VIA ELECTRONIC MAIL 

May 5, 2010

Office of Regulations and Interpretations

Employee Benefits Securities Administration

Attn: 2010 Investment Advice Proposed Rule

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Dear Sir or Madam:

On March 2, 2010, the U.S. Department of Labor (DOL) published in the Federal Register1 a 

Proposed Regulation (Proposed Regulation) under the Employee Retirement Income Security Act 

(ERISA)2, and parallel provisions of the Internal Revenue Code of 19863, relating to the providing

of investment advice to participants and beneficiaries in individual account plans, such as 401(k) 

plans, and beneficiaries of individual retirement accounts (IRAs). The Proposed Regulation will 

implement the statutory exemption for investment advice to participants in participant-directed 

individual account plans that were enacted as part of the Pension Protection Act of 2006.4 Under 

the statutory exemption, the investment advice must be provided by a "fiduciary adviser" under 

an "eligible investment advice arrangement," which may be structured in one of two ways: (1) a 

"level fees" approach, where the fiduciary adviser's fees do not vary depending on the investment 

option selected, or (2) pursuant to a "computer model" that is periodically certified by an "eligible 

investment expert."

The Financial Services Institute (FSI) 5 welcomes this opportunity to comment on the Proposed 

Regulation. We believe that the Proposed Regulation should be withdrawn and the 2009 Final 

Investment Advice Regulation and Class Exemptions (2009 Rule)6

 

1 Department of Labor, Investment Advice – Participants and Beneficiaries, 29 CFR 2550, RIN 1210-AB35, available 

at 

should be re-introduced by the 

DOL. However, if the DOL chooses not to follow our recommended course of action, we believe 

that the Proposed Regulation could be improved by providing greater clarity in the sections 

dealing with the difference between “historical risk and return characteristics" and "historical 

performance," the impact to IRA accounts on the DOL’s decisions not to invalidate prior DOL 

guidance, and issues related to compensation. In addition, we believe that the Proposed 

Regulation’s exclusion of historical performance from computer models does a disservice to 

investors and should be corrected. Finally, we have concerns with the implementation date of the 

http://www.dol.gov/federalregister/PdfDisplay.aspx?DocId=23559 (March 2, 2010). 2 See generally, The Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1 - 3058 (1974). 3 See generally, Internal Revenue Code of 1986, 26 U.S.C. §§ 1 - 9834 (1986). 4 See generally, Pension Protection Act of 2006, Pub. L. 109-280, 120 Stat. 780 (2006). 5 The Financial Services Institute, Voice of Independent Broker-Dealers and Independent Financial Advisors, was

formed on January 1, 2004. Our members are broker-dealers, often dually registered as federal investment 

advisers, and their independent contractor registered representatives. FSI has 120 Broker-Dealer member firms that 

have more than 188,000 affiliated registered representatives serving more than 15 million American households. 

FSI also has more than 14,000 Financial Advisor members. 6 Department of Labor, Investment Advice – Participants and Beneficiaries, 29 CFR 2550, RIN 1210-AB13, available 

at http://edocket.access.gpo.gov/2009/E9-710.htm (January 21, 2009).
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May 5, 2010

Page 2 of 6

Proposed Regulation and recommend an extension to allow firms to implement necessary 

changes to policies, procedures, and systems.

Background on FSI Members

The IBD community has been an important and active part of the lives of American investors for 

more than 30 years. The IBD business model focuses on comprehensive financial planning 

services and unbiased investment advice. IBD firms also share a number of other similar business 

characteristics. They generally clear their securities business on a fully disclosed basis; primarily 

engage in the sale of packaged products, such as mutual funds and variable insurance products; 

take a comprehensive approach to their clients’ financial goals and objectives; and provide 

investment advisory services through either affiliated registered investment adviser firms or such 

firms owned by their registered representatives. Due to their unique business model, IBDs and 

their affiliated financial advisors are especially well positioned to provide middle-class Americans 

with the financial advice, products, and services necessary to achieve their financial goals and 

objectives.

In the U.S., approximately 180,000 financial advisors – or approximately 61.7% percent of all 

practicing registered representatives – operate as self-employed independent contractors, rather 

than employees, of their affiliated broker-dealer firm.7 These financial advisors provide 

comprehensive and affordable financial services that help millions of individuals, families, small 

businesses, associations, organizations, and retirement plans with financial education, planning, 

implementation, and investment monitoring. Clients of independent financial advisors are 

typically “main street America” – it is, in fact, almost part of the “charter” of the independent 

channel. The core market of advisors affiliated with IBDs is clients who have tens and hundreds 

of thousands as opposed to millions of dollars to invest. Independent financial advisors are 

entrepreneurial business owners who typically have strong ties, visibility, and individual name 

recognition within their communities and client base. Most of their new clients come through 

referrals from existing clients or other centers of influence.8

 Independent financial advisors get to 

know their clients personally and provide them investment advice in face-to-face meetings. Due 

to their close ties to the communities in which they operate their small businesses, we believe 

these financial advisors have a strong incentive to make the achievement of their clients’ 

investment objectives their primary goal.

