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 Chicago, IL 60654

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www.ababusinesslaw.org

 businesslaw@abanet.org

February 3, 2011 

By Electronic Mail and Regular Mail 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Attn: Definition of Fiduciary Proposed Rule 

Room N–5655 

U.S. Department of Labor, 

200 Constitution Avenue NW 

Washington, DC 20210 

Re: Definition of the Term “Fiduciary”, 29 CFR Part 2510 

Ladies and Gentlemen: 

 This letter is submitted on behalf of the Committee on Federal Regulation of 

Securities (the "Committee") of the Section of Business Law of the American Bar 

Association (the "ABA") in response to the request for comments on the proposal by the 

Department of Labor, Employee Benefits Security Administration (the “Department”) to 

expand the definition of the term “fiduciary” under the Employee Retirement Income 

Security Act (ERISA).1

 This letter was prepared by members of the Committee’s 

Subcommittee on Trading and Markets, with input from other members of the Committee. 

 The comments expressed in this letter represent the views of the Committee only 

and have not been approved by the ABA's House of Delegates or Board of Governors and 

therefore do not represent the official position of the ABA. In addition, these comments 

do not represent the official position of the ABA Section of the Business Law. 

 The Committee thanks the Department for this opportunity to comment on the 

Proposed Rule. Because, as discussed below, we write to urge the Department to defer its 

proposed changes until the U.S. Securities and Exchange Commission (the “Commission” 

or the “SEC”) has promulgated final rules relating to the fiduciary duties that may apply to 

investment advisers and broker-dealers, we are sending copies of this letter to the 

Director of the SEC’s Division of Trading and Markets and the Director of the SEC’s 

Division of Investment Management on this letter. The Staff of the Commission has 

recently recommended that all investment advisers and broker-dealers who provide 

personalized investment advice to retail customers be treated as fiduciaries to those 

 

1

 See 75 Fed. Reg. 65,263 (Oct. 22, 2010) (the “Proposing Release”). 

ASSOCIATION YEAR 2010-2011 

CHAIR 

Lynne B. Barr 

Exchange Place 

53 State Street 

Boston, MA 02109 

CHAIR-ELECT 

Linda J. Rusch 

P.O. Box 3528 

721 North Cincinnati Street 

Spokane, WA 99220 

VICE CHAIR 

Martin E. Lybecker 

1875 Pennsylvania Avenue, NW 

Washington, DC 20006 

SECRETARY 

Dixie L. Johnson 

Suite 800 

1001 Pennsylvania Avenue, NW 

Washington, DC 20004 

BUDGET OFFICER 

Renie Yoshida Grohl 

8300 Fox Hound Run, NE 

Warren, OH 44484 

CONTENT OFFICER 

Marsha E. Simms 

767 5th Avenue 

New York, NY 10153 

IMMEDIATE PAST CHAIR 

Nathaniel L. Doliner 

4221 West Boy Scout Boulevard 

Suite 1000 

Tampa, FL 33607 

SECTION DELEGATES TO 

THE ABA HOUSE OF DELEGATES 

Mary Beth M. Clary 

Naples, FL 

Barbara Mendel Mayden 

Nashville, TN 

Maury B. Poscover 

St. Louis, MO 

Hon. Elizabeth S. Stong 

Brooklyn, NY 

COUNCIL 

Mitchell L. Bach 

Philadelphia, PA 

Conrad G. Goodkind 

Milwaukee, WI 

Paul (Chip) L. Lion III 

Palo Alto, CA 

Timothy M. Lupinacci 

Birmingham, AL 

Jacqueline Parker 

Cherry Hill, NJ 

Margaret M. Foran 

Newark, NJ 

Lawrence A. Hamermesh 

Wilmington, DE 

Myles V. Lynk 

Tempe, AZ 

Christopher J, Rockers 

Kansas City, MO 

Jolene A. Yee 

Modesto, CA 

Doneene Keemer Damon 

Wilmington, DE 

Jean K. FitzSimon 

Philadelphia, PA 

Lawrence A. Goldman 

Newark, NJ 

Joel I. Greenberg 

New York, NY 

Donald C. Lampe 

Greensboro, NC 

Patrick T. Clendenen 

Boston, MA 

Frances Gauthier 

Wilmington, DE 

Samantha Horn 

Toronto, ON 

Jonathan C. Lipson 

Philadelphia, PA 

Peter J. Walsh, Jr. 

