advice may or may not be 

acted upon. Yet under the proposed language of the regulation, the frequent rendering by a broker of 

advice might raise doubts as to whether such advice serves as a primary basis for investment decisions

with respect to plan assets. The broker might have been one of several sources consulted by the plan in 

formulating the investment advice; however the broker may have no knowledge of the plan’s other 

brokerage relationships or utilization of additional advisory sources. Also, if the plan executes 

transactions through others, the broker may have no idea of the extent to which its recommendations are 

being followed.”). The 1975 comment serves to underscore the need for a mutual arrangement, 

understanding or agreement between the parties, consistent on both sides, and subject to termination at 

any time by either. 
 29

 All of these comments suggest a marketplace remarkably similar to that which exists today, with 

the exception of individual participants in self-directed 401(k) accounts. But 401(k) participants in plans 

generally have little contact with brokers, and to the extent that they do, the contact is quite similar to that 

of an IRA owner. Thus, we do not agree with the Department’s view that the market has shifted in a 

dramatic enough way to necessitate the wholesale revision which it has proposed here. 

The Department suggests that its proposed changes are required to make its enforcement program 

more effective. The preamble to the proposed regulation states: 

Amending the Department's current regulation by broadening the scope of service providers that 

would be considered fiduciaries would enhance the Department's ability to redress service provider 

abuses that currently exist in the market, such as undisclosed fees, misrepresentation of 

compensation arrangements, and biased appraisals of the value of employer securities and other 

plan investments. (Footnote omitted). 

 The Department has just released the last of its three initiatives (i.e., the Form 5500 Schedule C, 

the interim final regulation under section 408(b)(2) and the participant disclosure regulation) which were 

designed to eliminate undisclosed fees, undisclosed conflicts, and misrepresentation of fee arrangements. 

It is difficult to understand why this regulation is necessary to address the same issues. This regulation is 

far broader than the aims it seeks to address. It imposes fiduciary status without a relationship to a plan 

and creates prohibited transactions and cofiduciary liability on entities who have no understanding with a 

plan or IRA that any services at all will be provided. The Department also states that participants and 

beneficiaries would directly benefit from the Department’s more efficient allocation of enforcement 

resources by providing greater protections than are available under the current regulation. However, no 

example or explanation of this benefit is provided that would justify these sweeping changes. We 

respectfully submit that there is no evidence that the proposed regulation will be more protective but a 

great deal of evidence that these “protected” accounts will suffer greater costs and fewer choices – new 

asset-based advisory fees to replace a commission/spread based structure, additional transaction costs, and 

elimination of investment options and alternative vehicles, constriction of the dealer market, limits on 

permissible assets in IRAs, elimination of pricing of anything other than publicly traded assets. 

 The Department suggests that the proposed regulation will benefit its enforcement program by 

“expediting the resolution of difficult factual questions and enforcement challenges by removing the 

requirements in the current regulation's five-part test that investment advice must be provided on a regular 

basis based on the parties' mutual understanding and that the advice will serve as a primary basis for plan 

investment decisions”. 75 FR 65273. Reversing 35 years of case law, enforcement policy and the 

understanding of plans and plan service providers, without any legislative direction to depart from the 

Department’s contemporaneous understanding of the statute, to make it easier for the Department to sue

service providers seems to us an inadequate basis for proposing this radical change. And of course, this 

enforcement rationale cannot apply to IRAs, over which the Department has no enforcement authority. 

Just six months ago, in section 913 of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Congress asked the Securities and Exchange Commission to conduct a study on 

investment advisers and broker dealers and the distinctions between them. In addition, FINRA has 

proposed changes to its “Know Your Customer” (Rule 2090) and “Suitability” rules (Rule 2111), 75 FR 
 30

51310, August 19, 2010.37 The preamble to the DOL’s proposed regulation notes that the Department 

does not have cost data regarding how that conclusion alone would implicate the prohibited transaction

rules of ERISA and the Code. One would hope that the agencies will coordinate rule-making so that the

change in the standard of conduct would be effective at the same time that this regulation and the changes 

in the necessary prohibited transaction trading exemptions were effective. The SEC 913 study does NOT

suggest or recommend ERISA-like fiduciary duties with its attendant prohibited transactions, but rather a 

uniform standard of care that is business model/fee neutral and permits (i) principal trading, (ii) 

commission based arrangements and (iii) sale of proprietary products, all activities that ERISA’s 

prohibited transaction rules would prohibit for fiduciaries. The SEC 913 Study changes the standard of 

care without requiring all trading practices and products to be reconsidered; the SEC approach is carefully 

tailored to help retail accounts without increasing their costs, eliminating their choices, and making their 

trading less efficient. 

If all brokers who provide market color or investment information are deemed to be fiduciaries, 

regardless of the intentions of the parties, the vast majority of commission based accounts may move 

toward fee based arrangements. Securities and currency transactions that were formerly executed with a 

dealer as principal will be executed on an agency basis against a third party dealer, subjecting the account 

to an asset-based fee, plus commissions and markups. The effect of these changes on the capital markets 

should be studied by the agencies with jurisdiction over the securities markets. 

5. Costs of the Change

The Department’s cost estimates focus on the cost to service providers, and not the cost to plans. We 

think this emphasis is misplaced. The real question is the cost to plans and their participants. And even 

the list of uncertainties does not once mention IRAs. 38

 

 

37 The FINRA rule describes the initiative as follows: “The ‘know your customer’ and suitability obligations are 

critical to ensuring investor protection and fair dealing with customers. Under the proposal, the core features of these 

obligations set forth in NYSE Rule 405(1) and NASD Rule 2310 remain intact. FINRA, however, proposes modifications to 

both rules to strengthen and clarify them. In Regulatory Notice 09-25 (May 2009), FINRA sought comment on the proposal. 

The current filing includes additional proposed changes that respond to comments.” 75 FR 51310. 

38 The Department’s list of uncertainties is as follows: The Department's estimates of the effects of this proposed 

rule are subject to uncertainty. The Department is confident that adopting a new definition of the term ``fiduciary'' should 

discourage harmful conflicts of interest, improve service value, and enhance the Department's ability to redress abuses and 

more effectively and efficiently allocate its enforcement resources. However, it is uncertain about the magnitude of these 

benefits and potential costs. It is possible this rule could have a large market impact. 

 For example, the Department is uncertain regarding whether, and to what extent, service provider costs would 

increase due to the proposed rule, and if so, whether the increased cost would be passed on to plans. The Department expects 

that more service providers would be determined to be fiduciaries under the proposed rule than under the current regulation. 

These service providers could experience higher costs of doing business due to the increased liability exposure that is 

associated with ERISA fiduciary status, such as fiduciary liability insurance costs, which could result in higher fees for their 

plan clients. The Department also is uncertain whether the service provider market will shrink because some service providers 

would view the increased costs and liability exposure associated with ERISA fiduciary status as outweighing the benefit of 

continuing to service the ERISA plan market. The Department does not have enough information to provide a specific number. 

However, it is possible that many plans currently employ service providers who would be considered fiduciaries for the first 

time under the proposal. 
 31

The SIFMA study conducted by Oliver Wyman & Associates in connection with the Dodd-Frank 

section 913 study estimates that the realized cost for individual account plans will be an increase of 23-27 

basis points each year on these small plans and IRAs. If you multiply that increase by the $4.3 trillion in 

IRA plans today, the additional cost to IRA owners is $9.6 million to $11.3 million in investment costs 

annually. 

Data provided to the SEC for the SIFMA study suggests that over 30 million households hold 

assets solely in commission based accounts; 27 million of these accounts are from the small investor 

segment (less than $250,000 in assets).39 These accounts hold $58 billion of fixed income securities 

purchased through commission based accounts.40 If these self-directed, nonfiduciary accounts were to be 

deemed fiduciary accounts, all fixed income securities would be required to be purchased from brokerdealers unaffiliated with the account’s primary broker. While PTE 86-128 permits fiduciaries to select 

themselves or an affiliate to effect agency trades for a commission, there is no exemption that permits a 

fiduciary to sell a fixed income security (or any other asset) on a principal basis to a fiduciary account. 

The result of that prohibition is that the broker would trade away from his own firm, charging a 

commission for the trade on top of the mark-up charged by the selling dealer. That commission would 

result in an added cost for these self-directed accounts, and would disproportionately fall on smaller

investors, such as small plans and IRAs. In addition, the mark-up on these small trades would likely be 

higher than the broker’s own firm would have charged an existing client because the trades are so small. 

These additional costs, when added to the advisory fees that a fiduciary will likely charge its clients, will 

significantly erode the investment return of these smaller accounts. 