FSI is the advocacy organization for IBDs and independent financial advisors. Member firms

formed FSI to improve their compliance efforts and promote the IBD business model. FSI is

committed to preserving the valuable role that IBDs and independent advisors play in helping

Americans plan for and achieve their financial goals. FSI’s mission is to ensure our members

operate in a regulatory environment that is fair and balanced. FSI’s advocacy efforts on behalf of

our members include industry surveys, research, and outreach to legislators, regulators, and

policymakers. FSI also provides our members with an appropriate forum to share best practices in 

an effort to improve their compliance, operations, and marketing efforts.

Comments on the Proposed Regulation

FSI’s vision is that all individuals have access to competent and affordable financial advice, 

products, and services. In the preamble of the 2009 Rule, the DOL recognized the importance of 

investment advice to participants in ERISA plans and beneficiaries of IRAs. Unfortunately, 

contrary to the language in the preamble of the 2009 Rule, the DOL has taken an overly 

restrictive view of those who should be allowed to provide investment advice to participants and 

 

7 Cerulli Associates at http://www.cerulli.com/. 8 These “centers of influence” may include lawyers, accountants, human resources managers, or other trusted

advisors.
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May 5, 2010

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beneficiaries in the Proposed Regulation.

Under the statutory exemption of the Proposed Regulation, investment advice must be provided 

by a "fiduciary adviser" under an "eligible investment advice arrangement," which may be 

structured in one of two ways: (1) a "level fees" approach, where the fiduciary adviser's fees do 

not vary depending on the investment option selected, or (2) pursuant to a "computer model" that 

is periodically certified by an "eligible investment expert."9 By creating the exemption for “level 

fees” and a “computer model” to provide investment advice, the Proposed Regulation would 

appear to expand the sub-set of individuals that can provide such advice to participants and 

beneficiaries. However, in practice, given the current structure of the majority of financial services

firms, and their affiliated relationships, firms that provide investment advice to participants and 

beneficiaries will find it difficult to meet these exemptions. This effectively limits the 

professionals available to give advice unless the firms drastically alter their business practices.

The result is that the pool of qualified professionals available to help participants and 

beneficiaries in making investment decisions related to their plans is greatly reduced.

The 2009 Rule gave broader relief than the 2010 Proposed Regulation. In the 2009 Rule, there 

were three class exemptions related to fees. These three exemptions included: 1) the pure level 

fee arrangement, where the fees of the individual adviser, his firm, and any affiliates do not vary; 

2) the limited level fee arrangement, where the fees of the individual adviser and the fiduciary 

advisor do not vary, but the fees of affiliates may vary based on the options selected; and 3) the 

class level fee exemption that permits individualized advice under a level fee approach.10 The 

class fee leveling requirement applied solely to the compensation received by the individual 

providing the advice on behalf of the entity (e.g., the broker-dealer or the Register Investment 

Adviser (RIA)) and not to the compensation of that entity, or other employees of that entity (e.g., 

the individual’s manager), or affiliates of that entity. By limiting the level fee to the individual, 

rather than the entity, the 2009 Rule recognized the fact that if firms were required to be fee 

neutral, participants and beneficiaries could be harmed because they would have limited options 

available for investment advice. This approach provided reasonable protections to participants 

and beneficiaries while helping to insure universal access to professional advice and service. 

Accordingly, we believe that the DOL should re-issue the 2009 Rule and withdrawal the 2010 

Proposed Rule.

