Tracy L. Rich

Executive Vice President &

General Counsel

September 24, 2015

Submitted electronically:

e-ORI@dol.gov

e-OED@dol.gov

Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Conflict of Interest Rule, Room N–5655

U.S. Department of Labor

200 Constitution Avenue NW

Washington, DC 20210

Office of Exemption Determinations

Employee Benefits Security Administration

(Attention: D–11712)

U.S. Department of Labor

200 Constitution Avenue NW, Suite 400

Washington, DC 20210

Re: Definition of the Term Fiduciary (RIN 1210-AB32)

Best Interest Contract Exemption (ZRIN 1210-ZA25)

Amendment of PTE 84-24 (ZRIN 1210-ZA25)

Ladies and Gentlemen:

In light of the testimony received by the Department of Labor (“Department”) in public

hearings held from August 10 through August 13, 2015 and statements made by Department

officials during that testimony, The Guardian Life Insurance Company of America (“Guardian”)

and its affiliates submit this follow-up comment letter regarding the Department’s proposed

changes to the definition of “fiduciary” under the Employee Retirement Income Security Act, as

amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”), the

proposed introduction of two new exemptions, including the best interest contract exemption
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(“BIC Exemption”), and the proposed changes to class exemptions on which Guardian and other

insurance companies rely (the “Proposal”).1

Guardian previously submitted an initial comment letter on July 21, 2015. We reaffirm

those comments. As stated in our prior letter, Guardian generally supports a best interest

standard for individuals and their affiliated entities who act as investment advice fiduciaries to

ERISA plans, plan participants, and IRA owners. We support the Department’s efforts to ensure

that financial advisors are acting in the best interests of clients, not in the advisors’ self interest.

However, we believe that the proposed rule, as written, unintentionally impedes the

Department’s efforts to promote the best interests of these clients by limiting access to products

that may well be in the clients’ long term best interests. Low cost products typically do not

provide lifetime guaranteed income, a product feature that has proven to help millions of

American families over the years. By equaling low-cost with the best interest of the customer,

the Proposal has the unintended consequence of potentially harming middle income consumers

who want long term, lifetime income streams to supplement Social Security. This element of the

proposed rule is particularly troubling for consumers given the declining number of Americans

who have lifetime income streams guaranteed through employer-sponsored defined benefit

plans.

Therefore, we wish to reinforce certain changes that we strongly believe should be made

to the Proposal and included in the final regulation and exemptions. Guardian is concerned that

the failure to make these changes will have negative unintended consequences for consumers.

In particular, Guardian urges the Department to focus on the following areas when

considering comments on how to improve the Proposal:

1 All capitalized terms in this letter not defined in this letter have the same meaning of those terms in the Proposal.
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 Recognize the importance of annuity products, which are only issued by

insurance companies, in providing the security of lifetime income for consumers

saving for retirement by removing the bias in the Proposal against the sale of

these products.

 Protect the ability of middle income and working class consumers saving for

retirement to choose among a variety of products and services to help fund their

retirement by removing the emphasis on low-cost alternatives in the Proposal

that generally do not provide financial guarantees.

 Modify the definition of “investment advice” to exclude, among other things,

pure selling activities.

 Expressly exclude the sale of insurance products to health and welfare plans

from the Proposal.

 Remove the elements of the Proposal that would jeopardize the sale of

proprietary products by proprietary distribution channels.

Without the modifications that are discussed in this letter and our prior letter of July 21, the

Proposal will result in unnecessary disruption in this marketplace and, more importantly,

negative impacts to retirement plans, plan participants and individual IRA investors.

Specifically, without these changes, the Proposal will:

 Make it harder for retirees to obtain guaranteed lifetime income options.

 Make it harder for small businesses to offer retirement plans to employees.

 Make it harder for workers to obtain information and guidance on retirement

products.
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Consumers Should Have a Fair and Open Marketplace That Does Not Favor One Type of

Product over Another

Guardian is a mutual life insurer with a 150 year history of fulfilling promises to our

customers. As a mutual company, we are owned by our policyholders, naturally aligning our

shared ‘best interests.’ Guardian continues to hold some of the strongest financial ratings in the

industry. These are the kinds of characteristics that consumers, especially those saving for

retirement or interested in the lifetime income promise of an annuity, consider when making

decisions about their retirement nest eggs.

