February 3, 2011 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Attn: Definition of Fiduciary Proposed Rule 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Re: RIN 1210-AB32, Definition of Fiduciary Proposed Rule 

Dear Sir or Madam: 

 On behalf of the American Benefits Council (the “Council”), I am writing today 

with respect to the proposed regulations addressing the definition of a fiduciary. 

The Council is a public policy organization representing principally Fortune 500 

companies and other organizations that assist employers of all sizes in providing 

benefits to employees. Collectively, the Council’s members either sponsor directly or 

provide services to retirement and health plans that cover more than 100 million 

Americans. 

The Council has requested to testify at the hearing scheduled for March 1, 2011 

and, if necessary, March 2, 2011. We thank the Department of Labor (the 

“Department”) for scheduling the hearing and for extending the comment period. We 

believe that those were important steps in ensuring a full public policy dialogue with 

respect to this critical proposed regulation.

 We understand the desire of the Department to update and improve the 

regulatory definition of a fiduciary. We agree that the retirement community would 

benefit from rules that establish clear lines between fiduciary advice, on the one hand, 

and non-fiduciary education, marketing, and selling on the other hand. However, we 
2 

believe that the proposed regulations create too broad a definition of fiduciary. As 

discussed in more detail below, we are very concerned that an overly broad definition 

would actually have a very adverse effect on retirement savings by raising costs, 

inhibiting investment education and guidance for plans and participants, and 

significantly shrinking the pool of service providers willing to provide such investment 

education and guidance. 

 We know that the Department does not have any intent to create an overly broad 

definition that would adversely affect retirement savings or trigger burdensome and 

unnecessary costs that will be borne in whole or in part by participants. Accordingly, 

we look forward to a very constructive dialogue on the critical issues raised by the 

proposed regulations. 

 Defined contribution plan participants and individual retirement account or 

annuity (“IRA”) owners have generally been given the opportunity and responsibility 

to make their own investment decisions and to design their own path toward 

retirement security. This is an enormous challenge for individuals who are not 

investment professionals and may not be familiar with the investment markets. The 

public policy challenge is how to facilitate participant education and engagement with 

respect to effective investment strategies, while at the same time protecting participants 

from misleading self-interested advice. Finding a balance between these two goals 

should, in our view, be the core objective of the new definition of a fiduciary. 

 Moreover, as discussed further below, it is essential that the Department’s 

proposed regulations be coordinated with guidance issued by the Securities and 

Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority 

regarding the standard of conduct applicable to brokers and dealers. Without 

coordination, brokers and dealers would be subject to different and conflicting 

standards with respect to the same advice, reducing their ability to provide clear sound 

advice to participants. 

 The proposed regulations would also pose great challenges for defined benefit 

plan sponsors seeking investment information and valuation services. In particular, it is 

critical that the proposed regulations be coordinated with specificity with the 

Commodity Futures Trading Commission’s “business conduct” regulations regarding 

swaps; without clear coordination, the Department’s regulations could render swaps 

unavailable to plans, with devastating results. 

 The importance of coordinating among Federal agencies has recently been 

strongly emphasized by the President in a January 18, 2011 Executive Order: 

Some sectors and industries face a significant number of 

regulatory requirements, some of which may be redundant, 

inconsistent or, overlapping. Greater coordination across 
3 

agencies could reduce these requirements, thus reducing 

costs and simplifying and harmonizing rules. In developing 

regulatory actions and identifying appropriate approaches, 

each agency shall attempt to promote such coordination, 

simplification, and harmonization. 

 Finally, as discussed below, we strongly urge the Department to provide broad 

transition relief to avoid significant disruption of the retirement plan world. 

 Because of the length of this letter, a table of contents is provided below: 

ENSURING THE CONTINUED AVAILABILITY OF INVESTMENT EDUCATION 

AND GUIDANCE AND SERVICES TO RETIREMENT PLANS. ........................................ 4

Substantive modifications....................................................................................................... 4

Effective date. ........................................................................................................................... 5

Coordination with other guidance. ....................................................................................... 6

CLARIFICATION OF THE BASIC DEFINITION OF “FIDUCIARY”. ................................ 7

Individualized Specific Advice Should be Required in All Cases........................................ 7

Interaction with Interpretive Bulletin 96-1........................................................................... 7

Fiduciary Relationship: “May Be Considered” is Too Low a Threshold to Trigger 

Fiduciary Duties and Liabilities................................................................................................. 8

Requiring Individualized Specific Advice and Raising the “May Be Considered” 

Threshold Would Address Other Concerns. ........................................................................... 9

“Management of Securities or Other Property”: the Proposed Regulations Would 

Transform Contract Reviews and Other Non-Investment Advice Into Investment 

Advice.......................................................................................................................................... 10

Even Without the Management Issue, the Proposed Regulations Would Transform 

Legal Advice and Other Non-Investment Advice Into Investment Advice...................... 12

Clarity: Permitting the Parties’ Agreement to Clarify Fiduciary Status. ........................... 12

Plan-Level Education: Application of IB 96-1........................................................................ 13

Plan Sponsor and Advisor Employees: Who Should Be a Fiduciary? ............................... 13

SELLER/PURCHASER EXEMPTION.................................................................................... 15

Scope of the Exemption............................................................................................................. 15

Disclosure.................................................................................................................................... 17

PLAN MENU OF INVESTMENT OPTIONS......................................................................... 18

VALUATION.............................................................................................................................. 20

Transaction-Based Distinction. ................................................................................................ 20
4 

Other “Non-Transaction-Based” Issues.................................................................................. 22

Transaction-Based Valuations.................................................................................................. 23

COORDINATION WITH OTHER AGENCIES..................................................................... 24

Broker/Dealers: Coordination Between the Department and the SEC. ............................ 24

The SEC’s Study. .................................................................................................................... 25

Coordination........................................................................................................................... 26

Recommendation. .................................................................................................................. 27

Interaction with the Business Conduct Standards Regarding Swaps Proposed by the 

CFTC. ........................................................................................................................................... 28

Risk analysis. .......................................................................................................................... 28

Review of plan’s representative........................................................................................... 29

Recommending a swap. ........................................................................................................ 30

DISTRIBUTION ADVICE......................................................................................................... 31

Distribution Advice is Not Fiduciary Advice Under the Statute........................................ 31

Distribution Advice Cannot be Fiduciary Advice Conceptually........................................ 31

Advice Regarding Investment of Distributed Assets in an IRA or Another Plan Can be 

Investment Advice, Subject to the Seller Exemption. ........................................................... 31

Coordinating With Other Guidance........................................................................................ 32

Advisory Opinion 2005-23A..................................................................................................... 32

IRA AND NON-ERISA PLAN ISSUES: APPLICATION OF IB 96-1 AND THE 

INVESTMENT MENU EXCEPTIONS. ................................................................................... 33

ENSURING THE CONTINUED AVAILABILITY OF INVESTMENT EDUCATION 

AND GUIDANCE AND SERVICES TO RETIREMENT PLANS.

The Department’s regulations could have very significant effects on the 

provision of services to plan sponsors, and on the provision of investment education 

and guidance to plans, plan participants, and IRA owners. In this regard, the 

regulations could cause certain established means of providing such services, 

education, and guidance to cease, which could leave plans and participants with less 

access to investment education and guidance. That is clearly undesirable. 

We have the following recommendations with respect to avoiding this result: 

Substantive modifications. There are certain modifications to the 

proposed regulations that would be consistent with the Department’s 

objectives but would not unnecessarily disrupt established and successful 
5 

means of providing investment education and guidance. The remainder 

of this letter addresses those issues. 

Effective date. The regulations are proposed to be effective within 180 

days of finalization. That is not enough time. These regulations could 

cause portions of the investment advice industry to be restructured or 

eliminated. For example, in some cases, advisors may need to alter the 

type of education and guidance they provide or possibly eliminate certain 

services in order to avoid fiduciary status. These advisors will need 

significant training. In other cases, advisors will become fiduciaries, and 

this may require restructuring their compensation packages, as well as the 

fee structures of their employer. Even if existing agreements are 

grandfathered (as discussed below), new agreements regarding 

investment services will need to be developed. And potentially far more 

entities and persons will need to be insured as fiduciaries. All of this 

requires a substantial amount of time, especially at a time when 

administrative frameworks and systems are being strained by adjustments 

to broad new disclosure regimes. A transition period of at least 12 months 

following finalization of the regulations (and implementation of any 

necessary prohibited transaction exemptions) is critical to avoid periods 

when investment information is materially less available for plans and 

IRAs. 

In addition, we urge the Department not to disrupt existing agreements. 

For example, a plan sponsor may have an existing agreement with a 

consultant to provide non-fiduciary investment information regarding the 

plan’s investment options as well as other investment options that could 

be offered to plan participants. It would be very disruptive to cause that 

agreement to be terminated prior to its expiration by reason of the fact 

that the new rules would transform the arrangement into a fiduciary 

relationship. It may not be possible to renegotiate a different agreement 

under the new rules with the same service provider; it may even be the 

case that for a period of time, no service provider is prepared to provide 

services under the new rules. In this context, the forced termination of 

existing arrangements would certainly not be appropriate. 

