Act of 2010 (“Dodd-Frank”). Dodd-Frank directed the Commission to study the effects
of subjecting broker-dealers and investment advisers to a uniform standard of care that
requires them to act in the best interests of retail customers, while protecting a broker-
dealer’s ability to receive commission based compensation. In light of Congressional
intent and the SEC staff’s recommendation to consider implementation of a uniform
standard of care for both broker-dealers and investment advisers providing personalized
investment advice about securities to retail customers, we ask that the Department
reevaluate its proposal. Moreover, as IRA’s comprise such a large percentage of the
retail market for personalized advice, we request that the Department coordinate its
efforts with the SEC before adopting a rule that has such enormous potential to cause
confusion and widespread disruption in the IRA marketplace.

Effects of Causing Brokerage Firms to be Fiduciaries to IRAs

IRC §4975(c)(1)(F) prohibits “the receipt of any consideration for his own
personal account by any disqualified person who is a fiduciary from any party dealing
with the plan in connection with a transaction involving the income or assets of the plan.”
Under the Department’s interpretations of this rule (and the parallel provision in ERISA),
if a firm like PFSI is considered a fiduciary to an IRA account and is treated as advising
on an investment in an unaffiliated product, its receipt and retention of a dealer
reallowance or other compensation from the third-party provider of that product or its
affiliate would be a prohibited transaction.

If this is the case, the result would be to upend a large segment of the retail
broker-dealer industry by cutting off the compensation that enables such firms to
reasonably price brokerage services for middle-income IRA consumers, thereby forcing
such clients to deal only with “fee only” registered investment advisors, which are
generally compensated on a level asset-based fee. The Department has provided no
justification for such a drastic result. Moreover, such a result would be inconsistent with
the most recent expression of Congressional intent, as set forth in Dodd-Frank. As noted
in the SEC study cited above, Section 913 of the legislation specifically states that the
receipt of “commission compensation” is not to be considered a violation of the new
uniform standard of care that the SEC is authorized to impose on both broker-dealers and
investment advisers requiring them to act in the best interests of customers.

Requiring beneficial owners of IRAs to deal only with “fee only” investment
advisers would have an immediate, adverse impact on middle-income consumers.
Investment adviser programs impose much higher required minimum investments,
placing them beyond the reach of most lower-end investors. © If the Department puts an

® Recently, PFSI conducted an informal survey of wrap-fee mutual fund programs offered by registered
investment advisers. The lowest required minimum investment identified by the study was $25,000. As of
December 2010, PFSI served over 1.3 million individual retirement accounts with an average account
balance of approximately $10,000.

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could come under the definition in the proposal, but that ordinarily should not result
in fiduciary status if the purchaser knows that the seller has not undertaken to act as
an impartial adviser.

To permit dealings between broker-dealers and IRA beneficial owners of the type
common in the middle-income market, the exception should be modified to cover a
broker-dealer that delivers, at the point-of-sale, a plain-English disclosure to an IRA
beneficial owner that describes the compensation that the broker-dealer would
receive in connection with transactions for the account and any material conflicts
that may exist, and explains that the broker-dealer is not acting as a “fiduciary” for
purposes of IRC Section 4975. The standards used could be coordinated with any
standards that are developed by the SEC for broker-dealers, as those would be
designed to address the specific types of issues that arise in a brokerage
relationship. This would be consistent with the nature of the exception as a
disclosure-based limitation, making clear the nature of the relationship and what the
IRA beneficial owner should reasonably expect in its dealings with the broker-
dealer. Such an exception would, subject to the added disclosure, permit broker-
dealers to continue delivering the same level of investment services to their middle-
income IRA customers without raising costs or otherwise pricing such customers
out of access to their services, thereby promoting their ability to save for retirement.

