May 5, 2010 

The 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 

Re: Proposed Investment Advice Exemption on Investment Advice 

Ladies and Gentlemen: 

 On behalf of the Securities Industry and Financial Markets Association (“SIFMA”)1

, I am 

writing in response to the Department of Labor’s (“Department”) reproposed regulation under the 

Employee Retirement Income Security Act of 1974 (“ERISA”) that will provide additional 

guidance on the statutory exemption for investment advice. 

 SIFMA and its members appreciate the opportunity to comment on the reproposed regulations. 

We support the proposed regulation but believe it may be utilized more widely in the advisor 

community if the final regulation is modified. SIFMA believes that that with the modifications 

suggested below, more firms may find it feasible to rely on the exemption. 

 SIFMA appreciates that the Department has affirmed that the proposed regulations are not 

intended to alter past guidance. We particularly believe that the Department has hewed to 

Congressional intent in defining a fiduciary advisor as the entity that employs the individual who 

provides advice and that individual, and not all of such entity’s affiliates. 

Scope of Relief

 The scope of the exemptions should be clarified to explicitly include relief for 

extensions of credit, and uses of plan assets that are intrinsic to trading and that have been 

previously covered in trading exemptions such as PTE 75-1 and 86-128. In addition, the relief 

should extend to transactions such as overdrafts, float, settlement extensions of credit, short sales, 

debt instruments, etc. Finally, we hope the Department will confirm that where a plan used a 

broker dealer for brokerage without advice, that service has no effect on the availability of the 

 1

 The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of 

hundreds of securities firms, banks and asset managers. SIFMA's mission is to support a strong financial industry, investor 

opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial 

markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial 

Markets Association (GFMA). For more information, visit www.sifma.org. 
statutory or class exemption where other, separate transactions are engaged in with that broker 

dealer after a fiduciary advisor provides investment advice to a participant. 

 The Department should also include ministerial rebalancing of a portfolio in the scope 

of the exemption. Under this type of activity, the fiduciary advisor would be covered under the 

exemption when an IRA owner or participant has given standing instructions to rebalance the 

portfolio on a pre-determined basis. This should not be deemed to be a discretionary action on the 

part of the advisor but will occur solely at the direction of the participant within the meaning of 

the statutory and class exemption. We also urge the Department to include the kind of reoptimization or re-allocation that has been permitted in the TRAK, Target and PACE exemptions, 

which permit changes to a portfolio when the model changes and clients receive advance notice. 

Many IRA owners and plan participants in brokerage windows use investment advisers to 

help them select discretionary managers, who may or may not be affiliated with the advisor. That 

process usually takes place in wrap programs but need not be limited to that format. We urge the 

Department to make clear that that the statutory exemption does apply to recommendations made 

by the financial advisor that will enable a participant to select different discretionary managers for 

different asset classes and does not simply apply to investments in securities or other property.2

 

The preamble for last year’s final rule recognized that investment manager recommendations 

would be covered and clarification on this point would be helpful. 

In addition, the proposed regulation provides that self-directed brokerage accounts are 

accepted from the requirement that the computer model take into account “all designated 

investment options” under the plan. As the Department knows from the voluminous record 

established on the question of whether computer models are feasible for IRAs, there is no model 

found which takes into account the full range of investments available. Therefore, we ask that the 

Department confirm that this exception applies equally to IRAs. 

Finally, the proposed regulation should make clear that it applies to participants in the selfdirected plans of financial institutions (or such individuals’ IRAs) that provide advice. We think 

that this application is consistent with the Department’s and Congress’ long held view that it 

would be inappropriate to make the plans of a particular institution use products of competitor 

institutions. See for example, ERISA section 408(b)(4) (permitting plans maintained by a bank to 

invest in its own deposits), section 408(b)(5) (permitting plans maintained by an insurer to use the 

insurer’s own products), section 408(b)(6) (permitting plans of a bank to receive ancillary services 

from the bank), section 408(b)(8) (permitting plans of a bank or insurance company to invest in 

that institution’s pooled funds), PTE 77-3 (permitting plans of mutual fund advisors to invest in 

the affiliated mutual funds, and PTE 79-13 (permitting plans of closed end investment companies 

to invest in the affiliated closed end fund), and PTE 79-41 (permitting plans of insurers to invest 

in their own products). We think there should be no different result here. Plans of financial 

 

2

 As a technical matter, the substance of the regulation appears to cover both ERISA Title I plans as well as IRAs, Keoghs 

and other plans covered only by section 4975 of the Internal Revenue Code (“Title II Plans”). We assume that a regulation 

will be issued under section 4975 of the Code to cover Title II Plans and that the references to IRAs in this regulation will 

be eliminated. 

