21928 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

1By using the term ‘‘adviser,’’ the Department 

does not intend to limit its use to investment 

advisers registered under the Investment Advisers 

Act of 1940 or under state law. For example, as 

used herein, an adviser can be an individual or 

entity who can be, among other things, a 

representative of a registered investment adviser, a 

bank or similar financial institution, an insurance 

company, or a broker-dealer. 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Parts 2509 and 2510 

RIN 1210–AB32 

Definition of the Term ‘‘Fiduciary’’; 

Conflict of Interest Rule—Retirement 

Investment Advice 

AGENCY: Employee Benefits Security 

Administration, Department of Labor. 

ACTION: Notice of proposed rulemaking 

and withdrawal of previous proposed 

rule. 

SUMMARY: This document contains a 

proposed regulation defining who is a 

‘‘fiduciary’’ of an employee benefit plan 

under the Employee Retirement Income 

Security Act of 1974 (ERISA) as a result 

of giving investment advice to a plan or 

its participants or beneficiaries. The 

proposal also applies to the definition of 

a ‘‘fiduciary’’ of a plan (including an 

individual retirement account (IRA)) 

under section 4975 of the Internal 

Revenue Code of 1986 (Code). If 

adopted, the proposal would treat 

persons who provide investment advice 

or recommendations to an employee 

benefit plan, plan fiduciary, plan 

participant or beneficiary, IRA, or IRA 

owner as fiduciaries under ERISA and 

the Code in a wider array of advice 

relationships than the existing ERISA 

and Code regulations, which would be 

replaced. The proposed rule, and related 

exemptions, would increase consumer 

protection for plan sponsors, fiduciaries, 

participants, beneficiaries and IRA 

owners. This document also withdraws 

a prior proposed regulation published in 

2010 (2010 Proposal) concerning this 

same subject matter. In connection with 

this proposal, elsewhere in this issue of 

the Federal Register, the Department is 

proposing new exemptions and 

amendments to existing exemptions 

from the prohibited transaction rules 

applicable to fiduciaries under ERISA 

and the Code that would allow certain 

broker-dealers, insurance agents and 

others that act as investment advice 

fiduciaries to continue to receive a 

variety of common forms of 

compensation that otherwise would be 

prohibited as conflicts of interest. 

DATES: As of April 20, 2015, the 

proposed rule published October 22, 

2010 (75 FR 65263) is withdrawn. 

Submit written comments on the 

proposed regulation on or before July 6, 

2015. 

ADDRESSES: To facilitate the receipt and 

processing of written comment letters 

on the proposed regulation, EBSA 

encourages interested persons to submit 

their comments electronically. You may 

submit comments, identified by RIN 

1210–AB32, by any of the following 

methods: 

Federal eRulemaking Portal: http://

www.regulations.gov. Follow 

instructions for submitting comments. 

Email: e-ORI@dol.gov. Include RIN 

1210–AB32 in the subject line of the 

message. 

Mail: Office of Regulations and 

Interpretations, Employee Benefits 

Security Administration, Attn: Conflict 

of Interest Rule, Room N–5655, U.S. 

Department of Labor, 200 Constitution 

Avenue NW., Washington, DC 20210. 

Hand Delivery/Courier: Office of 

Regulations and Interpretations, 

Employee Benefits Security 

Administration, Attn: Conflict of 

Interest Rule, Room N–5655, U.S. 

Department of Labor, 200 Constitution 

Avenue NW., Washington, DC 20210. 

Instructions: All comments received 

must include the agency name and 

Regulatory Identifier Number (RIN) for 

this rulemaking (RIN 1210–AB32). 

Persons submitting comments 

electronically are encouraged not to 

submit paper copies. All comments 

received will be made available to the 

public, posted without change to 

http://www.regulations.gov and http://

www.dol.gov/ebsa, and made available 

for public inspection at the Public 

Disclosure Room, N–1513, Employee 

Benefits Security Administration, U.S. 

Department of Labor, 200 Constitution 

Avenue NW., Washington, DC 20210, 

including any personal information 

provided. 

FOR FURTHER INFORMATION CONTACT: 

For Questions Regarding the Proposed 

Rule: Contact Luisa Grillo-Chope or 

Fred Wong, Office of Regulations and 

Interpretations, Employee Benefits 

Security Administration (EBSA), (202) 

693–8825. 

For Questions Regarding the Proposed 

Prohibited Transaction Exemptions: 

Contact Karen Lloyd, Office of 

Exemption Determinations, EBSA, 202– 

693–8824. 

For Questions Regarding the 

Regulatory Impact Analysis: Contact G. 

Christopher Cosby, Office of Policy and 

Research, EBSA, 202–693–8425. (These 

are not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

I. Executive Summary 

A. Purpose of the Regulatory Action 

Under ERISA and the Code, a person 

is a fiduciary to a plan or IRA to the 

extent that he or she engages in 

specified plan activities, including 

rendering ‘‘investment advice for a fee 

or other compensation, direct or 

indirect, with respect to any moneys or 

other property of such plan . . . ’’ 

ERISA safeguards plan participants by 

imposing trust law standards of care and 

undivided loyalty on plan fiduciaries, 

and by holding fiduciaries accountable 

when they breach those obligations. In 

addition, fiduciaries to plans and IRAs 

are not permitted to engage in 

‘‘prohibited transactions,’’ which pose 

special dangers to the security of 

retirement, health, and other benefit 

plans because of fiduciaries’ conflicts of 

interest with respect to the transactions. 

Under this regulatory structure, 

fiduciary status and responsibilities are 

central to protecting the public interest 

in the integrity of retirement and other 

important benefits, many of which are 

tax-favored. 

In 1975, the Department issued 

regulations that significantly narrowed 

the breadth of the statutory definition of 

fiduciary investment advice by creating 

a five-part test that must, in each 

instance, be satisfied before a person 

can be treated as a fiduciary adviser. 

This regulatory definition applies to 

both ERISA and the Code. The 

Department created the test in a very 

different context, prior to the existence 

of participant-directed 401(k) plans, 

widespread investments in IRAs, and 

the now commonplace rollover of plan 

assets from fiduciary-protected plans to 

IRAs. Today, as a result of the five-part 

test, many investment professionals, 

consultants, and advisers 1 have no 

obligation to adhere to ERISA’s 

fiduciary standards or to the prohibited 

transaction rules, despite the critical 

role they play in guiding plan and IRA 

investments. Under ERISA and the 

Code, if these advisers are not 

fiduciaries, they may operate with 

conflicts of interest that they need not 

disclose and have limited liability under 

federal pension law for any harms 

resulting from the advice they provide. 

Non-fiduciaries may give imprudent 

and disloyal advice; steer plans and IRA 

owners to investments based on their 

own, rather than their customers’ 

financial interests; and act on conflicts 

of interest in ways that would be 

prohibited if the same persons were 

fiduciaries. In light of the breadth and 

intent of ERISA and the Code’s statutory 

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Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 21929 

2For purposes of the exemption, retail investors 

include (1) the participants and beneficiaries of 

participant-directed plans, (2) IRA owners, and (3) 

the sponsors (including employees, officers, or 

directors thereof) of non participant-directed plans 

with fewer than 100 participants to the extent the 

sponsors (including employees, officers, or 

directors thereof) act as a fiduciary with respect to 

plan investment decisions. 

3Although referred to herein as the ‘‘seller’s 

carve-out,’’ we note that the carve-out provided in 

paragraph (b)(1)(i) of the proposal is not limited to 

sales and would apply to incidental advice 

provided in connection with an arm’s length sale, 

purchase, loan, or bilateral contract between a plan 

investor with financial expertise and the adviser. 

definition, the growth of participantdirected investment arrangements and 

IRAs, and the need for plans and IRA 

owners to seek out and rely on 

sophisticated financial advisers to make 

critical investment decisions in an 

increasingly complex financial 

marketplace, the Department believes it 

is appropriate to revisit its 1975 

regulatory definition as well as the 

Code’s virtually identical regulation. 

With this regulatory action, the 

Department proposes to replace the 

1975 regulations with a definition of 

fiduciary investment advice that better 

reflects the broad scope of the statutory 

text and its purposes and better protects 

plans, participants, beneficiaries, and 

IRA owners from conflicts of interest, 

imprudence, and disloyalty. 

The Department has also sought to 

preserve beneficial business models for 

delivery of investment advice by 

separately proposing new exemptions 

from ERISA’s prohibited transaction 

rules that would broadly permit firms to 

continue common fee and compensation 

practices, as long as they are willing to 

adhere to basic standards aimed at 

ensuring that their advice is in the best 

interest of their customers. Rather than 

create a highly prescriptive set of 

transaction-specific exemptions, the 

Department instead is proposing a set of 

exemptions that flexibly accommodate a 

wide range of current business 

practices, while minimizing the harmful 

impact of conflicts of interest on the 

quality of advice. 

In particular, the Department is 

proposing a new exemption (the ‘‘Best 

Interest Contract Exemption’’) that 

would provide conditional relief for 

common compensation, such as 

commissions and revenue sharing, that 

an adviser and the adviser’s employing 

firm might receive in connection with 

investment advice to retail retirement 

investors.2 In order to protect the 

interests of plans, participants and 

beneficiaries, and IRA owners, the 

exemption requires the firm and the 

adviser to contractually acknowledge 

fiduciary status, commit to adhere to 

basic standards of impartial conduct, 

adopt policies and procedures 

reasonably designed to minimize the 

harmful impact of conflicts of interest, 

and disclose basic information on their 

conflicts of interest and on the cost of 

their advice. Central to the exemption is 

the adviser and firm’s agreement to meet 

fundamental obligations of fair dealing 

and fiduciary conduct—to give advice 

that is in the customer’s best interest; 

avoid misleading statements; receive no 

more than reasonable compensation; 

and comply with applicable federal and 

state laws governing advice. This 

principles-based approach aligns the 

adviser’s interests with those of the plan 

participant or IRA owner, while leaving 

the adviser and employing firm with the 

flexibility and discretion necessary to 

determine how best to satisfy these 

basic standards in light of the unique 

attributes of their business. The 

Department is similarly proposing to 

amend existing exemptions for a wide 

range of fiduciary advisers to ensure 

adherence to these basic standards of 

fiduciary conduct. In addition, the 

Department is proposing a new 

exemption for ‘‘principal transactions’’ 

in which advisers sell certain debt 

securities to plans and IRAs out of their 

own inventory, as well as an 

amendment to an existing exemption 

that would permit advisers to receive 

compensation for extending credit to 

plans or IRAs to avoid failed securities 

transactions. In addition to the Best 

Interest Contract Exemption, the 

Department is also seeking public 

comment on whether it should issue a 

separate streamlined exemption that 

would allow advisers to receive 

otherwise prohibited compensation in 

connection with plan, participant and 

beneficiary accounts, and IRA 

investments in certain high-quality lowfee investments, subject to fewer 

conditions. This is discussed in greater 

detail in the Federal Register notice 

related to the proposed Best Interest 

Contract Exemption. 

This broad regulatory package aims to 

enable advisers and their firms to give 

advice that is in the best interest of their 

customers, without disrupting common 

compensation arrangements under 

conditions designed to ensure the 

adviser is acting in the best interest of 

the advice recipient. The proposed new 

exemptions and amendments to existing 

exemptions are published elsewhere in 

today’s edition of the Federal Register. 

B. Summary of the Major Provisions of 

the Proposed Rule 

The proposed rule clarifies and 

rationalizes the definition of fiduciary 

investment advice subject to specific 

carve-outs for particular types of 

communications that are best 

understood as non-fiduciary in nature. 

Under the definition, a person renders 

investment advice by (1) providing 

investment or investment management 

recommendations or appraisals to an 

employee benefit plan, a plan fiduciary, 

participant or beneficiary, or an IRA 

owner or fiduciary, and (2) either (a) 

acknowledging the fiduciary nature of 

the advice, or (b) acting pursuant to an 

agreement, arrangement, or 

understanding with the advice recipient 

that the advice is individualized to, or 

specifically directed to, the recipient for 

consideration in making investment or 

management decisions regarding plan 

assets. When such advice is provided 

for a fee or other compensation, direct 

or indirect, the person giving the advice 

is a fiduciary. 

Although the new general definition 

of investment advice avoids the 

weaknesses of the current regulation, 

standing alone it could sweep in some 

relationships that are not appropriately 

regarded as fiduciary in nature and that 

the Department does not believe 

Congress intended to cover as fiduciary 

relationships. Accordingly, the 

proposed regulation includes a number 

of specific carve-outs to the general 

definition. For example, the regulation 

draws an important distinction between 

fiduciary investment advice and nonfiduciary investment or retirement 

education. Similarly, under the ‘‘seller’s 

carve-out,’’ 3 the proposal would not 

treat as fiduciary advice 

recommendations made to a plan in an 

arm’s length transaction where there is 

generally no expectation of fiduciary 

investment advice, provided that the 

carve-out’s specific conditions are met. 

In addition, the proposal includes 

specific carve-outs for advice rendered 

by employees of the plan sponsor, 

platform providers, and persons who 

offer or enter into swaps or securitybased swaps with plans. All of the rule’s 

carve-outs are subject to conditions 

designed to draw an appropriate line 

between fiduciary and non-fiduciary 

communications, consistent with the 

text and purpose of the statutory 

provisions. 

Finally, in addition to the new 

proposal in this Notice, the Department 

is simultaneously proposing a new Best 

Interest Contract Exemption, revising 

other exemptions from the prohibited 

transaction rules of ERISA and the Code 

and is exploring through a request for 

comments the concept of an additional 

low-fee exemption. 

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21930 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

C. Gains to Investors and Compliance 

Costs 

When the Department promulgated 

the 1975 rule, 401(k) plans did not exist, 

IRAs had only just been authorized, and 

the majority of retirement plan assets 

were managed by professionals, rather 

than directed by individual investors. 

Today, individual retirement investors 

have much greater responsibility for 

directing their own investments, but 

they seldom have the training or 

specialized expertise necessary to 

prudently manage retirement assets on 

their own. As a result, they often 

depend on investment advice for 

guidance on how to manage their 

savings to achieve a secure retirement. 

In the current marketplace for 

retirement investment advice, however, 

advisers commonly have direct and 

substantial conflicts of interest, which 

encourage investment recommendations 

that generate higher fees for the advisers 

at the expense of their customers and 

often result in lower returns for 

customers even before fees. 

A wide body of economic evidence 

supports a finding that the impact of 

these conflicts of interest on retirement 

investment outcomes is large and, from 

the perspective of advice recipients, 

negative. As detailed in the 

Department’s Regulatory Impact 

Analysis (available at www.dol.gov/

ebsa/pdf/conflictsofinterestria.pdf), the 

supporting evidence includes, among 

other things, statistical analyses of 

conflicted investment channels, 

experimental studies, government 

reports documenting abuse, and basic 

economic theory on the dangers posed 

by conflicts of interest and by the 

asymmetries of information and 

expertise that characterize interactions 

between ordinary retirement investors 

and conflicted advisers. This evidence 

takes into account existing protections 

under ERISA as well as other federal 

and state laws. A review of this data, 

which consistently points to substantial 

failures in the market for retirement 

advice, suggests that IRA holders 

receiving conflicted investment advice 

can expect their investments to 

underperform by an average of 100 basis 

points per year over the next 20 years. 

The underperformance associated with 

conflicts of interest—in the mutual 

funds segment alone—could cost IRA 

investors more than $210 billion over 

the next 10 years and nearly $500 

billion over the next 20 years. Some 

studies suggest that the 

underperformance of broker-sold 

mutual funds may be even higher than 

100 basis points, possibly due to loads 

that are taken off the top and/or poor 

timing of broker sold investments. If the 

true underperformance of broker-sold 

funds is 200 basis points, IRA mutual 

fund holders could suffer from 

underperformance amounting to $430 

billion over 10 years and nearly $1 

trillion across the next 20 years. While 

the estimates based on the mutual fund 

market are large, the total market impact 

could be much larger. Insurance 

products, Exchange Traded Funds 

(ETFs), individual stocks and bonds, 

and other products are all sold by agents 

and brokers with conflicts of interest. 

The Department expects the proposal 

would deliver large gains for retirement 

investors. Because of data constraints, 

only some of these gains can be 

quantified with confidence. Focusing 

only on how load shares paid to brokers 

affect the size of loads paid by IRA 

investors holding load funds and the 

returns they achieve, the Department 

estimates the proposal would deliver to 

IRA investors gains of between $40 

billion and $44 billion over 10 years and 

between $88 billion and $100 billion 

over 20 years. These estimates assume 

that the rule would eliminate (rather 

than just reduce) underperformance 

associated with the practice of 

incentivizing broker recommendations 

through variable front-end-load sharing; 

if the rule’s effectiveness in this area is 

substantially below 100 percent, these 

estimates may overstate these particular 

gains to investors in the front-load 

mutual fund segment of the IRA market. 

The Department nonetheless believes 

that these gains alone would far exceed 

the proposal’s compliance cost. For 

example, if only 75 percent of 

anticipated gains were realized, the 

quantified subset of such gains— 

specific to the front-load mutual fund 

segment of the IRA market—would 

amount to between $30 billion and $33 

billion over 10 years. If only 50 percent 

were realized, this subset of expected 

gains would total between $20 billion 

and $22 billion over 10 years, or several 

times the proposal’s estimated 

compliance cost of $2.4 billion to 5.7 

billion over the same 10 years. These 

gain estimates also exclude additional 

potential gains to investors resulting 

from reducing or eliminating the effects 

of conflicts in financial products other 

than front-end-load mutual funds. The 

Department invites input that would 

make it possible to quantify the 

magnitude of the rule’s effectiveness 

and of any additional, not-yet-quantified 

gains for investors. 

These estimates account for only a 

fraction of potential conflicts, associated 

losses, and affected retirement assets. 

The total gains to IRA investors 

attributable to the rule may be much 

higher than these quantified gains alone 

for several reasons. The Department 

expects the proposal to yield large, 

additional gains for IRA investors, 

including potential reductions in 

excessive trading and associated 

transaction costs and timing errors (such 

as might be associated with return 

chasing), improvements in the 

performance of IRA investments other 

than front-load mutual funds, and 

improvements in the performance of 

defined contribution (DC) plan 

investments. As noted above, under 

current rules, adviser conflicts could 

cost IRA investors as much as $410 

billion over 10 years and $1 trillion over 

20 years, so the potential additional 

gains to IRA investors from this 

proposal could be very large. 

The following accounting table 

summarizes the Department’s 

conclusions: 

TABLE 1—PARTIAL GAINS TO INVESTORS AND COMPLIANCE COSTS ACCOUNTING TABLE

Category Primary 

estimate Low estimate High estimate Year dollar Discount rate (9%) 

Period 

covered 

Partial Gains to Investors 

Annualized, Monetized ($millions/year) ............... $4,243 

$5,170 

$3,830 

4,666 

......................

......................

2015 

2015 

7 

3 

2017–2026 

2017–2026 

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Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 21931 

TABLE 1—PARTIAL GAINS TO INVESTORS AND COMPLIANCE COSTS ACCOUNTING TABLE—Continued 

Category Primary 

estimate Low estimate High estimate Year dollar Discount rate (9%) 

Period 

covered 

Notes: The proposal is expected to deliver large gains for retirement investors. Because of limitations of the literature and other available evidence, only some of these gains can be quantified. The estimates in this table focus only on how load shares paid to brokers affect the size 

of loads IRA investors holding load funds pay and the returns they achieve. These estimates assume that the rule will eliminate (rather than 

just reduce) underperformance associated with the practice of incentivizing broker recommendations through variable front-end-load sharing. 

If, however, the rule’s effectiveness in reducing underperformance is substantially below 100 percent, these estimates may overstate these 

particular gains to investors in the front-end-load mutual fund segment of the IRA market. However, these estimates account for only a fraction of potential conflicts, associated losses, and affected retirement assets. The total gains to IRA investors attributable to the rule may be 

higher than the quantified gains alone for several reasons. For example, the proposal is expected to yield additional gains for IRA investors, 

including potential reductions in excessive trading and associated transaction costs and timing errors (such as might be associated with return 

chasing), improvements in the performance of IRA investments other than front-load mutual funds, and improvements in the performance of 

DC plan investments. 