Guardian is concerned that the Proposal will be interpreted by consumers and their

attorneys as requiring Guardian’s representatives to sell only low cost or non-proprietary

products, particularly if relying on the BIC Exemption. For example, under the BIC Exemption

standards set forth in the Proposal, sales by Guardian agents of proprietary individual variable

annuities could far too often become the subject of potential litigation merely because the

product fees necessary to support the guarantees provided by the products are higher than the

costs of products such as indexed-based mutual funds, or because entities affiliated with

Guardian agents (but not the agents themselves) received revenue sharing as a result of the

product sale. We firmly believe this will result in a reduction of consumer access to annuity

products because Guardian and other issuers cannot be expected to bear this substantially

increased risk of litigation created by the rule as written. This reduction of consumer access

harms consumers because the guarantees under these products provide extremely valuable

guaranteed lifetime income benefits. Consumers will lose once again under the proposed rule if

the same litigation risk causes a loss of access to proprietary products even when a proprietary

product may be an appropriate fit for the client’s situation. Therefore, we urge the following

points be reflected in the final regulation and exemptions:
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1. Clarify that “Reasonable Compensation” under the BIC Exemption Takes Into

Account Insurance Product Guarantees: The Department has required that “reasonable

compensation” be paid for the services provided to a plan or IRA. The final BIC Exemption

should be clarified so that the determination of “reasonable compensation” not only takes into

account the value of services rendered, but also the value of the guarantees provided by the

contract. The provision of an insurance company guarantee is not a “service” as contemplated

under current regulations. However, such guarantees are essential to providing guaranteed

lifetime income and, of course, these guarantees have costs associated with them. The failure to

make this change may result in recommendations being made based solely on cost, specifically

the lowest cost, even though a more expensive investment or product guaranteeing lifetime

income may be the most appropriate product for the consumer.

2. Clarify that “Best Interest” of the Retirement Investor and “Without Regard To”

Allow for “Incidental Benefits” and Are Product and Distribution Channel Neutral: Currently,

the Proposal provides that a person acts in the Best Interest if he or she acts “without regard to

the financial or other interests of the Adviser, Financial Institution, any Affiliate, Related Entity,

or other party.” Guardian believes this language sets forth a standard that subjects Guardian and

its agents to material litigation risk because a plaintiff’s attorney could use this language to

support a claim that the sale of any product, particularly a proprietary product, is in the interest

of the Adviser or Financial Institution simply because it generates a fee for the Adviser and

Financial Institution. Further, this language appears to be contrary to long-standing principles

established under ERISA that a fiduciary may realize “incidental benefits” as a result of

performing its fiduciary duties.
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Therefore, the Best Interest standard under the BIC Exemption and the other exemptions in

the Proposal should be identical to the prudence requirement under section 404 of ERISA. The

Best Interest should be defined to require that advice be provided 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.”

Guardian believes this change will promote neutrality with regard to the products sold and

business models and distribution channels utilized. Without this change, we believe Advisers

who sell both proprietary and non-proprietary products will be driven to sell the non-proprietary

products in order to meet the “without regard to” requirement even if the proprietary product is

more appropriate for the consumer. Additionally, Financial Institutions may be driven to

distribute products only through unaffiliated distribution channels so as to minimize claims that

the Financial Institution, through its representative, failed to act in the best interest of the

consumer. In other words, the final exemptions should be drafted in a manner so that no single

business model or distribution channel is favored over another.

3. Clarify that Payments of Commissions and Revenue Sharing and Sale of

Proprietary Products are Permissible under the BIC Exemption: In the preamble to the proposed

BIC Exemption, the Department states that transaction-based compensation would be

permissible under the BIC Exemption. However, the Department also provides in the preamble

examples of fee arrangements, which do not include traditional transaction-based compensation

arrangements. The Department provides this list as a non-exclusive list of compensation

arrangements in which conflicts are eliminated. However, we think the inclusion of such

examples, without examples of traditional transaction-based compensation arrangements, may be
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interpreted as a bias against any arrangement other than those included in the preamble. The

final BIC Exemption should make clear that commissions and revenue sharing, particularly

revenue sharing that is paid to the issuer of a variable annuity contract rather than the selling

affiliate or its representative, are permissible forms of compensation.

4. Clarify that Payments of Revenue Sharing are Exempt under Prohibited

Transaction Exemption (“PTE”) 84-24: Guardian is concerned that PTE 84-24, as modified,

may be interpreted to exempt the payment of Insurance Commissions or Mutual Fund

Commissions, but not the payment of revenue sharing to the issuer of a variable annuity contract

rather than the selling affiliate or its representative. The payment of revenue sharing allows

service providers and product issuers to provide a level of service to small plans that would not

otherwise be available to such plans. Therefore, the Department should clarify that PTE 84-24

exempts the payment of revenue sharing to the issuer of the insurance or annuity contract.