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institutions should not have to select their competitor’s advice product and the competitors may 

not be willing to provide advice if they thought there was any possibility of reverse engineering a 

trade secret. The result of this impasse would be that participants in a financial institution plan 

would be unable to have advice and they are no less in need of advice than any other group of 

employees. 

Computer Models

 The preamble to the proposed rule seeks comment on a variety of questions regarding the 

Department’s role in defining investment methodologies, particularly with respect to the computer 

model portion of the exemption. SIFMA believes that any attempt by the Department to restrict 

or specify the factors involved in r prudent advice is a very troublesome departure from the 

Department’s long-held view that determining prudence is a facts and circumstances inquiry. The 

questions suggested by the Department may create a static rule with the Department’s imprimatur 

that would be substituted for the appropriate consideration that a prudent fiduciary is required, 

under section 404, to bring to his duties. 

 When the Department issued the fiduciary regulations under 29 CFR 2550.404a-1 in 1979, it 

was careful to make clear that there is no per se prudent outcome but instead, that prudence is 

judged by whether “the fiduciary has acted in a manner consistent with appropriate consideration 

of the facts and circumstances that the fiduciary knows or should know are relevant”, 44 FR 

37255, June 26, 1979. The Department noted: 

 “However, the Department does not consider it appropriate to include in the regulation 

any list of investments, classes of investment or investment techniques that might be 

permissible under the ‘prudence’ rule. No such list could be complete; moreover, the 

Department does not intend to create or suggest a ‘legal list’ of investments for plan 

fiduciaries.” Id. 

One of the areas the Department is seeking more information on include inputs which cannot 

be confidently expected to persist into the future. This statement appears to be targeted at the 

uncertainty of active manager returns. A significant number of computer model inputs carry some 

degree of uncertainty. For example, one critical input into deciding an appropriate mix between 

stocks and bonds is the expected volatility of stocks relative to that of bonds. Equities might have 

a 25 percent or more annualized volatility in some market conditions, and a 10 percent or less 

annualized volatility in others. If it were known with certainty that stocks carried a 10 percent 

risk, one might allocate a great deal to stocks in the portfolio, but much less at 25 percent risk. 

One might use a 17 percent expected volatility for modeling purposes, recognizing that future 

realized volatility might differ. 

 The Department also sought comment on what historical data should be taken into account. 

Generally speaking, historical data is useful, but one might apply less weight (i.e., less confidence 

and an associated greater degree of uncertainty) when the historical observations are few. 

Importantly, the historical length is not the only criteria to judge confidence. The type of 

information one is seeking from the historical data and the structure of the data matters too. For 

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example, less than a year of daily observations might be sufficient to confidently estimate the 

tracking error of an investment manager versus a benchmark, yet a decade of annual data might be 

insufficient to confidently estimate an active manager’s excess return versus the same benchmark. 

 The Department also sought comment on whether it should consider providing a list of 

appropriate criteria or designate which criteria are not important. The risk in expressly 

designating what criteria should be used by investors to structure their retirement investments is 

that important criteria may be omitted. No matter how carefully one chooses criteria appropriate 

for the average investor, there will always be specific individuals for whom other criteria might 

apply or for whom the criteria might have dramatically different weights. Even if the regulations 

should only suggest a partial list of criteria, the risk is that such a partial list would rapidly become 

the complete list, as designers of the computer models would be reluctant to add criteria that had 

not been blessed by explicit mention in the regulations. One strength of the “prudent man” rule is 

that the rule leaves open the question of what criteria to consider in making a prudent decision, 

thereby forcing the decision maker both to prudently make the judgment but also to prudently 

consider the factors entering into such a judgment. 

