Charles Schwab & Co., Inc.  Member SIPC.

Christopher P. Gilkerson 

Senior Vice President, Deputy General Counsel 

Charles Schwab & Co., Inc. 

211 Main Street 

San Francisco, CA 94105 

tel 415.667.0979 fax 415.667.1631 

May 5, 2010 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, N.W. 

Washington, DC 20210 

Submitted via email to e-ORI@dol.gov

Re: 2010 Investment Advice Proposed Rule 

Ladies and Gentlemen: 

We appreciate this opportunity to comment on the Department’s proposed rule implementing the 

Pension Protection Act (PPA) investment advice exemption (the “Proposed Rules” or “Rules”). 

The Charles Schwab Corporation is a leading provider of financial services, with more than 300 

offices and 7.8 million client accounts, 1.5 million corporate retirement plan participants, 

768,000 banking accounts, and $1.49 trillion in client assets. We applaud the Department’s 

efforts to finalize a rule implementing the PPA investment advice exemption and support the 

overall expansion of access to professional investment advice. 

We write to request that the Department provide clarification of certain aspects of the Proposed 

Rules’ fee-leveling, disclosure, and computer model requirements to help assure the usefulness 

and effectiveness of the Rule. Providing clarity in the areas noted below will facilitate industry 

compliance with the Rule and aid in the expansion of retirement savers’ access to professional 

investment advice. 
Charles Schwab & Co., Inc.  Member SIPC. 2

FEE-LEVELING ARRANGEMENTS 

Application to Wrap-fee Programs

The proposing release for the Rules cautions that receipt of varying compensation by the 

fiduciary adviser from its affiliate or receipt of varying compensation by any party “that is used 

for the benefit of” the fiduciary adviser would be inconsistent with the fee-leveling requirement. 

Both the Proposed Rule and Field Assistance Bulletin 2007-1, however, make clear that “an 

affiliate of a fiduciary adviser may receive fees that vary depending on investment options 

selected.” 

To avoid confusion, Schwab believes it is important for the Department to clarify that it does not 

intend to rule out traditional wrap-fee advisory programs as a permissible fee-leveling 

arrangement under the Proposed Rule, provided that there is no variable compensation paid to or 

received by the fiduciary adviser based on the recommended investments. 

A wrap-fee arrangement refers to a bundle of advisory and brokerage services, including trade 

execution and custody, provided for a single fee. One common arrangement is for a brokerdealer sponsor of the program to provide the brokerage services while an affiliated investment 

adviser (e.g. the fiduciary adviser where advice is provided to a retirement plan account) 

provides the investment advice (to plan participants or IRA beneficiaries), with each entity 

receiving a portion of the bundled wrap fee. It is also common in wrap-fee programs for the 

overall fee to be paid to the broker-dealer sponsor, which then passes on to the advisory affiliate 

its share of the fee – a share fully disclosed and agreed to by the recipient of the advice. 

It would be helpful for the Department to clarify that, so long as the portion of the wrap fee paid 

to the fiduciary adviser does not vary according to investment option, then neither the fact that 

payments flow from the broker-dealer to its affiliated fiduciary adviser, nor the fact that the 

affiliated, non-fiduciary broker-dealer may receive variable compensation on the underlying 

investments would render the wrap-fee approach ineligible under the Proposed Rule. 

Inter-Affiliate Arrangements

Financial services organizations commonly contract with affiliates to perform administrative, 

client service and other functions pursuant to inter-affiliate agreements. For example, a fiduciary 

adviser might contract with one or more of its affiliates to provide payroll, facilities, marketing, 

technology, research, and other support services. We request that the adopting release for the 

final rule clarify that the performance of these types of non-fiduciary services on behalf of a 

fiduciary adviser, pursuant to an inter-affiliate agreement, will not result in making the service 

provider affiliate a fiduciary adviser for purposes of the fee-leveling condition. This clarification 

is consistent with the policy goal of enabling fiduciary advisers affiliated with large financial 
Charles Schwab & Co., Inc.  Member SIPC. 3

institutions to provide advice for a level fee at a reasonable cost and will provide the industry 

with certainty in connection with common business practices. It also is consistent with prior 

DOL guidance that an entity which is not otherwise a plan fiduciary does not become a fiduciary 

merely because it is affiliated with an entity that engages in fiduciary activities. 

