Ron A. Rhoades, JD, CFP® 

c/o Western Kentucky University 

Gordon Ford College of Business 

Grise Hall #324 

1906 College Heights Blvd. 

Bowling Green, KY 42101

Phone: 270.745.4934 

E-mail (preferred): ron.rhoades@wku.edu

September 23, 2015 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

U.S. Department of Labor 

Attn: Conflict of Interest Rule, Room N-5655 

200 Constitution Avenue, NW 

Washington, DC 20210 

Office of Exemption Determinations 

Employee Benefits Security Administration 

U.S. Department of Labor 

Attn: D-11712 and D-11713 

200 Constitution Avenue, NW 

Washington, DC 202010 

 Re: Definition of the Term Fiduciary: Conflict of Interest Rule (RIN 1210-AB32); 

Proposed Best Interest Contract Exemption and Principal Transactions in Debt Securities 

Exemption (ZRIN: 1210-ZA25) 

Ladies and Gentlemen: 

I write to specifically reply to the comment letter dated July 21, 2015, submitted by Ralph C. Derbyshire, 

Senior Vice President and Deputy General Counsel, FMR LLC Legal Department, on behalf of Fidelity 

Investments (hereafter “Fidelity”). I possess significant concerns regarding the statements contained in 

that letter with regard to its portrayal of some aspects of fiduciary law in the United States. Additionally, I 

believe the major proposals in that letter, concerning modifications to the proposed exemptions, and in 

proposing a new “best interests” (non-fiduciary) exemption, would effectively create “the exemptions that 

swallow the rule.” Also, the proposals of Fidelity would fail to meet the requirements imposed by ERISA 

that any such exemption be in the interests of ERISA plans and plan participants and that plan participants 

be protected.

While I have the utmost respect for Fidelity as a company, I believe Fidelity’s proposals, if adopted, 

would result in the failure of ERISA’s fiduciary protections to be effectively applied to plan sponsors, 

plan participants, and IRA account owners. Hence, I urge Fidelity’s recommendations be rejected.

I submit these comments on my own behalf. My views do not necessarily represent the views of Western 

Kentucky University, the Gordon Ford College of Business nor its Finance Department. Nor are these 

comments necessarily reflective of the views of any association or organization with whom I may be, or 

have been, associated. 
2

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Executive Summary.

A. SIFMA’s/FINRA’s “Best Interest” Proposals, and Related Proposals by Fidelity and Others, 

Negate the Fiduciary Duty of Loyalty and, Accordingly, Fail to Adhere to the Requirements for 

the Grant of Exemptive Relief. 

1. The new “Best Interests” standard proposed by SIFMA, and seemingly endorsed by FINRA, 

Fidelity, and some other broker-dealer firms, is not protective of plan participants and their 

beneficiaries, and is not in the best interests of plan participants and their beneficiaries as the term 

“best interests” is commonly understood to mean in judicial opinions, other sources, and by the 

lay public.

2. The term “Best interests” is commonly known to equate to the fiduciary duty of loyalty. Yet, the 

new “Best Interests” standard proposed by SIFMA and/or by FINRA does not impose a fiduciary 

duty of loyalty upon providers of investment and retirement advice. 

3. Upon close analysis, the new “Best Interests” standard proposed by SIFMA and/or by FINRA is 

only a slight modification to the low standard of suitability; the suitability doctrine is 

inappropriate for the delivery of investment and retirement planning advice under ERISA. 

Additionally, under the new “Best Interests” standard proposed by SIFMA and/or by FINRA, the 

customer remains in an arms-length relationship, in which the doctrine of caveat emptor applies, 

rather than in a fiduciary-entrustor relationship as envisioned by ERISA’s detailed statutory 

prescriptions.

4. The use of the term “Best Interests” to describe SIFMA and/or FINRA’s proposed standard, given 

the established use of that term as equivalent to the fiduciary duty of loyalty, is deceitful. 

Additionally, it will exacerbate already-widespread consumer confusion.

5. Any proposal to create a prohibited transaction exemption based on these new “best interests” 

proposals advanced by SIFMA, FINRA, Fidelity or others would fail to meet the requirements for 

the Secretary of Labor’s grant of an exemption under the express provisions of ERISA. The 

Secretary lacks the authority under ERISA to diminish consumer protections, from those afforded 

by the fiduciary-entrustor relationship, to those minimal protections afforded in arms-length 

relationships as would exist under the SIFMA/FINRA proposals.

 

B. Contracting Out of Fiduciary Relationships is Impermissible and Any Exemptive Relief to 

Authorize Such a Procedure Would Fail to Meet ERISA’s Statutory Requirements for the 

Grant of Exemptive Relief.

1. Whether imposed by the express terms of ERISA, by Congress’ grant of authority to the U.S. 

Department of Labor to enact rules on qualified retirement plan and IRA accounts, or by the 

common law (such as when a relationship of trust and confidence exists), the ability of the 
3

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

advisor and client to “contract out” of the fiduciary-client relationship, and return to an armslength (sales-customer) relationship, is negated.

2. In the advisor-client context, core fiduciary duties cannot be waived. Even the “contractualists” 

academics who argue for a contract theory of fiduciary law (as might be applied in business 

settings, such as between business partners), accept the proposition that core fiduciary duties 

cannot be waived.

3. The application of the concepts of estoppel and waiver are limited in the fiduciary realm.

4. The ability to “contract away” the protections afforded by ERISA’s detailed statutory regime is 

not the basis for an exemption for which relief can be granted, given that contracting away such 

legal protections is neither protective of the plan beneficiaries nor in the interests of plan 

beneficiaries.

C. A Requirement for Demonstration of Actual Reliance by the Entrustor on the Fiduciary’s 

Advice Is Not Properly a Condition for Imposition of Fiduciary Status; Imposition of Such A 

Requirement Would Violate ERISA as Well as ERISA’s Established Requirements for the 

Grant of Exemptive Relief. 

1. While reliance by consumers on the investment and retirement planning advice they receive is 

commonplace, it is not a pre-condition to the law’s imposition of fiduciary status. 

2. Any attempt to establish such a pre-condition to the imposition of fiduciary status would not be in 

accord with established common law which applies fiduciary status upon those in relationships of 

trust and confidence with their clients, regardless of whether reliance is proven. 

3. Any attempt to establish a “reliance” pre-condition to the imposition of fiduciary status is in 

accord with ERISA, which does not impose such a precondition.

4. A plethora of sound public policy reasons exist for the imposition of fiduciary status by ERISA, 

which have nothing to do with reliance.

5. Imposition of a precondition requirement of “reliance” would enable widespread consumer harm.

6. Accordingly, any precondition requirement before fiduciary duties would be imposed would not 

be in the interests of beneficiaries, nor protective of plan beneficiaries, and hence any exemptive 

relief which might be granted on the basis of a reliance precondition requirement would exceed 

the Secretary’s authority, absent some other means of protecting the beneficiary.

D. Fiduciary Duties Apply During the Formation of the Advisor-Client Relationship.
4

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

E. Fidelity’s Proposal to Simplify Disclosures of Conflicts of Interest Does Not Meet the Fiduciary 

Requirement of Affirmative Disclosure.

F. Fidelity’s Proposal to Expand the Seller’s Carve-Out to Small Plan Sponsors Would Negate the 

Essential Protections Small Business Owners Require.

G. Fidelity’s Proposal to Expand the Carve-Out for Investment Education to Include 

Recommendations of Specific Investment Alternatives Impermissibly Creates a Loophole, and 

Would Not Meet ERISA’s Standards for the Grant of Exemptive Relief.

1. Advice, whether it is provided to one person, to a small group, or to a large group, is advice.

2. Given the extension of the definition of “fiduciary” under the DOL’s proposed “Conflicts of 

Interest” rule, there appears to be no need to any exemption for investment education. Education 

should be provided by fiduciaries.

3. Recommendations of specific securities clearly are investment advice. Any ability by a nonfiduciary advisor to undertake specific security recommendations would create a giant loophole, 

which over time would swallow up ERISA’s important fiduciary protections.

4. Accordingly, any expansion of the education exemption would not be protective of plan 

beneficiaries, nor in their interests, and hence would fail to satisfy the requirements for the grant 

of exemptive relief. 

INTRODUCTION: The Requirements of ERISA, Generally. 

For purposes of providing a foundation for my discussion of Fidelity’s proposals, and for the education of 

some (non-attorney) readers of this comment letter, I provide the following summary of key provisions of 

the Employee Retirement Income Security Act (“ERISA”). As the U.S. Department of Labor (“DOL”) 

considers finalization of the Conflicts of Interest rule proposals and any class exemption that may be 

granted, the DOL should at all times refer back to the ERISA’s statutory requirements and afford those 

statutory requirements a reasonable interpretation in light of the present circumstances of ERISA 

retirement plan participants and IRA account owners (hereafter collectively referred to as “participants”). 

As the U.S. Supreme Court has stated, “Congress went to great lengths to enumerate ERISA's fiduciary 

obligations and duties, see §§ 401-408; §§ 410-412, to create liability for breach of those obligations, see 

§ 409, and to authorize a civil suit to enforce those provisions, see § 502(a)(2).” Plan participants and 1

IRA account owners seek to overcome the challenges of today’s far more complicated modern financial 

world, with its myriad of investment options and significant number of traps for the unwary, and are in 

full need of these statutory protections, as well as the protections afforded by the DOL’s proposed 

Conflicts of Interest Rule. 

Fiduciary Standard of Conduct. ERISA section 404(a) sets forth the requirements of fiduciaries, including 

the “sole interests” and “exclusive purpose” requirements long attributed to the fiduciary duties of loyalty 

Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996). 1
5

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

and utmost good faith, as well as the fiduciary duty of due care (including skill, prudence and diligence). 

The statute provides: 

 (a) Prudent man standard of care 

(1) Subject to sections 1103 (c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge 

his duties with respect to a plan solely in the interest of the participants and beneficiaries and— 

(A) for the exclusive purpose of: 

(i) providing benefits to participants and their beneficiaries; and 

(ii) defraying reasonable expenses of administering the plan; 

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing 

that a prudent man acting in a like capacity and familiar with such matters would use in 

the conduct of an enterprise of a like character and with like aims; 

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, 

unless under the circumstances it is clearly prudent not to do so; and 

(D) in accordance with the documents and instruments governing the plan insofar as such 

documents and instruments are consistent with the provisions of this subchapter and 

subchapter III of this chapter. 

Sections 404(a)(1)(A) through (D) are sometimes referred to as the four general rules of an ERISA 

fiduciary: (A) “exclusive benefit rule”; (B) “prudent man rule”; (C) “diversification rule”; and (D) “plan 

document rule.” 

The U.S. Supreme Court recently confirmed the long-standing understanding that ERISA’s fiduciary 

standards are “derived from the common law of trusts.” The Court also stated: “In determining the 2

contours of an ERISA’s fiduciary duty, courts often must look to the law of trusts.” Id.

Prohibited Transactions, Generally. ERISA’s strict “sole interest” fiduciary standard is further augmented 

by ERISA’s prohibited transaction rules. ERISA section 406(a) prohibits various types of transactions 

between a plan and parties in interest. ERISA states that a plan fiduciary shall not cause the plan to 

engage in a transaction if the plan fiduciary knows or should know that such transaction constitutes a 

direct or indirect— 

• Sale or exchange, or leasing, of any property; 

• Lending of money or other extension of credit; 

• Furnishing of goods, services, or facilities; 

• Transfer to, or use by or for the benefit of a party in interest, of any assets of the plan; or 

• Acquisition, on behalf of the plan, of any employer security or employer real property in 

violation of ERISA section 407. 

Under these prohibited transaction rules, a plan fiduciary ordinarily cannot use plan assets to pay for 

services. For example, Section 406(a)(1)(A) prohibits the “sale or exchange, or leasing of any property 

between the plan and a party in interest.” This clause implicates the sale of investment products 

Tibble v. Edision, 475 U.S. ____ (2015) (slip opinion p.5), citing Central States, Southeast & Southwest Areas Pension Fund v. 2

Central Transport, Inc., 472 U.S. 559, 590 (1985).
6

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

(including annuities) to the plan and the payment to the broker, consultant, or investment adviser a fee or 

commission in connection therewith. 

Section 406(b) prohibits fiduciaries with direct or indirect access to plan assets from using those assets for 

their own benefit, or for the benefit of another party. 

Section 406(b)(1) provides that a fiduciary shall not deal with the assets of the plan in his or her own 

interest or for his or her own account. In other words, the fiduciary is prohibited from self-dealing. 

Section 406(b)(2) provides that a fiduciary shall not deal in his or her individual or in any other capacity 

act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are 

adverse to the interests of the plan or the interests of its participants or beneficiaries. Generally, this is 

commonly called the “dual loyalty” provision. A fiduciary must be able to represent the plan to its fullest 

ability in a transaction. 

Section 406(b)(3) provides that a fiduciary should not receive any consideration for his or her own 

personal account from any party dealing with such plan in connection with a transaction involving the 

assets of the plan. This is commonly known as the anti-kickback provision. 

It could be said that ERISA generally prohibits payments for services provided to the plan or account or 

participant, and even many dealings with a plan or account or participant. However, as seen below, 

ERISA addresses these constraints through several types of exemptions. 

Statutory Exemptions and Prohibited Transaction Exemptions, Generally. Certain transactions with parties 

in interest are exempt from the prohibited transaction rules, either because they are permitted by a 

statutory exemption in ERISA (of which there are 20), because they are covered under a class exemption 

issued by the DOL, or because the DOL has granted an individual exemption. 

The best known and perhaps most important statutory exemption is found in Section 408(b)(2), allowing 

the use of plan assets to pay fees for services. However, the exemption applies strictly to a fiduciary’s 

“contracting or making reasonable arrangements” with the plan’s service provider for “services that are 

necessary” for plan operation, and only if no more than “reasonable compensation” is paid for them. As 

often occurs with either statutory or class or individual exemptions, there are often substantial and 

significant conditions attached to the exemption. 

The DOL may grant administrative exemptions to an individual or a class of individuals allowing them to 

engage in a variety of transactions involving employee benefit plans. DOL administrative exemptions are 

referred to as Prohibited Transaction Exemptions (PTEs). Class exemptions are administrative "blanket" 

exemptions that permit a person to engage in a similar transaction or a series of similar transactions with a 

plan in accordance with the terms and conditions of the class exemption, without requiring the person to 

obtain an individual exemption from the DOL. 

Under the express terms of ERISA, the “Secretary may not grant an exemption under this subsection 

unless he finds that such exemption is— (1) administratively feasible, (2) in the interests of the plan and 
7

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

of its participants and beneficiaries, and (3) protective of the rights of participants and beneficiaries of 

such plan.” 29 U.S.C. §1108(a) (in pertinent part) [Emphasis added.] 

Understanding the Minimal Relaxation of “Sole Interests” When a PTE Exists: The Participants “Best 

Interests” Must Still Be Respected at All Times. Under ERISA’s legal standard for granting relief by 

means of a PTE from ERISA’s strict requirements, ERISA’s strict “sole interests” fiduciary standard, as 

well as its prohibitions on many transactions, is reduced if an exemption is granted to what constitutes, in 

essence, a requirement that the exemption be in the “best interests” of the participants – as the exemption 

must be “in the interests of the (participants)” and must be “protective of the rights of” the participants. 

By way of further explanation, the “sole interests” standard is frequently applied (with some exceptions, 

which vary from jurisdiction to jurisdiction) to trustee-beneficiary relationships. This soles interests 

standard generally prohibits transactions between the trustee and the trust, even if the transaction is 

mutually beneficial. 

In contrast, the “best interests” standard is somewhat more flexible. It permits transactions between a 

fiduciary and the assets under its, his, or her charge, but only if there is a mutual benefit to the assets 

managed (or the entrustor – i.e., the person who has entrusted the assets to the fiduciary’s care, or the 

adviser to the client). At a minimum, the entrustor should not be harmed by any transaction that involves 

the fiduciary. 

In either instance, the fiduciary standard is referred to as the “highest standard under the law.” In fact, the 

“best interests” standard is somewhat more lenient in the sense that certain transactions proposed by a 

fiduciary may be permitted which are otherwise prohibited under the “sole interests” standard. I would 

note, however, that the “best interests” standard – as applied to trustees (where transactions with the trust 

are not strictly prohibited), and to advisory relationships such as attorney-client which are quite similar (in 

terms of the vast disparity of knowledge between fiduciary and entrustor, for example), is not that far 

removed from the tough “sole interests” standard of conduct. 

A more elaborate explanation of the difference between the “sole interests” standard and “best interests” 

standard can be found in an article penned by Professor John Langbein: 

The sole interest rule prohibits the trustee from “plac[ing] himself in a position where his personal 

interest ... conflicts or possibly may conflict with” the interests of the beneficiary. The rule applies 

not only to cases in which a trustee misappropriates trust property, but also to cases in which no 

such thing has happened—that is, to cases in which the trust “incurred no loss” or in which “actual 

benefit accrued to the trust” from a transaction with a conflicted trustee. The conclusive 

presumption of invalidity under the sole interest rule has acquired a distinctive name: the “no 

further inquiry” rule. What that label emphasizes, as the official comment to the Uniform Trust 

Code of 2000 explains, is that “transactions involving trust property entered into by a trustee for 

the trustee’s own personal account [are] voidable without further proof.” Courts invalidate a 

conflicted transaction without regard to its merits—“not because there is fraud, but because there 

may be fraud.” “[E]quity deems it better to ... strike down all disloyal acts, rather than to attempt 

to separate the harmless and the harmful by permitting the trustee to justify his representation of 

two interests ... I compare the trust law duty of loyalty with the law of corporations, which 

originally shared the trust law sole interest rule but abandoned it in favor of a regime that 
8

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

undertakes to regulate rather than prohibit conflicts ... I recommend (in Section II.C) 

reformulating the trust law duty of loyalty in light of these developments. I would generalize the 

principle now embodied in the exclusions and exceptions, which is that the trustee must act in the 

beneficiary’s best interest, but not necessarily in the beneficiary’s sole interest. Overlaps of interest 

that are consistent with the best interest of the beneficiary should be allowed. What is needed to 

cure the overbreadth of the sole interest rule is actually quite a modest fix: reducing from 

conclusive to rebuttable the force of the presumption of invalidity that now attaches to a conflicted 

transaction.3

It should be emphasized, again, that the law of trusts informs the DOL as it seeks to apply and interpret 

ERISA’s provisions.

A. SIFMA’s/FINRA’s “Best Interest” Proposals, and Related Proposals by Fidelity and Others, 

Negate the Fiduciary Duty of Loyalty and, Accordingly, Fail to Adhere to the Requirements for 

the Grant of Exemptive Relief. 

1. The new “Best Interests” standard proposed by SIFMA, and seemingly endorsed by FINRA, 

Fidelity, and some other broker-dealer firms, is not protective of plan participants and their 

beneficiaries, and is not in the best interests of plan participants and their beneficiaries as the term 

“best interests” is commonly understood to mean in judicial opinions, other sources, and by the lay 

public.

The phrase “act in the best interests of the client” is used to explain, in language the lay person would 

understand, the core aspect of the fiduciary duty of loyalty. It is a phrase used over the centuries to 

connote the fiduciary duty of loyalty. Yet, despite this widespread acceptance of the current definition of 

“best interests,” Fidelity, SIFMA, FINRA and others opposed to the DOL’s imposition of fiduciary status 

have suggested a new and alternative “Bests Interests Paradigm” (hereafter the “BIP”) standard that does 

not encompass the requirements of the fiduciary duty of loyalty.

Fidelity, along with many others, have proposed this very troubling “Best Interests Paradigm” (BIP). Yet, 

as explained herein, their collective and apparently coordinated attempts to redefine “best interests” as a 

new type of suitability standard, and the lack of fiduciary duty of loyalty under such a “best interests” 

standard, do not meet the requirements for the grant of an exemption by the U.S. Department of Labor. 

Fidelity’s proposal is closely aligned with other proposals from various broker-dealer lobbying 

associations and their constituents to abandon and/or negate the fiduciary standard of conduct and to 

replace it with a nebulous, product-sales friendly standard that fails to provide any meaningful protections 

for consumers. 

Fidelity’s Proposal. Fidelity summarized its new “best interests” paradigm in its July 22, 2015 request to 

testify: 

Langbein, John H., Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest? Yale Law Journal, Vol. 114, p. 3

929 (2005). 
9

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

The Department [of Labor] should adopt a new paradigm for application of the best interest 

standard to investment advice ...: 

(a) engagement of advisor’s services and compensation should be non-fiduciary; 

(b) best interest standard should be applied within the scope of the engagement; 

(c) adopt broad principles-based transaction relief requiring only (i) an enforceable best interest 

commitment, (ii) payment of no more than reasonable compensation, and (iii) disclosure of 

conflicts of interest, including compensation payable to the advisor. 

In its July 21, 2015 comment letter submitted to the DOL, Fidelity set forth the specifics of its proposal 

(pertinent portion follows): 

Our new best interest paradigm would provide that the establishment of the terms of engagement 

between the advisor and investor is non-fiduciary in nature by modifying section 2510.3-21(c) of the 

Proposed Regulation as follows: 

 (c) Scope of fiduciary duty – investment advice. 