Conclusion

PFSI appreciates the Department’s efforts to provide better protections for large
pension plans that provide for the retirement interests of many hard-working Americans.
The Department, however, should pause to reevaluate what its proposal is about to do to
the retirement saving prospects of millions of middle-income Americans that are not
covered by large pension plans. The proposed changes to the definition of “fiduciary”
under ERISA will have wide-ranging, adverse consequences for those beneficial owners
of IRAs that seek to access traditional brokerage services. The proposal may force
broker-dealers to abandon the widely popular, existing IRA format or make fundamental
and unprecedented changes to long-standing industry practices that have been deemed
acceptable by federal and state securities regulators. The potential for harm to the public
is enormous. Fewer broker-dealers operating in the IRA business means less access to
investment products and services. Higher costs associated with complying with this
proposal will result in higher fees, which in combination with higher account minimums,
will further restrict access by pricing many middle-income IRA investors out of the
market. Finally, IRA investors that are not deterred from seeking advice because of
higher fees will ultimately discover that they have accumulated far less for retirement,
because the increased fees necessitated by this proposal have substantially eroded their
investment returns.

Page 8 of 9


understand their savings needs and how best to meet their retirement savings goals.
Under this structure, firms that serve the middle-income market are able to maintain low
minimum investment thresholds and minimize their charges to IRAs, by relying on
revenue from transaction-based compensation and other payments from product
providers. In short, these sources of revenue help the firms offset the high costs
associated with maintaining a large number of small accounts. Therefore, causing these
firms to become “fiduciaries” under the revised rules would severely impact their current
business models, with the negative impacts described below.

PFSI and Similar Firms Could be Deemed a Fiduciary Under the Proposal

IRC §4975(e)(3) defines the term “fiduciary” for purposes of IRC §4975, and
includes any person who “. . . renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of such plan, or has any
authority or responsibility to do so...” Shortly after Section 4975 was enacted, the
Department issued the current regulation that essentially limits the circumstances when
one providing investment advice, without discretionary authority, would be considered a
“fiduciary.” The current regulation requires that the advice be rendered “on a regular
basis to the plan pursuant to a mutual agreement, arrangement or understanding, written
or otherwise . . . that such services will serve as a primary basis for investment decisions
with respect to plan assets.” * The proposed amendment does away with the foregoing
requirements and defines “fiduciary” merely as one providing investment advice
regarding securities “. . . pursuant to an agreement, arrangement or understanding, written
or otherwise, between such person and the plan . . . that such advice may be considered in
connection with making investment . . . decisions with respect to plan assets, and will be
individualized to the needs of the plan. . .”

The proposed changes to this definition would, at a minimum, create uncertainty
as to whether (or more to the point when) the business of providing the above-described
brokerage and related services to middle-income consumers regarding their IRA assets
would cause the firm to be deemed a “fiduciary” under the proposal for purposes of
Section 4975. Specifically, by removing the “regular basis” and “mutual understanding”
elements of the current regulation, the proposal would put the firm at risk that an IRA
owner unilaterally believes (regardless of what the firm intends or what is agreed to in the
account documentation) that it is in a fiduciary relationship with the firm and, therefore,
the prohibited transactions provisions may apply.

Also, as you are aware, the staff of the SEC has recently completed the study
required by section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection

> The existing definition is found in Department of Treasury Regulation 26 CFR 54-4975-9(c) Definition of
“fiduciary”.

Page 4 of 9


end to the enormously popular commission-based IRA account, then where are these
lower-end investors to obtain investment guidance and services? Furthermore, in the
absence of the ability to receive revenues from product providers, firms that serve the
middle-income market will have to substantially raise account fees, which will reduce
investment returns. In short, limiting the access of middle-income consumers to
investment services at a time when most middle-income families are continuing to
struggle financially is completely contrary to what these families actually need. We are
convinced that the proposed rule, as currently written, would hinder our ability to
continue to deliver basic savings and investment services to the middle-income market
that we endeavor to serve.

Suggested Steps to Address the Effects on IRAs

To avoid the problems described above and permit firms like PFSI to continue to
serve the middle-income IRA market, we propose that either (1) the new rules not apply
to IRAs, (2) the rules not be applied to IRAs until after a study of their effects on the IRA
market can be conducted, or (3) the purchase and sale exception in the proposal be
expanded to permit brokers to deal with IRAs subject to providing appropriate disclosure.

