Insured Retirement Institute

 1101 New York Avenue NW | Suite 825

Washington, DC 20005

t 202.469.3000

f 202.898.5786

April 11, 2011 www.IRIonline.org

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By Electronic Delivery 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655

U.S. Department of Labor 

200 Constitution Avenue, N.W. 

Washington, DC 20210 

Re: Public Hearing on Definition of Fiduciary 

Dear Sir or Madam:

Thank you for the opportunity to testify at the March 1, 2011 hearing related to the proposed 

regulation defining who is an investment advice fiduciary under ERISA. At the hearing, we were 

asked by the Department to provide more information on why we believe that the proposed 

regulations would be the end of commission-based sales in the IRA account and retail retirement plan

marketplace. In particular, we were asked to supplement our testimony by specifically addressing the 

following items:

I. Why we believe we could not rely on the seller’s limitation set forth in the proposed 

regulations in order to continue to sell products on a commission basis; or alternatively, why 

we could not rely upon several current class prohibited transaction exemptions for 

commission-based sales if brokers, insurance agents, and other financial professionals become 

ERISA fiduciaries under the regulations; 

II. Why we do not believe that further exemptions issued by the Department would alleviate our 

prohibited transaction concerns; and

III. How we would suggest revising the proposed regulations to alleviate our concerns related to 

commission-based sales; as well as harmonize the Department’s regulations with the 

regulations we are expecting the SEC to issue based on the 913 Study recommending a 

uniform fiduciary standard for brokers and registered investment advisors who provide 

personalized advice to clients. 

The last item is vitally important given the Department’s current proposed regulations are oftentimes 

in direct conflict with the securities laws with respect to IRAs and other retail retirement accounts. 
2

We have added a fourth section that describes in detail the types of accounts (IRAs, Keoghs, open 

brokerage windows, etc.) that we believe warrant special consideration along with our rationale. 

I. The Proposed Regulations Would be the End of Commission-Based Sales in the IRA 

and Retail Retirement Plan Marketplace

The Department’s effort to expand the definition of investment advice fiduciary under ERISA will 

cause brokers and insurance agents to divide their products and services into the following four (4)

categories:

A. Those that fit within a current prohibited transaction exemption where the conditions 

can clearly be met based on current guidance;

B. Those products and services that can be made fee neutral under the Frost opinion;

C. Those products that can be sold on a non-fiduciary basis; or

D. Those products that will no longer be sold.

A. Those that fit within an exemption where the conditions can clearly be met. 

As you are aware, once a broker or agent is deemed to be an ERISA fiduciary, the receipt of 

compensation derived from the sale of investments and/or services must be analyzed to determine 

whether such transactions result in a prohibited transaction under ERISA or the Internal Revenue 

Code.

For IRAs, if a prohibited transaction does result, the broker or agent must return all of its fees to the 

owner plus pay significant excise taxes. In addition, if the transaction results in a loss to the plan, the 

broker or agent will have to reimburse the plan for such losses. Unless an exemption is clear and 

unequivocal, brokers will not rely on it. We would welcome timely interpretive guidance from the 

Department confirming availability of existing exemptions. However, at this time, our members will 

not be comfortable relying on current exemptions for the following reasons:

i. With respect to CPTE 86-128:

a. May be limited to “fees charged at the time of sale.” In this respect, it is not clear whether 

it would cover revenue sharing, order flow, investment management, transfer agency and 

other fees of affiliated entities, etc. Moreover, with limited exceptions, the exemption is 

available only for fees for effecting transactions as agent for the plan.

b. Does not cover true1principal trades which is a common way to sell bonds.

c. Does not cover “riskless principal” trades.2 These sales are functionally no different than 

commission-based agency trades yet the Department has not been willing to extend CPTE 

86-128 to cover these transactions. 

d. May not cover sales of mutual funds if they are determined to be sold on a riskless

principal basis as opposed to an agency basis.

 

1

 By “true principal trades,” we are referring to trades made from a broker’s inventory between the broker as seller and 

the client as purchaser.

2

“Riskless principal trades” are trades where the broker goes out to the market and purchases a security at the request of 

the client and resells it to the client with a disclosed mark-up.
3

e. Limited to “securities transactions” and therefore would be unavailable for futures 

transactions, fixed annuities, certificates of deposits and other investments that are not 

considered to be “securities” under current law. 

f. May only apply where the broker or an affiliate has discretionary authority over the 

account as it only covers a plan fiduciary’s use of its “authority” to cause a plan to pay a 

fee. An investment advice fiduciary generally has no authority to cause a plan to enter into 

a transaction. Instead, the investment advice fiduciary provides recommendations which 

another plan fiduciary or IRA owner is free to implement or ignore. 

g. For ERISA plans, the conditions are very onerous and introduce additional requirements 

that add new administrative costs into the broker-client relationship. For instance, the 

broker must send a “fire-me” letter to the client each year along with numerous other 

disclosures including a “portfolio turnover ratio” that have not been coordinated with the 

Department’s Form 5500 Schedule C disclosure regime.

ii. With respect to CPTE 84-24 (as applied to annuity sales):

a. For the sale of annuities issued by an unaffiliated insurance company, it is not clear 

whether the exemption is broad enough to cover fully disclosed revenue sharing payments 

made to the broker by the unaffiliated insurance company.

b. For the sale of variable annuities, it is not clear if the exemption would cover 

recommendations made by the broker regarding the selection of variable subaccounts, 

especially if one or more of the variable subaccounts are managed by, and pay an advisory 

or other fee to, an affiliate of the broker.

c. For sales of variable annuities issued by an affiliated insurance company, it is not clear if 

the exemption would cover the potential conflict arising out of the initial and subsequent 

recommendations made by the broker regarding how to allocate the contract’s account 

value between variable and fixed subaccounts, which of course would pay varying 

amounts of compensation to the affiliated investment manager depending on the 

investment strategy (e.g., international stock funds generally have a higher management 

fee than government bond funds).

d. May be limited to a situation where the adviser is inadvertently a fiduciary. The 

exemption should clearly apply to situations where the adviser states that he is a fiduciary 

and is being paid for his advice, regardless of whether the compensation is paid in the form 

of a commission or other fee, such as an advisory fee. 