Dual Employee Status

The fee-leveling condition applies both to the fiduciary adviser and its employees, agents and 

registered representatives. In many financial services organizations it is common for individuals 

to perform more than one role or even to maintain an employment relationship with more than 

one affiliate. For example, the representative of a registered investment adviser may also be 

under the partial supervision of an affiliated bank for purposes of enabling the representative to 

discuss the bank’s products and services (a banking requirement). The fact that a representative 

engages in non-fiduciary adviser activities from time to time should not prevent that 

representative from also delivering “eligible investment advice” in compliance with the Proposed 

Rule. To assist firms in understanding the scope of the fee-leveling provisions and to enable 

compliance, we ask the Department to clarify that a fiduciary adviser’s “employees, agents and 

registered representatives” include such individuals only when acting on behalf of the fiduciary 

adviser in providing investment advice. 

 

Advice Based on “Generally Accepted Investment Theories”

Fiduciary advice may cover the full range of stocks, bonds, mutual funds, exchange-traded 

funds, and other investments. Participants or beneficiaries, making their own investment 

decisions, may have a few positions in their account, or dozens of positions. A requirement of 

Proposed Rule (b)(3)(i)(A) is that “any investment advice is based on generally accepted 

investment theories that take into account the historic risks and returns of different asset classes 

over defined periods of time. . . .” It would be helpful for the Department to recognize when 

adopting the final rule that, because a beneficiary can choose to accept or ignore the fiduciary’s 

advice, investment holdings in the account might not reflect generally accepted investment 

theories despite receiving fiduciary advice based on generally accepted investment theories. 

DISCLOSURE REQUIREMENTS 

The Proposed Rule would require prior written disclosure to a plan participant or IRA 

beneficiary of, among other items, “[t]he past performance and historical rates of return of the 

designated investment options available under the plan.” As written, this requirement could levy 

an impossible task on fiduciary advisers offering a wide range of investment options. IRAs held 

at broker-dealers, for example, may offer a full range of “designated investment options” that 

includes thousands of stocks, bonds, mutual funds, and exchange traded funds. The fiduciary 

adviser seeks to customize client portfolios from among those thousands of investment options. 
Charles Schwab & Co., Inc.  Member SIPC. 4

It is simply not feasible to continuously track and publish performance results for each 

recommendable security. (This is in contrast to performance of client accounts, which can be 

tracked and compared to applicable benchmarks.) The Department should eliminate this 

requirement from the final rule, or at least clarify that “past performance and historical rates of 

return” means at an asset class level rather than individual investment level. 

For fiduciary advisers who are registered with the Securities and Exchange Commission, many 

of the disclosures required by the Proposed Rules are also required under or overlap with SEC 

rules promulgated under the Investment Advisers Act of 1940. To avoid unnecessary duplication 

or confusion to IRA beneficiaries who would already be receiving the SEC’s ADV Part II 

disclosure, we ask that the Department clarify that fiduciary advisers may provide the Fiduciary 

Adviser Disclosure under the Proposed Rules integrated (e.g., in the same disclosure brochure) 

with the fiduciary adviser’s disclosures under the Investment Advisers Act. Firms, of course, 

would need to supplement their ADV Part II disclosures to meet the additional requirements of 

the Proposed Rule. 

