888 373-1840 | 607 14th Street NW | Suite 750 | Washington, D.C. 20005 | financialservices.org

VIA ELECTRONIC MAIL (e-ORI@DOL, e-OED@dol.gov)

September 24, 2015

Employee Benefits Security Administration

Office of Regulations and Interpretations

Office of Exemption Determinations

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Re: Regulatory Definition of the Term “Fiduciary” as it Relates to Investment Advice; Conflict of 

Interest Proposal (RIN 1210-AB32); Proposed Best Interest Contract Exemption; Proposed 

Class Exemption for Principal Transactions in Certain Debt Securities Between Investment 

Advice Fiduciaries and Employee Benefit Plans and IRAs; Proposed Amendment to 

Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions 

Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain 

Broker-Dealers, Reporting Dealers and Banks; Proposed Amendment to and Proposed 

Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Securities 

Transactions Involving Employee Benefit Plans and Broker-Dealers; Proposed Amendment 

to and Proposed Partial Revocation of PTE 75-1, Exemptions From Prohibitions Respecting 

Certain Classes of Transactions Involving Employee Benefit Plans and Certain BrokerDealers, Reporting Dealers and Banks; Proposed Amendments to Class Exemptions 75-1, 

77-4, 80-83 and 83-1; Proposed Amendment to and Proposed Partial Revocation of 

Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance 

Agents and Brokers, Pension Consultants, Insurance Companies and Investment Company 

Principal Underwriters (RIN 1210-ZA25)

To Whom It May Concern:

Thank you for the opportunity for the Financial Services Institute (FSI) to submit additional 

comments for the record on the proposed rulemaking regarding the definition of the term 

“fiduciary” of an employee benefit plan and related proposed prohibited transaction exemptions 

(Proposal) and to elaborate on certain issues that were raised by the Department during the 

hearings held earlier this month. 

At the outset, we wish to acknowledge the Department’s decision to preserve commissionbased investment accounts under the Proposal. It is indisputable that such accounts can and do 

serve the best interests of retirement savers. Since 2009, FSI has advocated that such accounts 

(and all other investment accounts in which retail investors receive individualized advice) should be 

subject to a uniform best interest standard, supported by sensible compliance procedures and 
Employee Benefits Security Administration

September 24, 2015

Page 2

focused, useful disclosures, in a manner coordinated among all the regulators with jurisdiction. In 

its structure, the Proposal takes a similar approach.

FSI remains of the view, however, that the Proposal would create a regulatory regime that 

is operationally too complex, too cumbersome, and far too costly to manage, and that erects 

counterproductive obstacles for commission-based accounts. This position was described in detail 

in our comment letter, submitted to the Department on July 21, 2015, as well as in our August 12, 

2015 testimony. In our view, the Proposal will make it significantly harder for consumers to 

receive high quality, personalized retirement advice — in particular, clients with small account 

balances for whom advice will become cost-prohibitive if the Proposal goes forward as written —

thus decreasing investor choice among and access to retirement advice from a trusted advisor. 

While a number of the following comments are framed in the specific context of the 

proposed Best Interest Contract Exemption (BICE), they are also applicable to other exemptions 

for which comparable terms have been proposed.

I. Comparison of Proposed BICE and FSI Alternative

FSI believes that an exemption with simpler terms than the proposed BICE would 

accomplish the Department’s objectives of enhanced investor protection, but at a substantially 

lower cost to the retirement system, and thus with fewer barriers to investor access to and choice 

among professional investment services. Our alternative would better “... provide businesses with 

the flexibility to adopt practices that work for them and adapt those practices to changes [the 

Department] may not anticipate, while ensuring that they put their client’s best interest first and 

disclose any conflicts that may prevent them from doing so” – the objective of the exemption as 

described by the White House.1

To illustrate the differences between the proposed BICE and an alternative “best interest” 

exemption applying the principles suggested by FSI in Section XI of its July 21 comment letter, we 

have included in the Appendix A to this letter an example of the customer experience in the IRA 

rollover setting under existing law, as modified by the proposed BICE, and as suggested by FSI 

(Example). 

FSI believes that financial advisors can and most often do serve the best interests of their 

retirement investors. As the Example illustrates, FSI suggests a standard of care that would (i) 

accept the market reality that compensation to firms and financial advisors will vary among 

product types and product providers and (ii) unequivocally require financial advisors to put the 

best interest of their retirement customers first, supported by focused policies and procedures 

designed to manage material conflicts and a streamlined disclosure system. This approach omits 

the more granular requirements of the proposed BICE as duplicative, inefficient or operationally 

unworkable. Instead, our alternative relies on the standard of care itself, in the context of the 

investor protections provided by the existing non-ERISA regulatory framework supplemented in 

very targeted ways, to achieve the Department’s objectives. At the same time, it would minimize 

both the costs to the retirement system and the opportunities for conflicts with other regulatory 

regimes. FSI believes that this approach, in conjunction with the robust existing regulatory regime, 

 

1 FACT SHEET: MIDDLE CLASS ECONOMICS: STRENGTHENING RETIREMENT SECURITY BY CRACKING DOWN ON 

BACKDOOR PAYMENTS AND HIDDEN FEES, at https://www.whitehouse.gov/the-press-office/2015/ 02/23/fact-sheetmiddle-class-economics-strengthening-retirement-security-crac.
Employee Benefits Security Administration

September 24, 2015

Page 3

will ensure that firms can adopt business practices that work for them to the degree suggested by 

the White House, while retirement investors are protected to the degree sought by the 

Department. 

FSI would in particular emphasize the following elements of our alternative approach:

A. The Best Interest Standard Should Incorporate the ERISA Duty of Loyalty.

FSI’s suggested articulation of the best interest standard is intended to comport with 

Section 404(a) of ERISA,2 as well as with similar standards applicable under federal securities 

laws.3 As such, it is intended to incorporate the Section 404(a)(1)(A) duty of loyalty to act “solely 

in the interest” of and “for the exclusive purpose” of providing benefits to participants, 

beneficiaries or the IRA owner, as applicable, as well as defraying the costs of the retirement 

arrangement. This duty of loyalty does not bar all competing interests on the part of the 

fiduciary; ERISA Section 404(a) permits a fiduciary advisor to recognize a benefit incidental to a 

prudent investment transaction so long as the retirement investor’s interests are put first.

This latter point provides the rationale for the omission in the FSI formulation of the 

“without regard” terminology featured in the Proposal. The intent of the FSI formulation is not to 

evade any duty of loyalty. Rather, our articulation of the best interest standard will avoid any 

misconstruction that putting the client’s interest first means that the financial advisor is not allowed 

any competing interest whatsoever. Inasmuch as the “without regard” language does not appear 

in Section 404(a) or the regulations thereunder, that additional language might be misread to 

have independent significance or to create a new legal standard. Our members see a material 

risk that an arbiter other than the Department, perhaps influenced by certain of the studies cited 

by the Department in support of the Proposal, might conclude that a financial advisor cannot act 

“without regard” to his own interest even if he puts the retirement investor’s interest first. This is a 

point on which the best interest exemption must be unambiguously clear. 

B. The Best Interest Standard Should be Supplemented by Streamlined Disclosures. 

Disclosures are an indispensable element of a best interest exemption. In a retirement 

system that calls on plan fiduciaries, participants and IRA owners variously to make key decisions 

about retirement investments, it is essential that well-conceived disclosures be available to inform 

those decisions. This is the bedrock on which ERISA investment regulation rests — a substantive 

fiduciary standard supported by various disclosures under Parts 1 and 4 of Title I — which 

appropriately can serve as the basis for the best interest exemption as well.

Any such disclosures will be most efficacious if they are very specifically designed for the 

purpose for which they are intended. In the context of the BICE, the substantive standard is 

intended to assure the quality of the recommendations provided by the fiduciary advisor. The 

disclosures are intended to allow the retail investor to understand the economic perspective the 

 

2 Thus, while this suggested standard of care would require a financial advisor to provide advice that is in the best 

interest of the customer, it would not necessarily require recommending the lowest cost investment option. Cost would 

be an important factor in assessing the appropriateness of an investment recommendation, but not the only factor. 

See, e.g., Advisory Opinion 2002-14. 3 See, e.g., FINRA Rule 2111. It has long been recognized that a broker-dealer has a duty to deal fairly with the 

public. See Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), cert. denied, 321 U.S. 786 (1944), FINRA 

Rule 2010 and FINRA Supplementary Material 2111.01.
Employee Benefits Security Administration

September 24, 2015

Page 4

fiduciary advisor brings to the recommendation. The concern our members have about the 

disclosures proposed by the Department is that they are costly without being effective in the retail 

setting. The information would be better communicated to the investor in a simple, succinct, to-thepoint narrative form consistent with the models of the summary prospectus and the ERISA Reg. 

§2550.404a-5 disclosures. While the details of course differ, the Department’s observations in 

preambles leading to the §2550.404a-5 regulations are instructive:

Also, the Department is persuaded by RFI commenters that most participants and 

beneficiaries will probably not review large amounts of detailed investment information. 

Information that is too detailed may overwhelm participants, and commenters are 

concerned that the costs associated with providing overly detailed information, which 

ultimately will be borne by participants, significantly outweigh any possible benefits. 

However, the Department also is persuaded that the form in which information is required 

to be presented should serve to encourage and facilitate its review by participants and 

beneficiaries....4

While a critical objective of this rulemaking is to ensure that all participants and 

beneficiaries in participant-directed individual account plans are furnished the information 

they need to make informed investment decisions, the Department remains sensitive to the 

possibility that too much information may only serve to overwhelm, rather than inform, 

participants and beneficiaries....5

The disclosures suggested by FSI are tailored to provide the retail investor, in an accessible 

manner, the key information needed to understand the advisor’s interest — concise narrative 

descriptions of investment product types, business relationships, compensation arrangements and 

material conflicts provided through a public website and a short disclosure form, together with 

sources of additional information including about the specific compensation to be received by the 

financial advisor in connection with a particular investment.

C. The Best Interest Standard Should Rely on the Financial Advisor and the Firm 

Together to Manage Potential Conflicts.

 As illustrated by the Example, a best interest exemption can rely on checks and balances 

among the financial advisor and the broker-dealer to effectuate the best interest standard. 

• In the independent broker-dealer setting, the initial responsibility for any 

recommendation always rests with the financial advisor. The advisor is both an 

independent contractor and the professional with direct experience with the customer. 

The firm sets the menu of investment products and providers available on its platform 

– which most often is quite broad – and the advisor develops a recommendation for 

the customer from among the investments on that menu without direction from the firm.

• The firm currently evaluates under the FINRA suitability standard, and all other 

applicable requirements, any recommendation accepted by the customer and 

presented as an order for execution. Under a best interest exemption, the firm would 

 

4 73 Fed. Reg. 43014, 43016 (July 23, 2008).

5 75 Fed. Reg. 64910, 64918 (Oct. 30, 2010).
Employee Benefits Security Administration

September 24, 2015

Page 5

also evaluate whether the investment is within the range of choices a prudent 

retirement investor would make in the circumstances, subordinating the economic 

interests of the advisor and the firm to those of the retirement investor. If the firm 

determines that the recommendation does not meet this standard, the order would not 

be executed and the order request would be returned to the customer and the 

financial advisor for further consideration. This is a robust element of the supervisory 

process; firms are accustomed to rejecting orders that are not supported by the 

customer information provided by the financial advisor.

• The firm would also have in place supervisory processes implementing the FINRA 

conflict of interest report and rollover guidance (Regulatory Notice 13-45), adding 

additional oversight at potential pressure points for conflicts and in the rollover setting.

The approach suggested by FSI does not transfer the firm’s conflicts to the financial advisor. 

Rather, it mitigates conflicts throughout the recommendation process and relies on checks and 

balances as part of that mitigation. This process leverages existing regulatory structures to which 

financial advisors and firms are accustomed, and the best interest standard can be incorporated 

into those structures without the costs and uncertainties of a new compliance model.

D. The Best Interest Exemption Should be Available for Discretionary Accounts.

For similar reasons, the best interest exemption can and should appropriately be 

extended to discretionary investment advisory accounts. In these accounts, the financial advisor is 

compensated by a level asset-based advisory fee basis. The firm may (or may not) receive 

compensation that differs by investment but any such differences are not reflected in the 

compensation received by the advisor. As a result, the risk that the advisor will put those 

compensation differences to the firm before the interest of the customer is highly attenuated. The 

best interest standard, coupled with appropriate conflicts policies and disclosures, provides an 

equally effective solution in these circumstances as in the case where the financial advisor is only 

providing advice and receiving commission-based compensation. 

E. The Asset Definition is Unnecessary in the Best Interest Exemption.

We offer additional comments on the “asset” definition. Many comment letters and much 

hearing testimony included discussion about investment types excluded by the Proposal and the 

possibility for mirroring the performance of those assets using investment types permitted by the 

Proposal. The options for constructing a prudent retirement investment portfolio are beyond 

counting. For example, some customers and advisors prefer to include investments that mimic 

alternative investment classes, while others prefer the alternative investments themselves. To the 

extent that such a preference, on the part of a financial advisor, reflects the advisor’s interest 

rather than the customer’s, the advisor would violate the best interest standard. Accordingly, 

there is no need for the Department to break from the statute and long-standing regulatory 

practice by introducing a “legal list” requirement in the BICE, because the best interest standard 

inherently addresses those issues. Moreover, by limiting the universe of permissible investments, an 

advisor may be stymied from providing best interest advice based on the customer’s express 

needs, preferences, and risk tolerances, as suggested in the Example. 
Employee Benefits Security Administration

September 24, 2015

Page 6

A “legal list” approach also creates problems as the market evolves and new investment 

types emerge. Absent an amendment to the BICE, those new products would be outside the scope 

of the exemption. Product innovation for retirement investors would be stifled, or at least made 

more complicated and expensive. This is the antithesis of “principles based” regulation.

The “asset” definition thus should be omitted in the final exemption.

F. A Conventional Grandfather Rule Should be Adopted.

Finally, we would add to our prior comments on the BICE grandfather rule the following 

example. Consider the case, after the Applicability Date, of an IRA owner approaching age 

701⁄2 and thus the obligation under the Internal Revenue Code to commence required minimum 

distributions. To the extent a financial advisor notes the need to take that required distribution to 

the IRA owner, that communication may under the Proposal be fiduciary “investment advice” in the 

form of a call to action to take a distribution from the IRA. To the extent that distribution entails 

some liquidation of one or more of the Assets about which the financial advisor provided services 

prior to the Applicability Date, the proposed exemption for pre-existing conditions would cease 

to apply and grandfathering would be lost. This is thus another way in which the proposed BICE 

creates an impediment for financial advisors to see to the best interests of their customers, and in 

this instance involving a tax compliance matter. For this reason, as well as the other reasons noted 

in our July 21 letter, a conventional grandfather rule should be adopted. 

 

II. Further Commentary on the Regulatory Impact Analysis

As previewed in our July 21 letter, FSI has partnered with Oxford Economics to study the 

Proposal and, specifically, the Regulatory Impact Analysis (RIA). The study is included in the 

Appendix B to this letter. In connection with the cost-benefit justification of the Proposal, it is 

essential to appreciate that:

• Of the approximately 100 securities firms that are members of FSI, approximately 

half are local or regional firms that have under $35 million of annual revenue; and

• Every one of the over 160,000 advisors licensed with independent broker-dealers —

more than 60% of all producing registered representatives — is an independent 

business person, operating a Main Street business serving the local community, with (on 

information and belief) under $35 million revenue of annual revenue.

The independent broker-dealer industry thus is substantially comprised of small businesses that 

must be taken into account under the RIA’s Regulatory Flexibility Act analysis.

In its report as recently issued, which is attached to this letter, Oxford Economics concludes 

that, inter alia:

• The RIA materially underestimates the compliance cost of the Proposal and the 

challenges it presents to the survival of small broker-dealer firms if it is implemented 

as proposed; 
Employee Benefits Security Administration

September 24, 2015

Page 7

• The Proposal will result in startup costs ranging from $1.1 million to $16.3 million per 

independent broker-dealer firm, depending on firm size. These startup costs are 

roughly 4 times the RIA’s high and 20 times its preferred estimates. Oxford Economics 

provides the following breakdown of startup costs by firm size:

No. of Firms 

from RIA

Oxford Estimates RIA Preferred Estimate

Per firm Total Per firm Total

Large 42 $16,266,000 $683,172,000 $1,091,000 $45,822,000

Medium 137 3,350,000 458,950,000 145,000 19,865,000

Small 2,440 1,118,000 2,727,920,000 53,000 129,320,000

Total 2,619 3,870,042,000 195,007,000

• The Proposal will result in less access to advisory services for small and medium-sized 

investors. One unintended consequence might be that it will become harder for 

minority investors with small asset holdings to seek advice from financial advisors; and 

• The Proposal will result in industry consolidation likely to force small broker-dealers 

out of business. 

The Department’s Office of Policy and Research has already expressed an interest in 

understanding more about the methods and data underlying the Oxford Economics analysis, and 

FSI has submitted a separate response to that inquiry.

While FSI and Oxford Economics are confident of the attached analysis, we expect we 

and the Department may in the end disagree about the reasonably expected costs and benefits 

of the Proposal. That there is a basis for such a disagreement — that both avid proponents and 

constructive critics of the Proposal can point to evidence supporting their views — suggests to us 

at the very least that the consequences of the Proposal are sufficiently uncertain that every effort 

should be made to minimize its potential downsides. The alternative FSI suggests for the “best 

interest” exemption, among other things, represents such an effort. 

III. The Proposed Investment Advice Definition

While our July 21 letter offered comments only on the carve-outs under the proposed 

investment advice definition, we noted with interest the discussions during the hearing about the 

inclusive elements of the proposed definition. In our view:

• The nature of the inquiry required under Section 3(21)(A)(ii) of the statutory fiduciary 

definition is inherently different than that required under Section 3(21)(A)(i) or (iii). Under 

the latter subsections, a person either does or does not have, e.g., discretionary control 

over the management of plan assets or discretionary authority in the administration of the 

plan. Section 3(21)(A)(i) or (iii) describe functional responsibilities that can be identified on 

an objective basis. In contrast, under Section 3(21)(A)(ii), whether a person is providing 

investment advice that should be subject to Section 404(a) and 406(b), and IRC Section 

4975(c)(1)(E) and (F), turns not only on the nature of the activity, but also on whether a 

trusted advice relationship has been established; that is the characteristic that distinguishes 

fiduciary advice from arm’s length investment sales activity. Therefore, the investment 
Employee Benefits Security Administration

September 24, 2015

Page 8

advice definition cannot wholly be an objective determination, but also must take account 

of the parties’ contemplation.

• Furthermore, that contemplation cannot be one-sided. For there to be a relationship of 

trust, the financial advisor and the retirement investor both must understand that such a 

relationship has been formed.6 In addition, for the financial advisor’s status and legal 

liability to turn solely on the understanding of the retirement investor would create 

compliance, evidentiary and credibility problems that are wholly avoidable in the 

circumstances. In essence, if only the investor’s understanding is relevant, the firm would be 

obliged to build a compliance system around facts not within the firm’s reach or control, 

and the financial advisor would be required to prove a negative (that the investor did not 

expect the adviser to act as a fiduciary) in the event of any dispute.

• At the hearing, the Department explored the question of whether expressly reintroducing 

the concept of mutuality in section (a)(2)(ii) of the proposed regulation would effectively 

gut the definition, by allowing a putative fiduciary advisor to create the impression of a 

trusted relationship and then disclaim fiduciary status in obscure documentation. As we 

read it, however, the structure of the proposed definition already solves that concern. If a 

person is providing one or more of the services described in section (a)(1) of the 

regulatory definition and either represents or acknowledges that he or she is an ERISA 

fiduciary, then that status attaches by reason of section (a)(2)(i) (and, we note, with the 

participation of both parties). The section (a)(2)(ii) element of the definition, and the 

question of mutuality, is reached only if there has been no representation or 

acknowledgement of fiduciary status. 

IV. Remedies

We find the question of remedies under the best interest and related exemptions to be 

among the most difficult issues raised by the Proposal, as evidenced by the substantial attention 

these issues received at the hearing. We supplement our comments in our July 21 letter with the 

following observations.

A. Arbitration

We feel compelled to briefly respond to the attack in the commentary and at the hearing 

on the use of FINRA-Dispute Resolution arbitration to resolve customer claims involving ERISA and 

IRA accounts. FINRA provides both a favorable forum for investors, as is evidenced by their 

success in FINRA arbitrations, and myriad procedures designed to protect investors which are not 

available in other arbitration forums or, in fact, the courts. It is a certainty that ERISA fiduciary 

status and the best interest standard will be cited against our members in arbitrations, should the 

Proposal be adopted.

 

6 We do not mean to suggest that the parties must appreciate that the retirement advisor has taken on ERISA 

fiduciary status, but rather only that a trusted relationship has been formed.
Employee Benefits Security Administration

September 24, 2015

Page 9

If the Department reacts to the challenges to arbitration clauses by treating ERISA and IRA 

accounts differently than other investment accounts, the effect will be: (1) increased costs to both 

investors and investment professionals; (2) increased investor confusion; (3) increased litigation 

uncertainty; (4) conflicts with other regulatory requirements; and (5) the potential erosion of the 

benefits of FINRA arbitration to investors. Accordingly, any final exemptions, like the Proposal, 

should continue to allow both arbitration as a forum for “best interest” complaints and mandatory 

arbitration provisions.

1. FINRA Provides a Fair Forum for Investors at a Reduced Cost to Other 

Litigation.

FINRA arbitration contains numerous procedures — many of which were adopted in 

response to recommendations from investors and counsel for investors — that were specifically 

designed to provide a fair and cost-effective method for investors to pursue claims against FINRA 

members and their registered representatives. As a consequence, investors obtain either a 

settlement or award in their favor in the vast majority of FINRA arbitrations, along with a 

frequently expedited, less-costly, and more convenient process. 

