CAROLYN B. MALONEY 

12, .. DtSTIIICT, NlW YOM 

2308 R/,y..- HOVSl OffICI 8tADIN<I 

W.S"'NGTOtI, DC 206,6 3212 

(202) 226 7944 _n 

FINANCIAl SERVICES 

GOVERNMENT REFORM 

JO,NT ECONOMIC COMM)TTEE 

,S[NIO~ HOOK O[Moc~"'11 

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mas~11Igtoll . DC 20515-3212 

The Honorabl e Thomas E. Perez 

Secretary 

U.S. Department of Labor 

200 Constitution A venue NW 

Washington, DC 202 10 

September 2, 201 5 

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o 1651 T..-. AIIlHlIl 

Suon 311 

NEw YON<, NY 10'26 

1212) 860-0606 

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11.11011., NY 11102 

1718) 932-1804 

o 619 LOIIl"'£A S'~[n 

9~OO~~VN , NY ,12" 

(718) 349-5972 

~'I: m8looey.houM.gov TWill... .~M.1oney 

Re: Definition of the Term "Fiduciary"; ConfEct of lute.rest Rule - Retirement 

Investment Advice (RIN 1210-AB32) 

Proposed Best Interest Contract Exemption (ZRIN 1210-ZA2S) 

Dear Secretary Perez: 

I am writing to express my strong support for the Department of Labor's (the "Department") 

proposed changes to the definition of a " fiduciary" under the Employee Retirement Income 

Security Act of 1974 (ERISA) and the Internal Revenue Code, as well as the related exemptions. 

This much-needed regulatory update will strengthen the retirement security of millions of 

Americans by ensuring that persons who provide investment advice to retirement savers have a 

legal obligation to put their customers' interests first. 

As an initial maner, I would like to applaud the Department for its rigorous, thorough, 

transparent, and cvidenceMbascd approach to this proposaL I would also like to thank the 

Department For their constructive engagement with me and my office throughout this process. 

As with any proposed rule of this magnitude, certain clarifications will be necessary before the 

rul e is finalized. However, I also believe that there are some changes that the Department should 

no! make, because doing so would undermine the rule's critical investor protections. 

Preserve the Seller's Carve-Out 

I strongly urge the Department no! to expand the so-call ed "seller's carve-out" to the retail 

market. Making the seller's carve-out available in the retail market would effectively allow 

advisers to disclose their way out of a fiduciary duty when they are providing advice to 

individual IRA owners and small plan providers in too many situations. This would undermine 

the core purpose of the Department's proposal, which is to ensure that retirement investors who 

need and rely on professional financial advisers receive unbiased advice that is in their best 

interest. 

Please sign up for Rep. Maloney's enewsletter at maloney.house.gov/contact-me/newsletter 

_tlD 0fI MCYCUO PA/'llI " .... ,. 
Many have argued that a broader seller's carve-out is necessary to ensure that routine marketing 

and sales pitches are not treated as investment advice subject to a fiduciary duty. To the extent 

that the line between marketing and advice is unclear in the proposed rule, the solution is not to 

provide advisers a broad carve-out that allows them to avoid a fiduciary duty altogether. Rather, 

the solution to an unclear line between marketing and advice is, quite simply, a clearer line 

between marketing and advice. 

As such, the appropriate way to address this issue is by clarifying the de fi nition of a 

" recommendation" in the rule. The Department has indicated on numerous occasions that the 

intent of the proposed rule is to capture only "recommendations" that would also be considered 

" recommendations" under FrNRA's suitability rules and guidance. ' If the definition of a 

" recommendation" in the Department's rule were explicitly aligned with the existing FfN RA 

definition of a "recommendation," then the line between marketing and advice would no longer 

be unclear. Accordingly, I believe that the Department should clarify in the final rule that the rule 

.oniy:captures recommendations that would be considered as such under FfNRA's suitability 

rules and guidance. 

Replace Permissible "Assets" List With Principles-Based Approach; Alternatively, Include 

Listed Options as a Permissible Asset 

As proposed, the Best Interest Contract (BlC) exemption is limited to compensation generated by 

investments in a defined list of assets? According to the preamble to the proposed rule, the 

Department's intent was to limit the exemption to assets "that are commonly purchased by plans, 

participant and beneficiary accounts, and TRAs.") As a result, the list of penn is sible assets in the 

BlC exemption largely reflects the assets that are most commonly held in IRAs today.4 

However, the Department's own argument for why this proposal is necessary is that the 1975 

rule's overly narrow definition of "fiduciary" has allowed a large number of advisers to 

inappropriately steer individual IRA owners into investments that are not in their best interest. 5 

That premise suggests that the Department's starting point should not be the list of assets that are 

most commonly held in lRAs today, as this list like ly reflects investments into which IRA 

1 See e.g., Statement of Deputy Assistant Secretary Tim Hauser, Department of Labor, Conflict of Interest Public 

Hearing, Panel 3 (August 10,2015), available at: 

https:llwww.youtube.comlwatch?v=b554 mCkuOzU& I ist- PL6 F7 I CF 53 3 3 7F836B& index- IS. 