As noted elsewhere in this comment, IRAs hold more than $4.3 trillion as of March 2010. The 

vast majority of these assets are in self-directed accounts.41 The effect on plans should be analyzed using 

two different assumptions: (i) that the accounts will enter into asset based fee arrangements with their 

brokers, with the brokers complying with the prohibited transaction rules that govern fiduciaries under 

ERISA and the Code and (ii) that brokers will decide that the continuous monitoring and other duties 

required of fiduciaries is simply not feasible or economically efficient for these small accounts, regardless 

of whether asset-based fees can be charged. 

 

 Also, if more service providers are fiduciaries, more transactions would violate the self-dealing prohibitions 

contained in ERISA section 406(b). In order to avoid committing prohibited transactions, affected service providers would have 

to identify transactions that would be prohibited because they involve self-dealing, restructure these transactions, and modify 

their business practices in the absence of an applicable statutory, class, or individual prohibited transaction exemption. The 

Department is uncertain regarding the number of transactions that would have to be restructured, whether an applicable 

prohibited transaction exemption would be available for such transactions, and if not, the number of prohibited transactions 

exemption applications the Department could expect to receive regarding the transactions. The Department welcomes public 

comments regarding this issue. 

39 Oliver Wyman study, page 12; 2007 Federal Reserve Survey of Consumer Finances

40 Oliver Wyman study, page 16.

41 Investment Company Institute, Research Fundamentals, The US Retirement Market, Second Quarter 2010
 32

It is critical to measure the effect on these small accounts in the event that brokers reach this latter 

conclusion. If these IRAs have no ongoing relationship with a broker or other market professional, their 

primary resource will be the internet or other generic data sources like the financial press for information; 

they will be forced to make the effort to obtain their own market information, recommendations, and array 

of alternatives. We suggest that this proposed regulation, like the Department’s investment advice 

initiatives, will leave this pool of assets with no advice, or very expensive advice. Higher fees or no 

service: a Hobson’s choice for millions of IRA owners. 

The Employee Benefit Research Institute (EBRI) estimates that less than half of all families have a 

retirement plan through a current employer, 30% of all families have an IRA or Keogh plan, and two 

thirds of families have an IRA, Keogh or retirement plan though a past or current employer.42 These 

savings vehicles account for 60% of the assets of all families with income of $100,000 or less.43 Among 

families with both an individual account plan and an IRA, 45% of the overall asset average was 

attributable to IRA/Keogh balances. For families with an income under $100,000, the percentage of assets 

in IRAs alone exceeded 60% in 2007.44 Assuming just a 0.23% increase in cost, modest when one 

considers both the advisory fee likely to be imposed and the additional commissions charged on fixed 

income instruments, the incremental cost on these small accounts may lower returns by 1.17%.45 The 

effect on these accounts, virtually all of which are nonfiduciary commission-based accounts, will be 

substantial and detrimental at every income level, solely from the advisory fees and additional 

commissions. 

The Department suggests that the cost of complying with the new regulation will be $10 million in 

2011 (for existing service providers to analyze their plan relationships, and almost $1 million each year 

thereafter, for new service providers to do a compliance review.46 The analysis does not include banks, 

trust companies, fund administrators, private funds, FX dealers, all of whom sell products to plans and 

may be fiduciaries under the proposed regulation. The analysis also does not include advisers, which we 

think is mistaken, since the rule imposes additional fiduciary requirements on advisers simply because of 

the “status” tests for 3(21)(i) and (iii) fiduciaries and advisers. The Department’s estimates are based on 

the Form 5500 data and thus ignore the entire IRA universe.47 See 75 FR 65274, fn. 33. The estimates 

 

42 EBRI Issue Brief No. 333, August 2009

43 Id, p. 14.

44 EBRI Issue Brief No. 333, Figure 9a. 

45 Oliver Wyman, Page 24.

46 We think the Department’s assumptions with respect to compliance costs for service providers are wrong. Every 

brokerage and custody agreement will need to be revised, and re-signed. It seems very unlikely that any broker would take the 

risk of deemed consent, in light of the Department’s proposals. All documents and agreements will need to be revised to add 

the Department’s new disclosures required by the exceptions. A more reasonable estimate would be 50 hours of outside 

counsel time, at an average cost of $400/hr., and 1000 hours of internal legal and compliance costs at $150/hr., plus printing, 

mailing and follow-up costs for the millions of small plan and IRA accounts. Similarly, all swap documentation, dealer 

agreements, clearing agreements and advisory agreements will need to be revised. 

47 We think it is at least possible that if the IRA universe had been captured, there would be many more service 

providers who service only this market, who are not reflected in the analysis at all.
 33

ignore the costs of retooling all of the systems which create a compliance structure for the 4500 broker 

dealers in this country alone, ignoring the insurance agents, banks and trust companies, consultants, 

appraisers, recordkeepers, each of whom will have similar costs. The estimates also ignore the costs of 

retraining hundreds of thousands of professionals, of revising every plan service provider contract, of 

changing how transactions are effected in the principal markets, such as fixed income and currency, and 

the cost of the scores of exemptions that will be required. 

 More importantly, the estimates do not reflect the likely advisory fees that will be imposed on 

small plans and IRAs. If one looks only at IRAs and assumes an advisory fee of 100 basis points or 1%, 

the likely added costs are $43 billion a year, many times the Department’s estimates of the costs. Based 

on the facts in advisory opinions issued by the Department, this estimate may be significantly low. See 

DOL Adv. Opin. 2005-10, which provides as follows: “For the provision of asset allocation, custody and 

related services, the Bank charges each IRA participating in the CoMPAS Program an annual investment 

fee (i.e., the Management Fee) equal to 1.75% on the first $50,000, 1.5% on the next $250,000, and 1.25% 

on all assets over $300,000.” 

The estimates also ignore the additional fees and commissions that plans and IRAs will incur to do 

all transactions away from the broker dealer, resulting in both markups and commissions.48 The estimates 

ignore the constraints that the regulation will put on dealers who disseminate research or opinions, 

publicly or privately, to the plan sponsor or its fiduciaries. The trading costs to plans of dealing only with 

smaller dealers who are “institutional only” are critical components of any cost study. Finally, the

estimates ignore the cost of the litigation that will ensue because of the lack of certainty or the lack of 

mutual understanding between the parties. 

The Department concedes that there could be a large market impact: 

For example, the Department is uncertain regarding whether, and to what extent, service 

provider costs would increase due to the proposed rule, and if so, whether the increased cost 

would be passed on to plans. The Department expects that more service providers would be 

determined to be fiduciaries under the proposed rule than under the current regulation. These 

service providers could experience higher costs of doing business due to the increased liability 

exposure that is associated with ERISA fiduciary status, such as fiduciary liability insurance 

costs, which could result in higher fees for their plan clients. The Department also is uncertain 

whether the service provider market will shrink because some service providers would view the 

increased costs and liability exposure associated with ERISA fiduciary status as outweighing the 

benefit of continuing to service the ERISA plan market. The Department does not have enough 

information to provide a specific number. However, it is possible that many plans currently 

employ service providers who would be considered fiduciaries for the first time under the 

proposal. 

 

48 The Department notes that it rejected a regulatory alternative that would have simply tracked the statutory language 

because it would create uncertainty, causing most service providers “in order to mitigate or avoid any potential risks, might 

simply presume fiduciary status and charge higher fees to any plan client or limit or discontinue the availability of their services 

or products to ERISA plans.” We note again the fact that the Department has ignored the effects on IRAs. For all the reasons 

cited in this comment, the alternative selected by the Department has precisely the flaws, and will have precisely the effect of 

the alternative it rejected. 
 34

 Also, if more service providers are fiduciaries, more transactions would violate the selfdealing prohibitions contained in ERISA section 406(b). In order to avoid committing prohibited 

transactions, affected service providers would have to identify transactions that would be 

prohibited because they involve self-dealing, restructure these transactions, and modify their 

business practices in the absence of an applicable statutory, class, or individual prohibited 

transaction exemption. The Department is uncertain regarding the number of transactions that 

would have to be restructured, whether an applicable prohibited transaction exemption would be 

available for such transactions, and if not, the number of prohibited transactions exemption 

applications the Department could expect to receive regarding the transactions. The Department 

welcomes public comments regarding this issue. 

 The Department believes its assumptions are reasonable based on the available information 

and tentatively concludes that the proposed regulation's benefits would justify its costs. The 

Department invites comments that will help it assess the impact of areas where it is uncertain. 

Yet, in light of this uncertainty, the Department has not commissioned a study, issued a notice of 

intent to propose a rulemaking as it did with retirement income options, or sought out the significant

amount of data that exists on the costs of commissions and fee based programs on small investor 

investment costs and returns. The Department’s cost analysis refers to a 2005 SEC study, without 

reference to the data currently before the SEC in connection with the Dodd-Frank investment adviser 

study. It is unclear, how, in light of the Department’s stated uncertainties, it has determined that its 

assumptions are reasonable. 