As an initial matter, it is important to note that concerns that FINRA arbitration somehow 

amounts to broker-dealers sitting in judgment of themselves is unsupported by the facts. FINRA is 

regulated by the SEC, and its rules — including those for its arbitration process — are subject to 

SEC approval. Any FINRA rule must be approved by the FINRA Board of Governors, the majority 

of which are public members, and also go through a public comment process through the Federal 

Register. FINRA arbitration rules must also be approved by the National Arbitration and 

Mediation Committee (NAMC), the membership of which must be at least 50% non-industry.7 

Further, arbitration clauses by FINRA members are carefully circumscribed. Any arbitration clause 

must meet the detailed requirements of FINRA Rule 2268.

FINRA rules also are designed to ensure that any agreement to arbitrate is knowingly 

made, and that such agreements cannot strip customers of theories or types of recovery as is 

common in arbitration agreements not subject to FINRA rules. Among other requirements, FINRA 

Rule 2268 mandates that any arbitration provision: (1) must be highlighted; (2) must be disclosed 

immediately preceding the customer’s signature; (3) cannot limit the customer’s right to recover 

any form of damages or advance any specific legal theory; and (4) cannot limit the power of the 

arbitrators. 

The suggestion that industry-affiliated arbitrators are on each FINRA arbitration panel is 

categorically wrong. To be clear, every customer has an absolute right to an all-public panel if 

he or she so chooses. In response to comments from counsel for customer claimants, since 2011 

FINRA has specifically granted customers the right to an all-public panel.8 In 2015, these all 

public panels awarded damages to customers in 49% of decided cases, which is in line with the 

awards by such panels in previous years.9 While comments and testimony on the Proposal 

 

7 FINRA Rule 12102. The current chairman of the NAMC is Ryan Bakhtiari, a former board member and president of 

the Public Investors Arbitration Bar Association (PIABA). Attorneys who represent claimants constitute the majority of 

NAMC’s Board. See https://www.finra.org/ arbitration-and-mediation/national-arbitration-and-mediationcommittee-namc (listing the membership of NAMC) and https://piaba.org/member-directory/ryan-k-bakhtiari 

(providing Mr. Bakhtiari’s PIABA and NAMC experience).

8 FINRA Rule 12403.

9 See https://finra.org/arbitration-and-mediatio/dispute-resolution-statistics. 
Employee Benefits Security Administration

September 24, 2015

Page 10

questioned the service of former industry professionals on all-public panels, these commenters 

failed to note that FINRA — in response to similar comments — amended Rule 12100 as of June 

26, 2015 to permanently bar individuals with any significant connections to the securities industry 

(including, for example, attorneys and accountants) from service as all-public arbitrators while 

temporarily barring those with more limited connections (including the family members of those in 

the securities industry).10 

 

FINRA arbitration is designed to minimize the costs and burden on customer-claimants. In 

contrast to many arbitration forums that assess equal fees on the parties, FINRA’s fee structure 

favors the investor, with the industry party bearing a significantly larger portion of the filing 

fees.11 FINRA offers hearing locations in every state, Puerto Rico, and London, with a number of 

states having multiple hearing locations.12 Further, FINRA endeavors to select a hearing location 

that is most convenient for the customer, not the parties jointly.13

FINRA also safeguards a customer’s ability to present his or her claims to an extent not 

seen in court or in other arbitrations. Under FINRA rules, motions to dismiss prior to the completion 

of a customer’s case at hearing are all but prohibited. Rule 12504 — adopted in response to 

comments from counsel for customers — specifically notes that “[m]otions to dismiss a claim prior 

to the conclusion of a party’s case in chief are discouraged” and provides a gauntlet of 

procedural hurdles before a motion can be granted (which can only occur after a hearing with the 

full panel). Moreover, Rule 12504 requires that an industry defendant bear all hearing fees 

associated with a motion to dismiss when the motion is denied.14 The rule also requires that 

reasonable attorney’s fees and costs be awarded for frivolous motions and permits a panel to 

impose additional sanctions.15 Any dismissal must be unanimous, and the Rule states that:

The panel cannot act upon a motion to dismiss a party or claim under paragraph (a) of 

this rule, unless the panel determines that:

(A) the non-moving party previously released the claim(s) in dispute by a signed 

settlement agreement and/or written release; or

(B) the moving party was not associated with the account(s), security(ies), or conduct at 

issue.16

As this provision makes clear, even the absence of a cognizable claim is not enough to allow a 

defendant to dismiss a customer’s claim. As a consequence of Rule 12504, even frivolous claims 

survive to final hearing; therefore, most FINRA arbitrations are resolved by settlement, through 

mediation, or after the completion of a full hearing before the arbitration panel.17 

 

10 FINRA Rule 12100(u). 11 FINRA Rule 12900. 12 See https://www.finra.org/arbitration-and-mediation/finra-hearing-locations. 13 FINRA Rule 12213. Section 12213(a)(1) states: “The Director will decide which of FINRA’s hearing locations will be 

the hearing location for the arbitration. Generally, the Director will select the hearing location closest to the customer's 

residence at the time of the events giving rise to the dispute, unless the hearing location closest to the customer's 

residence is in a different state, in which case the customer may request a hearing location in the customer's state of 

residence at the time of the events giving rise to the dispute.”

14 FINRA Rule 12504(a)(1) & (9). 15 FINRA Rule 12504(a)(10)-(11). 16 FINRA Rule 12504(a)(6). 17 See https://finra.org/arbitration-and-mediatio/dispute-resolution-statistics.
Employee Benefits Security Administration

September 24, 2015

Page 11

2. If Arbitration Clauses Are Prohibited for ERISA and IRA Accounts, 

Litigation Costs May Significantly Increase, There Will Be Added 

Uncertainty, and the Efficacy of FINRA Arbitrations Will Be Diminished. 

Investors often discuss their investment options with their financial advisors in the context of 

their entire relationship, and alleged misrepresentations often occur without regard to account. 

Consequently, determining whether certain alleged damages related to an ERISA and IRA account 

(thereby potentially removing the case from arbitration) or instead another account would prove 

problematic. Other claims necessarily involve an evaluation of the entire customer relationship. 

For example, would an investor have a concentration claim that she could bring in court if her IRA 

was diversified in isolation, but contained concentrated positions when viewed in the context of an 

entire portfolio? A proposal that would give rise to extensive litigation simply to sift out the 

appropriate forum for each claim before even starting to adjudicate the merits of those claims 

would not serve the interests of the parties, the retirement system or the judicial system.

A prohibition on pre-dispute arbitration clauses for ERISA and IRA accounts would lead to 

other negative consequences for investors and the financial system as a whole. As an initial 

matter, such a change — if it were to have any effect at all — would lower the number of 

arbitrations administered by FINRA. This in turn could render it infeasible for FINRA to maintain 

hearing locations in all states. Fewer arbitrations would also reduce the incentive for qualified 

individuals to go through the application and training process to become FINRA arbitrators, 

reducing the quality of the arbitration experience. At worst, the FINRA arbitration process could 

be undermined in a manner that jeopardizes its viability – to be of any utility to the parties, 

arbitration has to be all or nothing.

Finally, a revision to the proposed rule relating to arbitration would create inefficiencies, 

uncertainty, and additional costs. If the Department were to bar pre-dispute arbitration 

agreements for ERISA and IRA accounts, there would be overlapping claims involving related 

accounts of the same customer of the same advisor at the same broker-dealer firm that would be 

heard in different forums. Furthermore, in many cases it would be unclear whether a mandatory 

arbitration clause in fact applied to the claims at issue. Despite the clear, unequivocal, and 

conspicuous arbitration language required by FINRA Rule 2268, investors still bring cases in court 

arguing that their claims are exempt from arbitration. Such claims will become much more 

difficult, costly, and time-consuming to adjudicate when claims related to some accounts (but not 

others) are permitted in court. 
Employee Benefits Security Administration

September 24, 2015

Page 12

B. Other Comments on Remedies

The apparent contemplation of the Proposal is that the private right of action created by 

the BICE would be adjudicated under state contract or tort principles. We continue to have 

serious reservations about introducing into the retirement system, through the BICE and other 

exemptions, a federal standard that in its enforcement is subject to the idiosyncrasies and 

variances of state law. “ERISA’s carefully crafted and detailed enforcement scheme provides 

strong evidence that Congress did not intend to authorize other remedies it simply forgot to 

incorporate expressly.”18 That is particularly the case for financial advisors who are fiduciaries 

to ERISA plans. That statute already provides federal remedies for the commission of a 

nonexempt prohibited transaction. In that circumstance, it is impossible to square an additional 

remedy under state law with the statutory structure of ERISA including its preemption provisions.

Also, the Department has been clear that damages are the intended remedy if the best 

interest standard is breached. Correction of a nonexempt prohibited transaction is functionally 

required by Section 502(i) of ERISA and IRC Section 4975(b), however. Consequently, rescission 

may be necessary even in the absence of damages. This possibility effectively would convert the 

best interest standard into a strict liability standard, contrary to the Department’s intent. This 

point must be resolved in any final exemptions.

Conclusion

Over 300,000 comment letters have already been submitted to the Department and four 

days of public hearings have passed. Those most familiar with the retirement and investment 

industry have been vocal in their concerns. While a diverse array of commentators have raised 

different points, experts on the industry have broadly expressed the concern that the Proposal 

would be harmful to retirement investors. As the Department moves forward, FSI urges it to weigh 

its interest in regulating the sale of investments, which is already heavily policed by agencies 

charged with that duty, with the consequences to the U.S. retirement system in the event that the 

experts are right.

The mission of the Employee Benefits Security Administration (EBSA) is to assure the 

security of the retirement, health and other workplace related benefits of America's workers and 

their families. FSI believes that with the Proposal, the very mission of EBSA — a secure retirement 

for Americans — is in some jeopardy. The effects of the Proposal, as drafted, would be farreaching, impacting foundational aspects of our retirement savings system, including the 

availability and cost of basic advice and education about investing. The business interests of FSI 

members are also at stake, of course, and we are concerned that the Proposal will have 

substantial deleterious effects on independent broker-dealers and advisors as small businesses. In 

addition to the likely cost increases on retirement products and advice that retail investors will see, 

the regulatory burden will fall disproportionately on smaller firms that cannot take advantage of 

scale. 

FSI believes that the Department can achieve its goals without the risks and problems 

associated with the Proposal, including the BICE. The alternatives proposed and comments 

provided by FSI provide a workable solution that maintains investor access to broker-dealer 

 

18 Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209 (2002).
Employee Benefits Security Administration

September 24, 2015

Page 13

models that have served retirement investors well for decades, while enhancing the protections 

provided to those investors. 

Again, we thank you for the opportunity to testify and provide you with the thoughts and 

concerns of our members as well as to answer some of your questions on these important issues. 

Please let us know if we can be of any further assistance. Should you have any questions, please 

contact me at (202) 803-6061.

Respectfully submitted,

David T. Bellaire, Esq.

Executive Vice President & General Counsel
888 373-1840 | 607 14th Street NW | Suite 750 | Washington, D.C. 20005 | financialservices.org

APPENDIX A

Example

Carl the Customer, an employee of SmallCo in Smalltown, USA, is retiring next week. The only investment decision he has ever 

made in his life has been to invest his SmallCo 401(k) Plan account balance in the Plan’s 2015 Target Date Fund, a “to retirement” 

target date fund. The SmallCo Plan offers, in addition to target date funds, a total stock mutual fund, a total bond mutual fund, and a 

money market fund. The Plan does not offer annuities or other lifetime income benefits. Carl must decide whether to reinvest his 401(k) 

account among other investments offered by the Plan, to take a distribution, or to rollover to an IRA. Carl is not seeking new 

employment, so a transfer to a new employer’s plan is not an available option. Carl is eligible to start receiving Social Security 

benefits.

1. At his retirement party, Carl seeks out his neighbor Anne the Advisor, a financial advisor licensed as a registered representative 

and investment advisory representative of an independent securities firm (Firm) and a licensed insurance agent. Carl asks Anne what 

she thinks about rollover IRAs. He says he would really like to take a lump sum distribution to pay off the mortgage on his house but 

that his boss gave him a rollover distribution form and told him that he really ought to rollover to an IRA. He asks Anne to explain 

how these rollovers work and whether she thinks it is in Carl’s best interest to do that rather than pay off his mortgage. Anne tells 

Carl that he actually has several options to choose among, and suggests meeting the next day at her office so she can better 

explain them. 

Existing Law BICE FSI Alternative

• Anne is at all times required by FINRA 

rules to observe high standards of 

commercial honor and engage in just 

and equitable principles of trade.

• The Firm has trained Anne in these 

standards.

• The Firm also has adopted standards 

regarding titles and professional 

designations that its registered 

representatives can use with the public. 

Anne cannot hold herself out as having 

• Anne and the Firm are subject to all 

“Existing Law” requirements.

• Anne is not yet acting as an ERISA 

fiduciary because she has not given a 

recommendation in the FINRA sense, so 

the conditions of BICE are not yet 

implicated. The Firm has filed its onetime notification of the Department that 

it intends to rely on the BICE.

• One key difference is that Anne is 

unlikely to explain the pros and cons of 

No difference from BICE at this early stage.
Employee Benefits Security Administration

September 24, 2015

Page 15

Existing Law BICE FSI Alternative

expertise in retirement investing unless 

she has obtained and maintains one of 

a limited number of professional 

designations.

Conclusion – FINRA rules set a high 

principles-based standard for brokerdealers and financial advisors which is 

reinforced by specific regulatory 

requirements.

investment products that have been 

excluded from the definition of “Asset” 

under the BICE. So regardless of 

whether Carl desires and would benefit 

from a direct investment in a nontraded REIT or option hedging strategy, 

Anne is unlikely to discuss these options.

From the outset, the interaction between Carl and Anne is subject to FINRA’s rule requiring member firms and their associated 

persons to observe high standards of commercial honor and engage in just and equitable principles of trade.19 

• Anne’s Firm, as is typical with most broker-dealers serving the retail public, provides training to Anne and her fellow registered 

representatives on these standards and principles as they apply to interactions with customers and prospective customers. This 

training is delivered in a variety of ways: as part of the “firm element” of the Firm’s continuing education program (which the 

Firm is required to maintain under a FINRA Rule), through other training and mentoring programs provided by the Firm, during 

annual inspections of each branch office of the Firm, and through written compliance manuals and other guidance provided by 

the Firm to its registered representatives. In this regard, FINRA rules require a firm to maintain a continuing and current 

education program for its registered representatives to enhance their securities knowledge, skill and professionalism. The Firm 

has designated a principal responsible for the Firm’s “firm element” continuing education program; this principal conducts an 

annual evaluation and prioritization of the Firm’s training needs and develops a written training plan for the Firm on a year-byyear basis.20 The Firm also conducts periodic training for its registered representatives, at least annually, focused specifically on 

compliance matters.21 

• The Firm also has adopted standards regarding titles and professional designations that its registered representatives can use 

with the public, consistent with guidance in FINRA Regulatory Notice 11-52. The Firm’s standards prohibit the use of professional 

designations that may suggest expertise in retirement investing, except in the case of designations awarded by a limited 

number of organizations that the Firm has determined have a rigorous curriculum, an emphasis on ethics, continuing education 

requirements, a method for determining the registered person’s status regarding the designation and a public disciplinary 

 

19 See FINRA Rule 2010. 20 See FINRA Rule 1250. 21 See FINRA Rule 3110.
Employee Benefits Security Administration

September 24, 2015

Page 16

process. In addition, the Firm requires a registered representative desiring to use such a designation to remain current with 

continuing education or other requirements necessary to remain in good standing with the issuing organization, and to 

demonstrate a level of experience in retirement planning and other related matters, as well as the ability to work with investors 

in this regard.

2. Over the next two weeks, Carl and Anne arrange by email to meet several times. Anne conducts all her email exchanges with Carl 

using the Firm’s email platform, and those emails are retained by the Firm along with any other form of correspondence between 

Carl and Anne. During their meetings, they talk about Carl’s overall financial situation, his expected needs and objectives for his 

retirement years, and his available assets. At Anne’s request, Carl brings in various documents that quantify his assets and liabilities, 

including his Social Security benefits. Anne also asks Carl about the financial legacy, if any, he hopes to leave after he passes 

away. Anne in turn explains what a rollover is, and the pro’s and con’s of all the various options available to Carl. They look at the 

investment menu materials published by the SmallCo Plan. To advance his investment literacy, Anne provides Carl financial 

education and retirement planning materials. The materials Anne provides to Carl are “retail communications” approved by the

Firm for use with clients and prospective clients. Anne makes a notation in her files regarding the communications provided to Carl. 

Finally, through their conversations and the use of interactive tools, Anne develops a sense of Carl’s tolerance for investment risk and 

his receptivity to potential investment types and providers. In these discussions, Anne does not recommend any specific course of 

conduct, even though Carl in a good natured way is starting to press for a specific recommendation. Anne does explain to Carl the 

services she provides, such as financial planning, as well as the method of compensation for these services. Carl has an opportunity 

to ask any questions about fees and payments and request additional information regarding compensation arrangements.

Existing Law BICE FSI Alternative

• Brochures, webpage information or 

other materials are communications with 

the public subject to FINRA rules.

• Communications must be based on 

principles of fair dealing and good 

faith, be fair and balanced and 

provide a sound basis for evaluating 

the facts.22

• The Firm’s website includes disclosures 

about its revenue sharing arrangements 

• Anne and the Firm are subject to all 

“Existing Law” requirements.

• Under the analysis suggested by the 

Department at the hearing, Anne is still 

not acting as an ERISA fiduciary. She 

has not given a recommendation in the 

FINRA sense, and at most her activities 

constitute non-fiduciary investment 

education. 

• The Firm also expects that it is not yet 

• The Firm maintains a public website 

disclosure disclosing:

o A detailed schedule of typical 

account fees and service charges;

o A page containing, for each type 

of packaged product (e.g., mutual 

funds, variable annuities, unit 

investment trusts, etc.), basic 

information useful to retail investors 

like Carl, including narrative 

descriptions of the types of 

 

22 FINRA Rule 2210.
Employee Benefits Security Administration

September 24, 2015

Page 17

Existing Law BICE FSI Alternative

and any particular product providers 

with which it has “preferred” or similar 

relationships.

• All materials provided or posted on a 

webpage are reviewed and provided 

by the Firm’s advertising compliance 

program to ensure compliance with 

FINRA requirements.

• Any email, letter or other written 

correspondence between Anne and 

Carl (even just an email confirming their 

meeting time) would be considered 

“correspondence” under FINRA rules 

and must be retained by the Firm under 

SEC rules and supervised by the Firm. 

The Firm has a program to retain and 

review electronic communications for 

compliance with securities laws.23

• Anne may discuss with Carl only the 

types of investments and securities that 

she and the Firm are authorized to 

transact in under FINRA rules.

• Anne is gathering information that 

would allow her to make a “suitable” 

recommendation to Carl and meet 

“know your customer” and other legal 

requirements.

• Anne is also gathering information 

reflecting the range of considerations 

discussed in FINRA guidance for 

rollover advice.

acting as an ERISA fiduciary, although 

the absence of a platform exception 

for IRAs complicates that conclusion.

• The Firm is maintaining a publicly 

available website that Carl can access 

at any time, which provides detailed 

compensation information about each 

of the investments the Firm currently has 

available or sold to investors within the 

scope of BICE within the last 365 days. 

The website has thousands if not millions 

of detailed entries. Carl finds it 

overwhelming and spends no time with 

it. 

• Finally, out of prudent conservatism, the 

Firm has adopted bright-line 

compliance policies on when the 

contract required by BICE must be 

presented and executed. Under these 

compliance policies, Carl’s building 

request for a specific recommendation 

triggers the BICE contract requirement, 

and Anne cannot provide any further 

assistance to Carl until he enters into 

that contract.

Conclusion - The Department’s disclosure 

regime duplicates current broker-dealer

current disclosures concerning revenue 

sharing and marketing allowances. 

Compliance with the BICE causes brokerdealers and financial advisors to present 

arrangements in which the Firm 

receives an economic benefit from 

a product manufacturer;

o A list of all product manufacturers 

with whom the Firm maintains 

arrangements that provide 

economic benefits to either the 

financial advisor or the Firm, 

grouped in tiers by such economic 

benefits.

Conclusion - FSI recommends enhancing 

existing broker-dealer web site disclosures 

with information that is designed to 

enhance investor understanding and 

decision making without information 

overload.

 

23 Exchange Act Rule 17a-4 and FINRA Rule 3110.
Employee Benefits Security Administration

September 24, 2015

Page 18

Existing Law BICE FSI Alternative

Conclusion - Communications with the 

public are subject to significant supervision 

by the broker-dealer and FINRA. In 

addition, a financial advisor’s 

recommendations are subject to a rigorous 

suitability analysis. Compliance with this 

standard requires a financial advisor to 

collect all relevant data from an investor 

prior to making a recommendation Finally, 

conflicts of interest are disclosed via the 

broker-dealer firm’s web site.

potential clients with a contract prior to the 

investor’s decision to do business with the 

firm and advisor.

This next step in Anne’s evolving interaction with Carl triggers additional and substantial SEC and FINRA requirements designed 

specifically to protect retail investors like Carl from harmful or abusive practices.

• Any brochure or other materials, or webpage information about the Firm referenced by Anne would be considered a 

communication with the public under FINRA rules, and subject to content standards mandating that communications be based on 

principles of fair dealing and good faith, be fair and balanced and provide a sound basis for evaluating the facts.24 Anne’s 

Firm has adopted policies prohibiting its registered representatives from using any brochure or materials relating to the Firm’s 

business other than materials provided by the Firm. In addition, the Firm’s policies (included in its compliance manual) prohibit 

Anne and her fellow registered representatives from maintaining or posting any webpage information other than information 

posted by the Firm, or approved by the Firm for posting by registered representatives. 