COMPUTER MODELS 

Generally Accepted Investment Theories and Use of Historical Performance

The request for comments asks, among other things, whether it is appropriate to “recommend a 

fund with superior performance over an alternative fund in the same asset class with average 

performance but lower fees.” Schwab believes that it may be appropriate, depending on other 

factors. For example, under generally accepted investment theories (a term used throughout the 

Proposed Rules), historical performance of a mutual fund is an important factor, but not the only 

one, used to make investment decisions. The absolute level of performance, standing alone, may 

not be an accurate measure of the manager’s skill, especially if the fund’s investment style (e.g., 

large-cap growth) happens to have been either in or out of favor in the market over the particular 

time period. For this reason it is generally accepted to consider risk-adjusted performance or 

risk- and style-adjusted performance in lieu of absolute performance in the investment decision 

making process. Research shows that performance is just one of several factors that should be 

considered. Expenses, of course, should be considered, but assets under management, cash 

flows, and the degree of active management are also important.1

 

                                                           

1 See, for example:  Chen, Joseph, Harrison Hong, Ming Huang, and Jeffrey D. Kubik.  2004.  “Does Fund Size Erode

Mutual Fund Performance?  The Role of Liquidity and Organization.” American Economic Review, vol. 94

(December): 1276‐1302. 

Peterson, James D., Paul A. Pietranico, Mark W. Riepe, and Fran Xu.  2001. “Explaining the Performance of

Domestic Equity Mutual Funds.” The Journal of Investing, vol. 10, no. 3: 81‐91.

Cremers, Martjin and Antti Petajisto.  2009.  “How Active is Your Fund Manager?  “A New Measure That Predicts

Performance.”  Review of Financial Studies, vol. 22, no. 9: 3329‐3365.
Charles Schwab & Co., Inc.  Member SIPC. 5

Historically well-performing funds in their categories may result not from chance (one 

possibility mentioned in the request for comments), but from superior investment management 

approaches based on quantitative or qualitative models. Although there is a healthy debate 

regarding the role of luck versus skill in investment management, studies have shown that some 

managers have enough security selection skill to more than cover their costs of trading and that 

the superior skill persists.2

The Proposed Rules state that a computer model must not “inappropriately distinguish among 

investment options within a single asset class on the basis of a factor that cannot confidently be 

expected to persist in the future.” For the reasons stated above, this should not preclude the 

appropriate use of historical performance as one valuable factor used to distinguish among 

investment options. Such a prohibition could have the effect of forcing fiduciary advisers using 

computer models to recommend nothing but index mutual funds and exchange traded funds, as 

the cost advantage enjoyed by these investments – only one factor in investment selection, as 

reflected in the multiple investment selection criteria laid out in the Proposed Rules themselves – 

is perhaps the only factor that can be confidently expected to persist in the future. Our 

experience tells us that many investors at various stages of saving for retirement have a desire for 

at least part of their portfolio to outperform a benchmark, and active management is the only way 

to do that. Therefore, the Proposed Rules should enable fiduciary advisers to help these 

investors identify active funds that give them the best opportunity to achieve their goals. 

Impact on Third-Party Advice Arrangements

Schwab’s experience shows that participants using computer model-generated advice generally 

tend to achieve better investment performance with respect to their 401(k) plan assets than those 

participants that do not receive advice. Computer model-generated advice today is typically 

provided by third parties. By preserving prior “regulations, exemptions, interpretive or other 

guidance issued by the Department,” we applaud the Proposed Rules’ preservation of this 

relatively low cost access to advice that would otherwise be unavailable to many participants. 

We note, however, that the regulatory exemption provided by the Proposed Rules, including 

qualification for the safe harbor, may create a negative implication for plan fiduciaries that a 

third party computer model (which does not require an exemption) provides less comfort than 

advice arrangements under the PPA. This may result in plan fiduciaries disfavoring less 

expensive and fully permissive third party arrangements. That would be unfortunate. The 

additional audit, certification, and disclosure provisions of the Proposed Rules contemplate an 

affiliated fiduciary adviser and so are intended to address the additional potential conflicts of 

interest that result. With the additional requirements comes the additional expense for a PPA 

                                                           

2 See, for example: Kosowski, Robert, Allan Timmermann, Russ Wermers, and Hal White.  2006.  “Can Mutual fund

“Stars” Really Pick Stocks?  New Evidence from a Bootstrap Analysis.” The Journal of Finance, vol. 61, no. 6: 2551‐

2595.