(1) Not Applying New Rules to IRAs. Congress and the Department have recognized in
other contexts that the IRA market operates differently from the market for
qualified retirement plans. In enacting an exemption for the provision of
“investment advice” to plans in 2006 (ERISA § 408(b)(14) of ERISA and IRC §
4975(d)(17)), Congress required the Department to undertake a study of whether
the “computer model” provisions of the exemption would be feasible for IRAs.
More recently, in adopting new disclosure rules for plan service providers under
ERISA § 408(b)(2), the Department did not apply the new rules to IRAs. Similar
considerations should apply here.

In describing the reasons for proposing changes to the existing regulation on the
definition of a fiduciary, the Department highlighted the shift from defined benefit
plans to defined contribution plans, the increasing types and complexity of
investment products and services, and problems it said the current regulation has
created for its enforcement initiatives. In short, the stated reasons for these changes
are not applicable to IRAs. First, the shift from defined benefit plans to defined
contribution plans is not an issue for IRAs, because IRAs never took the form of
defined benefit plans. Second, with respect to issues caused by increasing types and
complexity of investment products and services, this is not an issue for middle-
market IRAs, which generally invest in traditional retirement products such as
mutual funds and variable annuities. Finally, as for the Department’s enforcement
initiatives, IRAs are outside the scope of the Department’s enforcement authority
and responsibility. Therefore, these reasons do not apply to the IRA market.

Page 6 of 9


PFSI remains dedicated to educating middle-income families about the
importance of saving for retirement and assisting those families with establishing
retirement accounts. Therefore, we respectfully request that the proposal be amended to
allow us to continue to serve our middle-income customers, in the cost-effective manner
in which we now serve them.

We appreciate your consideration of these comments and hope to have the
opportunity to participate in the hearing scheduled for March 1, 2011. Of course, we are
also available to discuss any questions you might have regarding our concerns.

Vety truly yours,

J. :
\_/John S. Watts
Senior Vice President & Chief Counsel
PFS Investments Inc.

Phone: 770-564-7613
Email: john.watts@primerica.com

Page 9 of 9


Office of the General Counsel

John S. Watts
Senior Vice President &
Associate General Counsel

@® PRIMERICA

Primerica
3120 Breckinridge Boulevard
February 3, 2011 Duluth, GA 30099-0001

770-564-7613 Phone

Via Electronic Mail to e-ORI@dol.gov Jomunaticaprimereacom
Office of Regulations and Interpretations

Employee Benefits Security Administration

U.S. Department of Labor

200 Constitution Avenue, NW.

Washington, DC 20210

Re: Definition of Fiduciary Proposed Rule
Ladies and Gentlemen:

This letter is submitted to the Employee Benefits Security Administration of the
U.S. Department of Labor (the “Department”) by PFS Investments Inc. (“PFSI”), a
registered broker-dealer and an indirect wholly-owned subsidiary of Primerica, Inc.
(“Primerica”), a financial services company that is publicly-traded on the NYSE.' PFSI
appreciates the opportunity to comment on the proposed rule amendment that is intended
to more broadly define the circumstances under which a person is considered a
“fiduciary” for purposes of the prohibited transaction rules in Internal Revenue Code
(“IRC”) §4975, which generally governs how broker-dealers and other service providers
interact with tax-qualified retirement plans and accounts — including individual retirement
accounts and Coverdell education savings accounts (hereinafter cumulatively referred to
as “IRAs”).

The proposed amendment, if adopted in its current form, would have a dramatic
effect on how broker-dealers (including PFSI and its registered representatives), acting in
their traditional role, serve the middle-income IRA community. As proposed, it would
substantially undermine their ability to provide commission based brokerage services to
IRA investors. Specifically, if brokers, acting in their traditional role, are deemed
“fiduciaries” with respect to IRAs as a result of providing routine brokerage services to
such accounts, their activities would be subject to IRC Sections 4975(c)(1)(E) and (F).
The result would be to limit such firms’ ability to receive and retain certain types of
compensation paid by third parties (product providers and their affiliates) in connection
with transactions involving assets in IRAs.