• The Firm maintains an advertising compliance program for the development, review and approval of communications used by its 

registered representatives. This program differentiates between retail communications (those used with retail investors) and 

institutional communications (those used with institutional investors), consistent with FINRA rules.25 Any retail communication 

proposed to be used by the Firm or a registered representative must first be reviewed by a qualified securities principal with 

expertise in FINRA and SEC communication rules designated by the Firm and cannot be used unless it has been approved by 

that principal. This principal is also responsible for ensuring compliance with any applicable filing requirements before the retail 

communication is approved for use. FINRA imposes filing requirements on certain types of retail communications, including those 

 

24 See FINRA Rule 2210. 25 See FINRA Rule 2210.
Employee Benefits Security Administration

September 24, 2015

Page 19

for mutual funds and variable insurance contracts. FINRA maintains an advertising department that conducts a substantive 

review of filed communications, with power to direct that a communication not be used if the department determines the 

communication fails to meet FINRA standards. The Firm, as is typical for many broker-dealers, maintains an internal list of 

approved communications accessible by its registered representatives that they can use with retail investors. The Firm has 

instructed its registered representatives that they cannot make changes to any approved retail communications, unless those 

changes are also approved. Advertising compliance is verified during annual branch office inspections conducted by the Firm’s 

compliance department or other authorized persons.

• Any email, letter or other written correspondence between Anne and Carl (such as an email confirming their meeting time) would 

be considered “correspondence” under FINRA rules and must be retained by the Firm under SEC rules and supervised by the 

Firm.26 The Firm has a program to retain and review electronic communications for compliance with securities laws. The Firm also 

has provided training to its registered representatives regarding correspondence with customers. This training encompasses 

permissible and impermissible content (for example, that they are not permitted to make any guarantees of investment 

performance), the types of correspondence that must be reviewed and approved before use, and permissible and impermissible 

media for electronic communications. In this regard, the Firm has adopted policies prohibiting its representatives from using any 

electronic media for communicating with customers other than the Firm’s email platform. In light of this policy, Anne’s email 

exchanges with Carl were conducted using the Firm’s email platform.

The Firm’s procedures for the review of email communication designate the principals and supervisors responsible for conducting 

reviews, the standards and processes for the review and applicable escalation protocols. The Firm’s procedures require the 

designated principal and supervisors to review emails for compliance with applicable securities laws, regulations and FINRA 

rules, including the relevant content standards in FINRA rules, as well as other areas of concern identified by the Firm and 

relevant to its business mix, size and structure. The Firm, like most broker-dealers, employs risk-based review procedures, 

primarily through the use of a lexicon to identify emails (those based on sensitive words or phrases) subjected to supervisory 

review. The Firm has imposed reasonable security measures to keep the list confidential and periodically evaluates the efficacy 

of the lexicon. The Firm also considers targeted concentrated reviews of employees’ emails when warranted.

• Even in this initial setting, Anne may discuss with Carl only the types of investments and securities that she and the Firm are 

authorized to transact in under FINRA rules. SEC and FINRA rules recognize more than 20 different business lines (as listed on 

Form BD, the registration form for broker-dealers), each involving different securities markets, business practices and expertise, 

compensation practices and risk and conflicts considerations. A firm seeking authority to engage in a business line must 

demonstrate, among other things, that supervisory, management and compliance personnel have sufficient expertise for the 

business line and that the firm has adequate systems, facilities and financial capital to engage in the business. The Firm has 

obtained authority to engage in the following lines of business: (i) broker selling corporate equity and debt securities, (ii) selling 

 

26 See SEC Exchange Act Rule 17a-4 and FINRA Rule 3110.
Employee Benefits Security Administration

September 24, 2015

Page 20

group participant (corporate securities other than mutual funds), (iii) mutual fund retailer, and (iv) broker selling variable life 

insurance or annuities. Given the Firm’s authority, Anne can discuss with Carl only investments in those business lines.27 

• Anne is gathering information that will be used to populate the Firm’s new account form, if Carl decides to move forward. Anne 

also uses the new account form as a vehicle for explaining financial and investment concepts to Carl. The new account form was 

designed by the Firm to collect information about the client required to be maintained by the Firm under various rules, including 

FINRA’s “know-your-customer” rule,28 customer account information rule,29 and suitability rule,30 as well as rules adopted under 

the USA PATRIOT Act, such as anti-money laundering rules and the customer identification program (CIP) rule. SEC rules also 

specify information that broker-dealers must collect for their records, particularly in the case of natural person customers.31 The 

new account form also is used to collect information used by the Firm to assist with supervising recommendations made to the 

account owner and transactions effected for the account, discussed below.

• Anne is also gathering information reflecting the range of considerations discussed in FINRA Regulatory Notice 13-45, “FINRA 

Reminds Firms of Their Responsibilities Regarding Rollovers,” including:

o Investment Options—An IRA often enables an investor to select from a broader range of investment options than a plan. The 

importance of this factor will depend in part on how satisfied the investor is with the options available under the plan under 

consideration. For example, an investor who is satisfied by the low-cost institutional funds available in some plans may not 

regard an IRA’s broader array of investments as an important factor.

o Fees and Expenses—Both plans and IRAs typically involve (i) investment-related expenses and (ii) plan or account fees. 

Investment-related expenses may include sales loads, commissions, the expenses of any mutual funds in which assets are 

invested and investment advisory fees. Plan fees typically include plan administrative fees (e.g., recordkeeping, compliance, 

trustee fees) and fees for services such as access to a customer service representative. In some cases, employers pay for 

some or all of the plan’s administrative expenses. An IRA’s account fees may include, for example, administrative, account 

set-up and custodial fees.

o Services—An investor may wish to consider the different levels of service available under each option. Some plans, for 

example, provide access to investment advice, planning tools, telephone help lines, educational materials and workshops. 

Similarly, IRA providers offer different levels of service, which may include full brokerage service, investment advice, 

distribution planning and access to securities execution online.

 

27 To simplify the Example, we have excluded other lines of business that independent broker-dealers often conduct – e.g., government securities, municipal 

securities, and various forms of investment partnerships. These investment types often are productively included in a retirement portfolio, although not always in an 

IRA. 

28 FINRA Rule 2090. 29 FINRA Rule 4512. 30 FINRA Rule 2111. 31 See SEC Exchange Act Rule 17a-3.
Employee Benefits Security Administration

September 24, 2015

Page 21

o Penalty-Free Withdrawals—If an employee leaves her job between age 55 and 591⁄2, she may be able to take penaltyfree withdrawals from a plan. In contrast, penalty free withdrawals generally may not be made from an IRA until age 591⁄2. 

It also may be easier to borrow from a plan.

o Protection from Creditors and Legal Judgments—Generally speaking, plan assets have unlimited protection from creditors 

under federal law, while IRA assets are protected in bankruptcy proceedings only. State laws vary in the protection of IRA 

assets in lawsuits.

o Required Minimum Distributions—Once an individual reaches age 701⁄2, the rules for both plans and IRAs require the 

periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at 

age 701⁄2, however, he generally is not required to make required minimum distributions from his current employer’s plan. 

This may be advantageous for those who plan to work into their 70s.

o Employer Stock—An investor who holds significantly appreciated employer stock in a plan should consider the negative tax 

consequences of rolling the stock to an IRA. If employer stock is transferred in-kind to an IRA, stock appreciation will be 

taxed as ordinary income upon distribution. The tax advantages of retaining employer stock in a non-qualified account 

should be balanced with the possibility that the investor may be excessively concentrated in employer stock. It can be risky 

to have too much employer stock in one’s retirement account; for some investors, it may be advisable to liquidate the 

holdings and roll over the value to an IRA, even if it means losing long-term capital gains treatment on the stock’s 

appreciation.

BICE. The proposed BICE impacts the customer experience at this stage in various ways. First, the Firm is maintaining a publicly 

available website that Carl can access at any time, which provides the following information about each of the investments the Firm 

currently has available or sold to investors within the scope of BICE within the last 365 days:

Type of 

investment

Provider 

name, 

subtype

Transactional Ongoing

Affiliate Special 

rules Charges 

to 

investor

Compensation 

to firm

Compensation 

to adviser

Charges 

to 

investor

Compensation 

to firm

Compensation 

to adviser

As the Firm makes available mutual funds and annuities from dozens if not hundreds of product providers, each of which may have 

multiple share classes or pricing structures, the website has hundreds if not thousands or even millions of detailed entries. Unfortunately, 

the detailed entries contain mostly narrative descriptions, cross-references and ranges because the information elicited cannot be boiled 

down to a simple number or formula in the vast majority of cases. For instance, in the box titled “compensation to the adviser” the 

entries state that advisers may receive between 50% and 91% of Gross Dealer Concession depending on a number of factors detailed 

in a footnote at the bottom of the page. Anne’s Compliance Department is concerned that this disclosure methodology may not be 
Employee Benefits Security Administration

September 24, 2015

Page 22

sufficient but is uncertain how to meet the requirement for the thousands of financial advisers who act as the Firm’s representatives. This 

information and format is designed for financial professionals.32 It is not at all useful for retail investors. 

Also, because some of this information is not readily available to the Firm and/or is difficult on calculate on a transaction basis, 

creating and maintaining this website is a costly and uncertain endeavor. The Firm purchases at least some of the data from an outside 

vendor. These costs increase the price to Carl of the services provided by Anne and the Firm, even though it is of no utility to him. See 

the discussion below of the compliance costs projected in the Oxford Economics report attached to this letter.

Finally, in order to rely on the BICE, Anne must obtain Carl’s signature on a contract (incorporated by the Firm with the new 

account agreement) containing the provisions required by the BICE before delivering any recommendations. Because Carl is pressing 

for a recommendation, the Firm’s compliance policies require Anne to suspend her assistance to Carl until he has signed the account 

agreement. (This is the most reliable way the Firm has found to operationalize the BICE contract requirement in a manner that assures 

compliance with the exemption.) Carl is entirely perplexed about being asked to sign an agreement before he has received any 

investment recommendation, much less decided to engage Anne and the Firm. Carl’s reaction puts Anne and the Firm in a quandary. 

Any recommendation must be deferred until Carl becomes comfortable with this procedure and signs the agreement. 

FSI Alternative. Our alternative also calls on the Firm to maintain a public website disclosure (or provide paper copies free of 

charge) but, in sharp contrast to the BICE, its disclosures are designed to allow investors to better understand both the existence of 

payments to be made to the Firm and financial advisor, and the purposes of such payments. The expanded disclosures featured on the 

Firm’s website include: A detailed schedule of typical account fees and service charges; 

• A page containing information for each type of packaged product (e.g., mutual funds, variable annuities, unit investment trusts, 

etc.) that includes: 

o Educational information describing the product, 

o Considerations for selecting a particular share class or ways to reduce sales charges (if applicable), and 

o Narrative descriptions of the types of arrangements in which the Firm receives an economic benefit from a product 

manufacturer. The narrative descriptions include a statement on whether these arrangements impact financial advisor 

compensation; and, 

• A list of all product manufacturers with whom the Firm maintains arrangements that provide economic benefits to either the 

financial advisor or the Firm.

 

32 Preamble to Proposed BICE Exemption, 80 Fed. Reg. 21960, 21973 (April 20, 2015).
Employee Benefits Security Administration

September 24, 2015

Page 23

o To the extent the Firm maintains tiers representing different levels of arrangements with product providers, the Firm groups 

the product providers by tier and provide a narrative description of the benefits that different tiers offer. Differences in 

economic arrangements within a band tend to be narrow.

As compared to the website proposed in BICE, this website provides an investor-friendly, concise, cost-effective disclosure of 

conflict information in a narrative form. It apprises the investor, in the most direct and accessible manner, of the presence, nature and 

scope of any competing interests on the part of the advisor and the firm. It is consistent with the judgments made by the Department in 

ERISA Reg. §2550.404a-5 about how such information is most usefully and effectively communicated to retail investors. And it can be 

developed and maintained by the Firm utilizing existing resources, without purchasing data from vendors or costly systems builds.

3. Carl meets with Anne again, this time to discuss Anne’s recommendations for meeting Carl’s retirement investment and income needs. 

Anne presents an account agreement for Carl to sign, along with other disclosures and information the Firm requires be given at 

account opening. This information covers fees and charges imposed by the Firm. Carl responds that he wants to hear Anne’s 

recommendations before signing any documentation, and in any event, wants to take the information home with him to review. Carl 

then receives Anne’s recommendation that:

a. His assets available for retirement income can better be structured to provide a dignified standard of living, including 

servicing his debt obligations, if he does not immediately pay off his mortgage;

b. He roll his 401(k) balance out of the SmallCo Plan to an IRA. SmallCo does not subsidize the costs of Plan recordkeeping 

and operation, so the Plan offers mid-priced investment options in order to defray those costs. Carl is no longer actively 

employed and is unlikely to make use of the Plan loan facility in retirement, so there is no reason for him to continue 

contributing to the payment of those Plan costs;

c. He use a portion of the rolled over balance to purchase, in IRA form, a specified market-priced single premium immediate 

fixed annuity issued by ABC Insurance Company, an insurance company generally recognized as having a stable claimspaying ability. The annuity together with Social Security would provide Carl a baseline retirement income that he cannot 

outlive; and

d. He invest the remainder through the IRA in a specified portfolio of diversified, buy-and-hold mutual funds offered by the 

Northeast Fund Group, to provide for emergencies including extraordinary health costs, other liquidity needs, and inflation 

protection. The recommended portfolio utilizes a larger set of investment strategies than those available under the Plan, in 

order to improve the projected efficiency of the investment strategy. Structuring the portfolio as a commission-based 

brokerage account using A shares, taking into account sales charge breakpoints, projects to be less expensive to Carl over 

time than using an advisory account structure. Two of the recommended funds offer fee waivers for IRAs. Any increase in 

total cost over leaving Carl’s remaining balance in the Plan reasonably reflects, at a minimum, the value of the time, 

expertise and services provided by Anne and the Firm. Anne also notes that Carl is not comfortable making his own 
Employee Benefits Security Administration

September 24, 2015

Page 24

investment decisions and is concerned that left to his own devices would try to time the market by moving out of equity funds 

during market downturns and coming back after long bull runs. Carl has also told Anne that he is very worried about having 

to make investment decisions on his own. Anne believes that by providing Carl with ongoing assistance he will have greater 

peace of mind during his retirement years.

Anne gives Carl copies of the “investor kit” containing sales materials for the investments and prospectuses for the mutual funds 

she has discussed. Carl takes the information home with him.

Existing Law BICE FSI Alternative

• Anne can only discuss and recommend 

investments that the Firm, after a “new 

product” due diligence process, is 

authorized to make available to 

customers.

• Both FINRA and state insurance law 

require Anne to have a reasonable 

belief, after reasonable diligence into 

the customer’s profile, that she is 

recommending investments suitable for 

the customer.33

• Predictions of future investment 

performance are prohibited.

• The fees set by the Firm and the selling 

compensation paid by product 

providers must be “fair and 

reasonable.”

• FINRA rules permit non-cash incentive 

compensation for sales of certain 

investments, such as mutual funds and 

variable contracts, only if the 

• Anne and the Firm are subject to all 

“Existing Law” requirements.

• Anne’s recommendation must meet a 

“best interest” standard without regard 

to the interest of herself, the Firm or 

any other person.

• Anne may only recommend investments 

among the 13 asset classes permitted 

by BICE.

• If the Firm’s investment platform is not 

sufficiently broad with respect to all the 

asset classes reasonably necessary to 

service the best interests of a specific 

customer, it must provide certain 

disclosures to that customer.

• Anne and the Firm may not recommend 

investments to the extent they would 

receive more than “reasonable 

compensation.”

• The Firm may not use quotas, 

appraisals, bonuses, awards, 

• Anne’s recommendation must meet a 

“best interest” standard that puts Carl’s 

interest first.

• Anne provides Carl with a short-form 

narrative disclosure focused on the 

issues most important for retail 

investors.

• As explicitly stated in the short form 

disclosure, Anne provides Carl on 

request specific information about the 

compensation she would receive if her 

recommendations are implemented.

Conclusion – FSI supports a best interest 

standard. Investors are provided with the 

information most relevant to their decision 

making in a short and digestible format.

 

33 Both FINRA and the SEC also require firms to assess the appropriateness of account types. See e.g., NASD Notice to Members 03-68; National Exam Program 

Risk Alert, Volume IV, Issue 6, Retirement-Targeted Industry Reviews and Examinations Initiative.
Employee Benefits Security Administration

September 24, 2015

Page 25

Existing Law BICE FSI Alternative

compensation is based on “total 

production” of such investments, with 

equal weighting given to all products.

• Material information about securities 

and annuities must be delivered to the 

customer in prospectuses or other 

specified forms of documents. These 

include disclosures about product costs. 

Other required disclosures are 

integrated into the new account form.

Conclusion – A financial advisor may only 

recommend suitable investments that have 

been authorized by the broker-dealer 

after due diligence. Compensation must be 

“fair and reasonable.” The prospectus 

provides a comprehensive summary of the 

relevant information on the product, 

including its costs.

differential compensation or incentives 

that “tend to encourage” Anne to make 

recommendations not in the best interest 

of Carl, creating a potential conflict 

with the FINRA “total production” 

requirement.

• Anne must provide Carl with a chart 

that shows for each asset recommended 

by Anne the total cost (acquisition, 

ongoing, disposition and other costs 

including operating expenses) for the 

retirement investor for one-year, fiveyear and ten-year periods expressed 

in a dollar amount, assuming an 

investment of the dollar amount 

recommended by Anne and reasonable 

assumptions about the investment 

performance are disclosed.

Conclusion – In addition to the best 

interest standard, the BICE adds broad 

range, legal list and “reasonable 

compensation” requirements that are 

duplicative of or unnecessary in light of 

other regulatory requirements. The BICE 

supplements the product prospectus with 

complicated and costly disclosures. These 

complex and duplicative disclosures have 

the potential to overwhelm investors. 

Finally, compliance with the BICE 

requirement to project future costs will 

result in firm’s violating FINRA rules.
Employee Benefits Security Administration

September 24, 2015

Page 26

This stage in Anne’s interaction with Carl brings in to play important investor protections under SEC, FINRA and state insurance 

requirements with respect to the substance of the recommendation Anne makes to Carl, the compensation received by Anne and the 

Firm, and the investment disclosures provided to Carl.

• In the case of securities that can be acquired only in the context of a securities offering (such as mutual funds or variable 

insurance contracts), Anne can discuss and recommend only those specific investments that the Firm is authorized by agreement to 

make available to its customers. In the securities industry, such investments generally are available only through broker-dealers 

that have entered into an agreement with the issuer of the investment or designated distributor to “participate” in the offering. 

A broker-dealer takes on certain responsibilities when entering into an agreement to participate in an offering, including a “due 

diligence” obligation with regard to the offering. In addition, for certain types of offerings, FINRA rules impose duties and 

restrictions on firms participating in the offering. The Firm has implemented appropriate policies and procedures designed to 

ensure that its participation in offerings complies with these rules.

• The Firm also has adopted a “new products” program for vetting offerings before deciding to enter into an agreement. This 

new products program was designed to comply with “best practices” recommended by FINRA for such programs.34 Under the 

Firm’s “new products” program, a team of designated senior management, operational, compliance and legal personnel follow 

a standardized process for evaluating an offering to determine if the Firm should participate in the offering. This process 

entails conducting due diligence on the offering and offering materials, ascertaining whether the offering can be supported 

operationally by the Firm, and determining whether any limits should be placed on the types of investors or the amounts that 

investors can invest in the offering. The Firm has adopted guidelines and standards specific to the features of different 

investments, such as mutual funds, variable annuities, structured notes, real estate investment trusts, and other investments. The 

Firm also analyzes the offering under the “reasonable-basis” component of the FINRA suitability rule. In this regard, FINRA has 

explained that the suitability obligation (discussed below) has three components: reasonable basis suitability (i.e., a 

recommendation is suitable for at least some investors), customer-specific suitability (i.e., the recommendation is suitable for a 

particular customer) and quantitative suitability (relevant to a series of recommendations). The Firm also considers the training 

or education needs of its representatives to ensure that they understand the features of the investments being offered. The Firm 

considers sales support and other information that the distributor for the offering may provide. Investment product sponsors may 

facilitate this training or help to underwrite its cost.

o If the Firm decides to pursue participation in an offering, it then considers the terms of the selling agreement that it must 

enter into in order to participate. The terms of these agreements are regulated under SEC and FINRA rules and typically 

cover the conduct and conditions of the offering. Also, these agreements typically prohibit Anne and the Firm from furnishing 

information about the securities or offering other than information provided by the issuer or distributor for the offering. Any 

materials used in connection with the offering other than the prospectuses are likely to be subject to FINRA communication 

 

34 See NASD Notice to Members 05-26.
Employee Benefits Security Administration

September 24, 2015

Page 27

rules and may also be subject to FINRA filing requirements. Ordinarily, the distributor agrees to be responsible for filing 

these materials with FINRA; this responsibility is typically addressed in the selling agreement.

o The Firm generally seeks to participate in a number of offerings at any point in time that will address an array of investors

and investment situations and will provide diversification, both from the Firm’s perspective, as well as customers’ perspective. 

The Firm generally refers to the list of available offerings as its “menu.”

• Anne’s recommendations must comply with FINRA’s suitability rule.35 This rule requires a broker-dealer or associated person to 

have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is 

suitable for the customer, based on the information obtained through the reasonable diligence of the firm or broker to ascertain 

the customer’s investment profile. This investment profile is to include the customer’s age, other investments, financial situation and 

needs, tax status, investment objective, investment experience, investment time horizon, liquidity needs, risk tolerance and any 

other information the customer may disclose to the firm or associated person in connection with the recommendation. Further, as 

noted above, FINRA has explained that the suitability obligation has three components: reasonable-basis suitability, customerspecific suitability and quantitative suitability.36 Anne’s recommendations are limited to investments for which the Firm has 

already made a “reasonable basis” suitability determination under its “new products” program discussed above; given this, 

Anne’s recommendation primarily implicates the “customer-specific” suitability component of the suitability obligation. 

o Anne’s recommendations followed the process contemplated by FINRA’s suitability rule. Anne first collected investment 

profile information for Carl through the completion of the new account form. The Firm’s new account form has been designed 

to collect the “investment profile” information, as well as other information about the customer, the Firm considers relevant. 