Other existing arrangements may raise even more difficult problems. For 

example, swap agreements set out long-term financial and contractual 

obligations that cannot be modified without extensive and expensive 

renegotiations. The proposed regulations have great potential to force 

such renegotiations by, for example, treating certain valuations under 

typical agreements as fiduciary advice, which would, in turn, trigger 

prohibited transaction issues and termination provisions in swap 

agreements. 
6 

We are still gathering information on the extent of the adverse effects on 

existing arrangements, but what we have uncovered to date convinces us 

that there is a great need not to disrupt existing arrangements that may be 

very difficult to modify or replace, especially in the short term. 

Coordination with other guidance. If certain established means of 

providing investment information cease to be workable, members of the 

retirement plan community will be looking for alternative means of 

providing such information. In this regard, it is critical that all available 

tools be ready and available when investment information delivery 

systems are being redesigned. This means that the finalization of the 

proposed regulations should be coordinated with other rulemaking that 

could affect investment information delivery systems. For example, the 

proposed regulations implementing the prohibited transaction 

exemptions under the Pension Protection Act of 2006 (the “PPA”) should 

be finalized at least 12 months before the effective date of the fiduciary 

definition regulations, so that during the 12-month period, the plan 

community can explore whether use of the exemptions can provide a 

workable way to provide investment information. 

It is important that the Department clarify that all currently applicable 

prohibited transaction exemptions would remain in effect. In that regard, 

if the Department is planning, in light of the regulation, to revisit any 

exemptions affecting the investment advice area, it is critical that this be 

coordinated with the finalization of the fiduciary definition regulations, so 

that all available means of providing investment information can be 

evaluated prior to the effective date of the new rules. 

Coordination with the SEC is very important, as discussed further below. 

If the Department’s regulations are finalized and effective at a time when 

broker/dealers’ obligations under the securities laws are not settled, this 

will result in broker/dealers being unable to redesign their investment 

information delivery systems due to ongoing uncertainty. This could 

have a devastating effect on the availability of investment information 

from broker/dealers, which traditionally have been a very important 

source of such information, especially for small businesses and IRA 

owners. 

Coordination with the CFTC and the SEC regarding swaps is also critical. 

If the Department’s proposed regulations and the CFTC’s proposed 

business standards were finalized in their current state, plans would 

effectively be forced to cease using swaps, with devastating results, as 

discussed further below. 
7 

CLARIFICATION OF THE BASIC DEFINITION OF “FIDUCIARY”.

Individualized Specific Advice Should be Required in All Cases.

In general. We are very concerned that the furnishing of investment 

recommendations may, under the proposed regulations, be treated as a fiduciary act 

even if the recommendations are not specific or individualized. For example, assume 

that an investment adviser (within the meaning of section 202(a)(11) of Investment 

Advisers Act of 1940) (“Investment Adviser”) provides a firm newsletter to an IRA 

owner customer. The firm newsletter provides a discussion of the general market 

outlook, including a discussion of which industry sectors may be gaining or losing 

strength in the near future. 

 Arguably, the newsletter is providing recommendations regarding the 

“advisability of investing in, purchasing, holding, or selling securities.” If so, the 

newsletter would appear to be fiduciary advice under the proposed regulation since (1) 

the newsletter is provided to an IRA owner, (2) the newsletter is provided by an 

Investment Adviser, (3) the newsletter does not appear to be covered by any of the 

“limitations” in § 2510.3-21(c)(2), and (4) compensation, such as brokerage commissions, 

would be earned in connection with purchases or sales of securities. Furthermore, 

under the proposed regulations, affiliates of the Investment Adviser’ employer would 

also appear to be fiduciaries with respect to the matters addressed in the newsletter. 

 Clearly, the newsletter should not be treated as fiduciary advice. The newsletter 

is simply an effort to educate and engage individuals with respect to market trends. 

Such education should not be inhibited and we do not believe that the Department 

intended this result. (Of course, if a newsletter were sold that provides specific 

investment advice on particular investments that participants should buy or sell within 

a specific plan, the newsletter should be treated as fiduciary advice.) 

 The proposed regulations should be clarified so that in order to constitute 

fiduciary advice, recommendations must in all cases (1) be individualized to the needs 

of the plan, plan fiduciary, or participant or beneficiary, and (2) address the purchase, 

sale, or holding of specific securities, rather than market trends or asset allocations. 

This should apply in the case of subclauses (A), (B), and (C) of § 2510.3-21(c)(1)(ii), in 

addition to applying for purposes of subclause (D). 

Interaction with Interpretive Bulletin 96-1. Without the clarification described 

above, the meaning of Interpretive Bulletin 96-1 (“IB 96-1”) would be cast into doubt. It 

is true that the proposed regulations specifically provide that the provision of 

investment education and materials within the meaning of IB 96-1 does not give rise to 

fiduciary status. But IB 96-1 has generally been read to permit education about 

investments that does not involve individualized advice regarding specific securities. 
8 

The proposed regulations would call that interpretation into question by clearly 

implying that at least some non-individualized non-specific market guidance can 

constitute fiduciary advice. 

 If finalized in their current form, the proposed regulations would thus put a 

significant chill on investment education. Any non-individualized investment 

education that is not precisely addressed in IB 96-1 would be called into question and 

thus may cease to be provided. This would have a very adverse effect on critical 

educational tools currently in effect, leaving participants with far less information, 

especially low and middle-income participants who may not be able to afford to acquire 

investment assistance elsewhere. In addition, this structure will clearly stifle any future 

innovation with respect to investment education, such as the application of IB 96-1 to 

plans (in addition to plan participants) as discussed below. We do not believe that the 

Department intended these results, which can be avoided by clarifying the regulations 

in the manner recommended above. 

Fiduciary Relationship: “May Be Considered” is Too Low a Threshold to Trigger 

Fiduciary Duties and Liabilities

 As discussed above, recommendations should be fiduciary advice only if 

individualized and specific. However, that alone is not enough. For example, assume 

that a plan participant has done extensive research and consulted with an advisor, and 

has decided tentatively to invest in a group of mutual funds available under the plan. 

As a last-minute check, the individual asks a friend in the employer’s human resources 

department if the participant’s fund selections make sense for an individual in his 

situation. The human resources employee says she is not an expert but the choices 

make sense to her and are consistent with what many others are doing. Under the 

regulation, that reaction may be investment advice if the human resources employee is 

compensated in part for dealing with plan-related questions. 

 Alternatively, instead of calling the human resources employee, the employee 

calls a friend who is an Investment Adviser of an affiliate of the financial institution 

offering some of the funds under the plan. The Investment Adviser has nothing to do 

with the plan and his affiliate operates completely independently of the institution 

offering some of the plan’s funds. The Independent Adviser says that he cannot give 

the participant investment advice, but the choices seem generally appropriate for 

someone in the participant’s position. That reaction is clearly investment advice under 

the proposed regulations (and would thus be a prohibited transaction). 

 These examples are not real investment advice. These are situations where 

individuals receive very incidental comfort regarding decisions made independently by 

them. Yet the proposed regulations would turn this into investment advice that triggers 

personal liability and, in the case of the Investment Adviser, a prohibited transaction. 

This is not the right result. 
9 

 A fiduciary relationship should not be treated as existing unless: 

There is a mutual understanding that the recommendations 

or advice being provided in connection with a plan or IRA: 

 (1) will play a significant role in the recipient’s 

decision-making, and 

 (2) will reflect the considered judgment of the 

adviser. 

 The “may be considered” standard is such a low threshold that almost any casual 

discussion of investments will satisfy it. An ERISA fiduciary relationship is a very 

serious relationship with the highest fiduciary standard under the law, including (1) 

application of the prudent expert standard, (2) a duty to act solely in the interest of the 

participants and beneficiaries, and (3) very significant potential liability. In that context, 

fiduciary status should not be triggered by casual discussions but only by serious 

communications that reflect a mutual understanding that an adviser/advisee 

relationship exists. 

 Thus, we urge the Department to replace the “may be considered” standard with 

the standard described above. Moreover, no recommendations should be treated as 

giving rise to fiduciary status unless such recommendations meet this standard. Thus, 

this standard should be a part of subclauses (A), (B), and (C) of § 2510.3-21(c)(1)(ii), in 

addition to being part of subclause (D). 

Requiring Individualized Specific Advice and Raising the “May Be Considered” 

Threshold Would Address Other Concerns.