The partial-gains-to-investors estimates include both economic efficiency benefits and transfers from the financial services industry to IRA holders. 

The partial gains estimates are discounted to December 31, 2015. 

Compliance Costs 

Annualized, Monetized ($millions/year) ............... $348 

328 

......................

......................

$706 

664 

2015 

2015 

7 

3 

2016–2025 

2016–2025 

Notes: The compliance costs of the current proposal including the cost of compliance reviews, comprehensive compliance and supervisory system changes, policies and procedures and training programs updates, insurance increases, disclosure preparation and distribution, and some 

costs of changes in other business practices. Compliance costs incurred by mutual funds or other asset providers have not been estimated. 

Insurance Premium Transfers 

Annualized Monetized ($millions/year) ................ $63 

63 

......................

......................

......................

......................

2015 

2015 

7 

3 

2016–2025 

2016–2025 

From/To ................................................................ From: Service providers facing increased insurance premiums due to increased liability 

risk 

To: Plans, participants, beneficiaries, and IRA 

investors through the payment of recoveries—funded from a portion of the increased insurance premiums 

OMB Circular A–4 requires the 

presentation of a social welfare 

accounting table that summarizes a 

regulation’s benefits, costs and transfers 

(monetized, where possible). A 

summary of this type would differ from 

and expand upon Table I in several 

ways: 

• In the language of social welfare 

economics as reflected in Circular A–4, 

investor gains comprise two parts: 

Social welfare ‘‘benefits’’ attributable to 

improvements in economic efficiency 

and ‘‘transfers’’ of welfare to retirement 

investors from the financial services 

industry. Due to limitations of the 

literature and other available evidence, 

the investor gains estimates presented in 

Table I have not been broken down into 

benefits and transfer components, but 

making the distinction between these 

categories of impacts is key for a social 

welfare accounting statement. 

• The estimates in Table I reflect only 

a subset of the gains to investors 

resulting from the rule, but may 

overstate this subset. As noted in Table 

I, the Department’s estimates of partial 

gains to investors reflect an assumption 

that the rule will eliminate, rather than 

just reduce, underperformance 

associated with the practice of 

incentivizing broker recommendations 

through variable front-end-load sharing. 

If, however, the rule’s effectiveness is 

substantially below 100 percent, these 

estimates would overstate these partial 

gains to investors in the front-load 

mutual fund segment of the IRA market. 

The estimates in Table I also exclude 

additional potential gains to investors 

resulting from reducing or eliminating 

the effects of conflicts in financial 

products other than front-end-load 

mutual funds in the IRA market, and all 

potential gains to investors in the plan 

market. The Department invites input 

that would make it possible to quantify 

the magnitude of the rule’s effectiveness 

and of any additional, not-yet-quantified 

gains for investors. 

• Generally, the gains to investors 

consist of multiple parts: Transfers to 

IRA investors from advisers and others 

in the supply chain, benefits to the 

overall economy from a shift in the 

allocation of investment dollars to 

projects that have higher returns, and 

resource savings associated with, for 

example, reductions in excessive 

turnover and wasteful and unsuccessful 

efforts to outperform the market. Some 

of these gains are partially quantified in 

Table I. Also, the estimates in Table I 

assume the gains to investors arise 

gradually as the fraction of wealth 

invested based on conflicted investment 

advice slowly declines over time based 

on historical patterns of asset turnover. 

However, the estimates do not account 

for potential transition costs associated 

with a shift of investments to higherperforming vehicles. These transition 

costs have not been quantified due to 

lack of granularity in the literature or 

availability of other evidence on both 

the portion of investor gains that 

consists of resource savings, as opposed 

to transfers, and the amount of 

transitional cost that would be incurred 

per unit of resource savings. 

• Other categories of costs not yet 

quantified include compliance costs 

incurred by mutual funds or other asset 

providers. Enforcement costs or other 

costs borne by the government are also 

not quantified. 

The Department requests detailed 

comment, data, and analysis on all of 

the issues outlined above for 

incorporation into the social welfare 

analysis at the finalization stage of the 

rulemaking process. 

For a detailed discussion of the gains 

to investors and compliance costs of the 

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21932 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

4ERISA section 404(a). 

current proposal, please see Section J. 

Regulatory Impact Analysis, below. 

II. Overview 

A. Rulemaking Background 

The market for retirement advice has 

changed dramatically since the 

Department first promulgated the 1975 

regulation. Individuals, rather than large 

employers and professional money 

managers, have become increasingly 

responsible for managing retirement 

assets as IRAs and participant-directed 

plans, such as 401(k) plans, have 

supplanted defined benefit pensions. At 

the same time, the variety and 

complexity of financial products have 

increased, widening the information gap 

between advisers and their clients. Plan 

fiduciaries, plan participants and IRA 

investors must often rely on experts for 

advice, but are unable to assess the 

quality of the expert’s advice or 

effectively guard against the adviser’s 

conflicts of interest. This challenge is 

especially true of small retail investors 

who typically do not have financial 

expertise and can ill-afford lower 

returns to their retirement savings 

caused by conflicts. As baby boomers 

retire, they are increasingly moving 

money from ERISA-covered plans, 

where their employer has both the 

incentive and the fiduciary duty to 

facilitate sound investment choices, to 

IRAs where both good and bad 

investment choices are myriad and 

advice that is conflicted is 

commonplace. Such ‘‘rollovers’’ will 

total more than $2 trillion over the next 

5 years. These trends were not apparent 

when the Department promulgated the 

1975 rule. At that time, 401(k) plans did 

not yet exist and IRAs had only just 

been authorized. These changes in the 

marketplace, as well as the 

Department’s experience with the rule 

since 1975, support the Department’s 

efforts to reevaluate and revise the rule 

through a public process of notice and 

comment rulemaking. 

On October 22, 2010, the Department 

published a proposed rule in the 

Federal Register (75 FR 65263) (2010 

Proposal) proposing to amend 29 CFR 

2510.3–21(c) (40 FR 50843, Oct. 31, 

1975), which defines when a person 

renders investment advice to an 

employee benefit plan, and 

consequently acts as a fiduciary under 

ERISA section 3(21)(A)(ii) (29 U.S.C. 

1002(21)(A)(ii)). In response to this 

proposal, the Department received over 

300 comment letters. A public hearing 

on the 2010 Proposal was held in 

Washington, DC on March 1 and 2, 

2011, at which 38 speakers testified. 

The transcript of the hearing was made 

available for additional public comment 

and the Department received over 60 

additional comment letters. In addition, 

the Department has held many meetings 

with interested parties. 

A number of commenters urged 

consideration of other means to attain 

the objectives of the 2010 Proposal and 

of additional analysis of the proposal’s 

expected costs and benefits. In light of 

these comments and because of the 

significance of this rule, the Department 

decided to issue a new proposed 

regulation. On September 19, 2011 the 

Department announced that it would 

withdraw the 2010 Proposal and 

propose a new rule defining the term 

‘‘fiduciary’’ for purposes of section 

3(21)(A)(ii) of ERISA. This document 

fulfills that announcement in publishing 

both a new proposed regulation and 

withdrawing the 2010 Proposal. 

Consistent with the President’s 

Executive Orders 12866 and 13563, 

extending the rulemaking process will 

give the public a full opportunity to 

evaluate and comment on the revised 

proposal and updated economic 

analysis. In addition, we are 

simultaneously publishing proposed 

new and amended exemptions from 

ERISA and the Code’s prohibited 

transaction rules designed to allow 

certain broker-dealers, insurance agents 

and others that act as investment advice 

fiduciaries to nevertheless continue to 

receive common forms of compensation 

that would otherwise be prohibited, 

subject to appropriate safeguards. The 

existing class exemptions will otherwise 

remain in place, affording flexibility to 

fiduciaries who currently use the 

exemptions or who wish to use the 

exemptions in the future. The proposed 

new regulatory package takes into 

account robust public comment and 

input and represents a substantial 

change from the 2010 Proposal, 

balancing long overdue consumer 

protections with flexibility for the 

industry in order to minimize 

disruptions to current business models. 

In crafting the current regulatory 

package, the Department has benefitted 

from the views and perspectives 

expressed in public comments to the 

2010 Proposal. For example, the 

Department has responded to concerns 

about the impact of the prohibited 

transaction rules on the marketplace for 

retail advice by proposing a broad 

package of exemptions that are intended 

to ensure that advisers and their firms 

make recommendations that are in the 

best interest of plan participants and 

IRA owners, without disrupting 

common fee arrangements. In response 

to commenters, the Department has also 

determined not to include, as fiduciary 

in nature, appraisals or valuations of 

employer securities provided to ESOPs 

or to certain collective investment funds 

holding assets of plan investors. On a 

more technical point, the Department 

also followed recommendations that it 

not automatically assign fiduciary status 

to investment advisers under the 

Advisers Act, but instead follow an 

entirely functional approach to 

fiduciary status. In light of public 

comments, the new proposal also makes 

a number of other changes to the 

regulatory proposal. For example, the 

Department has addressed concerns that 

it could be misread to extend fiduciary 

status to persons that prepare 

newsletters, television commentaries, or 

conference speeches that contain 

recommendations made to the general 

public. Similarly, the rule makes clear 

that fiduciary status does not extend to 

internal company personnel who give 

advice on behalf of their plan sponsor 

as part of their duties, but receive no 

compensation beyond their salary for 

the provision of advice. The Department 

is appreciative of the comments it 

received to the 2010 Proposal, and more 

fully discusses a number of the 

comments that influenced change in the 

sections that follow. In addition, the 

Department is eager to receive 

comments on the new proposal in 

general, and requests public comment 

on a number of specific aspects of the 

package as indicated below. 

The following discussion summarizes 

the 2010 Proposal, describes some of the 

concerns and issues raised by 

commenters, and explains the new 

proposed regulation, which is published 

with this notice. 

B. The Statute and Existing Regulation 

ERISA (or the ‘‘Act’’) is a 

comprehensive statute designed to 

protect the interests of plan participants 

and beneficiaries, the integrity of 

employee benefit plans, and the security 

of retirement, health, and other critical 

benefits. The broad public interest in 

ERISA-covered plans is reflected in the 

Act’s imposition of stringent fiduciary 

responsibilities on parties engaging in 

important plan activities, as well as in 

the tax-favored status of plan assets and 

investments. One of the chief ways in 

which ERISA protects employee benefit 

plans is by requiring that plan 

fiduciaries comply with fundamental 

obligations rooted in the law of trusts. 

In particular, plan fiduciaries must 

manage plan assets prudently and with 

undivided loyalty to the plans and their 

participants and beneficiaries.4 In 

addition, they must refrain from 

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5ERISA section 406. The Act also prohibits 

certain transactions between a plan and a ‘‘party in 

interest.’’ 

6ERISA section 409; see also ERISA section 405. 

7See 26 CFR 54.4975–9(c), which interprets Code 

section 4975(e)(3). 40 FR 50840 (Oct. 31, 1975). 

Under section 102 of Reorganization Plan No. 4 of 

1978, the authority of the Secretary of the Treasury 

to interpret section 4975 of the Code has been 

transferred, with certain exceptions not here 

relevant, to the Secretary of Labor. References in 

this document to sections of ERISA should be read 

to refer also to the corresponding sections of the 

Code. 

engaging in ‘‘prohibited transactions,’’ 

which the Act does not permit because 

of the dangers to the interests of the 

plan and IRA posed by the 

transactions.5 When fiduciaries violate 

ERISA’s fiduciary duties or the 

prohibited transaction rules, they may 

be held personally liable for any losses 

to the investor resulting from the 

breach.6 In addition, violations of the 

prohibited transaction rules are subject 

to excise taxes under the Code. 

The Code also protects individuals 

who save for retirement through taxfavored accounts that are not generally 

covered by ERISA, such as IRAs, 

through a more limited regulation of 

fiduciary conduct. Although ERISA’s 

general fiduciary obligations of 

prudence and loyalty do not govern the 

fiduciaries of IRAs and other plans not 

covered by ERISA, these fiduciaries are 

subject to the prohibited transaction 

rules of the Code. In this context, 

however, the sole statutory sanction for 

engaging in the illegal transactions is 

the assessment of an excise tax enforced 

by the Internal Revenue Service (IRS). 

Thus, unlike participants in plans 

covered by Title I of ERISA, IRA owners 

do not have a statutory right to bring 

suit against fiduciaries under ERISA for 

violation of the prohibited transaction 

rules and fiduciaries are not personally 

liable to IRA owners for the losses 

caused by their misconduct. 

Under this statutory framework, the 

determination of who is a ‘‘fiduciary’’ is 

of central importance. Many of ERISA’s 

and the Code’s protections, duties, and 

liabilities hinge on fiduciary status. In 

relevant part, section 3(21)(A) of ERISA 

provides that a person is a fiduciary 

with respect to a plan to the extent he 

or she (i) exercises any discretionary 

authority or discretionary control with 

respect to management of such plan or 

exercises any authority or control with 

respect to management or disposition of 

its assets; (ii) renders investment advice 

for a fee or other compensation, direct 

or indirect, with respect to any moneys 

or other property of such plan, or has 

any authority or responsibility to do so; 

or, (iii) has any discretionary authority 

or discretionary responsibility in the 

administration of such plan. Section 

4975(e)(3) of the IRC identically defines 

‘‘fiduciary’’ for purposes of the 

prohibited transaction rules set forth in 

Code section 4975. 

The statutory definition contained in 

section 3(21)(A) deliberately casts a 

wide net in assigning fiduciary 

responsibility with respect to plan 

assets. Thus, ‘‘any authority or control’’ 

over plan assets is sufficient to confer 

fiduciary status, and any person who 

renders ‘‘investment advice for a fee or 

other compensation, direct or indirect’’ 

is an investment advice fiduciary, 

regardless of whether they have direct 

control over the plan’s assets, and 

regardless of their status as an 

investment adviser and/or broker under 

the federal securities laws. The statutory 

definition and associated fiduciary 

responsibilities were enacted to ensure 

that plans can depend on persons who 

provide investment advice for a fee to 

make recommendations that are 

prudent, loyal, and untainted by 

conflicts of interest. In the absence of 

fiduciary status, persons who provide 

investment advice would neither be 

subject to ERISA’s fundamental 

fiduciary standards, nor accountable 

under ERISA or the Code for imprudent, 

disloyal, or tainted advice, no matter 

how egregious the misconduct or how 

substantial the losses. Plans, individual 

participants and beneficiaries, and IRA 

owners often are not financial experts 

and consequently must rely on 

professional advice to make critical 

investment decisions. The statutory 

definition, prohibitions on conflicts of 

interest, and core fiduciary obligations 

of prudence and loyalty, all reflect 

Congress’ recognition in 1974 of the 

fundamental importance of such advice 

to protect savers’ retirement nest eggs. 

In the years since then, the significance 

of financial advice has become still 

greater with increased reliance on 

participant-directed plans and selfdirected IRAs for the provision of 

retirement benefits. 

In 1975, the Department issued a 

regulation, at 29 CFR 2510.3–21(c) 

defining the circumstances under which 

a person is treated as providing 

‘‘investment advice’’ to an employee 

benefit plan within the meaning of 

section 3(21)(A)(ii) of ERISA (the ‘‘1975 

regulation’’), and the Department of the 

Treasury issued a virtually identical 

regulation under the Code.7 The 

regulation narrowed the scope of the 

statutory definition of fiduciary 

investment advice by creating a five-part 

test that must be satisfied before a 

person can be treated as rendering 

investment advice for a fee. Under the 

regulation, for advice to constitute 

‘‘investment advice,’’ an adviser who is 

not a fiduciary under another provision 

of the statute must—(1) render advice as 

to the value of securities or other 

property, or make recommendations as 

to the advisability of investing in, 

purchasing or selling securities or other 

property (2) on a regular basis (3) 

pursuant to a mutual agreement, 

arrangement or understanding, with the 

plan or a plan fiduciary that (4) the 

advice will serve as a primary basis for 

investment decisions with respect to 

plan assets, and that (5) the advice will 

be individualized based on the 

particular needs of the plan or IRA. The 

regulation provides that an adviser is a 

fiduciary with respect to any particular 

instance of advice only if he or she 

meets each and every element of the 

five-part test with respect to the 

particular advice recipient or plan at 

issue. 

As the marketplace for financial 

services has developed in the years 

since 1975, the five-part test may now 

undermine, rather than promote, the 

statutes’ text and purposes. The 

narrowness of the 1975 regulation 

allows advisers, brokers, consultants 

and valuation firms to play a central 

role in shaping plan and IRA 

investments, without ensuring the 

accountability that Congress intended 

for persons having such influence and 

responsibility. Even when plan 

sponsors, participants, beneficiaries, 

and IRA owners clearly rely on paid 

advisers for impartial guidance, the 

regulation allows many advisers to 

avoid fiduciary status and disregard 

ERISA’s fiduciary obligations of care 

and prohibitions on disloyal and 

conflicted transactions. As a 

consequence, these advisers can steer 

customers to investments based on their 

own self-interest (e.g., products that 

generate higher fees for the adviser even 

if there are identical lower-fee products 

available), give imprudent advice, and 

engage in transactions that would 

otherwise not be permitted by ERISA 

and the Code without fear of 

accountability under either ERISA or 

the Code. 

Instead of ensuring that trusted 

advisers give prudent and unbiased 

advice in accordance with fiduciary 

norms, the current regulation erects a 

multi-part series of technical 

impediments to fiduciary responsibility. 

The Department is concerned that the 

specific elements of the five-part test— 

which are not found in the text of the 

Act or Code—now work to frustrate 

statutory goals and defeat advice 

recipients’ legitimate expectations. In 

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8Angela A. Hung, Noreen Clancy, Jeff Dominitz, 

Eric Talley, Claude Berrebi, Farrukh Suvankulov, 

Investor and Industry Perspectives on Investment 

Advisers and Broker-Dealers, RAND Institute for 

Civil Justice, commissioned by the U.S. Securities 

and Exchange Commission, 2008, at http://

www.sec.gov/news/press/2008/2008-1_

randiabdreport.pdf 

9U.S. Department of Labor, Private Pension Plan 

Bulletin Historical Tables and Graphs, (Dec. 2014), 

at http://www.dol.gov/ebsa/pdf/historicaltables.pdf. 

light of the importance of the proper 

management of plan and IRA assets, it 

is critical that the regulation defining 

investment advice draws appropriate 

distinctions between the sorts of advice 

relationships that should be treated as 

fiduciary in nature and those that 

should not. In practice, the current 

regulation appears not to do so. Instead, 

the lines drawn by the five-part test 

frequently permit evasion of fiduciary 

status and responsibility in ways that 

undermine the statutory text and 

purposes. 

One example of the five-part test’s 

shortcomings is the requirement that 

advice be furnished on a ‘‘regular 

basis.’’ As a result of the requirement, if 

a small plan hires an investment 

professional or appraiser on a one-time 

basis for an investment recommendation 

or valuation opinion on a large, complex 

investment, the adviser has no fiduciary 

obligation to the plan under ERISA. 

Even if the plan is considering investing 

all or substantially all of the plan’s 

assets, lacks the specialized expertise 

necessary to evaluate the complex 

transaction on its own, and the 

consultant fully understands the plan’s 

dependence on his professional 

judgment, the consultant is not a 

fiduciary because he does not advise the 

plan on a ‘‘regular basis.’’ The plan 

could be investing hundreds of millions 

of dollars in plan assets, and it could be 

the most critical investment decision 

the plan ever makes, but the adviser 

would have no fiduciary responsibility 

under the 1975 regulation. While a 

consultant who regularly makes less 

significant investment 

recommendations to the plan would be 

a fiduciary if he satisfies the other four 

prongs of the regulatory test, the onetime consultant on an enormous 

transaction has no fiduciary 

responsibility. 