iii. With respect to CPTE 75-1 (as applied to mutual fund sales):

a. Applies solely to non-affiliated mutual fund sales which makes it of little to no value if 

the broker is also selling affiliated mutual funds and cannot fit sales of affiliated funds 

within another exemption.

b. Applies solely to open-end mutual funds.

c. May be construed to apply solely to sales of mutual funds made on a principal basis. Note 

that since open end mutual funds issue new shares rather than sell existing shares, whether 

the sale is an agency trade or principal trade is irrelevant and meaningless for all practical 

purposes. Whether these sales are considered to be made on a principal basis probably 

depends largely on how the broker accounts for the sale in its books and records.3

 

3

For example, certain brokers record the transaction as a purchase with a debit to their general account and an offsetting 

debit, while for other brokers, the transaction may bypass their general account ledgers.
4

d. Not clear if it covers fully disclosed revenue sharing, 12b-1 fees and other compensation 

received from the mutual fund company or its service providers.

iv. With respect to CPTE 84-24 (as applied to mutual fund sales):

a. Does not apply to unaffiliated funds so it is of little to no value if the broker cannot fit within 

another exemption for unaffiliated mutual funds.

b. May not apply to affiliated funds because the exemption may not cover the receipt of 

investment management fees by an affiliated investment manager – see footnote 4 of 

Advisory Opinion 2000-15a. Note that if the exemption is not broad enough to cover the 

receipt of investment management fees by an affiliated investment manager, then the 

exemption would only be of use where the principal underwriter to the mutual fund is 

unaffiliated with the investment manager of the mutual fund. Although this situation is 

technically possible, we know of no mutual funds structured this way today or in 1984 when 

the exemption was issued prior to the Department narrowing its usefulness. Therefore, 

financial service providers are no longer confident in relying on the exemption. 

c. May be limited to situations where the broker or insurance agent is an “inadvertent fiduciary.”

B. Those that can be made fee neutral under the Frost opinion. 

As you know, the Department issued an advisory letter to Frost Bank that permitted Frost Bank to 

provide fiduciary advice for an asset-based advisory fee provided that Frost Bank provided a dollar 

for dollar offset for all revenue received by Frost Bank and its affiliates related to the investment of 

those plan assets. Although issued to a bank, the rationale behind the Frost Bank advisory opinion is 

used by a broad range of financial service providers including dually registered brokers. For 

instance, dually registered brokers4 may offer brokerage accounts on an advisory-wrap fee basis and 

waive any loads or commissions related to investments in the account. In addition, the broker would 

either rebate to the account or reduce its advisory fee to reflect any revenue received by the broker or 

an affiliated entity. We believe that this will be the only solution left to brokers under the rules to sell 

the types of products IRA owners need and desire. As noted in our March 1 testimony, advisory fee 

based accounts will often be more expensive for those IRA owners who purchase investments with 

long holding periods. 

Additionally, the fee offset methodology approved by the Department under the advisory opinion 

issued to Frost Bank unfairly penalizes affiliated mutual funds; and therefore, favors one business 

model over another. In a wrap account type of arrangement, a broker is paid an advisory fee to select 

mutual funds for a client at her request. The client does not pay an up-front sales commission and 

12b-1 fees can be rebated5or offset from the advisory fee. In addition to the advisory fee, the client 

also pays indirectly the operating expenses of the mutual funds including the investment management 

fee paid to the fund’s investment adviser. Often the fund’s adviser pays the broker a small part of the 

investment management fee under a revenue sharing program, and according to Frost, that payment 

must be offset from the advisory fee paid to the broker. The rest of the investment management fee is 

not offset and is therefore retained by the investment manager for the additional investment 

management services provided to the funds under this arrangement. However, if the mutual fund 

investment manager is affiliated with the broker, then guidance under Frost would require the entire 

 

4 Assume that the broker is dually registered as both a broker and an investment adviser.

5 The rebating of 12b-1 fees raises potential issues under federal securities laws. To the extent that Department guidance 

compels brokers to rebate 12b-1 fees, it would be helpful to have the SEC issue guidance indicating that such rebating is 

consistent with securities laws that require all mutual fund shareholders to be treated equally.
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management fee to be offset even though the investment manager is providing additional services to 

the client that are not offset when the services are provided by an unaffiliated investment manager. 

Because the investment management fee is charged as part of the mutual fund’s operating expense, it 

cannot be waived for the client but instead must be offset or rebated.6 This creates an unlevel playing 

field creating an incentive for brokers and agents to not recommend an affiliated mutual fund.7 

For example, assume that a broker charges 100 basis points (bps)8to provide investment advice to a 

client in an advisory wrap account. The broker recommends that the client invest half his assets in 

Fund A (an unaffiliated mutual fund investing in equities) and half of his assets in Fund B (an 

unaffiliated mutual fund investing in bonds). Fund A has an internal operating expense of 100 bps 

and Fund B has an internal operating expense of 80 bps. Both pay the broker a 25 basis point 12 b-1 

fee and a 10 basis point revenue sharing payment. The broker offsets its 100 bps fee by 35 bps to 

reflect these payments. The client pays a 65 basis point advisory wrap account fee plus an additional 

90 bps9indirectly to the fund’s service providers.

By contrast, assume that the broker instead recommends 50% in Fund A and 50% in Fund C. Fund C 

is an affiliated mutual fund that has a better track record than Fund B and a lower expense ratio – 70 

bps versus 80 bps. Fund C also pays a 25 basis point 12b-1 fee and a 10 basis point revenue sharing 

payment. However, since the manager of Fund C is affiliated with the broker, instead of offsetting 

the 10 basis point revenue sharing payment, the broker is required to offset the entire 70 basis point

operating expense. The result is that for the assets invested in Fund C, the broker is paid an advisory 

fee of 5 bps; which is 100 bps less the 25 basis point 12b-1 fee and the 70 basis point operating 

expense. In this respect, there is less incentive to recommend an affiliated mutual fund within a wrap 

account even if it’s the best choice for the client. 