A number of concerns have been identified regarding the proposed regulations’ 

“status” rules under which an adviser may, for example, become a fiduciary by reason 

of being a fiduciary for another purpose, an Investment Adviser, or in some cases an 

affiliate of an entity that meets one of these “status” requirements. (If the Investment 

Adviser “status” rule is retained, it should be clarified that the exclusions under section 

202(a)(11) of the Investment Advisers Act of 1940 apply in determining who is an 

Investment Adviser for purposes of the regulation.) For example, if a financial 

institution serves as a directed trustee, any discussion of the market by an affiliate of the 

financial institution, however benign the discussion, could arguably be treated as 

fiduciary advice under the proposed regulations solely by reason of the conceptually 

irrelevant point that the affiliated financial institution serves as a directed trustee. This 

inappropriate result is avoided if the proposed regulations are modified, in accordance 

with the suggestions set forth above, to provide that advice is treated as giving rise to 

fiduciary status if and only if: 
10 

(1) There is a mutual understanding that the recommendations or advice 

being provided in connection with a plan or IRA: 

(a) will play a significant role in the recipient’s decision-making, and 

(b) will reflect the considered judgment of the adviser, and 

(2) The recommendations or advice is individualized to the needs of the plan, 

plan fiduciary, or participant or beneficiary. 

 Thus, proposed regulation § 2510.3-21(c)(1)(ii) should be revised so that a person 

cannot be a fiduciary by reason of providing investment advice unless the person’s 

recommendations or advice satisfies the above requirements. 

“Management of Securities or Other Property”: the Proposed Regulations Would 

Transform Contract Reviews and Other Non-Investment Advice Into Investment 

Advice.

 The proposed regulations would include within the definition of “investment 

advice” the following: “advice...or recommendations as to the management of 

securities or other property.” The preamble states that: 

This would include, for instance, advice and 

recommendations as to the exercise of rights appurtenant to 

shares of stock (e.g., voting proxies), and as to selection of 

persons to manage plan investments. 

 The broad language of the proposed regulations raises many questions: 

• A plan decides to change trustees, chooses a new trustee, and begins negotiating 

a trust agreement with the new trustee. The plan asks for advice with respect to 

the terms of the trust agreement from the plan sponsor’s internal and external 

ERISA and contract attorneys, as well as the plan sponsor’s compliance 

personnel, human resources department, and tax department. The trustee is 

involved in the “management” of plan assets, and the terms of the trust 

agreement affect that management. Does that mean that all of the above 

personnel advising the plan with respect to the trust agreement are fiduciaries? 

If it does, the cost of trust agreements and many other routine plan actions will 

increase exponentially with the imposition of new duties and large potential 

liabilities. Also, many of the above persons may refuse to work on the project 

without a full indemnification from the plan sponsor. We do not believe that this 

type of cost increase and disruption was intended. 

What about the persons working on the agreement for the new trustee? If such 

persons make any “recommendations” to the plan in the course of negotiations, 

they would become fiduciaries because the seller exemption, on its face, only 

appears to apply to sales of property and not services. Any such 
11 

recommendations would thus trigger fiduciary status and corresponding 

prohibited transactions. Theoretically, this could chill all meaningful give-andtake during the negotiations, and many institutions may be unwilling to act as 

trustee. Again, we do not think that this was intended. 

• A plan has decided to enter into a swap and must execute a swap agreement. 

The terms of the swap agreement will have a significant effect on the plan’s 

rights with respect to the swap. The plan asks its internal and outside securities 

counsel to work on the swap agreement, and to consult with the plan’s internal 

and outside ERISA counsel. The plan also asks its investment manager for input 

on the types of provisions that are important for plans to include (or exclude) in 

swap agreements. The plan accountant is also asked to review the agreement. 

Finally, the company’s own compliance personnel, contract experts, and finance 

department also review the agreement. 

The terms of the swap agreement affect the “management” of the swap. So do all 

of the above personnel become fiduciaries under the proposed regulations? If 

the answer is yes, plans’ cost of investments will skyrocket, as an enormous new 

set of individuals and companies that have little material role in plan 

investments become fiduciaries, with far greater potential liability and a higher 

standard to meet. In addition, as noted above, many persons would likely refuse 

to review the agreement absent a full indemnification by the plan sponsor. 

• A plan negotiates a loan agreement in connection with an ESOP. Is everyone 

who works on the loan agreement a fiduciary? Could individuals working on 

the loan agreement for the lender become fiduciaries if they make any 

“recommendations” during negotiations? 

• Are Board recommendations regarding proxy voting on employer securities a 

fiduciary act? They could be under the proposed regulations. 

 To avoid the inappropriate results described above and many other similar 

results, we strongly urge you to provide a precise and appropriately narrow definition 

of “management” in the regulations. Under the definition, “management” would 

include: 

• The selection of persons to manage investments; 

• Individualized advice as to the exercise of rights appurtenant to shares of stock; 

and 

• Any exercise of discretion to alter the terms of a plan investment in a way that 

affects the rights of the plan, unless such exercise of discretion has been 

specifically reviewed and agreed to by a plan fiduciary. In the swap context, for 

example, swap terms can be modified without plan review and consent by, for 

example, swap data repositories. If any such changes are made, anyone making 
12 

those changes is acting for the plan and should be treated as a fiduciary. 

Moreover, such treatment is necessary in order to prevent harm to the plan. 

 This would target the actions identified by the Department in the preamble and 

would give the Department the flexibility to identify additional forms of 

“management”. But it would not have the inappropriately broad consequences 

illustrated above. 

Even Without the Management Issue, the Proposed Regulations Would Transform 

Legal Advice and Other Non-Investment Advice Into Investment Advice.

 Assume that the definition of “management” is revised in accordance with our 

suggestion. Let us go back to the swap example set forth above. 

• Assume that ERISA counsel advises the plan that entering into a swap with the 

particular dealer would raise prohibited transaction issues and counsels the plan 

not to enter into the swap for that reason. Under the proposed regulations, that 

would clearly constitute investment advice, making the ERISA attorney a 

fiduciary. 

• Assume that the plan sponsor’s contract experts determine that, separate from 

any investment issue, the swap agreement gives the dealer too much discretion 

in interpreting critical terms and advises the plan not to enter into the swap. 

That internal contract expert would be rendering investment advice under the 

proposed regulations and thus would also clearly be a fiduciary. 

• Assume that the plan sponsor’s compliance personnel are concerned about 

whether the swap, as structured by the dealer, would comply with the law and 

advise the plan not to enter into the swap for that reason. Again these internal 

compliance personnel would be rendering investment advice under the 

proposed regulations and thus would be fiduciaries. 

 These inappropriate results can be avoided by adding an additional exception to 

the regulations. Under this exception, advice would not be treated as investment advice 

if it relates to the compliance of the investment with applicable law or relates to risks 

separate from the advisability of the underlying investment. 

Clarity: Permitting the Parties’ Agreement to Clarify Fiduciary Status.

 Both plan sponsors and service providers have emphasized to the Council the 

importance of clarity with respect to who is and who is not a fiduciary. We know that 

similarly this is an important issue for the Department. In this regard, we remain 

concerned that, even with our suggested changes, it would be difficult in many 

circumstances to determine whether a fiduciary relationship exists. 
13 

 Accordingly, we recommend that the regulations provide that a service provider, 

adviser, or appraiser is not a fiduciary if the parties agree in writing to that effect. (This 

rule would apply separately from, and in addition to, the seller exemption.) We also 

propose the following safeguards be adopted as part of the rule we are suggesting: 

• The agreement would have to describe the type of advice that the parties agree is 

not fiduciary advice. For example, assume that a plan uses a particular 

investment manager (“Manager A”) for Pacific Rim investments. The agreement 

could provide that any advice not related to Pacific Rim investments is not 

fiduciary advice. 

• The agreement would also have to describe how the decisions on which the nonfiduciary advice may be given would be made. Under the agreement between 

Manager A and the plan, for example, Manager A agrees to be available to 

discuss investment opportunities outside the Pacific Rim, but the agreement 

specifies that the plan relies on different investment managers with respect to 

such other investments. The plan wants Manager A to be available as a 

sounding board and as a source of questions for the other investment managers, 

but the plan does not make such other investment decisions based on Manager 

A’s advice. In these circumstances, Manager A would not be a fiduciary with 

respect to the advice it renders regarding such other investments. 

• Similarly, if a swap counterparty provides information to a pension plan as 

required by the terms of a financial instrument or if requested by a fiduciary to a 

pension plan prior to entering into a financial instrument, the fiduciary to the a 

pension plan and the counterparty should be able to agree that the plan is relying 

on other advisors and that counterparty is not a fiduciary to the pension plan. 

 On a separate but related point, we urge the Department to clarify that an 

advisor is not treated as having acknowledged fiduciary status under Proposed 

Regulations § 2510.3-21(c)(1)(ii)(A) unless such acknowledgement is made in writing. 

Clarity with respect to fiduciary status is critical, and the regulations should not make 

fiduciary status turn on oral, informal discussions. 

Plan-Level Education: Application of IB 96-1.

 We believe that there is no legal or conceptual reason why the principles of IB 96-

1 regarding investment education should not be extended to defined benefit and 

defined contribution plans. The provision of investment education to defined benefit 

and defined contribution plan fiduciaries should not give rise to fiduciary status. 

Plan Sponsor and Advisor Employees: Who Should Be a Fiduciary?