 In addition to the costs on IRAs and plans, which are described above, the economic analysis for 

the proposed regulation suggests that service providers will spend only $10 million in the aggregate to 

come into compliance with this proposal, if adopted. If one assumes, as we do, that the costs of 

redocumenting every retirement account, retraining all personnel, revising data systems and trade order 

entry systems to block principal transactions, obtaining fiduciary insurance, and other retooling costs by 

the more than 4500 broker-dealers alone will cost many multiples of that amount.49 It is not an 

unreasonable assumption that at least some of these additional costs will be shifted to customers. If one 

assumes that each broker will spend an average of $500,000 to comply with the new rules, the costs for

broker-dealers alone is $300 million, without considering other service providers that will be similarly 

affected. If even half that cost is shifted to small plans and IRAs, the cost increase per plan, over and 

above the costs discussed above, would likely approach hundreds of dollars per account. 

 

6. Effective Date and Transition Rules

 The preamble to the proposed regulation states that the regulation will apply 180 days after its 

adoption. We believe that the effective date of the regulation raises very significant issues, especially 

 

49 The Department’s estimates are unrealistic. There are 4500 securities firms that would be affected by the proposed 

change, as well as insurance companies, consultants, appraisers, valuation agents, custodians, etc. Even if one assumed that the 

entire $10 million estimate in the Department’s analysis applied only to the securities industry, that number suggests that each 

broker-dealer would need to spend under $2,200 to come into compliance with the rule. That amount would not begin to cover 

the costs of fiduciary liability insurance, retraining, and revising systems and compliance programs. 
 35

when the change in interpretation applies to statutory language which has not changed. We think it is

critical that the regulation have a significantly delayed effective date (at least two years) to give service 

providers adequate time to change their systems, their agreements, their training and their compliance

programs. We also believe that the Department needs to provide some protection for conduct premised on 

the existing regulation. The Department provided almost a year delay for the section 408(b)(2) regulation 

which has been published in interim final form, and about 14 months for the participant disclosure 

regulation that interprets the requirements under section 404. We urge the Department to consider a 

transition period and a safe harbor rule for past conduct in reliance on the current regulation. In addition, 

we strongly urge the Department to make the regulation effective after the effective date of the DoddFrank regulations on standard of conduct and swap dealer business conduct standards. 

7. Plan Distributions

 The Department requested comment on whether and to what extent any final regulation should 

define the provision of investment advice to include recommendations regarding whether and when to 

take a plan distribution. Where a service provider is already acting as a fiduciary with respect to assets of 

a plan, these recommendations may be fiduciary recommendations; where there is no agreement, there is 

no reason to suggest that where assets are held (rather than how they are invested) should be deemed 

fiduciary conduct. In our view, this is not an investment decision. It is not related to decisions on how to 

invest assets of a plan or how to allocate assets of a plan. It is a personal, tax and financial decision, often 

based on a person’s desire to have all of his or her assets consolidated in one place for more efficient 

reporting. At older ages, this becomes more and more important and is often a decision on which children 

and spouses weigh in. The Department issued its opinion in this area just a few years ago; we do not 

believe it should be changed. Nothing has changed in the last 5 years. 

Conclusion

On behalf of its members, SIFMA respectfully urges the Department to reconsider its proposed 

changes to the definition of fiduciary regulation, to reassess its economic analysis, to confer with FINRA, 

the SEC and the CFTC on the interaction of these changes with the requirements of Dodd-Frank, the new 

suitability rules and the Investment Adviser/Broker-Dealer regulations that will be proposed by the SEC. 

We look forward to the hearing on March 1, 2011 and a continuation of this very important 

dialogue with the Department. 

 

Attachment A: Oliver Wyman Study 

Attachment B: Text of Section 913 of Dodd-Frank 
H. R. 4173—449 

‘‘(B) disclosing the action, if any, the Commission 

intends to take with respect to the finding or recommendation. 

‘‘(h) COMMITTEE FINDINGS.—Nothing in this section shall 

require the Commission to agree to or act upon any finding or 

recommendation of the Committee. 

‘‘(i) FEDERAL ADVISORY COMMITTEE ACT.—The Federal Advisory 

Committee Act (5 U.S.C. App.) shall not apply with respect to 

the Committee and its activities. 

‘‘(j) AUTHORIZATION OF APPROPRIATIONS.—There is authorized 

to be appropriated to the Commission such sums as are necessary 

to carry out this section.’’. 

SEC. 912. CLARIFICATION OF AUTHORITY OF THE COMMISSION TO 

ENGAGE IN INVESTOR TESTING. 

Section 19 of the Securities Act of 1933 (15 U.S.C. 77s) is 

amended by adding at the end the following: 

‘‘(e) EVALUATION OF RULES OR PROGRAMS.—For the purpose 

of evaluating any rule or program of the Commission issued or 

carried out under any provision of the securities laws, as defined 

in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 

78c), and the purposes of considering, proposing, adopting, or 

engaging in any such rule or program or developing new rules 

or programs, the Commission may— 

‘‘(1) gather information from and communicate with investors or other members of the public; 

‘‘(2) engage in such temporary investor testing programs 

as the Commission determines are in the public interest or 

would protect investors; and 

‘‘(3) consult with academics and consultants, as necessary 

to carry out this subsection. 

‘‘(f) RULE OF CONSTRUCTION.—For purposes of the Paperwork 

Reduction Act (44 U.S.C. 3501 et seq.), any action taken under 

subsection (e) shall not be construed to be a collection of information.’’. 

SEC. 913. STUDY AND RULEMAKING REGARDING OBLIGATIONS OF 

BROKERS, DEALERS, AND INVESTMENT ADVISERS. 

(a) DEFINITION.—For purposes of this section, the term ‘‘retail 

customer’’ means a natural person, or the legal representative of 

such natural person, who— 

(1) receives personalized investment advice about securities 

from a broker or dealer or investment adviser; and 

(2) uses such advice primarily for personal, family, or 

household purposes. 

(b) STUDY.—The Commission shall conduct a study to 

evaluate— 

(1) the effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers, persons 

associated with brokers or dealers, and persons associated with 

investment advisers for providing personalized investment 

advice and recommendations about securities to retail customers imposed by the Commission and a national securities 

association, and other Federal and State legal or regulatory 

standards; and 

(2) whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the 

protection of retail customers relating to the standards of care 
H. R. 4173—450 

for brokers, dealers, investment advisers, persons associated 

with brokers or dealers, and persons associated with investment 

advisers for providing personalized investment advice about 

securities to retail customers that should be addressed by rule 

or statute. 

(c) CONSIDERATIONS.—In conducting the study required under 

subsection (b), the Commission shall consider— 

(1) the effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers, persons 

associated with brokers or dealers, and persons associated with 

investment advisers for providing personalized investment 

advice and recommendations about securities to retail customers imposed by the Commission and a national securities 

association, and other Federal and State legal or regulatory 

standards; 

(2) whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the 

protection of retail customers relating to the standards of care 

for brokers, dealers, investment advisers, persons associated 

with brokers or dealers, and persons associated with investment 

advisers for providing personalized investment advice about 

securities to retail customers that should be addressed by rule 

or statute; 

(3) whether retail customers understand that there are 

different standards of care applicable to brokers, dealers, investment advisers, persons associated with brokers or dealers, and 

persons associated with investment advisers in the provision 

of personalized investment advice about securities to retail 

customers; 

(4) whether the existence of different standards of care 

applicable to brokers, dealers, investment advisers, persons 

associated with brokers or dealers, and persons associated with 

investment advisers is a source of confusion for retail customers 

regarding the quality of personalized investment advice that 

retail customers receive; 

(5) the regulatory, examination, and enforcement resources 

devoted to, and activities of, the Commission, the States, and 

a national securities association to enforce the standards of 

care for brokers, dealers, investment advisers, persons associated with brokers or dealers, and persons associated with 

investment advisers when providing personalized investment 

advice and recommendations about securities to retail customers, including— 

(A) the effectiveness of the examinations of brokers, 

dealers, and investment advisers in determining compliance with regulations; 

(B) the frequency of the examinations; and 

(C) the length of time of the examinations; 

(6) the substantive differences in the regulation of brokers, 

dealers, and investment advisers, when providing personalized 

investment advice and recommendations about securities to 

retail customers; 

(7) the specific instances related to the provision of 

personalized investment advice about securities in which— 

(A) the regulation and oversight of investment advisers 

provide greater protection to retail customers than the 

regulation and oversight of brokers and dealers; and 
H. R. 4173—451 

(B) the regulation and oversight of brokers and dealers 

provide greater protection to retail customers than the 

regulation and oversight of investment advisers; 

(8) the existing legal or regulatory standards of State securities regulators and other regulators intended to protect retail 

customers; 