Anne noted in particular Carl’s concern about lifetime income.

o Once Anne understood Carl’s investment objectives and situation, Anne realized that no one investment would achieve Carl’s 

overall objectives. Anne then developed an investment strategy, contemplating several coordinated investments. Anne’s 

recommendations encompass both a recommendation to purchase specific securities (shares of mutual funds in the Northeast 

Fund Group) and an investment strategy recommendation (allocating the rollover balance among the annuity and specified 

mutual funds). FINRA’s suitability rule applies to both types of recommendations.

o In developing her recommendations regarding Northeast Fund Group mutual funds, Anne considered the investment 

objectives and historical performance of the funds available in the retirement plan offered by Carl’s employer as well as 

the funds available on her Firm’s menu. Anne also considered the fees and charges associated with long-term investment in 

these mutual funds, including the sales charges and other expenses associated with different classes of fund shares, as well 

as those associated with the mutual fund investment options in Carl’s employer’s retirement plan. Anne determined that the A 

share class, which pays a front-end sales load and ongoing 12b-1 fee, in the Northeast Fund Group would appear to be 

the most economical over the long term, assuming certain investment returns, particularly because the rollover amounts to the

 

35 See FINRA Rule 2111. 36 See id.
Employee Benefits Security Administration

September 24, 2015

Page 28

recommended funds combined would qualify for breakpoint reductions in the sales charges. Anne knows a FINRA rule 

prohibits the sale of mutual fund shares in dollar amounts just below the point that would qualify for sales charge 

discounts.37 Anne looked into whether Carl was eligible for any sales charge waivers, given that his investments would be for 

a retirement account. Anne also considered the fees and charges associated with any changes over time in the amounts 

invested in the mutual funds, given that Carl’s investment needs and objectives might change over the course of his retirement 

years. She decided to recommend funds from the same family of funds offering exchange privileges so that Carl could (i) 

reallocate his investments among multiple funds and corresponding asset classes over time without incurring additional sales 

charges and (ii) combine those investments in the same fund family to qualify for sales charge breakpoints. In making her 

recommendation to Carl, Anne presented each of the fund class options in a balanced manner.

• Anne also is attentive to state insurance suitability requirements, which apply to the recommendation to purchase a single 

premium immediate annuity. These rules impose suitability and supervision requirements for annuity recommendations similar to 

those imposed under FINRA rules.38 Anne can sell an annuity to Carl only if she is appointed by the insurance company whose 

annuity she recommends. To qualify for appointment, Anne must satisfy, among other things, training requirements relevant to

annuities.

• Anne was careful, though, to avoid making any predictions to Carl regarding investment performance. FINRA rules generally 

prohibit the use of any projections of future performance for an investment, and thus would prohibit the projection of fees and 

costs associated with an investment to the extent that the projection takes into account future performance.39 This prohibition is 

emphasized in the training and compliance manuals provided by the Firm to its registered representatives.

• Anne gave Carl an information brochure regarding the Firm’s fee schedules and other account-related charges, as well as 

disclosures regarding compensation arrangements with investment product providers and sponsors, in connection with account 

opening activities. This brochure describes the ways in which the Firm is compensated, depending on the type of transaction and 

service provided, and explains that some of the costs incurred by a customer are charged directly to the customer, whereas 

some of the costs associated with an investment are paid by the issuer or distributor of the investment (as is typical for 

investments distributed in an offering, such as mutual funds or variable annuities).

• In setting its fee schedule, the Firm is cognizant of FINRA rules and state securities rules imposing “fair and reasonable” 

standards on the various types of compensation paid in connection with securities transactions (e.g., commissions, markups, 

concessions and allowances), as well as account fees and charges. The “fair and reasonable” standards generally take into 

account “all relevant circumstances.”40 The Firm maintains policies and procedures for the review of the fairness of the fees and 

 

37 See FINRA Rule 2342. 38 See Suitability in Annuity Transactions Model Regulation developed by the National Association of Insurance Commissioners (NAIC) and adopted by a majority 

of states.

39 See, e.g., FINRA Rule 2210. 40 See, e.g., FINRA Rules 2121, 2122 and 5110 and NASD Rule 2830.
Employee Benefits Security Administration

September 24, 2015

Page 29

other charges the Firm assesses against customer accounts. In the case of offerings, where the selling compensation is set by the 

issuer or distributor, the Firm considers the reasonableness of the selling compensation arrangements as part of its “new 

products” program review, discussed above.

• Anne would receive transaction-based compensation from her Firm if Carl implements her recommendations. As annuities and 

mutual funds are different types of financial instruments, the compensation arrangements for each of them are different. The 

rate of compensation for the mutual fund shares would be modestly less than the rate of compensation on the annuity, in part 

due to the effect of the breakpoints. In the case of the annuity transaction, the ABC Insurance Company would pay the Firm. In 

the case of the Northeast Funds, the fund distributor would pay the Firm an agreed upon percentage of the sales charges and 

12b-1 fees applicable to the fund shares purchased for Carl’s account. In addition, both the Northeast Funds and the ABC 

Insurance Company pay Anne’s firm marketing support payments that help to offset some of the cost of maintaining her firm’s 

brokerage platform and for the ongoing due diligence of the products offered on its menu. Finally, the Northeast Funds pay 

Anne’s firm sub-transfer agent fees to reflect shareholder accounting services provided by Anne’s firm to the Northeast Funds. 

Specifically, Northeast Funds does not have to maintain separate account records for each of the firm’s clients and does not 

have to send out prospectuses or other documents because these items are handled by Anne’s firm. Under Anne’s agreement 

with the Firm, Anne would receive a percentage of some of the amounts received by the Firm (Anne would not receive a portion 

of the marketing support payments or the sub-transfer agent fees). 

The transactions for Carl’s account would also be taken into account by Anne’s Firm in determining her eligibility under the Firm’s 

incentive compensation programs. FINRA rules limit the use of non-cash compensation, gifts and entertainment, and training and 

education benefits in connection with certain securities offerings, including mutual funds. FINRA rules permit non-cash incentive 

compensation for sales of certain investments, such as mutual funds and variable contracts, only if the compensation is based on 

“total production” of such investments, with equal weighting given to all products (i.e., the same weighting for non-proprietary 

investments as for proprietary investments).41 The Firm’s non-cash incentive program is specifically designed to comply with the 

total production and equal weighting requirements of these rules.

• Anne’s delivery of the investor kits is intended to satisfy information disclosure requirements imposed by applicable law. In the 

case of investments subject to the federal securities laws, the federal securities laws generally require the delivery of a 

prospectus if the investment recommendation involves a security offered by a prospectus.42 In the case of insurance contracts, a 

number of states that impose disclosure requirements for annuity transactions, including the delivery of a “buyer’s guide” for 

fixed annuities and equity indexed annuities. The investor kits are typically provided by the distributor (in the case of securities) 

or the insurer (in the case of annuity contracts). The application forms for the purchase of fund shares or an annuity policy 

typically request the applicant to indicate whether they received the materials in the investor kit. 

 

41 See, e.g., FINRA Rules 2310, 2320 and 5110 and NASD Rule 2830. 42 See Section 5 of the Securities Act of 1933. For clarity, we note that prospectuses are routinely available from public sources, and sometimes are formally 

delivered with the transaction confirmation rather than with the investment recommendation.
Employee Benefits Security Administration

September 24, 2015

Page 30

• Certain rules require the delivery of notices or disclosures at account opening, such as a notice regarding the firm’s CIP program, 

privacy policy and business continuity policy.43 The Firm has integrated these notices into the new account form/account 

agreement to make sure that the information is conveyed to the customer in a convenient, integrated form. Anne has been 

trained to point out these disclosures to customers when assisting them with completing the new account form.

BICE. Anne is providing Carl a recommendation in the FINRA sense, so she becomes an ERISA fiduciary under the Proposal and 

requires the relief provided by BICE because her compensation may differ with the investment choices Carl makes.44 The BICE would 

impose a number of additional requirements on this interaction, some of which duplicates and/or does not comport with existing law.

In the customer experience, the BICE contract would most sensibly be introduced in the account opening process. Under the 

Proposal, however, that contract must be executed in advance of any recommendation, which functionally splits customer account 

opening documentation into two separate processes. This is both inefficient and customer-unfriendly.

In addition to complying with the suitability rule, Anne’s recommendation must be in Carl’s “best interest,” reflecting the care, 

skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise based on the investment 

objectives, risk tolerance, financial circumstances, and needs of the retirement investor, without regard to the financial or other interests 

of the advisor, financial institution or any affiliate, related entity, or other party. 

Anne’s recommendation must be limited to an investment falling into one of the 13 asset classes described in BICE. For example, 

if it is in Carl’s best interest to (i) structure his retirement investments as a brokerage account rather than an advisory account and (ii) 

include in his portfolio an interest in a non-traded REIT, the Proposal provides no means to effectuate that “best interest” transaction. 

Also, the Firm would need to consider whether it is authorized to provide, and provides, most if not all of the 13 asset classes, as 

BICE requires a financial institution relying on the exemption to provide a range of options that is “broad enough” to enable its advisors 

to make recommendations with respect to all of the asset classes reasonably necessary to serve the “best interests” of the retirement 

investor. If a financial institution limits investments available to retirement investors based on whether the investments are proprietary 

products, generate “third-party payments” (defined to include sales charges, Rule 12b-1 fees and other payments by a third party) or 

for other reasons, the financial institution could still rely on the BICE, but only if four conditions are met: 

• The financial institution makes a “specific written finding” that the limitations so imposed do not prevent the advisor from 

providing advice that is in the “best interest” of the retirement investor; 

• Any compensation received in connection with an asset is reasonable in relation to the value of the specific services provided to 

the retirement investor in exchange for the payment and not in excess of the services’ fair market value; 

 

43 See CIP Rule, Regulation SP and FINRA Rule 4370. 44 We understand from statements made by representatives of the Department at the hearing that all of Anne’s activities potentially affecting her compensation, 

including the advice to take a rollover and to utilize a commission-based rather than an advisory account, are intended to be within the scope of relief provided 

by the BICE.
Employee Benefits Security Administration

September 24, 2015

Page 31

• Before an investment recommendation is given, the retirement investor is given written notice of the limits placed on the assets; 

and 

• The advisor notifies the retirement investor if the advisor (notably, not the financial institution) does not recommend a sufficiently 

broad range of assets to meet the retirement investor’s needs. 

If the Firm’s investment platform would be considered to be limited under BICE, the Firm might be required to provide a notice of 

limitations to retirement investors when a recommendation is made.

Anne and the Firm may not recommend an asset if the total compensation anticipated to be received by them, affiliates and 

related entities in connection with the purchase, sale or holding of the asset would exceed reasonable compensation in relation to the 

total services provided to the retirement investor. The touchstone for this standard does not appear to align with the “fair and 

reasonable” standards under FINRA rules, which take into account all relevant circumstances, including market conditions with respect to 

the security at the time of the transaction, the expense involved and other considerations. Anne and the Firm intend to and believe they

meet this requirement but, because of the absence of reliable benchmarks in the public domain and antitrust considerations, struggle to 

validate that determination.

The Firm may not use quotas, appraisals, bonuses, awards, differential compensation or incentives if they would “tend to 

encourage” Anne to make recommendations not in the best interest of Carl. This prohibition calls into question whether investments 

recommended to retirement investors must be excluded from conventional incentive programs maintained by broker-dealer firms, and 

whether the exclusion of those investments would cause a violation of “total production” requirements imposed by FINRA rules.

Anne must provide Carl with a chart that shows for each asset recommended by Anne the total cost (acquisition, ongoing, 

disposition and other costs including operating expenses) for the retirement investor for one-year, five-year and ten-year periods 

expressed in a dollar amount, assuming an investment of the dollar amount recommended by Anne and reasonable assumptions about 

the investment performance are disclosed. 

• This chart would appear to violate FINRA rules prohibiting projections of performance for investments.45 

• Even if allowable, the development of “reasonable” assumptions is a challenge for the Firm. The Firm is inclined to think that 

historical rates of return for asset classes make the most sense, but is concerned about a range of circumstances that in hindsight 

might make such an assumption appear “unreasonable,” e.g. (i) particular investments that deviate significantly from the 

performance of the asset class, (ii) the effect of a change in a product’s management or investment strategy on a projection of 

performance, and (iii) the consequences of a period of higher market volatility on projections as short as one and five years. 

The Firm also struggles with how frequently it must cause Anne to update Carl’s chart to take account of daily changes in the

market.

 

45 FINRA Rule 2210.
Employee Benefits Security Administration

September 24, 2015

Page 32

The chart is also difficult and expensive to provide, given the Firm’s existing systems capabilities and offerings available from 

vendors and the fact that the information being requested is largely outside of the Firm’s control:

• It is not clear what the “total cost” of a mutual fund holding would be. Would the firm merely use the current operating expense 

or would the firm be required to take into account the trading costs of the mutual fund which are not included in the operating 

expense ratio? What should the Firm use for the operating expense ratio if the fund’s investment manager is currently waiving 

a portion of its management fee?

• What would be the total cost of the fixed single premium annuity? The ABC Insurance Company is hoping that the premium it 

received will be less than the present value of the payments it makes to Carl over his lifetime plus the present value of any 

commissions paid to the Firm. Meanwhile the Firm knows how much it will receive from ABC Insurance Company and could 

disclose that amount but is concerned that this might not be the total cost. The Firm has no way of knowing what ABC Insurance 

Company might earn from the issuance of the contract yet will have engaged in a prohibited transaction if the Firm provides a

chart that is not accurate.

• What would be the total cost of a variable annuity? In addition to the mutual fund and fixed annuity concerns raised above, 

variable annuities charge a mortality and expense fee and rider fees in exchange for valuable rights provided to the client. 

For instance, the mortality and expense fee would cover both the commission paid to the Firm plus the return of principal 

guarantee inherent in the variable annuity should Carl die prior to annuitizing and have suffered a market loss. 

The Oxford Economics report attached to this letter projects the cost of implementation of the BICE contract requirement to 

average $4.5 million per broker-dealer, the cost of the BICE disclosure requirements to average $870,000 per broker-dealer, and the 

cost of the data collection required by BICE to average $570,000 per broker-dealer. 

FSI Alternative. In contrast, our alternative is specifically designed to mesh with both the customer experience and other 

applicable bodies of law. Most importantly, in providing a recommendation, Anne and the Firm must:

• Act in Carl’s best interest; 

• Provide advice with skill, care, and diligence based upon information that is known, about Carl’s investment objectives, risk

tolerance, financial situation, and other needs; and

• Disclose and manage material conflicts of interest, avoid them when possible, and obtain Carl’s informed consent to act when 

such conflicts cannot be reasonably avoided. 

This formulation is intended to comport not only with Section 404(a) of ERISA, but also fiduciary standards applicable under federal 

securities laws. The cure for conflicts contemplated by this standard is provided through the “best interest” prohibited transaction 

exemption. Because of our concerns about the remedial aspects of the Proposal, the FSI alternative positions the “best interest” 

standard as a term of the exemption, rather than as a term of a tri-party written contract or other binding legal obligation to the 

retirement investor.
Employee Benefits Security Administration

September 24, 2015

Page 33

Instead of the BICE contract and the point-of-sale disclosure, the account opening documents Anne provides to Carl includes a 

short-form disclosure document that includes:

• A statement of the best interest standard of care owed by the Firm to the client; 

• The nature and scope of the business relationship between the parties, the services to be provided, and the duration of the 

engagement; 

• A general description of the nature and scope of compensation to be received by the Firm and financial advisor; 

• A general description of any material conflicts of interest that may exist between the Firm, financial advisor and investor; 

• An explanation of the investor's obligation to provide the Firm with information regarding the investor's age, other investments,

financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs,

risk tolerance, and any other relevant information the customer may choose to disclose, as well as an explanation of the 

investor’s obligation to inform the Firm of any material changes in this information; 

• A statement explaining that customers may research the Firm and its financial advisors through FINRA’s BrokerCheck database 

or the IARD; 

• A phone number and/or e-mail address the investor can use to contact the Financial Institution regarding any concerns about the 

advice or service they have received; and 

• A description of the means by which a customer can obtain more detailed information regarding these issues, free of charge, 

including a link to the section of the Firm’s website featuring the disclosures discussed above. 

This short-form disclosure is focused on the issues that are of greatest importance to investors; functionally, it is the retail investor version 

of the disclosures required for plan fiduciaries under ERISA Reg. §2550.408(b)-2. It also constitutes an up-front commitment on the part 

of the Firm and the advisor to act in the best interest of the client, enforced through the exemption without the procedural complications 

of the BICE contract.

On request, Anne provides Carl specific information about the compensation she would receive if he acts on her 

recommendation. Under the FSI alternative, retirement advisers incur the cost of providing this information only to retirement investors 

who find it sufficiently material to request it. The short-form disclosure puts Carl on notice that this information is available from Anne.

The FSI alternative would not include a “legal list” of permissible investment types, but instead would rely on the best interest 

standard to police those concerns. If Anne recommends that Carl invest through a brokerage account in a non-traded REIT, relief would 

be available only if that investment is in Carl’s best interest, e.g. because its returns are not correlated with the rest of the portfolio and 

thus provides important diversification, or because it generates income that fills out Carl’s monthly needs in retirement. If the 

recommendation instead puts Anne’s interest in receiving a commission first, the exemption would not be available.
Employee Benefits Security Administration

September 24, 2015

Page 34

4. Carl takes a few days to review the information and decides to move forward with the recommendations. Carl meets again with 

Anne to sign the account agreement and various forms (including retirement plan rollover forms). Anne submits the information to the 

Firm, which opens an IRA account for Carl and initiates the processes for the purchase of the annuity and fund shares with amounts 

rolled over from Carl’s retirement plan.

Existing Law BICE FSI Alternative

• Firms must have review processes for 

customer accounts, including special 

processes for retirement accounts.

• Account opening documentation, 

including pre-dispute arbitration 

provisions, must meet FINRA 

requirements.

• Firms must retain and verify customer 

profile information.

• Firms must have a processes for 

reviewing and approving transactions 

for customer accounts, including a 

review of suitability, rollover 

considerations and the other factors 

discussed above

• Pursuant to FINRA guidance, firms are 

to maintain other policies for managing 

and mitigating compensation-related 

conflicts.

• Firms must conduct periodic 

examinations of customer accounts to 

detect and prevent irregularities or 

abuses.

Conclusion – Firms are obligated to 

supervise customer transactions and 

mitigate conflicts of interest, while 

• Anne and the Firm are subject to all 

“Existing Law” requirements.

• Statements made by Anne and the Firm 

about investments, fees, “material 

conflicts of interest” and other 

information relevant to Carl’s decision 

may not be misleading.

• The Firm must make a determination 

that a commission-based account 

structure aligns with the best interests of 

investors. 

• The Firm must warrant that it is in 

compliance with all applicable law 

relevant to this investment activity. 

• The Firm must warrant that it has 

adopted written policies and 

procedures designed to mitigate the 

impact of “material conflicts of interest” 

and “ensure that its individual advisers 

adhere to impartial conduct standards.”

Conclusion - The foregoing, which in some 

respects duplicate existing law, are 

“principles-based” conditions for which 

there is no definitive means to comply. 

Failure to comply opens firms to significant 

liability exposure.

• The Firm must adopt policies and 

procedures that meet specified criteria 

to mitigate the effect of potential 

conflicts of interest.

Conclusion – This approach provides a 

reliable means to satisfy the exemption 

and promotes consistency between 

retirement and non-retirement accounts, 

improving the firm’s ability to comply in 

operation.
Employee Benefits Security Administration

September 24, 2015

Page 35

Existing Law BICE FSI Alternative

observing high standards of commercial 

honor and just and equitable principles of 

trade.

This step in the process triggers SEC and FINRA rules governing the acceptance of customer accounts, execution and supervision 

of transactions and transaction confirmations.

• FINRA rules require a member firm to have processes for the review and approval of each customer account.46 In addition, a 

member firm must review account information to identify specially designated nationals under OFAC rules and any suspicious 

activity under anti-money laundering laws, rules and regulations. Anne’s Firm has designated personnel responsible for 

reviewing and approving the opening of customer accounts pursuant to the Firm’s procedures and standards. Designated 

personnel review the new account form and any other information collected to determine if the account and account owner meet

the Firm’s requirements. In this case, because Carl’s account will be an IRA account, designated personnel review the account

information under the standards adopted for retirement accounts, and “code” the account as a retirement account for purposes 

of monitoring future activity in the account. 

• FINRA rules regulate any pre-dispute arbitration provision in an account agreement, and require that specified disclosures be 

provided to clients about arbitration procedures.47 SEC rules require the firm to provide a copy of the account agreement to the 

client.48 The Firm’s account agreement is integrated into its new account form. As part of the Firm’s account opening process, 

designated personnel confirm that Carl has signed an account agreement with the Firm (which also functions as an account 

agreement with its clearing firm) and that a copy has been provided to Carl. The Firm captures Carl’s signature in its systems to 

use for verification of signatures on any written instructions that Carl may provide at a later date.

• The Firm enters Carl’s “investment profile” information into its system, and sends Carl a notice with that information, requesting 

that he contact the Firm if there is an error in the information, consistent with SEC rules.49 It is important that this information be 

entered correctly, as the Firm’s supervision and surveillance programs will be based on the information so entered.

• Broker-dealers are required to have processes for reviewing and approving transactions for customer accounts, including a 

review of suitability and the other considerations discussed above.50 In the rollover setting, this includes a review in accordance 

 

46 See FINRA Rules 3110 and 4512. 47 See FINRA Rule 2268. 48 See SEC Exchange Act 17a-3. 49 See id. 50 See FINRA Rule 3110.
Employee Benefits Security Administration

September 24, 2015

Page 36

with the principles of FINRA Regulatory Notice 13-45. The review must be conducted by a registered principal and documented. 