5. Clarify that PTE 84-24 Applies to Sales of All Insurance Contracts: The final

PTE 84-24 should exempt prohibited transactions that arise in connection with the sale of any

insurance or annuity contract, not just contracts that are not “securities” under the securities laws.

PTE 84-24 has been available for insurance products, including all forms of annuities, for over

30 years and, in Guardian’s view, has proven effective in protecting consumers’ interests.

The Final Regulation Should Not Apply to Sales of Products Without a Policyholder

Investment Component to Health and Welfare Plans

Guardian is concerned that the proposed definition of “investment advice” may be

interpreted to apply to the sale and marketing of insurance to employer-sponsored health and

welfare plans because of authority indicating that insurance contracts are “property” under the

current law. The Proposal is clearly drafted with the intent of addressing conflicts of interest that

arise in the sales and marketing of products and services to plans that provide retirement benefits
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and to other retirement savings accumulation vehicles, but not health and welfare plans. The

health and welfare market is substantially different than the retirement and savings markets. Any

efforts by the Department to regulate the health and welfare marketplace should be undertaken

through a separate rulemaking under which the Department adequately studies how and if the

“investment advice” definition should apply to health and welfare plans.

Therefore, the final regulation should not apply for purposes of determining whether a

person acts as a fiduciary with regard to health and welfare plans. Based upon statements made

by Department officials during the hearings, our understanding is that the Department is inclined

to make this clear in the final regulation as long as the underlying insurance contract does not

have an investment component. However, the Department should clarify that an investment

component for purposes of the final regulation does not include the variable component of an

insurance contract if the variability is outside of the control of the policyholder. For example,

group permanent life insurance policies sold in the health and welfare plan market provide for

guaranteed cash values that can be increased only at the insurer’s discretion based on factors

such as the insurer’s general account performance and/or favorable mortality experience, and are

not based on investment decisions made by the policyholder. The existence of this cash value

portion of the policy should not be viewed as an investment component under the final

regulation.

Consumers Employed by Large or Small Employers Should Have Equal Access to

Retirement Products and Services

We are concerned that small businesses are disproportionately harmed by the Proposal.

The Proposal negatively impacts small plan formation by limiting sales activities that encourage

small business owners (with less than 100 employees) to start up, maintain, or improve their

employee benefit plans. The Department draws a different line in this regard for employers with
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100 employees or more-- a line which would ultimately impede the important public policy goal

of expanding small plan coverage.

The Proposal requires that a plan must be a certain size or that the fiduciary acting on

behalf of the plan must have a minimum amount of ERISA-governed assets over which it has

discretionary control in order to carve-out from “investment advice” certain circumstances when

a representative is selling a product or service. We do not believe such considerations are

supported by ERISA, which does not hold fiduciaries of smaller plans to a different standard

than those of larger plans. Therefore, we believe that the carve-out should apply to sales to plans

of any size.

Providing that a “Recommendation” Involves a “Call to Action” Would Preserve Access to

Education for Consumers

In the Proposal, the term “recommendation” is defined as “a communication that, based

on its content, context, and presentation, would reasonably be viewed as a suggestion that the

advice recipient engage in or refrain from taking a particular course of action.” The use of the

word “suggestion” could be interpreted to include any number of written or verbal

communications that are intended to be informational or educational in nature and no reasonable

investor would ever view as investment advice. Thus, the Department needs to clarify the

meaning of “recommendation” in order to avoid this outcome.

We agree with statements by the Department during the hearings that the definition of

“recommendation” for purposes of the final regulation would require a “call to action” similar to

that contained in FINRA Rule 2111. In our view, the Department should define the term

“recommendation” in the final regulation to specifically require a “call to action” rather than a

mere “suggestion.” Moreover, the Department should state in the preamble to the final

regulation that the Department intends that the meaning of the term “recommendation” be
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interpreted in accordance with guidance under FINRA Rule 2111. These changes will encourage

Advisers and Financial Institutions to provide important investment-related information to

consumers because they will not be concerned about the risk of inadvertently becoming a

fiduciary when they are merely providing general information or education to consumers.