' Under the ticker symbol “PRI.”

Primerica Companies Primerica Life PFS investments Inc. Primerica Financial Services
Insurance Company Member FINRA Home Mortgages, Inc.
Equal Housing Opportunity


(2)

(c)

Also, it does not appear that the potential costs to IRAs that will likely result from
the implementation of this proposal were taken into account as part of the
Regulatory Impact Analysis. The focus of the Analysis is on the cost of compliance
to the service providers, noting that the effects of higher fees, shrinkage of the
service provider market and the modification of business practices would be too
uncertain to estimate (see 75 Fed. Reg. at 65,275). As indicated above, we believe
that there would be significant adverse effects on the middle-income IRA market.
We further believe that those effects can be quantified by additional study.

For these reasons, the Department should carve out IRAs from the new rules. This
will permit the Department to focus its efforts and limited recourses on those areas
within the scope of its underlying concerns, without adversely affecting other areas
as well.

Studying the Effects on IRAs Before Subjecting Them to the New Rules. If the
Department does not agree that the new rules should exclude coverage of IRAs,
then the Department should, at the very least, conduct a comprehensive study (in
connection with the SEC) of the potential effects of subjecting IRAs to the new
rules. The study should include the consideration of the transition from commission
based brokerage accounts to fee-only advisory accounts, the effects of pricing low
balance accounts out of the marketplace, and the resulting effects on middle-income
IRA investors attempting to save for retirement. We believe that such a study would
allow the Department to better understand these issues as they relate to IRAs and, to
the extent appropriate, to create special rules that would both achieve the
Department’s goals and preserve access for middle-income IRA investors to these
types of traditional brokerage services.

Expanding the Purchase and Sale Exception. Absent a full exclusion of IRAs from
the new rule, one approach to preserving their access to traditional brokerage
services would be to provide definitive rules for maintaining such relationships.
We believe that the proposal’s “purchasing and selling” limitation could be clarified
for this purpose.

Under the proposal (subparagraph (2)(i)), a person will not be considered an
investment advice fiduciary if the person “can demonstrate that the recipient of the
advice knows or, under the circumstances, reasonably should know, that the person
is providing the advice or making a recommendation in its capacity as a purchaser
or seller of a security or other property, or as an agent of, or appraiser for, such a
purchaser or seller, whose interests are adverse to the interests of the plan or its
participants or beneficiaries, and that the person is not undertaking to provide
impartial investment advice.” This provision is intended to reflect the Department’s
understanding that, in the context of selling investments to a purchaser, a seller’s
communications with the purchaser may involve advice or recommendations that

Page 7 of 9


Because PFSI, and we believe other firms that endeavor to serve the middle-
income market, depend on such compensation to help defray the costs of delivering
services to their customers, PFSI and such other firms would be required to substantially
restructure their IRA businesses to account for the loss of such revenue. This
restructuring would undoubtedly include both raising the minimum account sizes and
substantially increasing account fees for IRAs. For these reasons, it is our view that the
rule, as proposed, would end up substantially reducing the investment and service options
available to middle-income retail consumers for their retirement and educational savings.
From our perspective, that result will only serve to exacerbate the national crisis that is
the lack of sufficient retirement savings among middle-income consumers.

We respectfully request that the Department amend its proposal to allow broker-
dealers like PFSI to continue to serve the needs of IRA investors in a cost-effective
manner (as discussed more fully below), by either excluding IRAs from the new rules,
delaying the application of the rules for IRAs in order to properly study the effects that
such rules would have on the IRA market and its customers, or modifying the “purchase
and sale” exception in the proposal to permit broker-dealers to continue to act in their
traditional role of providing access, on a commission brokerage-basis, to investment
products and services for the retail IRA market.