In such cases, the ‘‘regular basis’’ 

requirement, which is not found in the 

text of ERISA or the Code, fails to draw 

a sensible line between fiduciary and 

non-fiduciary conduct, and undermines 

the law’s protective purposes. A specific 

example is the one-time purchase of a 

group annuity to cover all of the benefits 

promised to substantially all of a plan’s 

participants for the rest of their lives 

when a defined benefit plan terminates 

or a plan’s expenditure of hundreds of 

millions of dollars on a single real estate 

transaction with the assistance of a 

financial adviser hired for purposes of 

that one transaction. Despite the clear 

importance of the decisions and the 

clear reliance on paid advisers, the 

advisers would not be plan fiduciaries. 

On a smaller scale that is still 

immensely important for the affected 

individual, the ‘‘regular basis’’ 

requirement also deprives individual 

participants and IRA owners of statutory 

protection when they seek specialized 

advice on a one-time basis, even if the 

advice concerns the investment of all or 

substantially all of the assets held in 

their account (e.g., as in the case of an 

annuity purchase or a roll-over from a 

plan to an IRA or from one IRA to 

another). 

Under the five-part test, fiduciary 

status can also be defeated by arguing 

that the parties did not have a mutual 

agreement, arrangement, or 

understanding that the advice would 

serve as a primary basis for investment 

decisions. Investment professionals in 

today’s marketplace frequently market 

retirement investment services in ways 

that clearly suggest the provision of 

tailored or individualized advice, while 

at the same time disclaiming in fine 

print the requisite ‘‘mutual’’ 

understanding that the advice will be 

used as a primary basis for investment 

decisions. 

Similarly, there appears to be a 

widespread belief among broker-dealers 

that they are not fiduciaries with respect 

to plans or IRAs because they do not 

hold themselves out as registered 

investment advisers, even though they 

often market their services as financial 

or retirement planners. The import of 

such disclaimers—and of the fine legal 

distinctions between brokers and 

registered investment advisers—is often 

completely lost on plan participants and 

IRA owners who receive investment 

advice. As shown in a study conducted 

by the RAND Institute for Civil Justice 

for the Securities and Exchange 

Commission (SEC), consumers often do 

not read the legal documents and do not 

understand the difference between 

brokers and registered investment 

advisers particularly when brokers 

adopt such titles as ‘‘financial adviser’’ 

and ‘‘financial manager.’’ 8

Even in the absence of boilerplate fine 

print disclaimers, however, it is far from 

evident how the ‘‘primary basis’’ 

element of the five-part test promotes 

the statutory text or purposes of ERISA 

and the Code. If, for example, a plan 

hires multiple specialized advisers for 

an especially complex transaction, it 

should be able to rely upon all of the 

consultants’ advice, regardless of 

whether one could characterize any 

particular consultant’s advice as 

primary, secondary, or tertiary. 

Presumably, paid consultants make 

recommendations—and retirement 

investors pay for them—with the hope 

or expectation that the 

recommendations could, in fact, be 

relied upon in making important 

decisions. When a plan, participant, 

beneficiary, or IRA owner directly or 

indirectly pays for advice upon which it 

can rely, there appears to be little 

statutory basis for drawing distinctions 

based on a subjective characterization of 

the advice as ‘‘primary,’’ ‘‘secondary,’’ 

or other. 

In other respects, the current 

regulatory definition could also benefit 

from clarification. For example, a 

number of parties have argued that the 

regulation, as currently drafted, does not 

encompass advice as to the selection of 

money managers or mutual funds. 

Similarly, they have argued that the 

regulation does not cover advice given 

to the managers of pooled investment 

vehicles that hold plan assets 

contributed by many plans, as opposed 

to advice given to particular plans. 

Parties have even argued that advice 

was insufficiently ‘‘individualized’’ to 

fall within the scope of the regulation 

because the advice provider had failed 

to prudently consider the ‘‘particular 

needs of the plan,’’ notwithstanding the 

fact that both the advice provider and 

the plan agreed that individualized 

advice based on the plan’s needs would 

be provided, and the adviser actually 

made specific investment 

recommendations to the plan. Although 

the Department disagrees with each of 

these interpretations of the current 

regulation, the arguments nevertheless 

suggest that clarifying regulatory text 

could be helpful. 

Changes in the financial marketplace 

have enlarged the gap between the 1975 

regulation’s effect and the Congressional 

intent of the statutory definition. The 

greatest change is the predominance of 

individual account plans, many of 

which require participants to make 

investment decisions for their own 

accounts. In 1975, private-sector defined 

benefit pensions—mostly large, 

professionally managed funds—covered 

over 27 million active participants and 

held assets totaling almost $186 billion. 

This compared with just 11 million 

active participants in individual 

account defined contribution plans with 

assets of just $74 billion.9 Moreover, the 

great majority of defined contribution 

plans at that time were professionally 

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10U.S. Department of Labor, Private Pension Plan 

Bulletin Abstract of 2012 Form 5500 Annual 

Reports, (Jan. 2015), at http://www.dol.gov/ebsa/

PDF/2012pensionplanbulletin.PDF. 

11U.S. Department of Labor, Private Pension Plan 

Bulletin Abstract of 1999 Form 5500 Annual 

Reports, Number 12, Summer 2004 (Apr. 2008), at 

http://www.dol.gov/ebsa/PDF/

1999pensionplanbulletin.PDF. 

12Brien, Michael J., and Constantijn W.A. Panis. 

Analysis of Financial Asset Holdings of Households 

on the United States: 2013 Update. Advanced 

Analytic Consulting Group and Deloitte, Report 

Prepared for the U.S. Department of Labor, 2014. 

managed, not participant-directed. In 

1975, 401(k) plans did not yet exist and 

IRAs had just been authorized as part of 

ERISA’s enactment the prior year. In 

contrast, by 2012 defined benefit plans 

covered just under 16 million active 

participants, while individual accountbased defined contribution plans 

covered over 68 million active 

participants— including 63 million 

participants in 401(k)-type plans that 

are participant-directed.10

With this transformation, plan 

participants, beneficiaries and IRA 

owners have become major consumers 

of investment advice that is paid for 

directly or indirectly. By 2012, 97 

percent of 401(k) participants were 

responsible for directing the investment 

of all or part of their own account, up 

from 86 percent as recently as 1999.11

Also, in 2013, more than 34 million 

households owned IRAs.12

Many of the consultants and advisers 

who provide investment-related advice 

and recommendations receive 

compensation from the financial 

institutions whose investment products 

they recommend. This gives the 

consultants and advisers a strong bias, 

conscious or unconscious, to favor 

investments that provide them greater 

compensation rather than those that 

may be most appropriate for the 

participants. Unless they are fiduciaries, 

however, these consultants and advisers 

are free under ERISA and the Code, not 

only to receive such conflicted 

compensation, but also to act on their 

conflicts of interest to the detriment of 

their customers. In addition, plans, 

participants, beneficiaries, and IRA 

owners now have a much greater variety 

of investments to choose from, creating 

a greater need for expert advice. 

Consolidation of the financial services 

industry and innovations in 

compensation arrangements have 

multiplied the opportunities for selfdealing and reduced the transparency of 

fees. 

The absence of adequate fiduciary 

protections and safeguards is especially 

problematic in light of the growth of 

participant-directed plans and selfdirected IRAs; the gap in expertise and 

information between advisers and the 

customers who depend upon them for 

guidance; and the advisers’ significant 

conflicts of interest. 

When Congress enacted ERISA in 

1974, it made a judgment that plan 

advisers should be subject to ERISA’s 

fiduciary regime and that plan 

participants, beneficiaries and IRA 

owners should be protected from 

conflicted transactions by the prohibited 

transaction rules. More fundamentally, 

however, the statutory language was 

designed to cover a much broader 

category of persons who provide 

fiduciary investment advice based on 

their functions and to limit their ability 

to engage in self-dealing and other 

conflicts of interest than is currently 

reflected in the five-part test. While 

many advisers are committed to 

providing high-quality advice and 

always put their customers’ best 

interests first, the 1975 regulation makes 

it far too easy for advisers in today’s 

marketplace not to do so and to avoid 

fiduciary responsibility even when they 

clearly purport to give individualized 

advice and to act in the client’s best 

interest, rather than their own. 

C. The 2010 Proposal 

In 2010, the Department proposed a 

new regulation that would have 

replaced the five-part test with a new 

definition of what counted as fiduciary 

investment advice for a fee. At that time, 

the Department did not propose any 

new prohibited transaction exemptions 

and acknowledged uncertainty 

regarding whether existing exemptions 

would be available, but specifically 

invited comments on whether new or 

amended exemptions should be 

proposed. The proposal also provided 

carve-outs for conduct that would not 

result in fiduciary status. The general 

definition included the following types 

of advice: (1) Appraisals or fairness 

opinions concerning the value of 

securities or other property; (2) 

recommendations as to the advisability 

of investing in, purchasing, holding or 

selling securities or other property; and 

(3) recommendations as to the 

management of securities or other 

property. Reflecting the Department’s 

longstanding interpretation of the 1975 

regulations, the 2010 Proposal made 

clear that investment advice under the 

proposal includes advice provided to 

plan participants, beneficiaries and IRA 

owners as well as to plan fiduciaries. 

Under the 2010 Proposal, a paid 

adviser would have been treated as a 

fiduciary if the adviser provided one of 

the above types of advice and either: (1) 

Represented that he or she was acting as 

an ERISA fiduciary; (2) was already an 

ERISA fiduciary to the plan by virtue of 

having control over the management or 

disposition of plan assets, or by having 

discretionary authority over the 

administration of the plan; (3) was 

already an investment adviser under the 

Investment Advisers Act of 1940 

(Advisers Act); or (4) provided the 

advice pursuant to an agreement or 

understanding that the advice may be 

considered in connection with plan 

investment or asset management 

decisions and would be individualized 

to the needs of the plan, plan 

participant or beneficiary, or IRA owner. 

The 2010 Proposal also provided that, 

for purposes of the fiduciary definition, 

relevant fees included any direct or 

indirect fees received by the adviser or 

an affiliate from any source. Direct fees 

are payments made by the advice 

recipient to the adviser including 

transaction-based fees, such as 

brokerage, mutual fund or insurance 

sales commissions. Indirect fees are 

payments to the adviser from any source 

other than the advice recipient such as 

revenue sharing payments from a 

mutual fund. 

The 2010 Proposal included specific 

carve-outs for the following actions that 

the Department believed should not 

result in fiduciary status. In particular, 

a person would not have become a 

fiduciary by— 

1. Providing recommendations as a 

seller or purchaser with interests 

adverse to the plan, its participants, or 

IRA owners, if the advice recipient 

reasonably should have known that the 

adviser was not providing impartial 

investment advice and the adviser had 

not acknowledged fiduciary status. 

2. Providing investment education 

information and materials in connection 

with an individual account plan. 

3. Marketing or making available a 

menu of investment alternatives that a 

plan fiduciary could choose from, and 

providing general financial information 

to assist in selecting and monitoring 

those investments, if these activities 

include a written disclosure that the 

adviser was not providing impartial 

investment advice. 

4. Preparing reports necessary to 

comply with ERISA, the Code, or 

regulations or forms issued thereunder, 

unless the report valued assets that lack 

a generally recognized market, or served 

as a basis for making plan distributions. 

The 2010 Proposal applied to the 

definition of an ‘‘investment advice 

fiduciary’’ in section 4975(e)(3)(B) of the 

Code as well as to the parallel ERISA 

definition. These provisions apply to 

both certain ERISA covered plans, and 

certain non-ERISA plans such as 

individual retirement accounts. 

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13As discussed below in Section E. Coverage of 

IRAs and Other Non-ERISA Plans, in recognition of 

differences among the various types of non-ERISA 

plan arrangements described in Code section 

4975(e)(1)(B) through (F), the Department solicits 

comments on whether it is appropriate for the 

regulation to cover the full range of these 

arrangements. These non-ERISA plan arrangements 

are tax favored vehicles under the Code like IRAs, 

but are not intended for retirement savings. 

In the preamble to the 2010 Proposal, 

the Department also noted that it had 

previously interpreted the 1975 

regulation as providing that a 

recommendation to a plan participant 

on how to invest the proceeds of a 

contemplated plan distribution was not 

fiduciary investment advice. Advisory 

Opinion 2005–23A (Dec. 7, 2005). The 

Department specifically asked for 

comments as to whether the final rule 

should include such recommendations 

as fiduciary advice. 

The 2010 Proposal prompted a large 

number of comments and a vigorous 

debate. As noted above, the Department 

made special efforts to encourage the 

regulated community’s participation in 

this rulemaking. In addition to an 

extended comment period, the 

Department held a two-day public 

hearing. Additional time for comments 

was allowed following the hearing and 

publication of the hearing transcript on 

the Department’s Web site and 

Department representatives held 

numerous meetings with interested 

parties. Many of the comments 

concerned the Department’s conclusions 

regarding the likely economic impact of 

the proposal, if adopted. A number of 

commenters urged the Department to 

undertake additional analysis of 

expected costs and benefits particularly 

with regard to the 2010 Proposal’s 

coverage of IRAs. After consideration of 

these comments and in light of the 

significance of this rulemaking to the 

retirement plan service provider 

industry, plan sponsors and 

participants, beneficiaries and IRA 

owners, the Department decided to take 

more time for review and to issue a new 

proposed regulation for comment. 

D. The New Proposal 

The new proposed rule makes many 

revisions to the 2010 Proposal, although 

it also retains aspects of that proposal’s 

essential framework. The new proposal 

broadly updates the definition of 

fiduciary investment advice, and also 

provides a series of carve-outs from the 

fiduciary investment advice definition 

for communications that should not be 

viewed as fiduciary in nature. The 

definition generally covers the following 

categories of advice: (1) Investment 

recommendations, (2) investment 

management recommendations, (3) 

appraisals of investments, or (4) 

recommendations of persons to provide 

investment advice for a fee or to manage 

plan assets. Persons who provide such 

advice fall within the general definition 

of a fiduciary if they either (a) represent 

that they are acting as a fiduciary under 

ERISA or the Code or (b) provide the 

advice pursuant to an agreement, 

arrangement, or understanding that the 

advice is individualized or specifically 

directed to the recipient for 

consideration in making investment or 

investment management decisions 

regarding plan assets. 

The new proposal includes several 

carve-outs for persons who do not 

represent that they are acting as ERISA 

fiduciaries, some of which were 

included in some form in the 2010 

Proposal but many of which were not. 

Subject to specified conditions, these 

carve-outs cover— 

(1) Statements or recommendations 

made to a ‘‘large plan investor with 

financial expertise’’ by a counterparty 

acting in an arm’s length transaction; 

(2) offers or recommendations to plan 

fiduciaries of ERISA plans to enter into 

a swap or security-based swap that is 

regulated under the Securities Exchange 

Act or the Commodity Exchange Act; 

(3) statements or recommendations 

provided to a plan fiduciary of an 

ERISA plan by an employee of the plan 

sponsor if the employee receives no fee 

beyond his or her normal compensation; 

(4) marketing or making available a 

platform of investment alternatives to be 

selected by a plan fiduciary for an 

ERISA participant-directed individual 

account plan; 

(5) the identification of investment 

alternatives that meet objective criteria 

specified by a plan fiduciary of an 

ERISA plan or the provision of objective 

financial data to such fiduciary; 

(6) the provision of an appraisal, 

fairness opinion or a statement of value 

to an ESOP regarding employer 

securities, to a collective investment 

vehicle holding plan assets, or to a plan 

for meeting reporting and disclosure 

requirements; and 

(7) information and materials that 

constitute ‘‘investment education’’ or 

‘‘retirement education.’’ 

The new proposal applies the same 

definition of ‘‘investment advice’’ to the 

definition of ‘‘fiduciary’’ in section 

4975(e)(3) of the Code and thus applies 

to investment advice rendered to IRAs. 

‘‘Plan’’ is defined in the new proposal 

to mean any employee benefit plan 

described in section 3(3) of the Act and 

any plan described in section 

4975(e)(1)(A) of the Code. For ease of 

reference in this proposal, the term 

‘‘IRA’’ has been inclusively defined to 

mean any account described in Code 

section 4975(e)(1)(B) through (F), such 

as a true individual retirement account 

described under Code section 408(a) 

and a health savings account described 

in section 223(d) of the Code.13

Many of the differences between the 

new proposal and the 2010 Proposal 

reflect the input of commenters on the 

2010 Proposal as part of the public 

notice and comment process. For 

example, some commenters argued that 

the 2010 Proposal swept too broadly by 

making investment recommendations 

fiduciary in nature simply because the 

adviser was a plan fiduciary for 

purposes unconnected with the advice 

or an investment adviser under the 

Advisers Act. In their view, such statusbased criteria were in tension with the 

Act’s functional approach to fiduciary 

status and would have resulted in 

unwarranted and unintended 

compliance issues and costs. Other 

commenters objected to the lack of a 

requirement for these status-based 

categories that the advice be 

individualized to the needs of the 

advice recipient. The new proposal 

incorporates these suggestions: An 

adviser’s status as an investment adviser 

under the Advisers Act or as an ERISA 

fiduciary for reasons unrelated to advice 

are no longer factors in the definition. 

In addition, unless the adviser 

represents that he or she is a fiduciary 

with respect to advice, the advice must 

be provided pursuant to an agreement, 

arrangement, or understanding that the 

advice is individualized or specifically 

directed to the recipient to be treated as 

fiduciary advice. 

Furthermore, the carve-outs that treat 

certain conduct as non-fiduciary in 

nature have been modified, clarified, 

and expanded in response to comments. 

For example, the carve-out for certain 

valuations from the definition of 

fiduciary investment advice has been 

modified and expanded. Under the 2010 

Proposal, appraisals and valuations for 

compliance with certain reporting and 

disclosure requirements were not 

treated as fiduciary advice. The new 

proposal additionally provides a carveout from fiduciary treatment for 

appraisal and fairness opinions for 

ESOPs regarding employer securities. 

Although, the Department remains 

concerned about valuation advice 

concerning an ESOP’s purchase of 

employer stock and about a plan’s 

reliance on that advice, the Department 

has concluded that the concerns 

regarding valuations of closely held 

employer stock in ESOP transactions 

raise unique issues that are more 

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14Reorganization Plan No. 4 of 1978. 

appropriately addressed in a separate 

regulatory initiative. Additionally, the 

carve-out for valuations conducted for 

reporting and disclosure purposes has 

been expanded to include reporting and 

disclosure obligations outside of ERISA 

and the Code, and is applicable to both 

ERISA plans and IRAs. Many other 

modifications to the other carve-outs 

from fiduciary status, as well as new 

carve-outs and prohibited transaction 

exemptions, are described below in 

Section IV—‘‘The Provisions of the New 

Proposal.’’ 

III. Coordination With Other Federal 

Agencies 

Many comments to the 2010 

rulemaking emphasized the need to 

harmonize the Department’s efforts with 

rulemaking activities under the DoddFrank Wall Street Reform and Consumer 

Protection Act, Pub. Law No. 111–203, 

124 Stat. 1376 (2010), (Dodd-Frank Act), 

in particular, the Security and Exchange 

Commission’s (SEC) standards of care 

for providing investment advice and the 

Commodity Futures Trading 

Commission’s (CFTC) business conduct 

standards for swap dealers. While the 

2010 Proposal discussed statutes over 

which the SEC and CFTC have 

jurisdiction, it did not specifically 

describe inter-agency coordination 

efforts. In addition, commenters 

questioned the adequacy of 

coordination with other agencies 

regarding IRA products and services. 

They argued that subjecting SECregulated investment advisers and 

broker-dealers to a special set of ERISA 

rules for plans and IRAs could lead to 

additional costs and complexities for 

individuals who may have several 

different types of accounts at the same 

financial institution some of which may 

be subject only to the SEC rules, and 

others of which may be subject to both 

SEC rules and new regulatory 

requirements under ERISA. 