 By very significantly lowering the threshold for fiduciary status, the proposed 

regulations raise serious questions regarding which plan sponsor and advisor 

employees may be treated as fiduciaries. For example, it is, of course, common for a 
14 

plan sponsor to form a committee of senior executives to oversee plan issues, including 

plan investment issues. It is certainly clear that such committee has fiduciary status. 

But plan sponsors have expressed concern about the status of other employees who 

perform the research and analysis necessary to present investment issues for the 

committee’s review and resolution. 

 Such other employees may provide recommendations for the committee to 

consider. This is simply how companies work. Middle-level employees frame issues 

for senior employees to resolve; issues are best presented in the context of a 

recommendation based on the advantages and disadvantages of any decision, so that 

senior employees can quickly appreciate the relevant factors. Many employees may 

participate in the research and the preparation of the recommendations to the 

committee. If all of these employees were fiduciaries, the effects would be severely 

negative. 

• The cost of fiduciary insurance would skyrocket, if such insurance would be 

available at all for such employees. 

• It would certainly become more difficult to get employees to work on these 

projects in the face of potentially staggering liabilities and lawsuits. 

• Creative work and recommendations would likely be stifled as middle-level 

employees propose conservative approaches with less downside (and 

correspondingly less upside). 

 

 The bottom line is that the employees preparing the reports for the plan 

committee are not the decision-makers. They are the researchers who prepare 

recommendations based on objective criteria for the committee members to evaluate 

and resolve. And the proposed regulations could potentially sweep in a huge number 

of employees, since the middle-managers formulate their recommendations based on 

the work of employees who in turn work for them. 

 As noted, this issue applies to third-party advisors as well as to plan sponsors. 

Recommendations by advisors may be formulated by a team of employees employed 

by the advisor. It would not make sense to treat the entire team of individuals as 

fiduciaries. 

 Accordingly, we ask that you clarify the regulations to address the situation 

where a company or committee within a company serves as a fiduciary with respect to 

investment decisions or recommendations. In that case, the employees who help the 

company or committee make those decisions or recommendations should not be 

fiduciaries. Otherwise, we could have a real problem as potentially hundreds of 

employees without decision-making power become fiduciaries. This is not to suggest 

that employees of a fiduciary company cannot be a fiduciary. For example, an advisor 

company’s employee may have the advisory relationship with a plan or participant and 

may become a fiduciary by reason of that relationship. Or an employee newsletter 
15 

might be sold to the company employees making very specific recommendations 

regarding the investments available under the company’s plan in which the employees 

should invest. But these cases are different. In these cases, employees involved are 

making direct investment recommendations that are not filtered through supervisors or 

entities that are fiduciaries. 

SELLER/PURCHASER EXEMPTION.

Scope of the Exemption. 

 The deletion of the “regular basis” and “primary basis” requirements from the 

existing regulation puts enormous pressure on establishing a workable distinction 

between selling and advice. If a one-time recommendation can give rise to fiduciary 

status, it is essential to distinguish between fiduciary recommendations and the selling 

of investment products or services. In both cases, the participant or plan is provided 

with in-depth recommendations regarding investment decisions. But clearly in the case 

of selling, there is no fiduciary relationship nor would the commercial world be 

workable if such a fiduciary relationship were imposed. 

 Thus, we applaud the Department for including an exemption for persons acting 

as, or on behalf of, purchasers or sellers. However, it is critical that the scope of this 

exemption be clarified. Consider, for example, the following situations: 

• A plan offers 40 mutual funds sponsored by fund families X, Y, and Z, as well as 

target date funds sponsored by fund families X and Y. A representative of X 

meets with a participant to promote her firm’s target date funds. The 

representative makes all appropriate disclosures regarding her self-interest. The 

recommendations made by the representative seem clearly covered by the 

proposed seller exemption, as they should be. 

• Same plan as above. A representative of Z meets with a participant and provides 

the participant with an illustrative portfolio consisting of Z funds. This 

representative also makes all the appropriate disclosures and recommends the 

illustrative portfolio as better than X and Y’s target date funds. This 

recommendation should clearly be covered by the seller exemption. Otherwise, 

the law would be, without justification, favoring target date funds over a group 

of funds that can perform the same function. 

• Same plan. An Investment Adviser with a commercial relationship with Y meets 

with a participant to promote Y’s target date funds. The Investment Adviser 

states in writing that she receives compensation for selling Y’s funds, and makes 

all other appropriate disclosures. Again, the proposed seller exemption should 

clearly cover this arrangement. The Investment Adviser discloses the 

compensation arrangement with Y and makes all other appropriate disclosures 

necessary to alert the participant to the Investment Adviser’s self-interest. There 

is no reason for such an arrangement not to be covered by the seller exemption. 
16 

• Pursuant to an RFP, a plan interviews three investment consultants to review the 

plan’s mutual fund offerings on an ongoing basis. As part of the interview 

process, the plan asks all three to come prepared with a review of the plan’s 

current offerings, together with recommendations for any changes. This is a very 

common part of the RFP process and it should be clarified that responses to RFPs 

(and similar marketing initiatives) do not constitute fiduciary advice. 

• IRA account. A representative of Z (a financial institution) meets with a client 

who indicates that he would like to roll over his section 401(k) account plan 

balance to an IRA. After discussing the client’s goals and assets, the 

representative of Z recommends that the client open an IRA custodial account 

with specific investments. The representative not only recommends products 

manufactured by Z but also by firms Y, X and V with whom Z has selling 

agreements. The representative makes all appropriate disclosures regarding her 

self-interest. All of these recommendations should be covered by the proposed 

seller exemption. The fact that Z makes other firms’ investments available (i.e., 

an “open architecture firm”) versus solely its own manufactured products 

should not affect the analysis. Both open architecture firms and those that only 

sell their own proprietary products should be able to avail themselves of the 

seller’s exemption with the appropriate disclosures. 

• A pension plan fiduciary is contacted by an investment bank to discuss potential 

trades with the investment bank as a counterparty, the investment bank provides 

information in advance of the trade to the pension plan fiduciary. The parties 

agree in writing either at the establishment of the counterparty relationship, or in 

the terms of the trade, that the plan fiduciary (and not the investment bank) is 

the fiduciary to the pension plan with respect to any dealings with such 

investment bank and that any information provided by the investment bank is 

not provided on a “fiduciary” basis to the pension plan. The information 

provided to the plan fiduciary should not be viewed as a “recommendation” or 

“investment advice” even if specific to the pension plan. Instead, the parties 

should be able to rely on the investment expertise of the plan’s investment 

manager, and not the investment bank counterparty which clearly has a conflict 

of interest. Otherwise, dealers will either refuse to deal with pension plans and 

plan fiduciaries or provide only “generic” information to potential pension plan 

counterparties which will put pension plan fiduciaries at an information 

disadvantage. 

• A defined benefit plan asks an asset manager for information regarding liabilitydriven investing. The manager provides white papers it has drafted on the topic 

and shares some general approaches on how defined benefit plans can 

implement liability-driven investing. The manager offers its services to the plan 

fiduciaries, which could be in the form of managing a separate account to a 

liability benchmark and/or investing in a liability-driven fund offered by the 

asset manager. It is unclear whether the seller exemption would cover this 

selling of investment services, but it clearly should if the manager discloses its 

potential self-interest in the separate account and fund contexts. 
17 

We ask the Department to clarify the purchaser/seller exception in accordance 

with the above discussion. The seller exemption should apply in any case where the 

entity providing a recommendation has a self-interest in the decision to be made by the 

plan or participants, and that self-interest is clearly and effectively communicated. 

Conceptually, it does not make sense to distinguish among sellers of an investment 

product, providers of an investment-related service, and any other entities that have a 

financial interest in the decision made by the plan or participant. The fundamental 

principle is clear: any person with an interest in an investment decision to be made by a 

plan or participant should be entitled to promote products and services as long as such 

person makes his or her self-interest clear. Any other rule would effectively prohibit 

marketing, promotion, and selling, which is not ERISA’s purpose. 

See also the discussion of the seller exemption in the context of distribution 

advice below. 

Disclosure. 

Under the proposed regulations, the seller/purchaser exception only applies if 

the recipient of the advice: 

knows or, under the circumstances, reasonably should 

know, that the person is providing the advice or making the 

recommendation in its capacity as a purchaser or seller of a 

security or other property...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. [emphasis added] 

 We have several comments regarding this language. First, the reference to 

“adverse” interests should be deleted. The relationship between a seller of investment 

products and an investor is by no means “adverse”. The seller’s objective is to establish 

a long-term mutually beneficial relationship. If the investor is not happy with the 

product or the service or feels somehow misled or taken advantage of, that will result in 

a short-term relationship and unhelpful word-of-mouth for the seller. It is certainly true 

that sellers of investment products profit by selling, but that is true of all product and 

service providers, including doctors, lawyers, counselors, etc. In short, the term 

“adverse” is inaccurate and unduly negative, and it does not provide the recipient of 

the disclosure with any meaningful information. 