(1) A person who is a fiduciary with respect to an employee benefit plan or IRA by reason of 

rendering investment advice (as defined in paragraph (a) of this section) for a fee or other 

compensation, direct or indirect, with respect to any securities or other property of such plan, or 

having any authority to do so, shall not be deemed to be a fiduciary with respect to: 

 (i) the terms and conditions of the engagement of the person, including the scope of the 

obligation to provide advice, the products or services with respect to which advice is provided 

and the compensation payable to such person, provided the plan fiduciary, participant or 

beneficiary, or IRA owner, has consented to the terms and conditions of the engagement after 

disclosure of all material aspects of such terms and conditions, including potential conflicts of 

interest; or 

 (ii) any assets of the plan or IRA with respect to which such person does not have any 

discretionary authority, discretionary control or discretionary responsibility, does not exercise 

any authority or control, does not render investment advice (as defined in paragraph (a)(1) of this 

section) for a fee or other compensation, and does not have any authority or responsibility to 

render such advice. 

[Emphasis in original; emphasis added.] 

In contrast, the DOL’s proposed section 2510.3-21(c) states in pertinent part: 

(c) Scope of fiduciary duty--investment advice. A person who is a fiduciary with respect to an 

employee benefit plan or IRA by reason of rendering investment advice (as defined in paragraph 

(a) of this section) for a fee or other compensation, direct or indirect, with respect to any 

securities or other property of such plan, or having any authority or responsibility to do so, shall 

not be deemed to be a fiduciary regarding any assets of the plan or IRA with respect to which 

such person does not have any discretionary authority, discretionary control or discretionary 

responsibility, does not exercise any authority or control, does not render investment advice (as 

defined in paragraph (a)(1) of this section) for a fee or other compensation, and does not have any 

authority or responsibility to render such investment advice .... 

Fidelity’s “best interest paradigm” (BIP) proposal is closely aligned with proposals which have been 

advanced by many broker-dealer and asset management firm lobbyists and their constituent members, in 
10

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

touting support for a form of “best interests” standard that does not amount to the fiduciary duty of 

loyalty.

SIFMA’S Proposal. In its July 20, 2015 comment letters to the DOL, SIFMA, “representing the brokerdealers, banks and asset managers” (i.e., Wall Street), stated in pertinent part: 

FINRA uses a much more common sense test that does not contain a standard that 

cannot practically be met: it requires that the adviser make suitable recommendations 

based on the client’s financial circumstances and needs and that the adviser put his 

client’s interest before his own. We urge the Department to use the FINRA 

formulation ... 

SIFMA members believe that a claim that a relationship is a fiduciary relationship 

should be “defeated” if the parties do not mutually understand that they both intended 

a fiduciary relationship .... 

As SIFMA has repeatedly stated, it concurs with a best interest standard ... 

SIFMA agrees that a person should not be able to agree to act as a fiduciary and then 

seek to avoid the fiduciary status to which he or she agreed ... 

SIFMA believes there are less disruptive and more comprehensive ways to 

implement a best interest standard for additional protection for individual investors 

who maintain securities investments. Our members long ago endorsed a best interest 

or uniform fiduciary standard of care for all retail investors, including the retirement 

sector, when providing personalized investment advice about securities. SIFMA has 

encouraged the SEC, which has broad jurisdiction and authority in this space, to take 

action to establish a uniform fiduciary standard across all retail securities accounts 

receiving personalized investment advice ... 

FINRA, under the supervision and oversight of the SEC, has been increasingly 

refining its definition of suitability under Rule 2111 and most recently through 

FINRA Notice 13-45, referenced earlier, to require brokers to put clients’ best 

interests ahead of their own ... 

To further assist the SEC and FINRA and to maintain forward progress towards 

formalizing a best interest standard across all retail investor securities accounts, 

SIFMA, on June 3, 2015, proposed a “Best Interests of the Customer Standard for 

Broker-Dealers”, which is designed to lay the groundwork for an investor-focused, 

comprehensive regulatory solution that works for investors and broker-dealers alike. 

SIFMA believes that an optimal “best interests of the customer” legal standard for 

broker-dealers should do the following: 

1. Apply across all investment recommendations made to individual retail 

customers in all brokerage accounts (not be limited to just IRA accounts); 

2. Serve as a benchmark for, be consistent with, and integrate seamlessly into, the 

SEC uniform fiduciary standard that ultimately emerges under Dodd-Frank § 

913; 

3. Provide interim, strong, substantive, “best interests” protections for retail 

customers; and 
11

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

4. Follow the traditional securities regulatory approach of establishing a rulesbased heightened standard, including robust disclosure, coupled with robust 

examination, oversight, and enforcement by the SEC, FINRA and state securities 

regulators, as well as a private right of action for investors, as exists today. 

On June 3, 2015, SIFMA provided this mark-up (modification to) FINRA’s rules, as part 

of its proposal: 

 2111. Suitability The Best Interests of the Customer 

a. A member or an associated person must have a reasonable basis to believe that 

a recommended transaction or investment strategy involving a security or 

securities is suitable for in the best interests of the customer, based on the 

information obtained through the reasonable diligence of the member or 

associated person to ascertain the customer’s investment profile. A customer’s 

investment profile includes, but is not limited to, the customer’s age, other 

investments, financial situation and needs, tax status, investment objectives, 

investment experience, investment time horizon, liquidity needs, risk tolerance, 

and any other information the customer may disclose to the member or associated 

person in connection with such recommendation. 

i. The best interests standard. A best interests recommendation shall: 

1. Reflect the care, skill, prudence, and diligence under the 

circumstances then prevailing that a prudent person would 

exercise based on the customer’s investment profile (defined 

above). The sale of only proprietary or other limited range of 

products by the member shall not be considered a violation of 

this standard. 

2. Appropriately disclose and manage investment-related fees. 

See Manage investment-related fees below. 

3. Avoid, or otherwise appropriately manage, disclose, and 

obtain consents to, material conflicts of interest, and otherwise 

ensure that the recommendation is not materially compromised 

by such material conflicts. See Manage material conflicts of 

interest below. 

ii. Manage investment-related fees. A member shall ensure that 

investment-related fees incurred by the customer from the member are 

reasonable, fair, and consistent with the customer’s best interests. 

Managing investment-related fees does not require recommending the 

least expensive alternative, nor should it interfere with making 

recommendations from among an array of services, securities and other 

investment products consistent with the customer’s investment profile. 

iii. Manage material conflicts of interests. A member or associated person 

shall avoid, if practicable, and/or mitigate material conflicts of interest 

with the customer. A member or associated person shall disclose material 

conflicts of interest to the customer in a clear and concise manner 
12

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

designed to ensure that the customer understands the implications of the 

conflict. The customer shall be given the choice of whether or not to 

waive the conflict, and must provide consent, as provided in Rule 2260 

(Disclosure). Notwithstanding the disclosure of, and customer consent to, 

any material conflict, a recommended transaction or investment strategy 

must nevertheless be in the best interests of the customer. 

iv. Provide required disclosures. A member or associated person shall 

provide and/or otherwise make available to the customer, among other 

things: 1) account opening disclosure, 2) annual disclosure, and 3) 

webpage disclosure, as provided in Rule 2260 (Disclosure). 

b. A member or associated person fulfills the customer-specific suitability 

obligation for an institutional account, as defined in Rule 4512(c), if (1) the 

member or associated person has a reasonable basis to believe that the 

institutional customer is capable of evaluating investment risks independently, 

both in general and with regard to particular transactions and investment 

strategies involving a security or securities and (2) the institutional customer 

affirmatively indicates that it is exercising independent judgment in evaluating 

the member’s or associated person’s recommendations. Where an institutional 

customer has delegated decision making authority to an agent, such as an 

investment adviser or a bank trust department, these factors shall be applied to 

the agent. 

 2260. Disclosures 

a. Account opening disclosure. A member or associated person shall disclose to 

the customer, at or prior to the opening of the customer account, or prior to 

recommending a transaction or investment strategy, if earlier, the following: 

• the type of relationships available from the broker-dealer and the standard 

of conduct that would apply to those relationships; 

• the services that would be available as part of the relationships, and 

information about applicable direct and indirect investment-related, fees; 

• material conflicts of interest that apply to these relationships, including 

material conflicts arising from compensation arrangements, proprietary 

products, underwritten new issues, types of principal transactions, and 

customer consents thereto; and 

• disclosure about the background of the firm and its associated persons 

generally, including referring the customer to existing systems, such as 

FINRA’s BrokerCheck database. 

b. Annual disclosure. A member shall disclose to the customer annually a good 

faith summary of investment related fees incurred by the customer from the 

member or associated person with respect to all products and services provided 

during the prior year (or such shorter period as applicable). 
13

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

c. Webpage disclosure. A member’s webpage shall provide disclosure that is 

concise, direct and in plain English, following a layered approach that provides 

supplemental information to the customer. A member’s webpage shall include 

access to all account opening disclosure. Paper disclosure shall be provided to 

customers that lack effective Internet access or that otherwise so request. 

d. Customer consent. Customer consent to material conflicts of interest or for 

other purposes as appropriate may be provided at account opening.(FN1) 

Existing customers with accounts established prior to the effective date of the 

best interests standard shall be deemed to have consented to the material conflicts 

of interest, if any, disclosed to the customer, upon continuing to accept or use 

account services. 

e. Disclosure updates. Updates to disclosures, if necessary or appropriate, may be 

made through an annual notification that provides a website address where 

specific changes to a member’s disclosure are highlighted. 

FN1. Customer consent to principal transactions, for example, could be provided at 

account opening. 

 

FINRA’s Proposal. In its July 17, 2015 comment letter to the DOL, FINRA stated in pertinent part: 

FINRA has publicly advocated for a fiduciary duty for years and agrees with the 

Department that all financial intermediaries, including broker-dealers, should be subject 

to a fiduciary “best interest” standard ... 

At a minimum, any best interest standard for intermediaries should meet the following 

criteria: 

 • The standard should require financial institutions and their advisers to: • act in their customers’ best interest; • adopt procedures reasonably designed to detect potential conflicts; • eliminate those conflicts of interest whenever possible; • adopt written supervisory procedures reasonably designed to ensure that any 

remaining conflicts, such as differential compensation, do not encourage 

financial advisers to provide any service or recommend any product that is not in 

the customer’s best interest; • obtain retail customer consent to any conflict of interest related to 

recommendations or services provided; and • provide retail customers with disclosure in plain English concerning 

recommendations and services provided, the products offered and all related fees 

and expenses ... 

The federal securities laws and FINRA rules comprehensively regulate all aspects of a 

broker-dealer’s business. Among the many requirements imposed are the principles that 

broker dealers deal fairly with customers, adhere to just and equitable principles of trade, 

and ensure that recommendations are suitable for customers. Broker dealers also must 

establish rigorous systems of compliance and supervision, which are regularly examined 

by FINRA and the SEC. 
14

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Using these existing requirements as the core structure of a best interest standard would 

reduce the costs of transitioning to a best interest requirement and provide assurance that 

the core structure will be enforced by the SEC and FINRA ... 

The standards for the investment adviser and the broker-dealer businesses must be 

harmonized to provide consistent investor protection while reflecting the distinctive 

nature of each business model .... 

Financial Services Institute’s (FSI’s) Proposal. In its July 21, 2015 comment letter, FSI, “an advocacy 

organization comprised of members from the independent financial services industry, and is the only 

organization advocating solely on behalf of independent financial advisors and independent financial 

services firms” [this author notes, however, that FSI does not represent many independent registered 

investment advisers, especially fee-only advisers], stated: 

Since 2009, FSI has supported a uniform fiduciary standard of care applicable to all 

professionals providing personalized investment advice to retail clients. Consistent with 

the Department’s intent, this standard of care would require financial advisors to act in 

the best interest of their clients ... 

FSI believes that a uniform fiduciary standard of care is critical to the protection of 

retirement plan assets and the stability of the financial markets. Such a definition should 

explicitly require Financial Institutions and financial advisors to: 

• Act in the best interest of their clients; 

• Provide advice with skill, care, and diligence based upon information that is 

known, about the customer’s investment objectives, risk tolerance, financial 

situation, and other needs; and 

• Disclose and manage material conflicts of interest, avoid them when possible, 

and obtain informed customer consent to act when such conflicts cannot be 

reasonably avoided .... 

[W]e have developed an alternate disclosure regime for the Department to consider in 

lieu of the BICE contract and disclosure requirements. FSI believes that the two-tiered 

disclosure regime outlined below will serve to inform investors of the information that is 

most critical to their decision-making ... 

The two-tiered disclosures would include: 

• First Tier: A short-form disclosure document, provided as part of the account 

opening process that would focus on the issues that are of greatest importance to 

investors. The short-form disclosure would also represent an upfront, enforceable 

commitment on the part of the financial advisor and the Financial Institution to 

act in the best interest of the client. The information detailed on the short-form 

disclosure would include: • A statement of the best interest standard of care owed by the 

Financial Institution 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 Financial Institution and financial advisor; 
15

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

• A general description of any material conflicts of interest that may 

exist between the Financial Institution, financial advisor and investor 

... 

• The second tier disclosure would provide investors with access to detailed 

compensation and material conflicts information via the Financial Institution's 

website or brochures to be provided free of cost. These disclosures would be in 

lieu of the website disclosure requirements of BICE Section III(c). Utilizing 

hyperlinks and other internet functionality, investors will be able to receive 

detailed information concerning available investments, considerations for making 

investment decisions, and information explaining how a financial advisor and a 

Financial Institution receive compensation for a particular type of product. The 

disclosures are designed to allow investors to better understand both the 

existence of payments to be made to the Financial Institution and the purposes of 

such payments .... 

Any undertaking to implement our proposed alternative should be a coordinated and joint 

effort between the Department, the SEC, FINRA and state securities regulators. In the 

absence of proper coordination, the true meaning of terms such as “best interest” will be 

determined by the judicial system, not the appropriate regulatory agencies. This is a risk 

that independent financial services firms – and, by extension, their clients – cannot afford 

to take .... 

Bank of America’s Proposal. In its July 21, 2015 comment letter, Bank of America (which includes 

Merrill Lynch) affirmed the theme found in the above comment letters, as well as the same theme found 

in many of the broker-dealer firms’ comment letters, stating: 

Bank of America supports the fundamental objective of the Department’s proposed rule: 

to hold Advisors to a “best interest” standard when they provide personalized investment 

advice to IRA account holders ... Bank of America has long supported a “harmonized” 

best interest standard .... 

FINRA’s recent guidance on IRA rollover conversations arises out of a “suitability” 

standard but should satisfy the Department’s fiduciary best interest standard as well ... 

 

 Bank of America recommends ... 

Conflicts of Interest. The Advisor firm would agree to disclose to the client material 

conflicts of interest with respect to the Advisor’s investment advice and recommendations 

to purchase, sell or hold securities or other assets in an IRA. 

Policies and Procedures. Finally, the Advisor firm would represent that it has established 

policies and procedures, including supervisory procedures, that are reasonably designed 

so that: a) investment advice and recommendations are in the client’s best interests; b) 

material conflicts of interest are disclosed; c) the costs and fees are fair and reasonable; 

and d) the Advisor firm complies with the laws and regulations that apply to an IRA. 

As will be seen in the sections that follow, these BIP proposals are not protective of the consumers’ 

interests, are not in accord with the requirements of ERISA, and are a mere sham intended to deceive the 

public that trust may be placed in a merchandizer. 
16

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

2. The term “Best interests” is commonly known to equate to the fiduciary duty of loyalty. Yet, the 

new “Best Interests” standard proposed by SIFMA and/or by FINRA does not impose a fiduciary 

duty of loyalty upon providers of investment and retirement advice. 

Far from the suggestion of some broker-dealer firms or their lobbyists that the term “best interests” needs 

to be defined, “best interests” is already utilized to describe the fiduciary duty of loyalty is frequently 

found in judicial decisions: 

In explaining the duty of loyalty owed by a board of directors to the corporation, the instruction to 

a lay jury reads: “Each member of the ... board of directors is required to act in good faith and 

in a manner the director reasonably believes to be in the best interests of the corporation when 

discharging his or her duties.” Schultz v. Scandrett, #27158, Supreme Court of South Dakota, 

2015 SD 52; 866 N.W.2d 128; 2015 S.D. LEXIS 85 (June 24, 2015). 

In describing the fiduciary duty of the director of a corporation to the corporation and its 

shareholders, a court opined: “The duty of loyalty ‘mandates that the best interest of the 

corporation and its shareholders takes precedence over any interest possessed by a director, 

officer or controlling shareholder and not shared by the stockholders generally.’ Cede & Co. v. 

Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993) (citing Pogostin v. Rice, 480 A.2d 619, 624 (Del. 

1984) and Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)); see also Diedrick v. Helm, 217 

Minn. 483, 14 N.W.2d 913, 919 (Minn. 1944). The classic example is when a fiduciary either 

appears on both sides of a transaction or receives a substantial personal benefit not shared by all 

shareholders. Id.” DQ Wind-Up, Inc. v. Kohler, Court File No. 27-CV-10-27509, Minnesota 

District Court, County Of Hennepin, Fourth Judicial District, 2013 Minn. Dist. LEXIS 118 

(2013). 

Similarly, “[t]he duty of loyalty requires that the best interests of the corporation and its 

shareholders take precedence over any self-interest of a director, officer, or controlling 

shareholder that is not shared by the stockholders generally.” Rales v. Blasband, 634 A.2d 927, 

936 (Del. 1993). 

Also, "”n dealing with corporate assets [the corporate officer] was required to act in the best 

interests of the corporation and he was prohibited from using either his position or the 

corporation's funds for his private gain.” Levin v. Levin, 43 Md. App. 380, 390, 405 A.2d 770 

(1979). 

A court, recently opining on ERISA’s fiduciary duty of loyalty, stated: “ERISA imposes a duty of 

loyalty on fiduciaries. Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir.), cert. denied, 459 U.S. 

1069, 74 L. Ed. 2d 631, 103 S. Ct. 488 (1982) (Friendly, J.). A trustee violates his duty of loyalty 

when he enters into substantial competition with the interests of trust beneficiaries. 

RESTATEMENT (SECOND) OF TRUSTS, § 170, comment p ... under the law of trusts, a fiduciary is 

generally prohibited, not just from acting disloyally, but also from assuming a position in 

which a temptation to act contrary to the best interests of the beneficiaries is likely to arise. 

Grynberg at 1319; 2 Scott on Trusts § 170, pp. 1297-98 (1967).” Salovaara v. Eckert, 94 Civ. 

3430 (KMW), U.S. D.C. SDNY, 1996 U.S. Dist. LEXIS 323 (1996). 

In describing an attorney’s fiduciary duty of loyalty to a client, a court stated: “public policy 

requires that he not be subjected to any possible conflict of interest which may deter him 

from determining the best interests of the client ... a client's right to the undivided loyalty of 
17

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

his or her attorneys must be protected ... The duty of both the associate and the successor 

attorney is the same: to serve the best interests of the client." Beck v. Wecht, No. S099665. , 

Supreme Court Of California, 28 Cal. 4th 289; 48 P.3d 417; 121 Cal. Rptr. 2d 384; 2002 Cal. 

LEXIS 4197; 2002 Cal. Daily Op. Service 5812; 2002 Daily Journal DAR 7326 (2002). 

[Emphasis added.] 

Numerous law review articles and academic texts also reflect on the fiduciary’s obligation to act in the 

client’s (entrustor’s) “best interests”: 

“Tracing this doctrine back into the womb of equity, whence it sprang, the foundation becomes 

plain. Wherever one man or a group of men entrusted another man or group with the management 

of property, the second group became fiduciaries. As such they were obliged to act conscionably, 

which meant in fidelity to the interests of the persons whose wealth they had undertaken to 

handle. In this respect, the corporation stands on precisely the same footing as the common-law 

trust.” Adolf A. Berle, Jr. & Gardiner C. Means, THE MODERN CORPORATION AND PRIVATE

PROPERTY 336 (1939). 

“The underlying purpose of the duty of loyalty, which the sole interest rule is meant to serve, is 

to advance the best interest of the beneficiaries ... There can be no quibble with the core policy 

that motivates the duty of loyalty. Any conflict of interest in trust administration, that is, any 

opportunity for the trustee to benefit personally from the trust, is potentially harmful to the 

beneficiary. The danger, according to the treatise writer Bogert, is that a trustee ‘placed under 

temptation’ will allow ‘selfishness’ to prevail over the duty to benefit the beneficiaries. ‘Between 

two conflicting interests,’ said the Illinois Supreme Court in an oft-quoted opinion dating from 

1844, ‘it is easy to foresee, and all experience has shown, whose interests will be neglected and 

sacrificed’ ... 

“The law is accustomed to requiring that attorneys zealously pursue their clients' interests

and that they not indulge interests that may conflict with those of a particular client without first 

disclosing the potential conflict to the client and receiving the client's approval. There are some 

conflicts that cannot be overcome by the client's permission where the conflicted attorney would 

have to avoid the conflict entirely or quit the representation of the client. Law firms vigorously 

monitor potential conflicts between attorneys and clients. The rules of professional 

responsibility go to great lengths to define the appropriate standard of conduct for attorneys 

and describe what constitutes a conflict and how an attorney, law firm, and client should handle 

it. These strictly enforced standards of conduct cover every facet of the attorney-client 

relationship and leave very little to chance in a court's ex post determination of whether an 

attorney has breached her fiduciary duties. While fiduciary duties may apply to the relationship 

and zealous advocacy is clearly required, the obligation an attorney owes a client is not left to 

vague, unpredictable ex post judicial review. It is quite thoroughly described in codes of conduct 

that have grown ever more complete and sophisticated over time.”4

[Emphasis added.] 