2 See Proposed Best Interest Contract Exemplion, 80 FR 2 1960, 21987 (April 20, 20 15). Specifically, the list of 

permissible assels under the BIC exemplion incl ude: bank deposits, CDs, exchange-Iraded stocks, Treasuries, 

government agency debt, registered corporate bonds, open-end mutual fu nds, ETFs, bank collective funds, insurance 

company separate accounts, exchange-traded REITs, insurance and annu ity contraclS, and guaranteed investment 

contral;ts.ld. Further, the proposed rule explicitly excludes options and futures. Id. 

) Id. at 21967. 

4 See ICI, Appendix: Additional Dala on IRA Ownership in 2014, Figure AJO (J anuary 26, 2015), available at: 

hups:llwww.ici.org/pdf/per21-0 Ia.pdf. 

, See Definition of the Term '·Fiduciary "; Conflict of Interest Rule - Retirement Investment Advice, 80 FR 21928, 

21928- 21929 (April 20, 20 15) (explaining that one of the reasons the Department "believes it is appropriale 10 

revisit its 1975 regu latory defi nition" of a fi duciary is that "[n Jon-fid uciaries may give imprudent and disloyal 

advice; steer plans and IRA owners to investments based on their own, rather than the ir customers' financia l 

interests. "). 

2 
owners have been inappropriately steered. This is, in fact, one of the very problems that the 

Department is trying to solve. 

Rather than codifying a list of permissible assets, I believe that the Department should adopt a 

principles-based approach that would make the S IC exemption available to investments that 

meet certain criteria, such as liquid and transparent pricing, and a sufficient track-record as a 

useful investment for retirement savers. 6 

Alternatively, if the Department chooses to retain the list of permissible assets in the final 

exemption, I would urge the Department to include listed options as a permissible asset. Listed 

options are more liquid, and have more transparent and readily avail able pricing, than many of 

the investments currently on the list of permissible assets, such as corporate bonds. Moreover, 

listed options can be a basic risk-management tool for equity investors. As roughly 40% of lRAs 

are invested in individual equities

7 - a percentage that would be unlikely to materially change if 

the Depatt!'1f'nt retains the list of penn issible assets - I believe that the BIC exemption should 

include investments in listed options. 

Specify that Health and Welfare Benefit Plans With No Investment Component Are Not 

Covered by the Rule 

As you know, there remains some uncertainty about whether the proposed rule applies to advice 

regarding the selection of health and welfare benefit plans with no investment component to plan 

participants or fiduciaries. It is my understanding that this type of advice is not currently treated 

as "investment advice" under ERISA, as ERISA covers investment advice, and such health and 

welfare benefit plans have no investment component. Moreover, I don't believe it was the 

Department's intent to treat these types of discussions as investment advice that is subject to a 

fiduciary duty. Therefore, I urge the Department to clarify in the final rule that advice regarding 

the selection of health and welfare benefit plans with no investment component to plan 

participants or fiduciaries will not be considered investment advice under the rule. 

Clarify Application to Model Portfolios Provided Through Intermediaries 

The 1975 rule required, among other things, that advice be provided pursuant to a "mutual 

agreement" between the adviser and the retirement investor that the advice would serve as the 

primary basis for the investment decision. The Department's proposed rule sensibly removes this 

"mutual agreement" standard, and replaces it with a requirement that the advice be provided 

"pursuant to a written or verbal agreement, arrangement or understanding that the advice is 

individualized to, or that such advice is specifically directed to, the advice recipient for 

consideration in making investment or management decisions with respect to securities or other 

property of the plan or IRA." 

The preamble further states that "[t]he parties need not have a meeting of the minds on the extcnt 

to which the advice recipient will actually rely on the advice, but they must agree or understand 

6 See e.g., Comment letter submitted by the Consumer Federation of America, at 57- 59 (July 2 1, 2015), available at: 

http://www.dol.gQv/ebsalpdf/ 1210-AB32-2-0066O.pdf. 

7 See ICI, Appendix: Addilionaf Dala on IRA Ownership in 2014, Figure AJO. 

3 

... , . 
that the advice is individualized or specifically directed to the particular advice rec ipient for 

consideration in making investment decisions." This new standard thus provides that fiduciary 

status can attach when the parties "understand" that the adviser's advice is " individualized or 

specifically directed to" the retirement investor. 

The uncertainty surrounding the circumstances under which the parties "understand" that advice 

is " individualized or specifically directcd to" the retirement investor has led some to question 

whether product manufacturers that provide model portfolios to third-party intermediaries would 

be considered fiduciaries under the proposed rule, even where the product manufacturer has no 

direct contact with the retirement investor whatsoever. While the intermediary's use of such 

model portfolios and associated investment tools to generate outputs that are individualized to 

the retirement investor could certainly render the intermediary a fiduciary under the rule, 

fiduci ary status should not attach vicariously to the product manufacturer, where the product 

manufacturer has no direct contact with the retirement investor. 