 Second, the reference to “not undertaking to provide impartial advice” is not 

necessarily correct. Sellers may in many circumstances be impartial because their 

objective is not short-term profits, but a long-term relationship. 
18 

 In lieu of the “adverse” and “not...impartial advice” references, the proposed 

regulations should be modified to be more accurate and precise. Regulation § 2510.3-

21(c)(2)(i) should be amended by deleting all the words starting with “whose interests 

are” replacing them with the following: 

who has a financial interest in the transaction to which the 

recommendation or other information provided relates. 

 This is an accurate portrayal of the relationship between a seller and investor, 

much more accurate than the description in the proposed regulations. It would be a 

disservice to both the seller and the investor to describe their relationship inaccurately. 

 Finally, we believe that the regulation should make clear that disclosures of the 

seller/purchaser’s relationship to the investor, as described above, should satisfy the 

“knows or reasonably should know” standard. So if a seller/purchaser were to make 

the above disclosure in writing, and provide a general description of the financial 

interest, that should satisfy the seller/purchaser exception. 

PLAN MENU OF INVESTMENT OPTIONS.

 The proposed regulations would confirm that the offering of a service provider 

menu of investment options does not constitute fiduciary advice. It should be clarified 

that this treatment does not turn on the service provider menu meeting any 

requirements regarding the number or nature of investment options. The critical issue, 

however, is: how does an employer select a plan menu of investment options from the 

broader service provider menu? In that regard, the proposed regulations clarify that 

“the provision of general financial information and data” to assist the employer in 

selecting a plan menu is not fiduciary advice. 

 Today, one of our greatest challenges in the retirement security area is 

broadening the retirement plan coverage among small businesses. It is critical that we 

step back and consider this proposed rule in that context. Small businesses will 

generally adopt a retirement plan only if the process is simple and inexpensive. If the 

process is burdensome, complicated, or costly, small businesses simply will not adopt 

retirement plans. In this context, imagine the hardware store owner who would like to 

adopt a plan for his 12 employees. Assume that the service provider presents its menu 

of 300 investment options, provides objective data regarding all 300, and tells the 

hardware store owner (1) to decide how many to offer and (2) to pick the right options 

for his employees, subject to fiduciary liability if he picks imprudently. Alternatively, 

the hardware store owner can find some independent consultants, interview them, 

choose one (subject to fiduciary liability), and pay that consultant a substantial amount 

of money to pick and monitor the plan menu. 
19 

 Needless to say, if that is the message that the hardware store owner receives, he 

will not adopt a plan for his employees. So if the rule set forth in the proposed 

regulations is finalized without further clarification, we may well see a marked decline 

in retirement plan coverage. 

 Service providers need a way to provide employers with help in choosing the 

plan menu so that the process is simple and inexpensive. In this regard, we urge you to 

treat all of the following as not triggering fiduciary status: 

• The service provider may provide the plan fiduciary with objective factors that 

others commonly use in selecting plan menus, such as fund ratings, past 

performance (measured against competitive funds), risk measurements, fees, and 

manager tenure. 

• The service provider may screen funds based on objective criteria that are 

provided by the plan fiduciary or that are commonly used in the industry. For 

example, if the plan fiduciary establishes criteria based on fund ratings, past 

performance (measured against competitive funds), fees, risk, and manager 

tenure, the service provider may screen the available funds based on such criteria 

and provide the plan fiduciary with fund options that meet the plan fiduciary’s 

criteria. Within each investment category, there would generally be multiple 

funds for the plan fiduciary to choose from, but in some circumstances, there 

could be a single fund. 

• The service provider may present non-individualized model plan menus that 

other similar businesses have chosen or that reflect a conservative, moderate, or 

aggressive investment approach, with an explanation of objective differences 

between the menus. 

• In the context of responding to an RFP, it is very common for service providers to 

provide a non-individualized model plan menu of investment options. This is 

necessary for pricing purposes and it is made very clear that the model menu is 

not being recommended. This should not give rise to fiduciary status. 

• The service provider may provide objective reasons that a plan fiduciary might 

choose one fund over another or might choose one model portfolio over another. 

• In some cases, a plan fiduciary may have decided to remove an investment 

option and may ask a service provider for a replacement fund that is, based on 

objective criteria, very similar to the fund being removed. Responding to this 

request with objectively similar funds—or a single fund if only one is objectively 

similar—should not give rise to fiduciary status. 

• In some cases, the service provider encourages a plan to have at least one 

investment option in every specified asset class and to have a set of target date 

funds (or similar investments). 

• A service provider might design its arrangements so that all “mapping” is done 

to the plan’s QDIA. 
20 

• The service provider may also use the seller exemption. It makes little sense to 

prohibit a service provider from using the seller exemption in situations where 

the service provider is selling a particular plan menu. 

Finally, the disclosures regarding “not undertaking to provide impartial 

investment advice” need to be modified to be accurate, as discussed above. The 

disclosure with respect to the service provider menu should provide as follows: 

The investment alternatives available were selected based on 

various criteria, including past performance, fees, quality of 

management, popularity, reputation, stability, financial 

relationships with the service provider, and/or 

compatibility with the service provider’s administrative 

systems. 

 The disclosure with respect to assistance in selecting the plan menu should be 

modified as follows: 

The service provider may have a financial interest in the 

investment alternatives that are offered under the plan. 

VALUATION.

 We have multiple concerns regarding the proposed position that, subject to a 

narrow exception, asset valuations are fiduciary acts. 

Transaction-Based Distinction. 

 We believe that it is critical that the regulations draw a distinction between two 

very different types of valuations. On the one hand, there are valuations that affect the 

amount of money that a plan pays or receives for the asset being valued. For example, 

if a plan is buying or selling real estate or closely held securities, a valuation may be 

relevant in determining how much a plan pays or receives. These valuations can 

materially affect the total amount of plan assets available to provide benefits to 

participants. This letter refers to such valuations as “Transaction-Based Valuations.” 

 On the other hand, there are valuations that do not affect the total amount of 

plan assets available to pay benefits to participants. For example: 

• A plan must value annuity contracts, separate accounts, GICs, and other assets 

without a readily ascertainable value in order to determine the required 

minimum distributions (“RMDs”) that must be made under section 401(a)(9) of 

the Internal Revenue Code (the “Code”). 
21 

• All defined benefit plan assets must be valued in order to determine the plan 

sponsor’s funding obligations, as well as for purposes of applying the various 

benefit restrictions applicable under ERISA section 206(g) and Code section 430. 

These benefit restrictions include restrictions on a plan’s ability to pay benefits in 

certain forms, such as lump sums. 

• In many circumstances, a participant’s defined contribution plan account may 

hold an interest in an asset such as a separate account, a GIC, an annuity 

contract, collective investment fund, or another asset without a readily 

ascertainable market value. In order to determine the amount payable to a 

terminating participant, it may be necessary to value such assets. 

 Though these valuations could affect the timing or form of distribution and/or 

the relative benefits paid to different participants, the valuations have no effect on the 

total assets available to pay benefits to participants. There is thus no risk that total plan 

assets may be inappropriately reduced by such valuations. On the contrary, these are 

everyday valuations that are necessary to the normal operation of a plan. 

 Moreover, if these valuations give rise to fiduciary status, holding these types of 

assets in plans will at the very least become much more expensive by reason of (1) the 

significant additional liability assumed by the person valuing the asset, and (2) the fact 

that many service providers will cease providing valuations due to the potential 

liability. In fact, it is very possible that the prohibited transaction rules would preclude 

many investment product providers from valuing their own products. 

 In addition, persons performing routine valuations would be forced to engage in 

new and difficult legal analyses. For example, in valuing assets for purposes of the 

RMD rules, what is a fiduciary’s duty? To minimize the value to preserve as much as 

possible in the plan? To maximize the value to avoid possible plan disqualification 

and/or participant excise tax problems? In valuing assets for purposes of funding 

determinations, is there a duty to minimize the value to increase funding obligations? 

Or is there a duty to maximize the value to permit the continued availability of all forms 

of distributions? Or should the appraiser be concerned that lump sums could drain the 

plan of assets, so that the valuation should be minimized? 

 In addition to sharply increased costs, we envision this regulation creating 

extremely difficult new issues for which there are no answers, like the issues noted 

above. Thus, routine plan operations will be thrown into question, and many service 

providers may simply refuse to provide such routine valuations, leaving plan sponsors 

without a means to operate their plans. And what purpose would be served by the 

additional cost, legal uncertainty, and operational chaos? None that we can think of. 

No problem has been identified that would justify the enormous disruption triggered 

by imposing fiduciary status by reason of performing routine valuations that do not 

affect total plan assets. 
22 

Other “Non-Transaction-Based” Issues. 

 We are very concerned that we have barely scratched the surface of all the issues 

that could arise if the proposed regulations’ treatment of valuations were finalized. For 

example, even custodians that simply report valuations prepared by others could be 

swept into fiduciary status. Similarly, service providers that value managed or unitized 

investment options (such as a fund of funds) based on third-party values could be 

treated as fiduciaries. Clearly neither of these results would be appropriate. 