We also see the term “best interests” used to describe the legal obligations arising for those who provide 

personalized investment advice to retail customers. On January 22, 2011, the Staff, fulfilling the mandate 

under § 913 of the Dodd-Frank Act, released its Study on the regulation of broker-dealers and investment 

John H. Langbein, Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?, 114 Yale L.J. 929 (March 2005). 4
18

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

advisers. The overarching recommendation made in the Study is that the SEC should adopt a uniform 

fiduciary standard for investment advisers and broker-dealers that is no less stringent than the standard 

under the Advisers Act. Specifically, the Staff recommended the following: “[T]he standard of conduct for 

all brokers, dealers, and investment advisers, when providing personalized investment advice about 

securities to retail customers (and such other customers as the Commission may by rule provide), shall be 

to act in the best interest of the customer without regard to the financial or other interest of the 

broker, dealer, or investment adviser providing the advice.” [Emphasis added.] 5

While the SEC Staff’s recommendation was a strong one, following on the actual language of the DoddFrank Act, one might argue that any confusion regarding the meaning of “best interests” has arisen from 

the acts of the SEC itself. The SEC began using the term to not describe the fiduciary duty of loyalty, but 

rather the fiduciary duty of due care – i.e., to manage the client's portfolio in the best interest of the clientrather than part of an adviser's duty of loyalty to disclose and thereafter properly manage any unavoidable 

conflicts of interest. However, any review of the history of the fiduciary standard and its legal 6

underpinnings results in the only logical conclusion regarding the best interest standard – that it is part of 

a fiduciary’s duty of loyalty, not duty of care. This is because the essence of the fiduciary’s duty of loyalty 

requires that the fiduciary acts not out of self-interest, but rather in the best interests of the fiduciary. The 

fiduciary steps into the shoes of the client, with all of the fiduciary’s superior knowledge and skills, and 

acts as if the client would then act. As Judge Posner has written, "[a] fiduciary is required to treat his 

principal as if the principal were he, and therefore he may not take advantage of the principal's incapacity, 

ignorance, inexperience, or even naiveté ...." In summary, the fiduciary is required to act as if the 7

fiduciary were the client – i.e., in the client’s best interests. By acquiring the duty of loyalty, the only 

“self-interest” the fiduciary is permitted to consider is the self-interest of the client, into whose shoes the 

fiduciary is now firmly planted. 

The much higher standard of conduct of the fiduciary advisor flows from the requirement of the fiduciary 

“to adopt the principal’s goals, objectives, or ends.” “It is what makes fiduciary law unique and separates 8

fiduciaries from other service providers.” As Professor Laby further explains: 9

SEC Staff, Study on Investment Advisers and Broker-Dealers ii (2011) [hereinafter SEC Staff Study], available at http:// 5

www.sec.gov/news/studies/2011/913studyfinal.pdf.

See Barbara Black, How to Improve Investor Protection After the Dodd-Frank Wall Street Reform and Consumer Protection Act, 6

13 U. Pa. J. Bus. L. 59, 86 (2010).

Market St. Assoc. v. Frey, 941 F. 2d 588, 593 (7th Cir. 1991). 7

 A fiduciary is “a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters 8

connected with his undertaking.” RESTATEMENT (2D) AGENCY § 13 comment (a) (1958). “[T]he general fiduciary principle 

requires that the agent subordinate the agent’s interests to those of the principal and place the principal’s interests first as to 

matters connected with the agency relationship.” RESTATEMENT (3D) AGENCY § 8.01 cmt. b (2007). See also Laby, Arthur B., 

“The Fiduciary Obligation as the Adoption of Ends,” Buffalo L. Rev 99, 103 (2008), available at available at: http://ssrn.com/

abstract=1124722. See also Varity Corp. v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), in which the U.S. 

Supreme Court, applying ERISA, stated that: “There is more to plan (or trust) administration than simply complying with the 

specific duties imposed by the plan documents or statutory regime; it also includes the activities that are "ordinary and natural 

means" of achieving the "objective" of the plan. Bogert & Bogert, supra, § 551, at 41-52. Indeed, the primary function of the 

fiduciary duty is to constrain the exercise of discretionary powers which are controlled by no other specific duty imposed by the 

trust instrument or the legal regime. If the fiduciary duty applied to nothing more than activities already controlled by other 

specific legal duties, it would serve no purpose.” Id. (Emphasis added.)

 Laby, supra n.65, at 130. 9
19

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Some even use the phrase “alter ego” to reference the fiduciary norm. This personalizes 

the duty in a particular way. The fiduciary must appropriate the objectives, goals, or ends 

of another and then act on the basis of what the fiduciary believes will accomplish them – 

a happy marriage of the principal’s ends and the fiduciary’s expertise. The fiduciary does 

not eliminate its own legal personality, rather it must consider the principal’s delegation 

of authority to the fiduciary from the perspective of fidelity to the principal’s objectives 

as the fiduciary understands them.10

This begs the all-important question – who does the registered representative or insurance agent represent 

under SIFMA’s and FINRA’s proposed “best interests” standards represent? This is the key question, for 

the following is well known in the law: 

The characters of buyer and seller are incompatible, and cannot safely be exercised by the 

same person. Emptor emit quam minimo potest; venditor vendit quam maximo potest. The 

disqualification rests ... on no other than that principle which dictates that a person 

cannot be both judge and party. No man can serve two masters. He that it interested with 

the interests of others, cannot be allowed to make the business an object of interest to 

himself; for, the frailty of our nature is such, that the power will too readily beget the 

inclination to serve our own interests at the expense of those who have trusted us.11

It is obvious that under SIFMA’s and FINRA’s proposed BIP standards, the registered representative 

would continue to act as sellers of products, thereby representing the broker-dealer firm and product 

manufacturers. This is a far, far cry from acting as a fiduciary, and acting as the representative of the 

purchaser.

Under BIP the broker-dealer’s representative or insurance agent would still represent the firm and/or the 

product manufacturer. Under BIP the registered representative or insurance agent would continue to be a 

merchandizer, not a trusted adviser bound by fiduciary obligations. Under BIP - and its fatal flaw as a 

regulatory construct - there exists no fiduciary duty of loyalty to the client.

 Laby, supra n.65, at 135. 10

Carter v. Harris, 25 Va. 199, 204 (1826); 1826 Va. LEXIS 26; 4 Rand. 199 (Va. 1826). 11
20

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

3. Upon close analysis, the new “Best Interests” standard proposed by SIFMA and/or by FINRA is 

only a slight modification to the low standard of suitability; the suitability doctrine is inappropriate 

for the delivery of investment and retirement planning advice under ERISA. Additionally, under 

the new “Best Interests” standard proposed by SIFMA and/or by FINRA, the customer remains in 

an arms-length relationship, in which the doctrine of caveat emptor applies, rather than in a 

fiduciary-entrustor relationship as envisioned by ERISA’s detailed statutory prescriptions.

“Goldman's arguments in this respect are Orwellian. Words such as ‘honesty,’ ‘integrity,’ 

and ‘fair dealing’ apparently [in Goldman’s eyes] do not mean what they say; [Goldman 

says] they do not set standards; they are mere shibboleths. If Goldman's claim of 

‘honesty’ and ‘integrity’ are simply puffery, the world of finance may be in more trouble 

than we recognize.” 

– Judge Paul Crotty, Richman v. Goldman Sachs Group, Inc., 

868 F. Supp. 2d 261 (S.D.N.Y. 2012). 

As Judge Crotty alluded to, the broker-dealer community has a tendency to seek to redefine terms, in 

ways that permit them to hold themselves out as something they are not, while at the same time denying 

the fiduciary or other liabilities which flow from such representations. Broker-dealer industry attempts to 

distort the English language, as to the definitions of terms which have existed for decades if not centuries 

or even millenia, should be resisted by all those who treasure truth and candor over fraud and distortion. 

In the table following I summarize the flaws in SIFMA’s and FINRA’s recent “best interests” proposals. 

In so doing I demonstrate why SIFMA’s proposed changes to FINRA’s suitability rule and FINRA’s 

proposal (as well as the proposals of Fidelity, Bank of America and others who tout this new “best 

interests” standard) do not come even close to the protections provided by the fiduciary standard: 

A Concise Comparison: Bona Fide Fiduciary Standard 

vs. SIFMA’s and FINRA’s “Best Interests” Proposals 

What requirements are 

imposed upon the 

person providing 

personalized 

investment advice?

Bona Fide 

Fiduciary 

Standard

SIFMA’s “Best Interest” 

Proposal (as outlined in its 

June 2015 release)

FINRA’S “Best Interest” 

Proposal (as outlined in its 

July 17, 2015 comment letter)

Who does the financial 

representative 

represent?

The client. The brokerage firm, and, through the 

firm, various product manufacturers. 

The financial representative functions 

as a “seller’s representative” with no 

substantial allegiance required to the 

purchaser (customer).

The brokerage firm, and, through the 

firm, various product manufacturers. 

The financial representative 

functions as a “seller’s 

representative” with no substantial 

allegiance required to the purchaser 

(customer).
21

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Does a duty exist upon 

the representative to 

clearly and fully 

disclose all 

compensation received 

by the person providing 

advice, and by his/her 

firm?

Yes. No. While annual disclosure occurs of 

“a good faith summary of the 

investment-related fees” associated with 

an investment, there is no requirement 

in SIFMA’s proposal that the 

compensation of the broker-dealer or its 

registered representative be 

affirmatively quantified and then 

disclosed. As a result, customers will 

remain uninformed of the precise 

amount of the compensation of the 

broker and its registered representative. 

Hence, the client will not possess the 

means to assess the reasonableness of 

the compensation so provided, and the 

receipt of only “reasonable 

compensation” is a requirement for a 

fiduciary actor.

No. While annual disclosure occurs 

of a product’s “fees and all related 

expenses,” there is no requirement in 

FINRA’s proposal that the 

compensation of the broker-dealer or 

its registered representative be 

affirmatively quantified and then 

disclosed. As a result, customers will 

remain uninformed of the precise 

amount of the compensation of the 

broker and its registered 

representative. Hence, the client will 

not possess the means to assess the 

reasonableness of the compensation 

so provided, and the receipt of only 

“reasonable compensation” is a 

requirement for a fiduciary actor. 

Why do broker-dealer firms resist the 

fiduciary requirement to fully 

disclosure a material fact – their 

compensation – to their customers? 

Because a large proportion of these 

customers believe that their 

registered representative and 

brokerage firm is acting gratuitously,

given broker-dealers’ ability to hide 

compensation from the customers.

Is there a duty upon the 

representative to ensure 

client understanding of 

material facts, 

including material 

conflicts of interest?

Yes. No. Under SIFMA’s proposal 

disclosures must only be “designed to 

ensure client understanding.” There is 

no requirement, as exists for a 

fiduciary, that client understanding of 

conflicts of interest, and their 

ramification, actually occur.

No. Under FINRA’s proposal 

disclosures relating to products must 

only be provided to the customer. 

There is no requirement, as exists for 

a fiduciary, that client understanding 

of conflicts of interest, and their 

ramification, actually occur by means 

of affirmative obligations placed 

upon the registered representative. 

What requirements are 

imposed upon the 

person providing 

personalized 

investment advice?

Bona Fide 

Fiduciary 

Standard

SIFMA’s “Best Interest” 

Proposal (as outlined in its 

June 2015 release)

FINRA’S “Best Interest” 

Proposal (as outlined in its 

July 17, 2015 comment letter)
22

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Is informed consent of 

the client required prior 

to the client 

undertaking each and 

every recommended 

transaction?

Yes. No. There is no requirement in 

SIFMA’s proposal that the client’s 

consent be “informed” – a key 

requirement of fiduciary law before 

client waiver of a conflict of interest 

can take place. Nor is there a 

requirement that the client provide 

informed consent prior to each and 

every transaction. Rather, SIFMA 

would only require: “Customer consent

to material conflicts of interest or for 

other purposes as appropriate may be 

provided at account opening.” Of 

course, consent “at client opening” 

often involves a customer briefly 

initialing a line, as one of many initials 

or signatures provided in account 

opening forms which are often dozens 

of pages long. The result of SIFMA’s 

proposal is that clients can and will 

consent to be harmed – an outcome 

which cannot exist under a bona fide 

fiduciary standard. And such “consent” 

will hardly ever be “informed.”

No. There is no requirement in 

FINRA’s proposal that the client’s 

consent be “informed” – a key 

requirement of fiduciary law before 

client waiver of a conflict of interest 

can take place. Nor is there a 

requirement that the client provide 

informed consent prior to each and 

every transaction. Rather, FINRA 

would only require brokers to “obtain 

client consent” to conflicts of 

interest. Such consent, often given 

with little or no understanding by the 

customer of the broker, creates an 

estoppel defense for the broker, who 

is in an arms-length relationship with 

the customer. As explained in this 

comment letter, the role of estoppel 

is very limited in fiduciary 

relationships, and much more than 

“simple consent” is required for the 

fiduciary to proceed when a conflict 

of interest is present.

Must the transaction 

remain, at all times, 

substantively fair to the 

client?

Yes. No. There is only a requirement that the 

transaction be in accord with the 

client’s “best interest” – a new SIFMAproposed standard that is ill defined and 

which remains subject to much 

interpretation. Such interpretations will 

primarily occur through FINRA’s 

much-maligned system of mandatory 

arbitration. In contrast, the fiduciary 

standard possesses centuries of 

interpretation and application. Under a 

bona fide fiduciary standard, clients are 

unable to waive core fiduciary duties; 

the role of estoppel is quite limited. 

This is enforced by the courts by 

requiring both informed consent of the 

client and that the transaction remain 

substantively fair to the client.

No. There is only a requirement that 

the transaction be in accord with the 

client’s “best interest” – a new 

FINRA-proposed standard that is ill 

defined and which remains subject to 

much interpretation. Such 

interpretations will primarily occur 

through FINRA’s much-maligned 

system of mandatory arbitration. In 

contrast, the fiduciary standard 

possesses centuries of interpretation 

and application. Under a bona fide 

fiduciary standard, clients are unable 

to waive core fiduciary duties; the 

role of estoppel is quite limited. This 

is enforced by the courts by requiring 

both informed consent of the client 

and that the transaction remain 

substantively fair to the client.

What requirements are 

imposed upon the 

person providing 

personalized 

investment advice?

Bona Fide 

Fiduciary 

Standard

SIFMA’s “Best Interest” 

Proposal (as outlined in its 

June 2015 release)

FINRA’S “Best Interest” 

Proposal (as outlined in its 

July 17, 2015 comment letter)
23

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

As seen, SIFMA’s and FINRA’s proposed “Best Interest Paradigm” (BIP) standards fall far short of the 

protections afforded by ERISA’s fiduciary standard. The fact of the matter is that Wall Street wants to eat 

its cake and have it too. It wants to be perceived as acting in customer's "best interests," but enjoy the 

freedom to act in its own interests. Wall Street’s new “Best Interests of the Consumer” proposal, or BIP,

is, in reality, only “Wall Street’s Self-Interest.” 

Furthermore, BIP is only a slight modification to the existing suitability standard. 

Through rules adopted by a self-regulatory organization (FINRA, previously NASD), broker-dealer firms 

and their registered representatives are prohibited from an act which would “effect any transaction in, or 

induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent 

Does there exist a duty 

to properly manage

investment-related fees 

and costs that the client 

will incur at all times?

Yes. No. SIFMA expressly states: 

“Managing investment-related fees 

does not require recommending the 

least expensive alternative, nor should 

it interfere with making 

recommendations from among an array 

of services, securities and other 

investment products consistent with the 

customer’s investment profile.” These 

caveats leave the door wide open for 

the broker to recommend highly 

expensive products, including products 

which pay the broker more, in which 

the total fees and costs incurred by the 

customer will substantially lower the 

long-term returns of the investor.

No. FINRA does not appear to 

recognize that, under fiduciary law, 

there is an obligation imposed upon 

the fiduciary to ensure that any 

expenditures of the client’s funds, 

through payment of product-related 

fees and costs, be undertaken with 

close scrutiny. FINRA appears to 

desire that high-cost products could 

still be recommended compared with 

lower-cost products that possess 

nearly the same risk and other 

characteristics. The fiduciary 

standard of due care requires that the 

client’s expenses be controlled and 

that avoidable expenses be avoided. 

The fiduciary is permitted to obtain 

reasonable, professional-level 

compensation, through agreement 

with the client at the inception of the 

relationship, and with full disclosure 

of same.

Does there exist a duty 

to properly manage the 

design, implementation 

and management of the 

portfolio, in order to 

reduce the tax drag 

upon the customer’s 

investment returns?

Yes. No. There is no express duty under 

SIFMA’s proposal to properly manage 

the tax consequences of investment 

decisions. Far too often under the 

suitability standard, and under this 

proposed “best interests” standard, 

customers of broker-dealers have and 

will possess substantial tax drag upon 

their investment returns that otherwise 

could have been avoided through expert 

advice.

No. Nothing in FINRA’s proposal 

addresses portfolio management. 

FINRA is mired in the ancient 

practice of providing products under 

the suitability standard. Today’s 

investors deserve expert advice from 

true fiduciaries, not the sale of 

products which generate high profits 

for the broker without proper 

consideration of how the product fits 

into the client’s overall portfolio.

What requirements are 

imposed upon the 

person providing 

personalized 

investment advice?

Bona Fide 

Fiduciary 

Standard

SIFMA’s “Best Interest” 

Proposal (as outlined in its 

June 2015 release)

FINRA’S “Best Interest” 

Proposal (as outlined in its 

July 17, 2015 comment letter)
24

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

device or contrivance.” Additionally, broker-dealers and their registered representatives must ensure that 12

a securities product be “suitable” for an individual investor as it relates to a recommendation or a 

particular transaction. Once applied, the suitability obligation generally ceases within the same timeline 13

of the transaction itself. 

The SEC staff recently contrasted the fiduciary duties of investment advisers with the more limited duties 

of broker-dealers, stating: 

A core difference, observed by many commentators and commenters, is that investment 

advisers are fiduciaries under the federal securities laws, while broker-dealers generally 

are not. The Commission has stated that the fiduciary duty of investment advisers 

includes a duty of loyalty and a duty of care (encompassing, among other things, a duty 

of suitability), with the duty of loyalty requiring investment advisers to act in the best 

interests of clients and to avoid or disclose conflicts. The standard of conduct for brokerdealers has been characterized as primarily to deal fairly with customers and to observe 

high standards of commercial honor and just and equitable principles of trade, and they 

also are subject to a number of specific obligations, including a duty of suitability, as well 

as requirements to disclose certain conflicts. In practice, with broker-dealers, required 

disclosures of conflicts have been more limited than with advisers and apply at different 

points in the customer relationship.14

“[S]uitability is also applied to investment advisers – it is part of (but does not supersede) the adviser’s 

fiduciary obligations. In Release No. 1406, the SEC proposed a rule under the Act’s anti-fraud 15

provisions requiring advisers give clients only suitable advice. Although the rule was never adopted, the 

SEC staff takes the position that the rule would have codified existing suitability obligations of advisers 

and, as a result, the proposed rule reflects the current obligation of advisers under the Act.”16

 FINRA Rule 2020, which further states: “(a)(1) Implicit in all member and registered representative relationships with 12

customers and others is the fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken only on a basis 

that can be judged as being within the ethical standards of the Association's Rules, with particular emphasis on the requirement to 

deal fairly with the public. (2) This does not mean that legitimate sales efforts in the securities business are to be discouraged by 

requirements which do not take into account the variety of circumstances which can enter into the member-customer relationship. 

It does mean, however, that sales efforts must be judged on the basis of whether they can be reasonably said to represent fair 

treatment for the persons to whom the sales efforts are directed, rather than on the argument that they result in profits to 

customers.”

 FINRA Rule 2310, Recommendations to Customers (Suitability), states: “(a) In recommending to a customer the purchase, sale 13

or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such 

customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial 

situation and needs. (b) Prior to the execution of a transaction recommended to a non-institutional customer, other than 

transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable 

efforts to obtain information concerning: (1) the customer's financial status; (2) the customer's tax status; (3) the customer's 

investment objectives; and (4) such other information used or considered to be reasonable by such member or registered 

representative in making recommendations to the customer.”

 SEC Staff “Study on Investment Advisers and Broker Dealers,” at p.106 (Jan. 21, 2011), available at http://sec.gov/news/ 14

studies/2011/913studyfinal.pdf. 

See Suitability of Investment Advice Provided by Investment Advisers, Investment Advisers Act Release No. 1406 (Mar. 16, 15

1994).

 Plaze, Robert E. Plaze, Outline, The Regulation of Investment Advisers by The Securities and Exchange Commission, at p.39, 16

fn. 82, available at http://www.sec.gov/about/offices/oia/oia_investman/rplaze-042006.pdf.]
25

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Suitability essentially looks at the risks of a security vis-à-vis the client. Suitability does not generally 

require registered representatives to recommend a lower cost product with similar risk and return 

characteristics, if one is available. Nor does the suitability doctrine require monitoring of an investment 

portfolio. Nor does the suitability doctrine require the design or management of the investment portfolio 

for a client in a tax-efficient manner.