The Firm has designated personnel responsible for conducting a review of transactions effected for customer accounts. Under 

the Firm’s review procedures, transaction(s) are compared to the account information to determine if the transaction(s) is(are) 

suitable for the customer account. The review procedures also take into account rules relevant to particular types of accounts or 

transactions. In the case of Carl’s account, the review process would take into account applicable breakpoints, waivers and 

discounts relevant to Northeast Mutual Funds.

• The Firm recognizes that the compensation arrangements for mutual funds, which are based on long-standing practices in the 

securities industry, present potential conflicts of interest for the Firm and its registered representatives. In light of a report on 

conflicts of interest issued by FINRA in 2013, the Firm maintains written policies and procedures for identifying and managing 

compensation-related conflicts that:

o Avoid creating compensation thresholds that enable a representative to increase his or her compensation disproportionately 

through an incremental increase in sales;

o Maintain a supervisory program that employs specialized surveillance of a registered representative that is approaching 

a threshold that would (a) result in a higher payout percentage in a financial institution’s compensation grid, (b) qualify an 

advisor to receive a back-end bonus, or (c) qualify an advisor to participate in a recognition club;

o Maintain a neutral compensation grid that does not include higher payout percentages for products of a particular 

type;

o Refrain from providing higher compensation to an advisor for the sale of proprietary products or products for which 

the firm has entered into revenue sharing arrangements;

o Monitor recommendations around key liquidity events in an investor’s lifecycle; and

o Develop red flag processes that include compensation adjustments for employees who do not properly manage conflicts of 

interest.

These considerations are reflected in the Firm’s review and supervision of Anne’s recommendations.

• Broker-dealers are also required to conduct periodic examinations of customer accounts to detect and prevent irregularities or 

abuses, and to maintain written records of the date when such reviews are conducted.51 Given this requirement, the Firm has 

implemented a number of integrated procedures and controls to monitor customer accounts, including the use of various activity 

and exception reports designed to identify potentially questionable transactions or patterns of transactions based on the sales 

practice risks presented by the types of transactions effected by the Firm. These reports include, with reference to Carl’s 

account, activity and exception reports focused on IRA accounts and rollover transactions.

 

51 See id.
Employee Benefits Security Administration

September 24, 2015

Page 37

BICE. The proposed BICE duplicates existing law by requiring that statements made by Anne and the Firm about investments, 

fees, “material conflicts of interest” and other relevant to Carl’s decision may not be misleading. Otherwise, BICE introduces three 

additional regulatory requirements in a manner that leaves firms and advisors at material risk.

The Firm must make a determination that a commission-based account structure aligns with the best interests of investors. The 

Firm must also make a determination as to whether Anne’s recommendation of the IRA rollover, the decision to purchase the single 

premium fixed annuity from ABC Insurance Company and the decision to purchase Northeast Funds was in Carl’s best interest and 

without regard to either Anne’s or the Firm’s financial interests. This determination can be second-guessed by the Department or in a 

private action by a retirement investor.

The Firm must warrant that it is in compliance with all applicable law relevant to this investment activity. Even a de minimis 

violation of any of the other laws described in this letter – including laws which do not provide for any private right of action –

potentially exposes Anne and the Firm to exposure under the BICE contract.

The Firm must warrant that it has adopted written policies and procedures designed to mitigate the impact of “material conflicts 

of interest” and “ensure that its individual advisers adhere to impartial conduct standards.” The Firm is at risk whether its policies and 

procedures satisfy this requirement. 

FSI Alternative. Our alternative avoids the risks created by the “principles based” approach of the BICE. Under the FSI 

alternative, the “best interest” exemption is predicated on a determination that variations in compensation to financial institutions and 

advisors among product types and product providers are not inconsistent with a best interest standard. It does not require separate 

(and contestable) determinations by each financial institution on that point.

In addition, adoption of the following policies and procedures by a financial institution would explicitly be sufficient to satisfy 

the exemption:

• Avoid creating compensation thresholds that enable a representative to increase his or her compensation disproportionately 

through an incremental increase in sales;52

• Maintain a supervisory program that employs specialized surveillance of a registered representative that is approaching a 

threshold that would (a) result in a higher payout percentage in a financial institution’s compensation grid, (b) qualify an 

advisor to receive a back-end bonus, or (c) qualify an advisor to participate in a recognition club;

• Maintain a neutral compensation grid that does not include higher payout percentages for products of a particular type;

• Refrain from providing higher compensation to an advisor for the sale of proprietary products or products for which the 

firm has entered into revenue sharing arrangements;

• Monitor recommendations around key liquidity events in an investor’s lifecycle; and

 

52 This is not to say that such thresholds are not allowable, but rather that they would be managed to minimize the risk that other than “best interest” advice is 

being provided.
Employee Benefits Security Administration

September 24, 2015

Page 38

• Develop red flag processes that include compensation adjustments for employees who do not properly manage conflicts of 

interest.

Finally, given the extensive regulation under other laws of the veracity and content of communications to investors, the FSI 

alternative imposes no additional requirements on this point. The FSI alternative also leaves the enforcement of other applicable laws 

to the remedies provided under those laws.

5. Carl receives confirmations and other disclosures about his transactions.

Existing Law BICE FSI Alternative

• Customers must receive confirmations of 

transactions.

• Customers must receive quarterly 

account statements showing the values 

of securities held in their accounts and 

activity during the period covered by 

the statement. They may also receive 

periodic statements from product 

providers or insurance companies.

• Firms are subject to substantial “books 

and records” requirements regarding 

customer accounts and transactions, and 

to make this information available to 

regulators on request.

Conclusion – Investors are routinely 

provided information on their account 

holdings and transactions.

• Anne and the Firm are subject to all 

“Existing Law” requirements.

• The Firm or advisor must send to 

retirement investors an annual 

statement listing each asset purchased 

or sold for the retirement investment 

and the related purchase or sale price 

– information that has already been 

included in the quarterly account 

statements – along with the total dollar 

amount of all fees and expenses paid 

directly or indirectly with respect to 

each asset sold, purchased or held by 

the account during the period and the 

total dollar amount of all compensation 

received by the adviser and financial 

institution directly or indirectly from any 

party as a result of each asset sold, 

purchased or held by the account 

during the period.

• If the retirement investor decides to 

make additional investments or transfer 

between investments under the IRA, the 

point of sale disclosure chart must be 

• To the extent not already provided, the 

total fees charged by the firm are 

reported on customers’ annual account 

statements, which also include a 

narrative reminder that the 

compensation paid to the advisor is 

available on request. 

Conclusion – Low cost disclosures are 

provided to all investors. Those desiring 

greater detail may obtain it.
Employee Benefits Security Administration

September 24, 2015

Page 39

reproduced (using the new investment 

amount or the transfer amount to 

develop the projections) if twelve 

months have passed between 

investments or if there has been a 

material change in costs.

• Financial institutions must maintain, in a 

form that permits production to the 

Department on six months’ notice, The 

Department can request a brokerdealer to provide information showing 

at the retirement investor level: (a) the 

name of the adviser; (b) the beginningof-quarter value of the client’s 

portfolio; (c) the end-of-quarter value 

of the client’s portfolio; and (d) each 

external cash flow to or from the 

client’s portfolio during the quarter and 

the date on which it occurred. The 

Department may publicly disclose any 

or all of this information so long as 

customer privacy is protected.

Conclusion – Additional disclosure 

requirements are complex, costly, and 

likely to overwhelm and overload investors.

Existing law regulates the information continue to receive about their accounts after transactions are effected.

Broker-dealers are required to furnish confirmations to customers to notify customers of the execution of orders and execution 

terms. Confirmations are also required to disclose information relating to commissions, fees, markups and other compensation received 

by the firms in connection with effecting the transactions. In the case of transactions in securities offered by a prospectus or other

offering document, the broker-dealer generally can rely on disclosure of the distribution compensation arrangements in those 

documents.53 Prospectuses would be delivered with the confirmation, if not previously provided.

 

53 SEC Exchange Act Rule 10b-10.
Employee Benefits Security Administration

September 24, 2015

Page 40

Broker-dealers generally must send quarterly account statements to their customers showing the values of securities held in the 

accounts and activity during the period covered by the statement.54 Anne’s Firm, like many broker-dealers, has arranged for its 

clearing firm to provide account statements. Knowing that the Firm remains responsible for the accuracy and timely delivery of the 

account statements, the Firm maintains a governance framework for the creation and distribution of account statements, as well as 

controls and audit protocols to confirm that the account statements are accurate and timely delivered. The Firm also permits its 

representatives to provide “consolidated” account statements to their customers that consolidate in one statement not only account 

information for the customer’s account with the broker-dealer but also account information for other accounts that the client may 

maintain with other financial institutions, such as checking accounts, credit card accounts and advisory accounts. The Firm has adopted 

policies, procedures and controls in place to ensure that the information in the consolidated account statements is clear, accurate and not 

misleading consistent with FINRA guidance.55 

Customers may also receive information periodically from the issuers of investments in their accounts. For example, a mutual 

fund investor receives updates to prospectuses and annual and semi-annual reports to shareholders and an investor in publicly traded 

equity securities may receive proxy statements and annual reports to shareholders. Depending on the circumstances, a broker-dealer 

may be responsible for the delivery of the prospectuses and statements on behalf of the issuer. Anne’s Firm reviews updates to 

prospectuses and shareholder reports for securities that the Firm is continuing to offer to its clients. 

State insurance regulations in various states require insurers to provide information periodically (typically annually) to contract 

owners regarding the status of their insurance contracts. As part of the process of becoming appointed by ABC Insurance Company to 

offer its annuity, the Firm confirmed that ABC Insurance Company sends these notices to contract owners, and requested that copies of 

the notices be sent to its representatives. In addition, the Firm arranged for ABC Insurance Company to transmit the account information 

to the Firm so that the Firm can include information in the consolidated account statements it provides to customers. 

Broker-dealers are required to create and retain records relating to customer accounts and customer transactions, and to make 

this information available to regulators for review upon request.56 The Firm maintains substantial books and records that satisfy these 

requirements and permit meaningful regulatory review by the Department pursuant to its ERISA Section 504 investigative authority. 

The Firm has designated a “books and records” principal who is responsible for the maintenance of all books and records, and is 

available to answer questions from regulators regarding the Firm’s records.57

BICE. As proposed, BICE would materially increase the cost of post-transaction information collection and disclosure, in a 

manner that is unlikely to be of commensurate value to retirement investors.

Under BICE, the Firm or Anne must send to Carl an additional statement, within 45 days after the end of each year, listing each 

asset purchased or sold for the retirement investment and the related purchase or sale price – information that has already been 

 

54 NASD Rule 2340. 55 See FINRA Regulatory Notice 10-19. 56 See Section 17 of the Securities Exchange Act of 1934 and FINRA Rule 8210. 57 See SEC Exchange Act Rule 17a-3.
Employee Benefits Security Administration

September 24, 2015

Page 41

included in the quarterly account statements. The annual statement must include other information not ordinarily included in customer 

accounts statements, such as the total dollar amount of all fees and expenses paid directly or indirectly with respect to each asset sold, 

purchased or held by the account during the period and the total dollar amount of all compensation received by the adviser and 

financial institution directly or indirectly from any party as a result of each asset sold, purchased or held by the account during the 

period. As explained above, the Firm does not know what the total cost of mutual funds or annuity products are and would need to 

obtain this information from ABC Insurance Company and Northeast Funds. Neither company is currently obligated to provide this 

information so the Firm must amend its selling agreements to include this obligation. It is unclear whether most such product 

manufacturers will agree to provide this information given the cost and ambiguity related to what would be required. The Firm may 

have to greatly limit the products on its menu available to retirement accounts for this reason. Furthermore, even for the information 

related to the Firm’s compensation and Anne’s compensation, there is a material cost to capture, validate and report that additional 

information, and no process or tool currently available in the marketplace would automate that procedure. Carl very well may not 

appreciate receiving or value this report; studies find that investors are increasingly less desirous of this sort of disclosure.58

If Carl wants to make additional contributions to his IRA or transfer between investments under the IRA, the point of sale 

disclosure chart need not be provided with respect to subsequent recommendations of the same product if the chart was previously 

provided in the past twelve months and total costs have not materially changed. If more than twelve months have passed, the chart will 

need to be reproduced and redeveloped (using the new contribution amount or the transfer amount to develop the projections) even if 

there have been no material changes in costs.

The Department can request a broker-dealer to provide information showing at the retirement investor level: (a) the name of the 

adviser; (b) the beginning-of-quarter value of the client’s portfolio; (c) the end-of-quarter value of the client’s portfolio; and (d) each 

external cash flow to or from the client’s portfolio during the quarter and the date on which it occurred. The BICE data request 

requirement compels the Firm to operationalize and maintain extensive account- and investment-level records beyond those required by 

FINRA and the SEC, also at a material cost and raise questions of data privacy. 

The Firm must keep records of compliance with BICE for six years, at an average cost projected by Oxford Economics of 

$200,000.

FSI Alternative. Our alternative would reduce these incremental post-transaction requirements to the cost-effective essentials 

useful to retail investors. To the extent not already provided, the total fees charged by the Firm are reported on Carl’s annual account 

statement, which also includes a narrative reminder that the compensation paid to Anne is available on request. 

* * * * *

 

58 See, e.g., Final Rule: New Disclosure Option for Open-End Management Investment Companies, Exchange Act Release No. 33-7513 (March 13, 1998); Sandra 

West & Victoria Leonard-Chambers, Investment Company Institute, UNDERSTANDING INVESTOR PREFERENCES FOR MUTUAL FUND INFORMATION (2006), available at 

http://www.ici.org/pdf/rpt_06_inv_prefs_full.pdf; Karrie McMillan & Brian Reid, Comment Letter, Enhanced Disclosure and New Prospectus Delivery Option for 

Registered Open-End Management Investment Companies, File No. S7-28-07 (August 29, 2008), available at http://www.ici.org/pdf/22836.pdf. 
Employee Benefits Security Administration

September 24, 2015

Page 42

In sum, the FSI alternative implements a best interest standard supported by specifically targeted policies and disclosures that, 

as compared to the proposed BICE, are more workable, less costly, better leverage and integrate with existing law, and more 

effectively match the needs and capabilities of retail investors.
ECONOMIC 

CONSEQUENCES 

of the US Department of 

Labor’s Proposed New 

Fiduciary Standard

EXECUTIVE SUMMARY

Report produced on 

August 2015 for Financial 

Services Institute
2

EXECUTIVE SUMMARY

BACKGROUND

•	 The Department of Labor (DOL) recently proposed a new regulation 

governing conflicts of interest in the retirement savings industry.1

•	 The rule would impose new fiduciary responsibilities on independent

Broker-Dealers (BDs)2 and investment advisers servicing retirement 

accounts.

•	 Essentially, the rule would prohibit any transaction deemed a conflict of

interest, unless an exemption is provided.

1 http://www.dol.gov/ebsa/regs/conflictsofinterest.html.

2	 BDs typically affiliate with financial advisors who are self-employed business owners serving a

distinct geographic region where they have community ties and a local reputation. They service

investment accounts ranging from tens of thousands of dollars to those in the hundreds of 

thousands, i.e. those of Middle America.

ECONOMIC 

CONSEQUENCES 

of the US Department of 

Labor’s Proposed New 

Fiduciary Standard

AUGUST 2015

2
3

We find that startup 

costs are many 

multiples—in some 

cases 20 times—higher 

than what the DOL 

estimates.

CONSEQUENCES

•	 The DOL has dramatically underestimated the compliance costs of 

the new rule and how difficult it will be for small firms to survive if it is

implemented.

•	 We estimate the proposed rule will result in startup costs ranging from 

$1.1 million to $16.3 million per firm, depending on firm size.

•	 BDs and investment advisers would be forced to either substantially 

change their current business models or navigate the challenging 

demands of a new “Best Interest Contract Exemption”3 (BICE).

•	 The rule will result in less access to advice from financial advisors for

small and medium-sized investors. One unintended consequence might

be that it will become harder for minority investors with small asset 

holdings to seek advice from financial advisors.

•	 The proposed rule will result in industry consolidation likely to force small 

broker-dealers out of business.

•	 An expanded potential for systemic risk in the retirement savings market 

as savers are increasingly pushed into the same set of standardized

“low-cost” assets.

3	 The BICE allows certain “conflicted” transactions to proceed if an advisor and the client enter

into a contract (enforceable through arbitration or in state court) where the advisor promises to 

act in the undefined “best interest” of the client.

Chart: All-In Startup Costs for Broker-Dealer Firms

$18

$16

$14

$12

$10

$8

$6

$4

$2

$0

$4,500

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0

Firm costs in millions

Total cost in millions

OE per firm DOL per firm OE Total DOL Total

Large Medium Small Total
4

COST BREAKDOWN

Our survey quantified startup costs for the rule:

•	 The average estimated cost to a single independent broker-dealer firm

of setting up required new system interfaces to accept data feeds is 

$570,000, with a median cost of $250,000.

•	 The average and median estimated cost of disclosure requirements in 

our survey is $870,000.

•	 The average estimated startup cost of the recordkeeping 

requirements is $200,000, and the median cost $150,000.

•	 The average cost of implementing BICE contracts is $4.5 million with 

a median cost of $400,000.

•	 Our survey estimates an average training cost of $800,000 per firm,

and a median cost of $580,000.

•	 Our survey estimates an average cost for supervisory, compliance, 

and legal oversight of $210,000, and a median cost of $138,000.

•	 Costs to model future returns and costs to investors, and litigation 

costs are estimated to be substantial, but were not quantified in our

survey.

REPORT METHODOLOGY

•	 Conducted interviews with independent broker-dealer and clearing firm

senior executives whose firms, employees, and contractors would be

directly affected by the proposed rule.

•	 Obtained detailed cost estimates about the proposal’s impact.

•	 Analyzed additional expense predictions using an online survey of

Financial Services Institute (FSI) members.

•	 Estimated medium firm costs at 20.6% of large firms and small firms at

6.9%. DOL estimated medium firm costs at 13.3%, and small firms at

4.8% of large firm costs.
5

ABOUT FSI

The Financial Services Institute (FSI) is the only organization advocating solely

on behalf of independent financial advisors and independent financial services

firms. Since 2004, through advocacy, education and public awareness, FSI has

successfully promoted a more responsible regulatory environment for more than 

100 independent financial services firm members and their 160,000+ affiliated

financial advisors – which comprise more than 60% of all producing registered

representatives. For more information, visit financialservices.org.

ABOUT OXFORD ECONOMICS

Oxford Economics is a global leader in thought leadership, forecasting, and 

quantitative analysis, serving more than 850 international corporations, financial

institutions, governmental organizations, and universities worldwide. Founded

in 1981 as a joint venture with Oxford University, Oxford Economics is now a

leading independent economic consultancy. Headquartered in Oxford, with

offices around the world, it employs more than 200 people, including over 120

economists, and a network of 500 contributing researchers. Learn more at

oxfordeconomics.com.
OXFORD

Abbey House, 121 St Aldates 

Oxford, OX1 1HB, UK 

Tel: +44 1865 268900 

LONDON 

Broadwall House, 21 Broadwall 

London, SE1 9PL, UK

Tel: +44 207 803 1400

BELFAST 

Lagan House, Sackville Street

Lisburn, BT27 4AB, UK

Tel: +44 28 9266 0669

NEW YORK 

5 Hanover Sq., 19th Floor

New York, NY 10004, USA

Tel: +1 646 786 1863

PHILADELPHIA 

303 Lancaster Avenue, Suite 1b

Wayne PA 19087, USA

Tel: +1 610 995 9600

SINGAPORE

No.1 North Bridge Road

High Street Centre #22-07

Singapore 179094

Tel: +65 6338 1235

PARIS

9 rue Huysmans

75006 Paris, France

Tel: + 33 6 79 900 846

email: mailbox@oxfordeconomics.com

www.oxfordeconomics.com
ECONOMIC 

CONSEQUENCES 

of the US Department of 

Labor’s Proposed New 

Fiduciary Standard

Report produced on 

August 2015 for Financial 

Services Institute
2

CONTENTS

3 I. INTRODUCTION

4 A. Background on Independent Broker Dealers

4 B. Our methods

5 C. Background on the new rules

8 II. COST CALCULATIONS

8 A. DOL’s cost estimates 

14 B. Our Cost Estimates 

24 III. BENEFITS CALCULATIONS

24 A. The Department’s claimed gains to investors

25	 B. Valuing the benefits that advisors provide to clients

27 C. Costs to investors in non-mutual fund assets

28 D. Sources of the claimed gains to investors and economic 

benefits

30 IV. EFFECTS ON THE INDUSTRY

31	 A. Effects on Independent Broker Dealers

32 V. EFFECTS ON INVESTORS

32 A. Higher Minimum Account Balances

34 B. Experience in the UK

34 C. Minority Access to Financial Advice

35 D. Summary

36 VI. CONCLUSION
3

I. INTRODUCTION

Following the withdrawal of a similar proposed rule on Broker-Dealer conflicts

of interest in 2010, the Department of Labor (“the Department” or “DOL”) 

recently issued a new proposed regulation governing conflicts of interest in the

retirement savings industry.1 In general, this rule would impose a new fiduciary

responsibility on Broker-Dealers (BDs) and investment advisers servicing 

retirement accounts, and would label as prohibited any transaction where a 

conflict of interest is deemed to exist. BDs and investment advisers would

therefore be forced to either dramatically change their current business models 

in order to avoid such conflicts altogether, or navigate the challenging demands

of the new Best Interest Contract Exemption (BICE), which allows certain 

conflicted transactions to proceed under very particular conditions, or some

combination thereof. 