Wilmington, DE 

BOARD OF GOVERNORS LIAISON

Stephen L. Tober 

 Portsmouth, NH

SECTION DIRECTOR

Susan Daly Tobias 

Chicago, IL 

(312) 988-6244 

suedaly@staff.abanet.org
U.S. Department of Labor 

February 3, 2011 

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customers.2 The SEC Staff recommended that the Commission engage in rulemaking that would 

apply fiduciary standards expressly and uniformly to such investment advisers and brokerdealers, and would harmonize the regulatory regimes applicable to broker-dealers and investment 

advisers. The SEC Staff Study provides a comprehensive roadmap with respect to the regulatory 

and interpretative changes that would be necessary in order to implement an expansion of the 

fiduciary duty concept, including changes to the regulation of finders and solicitors, advertising, 

supervision, customer remedies, supervision, licensing of firms, licensing of individuals, 

continuing education requirements, principal trading and books and records, and interpretative 

guidance concerning permissible investor education, personalized investment advice, and the 

application of the duty of care and the duty of loyalty. 

 Many of the issues associated with the Department’s proposed changes to the 

definition of the term “fiduciary” parallel the issues relating to fiduciary duty addressed in the 

SEC Staff Study. Because of the direct and indirect implications the proposed expansion of 

the definition may have to financial services professionals, we write to urge the Department to 

postpone its proposed rulemaking with respect to the definition of the term “fiduciary” until 

after the SEC has promulgated final rules with respect to investment adviser and broker-dealer 

fiduciary duties, and then to proceed with rulemaking in conjunction with exemptive or other 

relief under ERISA in order to permit investment advisers (and to the extent the SEC rules so 

provide, broker-dealers) to implement of the final SEC rules without such compliance 

constituting a breach of the prohibitions under ERISA. The ERISA definition of “fiduciary” 

has developed over the past 35 years against the backdrop of the prohibited transaction 

provisions of ERISA and the prohibited transaction exemptions that the Department has 

granted. For example, we understand that the current five-part test for fiduciary status in 29 

CFR § 2510.3–21(c) was developed in close consultation with the Staff of the SEC. The 

current definition was intended to prevent the ERISA provisions from disrupting longstanding 

and well-accepted practices by which financial services firms provide investment advice to 

customers.3

 We urge the Department to work closely again with the Staff of the SEC to 

consider the potential effects of expanding the fiduciary definition. The roadmap of 

regulatory and interpretative issues identified in the SEC Staff Study in connection with the 

SEC’s consideration of an expansion of the scope of fiduciary duties in the provision of 

personalized investment advice to retail investors provides, in our view, an excellent model 

 

2

 Staff of the Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers 

(January 2011) (available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf). 

3

 The “individualized advice” prong of the current definition of fiduciary status raises different issues. We 

believe it is vitally important that the Department encourage generalized education and information about 

investment alternatives. Studies regularly show that the “financial literacy” of many Americans is lower than they 

need to make well-informed financial decisions. Imposing ERISA liability for generalized educational and 

informational materials could have the unintended consequence of making both employers and financial services 

firms less willing to offer much-needed general educational materials about investing. We urge the Department to 

make it clear that generalized educational and informational materials, which clearly disclose that they are not 

tailored to a specific customer’s financial situation, do not give rise to fiduciary obligations. The proposed changes 

to the definition contain an exception for “investment education” but only in the context of “individual account 

plans,” and we urge the Department to consider whether this exception is sufficiently broad. 
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for the Department’s evaluation of any similar expansion of its definition of fiduciary status. 

Such a process will assist the Department’s efforts to address any needed changes to the 

prohibited transactions rules and exemptions necessary as a result of any change to the 

definition of fiduciary. 