At its core, when it applies to the provision of advice, the suitability doctrine actually lessens the duty of 

due care. In the context of advisory recommendations, suitability serves to confine the duties of brokerdealers and their registered representatives to their customers to below that of the broad common law duty 

of due care.

By way of explanation, with the early 20th Century rise of the concept of the duty of due care, and the 

commencement of actions for breach of one’s duty of due care (via the negligence doctrine that saw 

accelerated development during such time), broker-dealers sought a way to ensure they would not be held 

liable under the standard of negligence. After all, “[t]o the extent that investment transactions are about 

shifting risk to the investor, whether from the intermediary, an issuer, or a third party, the mere risk that a 

customer may lose all or part of its investment cannot, in and of itself, be sufficient justification for 

imposing liability on a financial intermediary.” This appears to be a valid view as to the duty of care that 17

should be imposed upon a broker-dealer, and appears appropriate if the broker-dealer is only providing 

only trade execution services to the customer.

In essence, the suitability standard was originally designed solely to protect brokers who provided trade 

execution services from breaches of the duty of due care applicable to all product sellers, given the 

inherent risks of investing in individual securities. Yet, as broker’s services have expanded, the suitability 

standard has inappropriately been applied to broker’s other services, including those services that are 

clearly of an advisory nature.

In contrast to the individual stocks and bonds for which brokers mostly executed transactions in the 

1930’s, currently brokers often recommend mutual funds and other pooled investment vehicles (including 

but not limited to unit investment trusts, ETFs, variable annuity subaccounts and equity indexed 

annuities). Indeed, mutual fund sales exploded a thousand-fold shortly following the SEC’s abolition of 

all fixed commission rates effective May 1, 1975. But, along the way, no longer were broker-dealers just 

performing trade execution services, but they were, in fact, providing advice through their 

recommendation of investment managers. Yet, inexplicably, the SEC and FINRA permitted the suitability 

doctrine to be extended to incorporate broker-dealers’ recommendations of the managers of pooled 

investment vehicles. As a result, brokers operate with a free hand today when providing advice on mutual 

fund selection. Brokers, as a result of the incorrect expansion of the application of the suitability doctrine, 

are unburdened by the duty of nearly every other person in the United States with respect to their advisory 

activities, which, at a minimum, for other providers of advice require adherence to the duty of due care of 

a reasonable person.

Suitability’s abrogation of the duty of care means that suitability lacks teeth when investment advice is 

provided. For example:

60 Am. U.L. Rev. 1265, 1275. 17
26

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

• Suitability does not generally impose upon broker-dealers and their registered representatives 

obligation to recommend a “good” product over a “bad” one.

• Suitability does not impose upon brokers and their registered representatives a duty to recommend a 

less expensive product over an expensive product, even where the product’s composition and risk 

characteristics are almost identical, and even though substantial academic research concludes that 

higher-cost products return less to investors than similar lower-cost products over longer periods of 

time.

• Suitability does not require brokers and their registered representatives to recommend products that 

meets most client’s objectives for tax-efficient and prudent investment portfolios.

• Suitability does not require brokers and their registered representatives to avoid conflicts of interest, 

nor to properly management conflicts of interest that remain to keep the clients’ best interests 

paramount at all times. 

In summary, the suitability standard permits the conflict-ridden sale of highly expensive, tax-inefficient 

and risky investment products, leaving the customer with little or no redress.

Suitability remains a “nebulous and amorphous with respect to its content and parameters.” It essentially 18

imposes upon broker-dealers only the responsibility to not permit their customers to “self-destruct.” 

In summary, the “suitability” standard was not originally designed to, nor should it be permitted to, apply 

to the provision of investment advice. Nor should “suitability,” as only slightly modified by BIP, apply to 

the provision of investment and retirement advice. For suitability abrogates the all-important duty of care 

required of nearly every other provider of services in America today.

In essence, suitability is a shield that protects brokers, not investors. It is such a low standard of conduct 

that, even when surrounded by a multitude of other rules and an enforcement regime, it is but a loud dog 

that lacks any teeth. Additionally, under the new BIP standard proposed by SIFMA and/or by FINRA, the 

customer remains in an arms-length relationship, in which the doctrine of caveat emptor applies, rather 

than in a fiduciary-entrustor relationship as envisioned by ERISA’s detailed statutory prescriptions.

By its BIP proposal SIFMA and FINRA do not turn brokers from sell-side merchandizers into buy-side 

purchaser’s representatives and fiduciaries. Rather, SIFMA’s and FINRA’s BIP proposal are nothing more 

than an attempt to obfuscate into some kind of obscene and confusing hybrid between the two, but even 

then grounded in the low requirements imposed by the suitability doctrine. In fact, the enhancement to the 

inherently weak suitability standard under these proposals is extremely modest, and it fails to arise to 

anywhere close to any fiduciary standard. Under BIP the inherently weak and ineffective suitability 

standard remains, with no real protections afforded to consumers. 

One might wonder why FINRA has even proposed the BIC exemption, given its purported role as a 

regulator and protection of consumer interests. The answer might be found in the fact that FINRA is a 

Lowenfels and Bromberg, Suitability in Securities Transactions, The Business Lawyer (Aug. 1999) 1557. 18
27

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

membership organization of broker-dealer firms. FINRA’s litany of failures, due to the inherent conflict of 

interest of this “self-regulatory organization,” have been well-documented.19

Why has FINRA had so many documented failures? Because — at its core — FINRA acts as the protector 

of its member firms, rather than protecting the public interest. As Tamar Frankel, America’s leading 

scholar on fiduciary law as applied to the securities industry, wrote in 1965:

NASD ... [does] not, as do the professions, consider the public interest as one of [its] goals ... Let 

us consider the attitude of the professions toward the public interest. The goal of public service is 

embedded in the definition of a profession. (Pound, The Lawyer from antiquity to modern times 

5, 1963). A profession performs a unique service; it requires a long period of academic training. 

Service to the community rather than economic gain is the dominant motive. We may measure the 

broker-dealer’s activities against these criteria ... Although at least part of his trade is to give 

service, profit is his goal. The public interest is stated in negative terms: he should refrain from 

wrongdoing because it does not pay. This attitude is the crux of the matter, the heart of the 

difference between a profession and the broker-dealer’s activity ... The industry emphasizes its 

merchandising aspect, and argues that the broker-dealer is subject to the duties of a 

merchandiser even when he is also acting is his advisory capacity ... the NASD [has] proved 

incapable of establishing accepted standards of behavior for the activities of the trade ... Past 

experience has proved that it is unrealistic to expect the NASD to regulate in the public interest 

.... [Emphasis added.]20

Sadly, Professor Frankel’s observations from nearly five decades ago continue to ring true.

4. The use of the term “Best Interests” to describe SIFMA and/or FINRA’s proposed BIP standard, 

given the established use of that term as equivalent to the fiduciary duty of loyalty, is deceitful. 

Additionally, it will exacerbate already-widespread consumer confusion.

Michelle Singletary, author of the nationally syndicated personal finance column, “The Color of Money.” 

recently wrote: 

The Labor Department, directed by the Obama administration, is proposing that more advisers, 

when giving retirement investment advice, put their clients’ best interests first. You’re probably 

thinking what I thought after learning about this: Wait, these advisers aren’t already required to 

recommend investment products that are in my best interests?21

There are dozens, if not hundreds, of similar articles, which use the term “best interests.” From all of 

these articles we can discern a simple truth - individual Americans believe that the term “best interests” 

mean that the advisor is loyal to the interests of the client. 

See, e.g., http://scholarfp.blogspot.com/2013/07/disband-finra-unabridged-and-with.html 19

Tamar Frankel, f/k/a Tamar Hed-Hoffman, “The Maloney Act Experiment,” 6 Boston College L.R. 186, 217 (1965) 20

Michelle Singletary, Is your adviser truly protecting your retirement (The Washington Post, Sept. 12, 2015). 21
28

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Yet, BIP tries to change this common understanding, by redefining a commonly utilized phrase which has 

an accepted definition. Why? One might speculate that the “redefinition” is to encourage the provision of 

trust and confidence by customers of brokers under the BIP standard, where no justification for such 

provision of trust should exist, as a means of facilitating the sale of products by broker-dealers and their 

registered representatives. 

FINRA continues to permit its members and their registered representatives to use the titles “financial 

consultant,” “financial advisor,” and “wealth manager.” Yet, these terms infer a relationship based upon 

trust and confidence, when such relationship of trust and confidence is later denied by the broker and its 

registered representative. 

FINRA has the ability to combat fraud by its member broker-dealer firms and their registered 

representatives. Exchange Act Section 15A(b)(6) requires the rules of an association be designed to 

promote just and equitable principles of trade. FINRA satisfies this statutory requirement in part through 

FINRA Rule 2010, which reads: “A member, in the conduct of its business, shall observe high standards 

of commercial honor and just and equitable principles of trade.” The SEC has held that FINRA’s authority 

under Rule 2010 relating to “just and equitable principles of trade” permits FINRA to sanction member 

firms and associated persons for a variety of unlawful or unethical activities, including those that do not 

implicate “securities.” 

Additionally, Exchange Act Section 15(c) prohibits any broker-dealer firm from effecting any transaction 

in or inducing or attempting to induce the purchase or sale of any security by means of any manipulative, 

deceptive, or other fraudulent device or contrivance. Under this prohibition, broker-dealers are precluded 

from making material omissions or misrepresentations and from any act, practice, or course of business 

that constitutes a manipulative, deceptive, or other fraudulent device or contrivance. 

Earlier this year Gil Weinrich quoted Dalbar’s CEO Lou Harvey as stating: “Imagine, for example, if 

anyone could describe themselves as ‘doctor’ or ‘attorney’ but the real ones were ‘fiduciary doctor’ and 

‘fiduciary attorney’ ....” The article goes on to state: “The heart of Harvey’s proposal is to restrict the 22

use of the word ‘advisor’ (or ‘adviser’) to fiduciaries alone, leading to prosecution for non-fiduciaries 

using that label.” At the fi360 Annual Conference in April 2013, Skip Schweiss, President of TD 23

Ameritrade Trust Company, pointed out Lou Harvey’s suggestion during a panel discussion in which this 

author participated. Skip Schweiss also suggested that anyone calling himself or herself a “financial 

advisor” or “financial consultant” be held to the fiduciary standard of conduct. 

The view that one holding out as an advisor should be governed by the fiduciary standard of conduct finds 

recent support in academic literature: “The relationship between a customer and the financial practitioner 

Gil Weinrich, “A Modest Proposal: Prosecute Non-Fiduciaries Using Term ‘Advisor’ (Dalbar CEO Lou Harvey reacts to 22

Tibergien’s lament about ‘fiduciaries in name only”, located at http://www.advisorone.com/2013/04/08/advisors-are-you-afiduciary-or-a-fraud.

Id. 23
29

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

should govern the nature of their mutual ethical obligations. Where the fundamental nature of the 

relationship is one in which customer depends on the practitioner to craft solutions for the customer’s 

financial problems, the ethical standard should be a fiduciary one that the advice is in the best interest of 

the customer. To do otherwise – to give biased advice with the aura of advice in the customer’s best 

interest – is fraud. This standard should apply regardless of whether the advice givers call themselves 

advisors, advisers, brokers, consultants, managers or planners.” [Emphasis added.] 24

There exists authority, as well, on the inappropriate use of titles, from the SEC itself. Very early on the 

SEC took a hard line on representations made by brokers. In its 1940 Annual Report, the U.S. Securities 

and Exchange Commission noted: “If the transaction is in reality an arm's-length transaction between the 

securities house and its customer, then the securities house is not subject to a fiduciary duty. However, the 

necessity for a transaction to be really at arm’s-length in order to escape fiduciary obligations has been 

well stated by the United States Court of Appeals for the District of Columbia in a recently decided case: 

‘[T]he old line should be held fast which marks off the obligation of confidence and conscience from the 

temptation induced by self-interest. He who would deal at arm's length must stand at arm's length. And 

he must do so openly as an adversary, not disguised as confidant and protector. He cannot commingle his

trusteeship with merchandizing on his own account...’” [Emphasis added.]25

Additionally, in its 1963 comprehensive report on the securities industry, the SEC stated that it had “held 

that where a relationship of trust and confidence has been developed between a broker-dealer and his 

customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular 

duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in 

transactions he effects for his customer ... [BD advertising] may create an atmosphere of trust and 

confidence, encouraging full reliance on broker-dealers and their registered representatives as 

professional advisers in situations where such reliance is not merited, and obscuring the merchandising 

aspects of the retail securities business ... Where the relationship between the customer and broker is 

such that the former relies in whole or in part on the advice and recommendations of the latter, the 

salesman is, in effect, an investment adviser, and some of the aspects of a fiduciary relationship arise 

between the parties.” [Emphasis added.] 26

The fact that misrepresentations of one’s status amounts to fraud is reflected in a recent regulatory action 

filed by the State of Illinois Attorney General, who sought civil penalties against Mr. Richard Lee Van 

Dyke, Jr. (a.k.a. "Dick Van Dyke"), a seller of fixed indexed annuities. Mr. Van Dyke is alledged to have 

stated in advertising: “If you want a successful financial plan, you need a financial advisor you can really 

trust ... He believes in principles like full disclosure and transparency and he doesn’t sell investments on 

James J. Angel and Douglas M. McCabe, Georgetown University, Ethical Standards for Stockbrokers: Fiduciary or Suitability? 24

Sept. 30, 2010.

Seventh Annual Report of the Securities and Exchange Commission, Fiscal Year Ended June 30, 1941, at p. 158, citing Earll v. 25

Picken (1940) 113 F. 2d 150.

1963 SEC Special Study, citing various SEC Releases. See also Arthur B. Laby, Reforming the Regulation of Broker-Dealers 26

and Investment Advisers, 65 Bus. Law. 395, 400, 413-17 (2010) (arguing that the broker-dealer exclusion from the definition of 

"investment adviser" in 15 U.S.C. § 80b-2(a)(11)(C) should be lost if a broker-dealer markets itself or otherwise holds itself out 

as an "adviser" in light of the connotation of the word).
30

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

commission which means he’s on your side so you get to reach your goals first before he does. When’s 

the last time an investment advisor put you first?” The basis of the complaint is a violation of Illinois’ 

Consumer Fraud and Deceptive Business Practices Act. The Attorney General’s complaint notes: “The 

representations cited above, on which Defendants intended consumers will rely, as well as others on 

Defendants’ website, lead consumers to believe Defendant Dick Van Dyke is an objective, knowledgeable 

and unbiased financial services expert for consumers facing retirement, when in fact he is an insurance 

salesman.”27

As a result of regulatory missteps by FINRA over many decades, substantial consumer confusion now 

abounds as to the standard of conduct consumers can expect from their providers of investment advice. In 

large part this is due to the improper use of titles by registered representatives, which, as discussed above, 

rises in the view of many to the level of intentional misrepresentation (i.e., fraud). Yet FINRA does 

nothing to prevent these ongoing misrepresentations from occurring.

And now, by this BIP proposal, FINRA seeks to further exacerbate confusion, and to further permit the 

use of trust-based selling, by a purported re-definition of the term “best interests” despite a common 

understanding among consumers as to what that term means, and despite substantial legal precedent 

which indicates that the term “best interests” is equivalent to the fiduciary duty of loyalty. 

FINRA seeks to have broker-dealers provide advice under a nebulous, and some would say nefarious, 

Best Interests Paradigm. Yet, BIP is but an attempt to disguise the merchandizing aspect of the 

relationship. And, more importantly, as stated by observers above, to give biased advice with the aura of 

advice in the customer’s best interest – is fraud.

5. Any proposal to create a prohibited transaction exemption based on this new “Best Interests 

Paradigm” (BIP) proposal advanced by SIFMA, FINRA, Fidelity or others would fail to meet the 

requirements for the Secretary of Labor’s grant of an exemption under the express provisions of 

ERISA. The Secretary lacks the authority under ERISA to diminish consumer protections, from 

those afforded by the fiduciary-entrustor relationship, to those minimal protections afforded in 

arms-length relationships as would exist under the SIFMA/FINRA proposals.

In creating ERISA, Congress went to great pains to enunciate the fiduciary duties imposed by the statute. 

It provides the Secretary the ability to grant exemptive relief from ERISA’s strict sole interests paradigm 

and prohibited transactions provisions, but only if the exemptive relief is protective of plan participants 

and beneficiaries and in their best interests. 

Clearly, Wall Street’s BIP proposal meets neither of these standards for the grant of exemptive relief. It 

would permit product sales to occur by merchandizers, under the aura of acting in the participant’s best 

Andy Gluck provides commentary on the case and Advisors4Advisors also provides a copy of the Complaint at http:// 27

advisors4advisors.com/compliance/advertising-compliance/article/17314-financial-advisor-in-illinois-accused-in-lawsuit-bystate-securities-regulators-of-advertising-he-acted-as-a-fiduciary-says-hes-done-nothing-wrong.
31

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

interests, as that term is commonly interpreted by the courts and the lay public today. Worse, BIP, if 

enacted, would perpetuate a great fraud on the American people. 

FINRA, by its apparent endorsement of SIFMA’s attempt to perpetuate this fraud, has revealed for all to 

see what it truly is - the protector of Wall Street, not Main Street. Fortunately, ERISA compels the U.S. 

Department of Labor to protect Main Street, not Wall Street. 

B. Contracting Out of Fiduciary Relationships is Impermissible and Any Exemptive Relief to 

Authorize Such a Procedure Would Fail to Meet ERISA’s Statutory Requirements for the 

Grant of Exemptive Relief.

In its comment letter, Fidelity speaks of permitting the “overall framework for the engagement” to “be 

freely negotiated.” Yet, fiduciary duties are imposed by law, and at their core fiduciary duties restrain 28

the conduct of the fiduciary. No fiduciary should be permitted to seek to have the client “free negotiate” 

the terms of the relationship.

1. Whether imposed by the express terms of ERISA, by Congress’ grant of authority to the 

U.S. Department of Labor to enact rules on qualified retirement plan and IRA accounts, or 

by the common law (such as when a relationship of trust and confidence exists), the ability 

of the advisor and client to “contract out” of the fiduciary-client relationship, and return to 

an arms-length (sales-customer) relationship, is negated.

Understanding fiduciary duties begins with an understanding of the two general types of relationships 

between product and service providers and their customers or clients under the law – “arms-length 

relationships” and “fiduciary relationships.” “Arms-length” relationships apply to the vast majority of 29

Fidelity Cmt. Ltr., Page A-5. 28

 “The legal system provides for only two levels of trust and their differentiation is necessary for them to be useful tools for 29

parties setting up relationships ... In essence, legal systems provide only two levels of loyalty between contracting parties, arm'slength and fiduciary relationships. The difference in the degree of trust that the two levels of loyalty entitle the parties is 

dramatic. Fiduciary relations impose a pure duty of loyalty, according to which the fiduciary must place the interests of his 

employer before his own. Arm's-length relations, by contrast, allow exploitation within the parameters of good faith.” 

Georgakopoulos, Nicholas L., “Meinhard v. Salmon and the Economics of Honor” (April 1998, revised Feb. 8, 1999). Available 

at SSRN: http://ssrn.com/abstract=81788 or DOI: 10.2139/ssrn.81788.
32

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

service provider–customer engagements. In arms-length relationships, the doctrine of “caveat emptor” 30 31

generally applies, although there are many exceptions made to this doctrine which effectively compel 32

affirmative disclosure of adverse material facts in diverse contexts. In other words, non-fiduciaries who 33

contract with each other can engage in “conduct permissible in a workaday world for those acting at arm's 

length.”34

In arms-length, commercial relationships, the level of trust or confidence reposed by the customer in the 

other party is not exceptional. “Mere subjective trust does not transform arms-length dealing into a 

fiduciary relationship.” “Absent express agreement of the parties or extraordinary circumstances, 35 36

however, parties dealing at arms-length in a commercial transaction lack the requisite level of trust or 

 See, for example, Hartman v. McInnis, No. 2006-CA-00641-SCT (Miss. 11/29/2007) ([O]rdinarily a bank does not owe a 30

fiduciary duty to its debtors and obligors under the UCC ... the power to foreclose on a security interest does not, without more, 

create a fiduciary relationship ... a mortgagee-mortgagor relationship is not a fiduciary one as a matter of law.”). “[T]he 

significant weight of authority holds that franchise agreements do not give rise to fiduciary ... relationships between the parties." 

GNC Franchising, Inc. v. O'Brien, 443 F.Supp.2d 737, 755 (W.D. Pa., 2006).

Caveat emptor is Latin for ‘Let the buyer beware.’ In its purest form at common law, in the absence of fraud, 31

misrepresentation or active concealment, the seller is under no duty to disclose any defect; it therefore provides a safe harbor to a 

seller to not to disclose any information to a buyer. See Alex M. Johnson, Jr., “An Economic Analysis Of The Duty To Disclose 

Information: Lessons Learned From The Caveat Emptor Doctrine” (2007), available at 

http://law.bepress.com/cgi/viewcontent.cgi?article=9154&context=expresso. It means that a customer should be cautious and 

alert to the possibility of being cheated. The doctrine supports the idea that buyers take responsibility for the condition of the 

items they purchase and should examine them before purchase. This is especially true for items that are not covered under any 

warranty. See, e.g. SEC v. Zandford, 535 U.S. 813 (2002).