This report explores the likely economic impact of the proposed rule, focusing 

on the perspective of independent BDs.2 It is a critique of the Department’s 

Regulatory Impact Analysis which, as we will show, fails to engage directly 

with what the rules specifically require affected entities to do to comply from a

business process standpoint, and consequently dramatically underestimates 

their cost. The Regulatory Impact Analysis also relies on a questionable reading 

of academic studies to assert across-the-board gains on more than a trillion 

dollars of assets, resulting in enormous purported benefits. At the same time, it

dismisses outright the evidence of benefits that investors receive from BDs and

Registered Investment Advisers (RIAs) that justify the costs of these services, 

along with the clear evidence that this new rule will result in less access to 

advisory services for small and medium-sized investors. 

The outline of the report is as follows: Section II reviews the Department’s 

cost estimates and presents the results of our original work to estimate the 

expected expense to businesses. Section III points out the Department’s 

questionable assumptions about the rule’s likely benefits for investors, and

1 http://www.dol.gov/ebsa/regs/conflictsofinterest.html.

2 See Section I A below for a description of independent broker-dealers.
4

discusses additional costs to investors that the Department either missed or 

ignored. Section IV discusses the impact of the rule on the industry, including 

the likelihood of significant consolidation as a result of resulting compliance

burdens. Finally, Section V discusses likely effects on investors, especially those

with relatively small assets who will find it increasingly difficult or impossible to

obtain investment advising at an affordable price.

A.BACKGROUND ON INDEPENDENT BROKER DEALERS

Independent Broker Dealer (IBD) firms operate a distinct business model that

aims to help investors by providing comprehensive and affordable financial

services. The IBD financial advisors are self-employed business owners

(classified for tax purposes as independent contractors) and often serve

a distinct geographic region where they have community ties and a local 

reputation. The IBD business model is designed to serve the financial needs of

Middle America. IBD firms service all types of investors, ranging from accounts

in the thousands of dollars to those in the millions. This gives the IBDs the 

ability to cater financial advice to individual needs and offer a wide range of

investment products. They primarily engage in the sale of packaged products, 

such as mutual funds and variable insurance and annuity products, and provide 

investment advisory services through either affiliated registered investment

adviser firms or such firms owned by their financial advisor.

B.OUR METHODS

This report represents a close reading and critique of the Department’s 

Regulatory Impact Analysis, acknowledging the wealth of comments already 

published on this topic.3 To inform this work, Oxford conducted its own data 

gathering with the help of the Financial Services Institute (FSI),4 the professional 

organization that represents independent financial services firms and

independent financial advisors.5 Specifically, we did the following:

3 It is important to note that this report is an economic analysis of the rule’s likely impacts. 

While we consulted with FSI lawyers and believe that we are not misrepresenting the rule’s 

requirements, this is not a legal analysis. Where we report interpretations of the rule’s likely 

effects—frequently necessary because the Department does not make clear its own intended

meaning—these reflect comments we’ve received from knowledgeable individuals in our

interviews.

4	 This work was conducted under contract with and financially supported by FSI.

5 Formed in 2004, FSI promotes a responsible regulatory environment for more than 100 

independent financial services firm members and their 160,000+ affiliated financial advisors
5

•	 Conducted interviews with nearly three dozen executives from 12 

companies that employ either directly or by contract BDs and RIAs who 

would be impacted by the proposed rules. The companies were typically 

independent BD firms, and the individuals interviewed were all senior

executives within these organizations.

•	 Followed up with a group of six of these firms to obtain detailed cost

estimates based on their expectations about the impact of the proposed 

rule. The cost categories were developed collaboratively during the 

interview process, 

•	 Interviewed executives from clearing firms regularly used by independent

broker dealers and financial advisors to get information about pass-along

costs connected to technology and disclosure upgrades that would be 

required under the new rule. 

•	 Analyzed possible responses to and expense predictions related to the 

proposed rule using an online survey of FSI members.

•	 Reviewed the Department’s Regulatory Impact Analysis in detail, as well 

as other researchers’ existing work on this topic.

Our interviews revealed that even very experienced securities lawyers are 

uncertain what the requirements of the proposed rules will mean in practice, 

and therefore have trouble estimating their likely costs. In having unanswered 

questions about the Department’s proposed rule, however, our interviewees are 

not alone: according to a Sutherland report,6 the Department of Labor itself has 

solicited responses to 170 questions related to its own proposed rule.

C.BACKGROUND ON THE NEW RULES

The major effect of the proposed rules would be to impose a fiduciary duty on

those in the financial industry servicing retirement accounts, including BDs,

RIAs, and plan sponsors.7 Generally, plan sponsors and RIAs already have a 

fiduciary duty to plan participants and beneficiaries, although with somewhat

different specific requirements and under different regulatory structures.

Importantly, adhering to the Securities and Exchange Commission (SEC)’s 

who provide affordable, objective advice to Main Street Americans. For more information, visit

financialservices.org.

6	 Sutherland (2015). “Legal Alert: DOL Has Many Questions About its Fiduciary

Reproposal.” http://www.sutherland.com/NewsCommentary/Legal-Alerts/174358/

Legal-Alert-DOL-Has-Many-Questions-About-its-Fiduciary-Reproposal

7 For example, sponsors of employer based plans like 401(k)s.
6

current fiduciary standards for RIAs does not in itself insure compliance with

the Department’s proposed standard. Nevertheless, the Department estimates 

that the firm costs imposed by the proposed rules on RIAs and plan sponsors

will be only $1,000-$10,000 per year, even for large firms. However, the

Department’s own calculations admit that the burden on BDs will be much 

larger.8

Under the Department’s proposed standard, any transaction in which a financial

advisor, or his or her firm, has a conflict of interest (i.e., would receive more

compensation if the investor were to make the transaction) would be labeled 

a Prohibited Transaction (PT). In order to go forward with such a transaction, 

an advisor would require a Prohibited Transaction Exemption (PTE), the most 

significant of which under the proposed rules is the Best Interest Contract

Exemption (BICE). Essentially, this would require the advisor and the client to 

enter into a contract where the advisor promises to act in the undefined “best

interest” of the client (including vague provisions like not receiving “excessive” 

compensation). Importantly, these contracts would be enforceable through state 

contract law courts,9 opening the door to unforeseeable litigation costs. 

Making use of the BICE would also impose myriad other duties on firms,

including recordkeeping and reporting requirements and forecasting investors’ 

cost burden over the following decade. In its Regulatory Impact Analysis, 

the Department never explains precisely what firms would have to do to

comply with the rule. This, coupled with the Department’s creation of a new 

enforcement mechanism through the state courts has generated a great deal of 

concern.

In essence, the proposed rule seems to envision two paths for firms: they can

either shift their business practices entirely to avoid any material conflicts, or

bear the heavy costs of implementing BICE contracts. As a start, avoiding 

Prohibited Transactions would seem to require those firms currently operating

(any part of their retirement business) under a commission structure, in which 

customers pay per transaction performed, to shift entirely to a fee-based 

compensation system, in which customers pay a fixed amount based on their

assets under management. It is not clear that this shift is truly in the interest of 

small investors.10

Moreover, even if all commission-based transactions were eliminated other firmlevel conflicts would remain because of the prevalence of payments received

8 See section II A below.

9	 The regulations specifically allow for arbitration to settle individual cases, but class action cases

would be able to go forward in court. See Section II B below.

10 See Section V A below.
7

by BDs from vendors and other product providers. Eliminating these payments 

would substantially reduce the ability of BDs to fund the supervisory, training, 

and compliance functions needed to maintain integrity in the market. Ultimately 

this would either restrict asset choice or raise costs to retirement account 

investors as firms trim their catalogs to ease compliance burdens. Many firms,

especially in the independent market we interviewed, have unavoidable conflicts

relating to certain classes of assets that they sell directly from originators, 

especially insurance and annuity products. In many cases, these products are a 

core differentiator of a BD firm from its competitors, and reflect a core piece of

the BD’s business, that can also involve managing clients’ other retirement, and 

possibly non-retirement, savings. These assets are sold today by different firms

both under suitability and under existing fiduciary standards. However, they

appear to be fundamentally incompatible with the Department’s proposed new 

fiduciary standard, and under that regime, their sale would require a BICE.

At the same time, the Department does not allow BICE to be applied at all to 

trades involving important classes of (generally less liquid) assets commonly 

held in retirement accounts today.11 Some of these assets are fundamentally 

conflicted in the manner discussed above (and also, owing to their specialized

nature, generally cannot be purchased without the assistance of a financial

advisor), and likely would be excluded from retirement accounts altogether 

under the proposed rules. 

All this leads to a situation where some individual investors will likely be forced 

to have both BICE-based and fiduciary (Prohibited Transaction avoiding)

retirement accounts, as well as perhaps non-retirement accounts with the same 

advisor.12 This has the potential to create great confusion over when an advisor 

is acting as a fiduciary and when he or she is acting in a client’s best interest,

and over how an advisor should take into consideration information from the 

client’s other account(s) when operating under a BICE. Again, the uncertainty is 

compounded by the Department’s lack of clear definitions and interpretations

and outsourcing of enforcement to contract law court.

A main recurring theme of this review is that the Department does not appear 

to have clearly described what specifically it is asking BD and RIA firms to

do. Even in its estimates of the costs of the proposed regulations, it does not 

specify what firms will need to do to comply. We review these cost estimates in

the next section.

11 Including, for example, non-traded Real Estate Investment Trusts, or REITs, and non-traded 

Business Development Companies, or BDCs.

12 See Deloitte, 2015, “Report on the Anticipated Operational Impacts to Broker-Dealers of 

the Department of Labor’s Proposed Conflicts of Interest Rules” for more discussion of the

difficulties and confusion likely to arise from having multiple client accounts.
8

II. COST CALCULATIONS

In this section, we first review the Department’s estimates of the costs of the

new rule, which are mostly contained in chapter 5 of the Regulatory Impact 

Analysis. Overall, we find the Department’s estimates to be vastly understated,

especially for smaller firms, and we question the assertion that costs for RIAs

will be trivial. Following this, we present our own cost estimates based on 

detailed interviews and a cost survey with independent BDs which would be 

affected. Most of these costs imposed by the new rule will be passed on to

investors in the form of higher fees for services.

A.DOL’S COST ESTIMATES 

The Department’s Regulatory Impact Analysis considers a number of categories 

of compliance costs, including those for three principal groups of affected

entities: BDs, RIAs, and plan sponsors. Costs for other entities, including call 

centers and asset providers, are also discussed but are generally asserted to 

be minimal and are not quantified.

In the case of RIAs and plan sponsors, the Department asserts the costs of the 

proposed rule would be trivial: $5,000-$49,000 in startup costs and $1,000-

$10,000 in on-going costs. Since the focus of our work was entirely on BD 

firms, we do not have data to directly dispute these numbers, however we note

that the BDs we spoke with are also dual registrants, i.e., they also employ 

Investment Adviser Representatives (“IARs”)13 working under existing fiduciary

standards. As a result, our interviewees generally believed and were very 

concerned that the investment adviser parts of their businesses would require 

significant attention and resources to ensure compliance as well.

With regard to BDs, we do not generally challenge the Department’s estimates 

of the number of affected entities, specifically that there are roughly 4,410

13 For the purposes of this discussion, we employ standard industry terminology. A Registered 

Investment Adviser (RIA) refers to a firm or company providing investment advice to consumers.

An Investment Adviser Representative (IAR) is a person who works at such a firm or company

and provides advice and aids in account set up and transactions for consumers.
9

BD firms, of which only 59% of the small and medium ones do business with

retirement accounts. We do not have any reason to doubt these universe 

numbers, though we note that it would be preferable to have more reliable data 

on which to base the estimates. 

1. DOL COST CATEGORIES

The Department identifies four areas of compliance costs that affected BDs

would incur. These are:

•	 Firm costs

•	 Errors & omissions insurance

•	 Switching/Training cost

•	 Additional PTE/Exemption Costs

We consider each in turn.

a. Firm Costs

Firm costs represent the bulk (70%) of the Department’s total 10-year expense

estimates (in what we consider the Department’s most plausible cost estimate, 

Scenario A with 3% discounting). However, the Department never defines

precisely what it considers firm costs to entail or include. Nor does it explain

in a straightforward way what it envisions the key compliance burdens for 

firms will be. Instead, the Department quotes from industry comment letters

about different proposed rulemakings, especially from a Securities Industry and

Financial Markets Association (SIFMA) letter about a proposed SEC rule.14 The 

Department declares that “while there will be substantive differences between

the Department’s new proposal and exemptions” and the SEC’s proposed rule, 

“there are also some similarities between the cost components in the SIFMA 

survey and cost that will be incurred by BDs to comply with the Department’s 

new proposal.”15

According to the Regulatory Impact Analysis, the SIFMA letter on which the 

Department’s cost calculations are based considered two categories of costs:

•	 “The cost of developing and maintaining a disclosure form and customer 

relationship guide” including “any (i) outside legal counsel costs, (ii) 

outside compliance consultant costs, (iii) other out-of-pocket costs, and 

14 http://www.sifma.org/issues/item.aspx?id=8589944317 

15	 Ibid., p. 161
10

(iv) employee and staff-related costs.” SIFMA members estimated this to

have a startup cost of $2.8 million, and an on-going cost of $631,000.

And,

•	 “The costs required for BD firms to develop and implement a new,

comprehensive compliance and supervisory system.” This includes “(i) 

information technology suppliers and vendors; (ii) information technology 

systems; (ii) communications, marketing, business review and risk 

review; (iv) training materials; (v) reviewing and updating all existing 

client contracts and client disclosures; (vi) reviewing and updating of 

sales surveillance tools; (vii) publishing and distributing revised policies 

and procedures; (viii) reviewing...impacted marketing materials; and (ix) 

updating exam test modules.”16 SIFMA members estimated this to have 

a startup cost of $5 million and an on-going cost of $2 million.

Given these inputs, the Department’s “Scenario A” estimates the startup costs 

for large BDs (those with more than $1 billion of capital) at $5 million, and 

on-going costs at $2 million. The Regulatory Impact Analysis states that “the 

Department has also added some additional costs for items that do not appear 

to have been included,”17 but in fact it appears to have left out roughly a third of 

the costs SIFMA reported.18

Next, the Department, asserting that the SIFMA data applies only to the large 

BD firms (although this is not how SIFMA presented its estimates), extrapolates

from this the costs to medium and small BD firms. Specifically, it assumes costs

for medium firms will be 13.3% of the costs to large firms, and for small firms,

4.8%. This is based on questionable extrapolations from an Investment Adviser

Association (IAA) survey.19

The Department believes however that “there is a reason to be concerned 

that the SIFMA submission significantly overestimates the costs of the new

proposal,”20 and marshals alternate estimates from an IAA comment letter to 

create a “Scenario B” estimate in which firm costs are only 21.81% as high.

Under this scenario, small BD firms will incur startup expenses of only $53,000,

with on-going costs of $21,000. The Department describes scenario A as an 

“over-estimate” and says that “scenario B is a more reasonable estimate, but 

probably also overstates costs.”21

16	 Ibid., p. 161

17	 Ibid., p. 164

18 The Department also references a Charles Schwab comment letter on Financial Industry 

Regulatory Authority (FINRA) Rule 2111, which estimated compliance costs of $5.5 million.

19	 This is based on ratios for different size categories of RIAs.

20	 SIFMA, op. cit., p. 162

21	 Ibid., p. 164
11

b. Insurance Costs

The Department estimates that insurance premiums will rise approximately 

10%, or $300 a year, for 290,00022 BD representatives, and some plan service 

providers. However, only half of these expenses are asserted represent true 

economic costs of the rule. The rest, according to the Department, is simply 

a transfer from BDs to wronged investors who receive insurance payouts. In 

general, we believe that these insurance costs miss the key point: the increased 

costs from litigation and litigation risk created by this new rule, which we 

discuss below. In general, these litigation costs loom far larger than the $150 

per BD representative the Department estimates. Moreover, it appears overly 

simplistic that insurance will address all the compliance and litigation risks 

associated with this complex rule. Many errors and omissions policies have 

exclusions for claims under ERISA. One would more reasonably expect that 

if complex rulemaking which invites class-action lawsuits were implemented, 

then insurance carriers will respond with a combination of higher premiums and 

coverage carve outs. 

22	 This represents 82% of those now providing services to Individual Retirement Account holders,

according to the Department. Some of the BDs that are dual-registered as RIAs already have 

insurance that covers them as fiduciaries, and it is assumed that their insurance premiums will

not be affected by the new rules.

Chart 1. Summary of DOL Cost Estimates

$5,500

$5,000

$4,500

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0

Costs in thousands

Scenario A

Start-Up Costs

Scenario A

On-Going Costs

Scenario B

Start-Up Costs

Scenario B

On-Going Costs

Large BD Medium BD Small BD
12

c. Switching/Training Costs

The Department estimates that the burdens of the new rules will lead 11,000 

Registered Representatives to transition to IAR status in the first five years, and

5,500 to transition in each subsequent year. The Department estimates that the 

costs for each switch will be approximately $5,600.

d. Additional PTE/Exemption Costs

The Department estimates costs associated with the various paperwork 

requirements of the new and updated exemptions. Of greatest interest here is 

the cost of the BICE. The Department estimates that the BICE will require 86

million disclosures to be distributed in the first year, and 66.4 million annually

in subsequent years. It is unclear where these numbers come from. The 

Department estimates that the costs associated with these disclosures will be 

approximately $77.4 million in the first year and $29.2 million in subsequent

years.

These numbers appear to be calculated on a per document basis (or perhaps 

by sheet of paper), but many of the costs involved are really incurred on a 

per firm basis. Using the Department’s ratio that costs for medium size firms

are 13.3% of those incurred by large firms, and small firm costs are 4.8% of

large firms, and its estimate of the number of impacted BDs, the implied costs

of BICE contracts per firm are shown in the table below. To say the least,

these costs seem low, with small BDs assumed to incur less than $8,000 a 

year for “producing and distributing the disclosures and complying with the 

recordkeeping conditions of the PTE, including staff time to create the original

disclosure templates and update IT systems.” In some instances, data purchase 

requirements alone would be substantially higher than the total recurring cost 

estimate put forth by the DOL.

Table 1. DOL Cost Estimates of BICE Contracts*

Size definition One-time Recurring

Large BDs Over $1 billion in capital $436,447 $164,655

Medium BDs $50 million to $1 billion in capital $58,047 $21,899

Small BDs Up to $50 million in capital $20,949 $7,903

* DOL estimates of costs to BDs for implementing BICE contracts using DOL ratios of number 

of affected BDs and cost ratios between small, medium, and large firms. According to the

Regulatory Impact Analysis, this includes producing and distributing the disclosures, complying 

with recordkeeping requirements, including staff time to create the templates and update IT

systems.
13

2. GENERAL COMMENTS

The Department’s cost estimates are unreliable even on their own terms. The 

estimates are based at their core on a SIFMA comment letter for a different

proposed rule, but also simply ignore one-third of the costs SIFMA estimates. 

Then, on a very thin basis, the Department declares that these costs apply only 

to the largest firms and assert that costs for smaller firms will be only a tiny

fraction of this amount. Despite this, the Department goes on to say that this 

is likely an overestimate owing to strategic reporting by SIFMA, and proceeds 

to reduce this total by 78% for a “Scenario B” estimate, again with little

quantitative basis. Additional costs for insurance, training, and implementing the 

PTEs are presented as an afterthought and are themselves unreasonably low. 

Estimated costs for all other affected entities, including RIAs and plan sponsors,

are assumed to be minimal with little supporting evidence.

3. DISCOUNTING: A TECHNICAL POINT

In general, the costs and benefits of the proposed rule should be discounted

at the same rate, although conducting sensitivity checks using more than one 

rate, each applied uniformly to both costs and benefits, is also desirable.23 The 

Department discounts the benefits to investors at a nominal rate of 5.6%.24

By contrast, the Department’s cost estimates appear to be discounted in 

real terms, as the projected costs do not rise over time with inflation, and are

performed using 3% and 7% discount rates.25 The version with 3% discounting

23	 The principle that costs and benefits be discounted at the same rate is fundamental to cost

benefit analysis; otherwise, it would be easy to justify a policy with greater costs than benefits

in each year simply by discounting costs more than benefits. Put another way: what is actually

being discounted is the net impact (benefit minus cost) in each year. A higher discount rate will

tend to favor proposals whose benefits are realized upfront and costs realized later and vice

versa for a lower discount rate.

24	 See also Section III A below on the inclusion of compound interest in the Department’s benefits

calculations. Note that the “benefits” are actually “gains to investors,” not pure social economic

benefits—see section III D below.

25	 The Office of Management and Budget sets rules for discounting in agency economic impact

Table 2. Comparison of DOL Scenario A and Scenario B Cost Estimates. 

(Dollar values in thousands.)

Firm Size and Type

SCENARIO A

SCENARIO B

(21.81% of A)

Start-Up 

Costs

On-Going 

Costs

Start-Up 

Costs

On-Going 

Costs

Large BD $ 5,000 $ 2,000 $ 1,091 $ 436

Medium BD $ 663 $ 265 $ 145 $ 58 

Small BD $ 242 $ 97 $ 53 $ 21 
14

is consistent with the discount rate used in the benefits section and an average

2.6% projected inflation rate, and we focus on this estimate in the remainder of

this paper. The version with 7% discounting, however, is inconsistent with the

discounting in the benefits section. Perhaps unsurprisingly, the Department’s

preferred cost estimate uses 7% discounting.26

B. OUR COST ESTIMATES 

Oxford conducted twelve interviews with FSI member firms to assess the

likely business impacts and consequent costs27 attached to the proposed 

rules. We also reviewed evidence that other researchers have gathered on 

this topic,28 and information provided by a broader group of IBDs in an online 

survey. Following these interviews, we also conducted a detailed survey by 

email with seven firms who were willing to attempt to break startup costs into

detailed categories. Of these seven BD firms, three were in the Department’s

large category (capital in excess of $1 billion), three were in the small category 

(capital less than $50 million), and one was medium sized with capital falling 

somewhere in between. 