(9) the potential impact on retail customers, including the 

potential impact on access of retail customers to the range 

of products and services offered by brokers and dealers, of 

imposing upon brokers, dealers, and persons associated with 

brokers or dealers— 

(A) the standard of care applied under the Investment 

Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) for providing 

personalized investment advice about securities to retail 

customers of investment advisers, as interpreted by the 

Commission and the courts; and 

(B) other requirements of the Investment Advisers Act 

of 1940 (15 U.S.C. 80b–1 et seq.); 

(10) the potential impact of eliminating the broker and 

dealer exclusion from the definition of ‘‘investment adviser’’ 

under section 202(a)(11)(C) of the Investment Advisers Act 

of 1940 (15 U.S.C. 80b–2(a)(11)(C)), in terms of— 

(A) the impact and potential benefits and harm to 

retail customers that could result from such a change, 

including any potential impact on access to personalized 

investment advice and recommendations about securities 

to retail customers or the availability of such advice and 

recommendations; 

(B) the number of additional entities and individuals 

that would be required to register under, or become subject 

to, the Investment Advisers Act of 1940 (15 U.S.C. 80b– 

1 et seq.), and the additional requirements to which brokers, dealers, and persons associated with brokers and 

dealers would become subject, including— 

(i) any potential additional associated person 

licensing, registration, and examination requirements; 

and 

(ii) the additional costs, if any, to the additional 

entities and individuals; and 

(C) the impact on Commission and State resources 

to— 

(i) conduct examinations of registered investment 

advisers and the representatives of registered investment advisers, including the impact on the examination cycle; and 

(ii) enforce the standard of care and other 

applicable requirements imposed under the Investment 

Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.); 

(11) the varying level of services provided by brokers, 

dealers, investment advisers, persons associated with brokers 

or dealers, and persons associated with investment advisers 

to retail customers and the varying scope and terms of retail 

customer relationships of brokers, dealers, investment advisers, 

persons associated with brokers or dealers, and persons associated with investment advisers with such retail customers; 

(12) the potential impact upon retail customers that could 

result from potential changes in the regulatory requirements 
H. R. 4173—452 

or legal standards of care affecting brokers, dealers, investment 

advisers, persons associated with brokers or dealers, and persons associated with investment advisers relating to their 

obligations to retail customers regarding the provision of investment advice, including any potential impact on— 

(A) protection from fraud; 

(B) access to personalized investment advice, and recommendations about securities to retail customers; or 

(C) the availability of such advice and recommendations; 

(13) the potential additional costs and expenses to— 

(A) retail customers regarding and the potential impact 

on the profitability of their investment decisions; and 

(B) brokers, dealers, and investment advisers resulting 

from potential changes in the regulatory requirements or 

legal standards affecting brokers, dealers, investment 

advisers, persons associated with brokers or dealers, and 

persons associated with investment advisers relating to 

their obligations, including duty of care, to retail customers; 

and 

(14) any other consideration that the Commission considers 

necessary and appropriate in determining whether to conduct 

a rulemaking under subsection (f). 

(d) REPORT.— 

(1) IN GENERAL.—Not later than 6 months after the date 

of enactment of this Act, the Commission shall submit a report 

on the study required under subsection (b) to— 

(A) the Committee on Banking, Housing, and Urban 

Affairs of the Senate; and 

(B) the Committee on Financial Services of the House 

of Representatives. 

(2) CONTENT REQUIREMENTS.—The report required under 

paragraph (1) shall describe the findings, conclusions, and recommendations of the Commission from the study required 

under subsection (b), including— 

(A) a description of the considerations, analysis, and 

public and industry input that the Commission considered, 

as required under subsection (b), to make such findings, 

conclusions, and policy recommendations; and 

(B) an analysis of whether any identified legal or regulatory gaps, shortcomings, or overlap in legal or regulatory 

standards in the protection of retail customers relating 

to the standards of care for brokers, dealers, investment 

advisers, persons associated with brokers or dealers, and 

persons associated with investment advisers for providing 

personalized investment advice about securities to retail 

customers. 

(e) PUBLIC COMMENT.—The Commission shall seek and consider 

public input, comments, and data in order to prepare the report 

required under subsection (d). 

(f) RULEMAKING.—The Commission may commence a rulemaking, as necessary or appropriate in the public interest and 

for the protection of retail customers (and such other customers 

as the Commission may by rule provide), to address the legal 

or regulatory standards of care for brokers, dealers, investment 

advisers, persons associated with brokers or dealers, and persons 

associated with investment advisers for providing personalized 
H. R. 4173—453 

investment advice about securities to such retail customers. The 

Commission shall consider the findings conclusions, and recommendations of the study required under subsection (b). 

(g) AUTHORITY TO ESTABLISH A FIDUCIARY DUTY FOR BROKERS

AND DEALERS.— 

(1) SECURITIES EXCHANGE ACT OF 1934.—Section 15 of the 

Securities Exchange Act of 1934 (15 U.S.C. 78o) is amended 

by adding at the end the following: 

‘‘(k) STANDARD OF CONDUCT.— 

‘‘(1) IN GENERAL.—Notwithstanding any other provision of 

this Act or the Investment Advisers Act of 1940, the Commission may promulgate rules to provide that, with respect to 

a broker or dealer, when providing personalized investment 

advice about securities to a retail customer (and such other 

customers as the Commission may by rule provide), the 

standard of conduct for such broker or dealer with respect 

to such customer shall be the same as the standard of conduct 

applicable to an investment adviser under section 211 of the 

Investment Advisers Act of 1940. The receipt of compensation 

based on commission or other standard compensation for the 

sale of securities shall not, in and of itself, be considered 

a violation of such standard applied to a broker or dealer. 

Nothing in this section shall require a broker or dealer or 

registered representative to have a continuing duty of care 

or loyalty to the customer after providing personalized investment advice about securities. 

‘‘(2) DISCLOSURE OF RANGE OF PRODUCTS OFFERED.—Where 

a broker or dealer sells only proprietary or other limited range 

of products, as determined by the Commission, the Commission 

may by rule require that such broker or dealer provide notice 

to each retail customer and obtain the consent or acknowledgment of the customer. The sale of only proprietary or other 

limited range of products by a broker or dealer shall not, 

in and of itself, be considered a violation of the standard set 

forth in paragraph (1). 

‘‘(l) OTHER MATTERS.—The Commission shall— 

‘‘(1) facilitate the provision of simple and clear disclosures 

to investors regarding the terms of their relationships with 

brokers, dealers, and investment advisers, including any material conflicts of interest; and 

‘‘(2) examine and, where appropriate, promulgate rules 

prohibiting or restricting certain sales practices, conflicts of 

interest, and compensation schemes for brokers, dealers, and 

investment advisers that the Commission deems contrary to 

the public interest and the protection of investors.’’. 

(2) INVESTMENT ADVISERS ACT OF 1940.—Section 211 of the 

Investment Advisers Act of 1940, is further amended by adding 

at the end the following new subsections: 

‘‘(g) STANDARD OF CONDUCT.— ‘‘(1) IN GENERAL.—The Commission may promulgate rules 

to provide that the standard of conduct for all brokers, dealers, 

and investment advisers, when providing personalized investment advice about securities to retail customers (and such 

other customers as the Commission may by rule provide), shall 

be to act in the best interest of the customer without regard 

to the financial or other interest of the broker, dealer, or investment adviser providing the advice. In accordance with such 
H. R. 4173—454 

rules, any material conflicts of interest shall be disclosed and 

may be consented to by the customer. Such rules shall provide 

that such standard of conduct shall be no less stringent than 

the standard applicable to investment advisers under section 

206(1) and (2) of this Act when providing personalized investment advice about securities, except the Commission shall not 

ascribe a meaning to the term ‘customer’ that would include 

an investor in a private fund managed by an investment 

adviser, where such private fund has entered into an advisory 

contract with such adviser. The receipt of compensation based 

on commission or fees shall not, in and of itself, be considered 

a violation of such standard applied to a broker, dealer, or 

investment adviser. 

‘‘(2) RETAIL CUSTOMER DEFINED.—For purposes of this subsection, the term ‘retail customer’ means a natural person, 

or the legal representative of such natural person, who— 

‘‘(A) receives personalized investment advice about 

securities from a broker, dealer, or investment adviser; 

and 

‘‘(B) uses such advice primarily for personal, family, 

or household purposes. 

‘‘(h) OTHER MATTERS.—The Commission shall— 

‘‘(1) facilitate the provision of simple and clear disclosures 

to investors regarding the terms of their relationships with 

brokers, dealers, and investment advisers, including any material conflicts of interest; and 

‘‘(2) examine and, where appropriate, promulgate rules 

prohibiting or restricting certain sales practices, conflicts of 

interest, and compensation schemes for brokers, dealers, and 

investment advisers that the Commission deems contrary to 

the public interest and the protection of investors.’’. 