 “When parties deal at arm's length the doctrine of caveat emptor applies, but the moment that the vendor makes a false 32

statement of fact, and the falsity is not palpable to the purchaser, he has an undoubted right to implicitly rely upon it. That would 

indeed be a strange rule of law which, when the seller has successfully entrapped his victim by false statements, and was called to 

account in a court of justice for his deceit, would permit him to escape by urging the folly of his dupe was not suspecting that he 

(the seller) was a knave." Holcomb v. Zinke, 365 N.W.2d 507, 511 (N.D., 1985).

 It is well settled that fraud may occur without the making of a false statement. Dvorak v. Dvorak, 329 N.W.2d 868 (N.D.1983). 33

The suppression of a material fact, which a party is bound in good faith to disclose, is equivalent to a false representation. Verry v. 

Murphy, 163 N.W.2d 721 (N.D.1969).

Meinhard v Salmon, 249 NY 458, 464 (N.Y. 1928). 34

 Exxon Corp. v. Breezevale Ltd., 82 S.W.3d 429 (Tex. App., 2002). 35

Pension Committee v. Banc of America Securities, 592 F.Supp.2d 608, 624 (S.D.N.Y., 2009) (“a fiduciary relationship may 36

arise where the parties to a contract specifically agree to such a relationship ....”). 
33

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

confidence between them necessary to give rise to a fiduciary obligation.” Ordinary “buyer-seller 37

relationships” do not give rise to the imposition of fiduciary duties upon the seller.38

Yet, commercial good faith is always required in contract performance. Actors in arms-length 

relationships are always subject to the requirement of “mere good faith and fair dealing” in the 39

 Pension Committee v. Banc of America Securities, 592 F.Supp.2d 608, 624 (S.D.N.Y., 2009) (“no fiduciary duties arise where 37

parties deal at arm's length in conventional business transaction”); Henneberry v. Sumitomo Corp. of America, 415 F.Supp.2d 

423, 460 (S.D.N.Y., 2006), citing Nat'l Westminster Bank, U.S.A. v. Ross, 130 B.R. 656, 679 (S.D.N.Y.1991) ("Where parties deal 

at arms length in a commercial transaction, no relation of confidence or trust sufficient to find the existence of a fiduciary 

relationship will arise absent extraordinary circumstances." (citing, inter alia, Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 

748 F.2d 729, 738-39 (2d Cir.1984); Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank, N.A., 731 F.2d 112, 122 (2d Cir. 

1984))), aff'd, Yaeger v. Nat'l Westminster, 962 F.2d 1 (2d Cir.1992) (table); Beneficial Commercial Corp. v. Murray Glick 

Datsun, Inc., 601 F.Supp. 770, 772 (S.D.N.Y. 1985) ("[C]ourts have rejected the proposition that a fiduciary relationship can arise 

between parties to a business transaction." (citing Grumman Allied Indus., Inc., 748 F.2d at 738-39; Wilson-Rich v. Don Aux 

Assocs., Inc., 524 F.Supp. 1226, 1234 (S.D.N.Y.1981); duPont v. Perot, 59 F.R.D. 404, 409 (S.D.N.Y.1973))); WIT Holding Corp. 

v. Klein, 282 A.D.2d 527, 724 N.Y.S.2d 66, 68 (App.Div.2001) ("Under these circumstances, where the parties were involved in 

an arms-length business transaction involving the transfer of stocks, and where all were sophisticated business people, the 

plaintiff's cause of action to recover damages for breach of fiduciary duty should have been dismissed.").

 In re Prudential Ins. Co. of America Sales Prac., 975 F.Supp. 584 (D.N.J., 1996), where, in a case involving sales by life 38

insurance agents of variable appreciable life insurance products as “investment plans,” the court stated: “An essential feature and 

consequence of a fiduciary relationship is that the fiduciary becomes bound to act in the interests of her beneficiary and not of 

herself. Obviously, this dynamic does not inhere in the ordinary buyer-seller relationship. Thus, ‘the efforts of commercial sellers 

— even those with superior bargaining power — to profit from the trust of consumers is not enough to create a fiduciary duty. If 

it were, the law of fiduciary duty would largely displace both the tort of fraud and much of the Commercial Code.’ Committee on 

Children's Television, Inc., v. General Foods Corp., 35 Cal.3d 197, 221, 197 Cal.Rptr. 783, 789, 673 P.2d 660, 675 (1983) (en 

banc).” In re Prudential Ins. Co. of America Sales Prac. At 616.

See GNC Franchising, Inc. v. O'Brien, 443 F.Supp.2d 737, 755 (W.D. Pa., 2006) (“A party bound by a fiduciary duty must 39

advance the interests of the cestui que trust above its own and act scrupulously in the other's interests. Imposition of this degree 

of duty—i.e., selfless service as opposed to merely good faith and fair dealing—would generally be inapplicable as between 

parties to a commercial relationship knowingly entered into for each party's own profit”). 

In arms-length relationships, the burden of proof of lack of fair dealing rests on the person alleging that the other party acted in 

such manner. This contrasts with the burden of proof where a fiduciary relationship exists, where the burden of proof of fair 

dealing rests with the fiduciary. See ABN Amro Mortgage Group, Inc. v. Pristine Mortgage, LLC, No. CV 04-4005389 (CT 

9/8/2005) (CT, 2005) (“The significance of the establishment of a fiduciary relationship is twofold. First, the burden of proving 

fair dealing shifts to the fiduciary. Secondly, the standard of proof for establishing fair dealing is not the ordinary standard of fair 

preponderance of evidence but requires proof of clear and convincing evidence.”)
34

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

performance of their obligations; this doctrine is fundamental to all commercial transactions. Good faith 40

requires that each party perform their respective obligations and enforce their rights honestly and fairly. 41

While there is no general duty to disclose material facts in arms-length transactions, actual or “common 

law” fraud is prohibited in the formation of commercial relationships. There is generally no duty to 

undertake full disclosure of material facts in the negotiation of commercial contracts, except where one 42

party’s superior knowledge renders non-disclosure of an essential fact inherently unfair or a “special 43

relationship” exists. Instead, actors in commercial relationships generally possess a duty to undertake 44

 The doctrine of good faith requires that the parties also perform their respective obligations and enforce their rights honestly 40

and fairly. See Restatement (Second) Contracts (1981) at §205, “Duty of Good Faith and Fair Dealing,” stating: “Every contract 

imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” The Comment to this 

section adds: “Good faith is defined in Uniform Commercial Code § 1-201(19) as ‘honesty in fact in the conduct or transaction 

concerned.’ ‘In the case of a merchant’ Uniform Commercial Code §2-103(1)(b) provides that good faith means ‘honesty in fact 

and the observance of reasonable commercial standards of fair dealing in the trade.’ The phrase ‘good faith’ is used in a variety of 

contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes 

faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety 

of types of conduct characterized as involving ‘bad faith’ because they violate community standards of decency, fairness or 

reasonableness. Failure to abide by the duty of good faith may constitute fraud (in the event of intentional misrepresentation) or 

breach of contract.”

 For example, the Uniform Commercial Code, adopted by every state except Louisiana, explicitly imposes a good faith 41

obligation on the performance and enforcement of every contract falling within its scope. UCC § 1-304, as amended (2003). 

Essentially, the Restatement of Contracts adopts the view that “bad faith in performance” is a violation of the good faith 

obligation. As stated by Professor Emily S.H. Hough: “The subcategories of bad faith in performance further delineated by 

Summers include ‘evasion of the spirit of the deal,’ ‘lack of diligence and slacking off,’ ‘willfully rendering only ‘substantial 

performance,’’ ‘abuse of power to determine compliance,’ and ‘interfering with or failing to cooperate in the other party’s 

performance.’” All of these subcategories contemplate cases in which judges would feel comfortable using their discretionary and 

equitable powers to find a breach of good faith where the express language of the contract might not otherwise support a claim 

for breach of contract.” Houh, Emily, “The Doctrine of Good Faith in Contract Law: A (Nearly) Empty Vessell?” Utah Law 

Review, 2005. Available at SSRN: http://ssrn.com/abstract=622982. 

See Southern Intermodal Logistics, Inc. v. Smith & Kelly Co., 190 Ga.App. 584, 379 S.E.2d 612, 613-4 (1989) (“While 42

concealment of material facts may amount to fraud when the concealment is of intrinsic qualities the other party could not 

discover by the exercise of ordinary care ... in an arms-length business or contractual relationship there is no obligation to 

disclose information which is equally available to both parties”).

 Henneberry v. Sumitomo Corp. of America, 415 F.Supp.2d 423 (S.D.N.Y., 2006), stating: “Even absent the existence of a 43

fiduciary relationship, however, a party's duty to disclose a material fact to another party it is negotiating with is triggered where 

‘one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of 

mistaken knowledge.’ Grumman Allied Indus., Inc., 748 F.2d at 739 (quoting Aaron Ferer & Sons Ltd., 731 F.2d at 123; Jana L. v. 

W. 129th St. Realty Corp., 22 A.D.3d 274, 802 N.Y.S.2d 132, 134 (App.Div.2005) (‘It is well established that, absent a fiduciary 

relationship between the parties, a duty to disclose arises only under the `special facts' doctrine `where one party's superior 

knowledge of essential facts renders a transaction without disclosure inherently unfair.'’ (quoting Swersky v. Dreyer & Traub, 219 

A.D.2d 321, 643 N.Y.S.2d 33, 37 (App.Div. 1996).” Henneberry at 461.

 See Giles v. General Motors Acceptance Corp., 494 F.3d 865, 881 (9th Cir., 2007) (“Nevada also recognizes "special 44

relationships" giving rise to a duty to disclose, such that ‘[n]ondisclosure . . . become[s] the equivalent of fraudulent 

concealment.’ Mackintosh v. Jack Matthews & Co., 109 Nev. 628, 855 P.2d 549, 553 (1993). In order to prove the existence of a 

special relationship, a party must show that (1) ‘the conditions would cause a reasonable person to impart special confidence’ and 

(2) the trusted party reasonably should have known of that confidence. Mackintosh v. Cal. Fed. Sav. & Loan Ass'n, 113 Nev. 393, 

935 P.2d 1154, 1160 (1997) (per curiam). ‘[T]he existence of the special relationship is a factual question . . . .’ Id.)
35

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

diligent inquiry in order to ascertain facts. However, if disclosures are undertaken by a party, the 45

statements made must be truthful and complete or actual fraud , also called “common law fraud,” 46 47

exists. Hence, while commercial good faith does not automatically extend to the area of contract 

negotiations, misrepresentations made during the formation of a contract may constitute either actual 

fraud or breach of contract. To put it much more simply, don’t lie, cheat, deceive or steal – even in 48

commercial arms-length relationships. 

No fiduciary obligations exist in most arms-length relationships. “An arms-length relationship can 

support no implied-in-law fiduciary obligations.” Instead, the standard of conduct expected of the actors 49

in arms-length relationships has been described by the courts as the “morals of the marketplace.”50

While some often think of our society as “free” and capitalism as best undertaken when it is “unfettered,” 

not all arms-length relationships are free from government intervention. Though not arising to the level of 

 See Burger King Corp. v. Austin, 805 F.Supp. 1007, 1019 (S.D. Fla., 1992) (“Florida law additionally charges a claimant with 45

knowledge of all facts that he could have learned through diligent inquiry ... In absence of a fiduciary relationship, mere 

nondisclosure of material facts in an arm's length transaction is ordinarily not actionable misrepresentation unless some artifice or 

trick has been employed to prevent the representee from making further independent inquiry, though non-disclosure of material 

facts may be fraudulent where the other party does not have an equal opportunity to become appraised of the facts.”), citing

Taylor v. American Honda Motor Co., 555 F.Supp. 59, 64 (M.D.Fla.1982).

 See Playboy Enterprises v. Editorial Caballero, 202 S.W.3d 250, 260 (Tex. App., 2006), stating: “In addition to situations 46

where there is a fiduciary or confidential relationship ... a duty to speak may arise in an arms-length transaction in at least three 

other situations: (1) when one voluntarily discloses information, he has a duty to disclose the whole truth; (2) when one makes a 

representation, he has a duty to disclose new information when the new information makes the earlier representation misleading 

or untrue; and (3) when one makes a partial disclosure and conveys a false impression, he has the duty to speak.”

 “Actual fraud is where one person causes pecuniary injury to another by intentionally misrepresenting or concealing a material 47

fact which from their mutual position he was bound to explain or disclose.” Charles Sweet, A Dictionary of English Law (1883).

 Waller, Spencer Weber and Brady, Jillian G., “Consumer Protection in the United States: An Overview; Strengthening the 48

Consumer Protection Regime” (2007), available at SSRN: 

http://ssrn.com/abstract=1000226. Private actions alleging actual fraud form an important, though often expensive and difficult, 

avenue for protection of the rights of a contracting party. “A consumer may file a lawsuit for deceit or fraud when a vendor 

intentionally conceals a material fact or makes a false representation of a material fact, knows that the representation is false, and 

meant to induce the consumer to act based on the misrepresentation. In order for the consumer to be successful in court, a 

plaintiff must also reasonably rely on the misrepresentation and suffer damage as a result of the reliance. Deceit can occur when a 

vendor makes a direct false statement, or when a misrepresentation is achieved through silence, concealment, half-truths, or 

ambiguity about a good. While misrepresentation of product facts may bring legal action, mere puffery and sales representative 

opinions are generally not subject to lawsuits for deceit.” Id. at p. 13.

 Marine, Inc. v. Brunswick Corporation, No. 07-13907 Non-Argument Calendar (11th Cir. 5/14/2008) (11th Cir., 2008) , at p.5; 49

see Taylor Woodrow Homes Florida, Inc. v. 4/46-A Corp., 850 So.2d 536, 541 Fla. 5th DCA 2003 ("When the parties are dealing 

at arm's length, a fiduciary relationship does not exist because there is no duty imposed on either party to protect or benefit the 

other."). See also Greenberg v. Chrust, 198 F.Supp.2d 578, 585 (S.D.N.Y., 2002) (“parties to arms length commercial contracts 

do not owe each other a fiduciary obligation”).

 In re Auto Specialties Mfg. Co., 153 B.R. 457, 488 (Bankr. W.D. Mich., 1993) (Courts have described the standard of conduct 50

to which a non-fiduciary will be held in the vernacular as the ‘morals of the marketplace’”).
36

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

fiduciary protections, specific statutes or regulations may nevertheless protect consumers. In essence, 51

the “caveat emptor” doctrine has been legislatively modified by the imposition of specific rules or 

doctrines which seek to provide government (public) redress for certain bad acts, provide enhanced 

disclosures, or provide additional rights which can be privately enforced, in recognition that unfettered 

capitalism can have ill effects. 52

In the context of securities regulation, various federal statutes provide for enhanced protection of 

consumers, beyond that found in pure arms-length relationships, through government oversight of certain 

activities, and by other means. For example, the 1933 Securities Act and the Securities and Exchange Act 

of 1934 both adopt a “full disclosure” regime as a protection for individual investors. Over the decades, 53

federal securities laws and regulations have evolved to protect investors largely through requiring the 

 There always exists a tension between calls for “freedom and independence” in commercial relations and “consumer protection.”

“In a contract society, individuals can provide for their basic needs, and can gain by exchanging the surplus they produce. In 

addition, such a society offers many options for its members to satisfy their needs. A contract society values freedom and 

independence highly, but it provides little security for its members.” Tamar Frankel, “Fiduciary Law,” 71 Calif. L. Rev. 795 

(1983). “Freedom” and “competition” in contract societies provide substantial opportunities for innovation and profit. However, 

as seen during the recent financial crisis, unfettered capitalism can also lead to abuses – and dangers – not only to those 51

individuals who seek out service providers, but to entire financial and economic systems. Hence, at times legislatures or the 

courts have seen fit to provide certain protections to one of the contracting parties, typically the consumer of a product or service, 

through either the imposition of certain disclosure regimes, mandating certain contract formats or terms, or other consumer 

protection measures. When circumstances dictate the need for greater security for consumer members of society, in order to 

combat forces which transform opportunism into greed and/or to achieve other public aims, the law applies fiduciary status upon 

the service provider.

 The undeniable truth is that capitalism runs on opportunism. In his landmark work, The Wealth of Nations, Adam Smith 52

described an economic system based upon self-interest. This system, which later became known as capitalism, is described in this 

famous passage: 

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard 

to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our 

own necessities but of their advantages. 

(Smith, p. 14, Modern Library edition, 1937). As Adam Smith pointed out, capitalism has its positive effects. Actions 

based upon self-interest often lead to positive forces which benefit others or society at large. As capital is formed into an 

enterprise, jobs are created. Innovation is spurred forward, often leading to greater efficiencies in our society and 

enhancement of standards of living. However, as Adam Smith also noted, a person in the pursuit of his own interest 

“frequently promotes that of the society more effectually than when he really intends to promote it.” (Smith, p. 423) 

Taken to excess, however, the self-interest which is so essential to capitalism can lead to opportunism, defined by Webster’s as 

the “practice of taking advantage of opportunities or circumstances often with little regard for principles or consequences.” A 

stronger word exists when consequences to others are ignored - “greed.” We might define “greed” in this context as the selfish 

desire for the pursuit of wealth in a manner which risks significant harm to others or to society at large. Whether through actions 

intentional or neglectful, when ignorance of material adverse consequences occurs, the term “greed” is rightfully applied. 

Gordon Gekko in the film Wall Street, who famously declared that “Greed, for lack of a better word, is good,” got it wrong. 

Greed is not good in society. However, opportunism itself – acting in pursuit of one’s self-interest - does not always lead to greed. 

Rather, it is only when the pursuit of wealth causes significant undue harm to others does such activity arise to the level of greed, 

and in such circumstance greed is not “good.”

 Section 10(b) of the Securities Exchange Act makes it "unlawful for any person ... [t]o use or employ, in connection with the 53

purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and 

regulations as the [SEC] may prescribe." 15 U. S. C. §78j. Rule 10b-5, which implements this provision, forbids the use, "in 

connection with the purchase or sale of any security," of "any device, scheme, or artifice to defraud" or any other "act, practice, or 

course of business" that "operates ... as a fraud or deceit." 17 CFR §240.10b-5 (2000). Among Congress' objectives in passing the 

Act was "to insure honest securities markets and thereby promote investor confidence" after the market crash of 1929. United 

States v. O'Hagan, 521 U. S. 642, 658 (1997); see also United States v. Naftalin, 441 U. S. 768, 775 (1979). More generally, 

Congress sought “to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high 

standard of business ethics in the securities industry.” Affiliated Ute Citizens of Utah v. United States, 406 U. S. 128, 151 (1972) 

(quoting SEC v. Capital Gains Research Bureau, Inc., 375 U. S. 180, 186 (1963)).
37

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

disclosure of information – whether it be of material facts regarding an issuer of a security, or of 

compensation paid to a financial services intermediaries, or of conflicts of interest which exist as to 

financial services intermediaries. Indeed, it has been stated that in the United States, “federal securities 

law’s exclusive focus is on full disclosure.”54

The SEC’s emphasis on disclosure, drawn from the focus of the 1933 and 1934 Securities Acts on 

enhanced disclosures, results from the myth that investors carefully peruse the details of disclosure 55

documents that regulation delivers. However, under the scrutinizing lens of stark reality, this picture 

gives way to an image of a vast majority of investors who are unable, due to behavioral biases and lack 56

of knowledge of our complicated financial markets, to comprehend the disclosures provided, yet alone 

undertake sound investment decision-making. As stated by Professor (and former SEC Commissioner) 

Troy A. Parades:

The federal securities laws generally assume that investors and other capital market 

participants are perfectly rational, from which it follows that more disclosure is always 

better than less. However, investors are not perfectly rational. Herbert Simon was among 

the first to point out that people are boundedly rational, and numerous studies have since 

supported Simon’s claim. Simon recognized that people have limited cognitive abilities to 

process information. As a result, people tend to economize on cognitive effort when 

making decisions by adopting heuristics that simplify complicated tasks. In Simon’s 

terms, when faced with complicated tasks, people tend to “satisfice” rather than 

“optimize,” and might fail to search and process certain information.57

Other investor biases overwhelm the effectiveness of disclosures. As stated by Professor Fisch: 

The primary difficulty with disclosure as a regulatory response is that there is limited 

evidence that disclosure is effective in overcoming investor biases. ... It is unclear ... that 

intermediaries offer meaningful investor protection. Rather, there is continued evidence 

that broker-dealers, mutual fund operators, and the like are ineffective gatekeepers. 