In the course of developing the new 

proposal and the related proposed 

prohibited transaction exemptions, the 

Department has consulted with staff of 

the SEC and other regulators on an 

ongoing basis regarding whether the 

proposals would subject investment 

advisers and broker-dealers who 

provide investment advice to 

requirements that create an undue 

compliance burden or conflict with 

their obligations under other federal 

laws. As part of this consultative 

process, SEC staff has provided 

technical assistance and information 

with respect to retail investors, the 

marketplace for investment advice and 

coordinating, to the extent possible, the 

agencies’ separate regulatory provisions 

and responsibilities. As the Department 

moves forward with this project in 

accordance with the specific provisions 

of ERISA and the Code, it will continue 

to consult with staff of the SEC and 

other regulators on its proposals and 

their impact on retail investors and 

other regulatory regimes. One result of 

these discussions, particularly with staff 

of the CFTC and SEC, is the new 

provision at paragraph (b)(1)(ii) of the 

proposed regulations concerning 

counterparty transactions with swap 

dealers, major swap participants, 

security-based swap dealers, and major 

security-based swap participants. Under 

the terms of that paragraph, such 

persons would not be treated as ERISA 

fiduciaries merely because, when acting 

as counterparties to swap or securitybased swap transactions, they give 

information and perform actions 

required for compliance with the 

requirements of the business conduct 

standards of the Dodd-Frank Act and its 

implementing regulations. 

In pursuing these consultations, the 

Department has aimed to coordinate and 

minimize conflicting or duplicative 

provisions between ERISA, the Code 

and federal securities laws, to the extent 

possible. However, the governing 

statutes do not permit the Department to 

make the obligations of fiduciary 

investment advisers under ERISA and 

the Code identical to the duties of 

advice providers under the securities 

laws. ERISA and the Code establish 

consumer protections for some 

investment advice that does not fall 

within the ambit of federal securities 

laws, and vice versa. Even if each of the 

relevant agencies were to adopt an 

identical definition of ‘‘fiduciary’’, the 

legal consequences of the fiduciary 

designation would vary between 

agencies because of differences in the 

specific duties and remedies established 

by the different federal laws at issue. 

ERISA and the Code place special 

emphasis on the elimination or 

mitigation of conflicts of interest and 

adherence to substantive standards of 

conduct, as reflected in the prohibited 

transaction rules and ERISA’s standards 

of fiduciary conduct. The specific duties 

imposed on fiduciaries by ERISA and 

the Code stem from legislative 

judgments on the best way to protect the 

public interest in tax-preferred benefit 

arrangements that are critical to 

workers’ financial and physical health. 

The Department has taken great care to 

honor ERISA and the Code’s specific 

text and purposes. 

At the same time, the Department has 

worked hard to understand the impact 

of the proposed rule on firms subject to 

the securities laws and other federal 

laws, and to take the effects of those 

laws into account so as to appropriately 

calibrate the impact of the rule on those 

firms. The proposed regulation reflects 

these efforts. In the Department’s view, 

it neither undermines, nor contradicts, 

the provisions or purposes of the 

securities laws, but instead works in 

harmony with them. The Department 

has coordinated—and will continue to 

coordinate—its efforts with other federal 

agencies to ensure that the various legal 

regimes are harmonized to the fullest 

extent possible. 

The Department has also consulted 

with the Department of the Treasury 

and the IRS, particularly on the subject 

of IRAs. Although the Department has 

responsibility for issuing regulations 

and prohibited transaction exemptions 

under section 4975 of the Code, which 

applies to IRAs, the IRS maintains 

general responsibility for enforcing the 

tax laws. The IRS’ responsibilities 

extend to the imposition of excise taxes 

on fiduciaries who participate in 

prohibited transactions.14 As a result, 

the Department and the IRS share 

responsibility for combating self-dealing 

by fiduciary investment advisers to taxqualified plans and IRAs. Paragraph (e) 

of the proposed regulation, in particular, 

recognizes this jurisdictional 

intersection. 

When the Department announced that 

it would issue a new proposal, it stated 

that it would consider proposing new 

and/or amended prohibited transaction 

exemptions to address the concerns of 

commenters about the broader scope of 

the fiduciary definition and its impact 

on the fee practices of brokers and other 

advisers. Commenters had expressed 

concern about whether longstanding 

exemptions granted by the Department 

allowing advisers, despite their 

fiduciary status under ERISA, to receive 

commissions in connection with mutual 

funds, securities and insurance products 

would remain applicable under the new 

rule. As explained more fully below, the 

Department is simultaneously 

publishing in the notice section of 

today’s Federal Register proposed 

prohibited transaction class exemptions 

to address these concerns. The 

Department believes that existing 

exemptions and these new proposed 

exemptions would preserve the ability 

to engage in common fee arrangements, 

while protecting plan participants, 

beneficiaries and IRA owners from 

abusive practices that may result from 

conflicts of interest. 

The terms of these new exemptions 

are discussed in more detail below and 

in the preambles to the proposed 

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21938 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

15For purposes of readability, this proposed 

rulemaking republishes 29 CFR 2510.3–21 in its 

entirety, as revised, rather than only the specific 

amendments to this section. See 29 CFR 2510.3– 

21(d)—Execution of securities transactions. 

16See also FINRA’s Regulatory Notice 11–02, 12– 

25 and 12–55. Regulatory Notice 11–02 includes the 

following discussion: 

For instance, a communication’s content, context 

and presentation are important aspects of the 

inquiry. The determination of whether a 

‘‘recommendation’’ has been made, moreover, is an 

objective rather than subjective inquiry. An 

important factor in this regard is whether—given its 

content, context and manner of presentation—a 

particular communication from a firm or associated 

person to a customer reasonably would be viewed 

as a suggestion that the customer take action or 

refrain from taking action regarding a security or 

investment strategy. In addition, the more 

individually tailored the communication is to a 

particular customer or customers about a specific 

security or investment strategy, the more likely the 

communication will be viewed as a 

recommendation. Furthermore, a series of actions 

that may not constitute recommendations when 

viewed individually may amount to a 

recommendation when considered in the aggregate. 

It also makes no difference whether the 

communication was initiated by a person or a 

computer software program. These guiding 

principles, together with numerous litigated 

decisions and the facts and circumstances of any 

particular case, inform the determination of 

whether the communication is a recommendation 

for purposes of FINRA’s suitability rule. 

exemptions. While the exemptions 

differ in terms and coverage, each 

imposes a ‘‘best interest’’ standard on 

fiduciary investment advisers. Thus, for 

example, the Best Interest Contract 

Exemption requires the investment 

advice fiduciary and associated 

financial institution to expressly agree 

to provide advice that is in the ‘‘best 

interest’’ of the advice recipient. As 

proposed, the best interest standard is 

intended to mirror the duties of 

prudence and loyalty, as applied in the 

context of fiduciary investment advice 

under sections 404(a)(1)(A) and (B) of 

ERISA. Thus, the ‘‘best interest’’ 

standard is rooted in the longstanding 

trust-law duties of prudence and loyalty 

adopted in section 404 of ERISA and in 

the cases interpreting those standards. 

Accordingly, the Best Interest 

Contract Exemption provides: 

Investment advice is in the ‘‘Best Interest’’ 

of the Retirement Investor when the Adviser 

and Financial Institution providing the 

advice act with the care, skill, prudence, and 

diligence under the circumstances then 

prevailing that a prudent person would 

exercise based on the investment objectives, 

risk tolerance, financial circumstances and 

needs of the Retirement Investor, without 

regard to the financial or other interests of 

the Adviser, Financial Institution, any 

Affiliate, Related Entity, or other party. 

This ‘‘best interest’’ standard is not 

intended to add to or expand the ERISA 

section 404 standards of prudence and 

loyalty as they apply to the provision of 

investment advice to ERISA covered 

plans. Advisers to ERISA-covered plans 

are already required to adhere to the 

fundamental standards of prudence and 

loyalty, and can be held accountable for 

violations of the standards. Rather, the 

primary impact of the ‘‘best interest’’ 

standard is on the IRA market. Under 

the Code, advisers to IRAs are subject 

only to the prohibited transaction rules. 

Incorporating the best interest standard 

in the proposed Best Interest Contract 

Exemption effectively requires advisers 

to comply with these basic fiduciary 

standards as a condition of engaging in 

transactions that would otherwise be 

prohibited because of the conflicts of 

interest they create. Additionally, the 

exemption ensures that IRA owners and 

investors have a contract-based claim to 

hold their fiduciary advisers 

accountable if they violate these basic 

obligations of prudence and loyalty. As 

under current law, no private right of 

action under ERISA is available to IRA 

owners. 

IV. The Provisions of the New Proposal 

The new proposal would amend the 

definition of investment advice in 29 

CFR 2510.3–21 (1975) of the regulation 

to replace the restrictive five-part test 

with a new definition that better 

comports with the statutory language in 

ERISA and the Code.15 As explained 

below, the proposal accomplishes this 

by first describing the kinds of 

communications and relationships that 

would generally constitute fiduciary 

investment advice if the adviser receives 

a fee or other compensation. Rather than 

add additional elements that must be 

met in all instances, as under the 

current regulation, the proposal 

describes several specific types of 

advice or communications that would 

not be treated as investment advice. In 

the Department’s view, this structure is 

faithful to the remedial purpose of the 

statute, but avoids burdening activities 

that do not implicate relationships of 

trust and expectations of impartiality. 

A. Categories of Advice or 

Recommendations 

Paragraph (a)(1) of the proposal sets 

forth the following types of advice, 

which, when provided in exchange for 

a fee or other compensation, whether 

directly or indirectly, and given under 

circumstances described in paragraph 

(a)(2), would be ‘‘investment advice’’ 

unless one of the carve-outs in 

paragraph (b) applies. The listed types 

of advice are— 

(i) A recommendation as to the 

advisability of acquiring, holding, 

disposing of or exchanging securities or 

other property, including a 

recommendation to take a distribution 

of benefits or a recommendation as to 

the investment of securities or other 

property to be rolled over or otherwise 

distributed from the plan or IRA; 

(ii) A recommendation as to the 

management of securities or other 

property, including recommendations as 

to the management of securities or other 

property to be rolled over or otherwise 

distributed from the plan or IRA; 

(iii) An appraisal, fairness opinion, or 

similar statement whether verbal or 

written concerning the value of 

securities or other property if provided 

in connection with a specific 

transaction or transactions involving the 

acquisition, disposition, or exchange, of 

such securities or other property by the 

plan or IRA; or 

(iv) A recommendation of a person 

who is also going to receive a fee or 

other compensation to provide any of 

the types of advice described in 

paragraphs (i) through (iii) above. 

Except for the prong of the definition 

concerning appraisals and valuations 

discussed below, the proposal is 

structured so that communications must 

constitute a ‘‘recommendation’’ to fall 

within the scope of fiduciary investment 

advice. In that regard, as stated earlier 

in Section III concerning coordination 

with other Federal Agencies, the 

Department has consulted with staff of 

other agencies with rulemaking 

authority over investment advisers and 

broker-dealers. FINRA Policy Statement 

01–23 sets forth guidelines to assist 

brokers in evaluating whether a 

particular communication could be 

viewed as a recommendation, thereby 

triggering application of FINRA’s Rule 

2111 that requires that a firm or 

associated person have a reasonable 

basis to believe that a recommended 

transaction or investment strategy 

involving a security or securities is 

suitable for the customer.16 Although 

the regulatory context for the FINRA 

guidance is somewhat different, the 

Department believes that it provides 

useful standards and guideposts for 

distinguishing investment education 

from investment advice under ERISA. 

Accordingly, the Department 

specifically solicits comments on 

whether it should adopt some or all of 

the standards developed by FINRA in 

defining communications that rise to the 

level of a recommendation for purposes 

of distinguishing between investment 

education and investment advice under 

ERISA. 

Additionally, as paragraph (d) of the 

proposal makes clear, the regulation 

does not treat the mere execution of a 

securities transaction at the direction of 

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Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 21939 

a plan or IRA owner as fiduciary 

activity. This paragraph remains 

unchanged from the 1975 regulation 

other than to update references to the 

proposal’s structure. The definition’s 

scope remains limited to advice 

relationships, as delineated in its text 

and does not impact merely 

administrative or ministerial activities 

necessary for a plan or IRA’s 

functioning. It also does not apply to 

order taking where no advice is 

provided. 

(1) Recommendations To Distribute Plan 

Assets 

Paragraph (a)(1)(i) specifically 

includes recommendations concerning 

the investment of securities to be rolled 

over or otherwise distributed from the 

plan or IRA. Noting the Department’s 

position in Advisory Opinion 2005–23A 

that it is not fiduciary advice to make 

a recommendation as to distribution 

options even if that is accompanied by 

a recommendation as to where the 

distribution would be invested, (Dec. 7, 

2005), the 2010 Proposal did not 

include this type of advice, but the 

Department requested comments on 

whether it should be included in a final 

regulation. Some commenters stated 

that exclusion of this advice from the 

final rule would fail to protect 

participant accounts from conflicted 

advice in connection with one of the 

most significant financial decisions that 

participants make concerning retirement 

savings. Other commenters argued that 

including this advice would give rise to 

prohibited transactions that could 

disrupt the routine process that occurs 

when a worker leaves a job, contacts a 

financial services firm for help rolling 

over a 401(k) balance, and the firm 

explains the investments it offers and 

the benefits of a rollover. 

The proposed regulation, if finalized, 

would supersede Advisory Opinion 

2005–23A. Thus, recommendations to 

take distributions (and thereby 

withdraw assets from existing plan or 

IRA investments or roll over into a plan 

or IRA) or to entrust plan or IRA assets 

to particular money managers, advisers, 

or investments would fall within the 

scope of covered advice. However, as 

the proposal’s text makes clear, one 

does not act as a fiduciary merely by 

providing participants with information 

about plan or IRA distribution options, 

including the consequences associated 

with the available types of benefit 

distributions. In this regard, the new 

proposal draws an important distinction 

between fiduciary investment advice 

and non-fiduciary investment 

information and educational materials. 

The Department believes that the 

proposal’s treatment of such nonfiduciary educational and informational 

materials adequately covers the 

common types of distribution-related 

information that participants find 

useful, including information relating to 

annuitizations and other forms of 

lifetime income payment options, but 

welcomes input on other types of 

information that would help clarify the 

line between advice and education in 

this context. 

(2) Recommendations as to the 

Management of Plan Investments 

The preamble to the 2010 Proposal 

stated that the ‘‘management of 

securities or other property’’ would 

include advice and recommendations as 

to the exercise of rights appurtenant to 

shares of stock (e.g., voting proxies). 75 

FR 65266 (Oct. 22, 2010). The 

Department has long viewed the 

exercise of ownership rights as a 

fiduciary responsibility because of its 

material effect on plan investment goals. 

29 CFR 2509.08–2 (2008). Consequently, 

individualized or specifically directed 

advice and recommendations on the 

exercise of proxy or other ownership 

rights are appropriately treated as 

fiduciary in nature. Accordingly, the 

proposed regulation’s provision on 

advice regarding the management of 

securities or other property would 

continue to cover individualized advice 

or recommendations as to proxy voting 

and the management of retirement 

assets in paragraph (a)(1)(ii). 

We received comments on the 2010 

proposal seeking some clarification 

regarding its application to certain 

practices. In this regard, it is the 

Department’s view that guidelines or 

other information on voting policies for 

proxies that are provided to a broad 

class of investors without regard to a 

client’s individual interests or 

investment policy, and which are not 

directed or presented as a recommended 

policy for the plan or IRA to adopt, 

would not rise to the level of fiduciary 

investment advice under the proposal. 

Additionally, a recommendation 

addressed to all shareholders in a proxy 

statement would not result in fiduciary 

status on the part of the issuer of the 

statement or the person who distributes 

the proxy statement. These positions are 

clarified in the proposed regulation. 

(3) Appraisals 

The new proposal, like the current 

regulation which includes ‘‘advice as to 

the value of securities or other 

property,’’ continues to cover certain 

appraisals and valuation reports. 

However, it is considerably more 

focused than the 2010 Proposal. 

Responding to comments, the proposal 

in paragraph (a)(1)(iii) covers only 

appraisals, fairness opinions, or similar 

statements that relate to a particular 

transaction. The Department also 

expanded the 2010 Proposal’s carve-out 

for general reports or statements of 

value provided to satisfy required 

reporting and disclosure rules under 

ERISA or the Code. The carve-out in the 

2010 proposal covered general reports 

or statements of value that merely 

reflected the value of an investment of 

a plan or a participant or beneficiary, 

and provided for purposes of 

compliance with the reporting and 

disclosure requirements of ERISA, the 

Code, and the regulations, forms and 

schedules issued thereunder, unless the 

reports involved assets for which there 

was not a generally recognized market 

and served as a basis on which a plan 

could make distributions to plan 

participants and beneficiaries. The 

carve-out was broadened in this 

proposal to includes valuations 

provided solely for purposes of 

compliance with the reporting and 

disclosure provisions under the Act, the 

Code, and the regulations, forms and 

schedules issued thereunder, or any 

applicable reporting or disclosure 

requirement under a Federal or state 

law, or rule or regulation or selfregulatory organization (e.g., FINRA) 

without regard to the type of asset 

involved. In this manner, the new 

proposal focuses on instances where the 

plan or IRA owner is looking to the 

appraiser for advice on the market value 

of an asset that the investor is 

considering to acquire, dispose, or 

exchange. In many cases the most 

important investment advice that an 

investor receives is advice as to how 

much it can or should pay for hard-tovalue assets. In response to comments, 

the proposal also contains an entirely 

new carve-out at paragraph (b)(5)(ii) 

specifically addressing valuations or 

appraisals provided to an investment 

fund (e.g., collective investment fund or 

pooled separate account) holding assets 

of various investors in addition to at 

least one plan or IRA. Also, as 

mentioned, the Department has decided 

not to extend fiduciary coverage to 

valuations or appraisals for ESOPs 

relating to employer securities at this 

time because the Department has 

concluded that its concerns in this 

space raise unique issues that are more 

appropriately addressed in a separate 

regulatory initiative. The proposal’s 

carve-outs do not apply, however, if the 

provider of the valuation represents or 

acknowledges that it is acting as a 

fiduciary with respect to the advice. 

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21940 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

17A number of commenters also pointed to such 

professional standards as alternatives to fiduciary 

treatment under ERISA. While the Department 

believes that such professional standards are fully 

consistent with the fiduciary duties, the rights, 

remedies and sanctions under both ERISA and the 

Code importantly turn on fiduciary status, and 

advice on the value of an asset is often the most 

critical investment advice a plan receives. As a 

result, treating appraisals as fiduciary advice 

provides an additional layer of protection for 

consumers without conflicting with the duties of 

appraisers. 

Some representatives of the appraisal 

industry submitted comments on the 

2010 Proposal arguing that ERISA’s 

fiduciary duty to act solely in the 

interest of the plan and its participants 

and beneficiaries is inconsistent with 

the duty of appraisers to provide 

objective, independent value 

determinations. The Department 

disagrees. A biased or inaccurate 

appraisal does not help a plan, a 

participant or a beneficiary make 

prudent investment decisions. Like 

other forms of investment advice, an 

appraisal is a tool for plan fiduciaries, 

participants, beneficiaries, and IRA 

owners to use in deciding what price to 

pay for assets and whether to accept or 

decline proposed transactions. An 

appraiser complies with his or her 

obligations as an appraiser—and as a 

loyal fiduciary—by giving plan 

fiduciaries or participants an impartial 

and accurate assessment of the value of 

an asset in accordance with appraisers’ 

professional standard of care. Nothing 

in ERISA or this regulation should be 

read as compelling an appraiser to slant 

valuation opinions to reflect what the 

plan wishes the asset were worth rather 

than what it is really worth. As stated 

in the preamble to the 2010 Proposal, 

the Department would expect a 

fiduciary appraiser’s determination of 

value to be unbiased, fair and objective 

and to be made in good faith based on 

a prudent investigation under the 

prevailing circumstances then known to 

the appraiser. In the Department’s view, 

these fiduciary standards are fully 

consistent with professional standards, 

such as the Uniform Standards of 

Professional Appraisal Practice 

(USPAP).17

(4) Recommendations of a Person To 

Provide Investment Advice or 

Management Services 

The proposal would treat 

recommendations on the selection of 

investment managers or advisers as 

fiduciary investment advice. In the 

Department’s view, the current 

regulation already covers such advice. 

