Suite 201

1600 K Street

Washington, D.C. 20006

Voice: 202.449.6340

800.322.4237

Fax: 202.449.6350

E-mail: fpa@fpanet.org

Web site: www.fpanet.org

May 5, 2010

Sent via Electronic Mail 

Office of Regulations and Interpretations

Employee Benefits Security Administration

Room N-5669

U.S. Department of Labor

200 Constitution Avenue, N.W.

Washington, DC 20210

Re: 2010 Investment Advice Proposed Rule

To Whom It May Concern:

The Financial Planning Association1("FPA®") is pleased to submit comments regarding 

the rules governing the delivery of personalized investment advice to plan participants 

under Section 601 of the Pension Protection Act of 2006 (the "PPA") and similar 

provisions governing individual retirement accounts ("IRAs").

Retirement planning is a core area of practice for financial planners. In addition to 

providing advice on a broad array of personal finance issues, many offer investment 

advice to plan participants, their beneficiaries and IRA account holders regarding the 

assets held in the 401(k) accounts and IRAs. Some financial planners may also serve 

as investment managers who advise plan sponsors on the selection of investment 

options to be offered under 401(k) plans. Most are subject to broad fiduciary duties as 

affiliates of registered investment advisers, and FPA members are also subject to a 

fiduciary duty for their financial planning activities under ethical rules incorporated by 

FPA in its bylaws2.

FPA supports the goals of the PPA to expand the pool of advisers eligible to help 

participants and beneficiaries owning assets in qualified plans and IRAs make wise 

investment decisions. We agree with the Department of Labor's (the "Department") 

 

1

 The Financial Planning Association is the largest organization in the United States representing 

financial planners and affiliated firms, with approximately 24,000 individual members. FPA members 

directly manage more than $1.5 trillion in assets with a combined client base of 2.75 million individuals. 

Approximately 50 percent of FPA members are affiliated with SEC-registered investment adviser firms 

and 22 percent with firms registered on the state level. Half of its individual members are also affiliated 

with broker-dealers. FPA is incorporated in Washington, D.C., where it maintains an advocacy office, with 

headquarters in Denver, Colorado.

2

See FPA Standard of Care, at http://www.fpanet.org/AboutFPA/Organization/CoreBeliefs/.
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May 5, 2010

view that participants and beneficiaries often make costly investment errors which could 

be avoided if they receive quality investment advice.

FPA offers comments on the following issues:

withdrawal of the individual class exemption;

continuation of pre-existing guidance issued by the Department that applies to 

the provision of investment advice;

the Department's request for comments on what constitutes generally 

accepted investment theories and appropriate and objective criteria to serve 

as basis for asset allocation;

qualifications and scope of responsibilities of independent auditor;

the Department's addition of a new requirement on factors that must be 

avoided in computer model-driven advice; and

the Department's prohibition on a fiduciary adviser's receipt of any fee or 

other compensation that is based on a participant's or beneficiary's selection 

of investment options.

WITHDRAWAL OF THE INDIVIDUAL CLASS EXEMPTION

The class exemption allowed varying fees to be provided to the fiduciary advisers’ 

employer (not just affiliates of the fiduciary adviser) for individualized off-model advice. 

FPA has concerns that participants and beneficiaries could receive conflicted 

investment advice, regardless of what disclosures may be made. FPA feels the 

withdrawal of the class exemption is appropriate since the PPA statutory exemption 

does not provide prohibited transaction relief for individualized advice following the 

furnishing of investment recommendations generated by a computer model. While FPA 

understands that there will be situations whereby participants or beneficiaries may 

request advice outside of that provided by the computer, such advice would not be 

precluded so long as the advice is rendered under a fee-leveling arrangement. 

EXISTING GUIDANCE ISSUED BY THE DOL OUTSIDE OF THE EXEMPTION 

WOULD STILL APPLY TO THE PROVISION OF INVESTMENT ADVICE

FPA is pleased that the proposed regulations continue to expressly provide that neither 

the PPA nor the regulations invalidates or otherwise affects prior regulations, 

exemptions, interpretative or other guidance issued by the Department. Many of our 

members are currently providing participant education and advice under the current 

rules and will continue to do so. The PPA exemption was enacted to provide additional 

methods to allow investment advice to be provided to participants and beneficiaries. 
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May 5, 2010

THE REQUEST FOR COMMENTS ON GENERALLY ACCEPTED INVESTMENT 

THEORY AND OTHER MATTERS

The Department requested comments on the conditions applicable to computer-driven 

model investment advice, including: 

(i) which investment theories are generally accepted and which ones are not; 

(ii) whether the regulations should specify certain investment theories that are 

acceptable or proscribe the application of those not deemed to be 

generally acceptable; 

(iii) what historical data should be considered in determining a computer 

model's expectation for future performance of asset classes and specific 

investment alternatives; 

(iv) whether the regulations should specify what criteria are appropriate and 

objective and what criteria are not for asset allocation purposes;

(v) whether a fund's past performance relative to the average for its asset 

class is an appropriate criterion for allocating assets to the funds;

(vi) whether a fund's superior past performance can be demonstrated to 

derive not from chance, but from factors likely to persist in the future; and

(vi) how the computer model should take into account investment 

management style.

Even though the questions are limited to computer models, FPA is very concerned that 

the Department may prescribe specific guidelines for what constitutes generally 

accepted investment theories. Potentially, if such rules are promulgated, they would 

also affect the investment advice programs under the Sun America Advisory Opinion 

and education and asset allocation tools made available by plan sponsors to 

participants under Interpretative Bulletin 96-1.