Understanding the agency costs and other issues associated with investing through an 

intermediary may be more complex than investing directly in equities ....”58

The inadequacy of disclosures was known even in 1930’s. Even back during the consideration of the 

initial federal securities laws, the perception existed that disclosures would prove to be inadequate as a 

means of investor protection. As stated by Professor Schwartz: 

 Thomas Lee Hazen, The Law Of Securities Regulation, Vol. 1, § 8.1[1][B], at 740 (4th ed. 2002). 54

 For years it has been known that that investors do not read disclosure documents. See, generally, Homer Kripke, The SEC and 55

Corporate Disclosure: Regulation In Search Of A Purpose (1979); Homer Kripke, The Myth of the Informed Layman, 28 

Bus.Law. 631 (1973). See also Baruch Lev & Meiring de Villiers, Stock Price Crashes and 10b-5 Damages: A Legal, Economic, 

and Policy Analysis, 47 Stan. L. Rev. 7, 19 (1994) (“[M]ost investors do not read, let alone thoroughly analyze, financial 

statements, prospectuses, or other corporate disclosures ....”); Kenneth B. Firtel, Note, “Plain English: A Reappraisal of the 

Intended Audience of Disclosure Under the Securities Act of 1933, 72 S. Cal. L. Rev. 851, 870 (1999) (“[T]he average investor 

does not read the prospectus ....”).

 For an overview of various individual investor bias such as bounded irrationality, rational ignorance, overoptimism, 56

overconfidence, the false consensus effect, insensivity to the source of information, the fact that oral communications trump 

written communications, and other heuristics and bias, see Robert Prentice, “Whither Securities Regulation? Some Behavioral 

Observations Regarding Proposals for its Future,” 51 Duke L. J. 1397 (2002).

 Parades at p.3. 57

 Jill E. Fisch, “Regulatory Responses To Investor Irrationality: The Case Of The Research Analyst,” 10 Lewis & Clark L. Rev. 58

57, 74-83 (2006).
38

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Analysis of the tension between investor understanding and complexity remains scant. 

During the debate over the original enactment of the federal securities laws, Congress did 

not focus on the ability of investors to understand disclosure of complex transactions. 

Although scholars assumed that ordinary investors would not have that ability, they 

anticipated that sophisticated market intermediaries – such as brokers, bankers, 

investment advisers, publishers of investment advisory literature, and even lawyers - 

would help filter the information down to investors.59

Behavioral biases also negate the abilities of “do-it-yourself” investors. As shown in DALBAR, Inc.’s 

2009 “Quantitative Analysis of Investor Behavior”, most individual investors underperform benchmark 

indices by a wide margin, far exceeding the average total fees and costs of pooled investment vehicles. 60

A growing body of academic research into the behavioral biases of investors reveals substantial obstacles 

individual investors must overcome in order to make informed decisions, and reveal the inability of 61

individual investors to contract for their own protections.62

Note as well that “instead of leading investors away from their behavioral biases, financial professionals 

may prey upon investors’ behavioral quirks ... Having placed their trust in their brokers, investors may 

give them substantial leeway, opening the door to opportunistic behavior by brokers, who may steer 

investors toward poor or inappropriate investments.” [Emphasis added.] Moreover, “not only can 63

marketers who are familiar with behavioral research manipulate consumers by taking advantage of 

 Steven L. Schwarcz, Rethinking The Disclosure Paradigm In A World Of Complexity, Univ.Ill.L.R. Vol. 2004, p.1, 7 (2004), 59

citing “Disclosure To Investors: A Reappraisal Of Federal Administrative Policies Under The ‘33 and ‘34 Acts (The Wheat 

Report),“ 52 (1969); accord William O. Douglas, “Protecting the Investor,” 23 YALE REV. 521, 524 (1934).

Supra n. 17. 60

 As stated by Professor Ripken: “[E]ven if we could purge disclosure documents of legaleze and make them easier to read, we 61

are still faced with the problem of cognitive and behavioral biases and constraints that prevent the accurate processing of 

information and risk. As discussed previously, information overload, excessive confidence in one’s own judgment, overoptimism, 

and confirmation biases can undermine the effectiveness of disclosure in communicating relevant information to investors. 

Disclosure may not protect investors if these cognitive biases inhibit them from rationally incorporating the disclosed information 

into their investment decisions. No matter how much we do to make disclosure more meaningful and accessible to investors, it 

will still be difficult for people to overcome their bounded rationality. The disclosure of more information alone cannot cure 

investors of the psychological constraints that may lead them to ignore or misuse the information. If investors are overloaded, 

more information may simply make matters worse by causing investors to be distracted and miss the most important aspects of 

the disclosure ... The bottom line is that there is ‘doubt that disclosure is the optimal regulatory strategy if most investors suffer 

from cognitive biases’ ... While disclosure has its place in a well-functioning securities market, the direct, substantive regulation 

of conduct may be a more effective method of deterring fraudulent and unethical practices.” Ripken, Susanna Kim, The Dangers 

and Drawbacks of the Disclosure Antidote: Toward a More Substantive Approach to Securities Regulation. Baylor Law Review, 

Vol. 58, No. 1, 2006; Chapman University Law Research Paper No. 2007-08. Available at SSRN: http://ssrn.com/

abstract=936528. 

See Robert Prentice, Whither Securities Regulation Some Behavioral Observations Regarding Proposals for its Future, 51 62

Duke Law J. 1397 (March 2002). Professor Prentices summarizes: “Respected commentators have floated several proposals for 

startling reforms of America’s seventy-year-old securities regulation scheme. Many involve substantial deregulation with a view 

toward allowing issuers and investors to contract privately for desired levels of disclosure and fraud protection. The behavioral 

literature explored in this Article cautions that in a deregulated securities world it is exceedingly optimistic to expect issuers 

voluntarily to disclose optimal levels of information, securities intermediaries such as stock exchanges and stockbrokers to 

appropriately consider the interests of investors, or investors to be able to bargain efficiently for fraud protection.” Available at 

http://www.law.duke.edu/shell/cite.pl?51+Duke+L.+J.+1397. 

 Stephen J. Choi and A.C. Pritchard, “Behavioral Economics and the SEC” (2003), at p.18. 63
39

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

weaknesses in human cognition, but ... competitive pressures almost guarantee that they will do so.” 64

[Emphasis added.] Indeed, many brokers and other financial advisors have received training, time and 

again, stressing the need to first and foremost establish a relation of trust and confidence with the client; 

after trust is established, it is taught that the client usually defers to the judgment of the advisor as to 

recommendations made, usually without further inquiry by the client, thereby permitting the financial 

advisor to take advantage of the client.

Professor Langevoort undertook these further observations regarding “trust-based selling”: 

[W]hen faced with complex, difficult and affect-laden choices (and hence a strong 

anticipation of regret should those choices be wrong), many investors seek to shift 

responsibility for the investments to others. This is an opportunity – the core of the fullservice brokerage business – to use trust-based selling techniques, offering advice that 

customers sometimes too readily accept. Once trust is induced, the ability to sell vastly 

more complicated, multi-attribute investment products goes up. Complex products that 

have become widespread in the retail sector, like equity index annuities, can only be sold 

by intensive, time-consuming sales effort. As a result the sales fees (and embedded 

incentives) are very large, creating the temptation to oversell. In the mutual fund area, 

the broker channel – once again, driven by generous incentives - sells funds aggressively. 

Recent empirical research suggests that buyers purchase funds in this channel at much 

higher cost but performance on average is no better, and often worse, than readily 

available no-load funds.65

In contrast to arms-length relationships, the law imposes upon one party to some relationships the status 

of a fiduciary. This form of relationship is called the “fiduciary relationship” or “fiducial relationship.” 

One upon whom fiduciary duties are imposed is known as the “fiduciary” and is said to possess “fiduciary 

status.” The fiduciary standard of conduct is consistently described by the courts as the “highest standard 

of duty imposed by law.”66

The term "fiduciary" comes to us from Roman law, and means "a person holding the character of a 

trustee, or a character analogous of a trustee, in respect to the trust and confidence involved in it and the 

scrupulous good faith and candor which it requires.” Indeed, the Latin root of the word fiduciary – 67

fiduciarius – means one in whom trust – fiducia - reposes. Legal usage in many jurisdictions also 

 Robert Prentice, “Contract-Based Defenses In Securities Fraud Litigation: A Behavioral Analysis,” 2003 U.Ill.L.Rev. 337, 64

343-4 (2003), citing Jon D. Hanson & Douglas A. Kysar, “Taking Behavioralism Seriously: The Problem of Market 

Manipulation,” 74 N.Y.U.L.REV. 630 (1999) and citing Jon D. Hanson & Douglas A. Kysar, “Taking Behavioralism Seriously: 

Some Evidence of Market Manipulation,” 112 Harv.L.Rev. 1420 (1999).

 Donald C. Langevoort, “The SEC, Retail Investors, and the Institutionalization of the Securities Markets” (Jan. 2009), prior 65

version available at vailable at SSRN: http://ssrn.com/abstract=1262322.

See, generally BLACK'S LAW DICTIONARY 523 (7th ed. 1999) ("A duty of utmost good faith, trust, confidence, and candor owed 66

by a fiduciary (such as a lawyer or corporate officer) to the beneficiary (such as a lawyer's client or a shareholder); a duty to act 

with the highest degree of honesty and loyalty toward another person and in the best interests of the other person (such as the 

duty that one partner owes to another."); also see F.D.I.C. v. Stahl, 854 F.Supp. 1565, 1571 (S.D. Fla., 1994) (“Fiduciary duty, the 

highest standard of duty implied by law, is the duty to act for someone else's benefit, while subordinating one's personal interest 

to that of the other person); and see Perez v. Pappas, 98 Wash.2d 835, 659 P.2d 475, 479 (1983) (“Under Washington law, it is 

well established that ‘the attorney-client relationship is a fiduciary one as a matter of law and thus the attorney owes the highest 

duty to the client.’”), cited by Bertelsen v. Harris, 537 F.3d 1047 (9th Cir., 2008); also see Donovan v. Bierwirth, 680 F. 2d 262, 

272, n.8 (2nd Cir., 1982) (fiduciary duties are the “highest known to law”).

 BLACK'S LAW DICTIONARY, 5th Edition (1979)]. 67
40

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

developed an overlay - an implication of a particular relationship of confidence between the fiduciary and 

those who had placed their trust in that person. 

At the beginning of the nineteenth century, in Gibson, 31 Eng. Rep. 1044 (1801), the court, while 

explaining the decision to rescind the sale of an annuity by an attorney to his client, announced that “[one] 

who bargains in matter of advantage with a person placing confidence in him is bound to sh[o]w, that a 

reasonable use has been made of that confidence; a rule applying to trustees, attorneys or anyone else.” 

The courts eventually settled on “fiduciary” to denominate relationships of trust and confidence and 

denominated the doctrine (applied in Gibson) regulating these confidential relationships as “constructive 

fraud.” By the mid-nineteenth century, the doctrine of constructive fraud was said to arise from some 

peculiar confidential or fiduciary relation between the parties. 

More recently, Justice Philip Talmadge of the State of Washington Supreme Court summarized the core 

aspects of current fiduciary relationships: 

A fiduciary relationship is a relationship of trust, which necessarily involves vulnerability 

for the party reposing trust in another. One's guard is down. One is trusting another to 

take actions on one's behalf. Under such circumstances, to violate a trust is to violate 

grossly the expectations of the person reposing the trust. Because of this, the law creates 

a special status for fiduciaries, imposing duties of loyalty, care, and full disclosure upon 

them. One can call this the fiduciary principle. [Emphasis added.] 68

Should an advisee should be able to “opt out” of the fiduciary relationship, by contract? Many securities 

industry participants appear to believe that the fiduciary relationship is a matter of contract. For example, 

the SPARK Institute recommended in its March 1, 2011 testimony to the U.S. Department of Labor (in 69

hearings relating to the DOL’s expanded definition of “fiduciary”): “We believe that service providers and 

plan sponsors should have flexibility and discretion in determining and agreeing on a service provider’s 

role and whether a fiduciary relationship is mutually expected.” Similarly, the Financial Services 70

Institute opined that a “practical approach” should exist which “preserves investor choice and 

accommodates a range of business models.” And, in its July 21, 2015 comment letter, Fidelity has now 71

opined that “If the parties’ advice relationship evolves over time, any amendments to the terms of the 

engagement, including on a transaction-by-transaction basis, would be accomplished through the same 

disclosures and unilateral contracting process.” 

Yet these “investor choice” arguments ignore several fundamental aspects of fiduciary law. 

Von Noy v. State Farm Mutual Automobile Insurance Company, 2001 WA 80 (WA, 2001) (J. Talmadge, concurring opinion). 68

 The SPARK Institute represents the interests of a broad based cross section of retirement plan service providers and investment 69

managers, including banks, mutual fund companies, insurance companies, third party administrators, trade clearing firms and 

benefits consultants.

 Testimony of Larry H. Goldbrum, Esq., General Counsel, The SPARK Institute, Before the United States Department of Labor, 70

Employee Benefits Security Administration, Regarding the Proposed Definition of Fiduciary (March 1, 2011), available at http://

www.dol.gov/ebsa/pdf/1210-AB32-T6.pdf. See also comment letter to DOL of SIFMA dated Feb. 3, 2011 (“The proposed rule 

eliminates this central part of commercial and trust relationships. We believe plan sponsors and IRA holders should have the 

ability to dictate the terms of their relationships, rather than have the Department create a rule under which all of their service 

providers could be deemed fiduciaries.)

 Comment letter of the Financial Services Roundtable, dated Feb. 3, 2011, to the DOL regarding the proposed definition of 71

fiduciary, available at http://www.dol.gov/ebsa/pdf/1210-AB32-164.pdf. The Financial Services Roundtable represents 100 of 

the largest integrated financial services companies providing banking, insurance, and investment products and services.
41

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

First and foremost, fiduciary obligations are imposed to restrict certain forms of conduct; in this respect, it 

should be of no surprise that certain business models (or aspects thereof, or certain practices) are 

inconsistent with an investment or financial advisor’s fiduciary obligations and hence should be avoided. 

Business models should conform to the law; fiduciary law should not be eroded through “particular 

exceptions” in order to accommodate various business practices. 

Second, fiduciary obligations are typically imposed not as a result of the terms of the agreement between 

the parties, but rather are imposed by either statutory law (Advisers Act, ERISA, etc.) or state common 

law. Similarly, the DOL seeks to expand the definition of “fiduciary” to encompass more parties 

providing investment advise, and in so doing the DOL is imposing, pursuant to its statutory authority, 

fiduciary status as a matter of law. 

Third, as alluded to above, core fiduciary duties are not capable of broad waiver. Any contract between 

the parties which seeks to negate the protections afforded by fiduciary status are disregarded.

Moreover, courts have held that a fiduciary relationship, resulting from a relationship based upon trust 

and confidence, need not be created by contract. It may arise out of any relationship where both parties 

understand that a special trust or confidence has been reposed. “A fiduciary relation does not depend on 

some technical relation created by or defined in law. It may exist under a variety of circumstances and 

does exist in cases where there has been a special confidence reposed in one who, in equity and good 

conscience, is bound to act in good faith and with due regard to the interests of the one reposing the 

confidence.” Stated differently, once a relation between two parties is established, “its classification as 72

fiduciary and its legal consequences are primarily determined by the law rather than the parties. Thus, 

unlike a party to a contract, a person may find himself in a fiduciary relation without ever having intended 

to assume fiduciary obligations. The courts will look to whether the arrangement formed by the parties 

meets the criteria for classification as fiduciary, not whether the parties intended the legal consequences 

of such a relation.” [Emphasis added.] 73

And, as set forth below, in the advisor-client context, just as fiduciary status is imposed as a matter of law, 

disregarding any attempt by the parties to contract out of the fiduciary’s status as a fiduciary, core 

fiduciary duties cannot be waived.

2. The application of the concepts of estoppel and waiver are limited in the fiduciary realm.

Concepts of waiver and estoppel, while commonly applied in arms-length relationships, have limited 

application to the fiduciary realm. The most important application of this principle is found in fiduciary 

law’s treatment of the resolution of an unavoided conflict of interest. 

In a fiduciary relationship, the law requires that the fiduciary must not bring her or his own interests into 

conflict with the interests of the client. This requirement is called the “no conflict” rule. It is derived from 

English law concepts that have flowed into American law from centuries past. 

In re Clarkeies Market, L.L.C., 322 B.R. 487, 495 (Bankr. N.H., 2005). 72

 Tamar Frankel, “Fiduciary Law,” 71 Calif. L. Rev. 795, 817 (1983). 73
42

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

The “no conflict” rule has nothing to do with good or bad motive. The U.S. Supreme Court, in discussing 

conflicts of interest, has said: ‘The reason of the rule inhibiting a party who occupies confidential and 

fiduciary relations toward another from assuming antagonistic positions to his principal in matters 

involving the subject matter of the trust is sometimes said to rest in a sound public policy, but it also is 

justified in a recognition of the authoritative declaration that no man can serve two masters; and 

considering that human nature must be dealt with, the rule does not stop with actual violations of such 

trust relations, but includes within its purpose the removal of any temptation to violate them ....” 

And, as the U.S. Supreme Court said a hundred years ago, the law “acts not on the possibility, that, in 

some cases the sense of duty may prevail over the motive of self-interest, but it provides against the 

probability in many cases, and the danger in all cases, that the dictates of self-interest will exercise a 

predominant influence, and supersede that of duty.” 

Or, as an eloquent Tennessee jurist put it before the Civil War, the doctrine “has its foundation, not so 

much in the commission of actual fraud, but in that profound knowledge of the human heart which 

dictated that hallowed petition, “Lead us not into temptation, but deliver us from evil,” and that caused the 

announcement of the infallible truth, that “a man cannot serve two masters.”

In arms-length relationship consent by a customer to proceed, when a conflict of interest is present, is 

generally permitted. Caveat emptor (“let the buyer beware”) applies to such merchandiser-customer 

relationships. The customer is not represented by the merchandiser but is rather in an adverse relationship 

- that of seller and purchaser. 

In such arms-length relationships, it is a fundamental principle of the common law that volenti non fit 

injuria – to one who is willing, no wrong is done. Customer consent to the transaction generally gives rise 

to estoppel – i.e., the customer cannot later state that he or she can escape from the transaction because a 

conflict of interest was present, or because full awareness of the ramifications of the conflict of interest 

were absent. The customer, in such instances, bears the duty of negotiating a fair bargain. The law permits 

customers, in arms-length relationships, to enter into “dumb bargains.” Generally, jurists will not set aside 

unfair bargains unless fraud, misrepresentation, mutual mistake of fact exists or unless the contract is so 

unjust and burdensome that it is deemed unconscionable. 

But the fiduciary relationship is altogether different. The entrustor (client) and fiduciary actor have 

formed a relationship based upon trust and confidence. In such a form of relationship, the law guards 

against the fiduciary taking advantage of such trust. As a result, judicial scrutiny of aspects of the 

relationship occurs with a sharp eye toward any transgressions that might be committed by the fiduciary. 

Hence, mere consent by a client in writing to a breach of the fiduciary obligation is not, in itself, sufficient 

to create waiver or estoppel. If this were the case, fiduciary obligations – even core obligations of the 

fiduciary – would be easily subject to waiver.

Instead, to create an estoppel situation, preventing the client from later challenging the validity of the 

transaction that occurred, the fiduciary is required to undertake a series of steps: 
43

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

First, disclosure of all material facts to the client must occur. [For some commentators on the 

fiduciary obligations of investment advisers, this is all that is required. Often this erroneous 

conclusion is derived from misinterpretations of the landmark decision of SEC v. Capital Gains 

Research Bureau.] 

Second, the disclosure must be affirmatively made and timely undertaken. In a fiduciary 

relationship, the client’s “duty of inquiry” and the client’s “duty to read” are limited; the burden 

of ensuring disclosure is received is largely borne by the fiduciary. Disclosure must also occur in 

advance of the contemplated transaction. For example, receipt of a prospectus following a 

transaction is insufficient, as it does not constitute timely disclosure. 

Third, the disclosure must lead to the client’s understanding. The fiduciary must be aware of the 

client’s capacity to understand, and match the extent and form of the disclosure to the client’s 

knowledge base and cognitive abilities. 

Fourth, the informed consent of the client must be affirmatively secured. Silence is not consent. 

Also, consent cannot be obtained through coercion nor sales pressure. 

Fifth, at all times, the transaction must be substantively fair to the client. If an alternative exists 

which would result in a more favorable outcome to the client, this would be a material fact which 

would be required to be disclosed, and a client who truly understands the situation would likely 

never gratuitously make a gift to the advisor where the client would be, in essence, harmed. 

These requirements of the common law – derived from judicial decisions over hundreds of years – have 

found their way into our statutes. For example, ERISA’s exclusive benefit rule unyieldingly commands 

employee benefit plan fiduciaries to discharge their duties with respect to a plan solely in the interest of 

the plan’s participants and for the exclusive purpose of providing benefits to them and their beneficiaries. 

And the Investment Advisers Act of 1940 was widely known to impose fiduciary duties upon investment 

advisers from its very inception, and it contains an important provision that prevents waiver by the client 

of the investment adviser’s duties to that client. (However, SEC enforcement of Section 215 of the 

Advisers Act, prohibiting waivers of the duties of investment advisers, is sorely lacking.) 

We must also ask, when would the client of a fiduciary every knowingly consent to a conflict of interest 

that was otherwise unavoidable? In essence, when would a client ever provide informed consent to 

transform the key aspect of the relationship away from that of fiduciary-client and to an arms-length 

relationship in which the advisor permitted to act out of the advisor’s self-interest. 