Audit Requirements

 The proposed regulation and class exemption require the fiduciary advisor to obtain an 

independent audit on an annual basis. SIFMA has a number of comments regarding the audit 

requirements. First, it appears that the auditor may not be required to be a certified public 

accountant but it is not completely clear. If the Department believes that being an accountant is 

not required, it would be helpful to include a statement in the preamble that audits could be 

performed by professionals other than traditional accounting firms. It would be helpful if the 

Department provided some examples of appropriate experience that might qualify a firm for this 

role. 

 Another issue relates to auditor independence. The proposed auditor independence 

requirement is defined by reference to affiliation. We would like to confirm that there is no 

prohibition on using the same firm to certify the model as well as perform the annual audit 

referenced in the regulations as long as the certifying firm does not receive more than 10 percent 

of its revenue from the fiduciary advisor. In addition, we would appreciate the Department’s 

confirmation that the fact that the auditor may audit the company that is providing the advice or 

certifying the model, an affiliate of either, or a fund maintained by the entity providing the advice 

or an affiliate does not disqualify the auditor in any way. Any other answer is impractical in light 

of the small number of firms that will offer their services to perform these audits. 

 The audit requirements could also benefit from some additional clarity. For example, we 

believe that it should meet the audit requirements of the regulation and the class exemption if the 

auditor reviews the fiduciary advisor’s policies and procedures, and reviews a reasonable sample 

of accounts for the documentation required to be maintained. In connection with sampling, we 

urge the Department to clarify that the exemption does not require each IRA to be audited, so long 

as the sampling of documentation includes at least some IRAs. In addition, it is assumed that the 

regulation will not require that actual transactions be audited at all, and we would appreciate 

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clarification on that point. We urge the Department to consider the cost and time required of any 

other approach; for a firm with 15,000 registered representatives, thousands of IRAs that elect to 

retain an adviser for a fiduciary advice program and hundreds of plan clients, the audits would 

consume the entire year and millions of dollars. 

 We also believe that the timing of the audit report should be the same for IRAs and 

plans – 60 days. A shorter time is very impractical for a large institution and there appears to be 

no particular reason for the shorter period for IRAs. Especially where the audit must be mailed or 

otherwise delivered to all accounts, where hundreds of thousands of accounts are concerned, 60 

days is quite a short period of time. We also hope that the Department will make clear that the 

auditor need not send its audit report directly to clients, but rather, the fiduciary advisor will bear 

the responsibility for delivering the report. 

 The proposed regulation and the proposed exemption require notification of the 

Department in the case of any evidence of noncompliance. There is concern that this standard 

will result in thousands of reports to the Department detailing immaterial errors of recordkeeping 

and record retention. It would be very helpful if the Department added a standard of materiality to 

this requirement. In addition, we strongly urge a cure period. The audit provisions should make 

clear that if there is a problem that is capable of cure and cure is effected within 15 days, no notice 

need be sent to the DOL. 

Scope of Fee Leveling

 We believe that the Department has correctly recognized that the level fee requirement 

should relate to the individual giving the advice, and his or her employer but not to the employer’s 

affiliates. SIFMA is concerned about the expansiveness of the language requiring fee leveling 

under the proposed exemption. The fee-leveling provisions prohibit a fiduciary advisor from 

receiving compensation, commissions, fees, bonuses, awards or promotions that vary based on 

advice given. The Department should recognize, however, that advisors are paid and promoted 

based on total sales or total assets under management; not just those resulting from fiduciary 

investment advice. If financial advisor entities are required to exclude advice activities to plan 

participants or IRAs from any bonus, award or promotion decision of a fiduciary advisor, advisors 

may refuse to give advice because of the dampening effect it will have on the opportunity to 

advance. 

 SIFMA recommends that the language be revised so that the advisor’s compensation 

will be level, and no award, bonus or promotion will be specifically correlated to particular 

investment advice given under the Department’s rules. In addition, it would be helpful for the 

Department to clarify that broad performance metrics may apply to any bonus or promotion 

standards, so long as they are not specifically correlated to advice under this exemption. Finally, 

we hope the Department will clarify that an advisor’s decision to invest his 401(k) balance in a 

company stock fund, or his employer’s decision to make its discretionary contribution or match in 

company stock, will not be deemed to violate the level fee requirement, solely because the 

performance of the company may include the performance of all of the company’s affiliates. 