C. Those that can be sold on a non-fiduciary basis 

At this time, it appears that brokers will either have to refrain from providing any specific investment 

recommendations or attempt to fit within the seller’s limitation under the proposed regulations. We 

do not believe it would be feasible for a broker to structure its services without triggering the 

investment advice rules unless it is permitted to avail itself of a broad seller’s limitation. 

Unfortunately, the proposed seller’s limitation does not reflect, nor serve well, the needs of the IRA 

market. 

The proposed regulations will leave brokers with a Hobson’s choice of providing no 

recommendations at all or trying to fit within the proposed seller’s limitation. Because the 

compensation structure paid to a broker is established when the retail retirement account is 

established, the broker must know in advance whether he or she will ever provide any “investment 

advice” to the client. If the broker is dually registered, then he or she will be providing investment 

advice if she “makes any recommendations as to the advisability of investing in, purchasing, holding, 

or selling securities or other property.” If the broker is not dually registered or otherwise affiliated 

with a registered investment adviser or other plan fiduciary, then in addition to making such a 

 

6 The requirement to offset in, and of itself, creates considerable operational challenges that can add significantly to the 

cost of maintaining an advisory-fee based wrap account.

7 The ability to offer affiliated products and services permits clients to realize synergies (in the form of product design and

operating scale efficiencies for example) from an affiliated broker and investment manager relationship. 

8 A basis point is a hundredth of one percent. A hundred basis points is a one percent fee.

9 The average expense ratio of Fund A and Fund B.
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recommendation, there would need to be an understanding that the recommendation may be 

considered in connection with the client making an investment decision and that the recommendation 

be individualized to the needs of the client. Given that brokers have a duty under the securities laws

to both know their client and evaluate products for client suitability, any recommendation made by a 

broker would generally be deemed to be individualized. It seems unlikely to us that a broker would 

not expect her recommendations to at least be considered by her clients regardless of a client’s 

ultimate decision. In this respect, it appears that the only way to establish a commission-based 

account is if the broker can be certain that the client will never ask, and the broker’s registered 

representative will never provide, his or her opinion regarding the advisability of purchasing, selling 

or holding a security. 

At the Department’s hearing on March 1, 2011, Mark Machiz of the National Employment Lawyer’s 

Association stated that he expected that his broker could provide him with objective information

under the proposed regulations - such as that one of his stock holdings dropped in value by fifty 

percent. This commentator stated that so long as the broker does not advise him to buy, sell or hold 

the stock, then that the broker would not be an investment advice fiduciary under ERISA. We can 

agree with this presumption. Query, however, what he would expect his broker to say when asked 

whether he should hold or sell the stock? Perhaps Mr. Machiz would never ask this question but we

believe many clients would do so. What if Mr. Machiz instructs the broker to sell the stock and the 

broker feels strongly that this is a mistake? Should the broker sit by and watch the client sell at the 

bottom of the market in a panic without discussing the pros and cons of doing so? Or what if Mr. 

Machiz tells his broker that he is thinking of purchasing a municipal bond in his IRA? Would he expect 

his broker to explain that he should purchase the municipal bond in his non-qualified brokerage account 

to avoid turning a tax-exempt investment into a taxable one? Or would he expect his broker to remain 

silent so as not to provide a recommendation with respect to the IRA? Clients want and expect their 

brokers to provide guidance in these situations and we believe the regulations should accommodate 

these expectations. None of our members would put in place, nor expect their registered 

representatives to follow, a policy that requires the registered representative to sit back and watch 

their clients make uninformed decisions. Nor would any of our members be comfortable hiring a 

registered representative that would follow such a policy. Therefore, we must assume that when 

clients ask for a broker’s opinion, the broker will provide it. And furthermore, where a broker feels a 

client may be making a mistake, the broker will so inform the client. And if the broker meets the 

“know your client” requirement under federal securities laws, the recommendation will be 

individualized because the broker knows the specific client’s situation quite well and the broker 

certainly hopes that the client will consider the recommendation as part of the client’s investment 

decision.10

For the reasons discussed above, without a broad seller’s limitation, it is unlikely that most brokers 

will be able to sell any products in a non-fiduciary capacity. However, there are a number of issues 

we see with the proposed seller’s limitation: 

a. First, by its terms, the limitation only applies if the broker is a counterparty or the agent of a 

counterparty to the IRA owner or plan participant. Except for principal transactions, brokers 

typically act as an agent for the IRA owner or plan participant rather than for the counterparty. 

Therefore, for agency trades, the seller’s limitation appears to be unavailable. 

 

10 We would note that clients who seek limited interaction with their broker would generally seek out alternative “nofrills” brokerage business models (i.e., those that rely on client-driven transaction websites and call centers). 
7

b. Second, the seller’s limitation as currently drafted only applies to the sale of securities and 

other property. It does not cover the sale of advisory services. This limitation would be a 

problem if a broker offers both an advisory-based service and a commission-based service. 

c. Third, the limitation shifts the burden of proof to the broker to prove what the client knew or 

reasonably should have known, an impossible standard for brokers to meet. 

d. Fourth, the limitation is not available if the broker represents or acknowledges that it is acting 

as an ERISA investment advice fiduciary. Because the representation or acknowledgment 

need not be in writing, brokers will not be able to structure their programs to rely on the 

limitation as a client may later claim that the broker’s representative acknowledged fiduciary 

status in a conversation at some point. Furthermore, the SEC will likely require the broker to 

be acting as a fiduciary for purposes of federal securities laws so a client may legitimately 

believe that the broker acknowledged ERISA fiduciary status when the broker acknowledged 

fiduciary status under federal or state securities laws. 

e. Fifth, it is unclear when or how often a broker would need to provide a disclosure to clients to 

ensure they reasonably understand that the broker is acting in a selling capacity. 

f. Finally, in order for the seller’s limitation to apply, the broker must characterize his or her 

interests as adverse to the clients, a concept which does not work for a fiduciary under the 

securities laws. 

D. Those products that can no longer be sold at all.

Due to our concerns noted above regarding the availability of class prohibited transaction 

exemptions, the problems with fee leveling under the Frost advisory opinion, and what we believe is 

an unworkable and too narrow seller’s limitation, many essential products and services will no longer 

be available to IRA owners and retail retirement plan participants. Leading candidates of products or 

services that could no longer be sold include fixed and variable annuities, securities sold on a 

principal basis, commission-based mutual fund sales, affiliated mutual funds and any other product or 

service that does not work well in an advisory fee-based account. 