To answer this question it is important to first realize that disclosure is neither a fiduciary duty nor a cure 

(without much more) to the breach of one’s fiduciary obligations. In other words, it must be understood 

that, quite frankly, there exists no fiduciary duty of disclosure. While disclosure may be imposed by other 

law or regulation, or by contractual obligations created between the parties, disclosure is not, itself, a core 

fiduciary obligation found in the common law. 

Rather, fiduciaries owe the obligation to their client to not be in a position where there is a substantial 

possibility of conflict between self-interest and duty. Again, this is called the “no-conflict” rule, derived 

from English law. Fiduciaries also possess the obligation not to derive unauthorized profits from the 

fiduciary position. This is called the “no profit” rule, also derived from English law. 
44

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

While there is no fiduciary duty of disclosure, questions of disclosure are often central in the 

jurisprudence discussing fiduciary law, as many cases involve claims for breach of the fiduciary duty due 

to the presence of a conflict of interest. In essence, a breach of fiduciary obligation – either the obligation 

not to be in a position of conflict of interest and the duty to not make unauthorized profits – may be 

averted or cured by the informed consent of the client (provided all material information is disclosed to 

the client, the adviser reasonably expects client understanding to result given all of the facts and 

circumstances, the informed consent of the client is affirmatively secured, and the transaction remains in 

all circumstances substantially fair to the client). 

In essence, asking a client to consent to a conflict of interest by the fiduciary is requesting that the client 

waive the no conflict rule, the no profit rule, or both rules. Again, clients would only do so in 

circumstances where the client is not harmed. It would be difficult to believe that client is so gratuitous to 

his or her investment adviser that the client would incur a detriment, beyond reasonable compensation 

previously agreed to, in order to provide the adviser with more lucre or other benefits. 

Hence, disclosure, alone and without much more, is not a cure. And disclosure is only one of the five 

important requirements, all of which must be met, for a client’s waiver of a fiduciary obligation to be 

valid. Such waivers, while they may be required for unavoidable conflicts of interest, should be rare 

indeed. And even then the conflict of interest to which consent to proceed is given must be properly 

managed, for no client would ever knowingly consent to be harmed.

Some academics suggest that fiduciary duties are merely default rules, and that fiduciary obligations may 

be contracted away. But, the application of these views is found mainly in the realm of business 

relationships, such as those between business partners. The advisor-client relationship is an altogether 

different relationship, in which there are not two sophisticated parties of relatively equal bargaining power 

(or at least able to hirer attorneys to assist in same). Rather, in the investment adviser-client relationship 

there exists a huge gulf of knowledge and sophistication. For this reason, even the “contractualists” 

academics who argue for a contract theory of fiduciary law (as might be applied in business settings, such 

as between business partners), accept the proposition that core fiduciary duties cannot be waived, at least 

in adviser-client settings. 

3. The ability to “contract away” the protections afforded by ERISA’s detailed statutory 

regime is not the basis for an exemption for which relief can be granted, given that 

contracting away such legal protections is neither protective of the plan beneficiaries nor in 

the interests of plan beneficiaries.

ERISA requires the Secretary to determine, prior to the grant of exemptive relief, that such exemption is

— (1) administratively feasible, (2) in the interests of the plan and of its participants and beneficiaries, 

and (3) protective of the rights of participants and beneficiaries of such plan.” 29 U.S.C. §1108(a) (in 

pertinent part) [Emphasis added.]
45

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

It is clear that if a client could be asked to contract away the fiduciary protections afforded to the client, 

most would do so readily. They do not know the consequences of such a waiver. Nor will such 

consequences be adequately explained by the adviser. 

If they were aware of the consequences of contracting out of a fiduciary-client relationship, and into an 

arms-length relationship, clients would not enter into such a contract. They would not freely give up the 

substantial protections afforded by the fiduciary standard of conduct, in favor of the much lower 

suitability standard (whether modified by the BIP proposal, or not).

C. A Requirement for Demonstration of Actual Reliance by the Entrustor on the Fiduciary’s 

Advice Is Not Properly a Condition for Imposition of Fiduciary Status; Imposition of Such A 

Requirement Would Violate ERISA as Well as ERISA’s Established Requirements for the 

Grant of Exemptive Relief. 

1. While reliance by consumers on the investment and retirement planning advice they receive 

is commonplace, it is not a pre-condition to the law’s imposition of fiduciary status. 

As discussed above, there are many public policy reasons behind the imposition of fiduciary status, 

whether by Congress when it enacted ERISA or the Advisers Act, or under state common law. 

Yet, whether a fiduciary duty exists cannot be determined "by recourse to rigid formulas.” While 74

reliance, or the placing of trust and confidence, is often found in the judicial decisions, the mere holding 

Scott v. Dime Sav. Bank of New York, 886 F. Supp. 1073, 1078-79 (S. D. N. Y. 1995). 74
46

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

out as a fiduciary is sufficient to give rise to the possibility of a fiduciary relationship, as is the actual 75

delivery of advisory services, even to wealthy customers.76

Any attempt to establish such a pre-condition to the imposition of fiduciary status would not be in accord 

with established common law which applies fiduciary status upon those in relationships of trust and 

confidence with their clients, regardless of whether reliance is proven. 

2. Any attempt to establish a “reliance” pre-condition to the imposition of fiduciary status is in 

accord with ERISA, which does not impose such a precondition.

Nowhere in ERISA does there exist the pre-condition that the client must possess, or prove, reliance upon 

the advice or the advisor. 

Additionally, the test of whether a fiduciary relationship exists under the common law often requires a 

fact-intensive inquiry. While “reliance” may be a factor, there are many other factors which may lead to 77

the finding of a fiduciary relationship. Indeed, a variety of circumstances may indicate that a fiduciary 

 See, e.g., Hatleberg v. Norwest Bank Wisconsin, 2005 WI 109, 700 N.W.2d 15 (WI, 2005). [When a bank held out as either an 75

“investment planner,” “financial planner,” or “financial advisor,” the Wisconsin Supreme Court held that a fiduciary duty may 

arise in such circumstances.]

See, e.g.,Merrill Lynch, Pearce, Fenner & Smith vs. Millar (W.D. Pa. 2003). [“Merrill Lynch invited the Millars to its 76

headquarters in New York City to meet with some of its highest ranking executives. At that time, Merrill Lynch was aware that 

the Millars were meeting with other firms in order to find advisors to help them manage their wealth and achieve their investment 

objectives. Merrill Lynch was also acutely aware that the Millars had a net worth at that time in excess of $10 million. Moreover, 

the program that Menill Lynch presented Doug Millar was its Private Advisory Services. The PAS offered the Millars world class 

advisors that would work with and through the Millars local advisors. This is what Merrill Lynch was selling. Merrill Lynch did 

not at any time assert to the Millars that it would not monitor their account or that it would not give them advice on an ongoing 

basis. To the contrary, Merrill Lynch told the Millars it would work with them to formulate strategies with the most suitable 

recommendations for their investment needs ... There is no evidence that would suggest that the aggressive option strategy 

employed by Merrill Lynch was developed by Doug Millar. This was Dave Foster's strategy. Further, there is no evidence that 

Doug Millar would call Dave Foster on a systematic basis and instruct him to buy or sell puts and calls. To the contrary, Dave 

Foster was the prime mover behind the options strategy. Yet, after selling the Millars on its experience and ability to advise, 

manage and achieve their financial objectives, Merrill Lynch contends its only duty was to act with diligence and competence in 

the execution of an order. The Court finds such contention untenable. The Millars were not invited to Merrill Lynch headquarters 

in New York City merely to find technicians capable of executing a brokerage order. Regardless of Merrill Lynch's argument that 

the duty owed to the Millars was surprisingly narrow, the Panel found an unambiguous indication of the Millars' intent to sell 

100,000 shares of Free Markets stock on September 5, 2000. Moreover, whether a fiduciary duty exists cannot be determined "by 

recourse to rigid formulas." Scott v. Dime Sav. Bank of New York, 886 F. Supp. 1073, 1078-79 (S. D. N. Y. 1995) ("Under New 

York law, stockbrokers may owe fiduciary duties to their customers.") Rather, it depends upon "whether one person has reposed 

trust or confidence in another who thereby gains a resulting superiority or influence over the first." Id. More simply, "the 

existence of fiduciary duties depends on the facts of a particular relationship." Vannest v. Sage, Rutty & Co., 960 F. Supp. 651, 

655 (W. D. N. Y. 1997) (quoting Boley v. Pineloch Assoc., Ltd., 700 F. Supp. 673, 680 (S. D. N. Y. 1988)). The Panel obviously 

determined that the relationship between the Millars and Merrill Lynch exceeded that found ordinarily between a broker and a 

nondiscretionary account holder ... Aside from an obvious failure to execute its client's order, Merrill Lynch clearly failed to 

deliver the services it promised to the Millars. Instead of using its "world class advisors" to implement a reasonable and prudent 

plan of monetization and conservative diversification that would have allowed the Millars to preserve a portion of their $10 

million nest egg, Dave Foster placed their money into the high risk arena of options trading. This strategy was unsuitable to meet 

the clear objectives of the Millars ....”]

See ARA Automotive Group v. Central Garage, Inc., 124 F.3d 720,723 (C.A.5 (Tex.), 1997) (“The existence of a fiduciary 77

relationship, outside of formal relationships that automatically give rise to fiduciary duties, is usually a fact intensive inquiry”).
47

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

relationship exists, as opposed to an arms-length relationship. Such circumstances, or indicia or evidential 

factors, include influence, placement of trust, vulnerability or dependency, substantial disparity in 78

knowledge, the ability to exert influence, placement of confidence, the actual exercise of control over 79 80

a party, and (in a commercial transaction) whether “the parties have shared goals in each other’s 

commercial activities.” Another factor may lie in the ability of the fiduciary, by virtue of his or her 81

position or authority, to derive profits at the expense of his or her client.

3. A plethora of sound public policy reasons exist for the imposition of fiduciary status by 

ERISA, which have nothing to do with reliance.

The key to understanding fiduciary principles, and why and how they are applied, rests in discerning the 

various public policy objectives the fiduciary standard of conduct is designed to meet.

Fiduciary Status Address “Overreaching” When Person-to-Person Advice is Provided

The Investment Advisers Act of 1940 “recognizes that, with respect to a certain class of investment 

advisers, a type of personalized relationship may exist with their clients ... The essential purpose of [the 

Advisers Act] is to protect the public from the frauds and misrepresentations of unscrupulous tipsters and 

touts and to safeguard the honest investment adviser against the stigma of the activities of these 

individuals by making fraudulent practices by investment advisers unlawful.” “The Act was designed to 82

apply to those persons engaged in the investment-advisory profession -- those who provide personalized 

 However, merely because some degree of vulnerability exists does not necessarily give rise to a fiduciary relationship. See 78

New England Surfaces v. E.I. Du Pont De Nemours, 517 F.Supp.2d 466, 488-9 (D. Me., 2007) (“In Webber Oil Co. v. Murray, 

Webber agreed to provide gasoline to the public through pumps owned by Webber at a convenience store owned by Murray ... 

Murray staffed the pumps, collected the sales and paid the proceeds to Webber. Id Through the course of their relationship, 

Webber loaned money to Murray, and Murray and his wife signed promissory notes to Webber ... the Law Court declined to find 

a fiduciary relationship in this situation. ‘The evidence here showed no such relationship, but rather only a conventional business 

deal. Certainly one party was economically stronger than the other, but that is often the case in a business deal, and not the basis 

for a finding of a relationship of confidence.’” Quoting Webber Oil Co. v. Murray, 551 A.2d 1371(Me.1988).)

 Yet, superior knowledge or expertise, standing alone, has been held to be insufficient to impose fiduciary status on the one 79

with the higher level of knowledge or expertise. See Henneberry v. Sumitomo Corp. of America, 532 F.Supp.2d 523, 550 

(S.D.N.Y., 2007) (“a fiduciary obligation will not be imposed on one party ‘merely because it possesses relative expertise as 

compared to the other’ ... ‘Allegations of reliance on another party with superior expertise, standing by themselves, will not 

suffice’”) (citations omitted).

 A fiduciary relationship “is a relationship founded upon trust or confidence reposed by one person in the integrity and fidelity 80

of another ... in which influence has been acquired and abused, in which confidence has been reposed and betrayed ...." 

Henneberry v. Sumitomo Corp. of America, 415 F.Supp.2d 423, 458 (S.D.N.Y., 2006). “A fiduciary relationship may exist where 

one party reposes confidence in another and reasonably relies on the other's superior expertise or knowledge.” WIT Holding 

Corp. v. Klein, 282 A.D.2d 527, 724 N.Y.S.2d 66, 68 (App.Div.2001). However, the mere exchange of confidential information 

does not give rise to a fiduciary relationship. See U.S. v. Cassese, 273 F.Supp.2d 481, 487 (S.D.N.Y., 2003) (“The present case is 

also similar to Walton v. Morgan Stanley & Co. Inc., 623 F.2d 796 (2d Cir.1980). In Walton, the Second Circuit held that when 

two corporations' management were ‘at all times responsible for different interests, and ... had no relationship to each other 

before or other than in the acquisition discussions,’ they ‘must be presumed to have dealt, absent evidence of an extraordinary 

relationship, at arm's length.’ Id. at 798. The fact that information exchanged between the two parties is confidential does nothing 

to change their relationship from arms-length into a fiduciary relationship. Id. at 799.”)

 Hartman v. McInnis, No. 2006-CA-00641-SCT (Miss. 11/29/2007) (“This Court considers a number of factors in determining 81

whether a fiduciary relationship exists in a commercial transaction, including: whether (1) the parties have shared goals in each 

other's commercial activities, (2) one of the parties places justifiable confidence or trust in the other party's fidelity, and (3) the 

trusted party exercises effective control over the other party.”)

Lowe v. SEC, 472 U.S. 181, 200, 201 (1985). 82
48

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

advice attuned to a client's concerns, whether by written or verbal communication ... The dangers of 83

fraud, deception, or overreaching that motivated the enactment of the statute are present in personalized 

communications ....”84

Consumers’ Lack of Desire to Expend Time and Resources on Monitoring 

The inability of clients to protect themselves while receiving guidance from a fiduciary does not arise 

solely due to a significant knowledge gap or due to the inability to expend funds for monitoring of the 

fiduciary. Even highly knowledgeable and sophisticated clients (including many financial institutions) 

rely upon fiduciaries. While they may possess the financial resources to engage in stringent monitoring, 

and may even possess the requisite knowledge and skill to undertake monitoring themselves, the 

expenditure of time and money to undertake monitoring would deprive the investors of time to engage in 

other activities. Indeed, since sophisticated and wealthy investors have the ability to protect themselves, 

one might argue they might as well manage their investments themselves and save the fees. Yet, reliance 

upon fiduciaries is undertaken by wealthy and highly knowledgeable investors and without expenditures 

of time and money for monitoring of the fiduciary. In this manner, “fiduciary duties are linked to a social 

structure that values specialization of talents and functions.”85

The Shifting of Monitoring Costs to Government

In service provider relationships which arise to the level of fiduciary relations, it is highly costly for the 

client to monitor, verify and ensure that the fiduciary will abide by the fiduciary’s promise and deal with 

the entrusted power only for the benefit of the client. Indeed, if a client could easily protect himself or 

herself from an abuse of the fiduciary advisor’s power, authority, or delegation of trust, then there would 

be no need for imposition of fiduciary duties. Hence, fiduciary status is imposed as a means of aiding 

consumers in navigating the complex financial world, by enabling trust to be placed in the advisor by the 

client. 

Fiduciary relationships are relationships in which the fiduciary provides to the client a service that public 

policy encourages. When such services are provided, the law recognizes that the client does not possess 

the ability, except at great cost, to monitor the exercise of the fiduciary’s powers. Usually the client 

cannot afford the expense of engaging separate counsel or experts to monitor the conflicts of interest the 

person in the superior position will possess, as such costs might outweigh the benefits the client receives 

from the relationship with the fiduciary. Enforcement of the protections thereby afforded to the client by 

the presence of fiduciary duties is shifted to the courts and/or to regulatory bodies. Accordingly, a 

significant portion of the cost of enforcement of fiduciary duties is shifted from individual clients to the 

taxpayers, although licensing and related fees, as well as fines, may shift monitoring costs back to all of 

the fiduciaries which are regulated.

Id. at 208. 83

Id. at 210. 84

Tamar Frankel, Ch. 12, United States Mutual Fund Investors, Their Managers and Distributors, in CONFLICTS OF INTEREST: 85

CORPORATE GOVERNANCE AND FINANCIAL MARKETS (Kluwer Law International, The Netherlands, 2007), edited by Luc 

Thévenoz and Rashid Barhar.
49

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Consumers’ Difficulty in Tying Performance to Results

The results of the services provided by a fiduciary advisor are not always related to the honesty of the 

fiduciary or the quality of the services. For example, an investment adviser may be both honest and 

diligent, but the value of the client’s portfolio may fall as the result of market events. Indeed, rare is the 

instance in which an investment adviser provides substantial positive returns for each incremental period 

over long periods of time – and in such instances the honesty of the investment adviser should be suspect 

(as was the situation with Madoff).

Consumers’ Difficulty in Identifying and Understanding Conflicts of Interest

Most individual consumers of financial services in America today are unable to identify and understand 

the many conflicts of interest which can exist in financial services. For example, a customer of a brokerdealer firm might be aware of the existence of a commission for the sale of a mutual fund, but possess no 

understanding that there are many mutual funds available which are available without commissions (i.e., 

sales loads). Moreover, brokerage firms have evolved into successful disguisers of conflicts of interest 

arising from third-party payments, including payments through such mechanisms as contingent deferred 

sales charges, 12b-1 fees, payment for order flow, payment for shelf space, and soft dollar compensation. 

Survey after survey (including the Rand Report) has concluded that consumers place a very high degree 

of trust and confidence in their investment adviser, stockbroker, or financial planner. These consumers 

deal with their advisors on unequal terms, and often are unable to identify the conflicts of interest their 

“financial consultants” possess. As evidence of the lack of knowledge possessed by consumers, the Rand 

Report noted that 30% of investors believed that they did not pay their financial consultant any fees! This 

calls into substantial question the conclusion derived from the Rand Report’s survey that most customers 

of brokers are happy with their financial consultant. 

Transparency is important, but even when compensation is fully disclosed, few individual investors 

realize the impact high fees and costs can possess on their long-term investment returns; often individual 

investors believe that a more expensive product will possess higher returns.86

For Fiduciaries, the Cost of Proving Trustworthiness is Quite High

How does one prove one to be “honest” and “loyal”? The cost to a fiduciary in proving that the advisor is 

trustworthy could be extremely high – so high as to exceed the compensation gained from the 

relationships with the advisors’ clients. 

 In a recent study, Professors “Madrian, Choi and Laibson recruited two groups of students in the summer of 2005 -- MBA 86

students about to begin their first semester at Wharton, and undergraduates (freshmen through seniors) at Harvard. All 

participants were asked to make hypothetical investments of $10,000, choosing from among four S&P 500 index funds. They 

could put all their money into one fund or divide it among two or more. ‘We chose the index funds because they are all tracking 

the same index, and there is no variation in the objective of the funds,’ Madrian says ... ‘Participants received the prospectuses 

that fund companies provide real investors ... the students ‘overwhelmingly fail to minimize index fund fees,’ the researchers 

write. ‘When we make fund fees salient and transparent, subjects' portfolios shift towards lower-fee index funds, but over 80% 

still do not invest everything in the lowest-fee fund’ ... [Said Professor Madrian,] ‘What our study suggests is that people do not 

know how to use information well.... My guess is it has to do with the general level of financial literacy, but also because the 

prospectus is so long." Knowledge@Wharton, “Today's Research Question: Why Do Investors Choose High-fee Mutual Funds 

Despite the Lower Returns?” citing Choi, James J., Laibson, David I. and Madrian, Brigitte C., “Why Does the Law of One Price 

Fail? An Experiment on Index Mutual Funds” (March 6, 2008). Yale ICF Working Paper No. 08-14. Available at SSRN: http://

ssrn.com/abstract=1125023. 
50

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

In his influential article discussing the creation of the federal securities acts, and in particular their moral 

purpose, John Walsh (of the SEC’s OCIE) reviewed the legislative history underlying the creation of the 

Investment Advisers Act: 

As part of a congressionally mandated review of investment trusts the agency also 

studied investment advisers. The Advisers Act was based on that study. By the time it 

passed, it was a consensus measure having the support of virtually all advisers. 

Investment advisers’ professionalism, and particularly their professional ethics, 

dominated the SEC study and the legislative history of the Act. Industry spokespersons 

emphasized their professionalism. The “function of the profession of investment 

counsel,” they said, “was to render to clients on a personal basis competent, unbiased and 

continuous advice regarding the sound management of their investments.” In terms of 

their professionalism they compared themselves to physicians and lawyers. However, 

industry spokespersons indicated that their efforts to maintain professional standards had 

encountered a serious problem. The industry, they said, covered “the entire range from 

the fellow without competence and without conscience at one end of the scale, to the 

capable, well-trained, utterly unbiased man or firm, trying to render a purely professional 

service, at the other end.” Recognizing this range, “a group of people in the forefront of 

the profession realized that if professional standards were to be maintained, there must be 

some kind of public formulation of a standard or a code of ethics.” As a result, the 

Investment Counsel Association of America was organized and issued a Code of Ethics. 