 But it may be particularly helpful to explore the “non-transaction-based” issues 

in the context of one example: investment in uncleared swaps. (Similar issues may exist 

with respect to cleared swaps.) In the case of uncleared swaps (which will still exist in 

large numbers after the Dodd-Frank Act), a swap has to be valued frequently—often 

daily—in order to adjust the collateral posted by one or the other parties to secure the 

obligation under the swap agreement. Generally, it is the “dealer” that performs the 

valuation, subject to review and possible contestation by the plan (or other end user). 

The valuation by the dealer may be a fiduciary act under the proposed regulations: 

• The valuation is an appraisal of property; 

• The valuation is provided to a plan or plan fiduciary; 

• The valuation is performed pursuant to a written agreement that it may be 

considered in connection with making decisions regarding management of assets 

(i.e., the posting of collateral), and the valuation is individualized to the needs of 

the plan; and 

• Neither the seller exemption nor the valuation technically exemption applies. (In 

our view, the seller exemption should clearly apply, as discussed above, but in its 

current form, the exemption may not apply since the valuation is not performed 

in the context of a sale.) 

 If the dealer’s valuation is a fiduciary act, then the valuation is also a prohibited 

transaction that runs afoul of ERISA section 406(b), since the dealer’s interest is adverse 

to the plan’s. One might argue that the dealer should not perform the valuation due to 

its self-interest and that all valuations should be performed by independent third 

parties. But that would cause very significant disruption in the swaps market. 

Moreover, the plan reviews the dealer’s valuation and has the right to challenge it, so 

the conflicted nature of the dealer’s valuation is not of concern. But most importantly, 

the Dodd-Frank Act requires the dealer to make the valuation available to the plan. See 

section 731 of the Dodd-Frank, adding section 4s(h)(3)(B)(iii)(II) of the Commodity 

Exchange Act. So the option of solely using an independent third party to value the 

swap is simply unavailable. 

 Even if this problem could be solved, an additional problem exists. As noted 

above, the plan has the right to contest the dealer’s valuation and rely instead on an 

independent party’s valuation. This system would no longer be available under the 
23 

proposed regulations. By reason of performing the valuation, the independent 

appraiser would become a fiduciary with an exclusive duty of loyalty to the plan. 

Accordingly, the appraiser would cease to be independent, leaving the dealer and the 

plan with no way to resolve their valuation dispute. 

 Thus, the proposed regulations would create unworkable conflicts in the law 

with respect to swaps. How many more conflicts or problems are lurking out there 

with respect to this valuation issue? We do not know, nor does anyone. And that is our 

point. This valuation issue needs far more study and work before it moves forward. 

This is clearly true with respect to Non-Transaction-Based Valuations, since no 

problems or issues have been identified that would justify the disruption and cost that 

would be triggered by finalization of the proposed regulations. 

Transaction-Based Valuations. 

Transaction-Based Valuations, such as in the context of ESOPs, seem to have 

provided the impetus for including valuations in the proposed regulations as fiduciary 

acts. The preamble to the regulations specifically states that “a common problem 

identified in the Department’s recent ESOP national enforcement project involves the 

incorrect valuation of employer securities.” 

 We have two concerns with respect to Transaction-Based Valuations. First, as in 

the case of Non-Transaction-Based Valuations, we are very uncertain what the 

fiduciaries’ duties would be. In the preamble, the Department states that it: 

would expect a fiduciary appraiser’s determination of value 

to be unbiased, fair, and objective, and to be made in good 

faith and based on a prudent investigation under the 

prevailing circumstances then known to the appraiser. 

 If this is truly the standard, it needs to be reflected in the regulations, because 

that would not be how we read the law. A fiduciary is required by law to “discharge its 

duties with respect to a plan solely in the interest of the participants and beneficiaries.” 

A fiduciary is required by law not to be unbiased and objective; on the contrary, a 

fiduciary is required to represent the participants. For example, in negotiating with a 

service provider over fees, a fiduciary is required to solely represent the plan’s interests, 

not to be an unbiased and objective arbiter of what level of fees are “fair” for both 

parties. 1

 

 Without further regulatory clarification, an appraiser’s duty would be to 

minimize a plan’s purchase price and maximize a plan’s sales price. That would mean 

 

1

See generally Bedrick By & Through Humrickhouse v. Travelers Ins. Co., 93 F.3d 149, 154 (4th Cir. 1996) 

("[t]here is no balancing of interests; ERISA commands undivided loyalty to plan participants"). 
24 

that the opposing party would be required to hire a second appraiser, doubling the cost, 

and then there could well be a further negotiation based on the disparate valuations 

and, as in the case of swaps, possibly the need to hire an independent appraiser. 

Moreover, as discussed, by requiring that appraisers be plan fiduciaries, the proposed 

regulations would prohibit such “independent” party from being truly independent, 

leaving the plan without a mechanism to resolve the dispute. This could possibly also 

leave many ESOPs without a means to satisfy the “independent appraiser” requirement 

of Code section 401(a)(28)(C). 

 In short, applying a true fiduciary duty to an appraiser would be very disruptive, 

as well as unworkable, with respect to all Transaction-Based Valuations. Yet the 

preamble indicates that that is not what the Department intended. In fact, the result 

intended by the Department—a fair and objective valuation—may not be achievable 

through fiduciary status, which imposes wholly different obligations. Thus, we urge 

the Department to revisit this issue, so as to achieve the worthy objective described in 

the preamble. 

 Second, appraisals do not fall within the statutory definition of fiduciary advice. 

Appraisals are not “investment advice” under ERISA section 3(21)(A)(ii). As aptly 

discussed in Advisory Opinion 76-65, an appraiser is not rendering a view as the 

advisability of an investment decision; an appraiser is simply providing an opinion as 

the value of property. 

 In short, we urge the Department to pursue its worthy objectives with respect to 

the valuation of employer securities through a different approach that is workable and 

consistent with the statute. 

COORDINATION WITH OTHER AGENCIES.

 As noted above, on January 18, 2011 the President issued an Executive Order 

emphasizing the importance of agency coordination. This means far more than 

agencies letting each other know about regulatory projects being developed. In the 

President’s words, coordination means “harmonizing rules” and avoiding 

“inconsistent” or “overlapping” rules. Such coordination among the Department, the 

SEC, and the CFTC is essential as described below. 

Broker/Dealers: Coordination Between the Department and the SEC.

Under the proposed regulations, a very large number of brokers and dealers will 

become fiduciaries, such as a broker or dealer who gives individualized advice to a 

customer regarding IRA investment. This could present a major problem in light of the 

broker/dealer’s compensation structure. As a fiduciary, the broker/dealer’s 

opportunity to receive commissions or other compensation in connection with the 

advice would in many cases, absent an applicable exemption, cause the broker/dealer 
25 

to have committed a prohibited transaction solely by reason of the fact that the 

customers’ trading practices could affect the broker/dealer’s compensation. We 

recognize that the Department’s regulations are only proposed, but in their current 

state, they would generally provide broker/dealers with a choice: restructure an entire 

industry’s compensation arrangements or cease providing certain essential services to 

customers.2

 Thus, the Department’s proposed regulations could have a very adverse 

effect on the provision of investment assistance to participants, which is exactly the 

opposite of what is needed. 

 The SEC’s Study. The SEC’s staff (“Staff”) recently completed the study 

required by section 913 of the Dodd-Frank Act regarding the standards of care 

applicable to broker/dealers and investment advisers with respect to the provision of 

investment advice to retail customers (the “Study”). The Dodd-Frank Act specifically 

directs the SEC to study the effects of subjecting broker/dealers to the rules applicable 

to investment advisers. In addition, the SEC is authorized to issue regulations 

subjecting broker/dealers to such rules. 

The Dodd-Frank Act is, however, clear that, unlike the Department’s proposed 

regulations, any possible change in the standard of care applicable to broker/dealers is 

not intended to require “standard compensation” arrangements to be restructured: the 

“receipt of compensation based on commission or other standard compensation for the 

sale of securities shall not, in and of itself, be considered a violation of such standard 

applied to a broker or dealer.” On the contrary, the Dodd-Frank Act clearly emphasizes 

addressing broker/dealers’ compensation structures through disclosures of “material 

conflicts of interest.” 

In the Study, the Staff recommended: 

the consideration of rulemakings that would apply expressly 

and uniformly to both broker-dealers and investment 

advisers, when providing personalized investment advice 

about securities to retail customers, a fiduciary standard no 

less stringent than currently applied to investment advisers. 

. . . 

Study at v-vi. 

 

2

 In fact, in order to avoid having to restructure its entire compensation structure, a broker/dealer that is 

not an investment adviser may in some cases have to refrain from providing individualized advice with 

respect to plans and IRAs. This would result in far less advice being available to investors, especially in 

the IRA context. In addition, other broker/dealers may decline to seek investment adviser status just so 

as to enable them to continue to provide non-individualized advice with respect to plans and IRAs. 