As we mentioned in our testimony, annuity sales require substantial up-front work by the financial 

advisor and therefore have been structured to provide a larger up-front commission than many other 

products. Forcing annuities into an advisory wrap account where the broker is paid an ongoing assetbased fee may not be the preferred solution. First, since clients tend to hold annuity investments for a 

longer period of time, including them in wrap products would likely result in higher fees and less 

retirement income. Instead of an IRA owner paying a 5% fee once up-front, she might pay 1% per 

year for 20 years. Second, charging an ongoing advisory fee for assets held in an annuity would not 

be appropriate in all circumstances since there may not be a need for ongoing advice with respect to 

this type of investment. 

Similarly, clients who intend to purchase and hold stocks, bonds or mutual funds for longer periods 

of time often pay lower fees when they pay an up-front commission rather than an ongoing advisory 

fee. We would encourage the Department to confer on this issue with the SEC. The SEC has 

considerable experience with how mutual funds are sold to retail investors, such as IRA owners, and 

has imposed significant fines against brokers who have sold mutual fund B shares that charge higher 

ongoing fees (often 100 bps or more) when, in fact, a loaded A share would have been less costly to 

the client. The SEC generally prohibits a broker from selling retail customers a mutual fund share 

class that is expected to charge higher fees to the client over the client’s expected holding period. In 

fact, due in part to the enforcement actions of the SEC, many mutual funds have eliminated B shares 
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entirely. Yet we fear that the Department’s proposal will have the exact opposite impact on mutual 

fund sales by forcing brokers to sell these shares in an advisory-fee based account where an ongoing 

advisory wrap fee of 100 bps or more will be charged instead of a time of sale commission. 

We also point out that the SEC generally prohibits brokers from placing clients into an advisory-wrap 

fee account unless there is an expectation of sufficient trading to justify the advisory-wrap fee. 

Again, the SEC recognizes that charging clients ongoing advisory fees may not be suitable for 

investors who plan to hold investments for a long period of time.

II. Why We Are Concerned With the Department’s Suggestion to Expand or Clarify 

Existing and/or Add New Exemptions

We appreciate the Department’s willingness to consider modifying or adding new exemptions, and 

we believe that any such additional guidance must be timely and clear with any subsequent 

interpretation or modification being applied prospectively only, given the industry’s good faith 

reliance upon such guidance. Indeed, for the sake of clarity for IRA owners, plan participants and the

industry in general, a new exemption tailored to the retail marketplace that takes into account both 

commission based sales and advisory services models would be preferable than a modification to a 

patchwork of existing exemptions which may not address all the pertinent issues. 

In order for a new exemption to be effective, it would have to be issued well in advance of the 

effective date of any final regulations stipulating who is an investment advice fiduciary. Furthermore, 

any future exemptions would have to cover 406(b) self-dealing transactions. 

The importance of brokers being able to rely, in good faith, upon modified or new exemptions cannot 

be emphasized enough. If brokers rely on an exemption and it is later determined that the exemption 

does not cover the activity, the broker must return all compensation plus pay a 15% excise tax per 

year on the amount involved plus a 20% recovery penalty in an ERISA enforcement action brought 

by the Department. Assume that a broker relies on CPTE 86-128 for commission-based sales starting 

on January 1, 2013 when the definition of fiduciary under ERISA is broadened. Assume further that 

in 2016, the Department issues an opinion letter that states that CPTE 86-128 only applies if the 

broker has discretionary authority over the account in question. The broker would have to submit a 

Form 5330 along with a check in the amount of all of its commissions and other compensation 

received with respect to its IRA accounts (typically about 60% of its accounts) plus 15% per year. 

Service providers cannot take the risk that the Department could retroactively eliminate an exemption 

through subsequent guidance. That is why we believe that one exemption specifically tailored for 

those who sell products and receive commissions and other compensation is a better solution than 

trying to broaden existing exemptions that were issued with different circumstances in mind. 11

 

11 We were troubled by a statement made by Mr. Monhart, a senior member of the Department’s Office of Enforcement at 

the hearing where he suggests that the “inadvertent fiduciary” problem is overblown because, in order for a plaintiff to 

make a case, there must be a breach which causes a loss. This statement is untrue. If a broker is found to be a fiduciary 

and receives unlevel compensation, then even if the advice is great for the client and results in a significant profit for the 

plan, the broker would still have committed a prohibited transaction and be subject to disgorgement of all fees and excise 

taxes. So there is no need for a breach or a loss for an inadvertent fiduciary to face severe consequences under the 

prohibited transaction rules. And although the plaintiff cannot collect excise taxes, the plaintiffs’ bar can and will use the 

potential prohibited transaction liability as leverage to extract a settlement offer. 
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III. Our Recommendations to Preserve Commission-Based Sales, Harmonize the 

Department’s Fiduciary Standard with the SEC’s Standard, and Still Provide 

Important Protections to Retail Clients

At the hearings, there was a great deal of discussion as to whether the Department had sufficiently 

coordinated with the SEC in issuing these proposed regulations. Assistant Secretary Borzi made the 

point that the ERISA fiduciary duty is the highest fiduciary duty under the law and made it clear that 

the Department would not abdicate its role in protecting participants as it relates to the SEC fiduciary 

standard. Yet, Assistant Secretary Borzi also stated that a non-discretionary fiduciary seems like an 

oxymoron to her. Indeed under ERISA, the only time the role of a non-discretionary fiduciary exists 

is when the person is an “investment advice fiduciary.” Such investment advice fiduciaries are 

subject to the exact same fiduciary standard as those who have discretion. We believe that is why the 

Department deliberately constructed its investment advice regulation back in 1975 to ensure that it 

only applied to those persons who are providing advice on a regular basis where there is a mutual 

understanding that the advice will form the primary basis of the plan fiduciary’s investment decision. 

Under the Department’s new approach, anyone who ever makes an investment recommendation will 

be held to the same ERISA fiduciary standard as discretionary money managers. This approach is no 

more workable now than it was back in 1975 when the regulation was first issued in final form by the 

Department.