Permitting Arbitration of Non-Class Action Disputes Provides An Efficient and Effective

Method of Protecting Consumers and Resolving Disputes

The proposed BIC Exemption provides that the written contract entered into by

consumers may not contain a provision which waives or qualifies the consumer’s right to bring a

class action lawsuit in the event of a dispute with the Adviser or Financial Institution. However,

the preamble states that this provision is not intended to limit the ability of the parties to “enter

into a pre-dispute binding arbitration agreement with respect to individual contract claims.”

We strongly disagree with the testimony presented by some witnesses calling for the

elimination of a dispute resolution mechanism permitted under the BIC Exemption contract. We

believe that provisions mandating arbitration in the event of a dispute, which have been

permitted by FINRA for many years, have proven to be an efficient and effective method for

protecting consumer interests and resolving disputes. Therefore, we urge the Department to

continue to permit the use of arbitration provisions under the final BIC Exemption.

Including Disclosure Provisions Like Those Required Under Current Law in the Final BIC

Exemption Will Prevent Consumer Confusion

The disclosure requirements under the proposed BIC Exemption, including the website

disclosure, are unnecessarily complex, expensive to implement and will not help consumers

understand the fees that they will pay. In addition, some of the disclosure requirements under the

BIC Exemption conflict with, or are duplicative of, disclosure that is currently mandated under

other federal and state laws. This conflicting and/or duplicative disclosure will only confuse
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consumers and will not enhance their ability to make good decisions about their retirement.

Therefore, in our view, the final exemption should include simplified disclosures which follow

guidance under ERISA sections 408(b)(2) and/or 404(a)(5). The American Council of Life

Insurers’ comment letter of July 21, 2015 at pages 36-38 is illustrative of simplified disclosure

requirements Guardian believes would be adequately protective of consumer interests.

Deleting Overly Burdensome and Ineffective Recordkeeping Requirements from the Final

BIC Exemption Promotes Cost Savings That Will Benefit Consumers

Under Section IX of the proposed BIC Exemption, an extraordinary amount of data must

be retained in order to comply with the conditions of the exemption. In Guardian’s view, the

data to be retained would serve no useful purpose in enabling consumers to make better informed

investment decisions. As such, the benefits of maintaining the data will not outweigh the

substantial costs of maintaining such data. Therefore, the Section IX proposed data retention

requirement should be eliminated in its entirety.

Re-proposing the Regulation and the Exemptions Will Result in a Better Rulemaking

Process

Guardian believes that due to the complexity of the proposed definition of fiduciary and

the proposed exemptions, particularly the BIC Exemption, the Department should re-propose the

regulation and the exemptions so that they can be subject to further study and comment. In this

regard, Guardian notes that the Proposal is substantially and materially different from the

Department’s proposal in 2010.

Providing for at Least a Three-Year Effective Date Will Allow for Adequate Time for

Implementation

In Guardian’s view, service providers should be given at least three years to comply with

the final regulation and exemptions. The proposed eight-month effective date is simply not

enough time to implement the system changes and policies and procedures needed to comply
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with a rulemaking of this nature and complexity. We note that many panelists testified during

the public hearings that implementation within a short period of time would not be feasible.

Providing for Grandfathered Relief for Ongoing Relationships Prior to an Effective Date

Ensures Certainty for Consumers

Advisory arrangements, annuity contracts, and other arrangements entered into or

products sold prior to the effective date of the final regulation should be grandfathered under

current law. The application of fundamentally different compliance requirements to these preexisting relationships is unfair to both the service provider and the consumer. For example, the

costs related to compliance with the BIC Exemption may require termination of current

relationships or renegotiation of related fees. The Department should permit the bargained for

relationship to continue by permitting arrangements entered into and products sold prior to the

effective date to be covered under the exemptions available prior to the effective date.

Coordinating the Department’s Regulatory Activities with the SEC and FINRA Fosters

Compliance with All Regulatory Requirements

The final regulations and exemptions will have a significant impact on the compliance

procedures and operations of Guardian’s affiliated retail broker-dealer, which is closely and

effectively regulated by the SEC and FINRA, as well as the activities of Guardian agents, most

of whom are registered representatives of this broker-dealer. Therefore, the Department should

coordinate its final rulemaking with those regulators in order to assure that Guardian will

continue to be able to meet the panoply of federal regulations to which it is currently subject,

including disclosure requirements that are provided in fund and annuity product prospectuses and

Form ADV, and to which it will be subject once the Department’s final regulation and

exemptions are issued.
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Thank you for your time and attention to these important issues. We would be happy to

discuss any of these comments and any of the comments presented in our July 21, 2015 letter

with representatives of the Department.

Sincerely,

Tracy L. Rich