It is my understanding that the Departmei11 did not intend to subject product manufacturers that 

simply provide model portfolios aliC in "; :n nt tools to third-party intermediaries to fiduciary 

status. Therefore, out of an abundance of caution, I urge the Department to clarify that fiduciary 

status will not attach vicariously to a product manufacturer that provides model portfolios and 

investment tools to third-party intermediaries, where the product manufacturer has no direct 

contact with the retirement investor. 

Clarify Intent of "Without Regard To" Language in SIC Exemption 

The proposed BIC exemption requires advisers, as a condition of the exemption, to agree to 

provide investment advice in the "best interest" of the retirement investor, with "best interest" 

defined as advice that is provided: 

"with the care, skill, prudence, and diligence under the circumstances then prevailing that 

a prudent person would exercise based on the investment objecti ves, risk tolerance, 

financial circumstances, and needs of the Retirement Investor, without regard to the 

financial or other interests a/the Adviser, Financial Institution or any Affiliate, Related 

Entity, or other party ."s (emphasis added) 

As the Department notes in the preamble, this standard " is defined to effectively mirror the 

ERISA section 404 duties of prudence and loyalty" - and, indeed, the first half of this proposed 

standard copies ERISA 's language nearly word-for-word. 

The second half of this proposed standard, which begins with the phrase "without regard to the 

financi al or other interests of the Adviser" (italicized above), was taken from section 913 of 

Dodd-Frank, which authorizes the SEC to promulgate rules subjecting broker·dealers and 

investment advisers to a uniform fiduciary duty.9 Including this "without regard to" phrase thus 

ensures that the Department's rule will be compatible with any future SEC rul e - something 

that many in the industry have stressed as being crucial to the workability of the Department's 

• Proposed Best Interest Contract Exemption, 80 FR at 2 1984 . 

• 15 U.S.C. § 80b- l l(g)( I). 

4 
rule. 

The two concepts embodied in the proposed standard - the duty of prudence, and the duty to act 

"without regard to the financial or other interests of the Adviser" - are not incompatible, despite 

the fact that an action that is in the retirement investor's best interest might also benefit the 

adviser. In fact, ERISA has long reconciled a similar conflict, as ERISA also subjects fiduciaries 

to both a duty of prudence and a requirement to act "solely in the interest of' plan participants 

and beneficiaries. to ERISA reconciles these two concepts by recognizing that a fiduciary does 

not necessarily breach her duty by taking an action that incidentally benefits the fiduciary 

herself, as long as the fiduciary conducted a careful and impartial investigation, and reasonably 

concluded that the action was in the beneficiaries' best interest. 1I 

It is my understanding, based on conversations with Department staff, that the Department does 

not intend the "without regard to" phrase in the proposed fiduciary standard to prohibit any 

conduct which would not already be prohibited by ERISA's current duties of prudence and 

loyalty - including conduct which is allowed under ERISA's " incidental benefit" doctrine. 

Therefore, because the "without regard to" phrase provides the benefit of ensuring compatibility 

with any future SEC rule, and is not intended to alter the scope of ERISA's existing duties of 

prudence and loyalty, I urge the Department to retain this language but clarify its intent in the 

final rule. 

I look forward to our continued conversations on this critically important rule, and thank the 

Department for its hard work on behalf of millions of retirement savers aCrOSS the country. 

S

Ranking 

ub

4:~W committee 

Member 

on Capital 

~ Markets and 

Government Sponsored Enterprises 

10 See 29 U.S.c. § 1104(aX I). 

Sincerely, 

II See e.g., Donovan v. Bienvirlh, 680 F.2d 263, 27 1 (2d Cir. 1982) ("Although officers ofa corporation who are 

trustees of its pension plan do not violate their duties as trustees by taking action which, after carefu l and impartial 

investigation, they reasonably conclude best to promote the interests of participants and beneficiaries simply because 

it incidentally benefits the corporation or, indeed, themselves, their decisions must be made with an eye single to the 

interests of the participants and beneficiaries."); Morse v. Slanley, 732 F.2d 1139, 1146 (2d Cif. 1984) (" II is no 

violation of a trustee 's fiduciary duties to take a course of action wh ich reasonably best promotes the interest of plan 

participants simply because it incidentally also benefits the corporation."); Tibbie v. Edison Internalional, 639 F. 

Supp.2d 1074, 1106 (C.D. Cal. 2009) ("Despite the rule's apparent absolute nature, however, courts have 

recognized that a fiduciary docs not necessarily violate the rule by pursuing a course of action that 'incidentally 

benefits' the plan sponsor."). 

5