 As the Department is no doubt aware, the effect of being deemed a fiduciary under 

ERISA is substantially different from the consequence of an investment adviser being deemed 

a fiduciary under the Investment Advisers Act of 1940 (the “Advisers Act”), or (as suggested 

by the SEC Staff) for a broker-dealer under the Exchange Act.4

 Under the Advisers Act, the 

concept of fiduciary duty carries with it a limited number of broad principles-based 

responsibilities: a duty of care, which includes a duty to become fully informed on behalf of 

the client; a duty of loyalty to the client; a duty of honesty to the client; and a duty of good 

faith to act solely in the best interests of the client, which incorporates a substantive “prudent 

investor” standard. By contrast, ERISA treats a number of relationships as “prohibited 

transactions” which are entirely forbidden to ERISA fiduciaries. Many of those same 

relationships are permissible for investment advisers under the Advisers Act, and would be 

permissible for broker-dealers under the Exchange Act, so long as they are fully and fairly 

disclosed to clients, the clients consent to those relationships in advance, and the fiduciary 

makes a reasonable and good faith determination that the relationship is in the best interests of 

the clients. 

 In order to ameliorate the unintended harsh effects of the categorical proscriptions 

contained in the prohibited transactions provisions, the Department has used its regulatory 

authority to develop a series of carefully balanced exemptions from the prohibited 

transactions under ERISA. Over the years, the financial services industry has successfully 

adjusted to the various ERISA restrictions and exemptions. However, many of those 

exemptions in turn depend on the party relying on the exemptions not itself being an ERISA 

fiduciary. We are concerned that an expansion of the definition of the term “fiduciary” under 

ERISA, without a corresponding change to the scope of the prohibited transaction 

exemptions, would significantly disrupt some long-settled arrangements which may be in the 

best interests of clients. For these reasons, we urge the Department to defer consideration of 

revisions to the definition of the term “fiduciary” until the SEC has promulgated final rules 

regarding the fiduciary duties of investment advisers and broker-dealers. Following such final 

rulemaking, we also urge the Department not to adopt an expanded definition of the term 

“fiduciary” unless it has also conducted a thorough reexamination of the exemptions from the 

scope of prohibited transactions, as currently relied upon by the financial services industry. 

Absent these accommodations, and as discuss in more detail below, we believe that there will 

be significant market disruption to the financial services industry, and that quality investment 

 

4

 The SEC Staff Study recommends rejecting the alternative of repealing the brokerage exception to the 

definition of “investment adviser” in Section 202(a)(11) of the Investment Advisers Act, an alternative, which if 

adopted, would have the effect of treating both broker-dealers and investment advisers as subject to the Investment 

Advisers Act when they give personalized advice to retail clients. 
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advice could become less available to many American investors, particularly retail investors 

without significant investment experience and investors with smaller amounts to invest. 

 

 It may be useful to provide some concrete examples of our concerns. Under the 

Advisers Act, it is permissible for a financial services professional to receive what are known 

as Rule 12b-1 fees from mutual fund advisers. In part, these fees compensate the financial 

services professional for providing advice to clients, and in part, they compensate the 

financial services professional for performing servicing functions (statements, confirmations, 

mailings, etc.) that would otherwise fall on the mutual fund company. The SEC recently 

proposed reforming (and renaming) Rule 12b-1 fees.5

 However, the SEC concluded that it 

was not appropriate to ban entirely continuing payments from mutual fund advisers to 

financial professionals. Allowing those payments in appropriate circumstances creates an 

alternative method that allows some retail investors - notably many investors with IRA 

accounts - to pay for investment advice. By contrast, under ERISA, the acceptance by a 

fiduciary of payments from a party other than the client generally constitutes a prohibited 

transaction. ERISA fiduciaries typically either do not accept Rule 12b-1 payments from 

mutual fund advisers, or rebate those payments to clients (usually as an offset against the 

client’s investment advisory fees). The Department’s redefinition of fiduciary could being 

some financial services professionals within the scope of the term fiduciary. Unless the 

Department adjusts its prohibited transaction exemptions, the redefinition could eliminate the 

ability of such professionals to be compensated (through 12b-1 fees) for investment advice 

they have provided. As a result, retail investors may be denied the ability to pay their 

financial professionals for investment advice through periodic payments from mutual fund 

advisers. Some retail investors, who are unable to pay investment advisory fees or for whom 

such fees would be cost-prohibitive, might be unable to obtain quality investment advice at 

all.6

 Were the Department to determine to treat financial services professionals as 

fiduciaries, we believe it would be critically important for the Department to make 

corresponding changes to the exemptions from the prohibited transactions rules that would 

become effective at the same time as the definitional change. 