The proposal simply revises the 

regulation’s text to remove any possible 

ambiguity. The Department believes that 

such advice should be treated as 

fiduciary in nature if provided under 

the circumstances in paragraph (a)(1)(iv) 

and for direct or indirect compensation. 

Covered advice would include 

recommendations of persons to perform 

asset management services or to make 

investment recommendations. Advice as 

to the identity of the person entrusted 

with investment authority over 

retirement assets is often critical to the 

proper management and investment of 

those assets. On the other hand, general 

advice as to the types of qualitative and 

quantitative criteria to consider in 

hiring an investment manager would 

not rise to the level of a 

recommendation of a person to manage 

plan investments nor would a trade 

journal’s endorsement of an investment 

manager. Similarly, the proposed 

regulation would not cover 

recommendations of administrative 

service providers, property managers, or 

other service providers who do not 

provide investment services. 

B. The Circumstances Under Which 

Advice Is Provided 

As provided in paragraph (a)(2) of the 

proposal, unless a carve-out applies, a 

category of advice listed in the proposal 

would constitute ‘‘investment advice’’ if 

the person providing the advice, either 

directly or indirectly (e.g., through or 

together with any affiliate)— 

(i) Represents or acknowledges that it 

is acting as a fiduciary within the 

meaning of the Act or Code with respect 

to the advice described in paragraph 

(a)(1); or 

(ii) Renders the advice pursuant to a 

written or verbal agreement, 

arrangement or understanding that the 

advice is individualized to, or that such 

advice is specifically directed to, the 

advice recipient for consideration in 

making investment or management 

decisions with respect to securities or 

other property of the plan or IRA. 

Under paragraph (a)(2)(i), advisers 

who claim fiduciary status under ERISA 

or the Code in providing advice would 

be taken at their word. They may not 

later argue that the advice was not 

fiduciary in nature. Nor may they rely 

upon the carve-outs described in 

paragraph (b) on the scope of the 

definition of fiduciary investment 

advice. 

The 2010 Proposal provided that 

investment recommendations provided 

by an investment adviser under the 

Advisers Act would, in the absence of 

a carve-out, automatically be treated as 

investment advice. In response to 

comments, the new proposal drops this 

provision. Thus, the proposal avoids 

making such persons fiduciaries based 

solely on their or an affiliate’s status as 

an investment adviser under the 

Advisers Act. Instead, their fiduciary 

status would be determined by reference 

to the same functional test that applies 

to all persons under the regulation. 

Paragraph (a)(2)(ii) of the proposal 

avoids treating recommendations made 

to the general public, or to no one in 

particular, as investment advice and 

thus addresses concerns that the general 

circulation of newsletters, television 

talk show commentary, or remarks in 

speeches and presentations at financial 

industry educational conferences would 

result in the person being treated as a 

fiduciary. This paragraph requires an 

agreement, arrangement, or 

understanding that advice is directed to, 

a specific recipient for consideration in 

making investment decisions. The 

parties need not have a meeting of the 

minds on the extent to which the advice 

recipient will actually rely on the 

advice, but they must agree or 

understand that the advice is 

individualized or specifically directed 

to the particular advice recipient for 

consideration in making investment 

decisions. In this respect, paragraph 

(a)(2)(ii) differs significantly from its 

counterpart in the 2010 Proposal. In 

particular, and in response to 

comments, the proposal does not 

require that advice be individualized to 

the needs of the plan, participant or 

beneficiary or IRA owner if the advice 

is specifically directed to such recipient. 

Under the proposal, advisers could not 

specifically direct investment 

recommendations to individual persons, 

but then deny fiduciary responsibility 

on the basis that they did not, in fact, 

consider the advice recipient’s 

individual needs or intend that the 

recipient base investment decisions on 

their recommendations. Nor could they 

continue the practice of advertising 

advice or counseling that is one-on-one 

or that a reasonable person would 

believe would be tailored to their 

individual needs and then disclaim that 

the recommendations are fiduciary 

investment advice in boilerplate 

language in the advertisement or in the 

paperwork provided to the client. 

Like the 2010 Proposal, and unlike 

the 1975 regulation, the new proposal 

does not require that advice be provided 

on a regular basis. Investment advice 

that meets the requirements of the 

proposal, even if provided only once, 

can be critical to important investment 

decisions. If the adviser received a 

direct or indirect fee in connection with 

its advice, the advice recipients should 

reasonably expect adherence to 

fiduciary standards on the same terms 

as other retirement investors who get 

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18Although the preamble uses the shorthand 

expression ‘‘seller’s carve-out,’’ we note that the 

carve-out provided in paragraph (b)(1)(i) of the 

proposal is not limited to sales but rather would 

apply to incidental advice provided in connection 

with an arm’s length sale, purchase, loan, or 

bilateral contract between a plan investor with 

financial expertise and an adviser. 

recommendations from the adviser on a 

more routine basis. 

C. Carve-Outs From the General 

Definition 

The Department recognizes that in 

many circumstances, plan fiduciaries, 

participants, beneficiaries, and IRA 

owners may receive recommendations 

or appraisals that, notwithstanding the 

general definition set forth in paragraph 

(a) of the proposal, should not be treated 

as fiduciary investment advice. 

Accordingly, paragraph (b) contains a 

number of specific carve-outs from the 

scope of the general definition. The 

carve-out at paragraph (b)(5) of the 

proposal concerning financial reports 

and valuations was discussed above in 

connection with appraisals. The carveout in paragraph (b)(5)(iii) covers 

communications to a plan, a plan 

fiduciary, a plan participant or 

beneficiary, an IRA or IRA owner solely 

for purposes of compliance with the 

reporting and disclosure provisions 

under the Act, the Code, and the 

regulations, forms and schedules issued 

thereunder, or any applicable reporting 

or disclosure requirement under a 

Federal or state law, rule or regulation 

or self-regulatory organization rule or 

regulation. The carve-out in paragraph 

(b)(6) covers education. The other carveouts are limited to communications 

with plans and plan fiduciaries and do 

not cover communications to 

participants, beneficiaries or IRA 

owners. These more limited carve-outs 

are described more fully below. In each 

instance, the proposed carve-outs are for 

communications that the Department 

believes Congress did not intend to 

cover as fiduciary ‘‘investment advice’’ 

and that parties would not ordinarily 

view as communications characterized 

by a relationship of trust or impartiality. 

None of the carve-outs apply where the 

adviser represents or acknowledges that 

it is acting as a fiduciary under ERISA 

with respect to the advice. 

(1) Seller’s and Swap Carve-Outs 

(a) The ‘‘Seller’s Carve-Out’’ 18

Paragraph (b)(1)(i) of the proposed 

regulation provides a carve-out from the 

general definition for incidental advice 

provided in connection with an arm’s 

length sale, purchase, loan, or bilateral 

contract between an expert plan 

investor and the adviser. It also applies 

in connection with an offer to enter into 

such a transaction or when the person 

providing the advice is acting as a 

representative, such as an agent, for the 

plan’s counterparty. This carve-out is 

subject to the following conditions. 

First, the person must provide advice 

to an ERISA plan fiduciary who is 

independent of such person and who 

exercises authority or control respecting 

the management or disposition of the 

plan’s assets, with respect to an arm’s 

length sale, purchase, loan or bilateral 

contract between the plan and the 

counterparty, or with respect to a 

proposal to enter into such a sale, 

purchase, loan or bilateral contract. 

Second, either of two alternative sets 

of conditions must be met. Under 

alternative one, prior to providing any 

recommendation with respect to the 

transaction, such person: 

(1) Obtains a written representation 

from the plan fiduciary that he/she is a 

fiduciary who exercises authority or 

control with respect to the management 

or disposition of the employee benefit 

plan’s assets (as described in section 

3(21)(A)(i) of the Act), that the employee 

benefit plan has 100 or more 

participants covered under the plan, 

and that the fiduciary will not rely on 

the person to act in the best interests of 

the plan, to provide impartial 

investment advice, or to give advice in 

a fiduciary capacity; 

(2) fairly informs the plan fiduciary of 

the existence and nature of the person’s 

financial interests in the transaction; 

(3) does not receive a fee or other 

compensation directly from the plan, or 

plan fiduciary, for the provision of 

investment advice in connection with 

the transaction (this does not preclude 

a person from receiving a fee or 

compensation for other services); 

(4) knows or reasonably believes that 

the independent plan fiduciary has 

sufficient expertise to evaluate the 

transaction and to determine whether 

the transaction is prudent and in the 

best interest of the plan participants 

(such person may rely on written 

representations from the plan or the 

plan fiduciary to satisfy this condition). 

The second alternative applies if the 

person knows or reasonably believes 

that the independent plan fiduciary has 

responsibility for managing at least $100 

million in employee benefit plan assets 

(for purposes of this condition, when 

dealing with an individual employee 

benefit plan, a person may rely on the 

information on the most recent Form 

5500 Annual Return/Report filed by the 

plan to determine the value of plan 

assets, and, in the case of an 

independent fiduciary acting as an asset 

manager for multiple employee benefit 

plans, a person may rely on 

representations from the independent 

plan fiduciary regarding the value of 

employee benefit plan assets under 

management). In that circumstance, the 

adviser need not obtain written 

representations from its counterparty to 

avail itself of the carve-out, but must 

fairly inform the independent plan 

fiduciary that the adviser is not 

undertaking to provide impartial 

investment advice, or to give advice in 

a fiduciary capacity; and cannot receive 

a fee or other compensation directly 

from the plan, or plan fiduciary, for the 

provision of investment advice in 

connection with the transaction. In that 

circumstance, the adviser must also 

reasonably believe that the independent 

plan fiduciary has sufficient expertise to 

prudently evaluate the transaction. 

The overall purpose of this carve-out 

is to avoid imposing ERISA fiduciary 

obligations on sales pitches that are part 

of arm’s length transactions where 

neither side assumes that the 

counterparty to the plan is acting as an 

impartial trusted adviser, but the seller 

is making representations about the 

value and benefits of proposed deals. 

Under appropriate circumstances, 

reflected in the conditions to this carveout, these counterparties to the plan do 

not suggest that they are an impartial 

fiduciary and plans do not expect a 

relationship of undivided loyalty or 

trust. Both sides of such transactions 

understand that they are acting at arm’s 

length, and neither party expects that 

recommendations will necessarily be 

based on the buyer’s best interests. In 

such a sales transaction, the buyer 

understands that it is buying an 

investment product, not advice about 

whether it is a good product, from a 

seller who has opposing financial 

interests. The seller’s invitation to buy 

the product is understood as a sales 

pitch, not a recommendation. Also, a 

representative for the plan’s 

counterparty, such as a broker, in such 

a transaction, would be able to use the 

carve-out if the conditions are met. 

Although the 2010 Proposal also had 

a carve-out for sellers and other 

counterparties, the carve-out in the new 

proposal is significantly different. The 

changes are designed to ensure that the 

carve-out appropriately distinguishes 

incidental advice as part of an arm’s 

length transactions with no expectation 

of trust or acting in the customer’s best 

interest, from those instances of advice 

where customers may be expecting 

unbiased investment advice that is in 

their best interest. For example, the 

seller’s carve-out is unavailable to an 

adviser if the plan directly pays a fee for 

investment advice. If a plan expressly 

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21942 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

19Loewenstein, George, Daylian Cain, Sunita Sah, 

The Limits of Transparence: Pitfalls and Potential 

of Disclosing Conflicts of Interest, American 

Economic Review: Papers and Proceedings 101, no. 

3 (2011). 

20The proposed thresholds of 100 or more 

participants and assets of $100 million are 

consistent with thresholds used for similar 

purposes under existing rules and practices. For 

example, administrators of plans with 100 or more 

participants, unlike smaller plans, generally are 

required to report to the Department details on the 

identity, function, and compensation of their 

services providers; file a schedule of assets held for 

investments; and submit audit reports to the 

Department. Smaller plans are not subject to these 

same filing requirements that are imposed on large 

plans. The vast majority of plans with fewer than 

100 participants have 10 or less participants. They 

are much more similar to individual retail investors 

than to large financially sophisticated institutional 

investors, who employ lawyers and have the time 

and expertise to scrutinize advice they receive for 

bias. Similarly, Congress established a $100 million 

asset threshold in enacting the PPA statutory crosstrading exemption under ERISA section 408(b)(19). 

In the transactions covered by 408(b)(19), an 

investment manager has discretion with respect to 

separate client accounts that are on opposite sides 

of the trade. The cross trade can create efficiencies 

for both clients, but it also gives rise to a prohibited 

transaction under ERISA § 406(b)(2) because the 

adviser or manager is ‘‘representing’’ both sides of 

the transaction and, therefore, has a conflict of 

interest. The exemption generally allows an 

investment manager to effect cash purchases and 

sales of securities for which market quotations are 

readily available between large sophisticated plans 

with at least $100 million in assets and another 

account under management by the investment 

manager, subject to certain conditions. In this 

context, the $100 million threshold serves as a 

proxy for identifying institutional fiduciaries that 

can be expected to have the expertise to protect 

their own interests in the conflicted transaction. 

pays a fee for advice, the essence of the 

relationship is advisory, and the statute 

clearly contemplates fiduciary status. 

Thus, a service provider may not charge 

the plan a direct fee to act as an adviser, 

and then disclaim responsibility as a 

fiduciary adviser by asserting that he or 

she is merely an arm’s length 

counterparty. 

Commenters on the 2010 Proposal 

differed on whether the carve-out 

should apply to transactions involving 

plan participants, beneficiaries or IRA 

owners. After carefully considering the 

issue and the public comments, the 

Department does not believe such a 

carve-out can or should be crafted to 

cover recommendations to retail 

investors, including small plans, IRA 

owners and plan participants and 

beneficiaries. As a rule, investment 

recommendations to such retail 

customers do not fit the ‘‘arm’s length’’ 

characteristics that the seller’s carve-out 

is designed to preserve. 

Recommendations to retail investors 

and small plan providers are routinely 

presented as advice, consulting, or 

financial planning services. In the 

securities markets, brokers’ suitability 

obligations generally require a 

significant degree of individualization. 

Research has shown that disclaimers are 

ineffective in alerting retail investors to 

the potential costs imposed by conflicts 

of interest, or the fact that advice is not 

necessarily in their best interest, and 

may even exacerbate these costs.19 Most 

retail investors and many small plan 

sponsors are not financial experts, are 

unaware of the magnitude and impact of 

conflicts of interest, and are unable 

effectively to assess the quality of the 

advice they receive. IRA owners are 

especially at risk because they lack the 

protection of having a menu of 

investment options chosen by a plan 

fiduciary who is charged to protect the 

interests of the IRA owner. Similarly, 

small plan sponsors are typically 

experts in the day-to-day business of 

running an operating company, not in 

managing financial investments for 

others. In this retail market, a seller’s 

carve-out would run the risk of creating 

a loophole that would result in the rule 

failing to improve consumer protections 

by permitting the same type of 

boilerplate disclaimers that some 

advisers now use to avoid fiduciary 

status under the current ‘‘five-part test’’ 

regulation. Persons making investment 

recommendations should be required to 

put the interests of the investors they 

serve ahead of their own. The 

Department has addressed legitimate 

concerns about preserving existing fee 

practices and minimizing market 

disruptions through proposed 

prohibited transaction exemptions 

detailed below, rather than through a 

blanket carve-out from fiduciary status. 

Moreover, excluding retail investors 

from the seller’s carve-out is consistent 

with recent congressional action, the 

Pension Protection Act of 2006 (PPA). 

Specifically, the PPA created a new 

statutory exemption that allows 

fiduciaries giving investment advice to 

individuals (pension plan participants, 

beneficiaries and IRA owners) to receive 

compensation from investment vehicles 

that they recommend in certain 

circumstances. 29 U.S.C. 1108(b)(14); 26 

U.S.C. 4975(d)(17). Recognizing the 

risks presented when advisers receive 

fees from the investments they 

recommend to individuals, Congress 

placed important constraints on such 

advice arrangements that are calculated 

to limit the potential for abuse and selfdealing, including requirements for feeleveling or the use of independently 

certified computer models. The 

Department has issued regulations 

implementing this provision at 29 CFR 

2550.408g–1 and 408g–2. Including 

retail investors in the seller’s carve-out 

would undermine the protections for 

retail investors that Congress required 

under this PPA provision. 

Although the seller’s carve-out may 

not be available in the retail market, the 

proposal is intended to ensure that 

small plan fiduciaries, plan participants, 

beneficiaries and IRA owners would be 

able to obtain essential information 

regarding important decisions they 

make regarding their investments 

without the providers of that 

information crossing the line into 

fiduciary status. Under the platform 

provider carve-out under paragraph 

(b)(3), platform providers (i.e., persons 

that provide access to securities or other 

property through a platform or similar 

mechanism) and persons that help plan 

fiduciaries select or monitor investment 

alternatives for their plans can perform 

those services without incurring 

fiduciary status. Similarly, under the 

investment education carve-out of 

paragraph (b)(6), general plan 

information, financial, investment and 

retirement information, and information 

and education regarding asset allocation 

models would all be available to a plan, 

plan fiduciary, participant, beneficiary 

or IRA owner and would not constitute 

the provision of investment advice, 

irrespective of who receives that 

information. The Department invites 

comments on whether the proposed 

seller’s carve-out should be available for 

advice given directly to plan 

participants, beneficiaries, and IRA 

owners. Further, the Department invites 

comments on the scope of the seller’s 

carve-out and whether the plan size 

limitation of 100 plan participants and 

100 million dollar asset requirement in 

the proposal are appropriate conditions 

or whether other conditions would be 

more appropriate proxies for identifying 

persons with sufficient investmentrelated expertise to be included in a 

seller’s carve-out.20 The Department is 

also interested in whether existing and 

proposed prohibited transaction 

exemptions eliminate or mitigate the 

need for any seller’s carve-out. 

(b) Swap and Security-Based Swap 

Transactions 

Paragraph (b)(1)(ii) of the proposal 

specifically addresses advice and other 

communications by counterparties in 

connection with certain swap or 

security-based swap transactions under 

the Commodity Exchange Act or the 

Securities Exchange Act. This broad 

class of financial transactions is defined 

and regulated under amendments to the 

Commodity Exchange Act and the 

Securities Exchange Act by the DoddFrank Act. Section 4s(h) of the 

Commodity Exchange Act (7 U.S.C. 

6s(h)), and section 15F of the Securities 

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21http://www.dol.gov/ebsa/pdf/cftc20110428.pdf. 

Exchange Act of 1934 (15 U.S.C. 78o– 

10(h) establishes similar business 

conduct standards for dealers and major 

participants in swaps or security-based 

swaps. Special rules apply for 

transactions involving ‘‘special 

entities,’’ a term that includes employee 

benefit plans under ERISA, but not IRAs 

and other non-ERISA plans. 

In outline, paragraph (b)(1)(ii) of the 

proposal would allow swap dealers, 

security-based swap dealers, major swap 

participants and security-based major 

swap participants who make 

recommendations to plans to avoid 

becoming ERISA investment advice 

fiduciaries when acting as 

counterparties to a swap or securitybased swap transaction. Under the swap 

carve out, if the person providing 

recommendations is a swap dealer or 

security-based swap dealer, it must not 

be acting as an adviser to the plan, 

within the meaning of the applicable 

business conduct standards regulations 

of the CFTC or the SEC. In addition, 

before providing any recommendations 

with respect to the transaction, the 

person providing recommendations 

must obtain a written representation 

from the independent plan fiduciary, 

that the fiduciary will not rely on 

recommendations provided by the 

person. 