A. Carve Out For Retail Accounts 

At the hearings, we did not hear any proponents for applying the Department’s regulations to the IRA 

marketplace. In fact, some proponents of the regulations like ASPAA, specifically called for a carveout for IRAs. Other proponents of the regulations like Mr. Certner speaking on behalf of the AARP, 

testified that additional regulation was needed to protect 401(k) participants because these 

participants do not operate in the open marketplace but rather are constrained to pick amongst a few 

funds selected by their employer. This rationale does not extend to the retail IRA marketplace. Mr. 

Certner also testified that additional regulation was needed because the Supreme Court has taken 

away the ability of 401(k) plan participants to sue non-fiduciary service providers – a doctrine 

sometimes referred to as “betrayal without a remedy.” We would point out that this rationale does 

not extend to IRAs. Furthermore, we would note that ERISA does not preempt federal securities 

laws; and therefore, any duties imposed by the SEC on brokers would apply not only to IRAs but also 

to ERISA plans. 

We also heard testimony from Ms. Tuttle of Financial Engines, a firm dedicated to providing 

investment advice to 401(k) plan participants through a computer model, one of the methods 

permissible under the PPA as well as the Department’s SunAmerica opinion letter. While Financial 

Engines testified in support of the regulations as they apply to 401(k) plans, Ms. Tuttle admitted that 

Financial Engines is not in the IRA advice marketplace. This no doubt reflects the reality that 

creating a computer model to take into account a dozen or so mutual funds for a 401(k) plan is 

feasible whereas creating a computer model that can take into account the virtually infinite universe 

of investment choices available in the IRA marketplace is not.

We find it noteworthy that, as we reviewed the hundreds of pages of testimony from the hearings, we 

did not find a single proponent of these regulations who focused any part of their testimony on why 

the regulations should apply to IRAs. And despite the Department’s request for examples of harm 

done to IRA owners, the record remains empty on this point. While we do not doubt that an IRA 

owner has ever been harmed by a commission-based broker or insurance agent, we are not aware of 
10

any situation where the IRA owner was without a remedy that would be solved by the proposed 

regulations. 

Given the lack of support for these regulations as they apply to the IRA marketplace, we would, 

again, respectfully request the Department carve out IRAs and similar plans from these regulations.

B. Broad Exclusion for Those Who Disclose Conflicts

In lieu of the seller’s limitation, we would suggest that the Department consider adding a broad, 

disclosure-based exclusion from the definition of fiduciary under ERISA for purposes of providing 

investment advice. Such exclusion would require the service provider to provide a written disclosure 

at the outset of the relationship that (i) states that the service provider is not a fiduciary under ERISA 

or the Internal Revenue Code and (ii) that the service provider receives compensation that varies 

based on the products and services purchased by the client. We would object to characterizing the 

service provider’s advice as “adverse” or even “not intended to be impartial.” We believe that the 

vast majority of service providers do provide objective advice to their clients, act in the client’s best 

interests, and do not steer clients to products that pay them the most.12 In fact, we believe that 

brokers will have an obligation to act in the client’s best interests under the regulations that the SEC 

is expected to issue pursuant to the 913 study. We would therefore ask the Department to harmonize 

their regulation with the SEC by allowing the disclosure to state, to the extent applicable, that the 

service provider is a fiduciary under federal securities laws and has a duty to act in the best interests 

of the client under federal securities laws.

We would ask that the fiduciary exclusion be structured as a safe harbor so that the delivery of the 

disclosure would definitively establish that the service provider is not an ERISA fiduciary or subject 

to the prohibited transaction rules as to varying compensation under the Internal Revenue Code. The 

exception would be where the service provider represents or acknowledges in writing that it is acting 

as a fiduciary under ERISA or the Code. The “in writing” requirement is especially important 

because the broker may be required to provide information in writing and orally that it is acting as a 

fiduciary under federal securities laws if the SEC extends its fiduciary standard to brokers who 

provide personalized advice.

Note that we do not propose to limit the exclusion to those who are categorized as “sellers” or 

“counterparties.” We believe that anyone who provides services to a plan or IRA owner should be 

able to avail themselves of the exemption so long as the proper disclosure is provided. From a 

practical standpoint, anyone who makes recommendations with respect to securities must register as 

an investment adviser under the Investment Advisers Act of 1940 unless they fit within an 

exemption. In this respect, we do not believe there is a need to limit the exemption to those who are 

“sellers” and are concerned that such a limitation would inevitably create doubt as to whether the 

exclusion were available to brokers and others who seek to use it. 

C. Broad Exemption for Those Who Disclose Conflicts

While we prefer an exclusion from the definition of investment advice fiduciary, another option 

would be to provide as part of the regulatory process a class prohibited transaction exemption for 

service providers who disclose their conflicts of interest. The exemption would work exactly like the 

 

12 In fact, many of our members support the SEC’s effort to expand the fiduciary standard found under the Investment 

Advisers Act to brokers. 
11

exclusion described above, except that the service provider would acknowledge ERISA and/or Code 

fiduciary status rather than disclaim it. For non-ERISA plans such as IRAs, the end result would be 

identical since there is no fiduciary duty or obligations under the Internal Revenue Code for a Code 

fiduciary. For plans subject to ERISA, the service provider would still be an ERISA fiduciary and 

therefore, subject to ERISA’s fiduciary standards, including the duty to act in the best interests of the 

plan and its participants. For these service providers, the Department could still bring a claim that the 

service provider breached its fiduciary duty by failing to act in the best interests of the plan. 

However, the Department would have to show more than the fact that the service provider received 

differing compensation for products and services but rather that the receipt of unequal compensation 

was the motivation behind the service provider’s advice. Although we admit that this may not be an 

easy feat, it seems like a better use of the Department’s and the IRS’ enforcement budgets than trying 

to establish that the service provider is a fiduciary under the existing five part test. The litigation 

would focus on the advice provided by the service provider and the motivation for it which seems 

much more germane to whether the service provider breached its fiduciary duty. We would also note 

that although an exemption would take excise taxes off the table,13 it would not prevent the 

Department from recapturing excessive compensation or investment losses that result from such a 

breach nor would it prevent the Department from assessing the 20% penalty under ERISA section 

502(l) nor would it take away the private cause of action of a plan or plan participant under ERISA 

section 502(a). 