(h) HARMONIZATION OF ENFORCEMENT.— 

(1) SECURITIES EXCHANGE ACT OF 1934.—Section 15 of the 

Securities Exchange Act of 1934, as amended by subsection 

(g)(1), is further amended by adding at the end the following 

new subsection: 

‘‘(m) HARMONIZATION OF ENFORCEMENT.—The enforcement 

authority of the Commission with respect to violations of the 

standard of conduct applicable to a broker or dealer providing 

personalized investment advice about securities to a retail customer 

shall include— 

‘‘(1) the enforcement authority of the Commission with 

respect to such violations provided under this Act; and 

‘‘(2) the enforcement authority of the Commission with 

respect to violations of the standard of conduct applicable to 

an investment adviser under the Investment Advisers Act of 

1940, including the authority to impose sanctions for such 

violations, and 

the Commission shall seek to prosecute and sanction violators of 

the standard of conduct applicable to a broker or dealer providing 

personalized investment advice about securities to a retail customer 

under this Act to same extent as the Commission prosecutes and 

sanctions violators of the standard of conduct applicable to an 

investment advisor under the Investment Advisers Act of 1940.’’. 

(2) INVESTMENT ADVISERS ACT OF 1940.—Section 211 of the 

Investment Advisers Act of 1940, as amended by subsection 
H. R. 4173—455 

(g)(2), is further amended by adding at the end the following 

new subsection: 

‘‘(i) HARMONIZATION OF ENFORCEMENT.—The enforcement 

authority of the Commission with respect to violations of the 

standard of conduct applicable to an investment adviser shall 

include— 

‘‘(1) the enforcement authority of the Commission with 

respect to such violations provided under this Act; and 

‘‘(2) the enforcement authority of the Commission with 

respect to violations of the standard of conduct applicable to 

a broker or dealer providing personalized investment advice 

about securities to a retail customer under the Securities 

Exchange Act of 1934, including the authority to impose sanctions for such violations, and 

the Commission shall seek to prosecute and sanction violators of 

the standard of conduct applicable to an investment adviser under 

this Act to same extent as the Commission prosecutes and sanctions 

violators of the standard of conduct applicable to a broker or dealer 

providing personalized investment advice about securities to a retail 

customer under the Securities Exchange Act of 1934.’’. 

SEC. 914. STUDY ON ENHANCING INVESTMENT ADVISER EXAMINATIONS. 

(a) STUDY REQUIRED.— (1) IN GENERAL.—The Commission shall review and analyze 

the need for enhanced examination and enforcement resources 

for investment advisers. 

(2) AREAS OF CONSIDERATION.—The study required by this 

subsection shall examine— 

(A) the number and frequency of examinations of 

investment advisers by the Commission over the 5 years 

preceding the date of the enactment of this subtitle; 

(B) the extent to which having Congress authorize 

the Commission to designate one or more self-regulatory 

organizations to augment the Commission’s efforts in overseeing investment advisers would improve the frequency 

of examinations of investment advisers; and 

(C) current and potential approaches to examining the 

investment advisory activities of dually registered brokerdealers and investment advisers or affiliated broker-dealers 

and investment advisers. 

(b) REPORT REQUIRED.—The Commission shall report its 

findings to the Committee on Financial Services of the House of 

Representatives and the Committee on Banking, Housing, and 

Urban Affairs of the Senate, not later than 180 days after the 

date of enactment of this subtitle, and shall use such findings 

to revise its rules and regulations, as necessary. The report shall 

include a discussion of regulatory or legislative steps that are 

recommended or that may be necessary to address concerns identified in the study. 

SEC. 915. OFFICE OF THE INVESTOR ADVOCATE. 

Section 4 of the Securities Exchange Act of 1934 (15 U.S.C. 

78d) is amended by adding at the end the following: 

‘‘(g) OFFICE OF THE INVESTOR ADVOCATE.— 

‘‘(1) OFFICE ESTABLISHED.—There is established within the 

Commission the Office of the Investor Advocate (in this subsection referred to as the ‘Office’). 
Financial Services

Standard of Care HarmonizatImpact Assessment for SECOctober 2010
© 2010 Oliver Wyman  www.oliverwyman.com 

Contents1. Executive summary2. Methodology and source data3. Background and context4. Impact on choice 5. Impact on product access6. Impact on cost to the consumerAppendix Case study on impact of MiFID investor protection
Executive summarySection 1
© 2010 Oliver Wyman  www.oliverwyman.com 

Summary findings (1) Oliver Wyman collected data from a broad selection of retail brokerage firms to assess the impac

changes to the existing standard of care for broker-dealers and investment advisors

– A total of 17 firms provided data– These institutions serve 38.2MM households and manage $6.8TN in client assets 

– The survey captures approximately 33% of households and 25% of retail financial assets in th

 The primary issue at stake in the SEC ‘standard of care’ study is how to better protect the investo

choice of relationship, product access, and affordability of advisory services

 The key insight from the survey is that broker-dealers play a critical role in the financial services in

cannot be easily replicated with alternative services models

 Wholesale adoption of the Investment Advisers Act of 1940 for all brokerage activity is likely to ha

impact on consumers (particularly smaller investors) across each of the following dimensions

– Choice– Product access– Affordability of advisory services 
© 2010 Oliver Wyman  www.oliverwyman.com 

Summary findings (2)

Choice

Product Access

Affordability of 

Advisory Service

Potential impact of rulemaking on retail investors

 Reduced access to the preferred ‘investment and advisory model’ for 

– 95% of households hold commission-based brokerage accounts to– The fee-based advisory platform is far less popular (only 5% of ho– The ‘preference’ for brokerage accounts is evident across all wealt

strongest for smaller investors with less than $250K in assets

 Reduced access to products distributed primarily through broker-dea

– Municipal and corporate bonds represent ~15% of assets held by 

– These products (among others) are generally offered on a ‘principa

– Restricting principal or proprietary offerings will limit investor acces

and possibly limit financing options for municipalities or corporates 

 Reduced access to the most affordable investment options

– Fee-based services are 23-37 bps more expensive than brokerage

– For an investor with $200K in assets, this translates to $460 in add– The cost of shifting to fee-based pricing alone would reduce expec

more than $20K over a 20 year horizon (assuming 5% annual retu

 And the indirect costs of additional compliance, disclosure, and surve

an even greater impact on consumers → we estimate that 12-17MM 

the margin’ could lose access to current levels of advisory service if e

hours of coverage and support is required per client

1. Cost expressed as a percentage of assets under management in basis points (1bp = 0.01%)
Methodology and source dataSection 2
© 2010 Oliver Wyman  www.oliverwyman.com 

Oliver Wyman collected data from 17 SIFMA member firms to support assessmentPurpose of study The impact assessment that follows was designed in response to the SEC request for comment o

study of the standard of care obligations for broker-dealers and investment advisers

 Oliver Wyman gathered data from 17 SIFMA member firms to provide relevant market data for the 

 The study is intended to help 

– Identify the investor segments most likely to be affected by changes to the standard of care

– Understand the cost to the consumer (choice, product access, transaction costs) of potential c– Understand the one-time and ongoing costs of compliance for advisory and brokerage firms

– Estimate the broader market / economic impact of any changes, particularly for capital formati

Note on survey methodology 17 member firms participated, representing $6.8TN in assets (approximately 27% of total U.S. ho

assets) across 38.2MM households

 To obtain a fairly representative sample of the industry, data on asset management accounts, inv

cost structure was gathered from a diverse set of brokerage firms 

Note on confidentiality  Due to the highly sensitive nature of firm-specific information, all data is presented in aggregated 
© 2010 Oliver Wyman  www.oliverwyman.com 

1-5MM

85% 86%11% 11%

3% 3%

Economic data SIFMA data

The survey proved to be highly representative of the investor populatiwhole, capturing 33% of households and 27% of financial assets

16% 20%24%

28%

30%

26%

30% 26%

Economic data SIFMA 

Investors by wealth segment1Number of U.S. households, 2009

Assets by wealth segmentInvestable assets, 2009

< 250K250K-1MM> 5MM

100% = 116MM 38MM $26.0TN $6.8

Note: Economic data includes all investable assets whereas SIFMA data refers to managed assets, SIFMA dinvestors with <$1MM in assets 

1. Wealth segments based on client assets under managementSource: SIFMA member data, 2007 Federal Reserve Survey of Consumer Finances, Oliver Wyman analysis
Background and contextSection 3
© 2010 Oliver Wyman  www.oliverwyman.com 

Regulators have wide discretion in establishing a uniform ‘standard of the IABD industry  Regulators have a range of options in establishing a uniform ‘standard of care’ for broker-dealers 

advisers in the United States 

– Limited changes to current model – A ‘standard of care’ with disclosure / consent to conflicts that preserves commission-based bro– Wholesale adoption of the Advisers Act of 1940 for all broker-dealers and investment advisers 

 A major shift in the ‘standard of care’ will impact individual investors in several ways

– Choice of advisory model– Access to investment products– Cost of investment and advisory services