The IRA Market for Middle-Income Households

Primerica is a leading distributor of financial products to middle-income
households in North America. Primerica assists clients by meeting their needs for term
life insurance, which we underwrite, and for investments and other financial products,
which we distribute primarily on behalf of third parties. Primerica has been in business
since 1977 and currently insures more than 4.3 million lives and serves more than two
million investment clients. Primerica’s clients are generally middle-income consumers,
defined by us to include households with annual income of $30,000 to $100,000, which
represents approximately 50% of U.S. households.

As you may be aware, the smaller-sized transactions typical of middle-income
consumers have led most other financial services companies to focus on more
affluenv/high net worth consumers and abandon the middle-income market. PFSI’s
business model, however, is uniquely structured to reach the middle-income clients that
we serve. PFSI is an introducing broker-dealer that offers basic investment products
(mutual funds, variable annuities, and college savings plans) on an “application-way”
basis, and does not carry customer accounts. PFSI representatives are locally-based
independent contractors who serve customers in the communities in which they live and
are paid only by commissions resulting from product sales. PFSI allows its
representatives to be part-time, which permits them to earn supplemental income by

Page 2 of 9


concentrating on the smaller-sized transactions typical of middle-income consumers.”
PFSI believes that its representatives’ standing in their respective local communities
provides PFSI a unique ability to serve its customers.

PFSI’s primary investment philosophy is geared toward our middle-income
market. We teach the long-term benefits of dollar cost averaging through systematic
investing into a diversified investment vehicle, such as a mutual fund or variable annuity.
To help our customers adopt this approach, our affiliated shareholder servicing entity,
Primerica Shareholder Services (“PSS”), facilitates monthly investments into mutual fund
accounts by processing periodic bank drafts against customer checking accounts. PSS
has structured its operations to be able to accept what we believe to be the smallest,
minimum monthly investment amounts in the broker-dealer industry which allows
individuals with modest means to start a retirement or educational savings account.> In
addition to the benefits of dollar-cost averaging, PFSI emphasizes the need to begin
saving for retirement as soon as reasonably practicable, and our clients often start with a
small monthly investment. As a result, in just about any given year, approximately half
of all accounts opened by PFSI are individual retirement accounts whereby our customers
begin or continue the important task of saving for retirement. In fact, approximately 56%
of our customer accounts’ assets are held in IRAs. PFSI and our representatives are
committed to helping middle-income consumers recognize the urgent need to begin
saving and investing for their long-term retirement security.

Our concern with the proposed rule is that with respect to broker-dealers, the
proposal materially modifies elements of establishing a fiduciary relationship with their
traditional clients for purposes of IRC § 4975. The effects of this, as discussed more
fully below, are that if the broker-dealer is deemed to be a fiduciary, under IRC § 4975,
with respect to an IRA customer, the broker-dealer is prohibited, absent an applicable
exemption,’ from receiving non-levelized compensation based on product sales. It is for
this reason that firms such as PFSI structure their owner-direct IRA businesses in a
manner intended to keep the firm and its representatives from becoming a “fiduciary.”
Based on the Department’s current rules and guidance, firms generally limit their role to
making investment products (such as mutual funds and variable annuities) available to
their IRA customers, and providing investment education to help these customers

? Because we offer only the basic investment products noted above, PFSI representatives are required to
hold only Series 6 and 63 FINRA registrations. If PFSI was required to change its existing commission
based IRAs to fee-based IRAs, then our representatives that continue to service IRA customers would be
required to incur the burden of an additional licensing regime. This would likely limit the number of part-
time representatives that would be willing to continue to provide services to IRA customers.

* PSS’s minimums for individual retirement accounts are as follows: minimum initial purchase - $250;
minimum subsequent purchase - $50; and minimum preauthorized check-draft - $25.

* We note that although Prohibited Transaction Exemptions 75-1(II), 86-128 and 84-24 may provide some
limited relief for these issues, there are a number of open questions regarding their application to our core
business, including their availability in the context of non-discretionary advice and types of compensation
and payment methods covered.

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