An advantage of the exemption approach is that it better harmonizes the SEC’s regulatory effort 

because the service provider that provides advice is a fiduciary under both the securities laws and 

ERISA. A drawback to this approach is that it would likely raise costs as brokers and other financial 

service providers would need to consider the purchase of ERISA fiduciary insurance or heightened 

supervision should their representatives and agent be deemed to be ERISA fiduciaries.

D. Rollovers

With respect to rollovers, we would encourage the Department to develop a standard disclosure 

document that could be provided either in writing or over the phone that would explain the pros and 

cons of rolling plan assets from a plan to an IRA. Such a disclosure should note that one important 

factor to consider is the relative cost of the investments available within the IRA versus the costs of 

investments held inside the retirement plan. The disclosure should not state that investments in the 

IRA are more expensive than those found in the plan as that is often not a true statement.14 We note 

that it is already a common practice in the broker-dealer community to provide such information to 

plan participants. The Department could require such an educational document or conversation be 

provided as part of the safe harbor exclusion or exemption described above. Providing such guidance 

as part of these regulations would also have the effect of removing a barrier for service providers to 

act in a fiduciary capacity with respect to plans. Many service providers are unwilling to act as an 

 

13 Comment limited to the situation where the service provider actually provided the disclosures and put the plan or plan 

participant on notice that it received unequal compensation. Those who fail to provide disclosure would still be subject to 

the substantial excise taxes prescribed under the Code. 

14 Although we understand that the GAO recommends such a disclosure, we would note that in some cases the client may 

actually have lower fees in his or her IRA if, for instance, he or she is moving from equity-based mutual funds that may 

charge 100 bps or more in operating expenses to a portfolio of individual stocks. Regardless, our experience is that the 

primary reason clients roll their money away from their employer’s 401(k) plan to an IRA is that they want the maximum 

amount of control over their retirement savings and do not desire either the government or their former employer to 

control or influence any aspect of their retirement account. 
12

ERISA fiduciary due to concerns that doing so may prevent them from accepting IRA rollovers from 

the plan participants.

E. Updating Existing Exemptions

We would appreciate any helpful guidance the Department can provide with respect to the myriad of 

class prohibited transactions that have already been issued. While such clarification would be 

welcomed and we specifically support all of the modifications requested by SIFMA, we caution 

whether it could be done in a manner that is sufficient to fully meet our concerns. Many of the 

exemptions discussed in Part I of this letter were issued shortly after ERISA was passed (or were 

derived from such exemptions) and were intended to cover situations where brokers sold products to 

employers rather than plan participants or IRA owners. Over time, the Department has clarified that 

the exemptions would also apply to products sold to IRA owners or 401(k) participants. Even so, 

most of these exemptions were not designed specifically for situations where brokers are acting as 

investment advice fiduciaries and selling products and services to IRA owners. Some of the 

exemptions, such as CPTE 86-128 have no conditions as applied to IRAs while other exemptions 

contain stringent requirements that apply to both ERISA plans and IRA owners. It is also very 

confusing for brokers to have to meet the conditions of several different exemptions depending on 

what products and services are purchased by the client.

IV. Background on IRA and Retail Retirement Plan Marketplace

A. Types of Retail Retirement Accounts

We would ask the Department to extend the solutions we described in Part III of this letter to 

traditional and Roth IRAs, SEPs, SIMPLE IRAs, Keogh plans and also to participant directed 

accounts to the extent that the participant is able to make investments beyond a list of designated 

investment alternatives. IRAs are different than employer-sponsored plans because the IRA owner is 

free to choose the investment arrangement with no input from an employer fiduciary. In fact, IRA 

owners are free to select a service provider that will act in a fiduciary capacity or one that acts in a 

non-fiduciary capacity. The same can be said for Keogh plans and SEPs and SIMPLE IRAs too. We 

would also point out that many 401(k) plans permit participants to open a brokerage account with the 

financial institution of their choice. We believe it is important to preserve these types of accounts 

too.

B. Issues Unique to Retail Retirement Accounts

Many concepts that make sense in the large 401(k) market quickly fall apart in the retail retirement

marketplace. For instance, the Department’s long standing position is that if a fiduciary uses its 

discretionary authority or control to cause a plan to pay it additional fees (even if additional services 

are provided), the fiduciary has engaged in a self-dealing transaction. With respect to nondiscretionary fiduciaries (i.e., investment advice fiduciaries), the Department’s position is that if the 

investment advice provider recommends products or services that pay the investment advice provider 

more compensation, such transactions are considered self-dealing. It is important that the 

Department consider how this concept would be applied in the retail marketplace. If a broker can 

recommend the client purchase stocks through an advisory fee based account paying the broker 100 

bps as opposed to a commission-based brokerage account at $25 per trade, query as to whether 

making such a recommendation might be considered a self-dealing transaction. 
13

If the broker recommends the client purchase an annuity, the client will likely pay a larger up-front 

commission and receive some form of guaranteed income opportunity. This type of product will 

certainly pay more compensation to the broker than, for instance, a money market fund. In fact, the 

only product or service that a fiduciary broker could sell (without an exemption) would be the one 

that pays it the lowest possible compensation regardless of whether that product or service is suitable 

to meet the client’s needs. Most likely in today’s world, that product or service would be a sweep 

account option or a money market mutual fund; neither of which would be suitable long-term 

investments for the average retirement saver. Therefore, without a method to either (i) permit brokers 

to provide recommendations without becoming a fiduciary or (ii) a prohibited transaction exemption 

that permits brokers to sell products and services that pay it various forms and levels of 

compensation, brokers will be required to do away with commission-based sales entirely and place 

clients into a “super wrap” fee-based advisory account.15 

Another problem we see with applying the proposed regulations to the retail marketplace is the 

difficulty to determine what compensation should be deemed to apply to recommendations made by 

the broker. Typically, brokers and investment advisers deliver a financial plan for a fixed fee and the 

client chooses to implement the financial plan by purchasing products and services from the 

investment adviser. The advice in such a scenario would appear not to trigger a prohibited 

transaction because it was paid for through a flat fee. However, if the investment adviser’s 

experience is that 95% of the time clients choose to implement such a financial plan through products 

and services offered by the investment adviser’s affiliated broker, query as to whether the Department

would consider this implementation to be a self-dealing transaction. What if the broker or investment 

adviser provides the financial plan for free in the hopes that the client will implement the plan with 

the broker? What if the broker provides free advice related to the client’s 401(k) plan held at another 

institution but receives compensation related to other products or services provided to the client? It is 

imperative that brokers continue to be able to provide clients with a holistic financial plan on all of 

their assets including those held in retirement plans. 