Should the DOL reject this approach, we urge the DOL to address our concerns with the Proposed 

Regulation and clarify several its provisions. Our specific concerns on the Proposed Regulation 

are discussed in detail below:

• Clarification of difference between “historical risk and return characteristics" and 

"historical performance" – The preamble of the release provides “that a computer 

model shall be designed and operated to avoid investment recommendations that 

inappropriately distinguish among investment options within a single asset class on the 

basis of a factor that cannot confidently be expected to persist in the future.”11

 

9 Department of Labor, Investment Advice – Participants and Beneficiaries, 29 CFR 2550, RIN 1210-AB35, available 

at 

 It goes on 

to says that “some differences between investment options within a single asset class, 

such as differences in fees and expenses or management style, are likely to persist in the 

future and therefore to constitute appropriate criteria for asset allocation, other 

differences, such as differences in historic performance, are less likely to persist and 

http://www.dol.gov/federalregister/PdfDisplay.aspx?DocId=23559 (March 2, 2010). 10 Department of Labor, Investment Advice – Participants and Beneficiaries, 29 CFR 2550, RIN 1210-AB13, 

available at http://edocket.access.gpo.gov/2009/E9-710.htm (January 21, 2009). 11 Department of Labor, Investment Advice – Participants and Beneficiaries, 2.
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therefore less likely to constitute appropriate criteria for asset allocation.”12 This section 

concludes with the following, “[a]sset classes, in contrast, can more often be distinguished 

from one another based on the basis of differences in their historical risk and return.”13

We request further clarification on the differences between "historical risk and return 

characteristics" and "historical performance" within the context of this portion of the 

release. We believe a clear and concise distinction will provide additional guidance to 

firms and will help ensure compliance. Failure to provide this clarification will create a

myriad of interpretations leading to a lack of consistency in application.

• Invalidation of Prior Regulation – Section 2550.408g-1(a)(3) of the Proposed 

Regulation provides that “[n]othing contained in ERISA section 408(g)(1), Code section 

4975(f)(8), or this regulation invalidates or otherwise affects prior regulations, 

exemptions, interpretive or other guidance issued by the Department of Labor pertaining 

to the provision of investment advice and the circumstances under which such advice may 

or may not constitute a prohibited transaction under section 406 of ERISA or section 

4975 of the Code.”14 

We request further clarification as to how any prior guidance related to an IRA account is 

impacted because of this Proposed Regulation. Specifically, are prior ERISA regulations 

now applicable to IRAs? Are prior DOL advisory opinions, exemptive orders, and field 

assistance bulletins that the DOL issued for ERISA now applicable to IRAs?15 These issues

must be clarified for firms to have confidence in their ability to comply with the Proposed 

Regulation.

• Computer Models – With respect to investment advice arrangements that use computer 

models, the Proposed Regulation prohibits recommendations that inappropriately 

distinguish among investment options within a single asset class based on a factor that 

cannot confidently be expected to persist in the future.16 The DOL contemplates that 

historical performance is unlikely to persist in the future and is, therefore, an 

inappropriate criteria for asset allocation.17 The Proposed Regulation contemplates that 

differences in fees and expenses or management style are likely to persist in the future 

and therefore are appropriate criteria for asset allocations.18

We believe that if fees, expenses, and management style are the primary factors taken 

into consideration when providing advice to participants and beneficiaries via computer 

models, and that advice does not take into consideration historical performance, 

participants and beneficiaries will not have the information needed to make informed 

investment decisions. There is little information more important to investor making 

investment decisions than historical performance. In 2006, the Investment Company 

Institute (ICI) surveyed investors to understand the types of information they reviewed 

before and after a purchase of a mutual fund. The results were published in a report 

 

12 Id. at 2 13 Id. at 3 14 Department of Labor, Investment Advice – Participants and Beneficiaries, 29 CFR 2550, RIN 1210-AB35, 7. 15 See generally, Field Assistance Bulletin No. 2007-01 (February 2, 2007), available at 

http://www.dol.gov/ebsa/regs/fab_2007-1.html; SunAmerica Advisory Opinion 2001-09A (December 14, 2001), 

available at http://www.reish.com/pa/benefits/2001-09a.pdf, and Frost National Bank Advisory Opinion, 1997-

15A, ERISA SEC. 406(b)(3), available at http://www.dol.gov/ebsa/programs/ori/advisory97/97-15a.htm. 16 Id. at 7, See generally, Section 2550.408g-1(b)(4)(i)(E)(3) of the Proposed Regulation. 17 Id. at 3. 18 Id. at 2.
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titled, “Understanding Investor Preferences for Mutual Fund Information.”19 The survey 

revealed that in addition to fees and expenses, one of the most frequently reviewed items

prior to the purchase of a fund was the historical performance of that fund.20 The survey 

found that 69% of those surveyed looked at and reviewed the historical performance 

prior to purchase.21 Historical performance ranked as the second most reviewed item, 

after fees and expenses.22

Excluding historical performance from computer modeling unwisely overemphasizes the 

cost of investments in the decision making process. Accordingly, we request that DOL 

include historical performance as an appropriate criterion for asset allocation 

determinations in the final version of the Proposed Regulation. Failure to include past 

performance in investment models will deprive participants and beneficiaries of 

information they desire in making these important investment decisions. We believe this 

would be an extremely unfortunate result that must not be allowed to happen.