Again, this would not appear to be a favorable development from a public policy perspective. These 

approaches, however, may not be possible under the upcoming guidance from the SEC, as discussed 

below. 
26 

The Staff’s reasoning for this conclusion included the following: 

a harmonization of regulation – where such harmonization 

adds meaningful investor protection – would offer several 

advantages, including that it would provide retail investors 

the same or substantially similar protections when obtaining 

the same or substantially similar services from investment 

advisers and broker-dealers. . . . 

[R]etail customers do not understand and are confused by 

the roles played by investment advisers and broker-dealers, 

and more importantly, the standards of care applicable to 

investment advisers and broker-dealers when providing 

personalized investment advice and recommendations about 

securities. 

Study at viii, 101. 

 Coordination. The regulatory projects undertaken by the Department and the 

SEC have enormous overlap; i.e., they overlap with respect to all retail customers 

saving for retirement under arrangements subject to the Department’s regulations. Yet 

neither the Study nor the Department’s proposed regulations indicate that there will be 

any coordination with the other project. The Study states that “the requirements of 

ERISA are beyond the scope of the Study.” Study at 87. The Department’s proposed 

regulations do not mention the upcoming Study, despite the fact that it addresses the 

same issue. 

This lack of coordination is of great concern for many reasons: 

• Executive Order. This lack of coordination is directly contrary to the 

Executive Order issued by the President on January 18, 2011, which requires 

coordination, not simply notifying other agencies of pending projects. The 

Order is critical of regulatory requirements that are “inconsistent or 

overlapping” and requires agencies to attempt to promote “coordination, 

simplification, and harmonization.” 

• Inconsistent with the Study. The Study concludes that the existence of 

differing standards harms and confuses investors. Yet without coordination 

between the two agencies, we appear to be moving toward enshrining a 

system whereby broker/dealers providing advice to the same customer 

would be subject to two very different standards with respect to different 

parts of the customer’s portfolio. 
27 

The Study also emphasizes “business model neutrality” by not prohibiting 

any business model and thus preserving “investor choice among... services 

and products and how to pay for these services and products (e.g., by 

preserving commission-based accounts, episodic advice, principal trading 

and the ability to offer only proprietary products to customers).” Study at 

113. The Department’s proposed regulations would directly conflict with the 

Study’s business model neutrality. 

The Executive Order also stresses that, consistent with the law and regulatory 

objectives, it is important to “reduce burdens and maintain flexibility and 

freedom of choice for the public.” 

• Significance of the Regulations. These two regulatory projects have great 

potential to modify the investment information available to millions of 

Americans and to have enormous effects on the financial industry. Projects of 

this magnitude deserve coordinated, careful consideration. In this regard, a 

Presidential Memorandum issued concurrently with the Executive Order 

states that, “[i]n the current economic environment, it is especially important 

for agencies to design regulations in a cost-effective manner consistent with 

the goals of promoting economic growth, innovation, competitiveness, and 

job creation.” President Obama echoed this sentiment in the recent State of 

the Union address. 

• Small Businesses. Without coordination, there is a great risk that IRA 

owners and employees of small businesses in particular will be cut off from a 

main source of investment advice, since broker/dealers provide substantial 

assistance in these areas. This is not what anyone wants. The President has 

made clear that his objective is “to promote innovation” – not eliminate 

business opportunities. Moreover, the Presidential Memorandum places 

emphasis on “ensuring that regulations are designed with careful 

consideration of their effects . . . on small businesses.” The lack of 

coordination with respect to broker/dealers does not reflect consideration of 

small business interests. 

Recommendation. The Department and the SEC should coordinate and 

articulate a single standard of conduct applicable to brokers and dealers in providing 

investment advice. That single standard should apply with respect to (1) the retirement 

savings of “retail customers” (as defined for purposes of the Dodd-Frank Act) and (2) 

any other advice related to retirement savings to which the SEC applies the retail 

customer standard. Having a single standard is critical because it would not serve 

investors well to have their advisors subject to inconsistent and overlapping rules. 

 In developing that single standard, the Department and the SEC will need to 

work within the statutory framework of the Dodd-Frank Act, which permits brokers 
28 

and dealers to receive “standard compensation”. Standard compensation should be 

interpreted to include, for example, commissions, sales incentives, and the benefits of 

principal trading. Under the Dodd-Frank Act, any issue related to such compensation 

is to be addressed through disclosure of “material conflicts of interests”. 

 

Interaction with the Business Conduct Standards Regarding Swaps Proposed by the 

CFTC.

 On December 22, 2010, the CFTC published proposed business conduct 

regulations regarding swaps. Those proposed regulations have very significant 

interactions with the Department’s proposed regulations, rendering coordination 

acutely necessary. If both sets of regulations were finalized in their current state, swap 

dealers and major swap participants (“MSPs”) that enter into swaps with plans would 

become plan fiduciaries solely by reason of complying with the business conduct 

regulations. This would create automatic prohibited transactions, so that the end result 

would be that retirement plans would cease to be able to use swaps, which would have 

a devastating effect on plans and on the swap market. 

The solution is clear. In addition to the specific changes recommended below, 

the Department’s regulations need to state that no action required by the CFTC’s 

business conduct standards shall transform a plan’s counterparty into a plan 

fiduciary. Otherwise, the two sets of regulations would be in irreconcilable conflict. 

 Defined benefit plans use swaps to hedge their asset and liability risks. Without 

swaps, plan assets and liabilities would be far more volatile, leading to greatly 

increased funding volatility. Increased funding volatility would, in turn, force plan 

sponsors to set aside much greater reserves to address possible future funding 

obligations. Those reserves would directly reduce money available to invest in jobs and 

in the economic recovery. In short, making swaps far less available would have farreaching adverse effects throughout the economy. In addition, without swaps, the 

greatly increased volatility with respect to funding adequacy would undermine the 

security of participants’ benefits. 

Risk analysis. Under the CFTC’s proposed regulations, if a plan enters into a 

swap with a swap dealer or MSP, the swap dealer or MSP must provide the plan with 

“material information concerning the swap in a manner reasonably designed to allow 

the [plan] to assess...[t]he material risks of the particular swap,...[t]he material 

characteristics of the particular swap,...and...[t]he material incentives and conflicts of 

interest that the swap dealer or [MSP] may have in connection with the particular 

swap.” Moreover, in the case of a high-risk complex bilateral swap, the swap dealer or 

MSP must provide the plan with: 

a scenario analysis designed in consultation with the [plan] 

to allow the [plan] to assess its potential exposure in 
29 

connection with the swap. The scenario analysis shall be 

done over a range of assumptions, including severe 

downturn stress scenarios that would result in significant 

loss. 

Prop. Reg. § 23.431(a). The definition of a high-risk complex bilateral swap is not 

entirely clear, but it appears likely broad enough to sweep in many swaps commonly 

entered into by plans. Even if the swap is not a high-risk complex bilateral swap, but it 

is a bilateral swap that is not available for trading on a designated contract market or 

swap execution facility, the swap dealer or MSP must provide the plan with a scenario 

analysis upon request. 

 Unless the seller exemption applies, it is clear that a swap dealer or MSP that 

complies with the above would be a fiduciary under the Department’s proposed 

regulations: (1) the swap dealer or MSP would be providing a plan with individualized 

investment advice regarding investment risks, (2) the advice “may be considered” by 

the plan, and (3) the swap dealer or MSP would receive compensation under the swap 

agreement. Some have taken the position that the swap dealer or MSP’s advice is not 

really advice, but rather the provision of objective data and thus would not trigger 

fiduciary status under the proposed regulations. We question this position for two 

reasons. First, risk analyses are not rote exercises based on universally accepted facts; 

they can be highly subjective and will vary greatly, as demonstrated by the fact that the 

CFTC’s regulations recognizes that the scenario analyses may be based on confidential 

proprietary information. Prop. Reg. § 23.431(a)(1)(iv). Second, the Department’s 

proposed regulations do not contain any general exception for advice based on factual 

data. On the contrary, the existence of very specific exceptions for factual data 

provided with respect to plan menu issues and for IB 96-1 raises a strong inference that 

no such general exception applies. 

 We strongly believe that the right answer in this case is that the seller exemption 

should apply to the swap dealer or MSP in this case. The swap dealer or MSP is the 

opposing party, and the plan knows not to rely on anything provided by such an 

opposing party. It is critical, however, that the applicability of the seller exemption be 

clarified to apply to swap counterparties. Without this clarification, swap dealers or 

MSPs would be required to be fiduciaries and, as such, would be engaging in a 

prohibited transaction in the case of swaps with plans. Thus, all plan swaps would be 

required to cease. 