One issue that came up at the hearings was a concern that where a 401(k) participant is receiving 

assistance from a financial professional endorsed (either expressly or implied) by their employer to 

help them select amongst funds chosen by their employer, there is a heightened concern that the 

401(k) participant would assume that the financial professional is acting in a fiduciary capacity. On 

the other hand, where a retail client seeks out help from a broker that is unrelated to his or her 401(k) 

plan and/or selecting among a whole universe of options that have not been constrained by their 

employer, then the retail client is no different than any other consumer in the financial marketplace. 

While all consumers deserve protection, there is no policy reason why IRA owners should be subject 

to greater restrictions on what products and services they may purchase and which financial 

professionals they may consult than consumers with non-qualified accounts when seeking out 

financial assistance and guidance. 

In any of the above examples, the broker or agent who has established a relationship with the IRA or 

Keogh owner may advise the client to roll over any assets held in their former employer’s 401(k) to 

 

15 For instance, even if the Department clarified that CPTE 86-128 applied to agency sales made by an investment advice 

fiduciary broker, the broker could not make this solution available if it sold other products through an advisory-wrap fee 

program modeled after the Frost advisory opinion. In that situation, the broker would recommend the advisory-fee wrap 

program for clients who planned to trade frequently or who needed more advice. Although recommendations made once 

the advisory relationship has been established would be fee neutral, the recommendation to place the client into the 

advisory wrap program would not be fee neutral and in fact may very well lead to the broker earning more compensation. 
14

an IRA maintained by that broker’s firm. If the broker or agent has no relationship with the 401(k) 

plan then he or she probably receives no compensation with respect to the assets in the 401(k) plan. 

In that case, if the broker is deemed to be a fiduciary, a recommendation to rollover to an IRA will 

always result in the broker receiving more compensation and thus would constitute a prohibited 

transaction unless an exemption is available. On the other hand, the existing service providers have a 

conflict in that if money leaves the plan they will lose compensation, unless the money is rolled over 

to an IRA maintained by that service provider. Rather than choose sides, the Department’s rules 

should require that any discussion of distribution options contains disclosures sufficient to allow the 

participant to make an informed decision. 

C. Current Regulatory Protections

We believe brokers play a critical role in helping Americans save for retirement. Brokers work with 

401(k) participants and IRA owners every day to help them reach their retirement goals. It appears, 

from comments made by the Department, that it believes that brokers and commission-based 

recommendations are harmful to investors; yet we would challenge this premise given our experience 

and belief that brokers often lend critical assistance to IRA account holders and small business 

owners. We find it noteworthy that the SEC, who has considerable knowledge regarding the 

practices of brokers, appears to have a very different view of the value of brokers than does the 

Department. 

The only basis given for the Department’s proposed regulations involved harm to plan participants by 

pension consultants providing services to defined benefit plans and ESOP appraisers. Neither of 

those examples has any relationship to the services provided by brokers to IRA owners or retail 

retirement plan participants. We further note that the Department asked several proponents to the 

regulations for evidence of harm to 401(k) plan participants and IRA owners and none could point to 

any empirical evidence to support this contention. We do not believe a few anecdotal examples 

should form the basis for the Department’s viewpoint on the value of the services provided today by 

brokers.

Financial services firms and their professionals currently working with retirement savers to meet their 

retirement needs are currently subject to a myriad of federal, state, and self-regulatory organization 

rules. Securities professionals providing retirement saving services to investors are typically subject 

to regulation under broker-dealer, investment advisory, and insurance regimes and, in many cases, 

some combination of the three. 

Investment advisers are significant providers of retirement services to consumers and have long been 

held to a fiduciary standard that is substantially similar to the definition adopted by the Department. 

In furtherance of this fiduciary standard, the SEC imposes detailed disclosure requirements on 

advisers, requiring advisers to disclose conflicts of interest, compensation, methods of securities 

analysis, and other information important to investors. 

We respectfully suggest that this extensive disclosure regime renders the Department’s proposed rule 

unwarranted and confusing as applied to retail investors, as these consumers are already receiving the 

information they need to make an informed retirement investment decisions. In addition to SEC 

regulation, the states register smaller investment advisory firms and regulate the activities of 

investment advisers by imposing registration, licensing or qualification requirements on investment 

adviser representatives with a place of business within the state. States also retain authority over 
15

SEC-registered investment advisers under state investment adviser statutes to investigate and bring 

enforcement actions with respect to fraud or deceit against an investment adviser and an investment 

adviser’s associated persons. 

Broker-dealers providing retirement services similarly are subject to extensive regulation at the 

federal and state level. In addition to a dual system of federal and state oversight, broker-dealers are 

required to be members of the Financial Industry Regulatory Association (FINRA), which imposes 

detailed standards on broker-dealers relating to capital, advertising, reporting, and disclosure issues. 

Firms must disclose the commissions they receive, as well as comply with explicit risk disclosure 

standards when recommending investments. Brokers must know their clients and only recommend 

products that are suitable based on a particular’s client’s needs, time horizon, and risk profile. Courts 

have even held broker-dealers to a fiduciary standard, particularly in cases where the firm exercises 

discretion or control of client assets. For both discretionary and non-discretionary broker-dealers, the 

SEC and FINRA have imposed an extensive scheme of mandated supervision and prophylactic 

regulation to protect investors that many would argue goes far beyond traditional fiduciary 

obligations. 

Insurance agents servicing retirement investors also are subject to a complex array of state licensing 

and conduct requirements. Each state has an insurance official who oversees the financial strength, 

policy content, market conduct, claims settlement practices, and distribution and marketing systems 

of insurance companies doing business in his or her state. 