 Beyond these direct costs to the consumer, we also anticipate broader economic costs to the indu

– Broker-dealers and investment advisory firms will all face one-time and ongoing costs to comp

fiduciary, disclosure, and surveillance requirements → these may be passed on to investors

– Potential limitations on product accessibility for retail investors will place constraints on capital 

issuers’ ability to finance at attractive rates
© 2010 Oliver Wyman  www.oliverwyman.com 

Our analysis will focus on the relative impact of two possible scenarioharmonization of the standard of care

 Solely in t

client

 Best interest of the client or solely 

in the interest of the client, depending on relationship

 Best interest of the client (advisory 

services) or suitability (brokerage 

services)

IRA / retirement accounts

 Trade-by-

required

 Best interest of the client with 

disclosure / consent to conflicts

 Best interest of the client (advisory 

services) or suitability (brokerage 

services)

Principal transactions

 Best interest of the client with  Not availa

disclosure / consent to conflicts

 Best interest of the client (advisory 

services) or suitability (brokerage 

services)

Proprietary product sales

 Best interest of the client, at point  Best inter

of sale or ongoing depending on relationship

 Best interest of the client (advisory 

services) or suitability (brokerage 

services)

Advice on client holdings

 Best interest of the client with  Best inter

disclosure / consent to conflicts

 Suitability for resultant securities 

transactions

Asset allocation advice

 Best interest of the client with  Best inter

disclosure / consent to conflicts

 Suitability for resultant securities 

transactions

Investment planning

Activity

STATUS QUO WITH GREATER DISCLOSUREHarmonized standards that preserve existing practices but require greater disclosure 

FIDUCIARY DUTY WITH CONSENT TO CONFLICTSFiduciary standard for advisory activity that preserves commission-based brokerage model

ADOPTIOACT OF 1Fiduciary stactivity with under mana

Rule making scenarios

Baseline for impact analysis
Impact on choiceSection 4
© 2010 Oliver Wyman  www.oliverwyman.com 

32.8

4.2

1.0 0.1

05

101520253035

< 250K 250K-1MM 1MM-5MM > 5MM

Households (MM)

The vast majority (97%) of the US investor population holds less than assets with a broker-dealer or investment adviser

Investor landscape (survey population)Number of investors by wealth segment1, 2009

 97% of investors in the survey (37

than $1MM in assets with broker-investment advisers

 Despite the heavy skew toward sm

assets are evenly distributed acrospectrum ($1.3-1.9TN in all group

 Average account balance for inve

wealth segment is $40K → this is likely to be affected by a significan

Key observations

Client assets under management 

$1.3TN $1.9TN $1.8TN $1.8TN

1. Wealth segments based on client assets under managementSource: SIFMA member data, 2007 Federal Reserve Survey of Consumer Finances, Oliver Wyman analysis

86% of investorsAverage account balance $40K

11% of investorsAverage account balance $456K
© 2010 Oliver Wyman  www.oliverwyman.com 

Across wealth segments, less than 5% of investors use fee-based accto serve their investment needs 

92%

73%

64%

3%

8%

3%

4%

19%

33%

< 250K 250K-1MM > 1MM

Channel preference (survey population)Number of households by relationship model, 2009 

Source: SIFMA member data, 2007 Federal Reserve Survey of Consumer Finances, Oliver Wyman analysis

13

 As wealth increases, more inv

model of fees and commissiomanagement

Mix of commission- and fee-b

 Only 1.3MM investors (4% of 

solely under fee-based mana

 Fees-only management is the 

channel across all wealth seg

 Over 30MM households hold 

commission-based accounts; from the lowest wealth segme

 Investors in the lowest wealth 

much stronger skew towards management than any other w

2 Fee-based accounts 

Commission-based accounts
© 2010 Oliver Wyman  www.oliverwyman.com 

The current model offers investors a wide range of advisory service, paccess, and pricing options 

 Low

on t

 Pre

wor

Common investors  Affluent and HNW  Affluent and HNW  All investors

 Balanced → point in time  Lim

advice on specific products

 Highest → ongoing 

advice and account surveillance

 Highest → ongoing 

advice and account surveillance 

Level of service

 Balanced cost Range = 38-94 bps2

 Balanced cost Range = 43-99 bps2

 Highest cost Range = 67-117 bps2

Cost

 All  Cas

 Investable assets Cash and equivalents Concentrated positions 

with special requirements

 Investable assets Cash and equivalents Concentrated positions 

with special requirements

Typical holdings  Investable assets only

 Com

and on c

 Combination of active 

and passive, depending on client choice

 Combination of active  Active investment

and passive, depending on client needs

Investment activity

 Product-specific advice,  Unc

access to principal products

 Broad, portfolio-based 

financial planning and investment advice plus

product-specific advice

 Broad, portfolio-based 

financial planning and investment advice

Advisory needs

4% 7% Share of population

Key Attributes

Fee-Based Fees and Commissions Commission-Based Advised

Account Types

Co

88%

1. Non-advised accounts (e.g. self-directed online) were not targeted in this study but represent a significant subset of commission-based accounts2. Range dependent on wealth segment (high end of the range reflects pricing for lowest wealth segment)
Impact on product accessSection 5
© 2010 Oliver Wyman  www.oliverwyman.com 

< 250K 250K-1MM 1MM-5MM > 5MM

Direct holdings of individual securities (such as municipal bonds) repimportant element of investment strategy across all wealth segments

Asset allocation (survey population)Allocation of assets (%) by wealth segment, 2009

 Investors across all wea

at least 30% of their portholdings of individual se

 Municipal and corporate 

and diversification benefmay be unable to acces

 Across all investors, mu

corporate bonds represewealth and 18% of inves(excluding cash)

 Allocations to municipal 

bonds range from 7% of for low net worth accoun26% for high net worth a

Key observations

Cash and other1Structured productsAlternativesMutual Funds / ETFsMunicipal BondsGovernment BondsCorporate BondsEquities

1. Includes cash, currencies, money market funds, etcSource: SIFMA member data, Oliver Wyman analysis

100% = $1.3TN $1.9TN $1.8TN $1.8TN
© 2010 Oliver Wyman  www.oliverwyman.com 

Commission Fee

Commission-based brokerage is the primary channel for accessing thproducts today, especially for investors in the lowest wealth segment 

Low Net worth investors (<250K AUM)Product access by account type2

High Net Worth Investors (>5MM AUProduct access by account type

1. Cash and other includes cash, currencies, money market funds, etc.2. Non-discretionary, commission accounts and discretionary, fee accountsSource: SIFMA member data, Oliver Wyman analysis

$1,100BN

$115BN

$1,400BN

$260BN

Cash and other1

Structured products

Alternatives

Mutual Funds / ETFs

Municipal Bonds

Government Bonds

Corporate Bonds

Equities

Commission Fee

$58BN 

$100BN

93% of municipal and corporate bonds held by investors in the lowest net worth segment ($58BN) were purchased through commission-based brokerage accounts 

77% of municipal and bonds held by high neinvestors ($100BN) wpurchased through cobased brokerage acco
© 2010 Oliver Wyman  www.oliverwyman.com 

Individual investors hold 70% of municipal debt in the US today, both direct and pooled investments

0.7 0.8 0.9 0.9 0.9 1.0 1.0

0.7

0.7 0.8 0.9 1.0

1.0 1.0

0.6

0.7

0.7

0.8 0.8

0.8 0.9

0.00.51.01.52.02.53.0

2004 2005 2006 2007 2008 2009 2010

ytd

2.0

2.2

2.4

2.6 2.7

2.8 2.8

All other1

Individualholdings

Indirect 34% 33% 34% 36% 36% 35% 34%

Direct 37% 37% 36% 34% 34% 36% 36%Individual holdings (% of total outstanding)

Investor demand for Municipal SecuritiesHoldings of Municipal Securities by segment, $TN

1. Other sectors include corporates, financial institutions, broker-dealers, and foreign entitiesSource: Federal Reserve

 The municipal securities market h

over the past several years and nnearly $3TN in financing for state governments

 Municipalities in the U.S. have is

debt annually over the past five yinstruments

 The market is dominated by indiv

who hold ~ 70% of outstanding ddirect exposures and pooled inve

 Financial institutions are relativel

the space, collectively holding lestotal assets (including broker-dea

 A significant shift in the ‘standard 

for origination and distribution of on a principal basis (as Munis aresignificant market impact along 2 

– Access and cost for retail in– Low cost financing for muni

Key observations

Pooledinvestments

Municipal bond market
© 2010 Oliver Wyman  www.oliverwyman.com 

 Transaction costs are built into the ‘discount’ or under

the issuer 

 Investors have access to securities with no explicit ma

limited retail order periods

 Securities trade on the secondary market and prices f

supply and demand

 Investors have access to securities through broker-de

principals and build inventory (mark-up paid by invest

 Securities are bought and sold by broker-dealers on b

investment funds

 Investors pay the funds’ asset management / advisory 

transaction costs / sales loads passed on by the fund

Broker-dealers play a key role in the Munis market, providing individuawith direct and cost effective access to new issuances of these securi