FPA believes that "generally accepted investment theory" is not one that is susceptible 

to specific guidelines. Rather, it is a fluid theory which has evolved over the years and 

will continue to evolve in the future. Investment professionals have sufficient knowledge 

and expertise to determine what theories are appropriate to be used in computer 

models and what data should be considered in developing computer models.

Under the proposed rules, an eligible investment expert must certify that the computer 

model meets the requirements of the regulations, including that it applied generally 

accepted investment theories. Additionally, an annual audit must be performed by an 

independent auditor who has appropriate technical training and experience and 
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May 5, 2010

efficiency. The audit requirement applies to both level fee advice and computer-driven 

advice. 

FPA believes that prescribing methodology to determine whether the generally 

accepted investment theory requirement was satisfied would be beyond the 

Department's purview and would substitute its judgment for that of the experts required 

to be retained by the fiduciary adviser. Moreover, it would not be practicable since any 

requirements published today would not take into account changing financial markets 

and conditions in the future.

ADDITIONAL GUIDANCE NEEDED ON QUALIFICATIONS OF INDEPENDENT 

AUDITOR AND THE SCOPE OF THE AUDIT 

The regulations require annual audits for both level fee advice and computer 

model-driven advice. The audits are to be conducted by an independent auditor who 

has appropriate training or experience and proficiency. The auditor is required to 

“review sufficient relevant information to formulate an opinion as to whether the 

investment advice arrangements, and the advice provided pursuant thereto, offered by 

the fiduciary adviser during the audit period were in compliance with [the regulations].” 

FPA believes that additional guidance should be provided on the qualifications for an 

independent auditor based on satisfaction of enumerated requirements as to 

experience, education, professional certification and/or licensing. The regulations 

impose a fiduciary duty on the fiduciary adviser for the selection of the auditor, but do 

not provide any tangible guidance to them on what qualifications would constitute 

“appropriate technical training or expertise.” 

FPA also believes that additional guidance should be provided on the scope of the 

auditor’s engagement. Under the regulations, the auditor is tasked with determining the 

appropriate scope of the audit and the extent to which it can rely on representative 

samples. However, this reliance upon the auditor without any guidance as to what the 

Department would consider a reasonable scope does not assist the fiduciary adviser in 

selecting and monitoring the independent auditor. This is a new requirement and 

persons who will fulfill the responsibilities of an independent auditor (as well as fiduciary 

advisers who retain them) will need guidance on the scope of the engagement in 

auditing both the level fee arrangement and the computer model arrangement.

 

ADDITIONAL REQUIREMENT ON FACTORS TO AVOID IN COMPUTER 

MODEL-DRIVEN ADVICE

The regulations added a new requirement that computer model advice must satisfy—

the investment recommendations must not "inappropriately favor investment options 

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

to persist in the future." In the Preamble, the Department, in explaining this language, 

opined that:
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May 5, 2010

While some differences between investment options within a 

single asset class, such as differences in fees and expenses 

or management style, are likely to persist in the future and 

therefore to constitute appropriate criteria for asset 

allocation, other differences, such as differences in historical 

performances, are less likely to persist and therefore less 

likely to constitute appropriate criteria for asset allocation. 

[Emphasis added.]

FPA is very concerned by this comment. Historical rates of returns, even within a single 

asset class, have always been considered under generally accepted investment 

theories. Obviously, historic rates of returns are not the only criterion and must be 

carefully analyzed along with many factors, but they should not be ignored.

FPA is also concerned that the Department is favoring passively managed or index 

investment funds over actively-managed funds for 401(k) plans and IRA accounts. 

Again, we believe that this decision is outside the scope of the Department's role in 

promulgating these regulations and also not within its expertise. The Department would 

be substituting its judgment for that of the experts required to be retained by the 

fiduciary adviser. The investment experts will use their expertise and professional 

judgment in providing investment advice and developing, certifying and auditing eligible 

investment advice arrangements. One final comment is that there are many changes 

that occur in funds—managers leave, others are retained; fees and expense ratios 

increase and decrease over time; new participants may be precluded from investing in 

funds; or different terms of investments may apply from time to time. Nothing is 

immutable and any major event at the fund level may render criteria used "less likely to 

persist."

PROHIBITION ON THE FIDUCIARY ADVISER'S RECEIPT OF COMPENSATION 

BASED IN WHOLE OR IN PART BASED ON THE PARTICIPANT'S SELECTION OF 

INVESTMENT OPTIONS

FPA supports the Department's objective to clarify that a fiduciary adviser (including any 

employee, agent or registered representative) may not receive any fees or other 

compensation (other than its disclosed level fee) from any party that is based (in whole 

or in part) on a participant's selection of an investment option. FPA understands that, in 

order to assure that the level-fee requirement is rigorously enforced on financial 

advisers, it is important that the rules are not breached through “backdoor” 

arrangements. However, we believe that the rule as written is overly broad and 

ambiguous. For example, it includes "awards," "promotions" and "other things of 

value." This encompasses more, we believe, than is necessary to ensure unbiased 

advice through level-fee arrangements.
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May 5, 2010

SUMMARY

We thank you for the opportunity to comment on the proposed rules that are critical to 

helping Americans reach financial independence at retirement and with standards that 

allow for the delivery of competent, objective investment advice. We are available to 

discuss these matters further at the Department's request. Please do not hesitate to 

contact us at (202) 449-6340.

Very truly yours,

Phillips Hinch

Assistant Director, Government Relations