Under the Commodity Exchange Act, 

swap dealers or major swap participants 

that act as counterparties to ERISA 

plans, must have a reasonable basis to 

believe that the plans have independent 

representatives who are fiduciaries 

under ERISA. 7 U.S.C. 6s(h)(5). Similar 

requirements apply for security-based 

swap transactions. 15 U.S.C 78o– 

10(h)(4) and (5). The CFTC has issued 

a final rule to implement these 

requirements and the SEC has issued a 

proposed rule that would cover 

security-based swaps. 17 CFR 23.400 to 

23.451 (2012). 

Paragraph (b)(1)(ii) reflects the 

Department’s coordination of its efforts 

with staff of the SEC and CFTC, and is 

intended to provide a clear road-map for 

swap counterparties to avoid ERISA 

fiduciary status in arm’s length 

transactions with plans. The provision 

addresses commenters’ concerns that 

the conduct required for compliance 

with the Dodd-Frank Act’s business 

conduct standards could constitute 

fiduciary investment advice under 

ERISA even in connection with arm’s 

length transactions with plans that are 

separately represented by independent 

fiduciaries who are not looking to their 

counterparties for disinterested advice. 

If that were the case, swaps and 

security-based swaps with plans would 

often constitute prohibited transactions 

under ERISA. Commenters also argued 

that their obligations under the business 

conduct standards could effectively 

preclude them from relying on the 

carve-out for counterparties in the 2010 

Proposal. Although the Department does 

not agree that the carve-out in the 2010 

Proposal would have been unavailable 

to plan’s swap counterparty (see letter 

dated April 28, 2011, to CFTC Chairman 

Gary Gensler from EBSA’s Assistant 

Secretary Phyllis Borzi), the separate 

proposed carve-out for swap and 

security-based swap transactions in the 

proposal should avoid any 

uncertainty.21 The Department will 

continue to coordinate its efforts with 

staff of the SEC and CFTC to ensure that 

any final regulation is consistent with 

the agencies’ work in connection with 

the Dodd-Frank Act’s business conduct 

standards. 

(2) Employees of the Plan Sponsor 

The proposal at paragraph (b)(2) 

provides that employees of a plan 

sponsor of an ERISA plan would not be 

treated as investment advice fiduciaries 

with respect to advice they provide to 

the fiduciaries of the sponsor’s plan as 

long as they receive no compensation 

for the advice beyond their normal 

compensation as employees of the plan 

sponsor. This carve-out from the scope 

of the fiduciary investment advice 

definition recognizes that internal 

employees, such as members of a 

company’s human resources 

department, routinely develop reports 

and recommendations for investment 

committees and other named fiduciaries 

of the sponsors’ plans, without acting as 

paid fiduciary advisers. The carve-out 

responds to and addresses the concerns 

of commenters who said that these 

personnel should not be treated as 

fiduciaries because their advice is 

largely incidental to their duties on 

behalf of the plan sponsor and they 

receive no compensation for these 

advice-related functions. 

(3) Platform Providers/Selection and 

Monitoring Assistance 

The carve-out at paragraph (b)(3) of 

the proposal is directed to service 

providers, such as recordkeepers and 

third party administrators, that offer a 

‘‘platform’’ or selection of investment 

vehicles to participant-directed 

individual account plans under ERISA. 

Under the terms of the carve-out, the 

plan fiduciaries must choose the 

specific investment alternatives that 

will be made available to participants 

for investing their individual accounts. 

The carve-out merely makes clear that 

persons would not act as investment 

advice fiduciaries simply by marketing 

or making available such investment 

vehicles, without regard to the 

individualized needs of the plan or its 

participants and beneficiaries, as long as 

they disclose in writing that they are not 

undertaking to provide impartial 

investment advice or to give advice in 

a fiduciary capacity. 

Similarly, a separate provision at 

paragraph (b)(4) carves out certain 

common activities that platform 

providers may carry out to assist plan 

fiduciaries in selecting and monitoring 

the investment alternatives that they 

make available to plan participants. 

Under paragraph (b)(4), merely 

identifying offered investment 

alternatives meeting objective criteria 

specified by the plan fiduciary or 

providing objective financial data 

regarding available alternatives to the 

plan fiduciary would not cause a 

platform provider to be a fiduciary 

investment adviser. These two carveouts are clarifying modifications to the 

corresponding provisions of the 2010 

Proposal. They address certain common 

practices that have developed with the 

growth of participant-directed 

individual account plans and recognize 

circumstances where the platform 

provider and the plan fiduciary clearly 

understand that the provider has 

financial or other relationships with the 

offered investments and is not 

purporting to provide impartial 

investment advice. It also 

accommodates the fact that platform 

providers often provide general 

financial information that falls short of 

constituting actual investment advice or 

recommendations, such as information 

on the historic performance of asset 

classes and of the investments available 

through the provider. The carve-outs 

also reflect the Department’s agreement 

with commenters that a platform 

provider who merely identifies 

investment alternatives using objective 

third-party criteria (e.g., expense ratios, 

fund size, or asset type specified by the 

plan fiduciary) to assist in selecting and 

monitoring investment alternatives 

should not be considered to be 

rendering investment advice. 

While recognizing the utility of the 

provisions in paragraphs (b)(3) and 

(b)(4) for the effective and efficient 

operation of plans by plan sponsors, 

plan fiduciaries and plan service 

providers, the Department reiterates its 

longstanding view, recently codified in 

29 CFR 2550.404a–5(f) and 2550.404c– 

1(d)(2)(iv) (2010), that a fiduciary is 

always responsible for prudently 

selecting and monitoring providers of 

services to the plan or designated 

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21944 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

22Although the proposal would formally remove 

IB 96–1 from the CFR, the Department notes that 

paragraph (e) of IB 96–1 provides generalized 

guidance under section 405 and 404(c) of ERISA 

with respect to the selection by employers and plan 

fiduciaries of investment educators and the lack of 

responsibility of employers and fiduciaries with 

respect to investment educators selected by 

participants. Specifically, paragraph (e) states: 

As with any designation of a service provider to 

a plan, the designation of a person(s) to provide 

investment educational services or investment 

advice to plan participants and beneficiaries is an 

exercise of discretionary authority or control with 

respect to management of the plan; therefore, 

persons making the designation must act prudently 

and solely in the interest of the plan participants 

and beneficiaries, both in making the designation(s) 

and in continuing such designation(s). See ERISA 

sections 3(21)(A)(i) and 404(a), 29 U.S.C. 1002 

(21)(A)(i) and 1104(a). In addition, the designation 

of an investment advisor to serve as a fiduciary may 

give rise to co-fiduciary liability if the person 

making and continuing such designation in doing 

so fails to act prudently and solely in the interest 

of plan participants and beneficiaries; or knowingly 

participates in, conceals or fails to make reasonable 

efforts to correct a known breach by the investment 

advisor. See ERISA section 405(a), 29 U.S.C. 

1105(a). The Department notes, however, that, in 

the context of an ERISA section 404(c) plan, neither 

the designation of a person to provide education 

nor the designation of a fiduciary to provide 

investment advice to participants and beneficiaries 

would, in itself, give rise to fiduciary liability for 

loss, or with respect to any breach of part 4 of title 

I of ERISA, that is the direct and necessary result 

of a participant’s or beneficiary’s exercise of 

independent control. 29 CFR 2550.404c–1(d). The 

Department also notes that a plan sponsor or 

investment alternatives offered under 

the plan. 

Several commenters also asked the 

Department to clarify that the platform 

provider carve-out is available in the 

403(b) plan marketplace. In the 

Department’s view, a 403(b) plan that is 

subject to Title I of ERISA would be an 

individual account plan within the 

meaning of ERISA section 3(34) of the 

Act for purposes of the proposed 

regulation, so the platform provider 

carve-out would be available with 

respect to such plans. 

Other commenters asked that the 

platform provider provision be generally 

extended to apply to IRAs. In the IRA 

context, however, there typically is no 

separate independent ‘‘plan fiduciary’’ 

who interacts with the platform 

provider to protect the interests of the 

account owners. As a result, it is much 

more difficult to conclude that the 

transaction is truly arm’s length or to 

draw a bright line between fiduciary 

and non-fiduciary communications on 

investment options. Consequently, the 

proposed regulation declines to extend 

application of this carve-out to IRAs and 

other non-ERISA plans. As the 

Department continues its work on this 

regulatory project, however, it requests 

specific comment as to the types of 

platforms and options that may be 

offered to IRA owners, how they may be 

similar to or different from platforms 

offered in connection with participantdirected individual account plans, and 

whether it would be appropriate for 

service providers not to be treated as 

fiduciaries under this carve-out when 

marketing such platforms to IRA 

owners. We also invite comments, 

alternatively, on whether the scope of 

this carve-out should be limited to large 

plans, similar to the scope of the 

‘‘Seller’s Carve-out’’ discussed above. 

As a corollary to the proposal’s 

restriction of the applicability of the 

platform provider carve-out to only 

ERISA plans, the selection and 

monitoring assistance carve-out is 

similarly not available in the IRA and 

other non-ERISA plans context. 

Commenters on the platform provider 

restriction are encouraged to offer their 

views on the effect of this restriction in 

the non-ERISA plan marketplace. 

(4) Investment Education 

Paragraph (b)(6) of the proposed 

regulation is similar to a carve-out in the 

2010 Proposal for the provision of 

investment education information and 

materials within the meaning of an 

earlier Interpretive Bulletin issued by 

the Department in 1996. 29 CFR 

2509.96–1 (IB 96–1). Paragraph (b)(6) 

incorporates much of IB 96–1’s 

operative text, but with the important 

exceptions explained below. Paragraph 

(b)(6) of the proposed regulation, if 

finalized, would supersede IB 96–1. 

Consistent with IB 96–1, paragraph 

(b)(6) makes clear that furnishing or 

making available the specified 

categories of information and materials 

to a plan, plan fiduciary, participant, 

beneficiary or IRA owner will not 

constitute the rendering of investment 

advice, irrespective of who provides the 

information (e.g., plan sponsor, 

fiduciary or service provider), the 

frequency with which the information is 

shared, the form in which the 

information and materials are provided 

(e.g., on an individual or group basis, in 

writing or orally, via a call center, or by 

way of video or computer software), or 

whether an identified category of 

information and materials is furnished 

or made available alone or in 

combination with other categories of 

investment or retirement information 

and materials identified in paragraph 

(b)(6), or the type of plan or IRA 

involved. As a departure from IB 96–1, 

a new condition of the carve-out for 

investment education is that the 

information and materials not include 

advice or recommendations as to 

specific investment products, specific 

investment managers, or the value of 

particular securities or other property. 

The paragraph reflects the Department’s 

view that the statutory reference to 

‘‘investment advice’’ is not meant to 

encompass general investment 

information and educational materials, 

but rather is targeted at more specific 

recommendations and advice on the 

investment of plan and IRA assets. 

Similar to IB 96–1, paragraph (b)(6) of 

the proposed regulation divides 

investment education information and 

materials into four general categories: (i) 

Plan information; (ii) general financial, 

investment and retirement information; 

(iii) asset allocation models; and (iv) 

interactive investment materials. The 

proposed regulation in paragraph 

(b)(6)(v) also adopts the provision from 

IB 96–1 stating that there may be other 

examples of information, materials and 

educational services which, if 

furnished, would not constitute 

investment advice or recommendations 

within the meaning of the proposed 

regulation and that no inference should 

be drawn regarding materials or 

information which are not specifically 

included in paragraph (b)(6)(i) through 

(iv). 

Although paragraph (b)(6) 

incorporates most of the relevant text of 

IB 96–1, there are important changes. 

One change from IB 96–1 is that 

paragraph (b)(6) makes clear that the 

distinction between non-fiduciary 

education and fiduciary advice applies 

equally to information provided to plan 

fiduciaries as well as information 

provided to plan participants and 

beneficiaries and IRA owners, and that 

it applies equally to participant-directed 

plans and other plans. In addition, the 

provision applies without regard to 

whether the information is provided by 

a plan sponsor, fiduciary, or service 

provider. 

Based on public input received in 

connection with its joint examination of 

lifetime income issues with the 

Department of the Treasury, the 

Department is persuaded that additional 

guidance may help improve retirement 

security by facilitating the provision of 

information and education relating to 

retirement needs that extend beyond a 

participant’s or beneficiary’s date of 

retirement. Accordingly, paragraph 

(b)(6) of the proposal includes specific 

language to make clear that the 

provision of certain general information 

that helps an individual assess and 

understand retirement income needs 

past retirement and associated risks 

(e.g., longevity and inflation risk), or 

explains general methods for the 

individual to manage those risks both 

within and outside the plan, would not 

result in fiduciary status under the 

proposal.22

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fiduciary would have no fiduciary responsibility or 

liability with respect to the actions of a third party 

selected by a participant or beneficiary to provide 

education or investment advice where the plan 

sponsor or fiduciary neither selects nor endorses 

the educator or advisor, nor otherwise makes 

arrangements with the educator or advisor to 

provide such services. 

Unlike the remainder of the IB, this text does not 

belong in the investment advice regulation. Also, 

the principles articulated in paragraph (e) are 

generally understood and accepted such that 

retaining the paragraph as a stand-alone IB does not 

appear necessary or appropriate. 

23When the Department issued IB 96–1, it 

expressed concern that service providers could 

effectively steer participants to a specific 

investment alternative by identifying only one 

particular fund available under the plan in 

connection with an asset allocation model. As a 

result, where it was possible to do so, the 

Department encouraged service providers to 

identify other investment alternatives within an 

asset class as part of a model. Ultimately, however, 

when asset allocation models and interactive 

investment materials identified any specific 

investment alternative available under the plan, the 

Department required an accompanying statement 

both indicating that other investment alternatives 

having similar risk and return characteristics may 

be available under the plan and identifying where 

information on those investment alternatives could 

be obtained. 61 FR 29586, 29587 (June 11, 1996). 

24As indicated earlier in this Notice, the 

Department believes that FINRA’s guidance in this 

area may provide useful standards and guideposts 

for distinguishing investment education from 

investment advice under ERISA. The Department 

specifically solicits comments on the discussion in 

FINRA’s ‘‘Frequently Asked Questions, FINRA Rule 

2111 (Suitability)’’ of the term ‘‘recommendation’’ 

in the context of asset allocation models and 

general investment strategies. 

As noted, another change is that the 

Department is not incorporating the 

provisions at paragraph (d)(3)(iii) and 

(4)(iv) of IB 96–1. Those provisions of IB 

96–1 permit the use of asset allocation 

models that refer to specific investment 

products available under the plan or 

IRA, as long as those references to 

specific products are accompanied by a 

statement that other investment 

alternatives having similar risk and 

return characteristics may be available. 

Based on its experience with the IB 96– 

1 since publication, as well as views 

expressed by commenters to the 2010 

Proposal, the Department now believes 

that, even when accompanied by a 

statement as to the availability of other 

investment alternatives, these types of 

specific asset allocations that identify 

specific investment alternatives 

function as tailored, individualized 

investment recommendations, and can 

effectively steer recipients to particular 

investments, but without adequate 

protections against potential abuse.23

In particular, the Department agrees 

with those commenters to the 2010 

Proposal who argued that cautionary 

disclosures to participants, 

beneficiaries, and IRA owners may have 

limited effectiveness in alerting them to 

the merit and wisdom of evaluating 

investment alternatives not used in the 

model. In practice, asset allocation 

models concerning hypothetical 

individuals, and interactive materials 

which arrive at specific investment 

products and plan alternatives, can be 

indistinguishable to the average 

retirement investor from individualized 

recommendations, regardless of caveats. 

Accordingly, paragraphs (b)(6)(iii) and 

(iv) relating to asset allocation models 

and interactive investment materials 

preclude the identification of specific 

investment alternatives available under 

the plan or IRA in order for the 

materials described in those paragraphs 

to be considered investment education. 

Thus, for example, we would not treat 

an asset allocation model as mere 

education if it called for a certain 

percentage of the investor’s assets to be 

invested in large cap mutual funds, and 

accompanied that proposed allocation 

with the identity of a specific fund or 

provider. In that circumstance, the 

adviser has made a specific investment 

recommendation that should be treated 

as fiduciary advice and adhere to 

fiduciary standards. Further, materials 

that identify specific plan investment 

alternatives also appear to fall within 

the definition of ‘‘recommendation’’ in 

paragraph (f)(1) of the proposal, and 

could result in fiduciary status on the 

part of a provider if the other provisions 

of the proposal are met. The Department 

believes that effective and useful asset 

allocation education materials can be 

prepared and delivered to participants 

and IRA owners without including 

specific investment products and 

alternatives available under the plan. 

The Department understands that not 

incorporating the provisions of IB 96–1 

at paragraph (d)(3)(iii) and (4)(iv) into 

the proposal represents a significant 

change in the information and materials 

that may constitute investment 

education. Accordingly, the Department 

invites comments on whether this 

change is appropriate.24

D. Fee or Other Compensation 

A necessary element of fiduciary 

status under section 3(21)(A)(ii) of 

ERISA is that the investment advice be 

for a ‘‘fee or other compensation, direct 

or indirect.’’ Consistent with the statute, 

paragraph (f)(6) of the proposed 

regulation defines this phrase to mean 

any fee or compensation for the advice 

received by the advice provider (or by 

an affiliate) from any source and any fee 

or compensation incident to the 

transaction in which the investment 

advice has been rendered or will be 

rendered. It further provides that the 

term ‘‘fee or compensation’’ includes, 

but is not limited to, brokerage fees, 

mutual fund sales, and insurance sales 

commissions. 

Paragraph (c)(3) of the 2010 Proposal 

used similar language, but it also 

provided that the term included fees 

and compensation based on multiple 

transactions involving different parties. 

Commenters found this provision 

confusing and it does not appear in the 

new proposal. The provision was 

intended to confirm the Department’s 

position that fees charged on a so-called 

‘‘omnibus’’ basis (e.g., compensation 

paid based on business placed or 

retained that includes plan or IRA 

business) would constitute fees and 

compensation for purposes of the rule. 

Direct or indirect compensation also 

includes any compensation received by 

affiliates of the adviser that is connected 

to the transaction in which the advice 

was provided. For example, when a 

fiduciary adviser recommends that a 

participant or IRA owner invest in a 

mutual fund, it is not unusual for an 

affiliated adviser to the mutual fund to 

receive a fee. The receipt by the affiliate 

of advisory fees from the mutual fund is 

indirect compensation in connection 

with the rendering of investment advice 

to the participant. 

Some commenters additionally 

suggested that call center employees 

should not be treated as investment 

advice fiduciaries where they are not 

specifically paid to provide investment 

advice and their compensation does not 

change based on their communications 

with participants and beneficiaries. The 

carve-out from the fiduciary investment 

advice definition for investment 

education provides guidelines under 

which call center staff and other 

employees providing similar investor 

assistance services may avoid fiduciary 

status. However, commenters stated that 

a specific carve-out for such call centers 

would provide a greater level of 

certainty so as not to inhibit mutual 

funds, insurance companies, brokerdealers, recordkeepers and other 

financial service providers from 

continuing to make such assistance 

available to participants and 

beneficiaries in 401(k) and similar 

participant-directed plans. In the 

Department’s view, such a carve-out 

would be inappropriate. The fiduciary 

definition is intended to apply broadly 

to all persons who engage in the 

activities set forth in the regulation, 

regardless of job title or position, or 

whether the advice is rendered in 

person, in writing or by phone. If, in the 

performance of their jobs, call center 

employees make specific investment 

recommendations to plan participants 

or IRA owners under the circumstances 

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25The Secretary of Labor also was transferred 

authority to grant administrative exemptions from 

the prohibited transaction provisions of the Code. 

described in the proposal, it is 

appropriate to treat them, and possibly 

their employers, as fiduciaries unless 

they meet the conditions of one of the 

carve-outs set forth above. 