Oxford’s interviews and cost analysis focused on first-year startup costs

because these were more easily identifiable at this early stage. However, that

does not mean that the recurring compliance costs will not be high as well. 

For example, it is very expensive to build the system architecture necessary 

to process the data feeds from third-party sources needed to aggregate 

required compliance data (a startup cost). But each year thereafter compliance 

data will still need to be purchased (recurring costs). Similarly, Oxford’s costs 

estimates do not include the substantial business disruption costs that are 

also anticipated. As shall be described later, these costs will probably be 

so significant that industry consolidation will likely result. One unintended

consequence might be that this will give the remaining firms greater pricing

power, resulting in higher costs for investors.

analyses. See https://www.whitehouse.gov/sites/default/files/omb/assets/a94/a094.pdf and 

https://www.whitehouse.gov/sites/default/files/omb/inforeg/regpol/circular-a-4_regulatoryimpact-analysis-a-primer.pdf. It specifically sets out these 3% and 7% real discount rate

scenarios, but they are to be applied to both costs and benefits.

26 DOL, op. cit., p. 178

27	 These are our best estimates but are subject to significant uncertainty related at least in part to

the use of poorly defined terms in the DOL proposed rule.

28 Notably Deloitte (2015) “Report on the Anticipated Operational Impacts to Broker-Dealers of the 

Department of Labor’s Proposed Conflicts of Interest Rule Package” which report considered

the BD industry as a whole, not just Independent BDs.
15

1. CATEGORIES OF COSTS RELATED TO THE PROPOSED RULE’S 

REQUIREMENTS

In order to gain a better understanding of the costs of the proposed rule, 

we held numerous discussions with experts from independent BD firms.

We assembled the following cost categories that the proposed regulation 

will impose on BD firms: Data collection; modeling future costs and returns;

disclosure requirements; record keeping; implementing BICE contracts; training 

and licensing; supervisory, compliance, and legal oversight; litigation. We believe 

this list is more comprehensive and provides greater accuracy for estimating 

costs compared to DOL’s cost categories.

The remainder of this section will tackle these in turn, and provide estimates of 

the likely dollar costs related to each.

a. Data collection

The new rule will require firms to obtain and disclose copious amounts of

compensation and performance data that they do not currently possess and 

in some critical areas does not exist in a form required by the Department’s 

proposal. Some of the data will be available within the firms themselves;

however gathering it will require the creation of new data systems and controls 

to ensure accuracy. Some of the data will need to be purchased from third 

party vendors. Importantly, for almost every firm we spoke with, it would be

necessary to both purchase some data from third party vendors, as well as to 

generate new data internally, and then to marry these data together.

The average estimated cost of setting up new 

system interfaces to accept data feeds is 

$570,000, with a median cost of $250,000. 

Table 3. Comparison of OE and DOL Estimated Cost Categories

OE DOL

1. Data collection 1. Firm Costs

2. Modeling future costs and returns 2. Errors & omissions insurance

3. Disclosure requirements 3. Switching/ training cost

4. Record keeping 4. Additional PTE/ exemption costs

5. Implementing BICE contracts

6. Training and licensing

7. Supervisory, compliance, and legal oversight

8. Litigation
16

b. Modeling future returns and costs

The proposed rule requires firms to estimate costs to the investor associated

with holding an asset for a ten-year period. Developing the logic for these 

estimates and building systems to create them is a substantial burden on firms.

Our survey did not separately estimate this cost category. It is generally contrary 

to industry standards to make projections for asset classes, and many of those 

who have commented on the proposed rule believe that it is in conflict with

existing Financial Industry Regulatory Authority (FINRA) stipulations,29 which 

would need to be amended. Notwithstanding the regulatory inconsistency 

that would result if the DOL’s proposed rule were imposed, the cost to firms

of obtaining and disseminating historic expense and future performance 

projections is substantial and cannot be accurately projected at this point. Much 

of this data would need to be purchased from independent research firms that

provide historic and comprehensive data on the many thousands of products 

available to investors; and then system interfaces would need to be created 

to provide this information at the required account level. These would require 

significant information technology investments.

c. Disclosure requirements

The new rules require firms to make extensive disclosures to investors of

material conflicts of interest including sales loads, redemption fees, exchange

29 See FINRA Rule 2210(d)(1)(f).

DISCLOSURES OF “COSTS” FOR NON-MARKET TRADED ASSETS. 

According to those we interviewed, the proposed rule as written seems to 

be related primarily to mutual fund products, and it is not always clear how 

the rules would be applied to other asset classes. For example, it is not clear 

what the 10-year cost disclosure would be for annuity products. Moreover, 

some annuity products, such as variable rate annuities, are essentially a 

portfolio of investment products; each one potentially subject to disclosure 

requirements. Clearly these products have costs associated with them, and 

their creators and distributors are compensated for the value they provide. 

However, unlike mutual funds where specific fees are charged on a regular

basis as a share of the value of the investment, the income stream from 

an annuity is fixed, and its on-going “cost” to the investor is only really

measureable against an alternative investment. This is one more example of the 

confusion and uncertainty associated with the proposed rules.
17

fees, account fees, management fees, distribution fees, operating expenses, 

and other expenses. Currently, this information is already being provided to 

investors in the form of a prospectus. Instead, the DOL is requiring firms to

maintain a public webpage that makes aggregate fee data available. 

The average and median estimated cost 

of disclosure requirements in our survey is 

$870,000.

d. Record Keeping

The new rules require firms to keep records of the above information for six

years and make it available on request. Based on the company interviews that 

were conducted, none of the respondents indicated that they currently track, 

record, and report historic data of this type. Hence entirely new infrastructure 

would need to be created.

The average estimated startup cost of the 

recordkeeping requirements is $200,000, and 

the median cost $150,000. 

e. Implementing BICE Contracts

The cost of implementing BICE contracts is potentially enormous. Some of 

this is the simple cost of designing the new contracts, but the more significant

expenses are the amount of time related to creating them and the operational 

DISCLOSURE ISSUES. Firms expressed deep concern about the proposed 

rule’s requirements to disclose extensive compensation data on public 

websites. Given disruptions already expected in the industry as a result of the 

rule, interviewees feared that competitors would actively mine disclosed data in 

order to determine compensation structures and poach talent. Similar concerns 

were expressed over now-proprietary information involving payments received 

from vendors. Both kinds of disclosures will contribute to the consolidation 

in the industry that the rules are already expected to drive, with many small 

firms forced out of business by high compliance costs and the decreased

ability to serve small accounts (see Section V below). In addition, much of the 

information mandated by the DOL under the proposed rule does not currently 

exist in the aggregate and existing information technology infrastructure will 

need to be substantially modified at the firm level in order to comply with

reporting requirements.
18

challenges that these contracts will likely impose. For example, relationships 

between potential investors and financial advisors take time to develop and the

imposition of complex contracts prior to executing even a single transaction 

would severely disrupt existing business development practices. All of these 

soft and hard costs need to be quantified.

The Department seems to view the contracts as a mere nuisance, whose cost 

can be quantified based on the number of pages that need to be printed.30 It 

specifically states “the cost estimates do not include time or disruption costs

for the situation where phone interactions between advisors and investors are 

interrupted (or switched entirely to e-mail, print, or in-person) in order for the 

investor to first sign the contract.”31 In the case of new clients,32 this is because 

“these situations already arise in the current environment. New clients call up 

brokers and paperwork and agreements have to be filled out and signed before

the broker will conduct the transactions.”33

It is unclear how the Department believes this rule will result in large increases 

in investor returns if BICE contracts are just one more piece of paper that has 

to be signed. Our interviewees strongly believe that the new contracts would 

require significant time on the part of representatives, with more than nominal

associated costs. There was also concern about having to sign contracts 

before even beginning a discussion, which was thought not to be conducive to 

long-term trust. 

Perhaps emphasizing the uncertainties involved in this topic, there was 

considerable variability in expected costs in implementing a BICE contract. 

Part of the variation in BICE contract cost estimates was related to the differing

ways each firm used to classify disclosure costs. In some instances almost

all disclosure costs were attributed to the public disclosure web site. In other 

instances, disclosure costs were allocated to both the public disclosure web 

site and the BICE contract.

Our survey estimates an average cost of $4.5 

million for implementing a BICE and a median 

cost of $400,000.

30 DOL, op. cit., Sections 5.7 and 5.5.4 of the Regulatory Impact Analysis.

31	 Ibid., p. 176

32	 For existing clients, “during the transition period...firms should be able to plan ahead and put

updated contracts in place for their current clients.”

33	 Ibid., p. 176
19

f. Training and licensing

In its analysis, the Department included training and licensing costs for 

registered representatives to transition to IAR status. While this is an important 

component of training costs, in reality the new rules will impose considerably 

larger costs as staff throughout the organization need to be trained as to how

the new regulations would affect their work.

Not surprisingly, this is an area with considerable variability between firms, with

the smaller firms generally reporting lower training costs.

Our survey estimates an average training cost 

of $800,000 per firm, and a median cost of 

$580,000.

g. Supervisory, compliance, and legal oversight

The new rule will undoubtedly require significant oversight to ensure

compliance, especially with the risk of litigation discussed below. Systems 

will need to be developed, and lawyers and other compliance officers hired or

retrained. 

Our survey estimates an average cost for this 

category of $210,000, and a median cost of 

$138,000.

h. Litigation

Perhaps the greatest concern of BDs we spoke to—likely because it is the area

with the greatest inherent uncertainties—is the potential costs of litigation. While

the proposed rule allows for arbitration of individual disputes, it also exposes 

firms to potential class-action liability.

Our interviewees gave countless examples of potential and often trivial litigation 

GRANDFATHERING ISSUES. There is significant concern over how existing

accounts will be “repapered” with BICE contracts in the final rules. On the one

hand, contacting every existing customer, including possibly those with small 

accounts opened years previously, is potentially extremely cumbersome and 

expensive. On the other hand, allowing existing accounts to continue without 

BICE contracts until the next active trade or consultation creates a perverse 

incentive not to contact existing clients. 
20

that the rule seems to invite. For example, imagine that Firm A purchases data 

regarding mutual fund experience from a well-regarded independent source. 

The data is received on the first day of the month. At the end of the first

week of the month, disclosure reports are mailed to Firm A’s clients but those 

notices did not reflect the most current information received about mutual fund

performance because of an overlap in the processing of the data received on 

the first day of the month and the mailing of disclosure notices at the end of

the week. Is the firm now liable for any damages that might be connected to

the dated information? As a second example, what is meant by a “reasonable” 

rate of compensation as required by the BICE? During the interviews that 

we conducted, companies expressed concern regarding a wide number of 

such questions and expressed profound concern about the potential litigation 

(particularly nuisance class action lawsuits) that may result.

Importantly, from an economic perspective, the full cost of all this may be far 

larger than the ultimate amount spent on litigation—although that could end up

being quite large as well. The cost of the uncertainty caused by the proposed 

rule could be far greater, as firms waste resources and forgo opportunities

because of the risk of litigation. For example, firms may give up on product lines

or exit the retirement savings market altogether.

The Department assumes that Error and Omission insurance costs for some BD 

representatives will increase by 10%. This appears to be a wild underestimation

of the potential costs of litigation, and the uncertainty it fosters as a result of the 

proposed rule. 

Because of the extreme uncertainties surrounding litigation risk, we did not 

attempt to quantify it in our survey, and our total start-up cost estimates 

(presented below) exclude this potentially most significant cost category.

2. COST SUMMARY

In total, we estimate the proposed rule will result in startup costs 

ranging from $1.1 million to $16.3 million per firm, depending on firm 

size. This is based on firm survey results that ranged from $930,000 to 

$28 million. The largest firms can expect the highest costs. Table 4 below 

presents the average startup costs by firm size, along with the DOL estimates

for comparison. It is important to note that smaller firms often assume (perhaps

naively) that some of the large technology platform providers on whom they 

depend will be the ones to “figure out” all of these compliances costs and

simply pass those costs along to the BDs as a higher per transaction fee 

amount. Note that in our discussions with some of the technology platform 

providers, it was not at all clear that the transition would work in this fashion.

“We estimate total 

start-up costs will be 

nearly $3.9 billion 

dollars, nearly 20 

times DOL’s preferred 

estimate.”
21

The cost estimates that we present are based upon a detailed examination by 

several independent BDs of the likely expenses that they would incur should 

the proposed rule be implemented. Based upon Oxford’s interviews, it appears 

likely that independent BDs may in fact be underestimating their first year

startup costs. As independents, these firms are likely to rely on third-party

technology platforms to clear and settle accounts. Rightly or wrongly, the 

expectation of many of those interviewed was that large portions of year one 

startup costs will be borne by these technology platform service providers and 

passed along as higher transaction costs. Hence if this view proves correct, 

then what other BDs might consider an upfront start-up cost, an independent 

BD might consider as an expected increase in recurring costs.34

34 Compare our estimates, for example, to Deloitte (2015) “Report on the Anticipated Operational 

Impacts to Broker-Dealers of the Department of Labor’s Proposed Conflicts of Interest Rule

Package.” On pp. 23-24 of that report, they estimate average startup costs for all (not just 

independent) BDs at $38.1 million for large, and $5-$23.1 million for medium BDs, 2.3 and 1.5 

times our estimates respectively. Their estimates involved a larger sample of interviewees (18 

firms in total), and made estimates for on-going costs as well.

Table 4. All-In Startup Costs for Firms

DOL 

# of 

firms

Our Estimates DOL high estimates DOL preferred estimate

Per firm Total Ratio Per firm Total Ratio Per firm Total Ratio

Large 42 $16,266,000 $683,172,000 1.0 $5,000,000 $210,000,000 3.3 $1,091,000 $45,822,000 14.9

Medium 137 $3,350,000 $458,950,000 1.0 $663,000 $90,831,000 5.1 $145,000 $19,865,000 23.1

Small 2,440 $1,118,000 $2,727,920,000 1.0 $242,000 $590,480,000 4.6 $53,000 $129,320,000 21.1

$3,870,042,000 1.0 $891,311,000 4.3 $195,007,000 19.8

Chart 2. All-In Startup Costs for Broker-Dealer Firms

$18

$16

$14

$12

$10

$8

$6

$4

$2

$0

$4,500

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0

Firm costs in millions

Total cost in millions

OE per firm DOL per firm OE Total DOL Total

Large Medium Small Total
22

It is important to note that many critical business disruption costs—some of

which reflect the true economic costs of the rules and others which likely would

not—were also identified but not quantified. These could include: disruptions

to sales models; shifting clients from commission to fee-based accounts; 

opportunity cost of selling fewer, more commoditized products; reductions in 

payments from third-party vendors, among others. All of these impose costs 

and disruption to businesses as well. 

It should also be noted that the Department cost estimates to which these 

numbers are most compared are what the Department calls “firm costs.” The

Department’s firm costs specifically exclude E&O insurance costs, switching/

training costs, and costs of implementing the exemptions. As we discuss 

above, our cost estimates exclude potential litigation costs, which we expect to 

be far in excess of the Department’s E&O insurance cost estimates. Moreover, 

firm costs represent roughly 80% of the Department’s total cost estimates, and

a larger share of start-up costs. 

We do not wish to over-emphasize the precise figures presented here. First, as

we’ve noted throughout, there is a great deal of uncertainty among respondents 

both about what the practical substantive requirements of the new rules will be, 

and what the costs of these will be. Second, our sample size is small and only 

consists of independent BDs (although as we noted above, there are reasons to 

believe startup costs for independent BDs will be low relative to others). Thus, 

it’s possible these estimates are too high; it’s also possible they are too low.

A significant point to take from this exercise is that our estimates exceed the

Department totals by significantly larger margins for small and medium firms—

specifically, 4.6-5.1 times as high—as for large firms—3.3 times as high. This

should come as no surprise because, as discussed above, the Department’s 

basis for estimating costs for small and medium firms as a share of large firm

costs is particularly thin, being based on a single comment letter for a different

proposed rule. Where the Department estimates that medium firms’ costs will

be only 13.3%, and small firms only 4.8% of large firms’ costs, our estimates

are 20.6% and 6.9% respectively (see Table 5).

Table 5. Comparison of Department and OE ratios of startup costs by 

size category of BD 

OE estimate DOL estimate

Large 100.0% 100.0%

Medium 20.6% 13.3%

Small 6.9% 4.8%
23

In general, while this is only a limited cost comparison, we find that total costs

are several multiples—roughly 4.3 times—higher than what the Department

estimates in its most expensive scenario (scenario A), and almost 20 times 

higher than the Department’s preferred figure (in scenario B). Applying these

ratios to the Department’s total 10-year cost figures of $5.6 billion under

scenario A would yield a total 10-year cost of $24 billion. 
24

III. BENEFITS 

CALCULATIONS

The Department calculates “gains to investors” of the new rule in Section 3.3 of 

the Regulatory Impact Analysis. It focuses entirely on front-end loaded mutual 

funds where it believes the evidence for gains from eliminating conflicted advice

is most developed.

Below, we first review the assumptions behind the Department’s alleged gains,

and discuss critiques of the underlying basis in academic research. Next, we 

discuss some of the value provided by financial advisors that the Department

disregards. Following this, we discuss some of the aggregate costs to investors 

of the proposed rules in other asset classes besides the front-end loaded 

mutual funds the Department focuses on. Finally, we discuss the distinction 

between gains to investors and true economic benefits, and the potential

sources of the Department’s purported gains.

A.THE DEPARTMENT’S CLAIMED GAINS TO 

INVESTORS

The Department’s calculations regarding gains for investors rely on the huge 

size ($1.5 trillion) of front-end loaded mutual fund holdings. These enormous 

purported benefits, taken at face value, could justify almost any policy

intervention. Specifically, the Department assumes that eliminating conflicts

of interest on retirement accounts will eventually result in approximately 

0.5% higher annual returns on all front-end load mutual funds held in IRAs.

These benefits would ramp up over the first ten years of implementation (as

older funds, supposedly tainted by conflicts of interest, work their way out of

retirement accounts), averaging out to approximately 0.25% higher returns on

the roughly $1.5 trillion (averaged over the next ten years) in front-ended load 

mutual funds. This works out to roughly $4 billion of benefits per year. In total,

the Department asserts $39.8 billion of gains to investors over ten years.35

35 There are technical considerations here about compound interest and discounting. In our view, 

the Department is incorrect to compound the benefits of the rule (without compounding the

costs); however because they discount these returns at a rate roughly equal to the rate of 
25

The 0.5% increased returns on assets is a fundamental assumption of the

Department’s benefits calculation. It is based on several academic studies

that claim to show lower returns to investors receiving conflicted advice

relative to investors who self-direct their accounts or receive nonconflicted

advice. Such studies are inherently difficult to implement, although researchers

have used sophisticated techniques to attempt to control for unobserved 

differences between investors, difficult to observe or measure services of

advisors, and actual risk-adjusted returns to investors rather than returns of 

funds. The specific studies on which the Department relies have been critiqued

extensively elsewhere.36 Suffice it to say that while there is some evidence for

the Department’s central assertion that conflicts of interest can lead to lower

rates of return for investors, the academic consensus is not nearly as absolute 

as the Department portrays it, and the specific 0.5% higher annual return the

Department asserts has a rather thin quantitative basis. Nevertheless, even a 

considerably smaller assumed increased rate of return, when applied to a base 

as large as all of the holdings of mutual funds in US retirement accounts, would 

result in an enormous calculated benefit. (Of course, this assumes no similar

across-the-board costs to investors, a point we challenge below.)

B.VALUING THE BENEFITS THAT ADVISORS PROVIDE 

TO CLIENTS

Numerous others commenting on the proposed rules have discussed the 

benefits that investors, especially inexperienced investors, receive from financial

advisors. These benefits represent both quantifiable hard services, such as

rebalancing portfolios and helping investors avoid mistakes attempting to time 

the market, and softer services, such as encouraging investors to save for 

retirement, and reassuring them when markets inevitably go down. Several 

studies have shown the positive effects of investors working with financial

advisors, including:37 38

return on assets, the effect is minimal.

36	 Notably in NERA (2015) “Review of the White House Report Titled ‘The Effects of Conflicted

Investment Advice on Retirement Savings.” http://www.nera.com/content/dam/nera/

publications/2015/PUB_WH_Report_Conflicted_Advice_Retirement_Savings_0315.pdf. 

See also Litan, Robert and Hal Singer (2015) “Good Intentions Gone Wrong: The Yet-to-be 

Recognized Costs of the Department of Labor’s Proposed Fiduciary Rule.” http://www.dol.

gov/ebsa/pdf/1210-ZA25-00070.pdf. Investment Company Institute (April 7, 2015) Letter to 

Howard Shelanski, Administrator, Office of Information and Regulatory Affairs https://www.ici.

org/pdf/15_ici_omb_data.pdf. 

37	 Kinniry, Francis, et. al., “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha,”

Vanguard Research, March 2014, p. 4, available at http://www.vanguard.com/pdf/ISGQVAA.

pdf. 

38 Merrill Lynch Wealth Management, “Americans’ Perspectives on New Retirement Realities 

and the Longevity Bonus: A 2013 Merrill Lynch Retirement Study,” conducted in partnership 
26

•	 Encouraging investors to save at a higher rate 

•	 Preventing investors from taking withdrawals out of their retirement 

savings

•	 Providing objective advice (instead of emotional reactions) to market 

fluctuations

•	 Creating a disciplined approach to saving by utilizing a regular investing 

plan

•	 Balancing portfolios over time to achieve investment objectives

•	 Helping investors feel more confident about retirement and more

financially knowledgeable

•	 Addressing investors’ myriad, wide-ranging questions, concerns, and 

strategies to help them achieve overall financial healthy

Litan and Singer (2015)39 attempt to quantify the benefits investors receive from

relationships with financial advisors. Citing Vanguard studies, Litan and Singer

find that advisors provide 44.5 basis points of added return from timing and

rebalancing services. Using the same $1.5 trillion of mutual fund assets the 

Department uses to arrive at its large benefits numbers, and assuming that half

of investors (on a dollar-weighted basis) lose access to brokers as a result of 

the rule, Litan and Singer estimate these costs at $3.3 billion per year. They 

also hypothesize that the other half of front-end load mutual fund investors are 

pushed into fee-based accounts, with higher fees amounting to 31 basis points, 

for a cost of $2.3 billion per year. Even accepting the Department’s claimed 25 

basis points of benefits per year, they report a net cost of the proposed rule of

$1.9 billion per year, or about $20 billion of net costs over 10 years, ignoring 

compliance costs. They consider alternate assumptions, leading to net costs of 

the rule of up to $80 billion over 10 years.