Finally, we urge the Department to make clear that under proposed 29 CFR 2550.408(g)-

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1(b)(3)(i)(D) that rather than charge the plan or participant a fee for advice, the fiduciary advisor 

may receive revenue sharing from each vehicle in which the plan invests, so long as those 

amounts do not vary from vehicle to vehicle.3

 

Disclosure Information

 SIFMA appreciates that the Department has provided a model disclosure document in the 

guidance. However, we suggest that the Department revise the disclosure requirements to ensure 

that it doesn’t require disclosure of all information regarding all investments that are available in 

the market. Perhaps some examples would be helpful that make clear that the disclosure is related 

to the general types of products that will be recommended (i.e., “We will be recommending 

stocks, bonds, mutual funds and insurance products; however, there are many other investment 

products available in the market that we do not typically recommend under this program, and 

those might result in higher or lower fees for us than the universe of products that we will 

recommend.”) In addition, both the regulation and the exemption use the term “all” fees and 

compensation, and “all” services. As we have commented before in other contexts, we are 

concerned that the term “all” will either drown the participant in disclosure in a non-helpful 

manner, or will be used to deny the exemption to an advisor for an inadvertent or immaterial 

failure to disclose a particular fee or fact. We urge the Department to provide a materiality 

standard. 

 In addition, as the Department has recognized in the Form 5500 disclosure, spreads on 

principal transactions are not disclosed. We believe it is very important for the Department to 

reiterate this point in the final exemption and final regulation so that advisors will not be required 

to estimate or guess at spreads that are not disclosed to any other investor and that at best would 

be haphazard and misleading. 

 It would also be extremely helpful to indicate in the final guidance that the required 

disclosures may be provided in another disclosure document that is already provided to plan 

participants or IRA holders. For example, broker-dealer firms that are also registered as 

investment advisers may offer certain advice programs to ERISA plan accounts or IRAs. Under 

SEC Rule 204-3, these firms already provide a disclosure brochure or form to clients and 

prospective clients. Some of the disclosures required under the proposed regulations and class 

exemption overlap with these SEC Form ADV Part II disclosures. Provided that both SEC and 

DOL requirements are met in a single disclosure brochure (including the “clear and conspicuous” 

requirement), allowing a single disclosure document would reduce the overall burden and result in 

more efficient and clear disclosure to plan participants and IRA holders. This would be consistent 

with Section III(g) of the class exemption that the fiduciary adviser provides appropriate 

disclosure in accordance with all applicable securities laws. 

 In addition, SIFMA would urge the Department to provide more flexibility to utilize 

disclosure by electronic means. The statutory exemption requires that the participant be provided 

 

3

 Thus, if a fiduciary advisor recommends 5 mutual funds and each mutual fund pays 25 basis points to the fiduciary 

advisor’s employer, the compensation of that advisor should be deemed not to vary based on the advice of the advisor. 

 6
with a number of disclosures prior to the initial provision of advice. The statute specifically 

provides that the written disclosures “may consist of notification by means of electronic 

communication.” In implementing the participants statement changes provided under the Pension 

Protection Act in 2006, the Department concluded that access to a secure website would constitute 

delivery, subject to the condition that participants are provided with notice and their right to 

request paper documentation.4

Definition of Affiliate

 Both the proposed regulation and the proposed class exemption define affiliate as owning, 

controlling or holding with the power to vote. We believe this is a mistake; as the Department 

recognized in the preamble to its changes to QPAM, the holding reference sweeps in every 

investment manager whose accounts hold a particular security. That definition would make 

virtually every financial institution an affiliate of each other. We urge the Department to use the 

definition of affiliate in 29 CFR 2510.3-21. 

Application of Bonding Rules

 

 It is noted that the proposed regulation require the entity that certifies the model to be a 

fiduciary. Under section 412 of ERISA, every fiduciary to a plan must be bonded; regardless of 

whether that fiduciary handles plan assets, unless an exemption applies. An explicit statement 

regarding whether the certifier would need to comply with the bonding rules would be helpful. 

Accordingly, it would be beneficial for the Department to amend section 412 to exempt the entity 

certifying the model from the bonding requirements. 

* * * * 

 We look forward to continuing to work with the Department on these important issues 

and hope you will call upon us and our members if you have particular questions on which we 

might be helpful. 

 Best regards, 

 

 Liz Varley 

cc: Robert Doyle 

 

4

 See Field Assistance Bulletin 2006-03 which provided transition guidance for the participant statements required under 

PPA. 

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