Review of plan’s representative. Under the CFTC’s proposed regulations, if a 

swap dealer or MSP is simply entering into a swap with a plan, the swap dealer or MSP 

must engage in a swap-by-swap in-depth analysis of whether the plan’s representative 

is qualified to function as an advisor to the plan. Prop. Reg. § 23.450. It is clear under 

the CFTC’s regulations that the swap dealer may not simply accept representations to 

that effect, but rather must engage in its own scrutiny of any representations given. 
30 

Thus, there is a very strong argument that the swap dealer or MSP is effectively 

rendering advice to the plan regarding its choice of an advisor. As noted in the 

preamble to the Department’s proposed regulations, advice to a plan regarding its 

choice of an investment advisor is a fiduciary act under the proposed regulations. Thus, 

the swap dealer or MSP may be treated as a fiduciary with respect to the plan under the 

proposed regulations, triggering a prohibited transaction in the case of swaps with 

plans. Unless the two sets of proposed regulations are modified, this analysis could 

result in a cessation of all plan swaps. 

Recommending a swap. Under the CFTC’s proposed regulations, if a swap 

dealer or MSP “recommends” a swap or trading strategy to a plan, the swap dealer or 

MSP has (1) a duty to act in the best interests of the plan, and (2) a duty to have a 

reasonable basis to believe that the swap is suitable for the plan. 

 So the question is: under what circumstances would a swap dealer or MSP be 

treated as “recommending” a swap or trading strategy. This is very unclear under the 

CFTC’s proposed regulations. The preamble to the CFTC’s proposed regulations states 

that a: 

recommendation would include any communication by 

which a swap dealer or major swap participant provides 

information to a counterparty about a particular swap or 

trading strategy that is tailored to the needs or 

characteristics of the counterparty, but would not include 

information that is general transaction, financial, or market 

information, swap terms in response to a competitive bid 

request from the counterparty. 

 In our view, if the swap dealer or MSP clearly informs the plan in writing that 

the swap dealer or MSP is functioning as a counterparty and not as an advisor, 

everything communicated to the plan by the swap dealer or MSP should be treated as 

“selling” not recommendations. But the CFTC’s proposed regulations contain no such 

seller exemption. On the contrary, under the CFTC’s proposed regulations, it is very 

possible that the CFTC’s proposed regulations could be interpreted differently to turn 

common-place selling—e.g., “this is appropriate for you because it addresses your need 

to hedge your interest rate risk”—into a “recommendation”, triggering a duty of the 

swap dealer or MSP to act in the best interests of the plan. If that is so, problems arise. 

 If a swap dealer or MSP must act in the best interests of the plan, that would 

seem to imply a duty to advise the plan regarding the swap. Unless the seller 

exemption applies, that would clearly make the swap dealer or MSP a fiduciary under 

the Department’s proposed regulations, creating a prohibited transaction in the case of 

swaps with plans. Thus, again it is critical that the seller exemption be clarified to apply 

to the swap dealer or MSP. 
31 

DISTRIBUTION ADVICE.

 The preamble to the proposed regulations invites comments regarding “whether 

and to what extent the final regulations should define the provision of investment 

advice to encompass recommendations related to taking a plan distribution.” This issue 

needs to be divided into two analytically separate parts: (1) advice regarding whether to 

take a distribution, and (2) advice regarding how to invest any distribution that may be 

made. As discussed below, from a statutory and conceptual perspective, these 

questions need to be addressed separately. 

Distribution Advice is Not Fiduciary Advice Under the Statute. 

 ERISA section 3(21)(A)(ii), on which the proposed regulations are based, 

specifically refers to “investment advice.” A decision whether to invest in an S&P 500 

index fund inside a plan or to take a distribution from the plan and invest in the same 

fund outside the plan is simply not an investment decision. Thus, advice regarding that 

decision is not investment advice under the statute, and the Department lacks the 

statutory authority to treat such advice as giving rise to fiduciary status. 

Distribution Advice Cannot be Fiduciary Advice Conceptually. 

 The lack of a statutory basis to treat distribution advice as fiduciary advice makes 

conceptual sense. A fiduciary has a duty to the participants as participants. A 

distribution decision is a decision in which an individual must weigh his or her needs 

as a participant versus his or her needs as a non-participant. By definition, a fiduciary 

cannot help in that regard, since a fiduciary is required by law to act on behalf of a 

participant as a participant and not consider the participant’s needs as a nonparticipant. So, advice regarding distributions is, by definition, made in a non-fiduciary 

capacity. 

Advice Regarding Investment of Distributed Assets in an IRA or Another Plan Can 

be Investment Advice, Subject to the Seller Exemption. 

 We appreciate the Department’s concern with respect to advice provided to 

participants regarding how to invest distributed assets in an IRA or another plan. Such 

advice could be investment advice with respect to the IRA or other plan. However, this 

issue is an excellent reminder of how critical the seller exemption is, and how important 

it is that the scope of that exemption be clarified in accordance with our 

recommendations so that entities are able to promote and sell investment products for 

IRAs, subject to the clear disclosures discussed above with respect to the seller 

exemption. 
32 

Coordinating With Other Guidance. 

 If the Department decides to issue guidance that goes beyond the framework 

discussed above, it is critical that the Department do so in a coordinated manner. 

Issuance of any guidance treating distributions as fiduciary advice should be 

coordinated with expansion of IB 96-1 to apply to distributions so that the retirement 

plan community understands how to stop short of fiduciary advice but still provide 

valuable education. For example, guidance regarding the allocation between annuity 

distributions and non-annuity distributions should be treated as education to the extent 

that no specific options (such as a particular provider’s annuity) are recommended. In 

addition, the investment advice area contains many prohibited transaction exemptions 

that permit advice to be given under appropriate circumstances not contemplated 

expressly by the statute. We would certainly need similar prohibited transaction 

exemptions to make the distribution area function appropriately if distribution 

recommendations become fiduciary advice. So any regulatory guidance treating 

distribution advice as fiduciary advice should be combined with appropriate prohibited 

transaction exemptions. Providing the regulatory guidance without prohibited 

transaction exemptions would almost certainly create the same type of havoc that 

withdrawing all investment advice prohibited transaction exemptions would create. 

 However, as noted above, we strongly believe that there is no statutory basis to 

treat distribution recommendations as fiduciary advice. 

Advisory Opinion 2005-23A. 

 Finally, we urge the Department to revisit Advisory Opinion 2005-23A. In the 

Advisory Opinion, recommendations regarding the investment of distributed assets 

made by any plan fiduciary are automatically fiduciary advice. This is inconsistent 

with the clear longstanding rule of law that an entity is only an ERISA fiduciary with 

respect to those functions for which it has fiduciary powers and duties. So, for example, 

if an affiliate of a directed trustee that has no responsibility regarding the investment of 

plan assets were to make recommendations regarding the investment of distributed 

assets, such affiliate is clearly not a plan fiduciary with respect to those 

recommendations and there is no reason to treat it as such. We urge the Department to 

revise Advisory Opinion 2005-23A accordingly. 

 Our position here is not inconsistent with Varity Corporation v. Howe, 516 U.S. 

489(1996). In Varity, the plan administrator, acting as the plan administrator, provided 

misleading information regarding the plan. This case stands for the proposition that a 

fiduciary, when acting as a fiduciary, is subject to ERISA’s fiduciary standards. It does 

not apply to a plan fiduciary who is acting as a wholly separate capacity, i.e., as a seller 

of services unrelated to its status as a plan fiduciary. 
33 

IRA AND NON-ERISA PLAN ISSUES: APPLICATION OF IB 96-1 AND THE 

INVESTMENT MENU EXCEPTIONS.

 The proposed regulations apply to IRAs. We are concerned that the regulations 

were developed in the plan context and do not reflect consideration of the many unique 

factors affecting IRAs. This letter does not address in a substantive way the issue of 

whether IEAs should be covered by these regulations. This is an issue that can be more 

directly addressed by other organizations, but we believe that the Department should 

consider separating the proposed regulations into two parts, one addressing plan issues 

and one addressing IRA issues. 

 At a minimum, however, we note that the proposed regulation can be read not to 

apply the IB 96-1 and investment menu exceptions to IRAs and non-ERISA plans 

subject to the Code. This should be corrected. IRA owners and non-ERISA plan 

participants need investment education, just as ERISA plan participants do, so there is 

no reason not to make the IB 96-1 exception applicable to IRAs and non-ERISA plans 

subject to the Code. In addition, IRA sponsors and non-ERISA plans subject to the 

Code can provide a menu of investment options and can provide objective assistance 

with respect to choosing among such options, just as service providers in the ERISA 

plan area would do. The investment menu exceptions should thus apply to IRAs and 

non-ERISA plans subject to the Code. 

* * * 

 

 In short, we believe that the proposed regulations address a wide range of critical 

issues. An extended and robust public policy dialogue on all of these issues is needed 

to avoid (1) a material reduction in the services, investment education, and guidance 

available to plans, plan participants, IRA owners, and plan sponsors and (2) a 

substantial increase in costs. 

 We very much appreciate the opportunity to comment on these important 

proposed regulations. 

 Sincerely, 

Jan Jacobson 

 Senior Counsel, Retirement Policy