E. Coverage of IRAs and Other NonERISA Plans 

Certain provisions of Title I of ERISA, 

29 U.S.C. 1001–1108, such as those 

relating to participation, benefit accrual, 

and prohibited transactions also appear 

in the Code. This parallel structure 

ensures that the relevant provisions 

apply to all tax-qualified plans, 

including IRAs. With regard to 

prohibited transactions, the Title I 

provisions generally authorize recovery 

of losses from, and imposition of civil 

penalties on, the responsible plan 

fiduciaries, while the Code provisions 

impose excise taxes on persons engaging 

in the prohibited transactions. The 

definition of fiduciary with respect to a 

plan is the same in section 4975(e)(3)(B) 

of the IRC as the definition in section 

3(21)(A)(ii) of ERISA, 29 U.S.C. 

1002(21)(A)(ii), and the Department’s 

1975 regulation defining fiduciary 

investment advice is virtually identical 

to regulations that define the term 

‘‘fiduciary’’ under the Code. 26 CFR 

54.4975–9(c) (1975). 

To rationalize the administration and 

interpretation of dual provisions under 

ERISA and the Code, Reorganization 

Plan No. 4 of 1978 divided the 

interpretive and rulemaking authority 

for these provisions between the 

Secretaries of Labor and of the Treasury, 

so that, in general, the agency with 

responsibility for a given provision of 

Title I of ERISA would also have 

responsibility for the corresponding 

provision in the Code. Among the 

sections transferred to the Department 

were the prohibited transaction 

provisions and the definition of a 

fiduciary in both Title I of ERISA and 

in the Code. ERISA’s prohibited 

transaction rules, 29 U.S.C. 1106–1108, 

apply to ERISA-covered plans, and the 

Code’s corresponding prohibited 

transaction rules, 26 U.S.C. 4975(c), 

apply both to ERISA-covered pension 

plans that are tax-qualified pension 

plans, as well as other tax-advantaged 

arrangements, such as IRAs, that are not 

subject to the fiduciary responsibility 

and prohibited transaction rules in 

ERISA.25

Given this statutory structure, and the 

dual nature of the 1975 regulation, the 

proposal would apply to both the 

definition of ‘‘fiduciary’’ in section 

3(21)(A)(ii) of ERISA and the 

definition’s counterpart in section 

4975(e)(3)(B) of the Code. As a result, it 

applies to persons who give investment 

advice to IRAs. In this respect, the new 

proposal is the same as the 2010 

Proposal. 

Many comments on the 2010 Proposal 

concerned its impact on IRAs and 

questioned whether the Department had 

adequately considered possible negative 

impacts. Some commenters were 

especially concerned that application of 

the new rule could disrupt existing 

brokerage arrangements that they 

believe are beneficial to customers. In 

particular, brokers often receive revenue 

sharing, 12b–1 fees, and other 

compensation from the parties whose 

investment products they recommend. If 

the brokers were treated as fiduciaries, 

the receipt of such fees could violate the 

Code’s prohibited transaction rules, 

unless eligible for a prohibited 

transaction exemption. According to 

these commenters, the disruption of 

such current fee arrangements could 

result in a reduced level of assistance to 

investors, higher up-front fees, and less 

investment advice, particularly to 

investors with small accounts. In 

addition, some commenters expressed 

skepticism that the imposition of 

fiduciary standards would result in 

improved advice and questioned the 

view that current compensation 

arrangements could cause sub-optimal 

advice. Additionally, commenters 

stressed the need for coordination 

between the Department and other 

regulatory agencies, such as the SEC, 

CFTC, and Treasury. 

As discussed above, to better align the 

regulatory definition of fiduciary with 

the statutory provisions and underlying 

Congressional goals, the Department is 

proposing a definition of a fiduciary 

investment advice that would 

encompass investment 

recommendations that are 

individualized or specifically directed 

to plans, participants, beneficiaries or 

IRA owners, if the adviser receives a 

direct or indirect fee. Neither the 

relevant statutory provisions, nor the 

current regulation, draw a distinction 

between brokers and other advisers or 

carve brokers out of the scope of the 

fiduciary provisions of ERISA and of the 

Code. The relevant statutory provisions, 

and accordingly the proposed 

regulation, establish a functional test 

based on the service provider’s actions, 

rather than the provider’s title (e.g., 

broker or registered investment adviser). 

If one engages in specified activities, 

such as the provision of investment 

advice for a direct or indirect fee, the 

person engaging in those activities is a 

fiduciary, irrespective of labels. 

Moreover, the statutory definition of 

fiduciary advice is identical under both 

ERISA and the Code. There is no 

indication that the definition should 

vary between plans and IRAs. 

In light of this statutory framework, 

the Department does not believe it 

would be appropriate to carve out a 

special rule for IRAs, or for brokers or 

others who make specific investment 

recommendations to IRA owners or to 

other participants in non-ERISA plans 

for direct or indirect fees. When 

Congress enacted ERISA and the 

corresponding Code provisions, it chose 

to impose fiduciary status on persons 

who provide investment advice to 

plans, participants, beneficiaries and 

IRA owners, and to specifically prohibit 

a wide variety of transactions in which 

the fiduciary has financial interests that 

potentially conflict with the fiduciary’s 

obligation to the plan or IRA. It did not 

provide a special carve-out for brokers 

or IRAs, and the Department does not 

believe it would be appropriate to write 

such a carve-out into the regulation 

implementing the statutory definition. 

Indeed, brokers who give investment 

advice to IRA owners or plan 

participants, and who otherwise meet 

the terms of the current five-part test, 

are already fiduciaries under the 

existing fiduciary regulation. If, for 

example, a broker regularly advises an 

individual IRA owner on specific 

investments, the IRA owner routinely 

follows the recommendations, and both 

parties understand that the IRA owner 

relies upon the broker’s advice, the 

broker is almost certainly a fiduciary. In 

such circumstances, the broker is 

already subject to the excise tax on 

prohibited transactions if he or she 

receives fees from a third party in 

connection with recommendations to 

invest IRA assets in the third party’s 

investment products, unless the broker 

satisfies the conditions of a prohibited 

transaction exemption that covers the 

particular fees. Indeed, broker-dealers 

today can provide fiduciary investment 

advice by complying with prohibited 

transaction exemptions that permit the 

receipt of commission-based 

compensation for the sale of mutual 

funds and other securities. Moreover, 

both ERISA and the Code were amended 

as part of the PPA to include a new 

prohibited transaction exemption that 

applies to investment advice in both the 

plan and IRA context. The PPA 

exemption clearly reflects the 

longstanding concern under ERISA and 

the Code about the dangers posed by 

conflicts of interest, and the need for 

appropriate safeguards in both the plan 

and IRA markets. Under the terms of the 

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Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 21947 

26Peter Brady, Sarah Holden, and Erin Shon, The 

U.S. Retirement Market, 2009, Investment Company 

Institute, Research Fundamentals, Vol. 19, No. 3, 

May 2010, at http://www.ici.org/pdf/fm-v19n3.pdf. 

exemption, the investment 

recommendations must either result 

from the application of an unbiased and 

independently certified computer 

program or the fiduciary’s fees must be 

level (i.e., the fiduciary’s compensation 

cannot vary based on his or her 

particular investment 

recommendations). 

Moreover, as discussed in the 

regulatory impact analysis below, there 

is substantial evidence to support the 

statutory concern about conflicts of 

interest. As the analysis reflects, 

unmitigated conflicts can cause 

significant harm to investors. The 

available evidence supports a finding 

that the negative impacts are present 

and often times large. The proposal 

would curtail the harms to investors 

from such conflicts and thus deliver 

significant benefits to plan participants 

and IRA owners. Plans, plan 

participants, beneficiaries and IRA 

owners would all benefit from advice 

that is impartial and puts their interests 

first. Moreover, broker-dealer 

interactions with plan fiduciaries, 

participants, and IRA owners present 

some of the most obvious conflict of 

interest problems in this area. 

Accordingly, in the Department’s view, 

broker-dealers that provide investment 

advice should be subject to fiduciary 

duties to mitigate conflicts of interest 

and increase investor protections. 

Some commenters additionally 

suggested that the application of special 

fiduciary rules in the retail investment 

market to IRA accounts, but not savings 

outside of tax-preferred retirement 

accounts, is inappropriate and could 

lead to confusion among investors and 

service providers. The distinction 

between IRAs and other retail accounts, 

however, is a direct result of a statutory 

structure that draws a sensible 

distinction between tax-favored IRAs 

and other retail investment accounts. 

The Code itself treats IRAs differently, 

bestowing uniquely favorable tax 

treatment on such accounts and 

prohibiting self-dealing by persons 

providing investment advice for a fee. In 

these respects, and in light of the special 

public interest in retirement security, 

IRAs are more like plans than like other 

retail accounts. Indeed, as noted above, 

the vast majority of IRA assets today are 

attributable to rollovers from plans.26 In 

addition, IRA owners may be at even 

greater risk from conflicted advice than 

plan participants. Unlike ERISA plan 

participants, IRA owners do not have 

the benefit of an independent plan 

fiduciary to represent their interests in 

selecting a menu of investment options 

or structuring advice arrangements. 

They cannot sue fiduciary advisers 

under ERISA for losses arising from 

fiduciary breaches, nor can the 

Department sue on their behalf. 

Compared to participants with ERISA 

plan accounts, IRA owners often have 

larger account balances and are more 

likely to be elderly. Thus, limiting the 

harms to IRA investors resulting from 

conflicts of interest of advisers is at least 

as important as protecting ERISA plans 

and plan participants from such harms. 

The Department believes that it is 

important to address the concerns of 

brokers and others providing investment 

advice to IRA owners about undue 

disruptions to current fee arrangements, 

but also believes that such concerns are 

best resolved within a fiduciary 

framework, rather than by simply 

relieving advisers from fiduciary 

responsibility. As previously discussed, 

the proposed regulation permits 

investment professionals to provide 

important financial information and 

education, without acting as fiduciaries 

or being subject to the prohibited 

transaction rules. Moreover, ERISA and 

the Code create a flexible process that 

enables the Department to grant class 

and individual exemptions from the 

prohibited transaction rules for fee 

practices that it determines are 

beneficial to plan participants and IRA 

owners. For example, existing 

prohibited transaction exemptions 

already allow brokers who provide 

fiduciary advice to receive commissions 

generating conflicts of interest for 

trading the types of securities and funds 

that make up the large majority of IRA 

assets today. In addition, simultaneous 

with the publication of this proposed 

regulation, the Department is publishing 

new exemption proposals that would 

permit common fee practices, while at 

the same time protecting plan 

participants, beneficiaries and IRA 

owners from abuse and conflicts of 

interest. As noted above, in contrast 

with many previously adopted PTE 

exemptions that are transaction-specific, 

the Best Interest Contract PTE described 

below reflects a more flexible approach 

that accommodates a wide range of 

current business practices while 

minimizing the impact of conflicts of 

interest and ensuring that plans and 

IRAs receive investment 

recommendations that are in their best 

interests. 

As discussed, the Department 

received extensive comment on the 

application of the 2010 Proposal’s 

provisions to IRAs, but comments 

regarding other non-ERISA plans such 

as Health Savings Accounts (HSAs), 

Archer Medical Savings Accounts and 

Coverdell Education Savings Accounts 

were less prolific. The Department notes 

that these accounts are given tax 

preferences as are IRAs. Further, some 

of the accounts, such as HSAs, can be 

used as long term savings accounts for 

retiree health care expenses. These 

types of accounts also are expressly 

defined by Code section 4975(e)(1) as 

plans that are subject to the Code’s 

prohibited transaction rules. Thus, 

although they generally may hold fewer 

assets and may exist for shorter 

durations than IRAs, the owners of these 

accounts or the persons for whom these 

accounts were established are entitled to 

receive the same protections from 

conflicted investment advice as IRA 

owners. Accordingly, these accounts are 

included in the scope of covered plans 

in paragraph (f)(2) of the new proposal. 

However, the Department solicits 

specific comment as to whether it is 

appropriate to cover and treat these 

plans under the proposed regulation in 

a manner similar to IRAs as to both 

coverage and applicable carve-outs. 

F. Administrative Prohibited 

Transaction Exemptions 

In addition to the new proposal in 

this Notice, the Department is also 

proposing, elsewhere in this edition of 

the Federal Register, certain 

administrative class exemptions from 

the prohibited transaction provisions of 

ERISA (29 U.S.C. 1106), and the Code 

(26 U.S.C. 4975(c)(1)) as well as 

proposed amendments to previously 

adopted exemptions. The proposed 

exemptions and amendments would 

allow, subject to appropriate safeguards, 

certain broker-dealers, insurance agents 

and others that act as investment advice 

fiduciaries to nevertheless continue to 

receive a variety of forms of 

compensation that would otherwise 

violate prohibited transaction rules and 

trigger excise taxes. The proposed 

exemptions would supplement statutory 

exemptions at 29 U.S.C. 1108 and 26 

U.S.C. 4975(d), and previously adopted 

class exemptions. 

Investment advice fiduciaries to plans 

and plan participants must meet 

ERISA’s standards of prudence and 

loyalty to their plan customers. Such 

fiduciaries also face taxes, remedies and 

other sanctions for engaging in certain 

transactions, such as self-dealing with 

plan assets or receiving payments from 

third parties in connection with plan 

transactions, unless the transactions are 

permitted by an exemption from 

ERISA’s and the Code’s prohibited 

transaction rules. IRA fiduciaries do not 

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27By using the term ‘‘adviser,’’ the Department 

does not intend to limit the exemption to 

investment advisers registered under the 

Investment Advisers Act of 1940; under the 

exemption an adviser is individual who can be a 

representative of a registered investment adviser, a 

bank or similar financial institution, an insurance 

company, or a broker-dealer. 

have the same general fiduciary 

obligations of prudence and loyalty 

under the statute, but they too must 

adhere to the prohibited transaction 

rules or they must pay an excise tax. 

The prohibited transaction rules help 

ensure that investment advice provided 

to plan participants and IRA owners is 

not driven by the adviser’s financial 

self-interest. 

Proposed Best Interest Contract 

Exemption (Best Interest Contract PTE) 

The proposed Best Interest Contract 

PTE would provide broad and flexible 

relief from the prohibited transaction 

restrictions on certain compensation 

received by investment advice 

fiduciaries as a result of a plan’s or 

IRA’s purchase, sale or holding of 

specifically identified investments. The 

conditions of the exemption are 

generally principles-based rather than 

prescriptive and require, in particular, 

that advice be provided in the best 

interest of the plan or IRA. This 

exemption was developed partly in 

response to comments received that 

suggested such an approach. It is a 

significant departure from existing 

exemptions, examples of which are 

discussed below, which are limited to 

much narrower categories of 

investments under more prescriptive 

and less flexible and adaptable 

conditions. 

The proposed Best Interest Contract 

PTE was developed to promote the 

provision of investment advice that is in 

the best interest of retail investors, such 

as plan participants and beneficiaries, 

IRA owners, and small plans. The 

proposed exemption would apply to 

compensation received by individual 

investment advice fiduciaries (including 

individual advisers 27 and firms that 

employ or otherwise contract with such 

individuals) as well as their affiliates 

and related entities, that is provided in 

connection with the purchase, sale or 

holding of certain assets by the plans, 

participants and beneficiaries, and IRAs. 

In order to protect the interests of these 

investors, the exemption requires the 

firm and the adviser to contractually 

acknowledge fiduciary status, commit to 

adhere to basic standards of impartial 

conduct, warrant that they will comply 

with applicable federal and state laws 

governing advice and that they have 

adopted policies and procedures 

reasonably designed to mitigate any 

harmful impact of conflicts of interest, 

and disclose basic information on their 

conflicts of interest and on the cost of 

their advice. The standards of impartial 

conduct to which the adviser and firm 

must commit are basic obligations of fair 

dealing and fiduciary conduct to which 

the Department believes advisers and 

firms often informally commit—to give 

advice that is in the customer’s best 

interest; avoid misleading statements; 

and receive no more than reasonable 

compensation. This standards-based 

approach aligns the adviser’s interests 

with those of the plan or IRA customer, 

while leaving the adviser and 

employing firm the flexibility and 

discretion necessary to determine how 

best to satisfy these basic standards in 

light of the unique attributes of their 

business. 

As an additional protection for retail 

investors, the exemption would not 

apply if the contract contains 

exculpatory provisions disclaiming or 

otherwise limiting liability of the 

adviser or financial institution for 

violation of the contract’s terms. 

Adopting the approach taken by FINRA, 

the contract could require the parties to 

arbitrate individual claims, but it could 

not limit the rights of the plan, 

participant, beneficiary, or IRA owner to 

bring or participate in a class action 

against the adviser or financial 

institution. 

Additional conditions would apply to 

firms that limit the products that their 

advisers can recommend based on the 

receipt of third party payments or the 

proprietary nature of the products (i.e., 

products offered or managed by the firm 

or its affiliates) or for other reasons. The 

conditions require, among other things, 

that such firms provide notice of the 

limitations to plans, participants and 

beneficiaries and IRA owners, as well as 

make a written finding that the 

limitations do not prevent advisers from 

providing advice in those investors’ best 

interest. 

Finally, certain notice and data 

collection requirements would apply to 

all firms relying on the exemption. 

Specifically, firms would be required to 

notify the Department in advance of 

doing so, and they would have to 

maintain certain data, and make it 

available to the Department upon 

request, to help evaluate the 

effectiveness of the exemption in 

safeguarding the interests of plan and 

IRA investors. 

The Department’s intent in crafting 

the Best Interest Contract PTE is to 

permit common compensation 

structures that create conflicts of 

interest, while minimizing the costs 

imposed on investors by such conflicts. 

The exemption is designed both to 

impose broad fiduciary standards of 

conduct on advisers and financial 

institutions, and to give them sufficient 

flexibility to accommodate a wide range 

of business practices and compensation 

structures that currently exist or that 

may develop in the future. 

The Department is also considering an 

additional streamlined exemption that 

would apply to compensation received 

in connection with investments by 

plans, participants and beneficiaries, 

and IRA owners, in certain high-quality, 

low-fee investments, subject to fewer 

conditions than in the proposed Best 

Interest Contract PTE. If properly 

crafted, the streamlined exemption 

could achieve important goals of 

minimizing compliance burdens for 

advisers and financial institutions when 

they offer investment products with 

little potential for material conflicts of 

interest. The Department is not 

proposing text for such a streamlined 

exemption due to the difficulty in 

operationalizing this concept. However 

the Department is eager to receive 

comments on whether such an 

exemption would be worthwhile and, as 

part of the notice proposing the Best 

Interest Contract PTE, is soliciting 

comments on a number of issues 

relating to the design of a streamlined 

exemption. 

Proposed Principal Transaction 

Exemption (Principal Transaction PTE) 

Broker-dealers and other advisers 

commonly sell debt securities out of 

their own inventory to plans, 

participants and beneficiaries and IRA 

owners in a type of transaction known 

as a ‘‘principal transaction.’’ Fiduciaries 

trigger taxes, remedies and other legal 

sanctions when they engage in such 

activities, unless they qualify for an 

exemption from the prohibited 

transaction rules. These principal 

transactions raise issues similar to those 

addressed in the Best Interest Contract 

PTE, but also raise unique concerns 

because the conflicts of interest are 

particularly acute. In these transactions, 

the adviser sells the security directly 

from its own inventory, and may be able 

to dictate the price that the plan, 

participant or beneficiary, or IRA owner 

pays. 

Because of the prevalence of the 

practice in the market for fixed income 

securities, the Department has proposed 

a separate Principal Transactions PTE 

that would permit principal transactions 

in certain debt securities between a plan 

or IRA owner and an investment advice 

fiduciary, under certain circumstances. 

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28Class Exemption for Securities Transactions 

Involving Employee Benefit Plans and BrokerDealers, 51 FR 41686 (Nov. 18, 1986), amended at 

67 FR 64137 (Oct. 17, 2002). 

29Exemptions from Prohibitions Respecting 

Certain Classes of Transactions Involving Employee 

Benefit Plans and Certain Broker-Dealers, Reporting 

Dealers and Banks, 40 FR 50845 (Oct. 31, 1975), as 

amended at 71 FR 5883 (Feb. 3, 2006). 

