333 South Hope Street

Los Angeles, California 90071-1406

thecapitalgroup.com

September 23, 2015

Filed Electronically

Office of Regulations and Interpretations Office of Exemption Determinations

Employee Benefits Security Administration Employee Benefits Security Administration

Room N-5655 Attn: D-11712

U.S. Department of Labor U.S. Department of Labor

200 Constitution Avenue N.W. 200 Constitution Avenue N.W.

Washington, DC 20210 Washington, DC 20210

Re: RIN 1210-AB32; Conflicts of Interest Rule 

ZRIN 1210-ZA25; Proposed Class Exemption

Dear Sir or Madam:

The Capital Group Companies is pleased to provide supplemental comments on the 

Department of Labor’s proposed conflicts of interest rule and best interest contract 

exemption. Capital submitted a detailed comment letter dated July 20, 2015 and testified at 

the Department’s hearing on the proposal on August 12, 2015. 

Capital’s comment letter and testimony focused on the need for additional guidance on the 

treatment of pre-existing IRA investors who are currently serviced by registered 

representatives of broker-dealers. Specifically, we suggested including a grandfather rule for

hold recommendations on pre-existing commissionable investments, such as mutual funds 

that pay 12b-1 fees to broker-dealers. Without a grandfather rule, we believe the proposal 

will unnecessarily disturb millions of existing brokerage relationships by requiring either 

compliance with the best interest contract exemption or conversion of the relationship to a 

fee-based advisory solution.

At the hearing, a Department representative asked whether a grandfather rule for hold 

recommendations is needed if the final rule treats a recommendation to move from a preexisting commissionable account to a fee-based account as fiduciary investment advice. The 

implication was that such a rule would create a level playing field because advisors would 

ordinarily have to comply with the best interest contract exemption for transitions to feebased programs as well as continuations of pre-existing commissionable arrangements.
2

As we indicated at the hearing, we remain convinced that a grandfather rule for hold 

recommendations is necessary to prevent investors from losing access to their current 

advisor. Many financial advisors have indicated that they do not plan to offer an ongoing 

commissionable program for IRA investors after the new rules are finalized. Thus, without a 

grandfather rule, investors who do not meet the relevant threshold for their advisor’s feebased advisory program will lose access to their financial advisor despite in many instances

having pre-paid for advice through an upfront commission. Requiring compliance with the 

best interest contract exemption for transitions will only increase the need for a grandfather 

rule by arguably making it harder for existing advisors to continue to service their pre-existing 

clients. 

We agree, however, that there needs to be clear guidance on the standard that applies to 

fee-based transitions. Regardless of the details of the final best interest contact exemption, it 

is clear that the new rules will provide a tailwind for fee-based programs. But, as proposed,

the applicable standard of conduct for transitions from commissions to fee-based advice is 

simply not clear. The proposal treats the recommendation of an investment advisor as a 

fiduciary recommendation, if the recommending advisor is receiving compensation. As 

reflected in comments and at the hearing, many have read this provision to apply equally to 

an advisor’s recommendation of its own or an affiliate’s advisory services. But this 

interpretation is inconsistent with existing Department regulations which were not withdrawn 

or modified in the proposal.

1

We appreciate the clarifying approach suggested by the Department at the hearing, namely 

that a “hire me” recommendation would be treated as non-fiduciary selling activity but a 

recommendation to transition from a commissionable account to a fee-based program would 

be conflicted fiduciary investment advice, requiring compliance with the terms of an 

exemption. We agree that selling one’s own advisory services should not be considered 

fiduciary investment advice. Retail investors are capable of understanding that an advisor is 

not providing impartial investment advice in recommending that the investor hire the advisor. 

That said, we recognize that a recommendation to transition from a commissionable 

arrangement to a fee-based arrangement is qualitatively different because the advisor has a 

pre-existing relationship with the investor and the recommendation inherently involves an 

express or implied sell recommendation that terminates the commissionable relationship. 

It is important, however, that the Department tailor the best interest contract exemption to 

fee-based transitions. Thus, the exemption should clearly apply to fee-based transitions and 

its disclosure requirements should be well-suited to such transitions, for example, by focusing 

on a comparison of the fees and services associated with the existing and proposed 

compensation arrangements.

 1 See DOL Reg. section 2550.408b-2(f), Example 1 (treating a fiduciary advisor’s recommendation of its 

own additional portfolio evaluation services as a non-fiduciary recommendation).
3

Regardless, in our view, the approach the Department is considering only heightens the need 

for a grandfather rule for hold and other similar recommendations. For your convenience, we 

have taken the liberty of attaching draft language incorporating the grandfather rule we 

propose and creating an additional carve-out from the definition of fiduciary investment 

advice for selling one’s own advisory services. The grandfathering language is intended to 

create a prohibited transaction exemption for (i) hold recommendations on pre-existing 

assets; (ii) recommendations to continue a systematic purchase program that was in place 

prior to the applicability date of the new rules; and (iii) recommendations to exchange one 

fund for another, provided that the exchange does not trigger a new commission or 

otherwise increase the advisor’s compensation, for example, exchange recommendations on 

separate account investments under a variable annuity contact or pursuant to a mutual fund 

family’s pre-existing rights of exchange policy. 

