April 12, 2011 

Office of Regulations and Interpretations 

Employee Benefits and Security Administration 

U.S. Department of Labor 

200 Constitution Ave., NW 

Washington, DC 20210 

Submitted Electronically 

Re: Definition of Fiduciary Proposed Rule (RIN: 1210–AB32) 

These comments present the views of the National Association of Insurance and Financial 

Advisors (NAIFA) on the proposed rule regarding the definition of the term “fiduciary,” 75 

FR 65263 (Oct. 22, 2010) (the Proposed Rule), and related statements made by the 

Department of Labor (the Department) and others during the hearings held March 1 & 2, 

2011. 

NAIFA comprises more than 700 state and local associations representing the interests of 

200,000 members and their associates nationwide. NAIFA members focus their practices on 

one or more of the following: life insurance and annuities, health insurance, pension plans, 

employee benefits, multiline, and financial advising and investments. Founded in 1890 as 

The National Association of Life Underwriters, NAIFA is the nation’s largest financial 

services membership association. NAIFA’s mission is to advocate for a positive legislative 

and regulatory environment, enhance business and professional skills, and promote the 

ethical conduct of our members who assist the public in achieving financial security. 

Virtually all NAIFA members sell life insurance. In addition, nearly two-thirds of NAIFA 

members are licensed as registered representatives of broker-dealers (RRs) and sell 

securities to their clients. Of our members who deal in securities, 41% are “dual-registered” 

as both RRs and as investment advisers (IAs) under the Investment Advisers Act of 1940. 

Two-thirds of all NAIFA members, and 93% of our dual-registered members, provide 

retirement planning services. 

NAIFA appreciates the Department’s effort to make sure that its regulations are suitable for 

the retirement savings marketplace as it has evolved since the Department issued its initial 

rules soon after ERISA’s enactment in 1974. As the number of defined benefit plans has 

decreased and individually directed defined contribution plans have become dominant, 

there is a strong and ever-growing need for workers to have access to quality, affordable 

investment education and investment advice. However, NAIFA is concerned that the 

current proposal to expand the definition of “fiduciary” will have the effect of substantially 

reducing consumer access to investment education and advice, and thus create a substantial 

advice gap for potentially millions of individuals who need professional guidance to 

understand and make investments decisions about their retirement accounts. 
2

Investment Advice for the Middle Market Depends on Commission-Based Compensation

The effect of newly defining persons as fiduciaries if they provide investment recommendations to plan

participants or IRA holders is to prohibit or impose a thick new layer of regulation on the receipt of compensation 

in the form of commissions. Yet commissions are the dominant form of compensation for advice given to middle 

market investors. In December 2010, LIMRA surveyed 3,372 NAIFA members and a representative sample of 

1,008 American adults to better understand consumer preferences and how financial advisory services are actually 

delivered to “Main Street” investors.1 While 50% of consumers surveyed said they have used a financial advisor, 

only 19% of this group (less than 10% of all consumers) had more than $250,000 invested with the help of 

professional advisors. Most registered investment advisers will not service accounts below this threshold,2 so the 

vast majority of American households have access to professional investment advice only through commissionbased arrangements. 

Even if they have a choice between commission and other forms of payment for advice, many consumers would 

prefer to pay commissions. The LIMRA survey found that 71% of consumers say that, if their advisor charged a 

$2,500 upfront fee for a financial plan, they would seek another advisor or go without professional services (19% 

were unsure what they would do). A mere 5% of consumers disagree with the statement that “most people want a 

choice of how they pay for professional financial advice — compensating the advisor by paying a fee, or 

compensating the advisor through commissions on the purchase of financial products.” 

The proposed new definition of fiduciary imposes rules that would make it difficult, if not impossible, for an 

adviser who is compensated by commission to provide advice, unless the adviser qualifies under the proposal’s 

“seller’s exception.” Even if the Department were to issue additional prohibited transaction exemptions (PTEs) to 

allow commission-based payments to the new class of fiduciaries, the accompanying compliance requirements 

would significantly raise the cost of providing investment guidance to plans, plan participants and IRA holders. 

These compliance costs would reduce access to professional recommendations and/or raise costs for investors. 

When the LIMRA survey asked NAIFA’s security-selling members what they would do if regulatory compliance 

costs increased by 15%, only about a third said they could absorb that level of cost increase. 31% said they would 

limit their practice to high-asset clients, 14% would increase the fees charged, and 20% would stop selling 

securities. 