Primary market

Secondary market

Pooled investment funds

Retail Investors

Channels 

Municipal bond market

 Direct, affordable access to municipal bonds for retail i

primary and secondary principal trading desks → mutualternative channel to Munis but at higher cost as manerode returns (~1% management fees vs. 4-5% averag

Role of the broker-dealer
© 2010 Oliver Wyman  www.oliverwyman.com 

Individual investors are also important participants in the corporate bo

1.3 1.6 2.0 1.9 2.3 2.1

1.4 1.5 1.8

2.0 2.0 2.1 2.2

5.3

5.8

6.5

7.4 7.1 7.1 7.1

1.1

0.02.04.06.08.0

10.012.0

2004 2005 2006 2007 2008 2009 2010

ytd

7.9

8.9

10.0

11.4 11.0 11.4 11.4

All other1

Individualholdings

Investor demand for Corporate and Foreign BondsHoldings of Corporate and Foreign Securities by segment, $TN

1. Other sectors include corporates, financial institutions, broker-dealers, and foreign entitiesSource: Federal Reserve

Key observations

Pooledinvestments

 Corporations and foreign entities 

issuance of new debt between 20maintained annual new bond issusince the financial crisis 

 Individual investors (via direct ho

investments) are the largest singin the corporate and foreign bond 

 Individual investors hold $4.3TN 

outstanding debt today

 In absolute terms, individual inve

corporate securities market is larsecurities

 Capital formation for US corporat

part by individual investment

Indirect 18% 17% 18% 18% 18% 18% 19%Direct 14% 15% 16% 18% 18% 20% 18%Individual holdings (% of total outstanding)

Corporate bond market
© 2010 Oliver Wyman  www.oliverwyman.com 

Broker-dealers anticipate retail demand for corporate bonds and hold quickly, efficiently, and cost effectively meet client needs in the secon

Corporate bond market

 Predominantly institutional market Retail investors have little to no access to primary iss Primarily over-the-counter market → broker-dealers p

of access for retail investors to these securities

 Investors pay upfront mark-ups but no ongoing manag

are likely to erode returns

 Securities are bought and sold by broker-dealers on b

investment funds

 Investors pay the funds’ asset management / advisory 

transaction costs / sales loads passed on by the fund

Primary market

Secondary market

Pooled investment funds

Retail Investors

Channels 

 Direct, affordable access to corporate bonds for retail i

secondary principal trading desks → principal traders a

demand and build inventory that meets specific investmclients

Role of the broker-dealer
Impact on costSection 6
© 2010 Oliver Wyman  www.oliverwyman.com 

We have profiled three typical investors within each wealth segment to the potential costs of broad application of the Advisers Act of 19401

 $500K in assets held in commission-based accounts Active investor with more than 10 trades per year (~75% of investors in $ Pays 53 bps or $2,650 in commissions per year Holds $292K (59% of assets) in mutual funds and cash / cash equivalent Holds $117.5K (23% of assets) in equities Hold $90.5K (18% of assets) in fixed income, structured products and alt

 $10MM in assets held in commission-based accounts Active investor with more than 10 trades per year (~75% of investors in > Pays 38 bps or $38,000 in commissions per year Mutual funds and cash / cash equivalents together are $4.1MM (41% of a Equities are largest part of portfolio, with $3.3MM invested (33% of asset Fixed income, structured products and alternatives represent $2.6MM (26

 $200K in assets held exclusively in commission-based accounts Passive investor with less than 10 trades per year (~50% of investors in < Pays 94 bps or $1,890 in commissions per year Holds $132K (68% of assets) in mutual funds and cash / cash equivalent Significant direct holdings (31% of assets), mainly in equities Limited investments in alternatives, fixed income, and structured products

‘Small Investor’ with 

commission-based 

accounts

77% of all investors

‘Affluent Investor’ with 

commission-based 

accounts

7% of all investors

‘High Net Worth Investor’

with commission-based 

accounts

2% of all investors

1. Asset allocation based on observed average asset allocation for each wealth segmentSource: SIFMA member data, Oliver Wyman analysis

ABC
© 2010 Oliver Wyman  www.oliverwyman.com 

325

2,240

7,335

50,030

0

5,000

10,00015,00020,000

< 250K 250K-1MM 1MM-5MM > 5MM

Commission-based accounts provide the most cost effective option foacross the wealth spectrum today

Financial cost to consumerAverage annual fees and commissions, 2009

1. Based on existing balance of assets between fee-based and commission-based accountsSource: SIFMA member data, Oliver Wyman analysis

0.00%0.20%0.40%0.60%0.80%1.00%1.20%

<250K 250K-1MM 1MM-5MM 

Average annual fees and commissions as % 

Δ23 bp

Δ37 bp

A

B
© 2010 Oliver Wyman  www.oliverwyman.com 

A broad shift to fee-based advisory would substantially increase costs wealth segments

Current cost Incremental

cost

New cost Current cost Incremental

cost

New cost Current cost Increme

cos

1. Assumes current pricing for commission- and fee-based accounts hold for all investors2. Illustrative, not based on observed annual returnsSources: SIFMA data, Oliver Wyman analysis

- Incremental Cost 0.23%Current Expected Return 4.06%New Expected Return 3.83%- Current Cost 0.94%Gross Expected Return1 5.00%

Potential impact on advisory fees and expected returnsPro forma impact of transition to fee-based accounts at current pricing, annual advisory costs1

Small Investor Affluent Investor High net worth In

$2,650

$4,500

$38,000

$1,850 $29,0

$1,890

$2,350

$460

- Incremental Cost 0.37%Current Expected Return 4.47%New Expected Return 4.10%- Current Cost 0.53%Gross Expected Return1 5.00%

- Incremental Cost Current Expected RetuNew Expected Retur- Current Cost Gross Expected Retur

+76%

+24% +70%

A B C
© 2010 Oliver Wyman  www.oliverwyman.com 

The shift to a fee-based model would reduce cumulative returns to ‘sm(with $200K in assets) by $20K over the next 20 years

1. Assumes initial investment of $200K in a balanced portfolio reflecting typical, balanced asset allocation for lower net worth investors with <$250K Aannual returns of 5%, not adjusted for inflation; commissions deducted from principal balance starting at year end

Return (Current Costs) Return (New Costs) 

Impact of cost on investor returns Key observationsExpected investment gains on $200K portfolio, 2010-20301

$ 239K 

$ 219K 

 The average investor in the lowe

trades relatively infrequently oveyear

 As a result, a fee-based cost stru

more costly for these ‘passive inincremental costs (+23 bps) erod

 For ‘small investor,’ a fee-based 

cumulative reduction in investmeover 10 years, roughly 10% of th

– ‘Small investor’ would pay ~ 

commissions over the coursthrough commission-based 

– Under a fee-based advisory 

investor’ would pay an addiand lose $7K in investment lower principal balances ea

+120%
© 2010 Oliver Wyman  www.oliverwyman.com 

However, the costs of complying with and / or demonstrating complian

new standard of care will place additional pressure on pricing 

 Median income for investment advisers estimate Adviser compensation represents 42% of fully lo

on SIFMA member data

 Given 2,000 working hours per year, average ho

is $200 / hour

Increased activities required by shift in ‘standard of care’ Adviser training Increased legal and compliance Increased risk management and oversight Production and mailing of additional disclosures Initial client consultation

– Review relationship– Obtain formal consent for existing strategy

 Investment strategy and plan

– Evaluate portfolio– Assess investment objectives– Agree on new investment plan for client

 Documentation of client discussions Ongoing account surveillance 

HNW investor ($10MM) 2bps 4bps 6bAffluent investor ($500K) 4bps 8bps 12b

Small investor ($200K) 10bps 20bps 30b

Estimated cost $200 $400 $6Additional hours 1 2 

Incremental cost of complianceAnnual costs expressed as bps over assetsMethodology for calculating hourly rate

1. Based on 2010 annual compensation survey by Registered RepSource: SIFMA member data, Oliver Wyman analysis

Focus of analysis on following slides (conservative e

ABC
© 2010 Oliver Wyman  www.oliverwyman.com 

These incremental costs will disproportionately impact investors with investment portfolios

Current cost Incremental

cost

New cost Current cost Incremental

cost

New cost Current cost Increm

cos

- Incremental Cost 0.43%Current Expected Return 4.06%New Expected Return 3.63%- Current Cost 0.94%Gross Expected Return1 5.00%

$2,650

$4,900

$38,000

$1,850

$1,890

$2,750

$460

- Incremental Cost 0.45%Current Expected Return 4.47%New Expected Return 4.02%- Current Cost 0.53%Gross Expected Return1 5.00%