It is critical to note that the overwhelming majority of financial services professionals are subject to 

regulation by a combination of insurance, broker-dealer, and investment adviser regulation. We 

believe the Department’s efforts to reinterpret the fiduciary definition, in a manner that imposes 

fiduciary status on a person who has no authority or control over a plan or its assets, would do little to 

promote investor protection or the safety of retirement assets, but instead, would result in firms 

limiting the retirement investment choices available to investors and raising fees to offset the 

additional associated costs. Therefore, we recommend that the Department undertake an in depth 

cost-benefit analysis to determine whether the additional regulatory costs triggered by this proposed 

rule are warranted. 

D. Economic Impact Analysis

Given the broad range of concerns raised by numerous comment letters and the lack of economic 

analysis relating to IRAs, we are concerned with the Department’s intention to finalize these 

regulations by the end of the year. We do not believe this timeframe allows the Department to assess 

the economic impact of its regulations on the 48 million Americans who use IRAs to help fund their 

retirement. At this time, the Department’s economic impact analysis under the proposed regulations 

does not take into account the potential impact on the IRA marketplace.16 The economics to 

consumers of common products and services held in IRAs and other retail qualified accounts should 

be taken into account.17 

 

16 This fact was pointed out by several commentators and at no time was it rebutted by the Panel or any proponents to the 

regulations. 

17 The economics of the small account prevent an asset based fee arrangement from working. This is why it is dangerous 

to extrapolate concepts that work in the large 401(k) market to IRAs. Some proponents of the proposed regulations 

inferred that a new fee-based arrangement market might develop to serve middle-income Americans. In other words, if 

the Department prohibits commission-based recommendations, these proponents argued that the investment advisors will 
16

The testimony by SIFMA suggested that 90% of households with an IRA invest in a non-fiduciary 

commission based account. The Department questioned whether it is fair to assume from this 

statistic that these investors prefer non-fiduciary accounts over fiduciary ones. Embedded in that 

comment we suspect is a concern that perhaps these IRA owners are unsophisticated investors that 

are being taken advantage of by the financial community. We disagree with this premise and would 

encourage the Department to dig deeper into this statistic, perhaps even commissioning a study. 

What the Department would quickly discover is that commission-based accounts are less expensive

for many Americans and that advisory-fee based accounts are not available to Americans with small 

account balances. The reason is scale and service level. An individual with a $10,000 account 

balance cannot afford to pay a $3,000 advisory fee. No matter how good the advice is, we believe it 

cannot make up for the fact that it cost the investor 30% of his or her account balance. 

If the Department does not carve out IRAs and other retail retirement accounts in the final regulation, 

we are concerned that the Department may revise its economic impact to consider the impact on these 

accounts as part of the final regulations. Such a process would give the financial services community 

no opportunity to comment on the Department’s economic impact analysis. We agree with the 

Department that it is important to comment not only on the substance of a proposed regulation but 

also on the economic impact assessment. We also agree with the Department’s view that the only 

way to get an accurate estimate of what a regulation is going to cost is through comments provided 

by the regulated community as to the accuracy of the Department’s economic impact assessment.18 

Therefore, before it finalizes these regulations, we believe it vitally important that the Department 

conduct an economic impact assessment on IRAs and give the regulated community an opportunity 

to comment. 

For instance, we are troubled by the line of questions asked by Mr. Piacentini relating to whether the 

Department’s proposed regulations would likely result in increased investment returns by IRA 

owners and 401(k) plan participants. Mr. Piacentini pointed to the GAO study on pension consultants 

to large defined benefit plans where the GAO determined that those plans that obtained advice from 

advisers with concealed conflicts did in fact receive lower investment returns. We do not think such 

an extrapolation to the IRA market would make sense nor do we think it would be appropriate to 

make such an assumption without any empirical data to support it. Further, we would point out that 

many low and moderate income investors will be left with no advice and in that situation are unlikely 

to save as much for retirement as those serviced by commissioned brokers. And of course, the cost of 

the advice must be factored into the analysis as well. Neither of these factors is relevant to the 

GAO’s study on pension consultants. 

 

start working with small accounts on a level advisory-fee basis. Lest the Department find these arguments persuasive, we 

would point to some of the studies commissioned by PriceMetrix and found on their website, PriceMetrix.com. Most of 

their studies focus on how wealth managers (e.g., those who offer investment advice on an advisory fee basis) can 

increase their profitability by getting rid of small accounts. Not surprisingly, we have heard no testimony or read any 

comment letter suggesting that fee-only advisors were planning to pick up the millions of IRA accounts that hold less 

than $25,000 in assets. 

18 See interchange between Assistant Secretary Borzi and Mr. McCarthy from Morgan Stanley relating to the importance 

of the economic impact assessment.
17

Conclusion

Again we thank the Department for giving us the opportunity to provide additional comments relating 

to the proposed regulations. We very much would like to take advantage of any opportunity the 

Department would make available to us to continue a dialogue relating to the unique structure of the 

retail marketplace. 

Furthermore, though we stressed in our comments the areas where the Department’s regulation 

troubles us greatly, there certainly are areas of common ground to build upon. For instance, we 

strongly agree that where a service provider acknowledges in its contract that investment 

recommendations are intended to be ERISA fiduciary advice, such acknowledgment should be 

binding on the service provider. 

We also thoroughly agree that the recipients of investment recommendations should know whether 

the service provider making the recommendation is paid differently depending on the investments 

being recommended and whether the service provider is acting as an ERISA fiduciary. On the other 

hand, we believe strongly that brokers and insurance agents provide valuable services to IRA owners 

and other retail investors and that a commission-based compensation structure is often the most 

appropriate method to deliver products and services to these investors. 

We fear that the Department’s proposed regulations, without a carve out for IRAs and similar retail 

retirement accounts, or a broad disclosure-based exclusion or exemption, will eliminate commission 

based sales and prevent IRA owners and other retail investors from working with the investment 

professional of their choice, and pursuing the products they desire, at the very time when such 

assistance is critical.

Sincerely,

,

Catherine J. Weatherford 

President & CEO