Importantly, the Department claims enormous benefits from the new rule based

on the enormous size of the retirement mutual fund market. But the Department 

ignores the benefits investors receive from brokers, which are similarly large

based on the large size of investments.

with Age Wave, January 2013, p. 13, available at http://wealthmanagement.ml.com/publish/

content/application/pdf/GWMOL/2013_Merrill_Lynch_Retirement_Study.pdf.

39 http://www.dol.gov/ebsa/pdf/1210-ZA25-00070.pdf
27

C.COSTS TO INVESTORS IN NON-MUTUAL FUND 

ASSETS

As noted above, investors receive important benefits from advising services.

The reduction in advising that will almost certainly follow adoption of this rule 

will result in significant qualitative and quantitative losses to all retirement

investors, including and especially small investors (see Section V below).

However, by focusing only on mutual funds in its calculations, the Department 

ignores significant costs the proposed rules would impose on investors

interested in other retirement products that would then be considerably harder 

to obtain. For example, the BICE rules specifically exempt entirely from inclusion

in a BICE-covered retirement account certain classes of relatively illiquid assets 

such as non-traded REITs and non-traded BDCs. These asset classes are 

typically held by wealthier, more sophisticated investors and are well-suited 

for retirement accounts because of their illiquidity. The nature of these assets 

makes it difficult to entirely avoid material conflicts and trade on a nonProhibited basis. 

More generally, the added structures of the new rule will likely lead BDs to 

curtail their offerings, leading to less overall choice for most investors. A good

example is the case of variable annuities, which are an important product 

to many investors concerned about retirement planning. These annuities 

are often recommended to investors who wish to diversify portions of their 

retirement savings out of the direct equity market, or supplement dividend and 

Social Security income with an annual cash payout. These products are often 

only available to the public through a BD or RIA. Yet there is considerable 

uncertainty among the financial advising community as to how they will be

able to continue recommending these products to retirement savers under 

the BICE model. Product manufacturers would have to provide substantially 

more disclosure information to allow for compliance. Often there is an explicit 

willingness on the part of the investor to accept a lower return than would 

historically be projected from stocks because they want to remove some 

portion of retirement savings for diversifying’s sake from the equity markets. 

Annuities are a very popular retirement product that is usually sold on a 

commission rather than a fee on assets-under-management basis because it is 

typically bought in a single, one-time transaction. The BICE requirement would 

likely make it much more difficult for retirement advisors to offer and retirement

investors to buy variable annuities, which are widely regarded as an entirely 

appropriate tool to diversify retirement savings, and which give investors access 

to increasingly critical planning features such as guaranteed retirement income 

and/or guaranteed survivor benefits.
28

Moreover, there was considerable concern expressed by firms in our interviews

that product choice would have to be limited in response to the DOL rule. This 

would force more retirement savings into volatile equity markets and less in 

diversified products or products with lower correlations to equities. This has

the potential to increase systemic risk in the retirement savings market as 

savers are increasingly pushed by government regulation into the same set of 

standardized “low-cost” assets.

D.SOURCES OF THE CLAIMED GAINS TO INVESTORS 

AND ECONOMIC BENEFITS 

As discussed above, based on a questionable reading of academic studies, 

and rejecting or ignoring evidence for the benefits provided by advisors, the

Department asserts that conflicts of interest cost investors 0.5% annually on

their mutual fund investments. As the Department notes however, removing 

these conflicts would create purported “gains to investors” that are not all true

social economic benefits of the new rule, but in fact consist of four categories:40

(1) Transfers of surplus to IRA investors from advisors and others in the 

supply chain

(2) Other transfers to retirement investors from improved trading decisions 

relative to counterparties from whom the transfers will come

(3) Reduction in underperformance from suboptimal allocation of capital

(4) Resource savings associated with reduced excessive trading

As the Department notes (although it doesn’t attempt to separately quantify 

these categories), of these, categories (3) and (4) represent true social welfare 

gains, while (1) and (2) represent transfers from one group to another. We 

applaud the Department for this effort to consider the ultimate sources of the

benefits they assert.

A different grouping of these four categories, however, is more informative:

categories (2) and (3) represent pure errors on the part of financial advisors (or

others in the supply chain, e.g. mutual fund manufacturers), giving up gains 

that would otherwise accrue to their clients or that they could capture for 

themselves. There is no obvious reason why conflicted advisors would be more

likely than non-conflicted advisors to give up potential investment gains to the

40	 Includes items from lists on pp. 100 and 176 of the Regulatory Impact Analysis.
29

broader market.41 The Department appears to broadly agree with this logic, 

stating that it expects category (2) to be small.42

Categories (1) and (4), on the other hand, represent economic resources being 

transferred from clients to financial advisors and others in the supply chain.

The distinction between (1) and (4), then, is whether those resources represent 

pure economic rents (1), or whether they represent compensation for economic 

activity undertaken by the advisors with real associated costs. Because the 

Department assumes that advisors provide no service of value to customers, 

they describe any such activity as being essentially wasteful, associated with 

“excessive trading” (4). The Department does not consider a fifth category:

(5) Expense savings to investors associated with reduced benefits from

advising services.

Returning to the Department’s grouping of social benefits versus transfers,

this category of “gains to investors” is not a social benefit. Indeed, the cost

to investors of reduced benefits from advising services might well exceed the

gains, irrespective of other (e.g. compliance) costs of the proposed rule. 

To the extent that the proposed rules generate the “gains to investors” that 

the Department alleges, it is likely that much of these gains are in the form of 

reduced expense for services no longer received.

More generally, the Department is unclear overall where their claimed gains to 

investors are expected to come from, and how much of these represent true 

economic benefits. Again, because the Department is vague about the sources

of these gains, it is difficult to assess whether the requirements of the rule are

necessary (or sufficient) to obtain them.

41	 Indeed, since by assumption conflicted advisors have some ability to capture these gains, we

would expect them to be less likely to do so.

42 See p. 100 of the Regulatory Impact Analysis: “the Department believes that transfers to IRA 

investors in conflicted advice arrangements are likely to come mostly from professional asset

managers and others in the financial industry rather than from other retail investors.” There is no

obvious reason why category (2) would be small and (3) large.
30

VI. EFFECTS ON THE 

INDUSTRY

The Department’s proposed rules seek to eliminate payments from third parties 

that might produce conflicted advice. Many BDs receive sizable payments from

third parties, including various vendors, and these payments create firm-level

conflicts that must be disclosed in the BICE. These fees (which typically flow

to the firm and not the individual advisor) are an important source of firm-level

income. For those BDs that support independent financial advisors (FAs) on

a consolidated platform this revenue provides their training, compliance, and 

technology support. If the DOL rule succeeded in reducing this income stream, 

then FA’s would be charged more to join the consolidated platform (and these 

costs would be passed along to investors). In addition, the compensation of 

each financial advisor would be publicly disclosed. This would allow very large

firms to more easily identify and target specific FAs for recruitment.

Because of the very large infrastructure costs associated with complying with 

these disclosure requirements (both purchasing and disseminating detailed 

account, product cost, and performance histories), smaller firms will likely join

much larger companies (since it will be easier to share these fixed costs). Many

smaller firms hope that the large technology platforms on which they rely to

clear and settle accounts will absorb many of these infrastructure costs. We 

anticipate, based on evidence from the UK, that many of these smaller firms

might find that the resulting per transaction costs and/or remaining compliance

costs will prove sufficiently expensive that being absorbed by a larger BD or

even leaving the industry altogether will become a more compelling alternative.43

All of these trends—reduced third party payments; public disclosure of

advisor compensation; high fixed infrastructure costs—to comply with rules

will encourage a bifurcation of the industry. Large firms will offer sophisticated

platforms that comply with the Department rule and from which financial

advisors can continue to operate. But even the surviving large firms will

have a huge incentive to offer fewer and more commoditized products. Low

43	 See “The impact of the RDR on the UK’s market for financial advice” at http://www.cass.city.

ac.uk/__data/assets/pdf_file/0016/202336/The-impact-of-RDR-Cass-version.pdf
31

cost generic platforms will continue to serve self-directed accounts (and 

these platforms will continue to receive third-party payments in a completely 

undisclosed manner).

A.EFFECTS ON INDEPENDENT BROKER DEALERS

There are at least three reasons to think that the proposed rules would hit 

IBDs particularly hard. First, IBDs are far more likely than larger (“wirehouse”) 

competitors to use clearing firms to clear some of their transactions, meaning

they must both pay for new services and data feeds, as well as integrate 

multiple sources of data in creating their disclosures. Secondly, IBDs are more 

likely than wirehouse competitors to work directly with firms that construct

specialty retirement assets, such as insurance companies, creating unavoidable 

conflicts that will require a BICE. Third, IBDs disproportionately serve small retail

investors, with lower or no account minimums (currently). 
32

VII. EFFECTS ON 

INVESTORS

Compensation for brokerage services, both in retirement and non-retirement 

accounts, generally comes in two forms: fee-based and commission-based, 

although hybrid compensation models certainly exist as well.44 Broadly 

speaking, commission-based accounts are more appropriate for accounts that 

trade infrequently, as well as for small accounts since the active management 

services typically associated with fee-based compensation are less easily 

supported by low account balances. It’s important to note that within the 

category of commission-based accounts are self-directed accounts, i.e., 

accounts where individuals direct BDs precisely what assets to buy and sell, 

without paying for or receiving investment advice. For obvious reasons, such 

accounts typically only trade in standardized investment products, and are 

appropriate for more knowledgeable investors who don’t require as much 

advising but whose modest holdings don’t warrant the active management of a 

financial advisor.

It’s worth noting that existing SEC and FINRA regulations restrict BDs’ use of 

fee-based accounts, prohibiting the practice known as “reverse churning.”45

Many of our interviewees expressed concerns about the proposed rule—which

encourages fee-based retirement accounts in order to avoid PTs and the 

BICE—being inconsistent with these reverse churning rules.

A.HIGHER MINIMUM ACCOUNT BALANCES

One potential impact that was mentioned by several of our interviewees, as well 

as by other commenters on the proposed rules is the loss of access, especially 

by small investors, to financial advisors. Many in the industry believe that due

44 Much of this draws from Oliver Wyman’s (2011) “Assessment of the impact of the Department 

of Labor’s Proposed ‘Fiduciary’ Definition on IRA Consumers.”

45 Churning occurs when a BD managing a commission-based account encourages excessive 

trading to generate commissions. Reverse churning occurs when infrequently trading investors 

are pushed into fee-based accounts that are more expensive for them.
33

Approximately 50% of 

U.S. households have 

a retirement account, 

and the median value 

of that type of account 

is $59,000. This means 

that if the typical investor 

wanted to seek advice 

from a financial advisor 

for a retirement account, 

it would cost more than 

600 basis points.

to the cost burdens implicit in the rules, firms will shift their business model

towards fee-based advising and create a minimum balance for client accounts. 

These account minimums will effectively force smaller investors into self-advised

or robo-advice accounts. As a result, only investors with substantial assets will 

have access to financial advisors.

One estimate, by Don Trone, who has written extensively about fiduciary

standards, puts the expected minimum account balance under the new rule 

at $360,000 assuming a 1% fee on assets. He calculates that at a typical

advisor would have to dedicate 12 hours per year at a rate of $175 per hour 

per client to meet the Department’s fiduciary standard. Additionally he estimates

compliance and oversight costs to be $1,500 per year per client. These costs 

amount to $3,600 per client per year.46 Any account under $360,000 would

have to pay fees greater than 1% of assets, thereby eliminating any potential

savings from the implementation of the rule. Importantly, the estimates and 

methodologies suggested by Mr. Trone were raised and confirmed by several

companies during the course of our interviews.

According to the 2013 Survey of Consumer Finances, retirement accounts are 

the second most-held financial asset in the U.S. after transaction accounts.

Approximately 50% of U.S. households have a retirement account, and the

median value of that type of account is $59,000.47 This means that if the typical 

investor wanted to seek advice from a financial advisor for a retirement account,

it would cost more than 600 basis points.

It’s worth noting that the Department has strongly disputed the conclusion that 

the new rules will result in loss of access to financial advising by small account

holders.48 One of the Department’s principal claims in this regard is that the 

new rules will promote innovation in the industry, specifically so-called “roboadvising” services.49 Our interviewees, understandably proud of their profession, 

were highly skeptical of the ability of robo-advising to offer the sort of benefits

investors now receive from investment advisers, including the important soft 

benefit of talking investors through market downturns without cashing out. It’s

possible that the Department is right that robo-investing will eventually catch on 

and displace traditional investment models; it’s also troubling that the success 

of the proposed rules is dependent upon such an untested model. 

46 http://www.thinkadvisor.com/2015/05/28/don-trone-father-of-fiduciarythe-2015-ia-35-for-35

47 http://www.federalreserve.gov/econresdata/scf/scfindex.htm

48 See Section 8.3.1 of the Regulatory Impact Analysis.

49 See Section 8.3.5 of the Regulatory Impact Analysis.
34

B.EXPERIENCE IN THE UK

Already, this divide has occurred in the UK financial services industry where

similar rules have been passed. In the UK, the Retail Distribution Rule went 

into effect on January 2013. Before the rule passed, small investors were able

access financial advisors at the UK’s four largest banks. However, after the rule

was put into effect, each bank determined it was too costly to service small

investors and created the following guidelines: 50

•	 HSBC—Minimum investment of £50,000 with a minimum upfront fee of

£950.

•	 Lloyds—Minimum investment of £100,000 with an upfront fee of 2.5%.

•	 The Royal Bank of Scotland—No minimum investment with an upfront

fee of 1.25% (fee is reduced for assets greater than £500,000) plus a flat

fee of £500.

•	 Barclays—Investors must have at least £500,000 in assets for investment

advice from Barclays Wealth Management. Barclays Financial Planning, 

which previously serviced smaller investors, no longer operates.

A report by Europe Economics found that after the RDR rule was implemented, 

there was a decline in the proportion of adults who opened investment 

accounts. What is most alarming about this decline is that it is concentrated 

in the group of investors with pre-existing savings of £50,000-£99,999 and

£20,000-£49,999 respectively. 51

C.MINORITY ACCESS TO FINANCIAL ADVICE

Lower and moderate net-worth individuals are disproportionately minority and 

single parent households. According to the 2013 Survey of Consumer Finances, 

the median net worth for a white non-Hispanic family is $141,900 compared 

to $18,100 for nonwhite or Hispanic families. A similar gap exists for singleparent families. Couples reported a median net worth of $93,000 compared 

50 http://www.telegraph.co.uk/finance/personalfinance/investing/9793587/Banks-New-feesrevealed-for-cost-of-investment-advice.html. And https://wealth.barclays.com/en_gb/home/

wealth-management/who-we-help.html

51 See Europe Economics (2014) “Retail Distribution Review Post Implementation Review.” 

http://web.archive.org/web/20141230121929/http:/www.fca.org.uk/static/documents/

research/rdr-post-implementation-review-europe-economics.pdf. And FSI Briefing (2015).

“Foreign Experiences Indicate DOL Fiduciary Rule Proposal Could Have Significant Unintended

Consequences.”
35

to $14,200 for single-parent households.52 A recent study by Prudential 

found that while most African Americans surveyed considered themselves 

knowledgeable about financial decisions, they did not see themselves as

savers or investors. Only 9% of African American respondents categorized

themselves as investors.53 This indicates that there is tremendous potential to 

expand investment services to African American households. As discussed in 

Section III B above, financial advisors provide valuable advice to investors. It

would be detrimental to limit access to such valuable advice, especially to those 

households that need it the most.

D.SUMMARY

The evidence clearly suggests that only high net-worth investors will be able 

to access and afford investment advice from professionals. A study by Oliver

Wyman estimated that 7.2 million IRA account holders would lose access to 

advisory services because of account minimums.54 Furthermore, they found that 

98% of small investors (defined as having IRA accounts with $25,000 or less)

had a brokerage relationship.55 If the proposed rule were passed in its current 

form, small investors would be forced out of their preferred model for investing 

and into a model that is less adequate. This divide will potentially worsen 

the country’s struggle with wealth inequality as low and moderate net-worth 

investors are left to their own devices during market downturns.

52 http://www.federalreserve.gov/econresdata/scf/scfindex.htm

53 http://www.prudential.com/media/managed/aa/AAStudy.pdf

54 http://www.dol.gov/ebsa/pdf/WymanStudy041211.pdf

55 http://www.dol.gov/ebsa/pdf/WymanStudy041211.pdf
36

VIII.CONCLUSION

A recurring theme of this analysis has been that, in its drafting of the new rules 

and in the Regulatory Impact Analysis about them, the Department has failed to 

engage with the nature of the specific requirements it is imposing upon BDs. It

has similarly failed to engage with the mechanism by which these requirements 

will lead to higher investment returns. In estimating the compliance costs of 

the rules, for example, rather than explaining the tasks and burdens it expects 

its own rules to impose on firms, the Department substitutes comment letters

for different proposed regulations of other agencies. When assessing gains to

investors from the new rules, the Department relies on academic studies to 

assert higher returns without specifying precisely where these returns come 

from or whether they represent true economic benefits.

We have presented evidence that the Department underestimates compliance 

costs, that the benefits investors receive from advisors are real and should be

given greater consideration, and that the Department’s narrow focus on mutual 

funds neglects other costs imposed by the rules. Further, it appears likely that 

the proposed rules would lead to significant consolidation in the BD industry,

and restrict small investor access to financial advising services.

Nevertheless, the Department may be correct that some action is warranted 

to address conflicts of interest in retirement accounts. Where its cost-benefit

account is insufficient, however, is in showing that the precise requirements it

specifies are both necessary and sufficient to address the problems it purports

to identify and achieve the benefits it claims.

The Department does make some effort in this direction in chapter 7 of the

Regulatory Impact Analysis, “Regulatory Alternatives.” To give one example, 

Section 7.8 considers “issu[ing] a prescriptive, rather than contractual, 

PTE,” that is, offering specific requirements for BDs to satisfy in order to

be in compliance rather than relying on the vague standards of BICE. The 

Department explains that the contractual nature of the BICE is a virtue because 

it gives a BD firm “broad latitude to design its own policies and procedures,

including its own mechanism for determining whether they are being followed 

and whether applicable fiduciary standards are met.” What the Department

presents as flexibility is overwhelmingly viewed as lack of clarity by the affected
37

entities in our interviews. In essence, the Department is outsourcing the 

task of deciding what constitutes appropriate fiduciary behavior to the firms

themselves. More concerning, it is outsourcing the job of determining whether 

the firms have succeeded in this task to state contract law courts. It is hard to

credit the Department’s calculations of benefits from standards it seems to so

poorly understand.

In sum:

•	 The DOL has dramatically underestimated the compliance cost of the 

new rule (about $195,000 per firm) and how difficult it will be for small

firms to survive if it is implemented.

•	 We estimate the proposed rule will result in startup costs ranging 

from $930,000 to $28 million per firm, depending on firm size. These

estimates do not include costs to model future returns and costs to 

investors, or the costs of litigation.

•	 BDs and investment advisers would be forced to either substantially 

change their current business models or navigate the byzantine demands 

of a BICE.

•	 The rule will result in less access to advisory services for small and 

medium-sized investors.

•	 Financial advice will be particularly constricted for low-income and 

minority investors.

•	 The proposed rule will result in industry consolidation likely to force small 

broker-dealers out of business.

•	 An expanded potential for systemic risk in the retirement savings market 

as savers are increasingly pushed into the same set of standardized 

“low-cost” assets.

Our average estimates of the actual costs of the proposed rule include:

•	 SETTING UP REQUIRED NEW SYSTEM INTERFACES to accept data 

feeds—$570,000, with a median cost of $250,000.

•	 DISCLOSURE REQUIREMENTS (average and median)—$870,000.

•	 RECORDKEEPING REQUIREMENTS—$200,000, with a median cost of 

$150,000.

•	 IMPLEMENTING A BICE—$4.5 million, with a median cost of $400,000.
38

•	 TRAINING—$800,000, with a median cost of $580,000.

•	 SUPERVISORY, COMPLIANCE, AND LEGAL OVERSIGHT—$210,000, 

with a median cost of $138,000.

•	 COSTS TO MODEL FUTURE RETURNS AND COSTS TO INVESTORS—

estimated to be substantial, but not quantified.

•	 LITIGATION COSTS—estimated to be substantial, but not quantified.
OXFORD

Abbey House, 121 St Aldates 

Oxford, OX1 1HB, UK 

Tel: +44 1865 268900 

LONDON 

Broadwall House, 21 Broadwall 

London, SE1 9PL, UK

Tel: +44 207 803 1400

BELFAST 

Lagan House, Sackville Street

Lisburn, BT27 4AB, UK

Tel: +44 28 9266 0669

NEW YORK 

5 Hanover Sq., 19th Floor

New York, NY 10004, USA

Tel: +1 646 786 1863

PHILADELPHIA 

303 Lancaster Avenue, Suite 1b

Wayne PA 19087, USA

Tel: +1 610 995 9600

SINGAPORE

No.1 North Bridge Road

High Street Centre #22-07

Singapore 179094

Tel: +65 6338 1235

PARIS

9 rue Huysmans

75006 Paris, France

Tel: + 33 6 79 900 846

email: mailbox@oxfordeconomics.com

www.oxfordeconomics.com