 As another example, Section 206(3) of the Advisers Act permits an investment adviser 

to transact as principal with a client, so long as the investment adviser gives the client full and 

fair disclosure of the terms of the transaction and obtains the written consent of the client. In 

some situations, for some securities, SEC Temporary Rule 206(3)-3T allows investment 

advisers to obtain this consent on a blanket basis (as opposed to a transaction-by-transaction 

basis). The SEC adopted, and recently extended, this temporary rule because it was 

concerned that otherwise, investment advisers might not be able to obtain best execution for 

 

5

 Securities Act Rel. No. 9128 (July 21, 2010) (available at http://www.sec.gov/rules/proposed/2010/33-

9128.pdf). 

6

 Many beginning investors, and investors with smaller amounts to invest, either do not have sufficient assets 

to qualify for investment advice based on an assets-under-management fee, or such a fee would be prohibitively 

expensive for them. For these investors, their only practical access to investment advice may be through mutual 

funds that pay their investment professional an ongoing fee.
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retail clients in some securities. Specifically, investment grade fixed-income securities 

(government, corporate and municipal bonds) typically trade at better prices in block 

transactions in the inter-dealer market than they do in retail-sized transactions.7 Without the 

ability to trade such securities as principal, financial services providers may not be able to 

provide these better inter-dealer prices to retail customers. By contrast, under ERISA, the 

prohibited transaction rules typically forbid a fiduciary from trading with a client as principal 

at all.8

 Thus, as we understand it, ERISA bars investment professionals who are deemed to be 

fiduciaries from conducting principal trades with clients in circumstances where the SEC has 

determined that principal trades may actually provide the clients with best execution for their 

transactions. We believe that this issue deserves to be debated on the merits, as part of a 

comprehensive analysis of the implications of the Department’s proposed change to the 

definition of the term “fiduciary.” 

 The above are only two of many possible examples. Our larger point is that any 

consideration of a change to the definition of the term “fiduciary” should also encompass an 

analysis of the implications of the change to financial services professionals. Because this 

analysis will not be possible until the SEC has determined what changes are required to the 

application of fiduciary duty concepts to investment advisers and broker-dealers, we believe it 

is critical that the Department defer consideration of its proposed definitional change until the 

SEC has promulgated its final rules regarding fiduciary duty. Only against this backdrop will 

the implications of the Department’s proposed definitional change become clear, as will the 

need for changes to the applicable exemptions so as not to disrupt a system that has 

functioned for many years in the best interests of investors. We therefore strongly urge the 

Department to defer its current rulemaking proposal. We are concerned that the Department’s 

rulemaking at this time, prior to SEC rulemaking, will work to the detriment of both the 

financial services industry and the investing public. 

* * * 

 

 We appreciate the opportunity to comment on the Department’s proposed changes to 

the definition of the term “fiduciary”. Members of the Committee would be pleased to meet 

with the Department or its staff to discuss these important issues further. If you should have 

any questions regarding this comment letter, please contact W. Hardy Callcott, Chair of our 

 

7

 See Investment Advisers Act Rel. No. 3128 (Dec. 28, 2010) (available at 

http://www.sec.gov/rules/final/2010/ia-3128.pdf). 

8

 We note that the Proposing Release contains an exception where “the recipient of the advice knows or, 

under the circumstances, reasonably should know, that the person is providing the advice or making the 

recommendation in its capacity as a purchaser or seller of a security or other property, . . . whose interests are 

adverse to the interests of the plan or its participants or beneficiaries, and that the person is not undertaking to 

provide impartial investment advice.” But as we understand it, this exception would not be available to anyone who 

“represents or acknowledges that [he or she] is acting as a fiduciary within the meaning of the Act with respect to 

providing advice or making recommendations” and is substantially more limited that the treatment of principal 

trades under the Investment Advisers Act. 
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February 3, 2011 

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Subcommittee on Trading and Markets, by email at hardy.callcott@bingham.com or by 

telephone at (415) 393-2310. 

Sincerely yours, 

/s/ Jeffrey W. Rubin

Jeffrey W. Rubin, Chair, Committee on 

Federal Regulation of Securities 

cc: 

Robert Cook, Director, SEC Division of Trading and Markets 

Eileen Rominger, Director, SEC Division of Investment Management