Nonetheless, the problem remained that the Association could not police the conduct of 

those who were not members nor did it have any punitive power. 

The SEC Study noted that it had been the unanimous opinion of all who had testified at 

its public examination, both members and nonmembers of the Association, that the 

industry’s voluntary efforts could not cope with the “most elemental and fundamental 

problem of the investment counsel industry—the investment counsel ‘fringe’ which 

includes those incompetent and unethical individuals or organizations who represent 

themselves as bona fide investment counselors.” Advisers of that type would not 

voluntarily submit to supervision or policing. Yet, all counselors suffered from the 

stigma placed on the activities of the individuals on the fringe. Thus, an agency was 

needed with compulsory and national power that could compel the fringe to conform to 

ethical standards. 

As a result of the Commission’s report to Congress, the Senate Committee on Banking 

and Currency determined that a solution to the problems of investment advisory services 

could not be affected without federal legislation. In addition, both the Senate and House 

Committees considering the legislation determined that it was needed not only to protect 

the public, but also to protect bona fide investment counselors from the stigma attached 

to the activities of unscrupulous tipsters and touts. During the debate in Congress, the 

special professional relationship between advisers and their clients was recognized. It is, 

said one representative, “somewhat [like that] of a physician to his patient.” The same 

Congressman continued that members of the profession were “to be complimented for 

their desire to improve the status of their profession and to improve its quality.”87

This is why it is important to fiduciary advisors to be able to distinguish themselves from non-fiduciaries. 

A recent example of the problems faced by investment advisers was the “fee-based brokerage accounts” 

 John H. Walsh, “A Simple Code Of Ethics: A History of the Moral Purpose Inspiring Federal Regulation of the Securities 87

Industry,” 29 Hofstra L.Rev. 1015, 1066-8 (2001), citing SEC, REPORT ON INVESTMENT COUNSEL, INVESTMENT 

MANAGEMENT, INVESTMENT SUPERVISORY, AND INVESTMENT ADVISORY SERVICES (1939).
51

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

final rule adopted by the SEC in 2005, which would have permitted brokers to provide the same 

functional investment advisory services as investment advisers but without application of fiduciary 

standards of conduct. This would have negated to a large degree economic incentives for persons to 88

become investment advisers and be subject to the higher standard of conduct. The SEC’s fee-based 

accounts rule was overturned in Financial Planning Ass'n v. S.E.C.

89

Monitoring and Reputational Threats are Largely Ineffective

The ability of “the market” to monitor and enforce a fiduciary’s obligations, such as through the 

compulsion to preserve a firm’s reputation, is often ineffective in fiduciary relationships. This is because 

revelations about abuses of trust by fiduciaries can be well hidden (such as through mandatory arbitration 

clauses and secrecy agreements regarding settlements), or because marketing efforts by fiduciary firms 

are so strong and pervasive that they overwhelm the reported instances of breaches of fiduciary duties. 

Public Policy Encourages Specialization, Which Necessitates Fiduciary Duties

As Professor Tamar Frankel, long the leading scholar in the area of fiduciary law as applied to securities 

regulation, once noted: “[A] prosperous economy develops specialization. Specialization requires 

interdependence. And interdependence cannot exist without a measure of trusting. In an entirely nontrusting relationship interaction would be too expensive and too risky to maintain. Studies have shown a 

correlation between the level of trusting relationships on which members of a society operate and the 

level of that society’s trade and economic prosperity.” Fiduciary duties are imposed by law when public 90

policy encourages specialization in particular services, such as investment management or law, in 

recognition of the value such services provide to our society. For example, the provision of investment 

consulting services under fiduciary duties of loyalty and due care encourages participation by investors in 

our capital markets system. Hence, in order to promote public policy goals, the law requires the 

imposition of fiduciary status upon the party in the dominant position. Through the imposition of such 

fiduciary status the client is thereby afforded various protections. These protections serve to reduce the 

 One might reasonably ask why “honest investment advisers” (to use the language of the U.S. Supreme Court in SEC vs. 88

Capital Gains) had to be protected by the Advisers Act. Was it not enough to just protect consumers? The answer can be 

found in economic principles, as set forth in the classic thesis for which George Akerlof won a Nobel Prize: 

There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this 

case there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to 

the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in 

the average quality of goods and also in the size of the market. 

George A. Akerloff, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, The Quarterly Journal of 

Economics, Vol. 84, No. 3. (Aug., 1970), p.488. George Akerloff demonstrated “how in situations of asymmetric information 

(where the seller has information about product quality unavailable to the buyer), ‘dishonest dealings tend to drive honest 

dealings out of the market.’ Beyond the unfairness of the dishonesty that can occur, this process results in less overall dealing and 

less efficient market transactions.” Frank B. Cross and Robert A. Prentice, The Economic Value of Securities Regulation, 28 

Cardoza L.Rev. 334, 366 (2006). As George Akerloff explained: “[T]he presence of people who wish to pawn bad wares as good 

wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the 

purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.” Akerloff at 

p. 495.

482 F.3d 481 (D.C. Cir., 2007). 89

 Tamar Frankel, Trusting And Non-Trusting: Comparing Benefits, Cost And Risk, Working Paper 99-12, Boston University 90

School of Law.
52

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

risks to the client which relate to the service, and encourage the client to utilize the service. Fiduciary 

status thereby furthers the public interest.

Public Policy Encourages Participation in our Capital Markets 

Investment advisory services encourage participation by investors in our capital markets system, which in 

turn promotes economic growth. The first and overriding responsibility any financial professional has is 

to all of the participants of the market. This primary obligation is required in order to maintain the 

perception and reality that the market is a fair game and thus encourage the widest possible participation 91

in the capital allocation process. The premise of the U.S. capital market is that the widest possible 

participation in the market will result in the most efficient allocation of financial resources and, therefore, 

will lead to the best operation of the U.S. and world-wide economy. Indeed, academic research has 

revealed that individual investors who are unable to trust their financial advisors are less likely to 

participate in the capital markets.92

Public Policy Encourages Saving and Proper Investing 

As stated in a 2002 white paper authored by Professor Macy: 

If people do not make careful, rational decisions about how to self-regulate the patterns 

of consumption and savings and investment over their life cycles, government will have 

to step in to save people from the consequences of their poor planning. Indeed the entire 

concept of government-sponsored, forced withholding for retirement (Social Security) is 

based on the assumption that people lack the foresight or the discipline, or the expertise 

to plan for themselves. The weaknesses in government-sponsored social security and 

retirement systems places increased importance on the ability of people to secure for 

themselves adequate financial planning.93

As seen, there are many public policy reasons behind ERISA’s imposition of fiduciary status. While 

reliance may be a small aspect of fiduciary-client relationships, it is not, alone, the major reason why 

fiduciary duties are imposed. 

 “Applying the Advisers Act and its fiduciary protections is essential to preserve the participation of individual investors in our 91

capital markets. NAPFA members have personally observed individual investors who have withdrawn from investing in stocks 

and mutual funds due to bad experiences with registered representatives and insurance agents in which the customer 

inadvertently placed his or her trust into the arms-length relationship.” Letter of National Association of Investment advisers 

(NAPFA) dated March 12, 2008 to David Blass, Assistant Director, Division of Investment Management, SEC re: Rand Study.

 “We find that trusting individuals are significantly more likely to buy stocks and risky assets and, conditional on investing in 92

stock, they invest a larger share of their wealth in it. This effect is economically very important: trusting others increases the 

probability of buying stock by 50% of the average sample probability and raises the share invested in stock by 3.4 percentage 

points ... lack of trust can explain why individuals do not participate in the stock market even in the absence of any other friction 

... [W]e also show that, in practice, differences in trust across individuals and countries help explain why some invest in stocks, 

while others do not. Our simulations also suggest that this problem can be sufficiently severe to explain the percentage of wealthy 

people who do not invest in the stock market in the United States and the wide variation in this percentage across countries.” 

Guiso, Luigi, Sapienza, Paola and Zingales, Luigi. “Trusting the Stock Market” (May 2007); ECGI - Finance Working Paper No. 

170/2007; CFS Working Paper No. 2005/27; CRSP Working Paper No. 602. Available at SSRN: http://ssrn.com/abstract=811545. 

 Macy, Jonathan R., “Regulation of Financial Planners” (April 2002), a White Paper prepared for the Financial Planning 93

Association; http://fpanet.org/docs/assets/ExecutiveSummaryregulationoffps.pdf provides an Executive Summary of the paper.
53

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

4. Imposition of a precondition requirement of “reliance” would enable widespread consumer 

harm.

Under Fidelity’s proposal, one would surmise that broker-dealers would simply provide, as one paper 

among a myriad of paperwork (often 60 pages or more) that customers sign when an account is first 

opened, a sheet in which the client acknowledges that reliance does not occur upon the adviser or the 

advice provided. 

As stated above, usually by this point a relationship of trust and confidence is already formed. Moreover, 

verbal statements trump written documents, when trust exists. It is easy to get the customer to sign nearly 

anything. 

The result of this proposal, if it were to find its way into a prohibited transaction exemption, would be, 

effectively, contracting out of the fiduciary relationship by signatures to a statement of non-reliance which 

the customer would rarely read, nor if read even understand. 

5. Accordingly, any precondition requirement before fiduciary duties would be imposed would 

not be in the interests of beneficiaries, nor protective of plan beneficiaries, and hence any 

exemptive relief which might be granted on the basis of a reliance precondition requirement 

would exceed the Secretary’s authority, absent some other means of protecting the 

beneficiary.

There exists no factual record under which the Secretary can conclude that the actual showing of reliance 

by a customer should be a precondition to the ability of a fiduciary to escape fiduciary obligations. As 

stated previously, fiduciary duties are imposed by ERISA, and they cannot be negated by the acts of the 

parties, whether such act is called a “contract” or a “statement of non-reliance” or otherwise. Widespread 

harm would result if such an exemption were to be granted. Accordingly, any exemptive relief which 

might be granted on the basis of a reliance precondition requirement would exceed the Secretary’s 

authority. 

D. Fiduciary Duties Apply During the Formation of the Advisor-Client Relationship.

Fidelity’s comment letter provides in pertinent part: 

A conceptually simple and straightforward solution to the sales dilemma is to separate the terms 

of engagement of the advisor - that is, the otherwise conflicted components of the transaction - 

from the underlying investment recommendation. The framework for engaging the advisor is 

agreed to by the investor after full disclosure which permits that framework to be established 

outside the relationship. However, once that fiduciary relationship is established, all 

recommendations with the framework must be in the investor’s best interests. 
54

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

However, under established law, dealings between a fiduciary and a client, even preliminary dealings, 

result in the imposition of fiduciary status upon the fiduciary. Fiduciary duties exist even during the 94

negotiation of the contract between the fiduciary and an entrustor.95

This is because fiduciary duties are imposed on relationships. In fact, fiduciary law is not derived solely 

from contract law, nor from tort law, nor trust law, nor agency law. Rather, “fiduciary law is ultimately a 

law of relationships.” [Emphasis in original.] 96

There is no requirement for fiduciary status to result that a contract actually be signed between the parties. 

Fiduciary duties are imposed by operation of law, not by the agreement of the parties. 

Given the nature of the fiduciary obligation, and its role in protecting the weak against the powerful, if 

fiduciary obligations were not applied during the formation of the relationship, and prior to the actual 

entry into a contract between the parties, then great abuse could occur of the client. For example, the 

client could easily be manipulated to pay unreasonable fees, or to waive core fiduciary obligations. 

While Fidelity may struggle with this concept - that fiduciary duties extend even before the entry into any 

contract between the parties, it should be noted that the fiduciary standard of conduct permits negotiation 

to occur regarding the compensation of the fiduciary. The client is protected during this negotiation by the 

fiduciary standard and its requirement that compensation be reasonable. Any attempt to take outside the 

coverage of fiduciary protections the negotiation of compensation could easily result in agreements for 

unreasonable compensation, which persist in the securities industry today and which are major instances 

of abuse which the DOL’s Conflict of Interests proposed rule is designed to address. 

E. Fidelity’s Proposal to Simplify Disclosures of Conflicts of Interest Does Not Meet the Fiduciary 

Requirement of Affirmative Disclosure.

As discussed above, the existence of a conflict of interest is, in essence, a breach of one’s fiduciary 

obligation. There is a multi-step process necessary to cure that breach. Part of that process is disclosure. 

Yet, to be effective, disclosure must be affirmatively made. 

As the SEC Staff has stated, “The Staff believes that it is the firm’s responsibility—not the customers’—

to reasonably ensure that any material conflicts of interest are fully, fairly and clearly disclosed so that 

 See, e.g., Dexter & Carpenter, Inc. v. Houston, 20 F.2d 647 (4th Cir. 1927), holding that the fiduciary obligation of joint 94

venturers "begins with the opening of the negotiations for the formation of the syndicate”. Id. at 652.

See, e.g., Waite v. Sylvester, 560 A.2d 619 (N.H. 1989) (dictum) (citation omitted). stating: “The rule generally accepted... 95

imposes a fiduciary duty not only with respect to transactions occurring during the partnership but also with respect to 'those 

taking place during negotiations leading to the formation of the partnership.”' Id. at 625. Also see DeVaux v. American Home 

Assurance Co., 444 N.E.2d 355 (Mass. 1983) (holding that an attorney might be liable for malpractice despite absence of a clear 

acceptance by him of an attorney-client relationship).

Rafael Chodos, The Nature of Fiduciary Law and Its Relationship to Other Legal Doctrines and Categories, 91 Boston 96

Univ.L.R. 837, 839 (2011).
55

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

investors may fully understand them.” Moreover, the duty is on the fiduciary to ensure the the client 97

understands the disclosures.98

Mere provision of access to disclosures does not ensure that the fiduciary’s duty of disclosure is met. Nor 

does it meet the fiduciary’s duty to ensure understanding of those disclosures. 

Given consumers’ propensity to not read disclosures, we should resist any attempt to make access to 

disclosures more difficult, and/or to negate the requirement that all disclosures of material facts be 

undertaken affirmatively and in a manner in which the advisor ensures each client’s understanding. 

F. Fidelity’s Proposal to Expand the Seller’s Carve-Out to Small Plan Sponsors Would Negate the 

Essential Protections Small Business Owners Require.

The so-called “seller’s carve out” proposed by the DOL applies only to large plan sponsors, and even then 

only to those who large plan sponsors who possess (or are advised upon) by those with sufficient financial 

expertise. Smaller plan sponsors rarely, if ever, possess the benefit of a trusted expert, objective adviser, 

independent of the product salesperson. 

Fidelity’s letter wants to extend the seller’s carve-out to small plan sponsors, but without these 

protections. Clearly this would not meet the requirements for the grant of exemptive relief under ERISA. 

The very abuses that the DOL seeks to end today would continue, as to plan sponsors, should Fidelity’s 

wish be granted. 

G. Fidelity’s Proposal to Expand the Carve-Out for Investment Education to Include 

Recommendations of Specific Investment Alternatives Impermissibly Creates a Loophole, and 

Would Not Meet ERISA’s Standards for the Grant of Exemptive Relief.

1. Advice, whether it is provided to one person, to a small group, or to a large group, is advice.

Advice is advice. It does matter if it is given in-person, over the phone, in a one-on-one conversation, in a 

group setting, by e-mail, by facsimile, by computer program, by video, or by any other means. 

Under ERISA, the provision of advice is a fiduciary act. 

Under the DOL’s Conflict of Interest rule proposal and PTE proposals, the use of asset allocation models 

that identify specific investment alternatives would no longer be treated as non-fiduciary investment 

education. This appears entirely proper. Advice is advice, even when delivered in group “educational” 

settings. Substance trumps form. 

SEC Staff Study, as mandated under Section 913 of Dodd Frank, p.117. 97

Id., at fn.532: “Cf. letter from Ron A. Rhoades dated Dec. 20, 2010 (“The burden is upon the investment adviser to reasonably 98

ensure client understanding”) (“Rhoades Letter 2”); Financial Planning Coalition Letter, supra note 471 (“It is not sufficient for a 

firm or an investment professional to make full disclosure of potential conflicts of interest with respect to such products [e.g., 

collateralized debt obligations and structured products]. The firm and the investment professional must make a reasonable 

judgment that the client is fully able to understand and evaluate the product and the potential conflicts of interest that it 

presents.”). 
56

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Yet, Fidelity in its comment letter seeks a grand expansion of the education advice exemption, even to 

situations in which very specific recommendations on investment products is provided. 

2. Given the extension of the definition of “fiduciary” under the DOL’s proposed “Conflicts of 

Interest” rule, there appears to be no need to any exemption for investment education. 

Education should be provided by fiduciaries.

The “education exemption” was initiated to provide for consumer education at a time when most 

“retirement plan consultants” were not fiduciaries. The purpose of the exemption was to encourage 

education of a general nature. 

Yet, with the DOL’s extension of the definition of fiduciary to encompass nearly all who provide advice to 

plan sponsors and plan participants, one must ask - why is there a need for the education exemption at all? 

Why wouldn’t you hold a fiduciary to a plan sponsor responsible for education provided to plan 

participants, especially if that advice touches on important subjects such as asset allocation? 

I would urge the DOL to sunset the education exemption, perhaps after a period of one year. It is simply 

no longer necessary. 

3. Recommendations of specific securities clearly are investment advice. Any ability by a nonfiduciary advisor to undertake specific security recommendations would create a giant 

loophole, which over time would swallow up ERISA’s important fiduciary protections.

Should the DOL amend its proposed PTE to provide that specific investment recommendations could be 

made to plan participants on specific investments, in group educational sessions, the result will be the 

delivery of investment advice by brokers and insurance agents almost exclusively under this arrangement. 

The non-application of fiduciary standards to the delivery of specific investment recommendations is, 

simply put, nonsensical - which the DOL has recognized in its most recent proposals. 

4. Accordingly, any expansion of the education exemption would not be protective of plan 

beneficiaries, nor in their interests, and hence would fail to satisfy the requirements for the 

grant of exemptive relief. 

Substantial abuse which could take place if specific investment advice, including specific advice on 

which investment products to choose to implement a client’s investment plan, were permitted to occur in 

group “educational” sessions. 

There is no longer any need for the education exemption. Those who provide education to plan 

participants, including advice on asset allocation (perhaps the most important decision an individual faces 

in terms of designing an investment policy), should be held to a fiduciary standard with respect to such 

advice. 

At the minimum, Fidelity’s proposal to expand the proposed PTE to encompass the recommendation of 

specific products would create a giant loophole, into which non-fiduciaries would jump wholeheartedly. 
57

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

And, the plan participants would, unfortunately, follow them into this non-fiduciary black hole of 

conflicted advice delivered under the meaningless (from the standpoint of consumer protections) standard 

of suitability. 

In Conclusion.

Judge Cardozo in Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928) famously wrote: 

Many forms of conduct permissible in a workaday world for those acting at arm's length, are 

forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals 

of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then 

the standard of behavior. As to this there has developed a tradition that is unbending and 

inveterate. Uncompromising rigidity has been the attitude of courts of equity when 

petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion' of 

particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level 

higher than that trodden by the crowd. It will not consciously be lowered by any judgment of 

this court. 

[Emphasis added.] 

The U.S. Department of Labor should reject the attempt by Fidelity, SIFMA, FINRA, and many others to 

redefine the established legal term “best interests.” In essence, these opponents to the DOL’s proposed 

Conflicts of Interest rule seek to eliminate the fiduciary duty of loyalty altogether and replace it with a 

modified, though still inherently weak, suitability standard. 

The “Best Interests Proposal” - B.I.P. - should be sent to File 13, where it should forever R.I.P. 

Additionally, the DOL should resist attempts to insert additional “particular exceptions” to fiduciary 

requirements that fail to meet ERISA’s standards for the protection of plan participants and the 

requirement that any exemption serve the interests of plan participants. 

Instead, the DOL should consider whether the existing and proposed PTEs, including the education 

exemption, and (as I have stated in a previous comment letter) BICE, should be sunset. There is a 

significant danger that the exemptions will be interpreted in such a manner that they swallow up the 

fiduciary protections which ERISA otherwise affords. At a minimum, I suggest that the DOL 

automatically sunset each and every PTE at some future date, with the requirement that any extension of 

the PTE be shown to be necessary. 

Sunsetting PTEs is wise and reflective of the rapid changes occurring in financial services. The 

investment advisory industry is changing rapidly, and fee-only and other independent providers of advice, 

under level compensation arrangements, are growing rapidly in market share. The delivery of retirement 

planning and investment advice through web-based platforms, with and without substantial human 

touches, is a promising development which is still in its infancy. Rapid developments may well occur in 

just the next few years. 
58

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

September 23, 2015

Moreover, new fee structures for securities and insurance products have emerged in recent years; many 

more investment products are now designed for the independent RIA marketplace. The DOL should 

encourage these trends by planning for a sunset of the PTEs. Of course, this could be done with the 

proviso that a further extension of the PTEs may occur should the marketplace at the time dictate their 

continued necessity, after a staff study of the advisory industry at the time. 

Thank you for the opportunity to submit these comments. I would be happy to meet with the Department 

staff to review any aspect of this comment letter, at a mutually convenient time. 

Yours truly, 

Ron A. Rhoades, JD, CFP®