Retirement Investors Will Lose Access to Investment Recommendations without a Robust Seller’s Exception

The Proposed Rule greatly broadens the nature of “investment advice” that would give rise to fiduciary status, 

making a “seller’s exception” such as the proposed Sec. 2510.3-21(c)(2)(i) essential for preserving consumer 

access to investment recommendations. The essence of this exception is to accommodate situations where an 

investor considers advice from an adviser who the investor knows is not impartial; i.e., one whose compensation 

is affected by the investment chosen by the person being advised. This is the essence of commission-based 

investment purchasing and selling, and as noted above, reflects the preference of a large majority of middleincome investors. 

As currently drafted, the “seller’s exception” in the Proposed Rule contemplates an adversarial relationship 

between the seller and the client. This is unwarranted. The exception characterizes the interests of the seller and 

the customer as “adverse,” suggesting that what is good for one party is bad for the other even though this may 

not be true. 

 

1

 More information about the NAIFA-LIMRA survey is available at http://www.naifa.org/ServingMainStreetInvestors/. 

2

 The 2008 RAND study commissioned by the Securities and Exchange Commission, “Investor and Industry Perspectives on 

Investment Advisers and Broker-Dealers,” found that half of investment advisors had $1 million account minimums, and 

most of the remainder had account minimums ranging from $100,000 to $500,000. 
3

We note that the “Fact Sheet” recently released by the Department3 restates the seller’s exception as applying to 

“persons who do not represent themselves to be ERISA fiduciaries, and who make it clear to the plan that they are 

acting for a purchaser/seller on the opposite side of the transaction from the plan rather than providing impartial 

advice.” This language is a substantial improvement over the Proposed Rule. It reflects the reality that the 

investor’s choice may affect the adviser’s compensation, but also the equal reality that where the investor knows 

this, the advice provided still has real value to the person being advised. In fact, it may be the only professional 

advice to which the investor has (affordable) access. In fact, the phrase “opposite side of the transaction” is more 

accurate than the term “adverse,” as the advice is provided in the context of a legitimate, arms-length transaction 

between a willing buyer and a willing seller. 

The Proposed Rule also requires the seller to demonstrate that the recipient of the advice knows or should know 

that they are dealing with an adviser whose interests are adverse to the interest of the plan or its participants, and 

not someone undertaking to provide impartial advice. As a matter of legal proof, it is difficult to establish what 

another person knows or should know, so cautious compliance departments are likely to shy away from using this 

exception. The “Fact Sheet” language is also an improvement in this respect, because the requirement for the 

seller is to “make it clear” that a recommendation is not impartial advice, rather than trying to prove what the 

customer knows. 

We encourage the Department to use this improved language requiring advisers to “make it clear” they are acting 

on the “opposite side of the transaction” in any modifications to the Proposed Rule, if the proposed rule is not 

withdrawn. We also encourage the Department to add clarifying language to the seller’s exception noting that this 

standard applies to situations where the adviser is working with plan participants or IRA holders, as well as with 

the plan itself. 

At the March 1-2 hearings, some participants suggested that the seller’s exception should not apply to investment 

recommendations made to individual plan participants or IRA holders. We vigorously disagree with this position. 

As noted previously, investment recommendations with commission-based compensation are the only affordable 

source of personalized advice available to most small, individual investors. As a result, the seller’s exception is 

particularly necessary for individuals to receive professional assistance in selecting investments. IRA holders and 

small businesses face an array of investment choices that have not been vetted by a plan sponsor’s investment 

committee, and are less likely to have access to computer models that will appropriately help them allocate 

investments. Moreover, standard computer models for asset allocation may not adequately reflect the priorities 

and needs of individual investors even where they are available. Restricting the seller’s exception to transactions 

with other plan fiduciaries could obliterate small investor access to individualized investment guidance regarding 

their tax-advantaged retirement accounts. 

The Expanded Fiduciary Definition Should Not Apply to IRAs

The Proposed Rule would apply the new definition of fiduciary not only to employer-provided retirement plans 

subject to ERISA, but also to arrangements named in Internal Revenue Code section 4975(e)(1). Thus, for the 

first time, persons advising the holders of individual retirement accounts, individual retirement annuities, and 

other tax-advantaged accounts for medical or education savings (hereinafter referred to as IRAs for simplicity) 

could be subject to prohibited transaction rules similar to investment professionals dealing with ERISA plans. 

This would be a sea change that could decimate consumer access to advice regarding their investments in IRAs. 

Unlike employer-provided retirement plans, IRAs contain the assets of only one individual. In addition, 

contributions are subject to a much lower annual cap than qualified plans, and are not allowed for high-income 

individuals. As a result, IRAs will rarely contain enough assets to make flat or asset-based fees workable. 