- Incremental Cost Current Expected ReNew Expected Retu- Current Cost Gross Expected Retu

$400

+46%

+85%

$400 +77

1. Assumes pricing for commission- and fee-based accounts rises to account for additional activity2. Illustrative, not based on observed annual returnsSources: SIFMA data, Oliver Wyman analysis

$29,0

$40

Potential impact on advisory fees and expected returnsPro forma impact of transition to fee-based accounts at new pricing, annual advisory costs

A Small Investor B Affluent Investor C High net worth In
© 2010 Oliver Wyman  www.oliverwyman.com 

Consumers may also face significant adviser capacity constraints thathe availability of service under the new standard of care 

Minimum number of required advisers 19KTime spent on all investors with <$250K AUM 38.1MM hoursTime spent per investor 1.3 hoursHourly rate for asset management services $200Average commissions/investor $268Investors with <$250K in commission accounts 28.4MM

Impact of additional service requirements+ 2 hours per investor

Additional advisers needed 20K 24K 26K 28KCoverage gap 12.1 14.2 15.8 17.0(total investors, MM)Implied capacity 16.3 14.3 12.7 11.4(total investors, MM)Implied capacity 54.4 47.6 42.3 38.1(MM hours)

Current utilization levels 70% 80% 90% 100%

Current state  Given current resources, we estim

investors in the lowest wealth segmif advisers are required to spend 2 each investor

 We estimate that 20-28K additiona

needed to serve the ‘uncovered’ insample population → our sample pUS investors, which suggests that may be needed

 Faced with this, the brokerage and 

industry can respond in one of thre

– Increase workforce and raise – Increase workforce and abso– Reduce coverage for lower n

whose ‘personalized investmwill exceed capacity 

 While the autonomy provided by se

is desirable for certain investors, mthat investors with advised accoun

– Make more sophisticated inv– Achieve higher average inves

Implications

Source: SIFMA member data, Oliver Wyman analysis

Capacity analysis
© 2010 Oliver Wyman  www.oliverwyman.com 

0

100200300400500600700800900

2000 2001 2002 2003 2004 2005 

Registered reps (000s)

0%

20%40%60%80%

100%120%

2005 2006 2007 2008 2009

Discount Broker Regional Broker-Dealer National Broker-Dealer 

Current economics of the IA/BD industry suggest that investors will neaccept higher costs or turn to alternative service models for investme

Industry capacity FINRA registered representatives (00

Industry profitabilityTotal costs before tax over total revenues1

Operating margins across the industry are thin 

and have deteriorated since 2005, leaving little 

room to absorb additional cost 

Industry headcount has been f

the past ten years; the addition

to cover small clients would be 

(at least in the nea

1. Public data for companies within the SNL National Broker-Dealer, Regional Broker-Dealer, and Discount Broker indices2. Figures overstate actual industry capacity (approximately 50-60% of individuals who hold Series 7 licenses do not advise investors, but serve in othcompliance, etc.)Sources: SNL Financial, FINRA 

-1% CAGR

100% CIR

No profit

672
© 2010 Oliver Wyman  www.oliverwyman.com 

And several recent studies suggest that investors without access to aservices may be disadvantaged and fail to realize investment goals

0%2%4%6%8%

10%12%14%

<25 26-35 36-45 46-55 56-65

Advised portfoliosNon-advised portfolios

Impact of professional financial advice1 on portfolio returns

401k returns by age segment, 2006 data

1. Use of advisory services for >1 year, ‘advisory services’ include personalized investment advice online, via phone, or in personSource: Charles Schwab studies on 401(k) portfolio returns (2007) and impact of professional advisory relationships in 401(k) plans (2010)

Δ= +4.7% +3.4% +2.9% +2.7% +2.5%

Key observations

 Participants in 401k plans administere

returns that were 3.3% higher on averafinancial advice was provided

 In addition to higher portfolio returns, p

advice had an impact on several dime

– Savings rate → 70% of participan

financial advice doubled their savaverage of 5% to 10% of pre-tax 

– Portfolio diversification → Partici

financial advice held positions acon average vs. self-directed invepositions in 3.7

– Investor confidence → Of particip

advice, 29% were confident of hato retire vs. 16% of investors who 
MiFID Investor ProtectionAppendix
© 2010 Oliver Wyman  www.oliverwyman.com 

In 2007, the Markets in Financial Instruments Directive (MiFID) made sprovisions for ‘investor protection’

Although less onerous than the ‘standard of care’ currently under consideration in studies nonetheless show the impact of similar compliance costs on asset manage

MiFID provisions Regulation of alternative trading systems 

– Regulation of multi-lateral trading facilities– Treatment of systemic internalisers, or principal 

traders, as mini-exchanges

 Increased pre and post trade transparency for all 

trading facilities

 Passporting or development of a single market for 

transactions in financial instruments across a number of European Union member states

 Requirement to enhance corporate governance 

structures to accommodate an independent compliance function 

 Investor protection

– Appropriate client categorization and client order 

handling

– Best execution requirement for all trades on 

behalf of clients

– Robust record keeping systems for periodic 

statements, transaction reporting, and client contracts and agreements

MiFID relative to Advisers Act of 1 MiFID provisions covered a narrow

activities and imposed a less onercare than the ‘best interest’ standarequired if the Advisers Act were a

Principal trading 

Suitabi



IRA / retirement accountsUnderwritingProprietary product salesAdvice on client holdingsAsset allocation adviceInvestment planning
© 2010 Oliver Wyman  www.oliverwyman.com 

The FSA’s impact studies on MiFID identified investor protection provithe greatest contributors to compliance costs

Order ExecutionClient ManagementClient Acquisition

# traleve# traleve

Electronic/voice storagePaper document storage

Demonstrating compliance with suitability and best execution requirements

Documentation of trades

# deprin# pr

Maintaining Chinese Walls Documentation/database

Identifying/addressing conflicts, actively managing potential issues before they become conflicts

Conflict of Interest 

# mven# clidisc

Regular reviews of execution venuesDisclosure to prove best execution policy

Achieving optimal mix of price, speed and likelihood of execution

Best execution

# clioffe

Upholding suitability requirement to Monitoring client accountsmaintain AUM in appropriate investments

Maintenance of client portfolios

Res# clidisc

One time client agreements/contractsRoutine disclosure

Disclosing information on suitability, best execution policy, conflicts of interest policy, principal trading, etc.

Consent/Disclosure

Fixe# clidata# pr

System/process to capture client dataClient data collectionUpdated risk information on products

Understanding needs, objectives, risk profiles, experience and expertise of clients

Suitability/ Appropriateness

Fixe# clidisc

System/process to capture client dataClient data collection

Categorizing clients according to size of portfolio, # trades, etc. 

Classifying client base

Activity Objective Cost Factors Cos

Source: Implementing MiFID for Firms and Markets, FSA Consultation Paper 2006
© 2010 Oliver Wyman  www.oliverwyman.com 

Smaller firms with a large retail client base incurred higher one-off coscompliance as a percentage of operating costs 

One-off compliance costs of MiFID by firm size1One-off costs as a percentage of operating costs, 2007

 The study found that client profile 

important determinant of costs, wincurring significantly more costs clients

 The biggest one-off costs arose 

IT and revisions of CRM systems points, especially for certain reta

 A significant portion of one-off co

irrespective of firm size and num

 Impact studies indicated that sm

unable to sustain large fixed cosand exit the industry

 In absolute terms, average one-o

~€1 MM for a small firm and ~€4 

 There is high variability in the lev

amongst smaller firms depending 

– Extent to which firms serve re– Ability of firms to make large u

Determinants of one-off costs

1. Firms with fewer than 100 employees were classified as “Small”Source: Europe Economics Study, 2007

0.00.51.01.52.02.53.03.54.04.55.05.56.0

Small Large
© 2010 Oliver Wyman  www.oliverwyman.com 

Due to their inability to make sizeable upfront investments, smaller firalso sustained higher ongoing costs of compliance as a percent of operating costs 

 Whereas larger asset managers complied with MiFID by investing in automated systems, smaller firms incr There is a trade-off between one-off and on-going costs, e.g. for smaller firms the option of updating IT syst

been too expensive, thus on-going costs of sustaining a larger workforce are much higher 

 The smallest firms in the study had no specialist compliance functions prior to MiFID, and required significa

cover compliance activities 

Audit 2% 16%

Training 2% 7%

External reporting 12% 17%IT 4% 30%Internal reporting 9% 12%

Additional staff 70% 18%

Small Large

On-going compliance costs of MiFIDEuropean asset managers by firm size1, 2007

1. Firms with fewer than 100 employees were classified as “Small”Source: Europe Economics Study, 2007

Ongoing compliance costs of MiFID by firm Ongoing costs as a percentage of operating co

0.00.20.40.60.81.01.21.41.61.8

Small