The attached language is modelled on the approach taken by the U.K. in its Retail 

Distribution Review (RDR), which grandfathered a similar set of investment recommendations 

from the RDR’s general prohibition on advice resulting in commissionable compensation. To 

the best of our knowledge, the grandfather rule in the U.K. has facilitated an orderly transition 

to the new rules and has not been the source of any perceived abuse. 

Finally, we wish to express our appreciation for the Department’s approach to the hearing. 

We were heartened by the Department’s openness to making appropriate changes to the 

best interest contract exemption. One of the themes that emerged from the hearing was that 

the new rules, if finalized in substantially the form proposed, could either force investors into 

fee-based arrangements or restrict access to advice altogether. This lack of choice would be 

particularly harmful to “buy and hold” investors and investors who need lifetime income 

products, particularly variable annuities. However, with the right changes, we are hopeful 

that the new rules will achieve the Department’s laudable goal of creating rules that are 

neutral as to business model. For a helpful discussion of the issues raised by the proposal for 

the broker-dealer business model, we commend you to FINRA’s comment letter, dated July 

17, 2015. 

Thank you for the opportunity to comment. Please do not hesitate to contact the 

undersigned if you have any questions. 

Respectfully submitted,

Jason K. Bortz Michael J. Downer

(213) 615-4007 (213) 486-9425
4

Suggested Revisions to Pre-Existing Transaction Exemption 

Section VII – Exemption for Pre-Existing Transactions

(a) In general. ERISA and the Internal Revenue Code prohibit Advisers, Financial 

Institutions and their Affiliates and Related Entities from receiving variable or third-party 

compensation as a result of the Adviser’s and Financial Institution’s advice to a Plan, 

participant or beneficiary, or IRA owner. Some Advisers and Financial Institutions did not 

consider themselves fiduciaries within the meaning of 29 CFR 2510-3.21 before the 

applicability date of the amendment to 29 CFR 2510-3.21 (the Applicability Date). Other 

Advisers and Financial Institutions entered into transactions involving Plans, participant or 

beneficiary accounts, or IRAs before the Applicability Date, in accordance with the terms of a 

prohibited transaction exemption that has since been amended. This exemption permits 

Advisers, Financial Institutions, and their Affiliates and Related Entities, to receive 

compensation, such as 12b-1 fees, in connection with the purchase, sale or holding of an 

Asset by a Plan, participant or beneficiary account, or an IRA, as a result of the Adviser’s and 

Financial Institution’s advice, that occurred prior to the Applicability Date, as described and 

limited below.

(b) Covered transaction. Subject to the applicable conditions described below, the 

restrictions of ERISA section 406(a)(1)(D) and 406(b) and the sanctions imposed by Code 

section 4975(a) and (b), by reason of Code section 4975(c)(1)(D), (E) and (F), shall not apply 

to the receipt of compensation by an Adviser, Financial Institution, and any Affiliate and 

Related Entity, for services provided in connection with the purchase, holding or sale of an 

Asset, as a result of the Adviser’s and Financial Institution’s advice, that was purchased, sold, 

or held by a Plan, participant or beneficiary account, or an IRA before the Applicability Date 

if:

(1) The compensation is not excluded pursuant to Section I(c) of the Best Interest 

Contract Exemption;

(2) The compensation is received pursuant to an agreement, arrangement or 

understanding that was entered into prior to the Applicability Date;

(3) The Adviser and Financial Institution do not provide additional advice to the Plan, 

participant or beneficiary account, or IRA regarding the purchase, sale or holding of the Asset 

after the Applicability Date unless such advice is a Legacy Recommendation; and

(4) The purchase or sale of the Asset transaction was not a non-exempt transaction 

pursuant to ERISA section 406 and Code section 4975 on the date it occurred.

Insert new definition to Section VIII-Definitions

(xx) “Legacy Recommendation” means investment advice that is in the Best Interest of a

beneficial owner of an IRA acting on behalf of the IRA and:

(1) A hold recommendation on an Asset that was purchased before the Applicability 

Date;

(2) A purchase recommendation that clearly relates to a systematic purchase program 

established before the Applicability Date; or
5

(3) A recommendation to exchange investments pursuant to an exchange right or a 

rebalancing program that was established before the Applicability Date, provided 

that the recommendation does not result in the Advisor, Financial Institution, and 

their Affiliates and Related Entities receiving more compensation (either as a fixed 

dollar amount or a percentage of assets) than such persons were entitled to receive 

prior to the Applicability Date.

Suggested Carve-Out for “Hire Me” Recommendation

Insert new paragraph (b)(7) to Proposed Definition of “Fiduciary”

(iii) Initial hiring recommendation. The person recommends itself or an affiliate to provide 

advice described in paragraph (a)(1)(i) through (iii), provided that such person does not 

advise on the selling or exchanging of securities or other property in connection with such 

recommendation.