• Compensation – Sections 408(b)(14) and 408(g)(1) of ERISA provide an exemption from 

the prohibitions of section 406 of ERISA for transactions described in section 408(b)(14) 

of ERISA in connection with the provision of investment advice to a participant or a 

beneficiary if the investment advice is provided by a fiduciary adviser under an “eligible 

investment advice arrangement.” Sections 4975(d)(17) and (f)(8) of the Code contain 

parallel provisions to ERISA sections 408(b)(14) and (g)(1). The Proposed Regulation 

provides that an “eligible investment advice arrangement” is defined as an arrangement 

that meets either the requirements of paragraph (b)(3) (use of fees) or paragraph (b)(4) 

(use of computer models).

23 Finally, Section 2550.408g-1(b)(3)(i)(D) of the Proposed 

Regulation provides that a fiduciary adviser (including any employee, agent, or registered

representative) that provides investment advice cannot receive from any party (including 

an affiliate of the fiduciary adviser), directly or indirectly, any fee or other compensation 

(including commissions, salary, bonuses, awards, promotions, or other things of value)

that is based in whole or in part on a participant’s or beneficiary’s selection of an 

investment option.

24

I. Affiliated Firms – The preamble of the Proposed Regulation provides that 

“the receipt by a fiduciary adviser of any payment from any party (including 

an affiliate of the fiduciary adviser), or used for the benefit of such fiduciary 

adviser, that is based, in whole or part, on the investment selected by 

participations or beneficiaries would be inconsistent with the fee-leveling 

requirement of the statutory exemption.”25

 

 

We seek clarification of the use of the term “affiliate.” Specifically, we are 

concerned about the extent to which a broker-dealer/RIA is considered an 

affiliate of other related legal entities. For example, is an independent RIA 

an affiliate of a product manufacturer that may be owned by the brokerdealer or may own the broker-dealer simply because the broker-dealer could 

be deemed to exercise control (and an affiliate by having the ability to 

 

19 Understanding Investor Preferences for Mutual Fund Information, Insurance Company Institute (2006), available at 

http://www.ici.org/pdf/rpt_06_inv_prefs_summary.pdf 20 Id. at 2. 21 Id. at 3. 22 Id. 

23 Id. at 7. 24 Id. at 7. 25 Department of Labor, Investment Advice – Participants and Beneficiaries, 29 CFR 2550, RIN 1210-AB35, 2. 
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influence the management or policies of the RIA) simply in executing its 

supervisory obligations? Simply, how far up the ownership chain does the 

term “affiliate” run?

 

II. Mutual Fund Networking Fees – We seek clarification of this provision’s 

application to compensation derived from mutual fund networking fees. 

Mutual fund companies with mutual funds electronically linked or 

“networked” with a broker-dealer often reimburse the broker-dealer for a 

portion of their account servicing and administrative costs, which may include 

accounting, statement preparation and mailing, tax reporting, and other 

shareholder services. Networking is a service that enables data sharing 

between the broker-dealer and mutual fund providers and/or their transfer 

agents. Participants and beneficiaries benefit from these arrangements 

because it allows the mutual fund companies to pay for plan expenses, rather 

than having these costs passed on to the investor.

Many dually registered broker-dealers/RIAs receive networking fees from 

mutual fund companies. These fees assist the firms in ensuring that 

participants and beneficiaries receive appropriate and timely services and 

ultimately benefit the clients of the dual registrant. We believe that these 

fees are appropriate, as long as they are fully disclosed to participants and 

beneficiaries. We ask the DOL to provide clear guidance that the payment of 

networking fees to a dual registrant would not be considered a violation of 

the above-mentioned section of the Proposed Regulation. 

• Effective Date – The Proposed Regulation provides that it will be effective within 60 

days of publication of the final regulation in the Federal Register. We believe that 60 

days is insufficient time given the expansive nature and scope of the Proposed 

Regulation. We request that the effective date be extended to 180 days after the 

publication of the final regulation in the Federal Register to ensure firms can comply with 

the Proposed Regulations.

Conclusion

We are committed to constructive engagement in the regulatory process and, therefore, welcome 

the opportunity to work with you to clarify and improve the Proposed Regulation for the benefit 

of all ERISA participants and IRA beneficiaries.

Thank you for your consideration of our comments. Should you have any questions, please 

contact me at 202 379-0943.

Respectfully submitted,

Dale E. Brown, CAE 

President & CEO