Commissions earned by brokers from IRA accounts are correspondingly small, so there is very little margin for 

 

3

 Available at http://www.dol.gov/ebsa/newsroom/fsfiduciary.html. 
4

absorbing higher compliance costs. The Proposed Rule contained no analysis of the regulatory impact costs for 

the IRA market—a critical omission in light of these key differences between the IRA and qualified plan markets. 

The Department recently recognized the fundamentally different nature of IRAs when it excluded these accounts 

from the new fee disclosure requirements for the IRC sec. 4975(d)(2) exemption.4

 The preamble to the interim 

final rule correctly observes that “IRAs generally are marketed alongside other personal investment vehicles. 

Imposing the regulation’s disclosure regime on IRAs could increase the costs associated with IRAs relative to 

similar vehicles that are not covered by the regulation.” By implication, it can be expected that brokers and 

advisers will not want to serve the IRA market and/or consumers will not choose the locked-in, long-term savings 

associated with IRAs. The same concerns apply to disclosures required for PTE qualification. 

The Fiduciary Definition Is Overly Broad for Investment Advisers Registered Under the 1940 Act

As noted above, 41% of NAIFA’s members who sell securities are registered both as RRs of broker-dealers and 

as IAs. Though these IAs are already “fiduciaries” under the SEC definition with respect to their advisory clients, 

SEC fiduciaries are subject to different standards than ERISA fiduciaries. Moreover, dual-registered persons 

typically act as non-fiduciary RRs with respect to some clients even while they act as fiduciary IAs with respect to 

other clients. 

It is a well-established principle that the ERISA definition of fiduciary is functional, so that registered investment 

advisers are only fiduciaries with respect to the plan assets for which they provide investment advisory services of 

a fiduciary nature. The Proposed Rule would upend this settled understanding and presumptively treat any person 

registered under the Investment Adviser Act of 1940 as a fiduciary whenever such a person makes investment 

recommendations. This apparently would include investment recommendations made by any dual-registered 

person, even if those recommendations are made in a broker-dealer capacity subject to SEC suitability standards. 

Moreover, the Proposed Rule applies this fiduciary presumption to any person who “through or together with any 

affiliate” is an investment adviser, potentially reaching broker-dealers and RRs who are not dual-registered simply 

because they have dual-registered affiliates. Because of the new costs and prohibitions associated with ERISA 

fiduciary status, this Proposed Rule would likely cause many investment advisers with broker-dealer or recordkeeper affiliates to either de-register as investment advisers or stop all affiliates from providing any services to 

employee benefit plans and IRAs. 

The Fiduciary Definition Is Overly Broad for Any Person Making Individualized Investment Recommendations

The Proposed Rule also contains a functional element, but it is much broader than the present definition. Under 

the proposed definition, a one-time investment recommendation, which may be considered in connection with 

making plan or IRA investment decisions, if the recipient of the advice understands the advice to be 

individualized to the needs of the plan, plan fiduciary, participant, or beneficiary, would be fiduciary advice. 

As a practical matter, this definition could transform every discussion about investment options that appears to be 

individualized into a fiduciary recommendation. Broker-dealers and insurance agents who are unwilling or unable 

to assume fiduciary status would be relegated to a mere clerical role of executing instructions from clients without 

providing any professional guidance about the suitability of different investment options. Such a restriction on 

brokers and agents would not serve the interests of clients seeking assistance in understanding their investment 

options. It would result in individuals either making uninformed choices, or incurring substantially higher costs 

associated with getting the advice they need. 

 

4

 29 C.F.R. Sec. 2550.408b-2(c)(1)(ii), effective January 1, 2012. 
5

Conclusion

The current Proposed Rule would have a predictable negative impact on the availability of investment guidance 

for retirement plans, plan participants and IRA holders. Yet other regulatory initiatives proceeding at the same 

time will likely alleviate or ameliorate the concerns that prompted the Department to propose the new fiduciary 

definition, including the Department’s own interim final rule requiring specific fee disclosures under ERISA 

Section 408(b)(2),5 and the ongoing Securities and Exchange Commissions (“SEC”) consideration of the standard 

of care obligations for broker-dealers and investment advisers. NAIFA urges the Department to carefully consider 

the full impact of its fiduciary definition proposal, and to reassess its necessity in light of these other regulatory 

initiatives, before proceeding with any final rulemaking. 

 Sincerely, 

Terry K. Headley, LUTCF, LIC, FSS 

NAIFA President 

 

5

 29 C.F.R. Sec. 2550.408b-2, effective January 1, 2012.