30Class Exemption for Certain Transactions 

Involving Insurance Agents and Brokers, Pension 

Consultants, Insurance Companies, Investment 

Companies and Investment Company Principal 

Underwriters, 49 FR 13208 (Apr. 3, 1984), amended 

at 71 FR 5887 (Feb. 3, 2006). 

The Principal Transaction PTE would 

include all of the contract requirements 

of the Best Interest Contract PTE. In 

addition, however, it would include 

specific conditions related to the price 

of the debt security involved in the 

transaction. The adviser would have to 

obtain two price quotes from 

unaffiliated counterparties for the same 

or a similar security, and the transaction 

would have to occur at a price at least 

as favorable to the plan or IRA as the 

two price quotes. Additionally, the 

adviser would have to disclose the 

amount of compensation and profit 

(sometimes referred to as a ‘‘mark up’’ 

or ‘‘mark down’’) that it expects to 

receive on the transaction. 

Amendments to Existing PTEs 

In addition to the Best Interest 

Contract PTE and the Principal 

Transaction PTE, the Department is also 

proposing elsewhere in the Federal 

Register amendments to certain existing 

PTEs. 

Prohibited Transaction Exemption 

86–128 

Prohibited Transaction Exemption 

(PTE) 86–128 28 currently allows an 

investment advice fiduciary to cause the 

recipient plan or IRA to pay the 

investment advice fiduciary or its 

affiliate a fee for effecting or executing 

securities transactions as agent. To 

prevent churning, the exemption does 

not apply if such transactions are 

excessive in either amount or frequency. 

The exemption also allows the 

investment advice fiduciary to act as an 

agent for both the plan and the other 

party to the transaction (i.e., the buyer 

and the seller of securities) and receive 

a reasonable fee. To use the exemption, 

the fiduciary cannot be a plan 

administrator or employer, unless all 

profits earned by these parties are 

returned to the plan. The conditions of 

the exemption require that a plan 

fiduciary independent of the investment 

advice fiduciary receive certain 

disclosures and authorize the 

transaction. In addition, the 

independent fiduciary must receive 

confirmations and an annual ‘‘portfolio 

turnover ratio’’ demonstrating the 

amount of turnover in the account 

during that year. These conditions are 

not presently applicable to transactions 

involving IRAs. 

The Department is proposing to 

amend PTE 86–128 to require all 

fiduciaries relying on the exemption to 

adhere to the same impartial conduct 

standards required in the Best Interest 

Contract PTE. At the same time, the 

proposed amendment would eliminate 

relief for investment advice fiduciaries 

to IRA owners; instead they would be 

required to rely on the Best Interest 

Contract PTE for an exemption for such 

compensation. In the Department’s 

view, the provisions in the Best Interest 

Contract Exemption better address the 

interests of IRAs with respect to 

transactions otherwise covered by PTE 

86–128 and, unlike plan participants 

and beneficiaries, there is no separate 

plan fiduciary in the IRA market to 

review and authorize the transaction. 

Investment advice fiduciaries to plans 

would remain eligible for relief under 

the exemption, as would investment 

managers with full investment 

discretion over the investments of plans 

and IRA owners, but they would be 

required to comply with all the 

protective conditions, described above. 

Finally, the Department is proposing 

that PTE 86–128 extend to a new 

covered transaction, for fiduciaries who 

sell mutual fund shares out of their own 

inventory (i.e., acting as principals, 

rather than agents) to plans and IRAs 

and to receive commissions for doing 

so. This transaction is currently the 

subject of another exemption, PTE 75– 

1, Part II(2) (discussed below) that the 

Department is proposing to revoke. 

Several changes are proposed with 

respect to PTE 75–1, a multi-part 

exemption for securities transactions 

involving broker dealers and banks, and 

plans and IRAs.29 Part I(b) and (c) 

currently provide relief for certain nonfiduciary services to plans and IRAs. 

The Department is proposing to revoke 

these provisions, and require persons 

seeking to engage in such transactions to 

rely instead on the existing statutory 

exemptions provided in ERISA section 

408(b)(2) and Code section 4975(d)(2), 

and the Department’s implementing 

regulations at 29 CFR 2550.408b–2. The 

Department believes the conditions of 

the statutory exemptions are more 

appropriate for the provision of these 

services. 

PTE 75–1, Part II(2), currently 

provides relief for fiduciaries selling 

mutual fund shares to plans and IRAs in 

a principal transaction to receive 

commissions. PTE 75–1, Part II(2) 

currently provides relief for fiduciaries 

to receive commissions for selling 

mutual fund shares to plans and IRAs in 

a principal transaction. As described 

above, the Department is proposing to 

provide relief for these types of 

transactions in PTE 86–128, and so is 

proposing to revoke PTE 75–1, Part II(2), 

in its entirety. As discussed in more 

detail in the notice of proposed 

amendment/revocation, the Department 

believes the conditions of PTE 86–128 

are more appropriate for these 

transactions. 

PTE 75–1, Part V, currently permits 

broker-dealers to extend credit to a plan 

or IRA in connection with the purchase 

or sale of securities. The exemption 

does not permit broker-dealers that are 

fiduciaries to receive compensation 

when doing so. The Department is 

proposing to amend PTE 75–1, Part V, 

to permit investment advice fiduciaries 

to receive compensation for lending 

money or otherwise extending credit, 

but only for the limited purpose of 

avoiding a failed securities transaction. 

Prohibited Transaction Exemption 

84–24 

PTE 84–24 30 covers transactions 

involving mutual fund shares, or 

insurance or annuity contracts, sold to 

plans or IRA investors by pension 

consultants, insurance agents, brokers, 

and mutual fund principal underwriters 

who are fiduciaries as a result of advice 

they give in connection with these 

transactions. The exemption allows 

these investment advice fiduciaries to 

receive a sales commission with respect 

to products purchased by plans or IRA 

investors. The exemption is limited to 

sales commissions that are reasonable 

under the circumstances. The 

investment advice fiduciary must 

provide disclosure of the amount of the 

commission and other terms of the 

transaction to an independent fiduciary 

of the plan or IRA, and obtain approval 

for the transaction. To use this 

exemption, the investment advice 

fiduciary may not have certain roles 

with respect to the plan or IRA such as 

trustee, plan administrator, fiduciary 

with written authorization to manage 

the plan’s assets and employers. 

However it is available to investment 

advice fiduciaries regardless of whether 

they expressly acknowledge their 

fiduciary status or are simply functional 

or ‘‘inadvertent’’ fiduciaries that have 

not expressly agreed to act as fiduciary 

advisers, provided there is no written 

authorization granting them discretion 

to acquire or dispose of the assets of the 

plan or IRA. 

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21950 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

31See the notices with respect to these proposals, 

published elsewhere in this issue of the Federal 

Register. 

The Department is proposing to 

amend PTE 84–24 to require all 

fiduciaries relying on the exemption to 

adhere to the same impartial conduct 

standards required in the Best Interest 

Contract Exemption. At the same time, 

the proposed amendment would revoke 

PTE 84–24 in part so that investment 

advice fiduciaries to IRA owners would 

not be able to rely on PTE 84–24 with 

respect to (1) transactions involving 

variable annuity contracts and other 

annuity contracts that constitute 

securities under federal securities laws, 

and (2) transactions involving the 

purchase of mutual fund shares. 

Investment advice fiduciaries to IRA 

owners would instead be required to 

rely on the Best Interest Contract 

Exemption for most common forms of 

compensation received in connection 

with these transactions. The Department 

believes that investment advice 

transactions involving annuity contracts 

that are treated as securities and 

transactions involving the purchase of 

mutual fund shares should occur under 

the conditions of the Best Interest 

Contract Exemption due to the 

similarity of these investments, 

including their distribution channels 

and disclosure obligations, to other 

investments covered in the Best Interest 

Contract Exemption. Investment advice 

fiduciaries to ERISA plans would 

remain eligible for relief under the 

exemption with respect to transactions 

involving all insurance and annuity 

contracts and mutual fund shares and 

the receipt of commissions allowable 

under that exemption. Investment 

advice fiduciaries to IRAs could still 

receive commissions for transactions 

involving non-securities insurance and 

annuity contracts, but they would be 

required to comply with all the 

protective conditions, described above. 

Finally, the Department is proposing 

amendments to certain other existing 

class exemptions to require adherence 

to the impartial conduct standards 

required in the Best Interest Contract 

PTE. Specifically, PTEs 75–1, Part III, 

75–1, Part IV, 77–4, 80–83, and 83–1, 

would be amended. These existing class 

exemptions will otherwise remain in 

place, affording flexibility to fiduciaries 

who currently use the exemptions or 

who wish to use the exemptions in the 

future. 

The proposed dates on which the new 

exemptions and amendments to existing 

exemptions would be effective are 

summarized below. 

G. The Provision of Professional 

Services Other Than Investment Advice 

Several commenters asserted that it 

was unclear whether investment advice 

under the scope of the 2010 Proposal 

would include the provision of 

information and plan services that 

traditionally have been performed in a 

non-fiduciary capacity. For example, 

they requested that the proposal be 

revised to make clear that actuaries, 

accountants, and attorneys, who have 

historically not been treated as ERISA 

fiduciaries for plan clients, would not 

become fiduciary investment advisers 

by reason of providing actuarial, 

accounting and legal services. They said 

that if individuals providing these 

services were classified as fiduciaries, 

the associated costs would almost 

certainly increase because of the need to 

account for their new potential fiduciary 

liability. This was not the intent of the 

2010 proposal. 

The new proposal clarifies that 

attorneys, accountants, and actuaries 

would not be treated as fiduciaries 

merely because they provide such 

professional assistance in connection 

with a particular investment 

transaction. Only when these 

professionals act outside their normal 

roles and recommend specific 

investments or render valuation 

opinions in connection with particular 

investment transactions, would they be 

subject to the proposed fiduciary 

definition. 

Similarly, the new proposal does not 

alter the principle articulated in ERISA 

Interpretive Bulletin 75–8, D–2 at 29 

CFR 2509.75–8 (1975). Under the 

bulletin, the plan sponsor’s human 

resources personnel or plan service 

providers who have no power to make 

decisions as to plan policy, 

interpretations, practices or procedures, 

but who perform purely administrative 

functions for an employee benefit plan, 

within a framework of policies, 

interpretations, rules, practices and 

procedures made by other persons, are 

not fiduciaries with respect to the plan. 

H. Effective Date; Applicability Date 

Final Rule 

Commenters on the 2010 Proposal 

asked the Department to provide 

sufficient time for orderly and efficient 

compliance, and to make it clear that 

the final rule would not apply in 

connection with advice provided before 

the effective date of the final rule. Many 

commenters also expressed concern 

with the provision in the Department’s 

2010 Proposal that the final regulation 

and class exemptions would be effective 

90 days after their publication in the 

Federal Register. Some commenters 

suggested that these effective dates 

should be extended to as much as 12 

months or longer following publication 

of the new rule to allow service 

providers sufficient time to make 

necessary changes in business practices, 

recordkeeping, communication 

materials, sales processes, compensation 

arrangements, and related agreements, 

as well as the time necessary to obtain 

and adjust to any additional individual 

or class exemptions. Several said that 

applicability of any changes in the 1975 

regulation should be no earlier than two 

years after the promulgation of a final 

regulation. Other commenters thought 

that the effective dates in the 2010 

proposal were reasonable and asked that 

the final rules should go into effect 

promptly in order to reduce ongoing 

harms to savers. 

In response to these concerns, the 

Department has revised the date by 

which the final rule would apply. 

Specifically, the final rule would be 

effective 60 days after publication in the 

Federal Register and the requirements 

of the final rule would generally become 

applicable eight months after 

publication of a final rule, with the 

potential exceptions noted below. This 

modification is intended to balance the 

concerns raised by commenters about 

the need for prompt action with 

concerns raised about the cost and 

burden associated with transitioning 

current and future contracts or 

arrangements to satisfy the requirements 

of the final rule and any accompanying 

prohibited transaction exemptions. 

Administrative Prohibited Transaction 

Exemptions 

The Department proposes to make the 

Best Interest Contract Exemption, if 

granted, available on the final rule’s 

applicability date, i.e., eight months 

after publication of a final rule. Further, 

the department proposes that the other 

new and revised PTEs that it is 

proposing go into effect as of the final 

rule’s applicability date.31

For those fiduciary investment 

advisers who choose to avail themselves 

of the Best Interest Contract Exemption, 

the Department recognizes that 

compliance with certain requirements of 

the new exemption may be difficult 

within the eight-month timeframe. The 

Department therefore is soliciting 

comments on whether to delay the 

application of certain requirements of 

the Best Interest Contract Exemption for 

several months (for example, certain 

data collection requirements), thereby 

enabling firms and advisers to benefit 

from the Best Interest Contract 

Exemption without meeting all the 

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Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 21951 

32Cerulli Associates, ‘‘Retirement Markets 2014: 

Sizing Opportunities in Private and Public 

Retirement Plans,’’ 2014. 

33For example, an ERISA plan investor who rolls 

$200,000 into an IRA, earns a 6% nominal rate of 

return with 3% inflation, and aims to spend down 

her savings in 30 years, would be able to consume 

$10,204 per year for the 30 year period. A similar 

investor whose assets underperform by 1 or 2 

percentage points per year would only be able to 

consume $8,930 or $7,750 per year, respectively, in 

each of the 30 years. The 1 to 2 percentage point 

underperformance comes from a careful review of 

a large and growing body of literature which 

consistently points to a substantial failure of the 

market for retirement advice. The literature is 

discussed in the Department’s complete Regulatory 

Impact Analysis (available at www.dol.gov/ebsa/ 

pdf/conflictsofinterestria.pdf). 

requirements for a limited period of 

time. Although the Department does not 

believe that a general delay in the 

application of the exemption’s 

requirements is warranted, it recognizes 

that a short-term delay of some 

requirements may be appropriate and 

may not compromise the overall 

protections created by the proposed rule 

and exemptions. As discussed in more 

detail in the Notice proposing the Best 

Interest Contract Exemption published 

elsewhere in this issue of the Federal 

Register, the Department requests 

comments on this approach. 

I. Public Hearing 

The Department plans to hold an 

administrative hearing within 30 days of 

the close of the comment period. As 

with the 2010 Proposal, the Department 

will ensure ample opportunity for 

public comment by reopening the 

record following the hearing and 

publication of the hearing transcript. 

Specific information regarding the date, 

location and submission of requests to 

testify will be published in a notice in 

the Federal Register. 

J. Regulatory Impact Analysis 

Under Executive Order 12866, 

‘‘significant’’ regulatory actions are 

subject to the requirements of the 

Executive Order and review by the 

Office of Management and Budget 

(OMB). Section 3(f) of the executive 

order defines a ‘‘significant regulatory 

action’’ as an action that is likely to 

result in a rule (1) having an annual 

effect on the economy of $100 million 

or more, or adversely and materially 

affecting a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

State, local or tribal governments or 

communities (also referred to as 

‘‘economically significant’’); (2) creating 

serious inconsistency or otherwise 

interfering with an action taken or 

planned by another agency; (3) 

materially altering the budgetary 

impacts of entitlement grants, user fees, 

or loan programs or the rights and 

obligations of recipients thereof; or (4) 

raising novel legal or policy issues 

arising out of legal mandates, the 

President’s priorities, or the principles 

set forth in the Executive Order. OMB 

has determined that this proposed rule 

is economically significant within the 

meaning of section 3(f)(1) of the 

Executive Order, because it would be 

likely to have an effect on the economy 

of $100 million in at least one year. 

Accordingly, OMB has reviewed the 

rule pursuant to the Executive Order. 

The Department’s complete 

Regulatory Impact Analysis is available 

at www.dol.gov/ebsa/pdf/ 

conflictsofinterestria.pdf. It is 

summarized below. 

Tax-preferred retirement savings, in 

the form of private-sector, employersponsored retirement plans, such as 

401(k) plans (‘‘plans’’), and Individual 

Retirement Accounts (‘‘IRAs’’), are 

critical to the retirement security of 

most U.S. workers. Investment 

professionals play a major role in 

guiding their investment decisions. 

However, these professional advisers 

often are compensated in ways that 

create conflicts of interest, which can 

bias the investment advice they render 

and erode plan and IRA investment 

results. In order to limit or mitigate 

conflicts of interest and thereby improve 

retirement security, the Department of 

Labor (‘‘the Department’’) is proposing 

to attach fiduciary status to more of the 

advice rendered to plan officials, 

participants, and beneficiaries (plan 

investors) and IRA investors. 

Since the Department issued its 1975 

rule, the retirement savings market has 

changed profoundly. Financial products 

are increasingly varied and complex. 

Individuals, rather than large 

employers, are increasingly responsible 

for their investment decisions as IRAs 

and 401(k)-type defined contribution 

plans have supplanted defined benefit 

pensions as the primary means of 

providing retirement security. Plan and 

IRA investors often lack investment 

expertise and must rely on experts—but 

are unable to assess the quality of the 

expert’s advice or police its conflicts of 

interest. Most have no idea how 

‘‘advisers’’ are compensated for selling 

them products. Many are bewildered by 

complex choices that require substantial 

financial literacy and welcome ‘‘free’’ 

advice. The risks are growing as baby 

boomers retire and move money from 

plans, where their employer has both 

the incentive and the fiduciary duty to 

facilitate sound investment choices, to 

IRAs, where both good and bad 

investment choices are myriad and most 

advice is conflicted. These ‘‘rollovers’’ 

are expected to approach $2.5 trillion 

over the next 5 years.32 These rollovers, 

which will be one-time and not ‘‘on a 

regular basis’’ and thus not covered by 

the 1975 standard, will be the most 

important financial decisions that many 

consumers make in their lifetime. An 

ERISA plan investor who rolls her 

retirement savings into an IRA could 

lose 12 to 24 percent of the value of her 

savings over 30 years of retirement by 

accepting advice from a conflicted 

financial advisor.33 Timely regulatory 

action to redress advisers’ conflicts is 

warranted to avert such losses. 

In the retail IRA marketplace, growing 

consumer demand for personalized 

advice, together with competition from 

online discount brokerage firms, has 

pushed brokers to offer more 

comprehensive guidance services rather 

than just transaction support. 

Unfortunately, their traditional 

compensation sources—such as 

brokerage commissions, revenue shared 

by mutual funds and funds’ asset 

managers, and mark-ups on bonds sold 

from their own inventory—can 

introduce acute conflicts of interest. 

Brokers and others advising IRA 

investors are often able to calibrate their 

business practices to steer around the 

narrow 1975 rule and thereby avoid 

fiduciary status and prohibited 

transactions for accepting conflict-laden 

compensation. Many brokers market 

retirement investment services in ways 

that clearly suggest the provision of 

tailored or individualized advice, while 

at the same time relying on the 1975 

rule to disclaim any fiduciary 

responsibility in the fine print of 

contracts and marketing materials. 

Thus, at the same time that marketing 

materials may characterize the financial 

adviser’s relationship with the customer 

as one-on-one, personalized, and based 

on the client’s best interest, footnotes 

and legal boilerplate disclaim the 

requisite mutual agreement, 

arrangement, or understanding that the 

advice is individualized or should serve 

as a primary basis for investment 

decisions. What is presented to an IRA 

investor as trusted advice is often paid 

for by a financial product vendor in the 

form of a sales commission or shelfspace fee, without adequate counterbalancing consumer protections that are 

designed to ensure that the advice is in 

the investor’s best interest. In another 

variant of the same problem, brokers 

and others provide apparently tailored 

advice to customers under the guise of 

general education to avoid triggering 

fiduciary status and responsibility. 

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21952 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

34 DOL Advisory Opinion 2005–23A (Dec. 7, 

2005). 

35See Loewenstein et al., (2011) for a summary 

of some relevant literature. 

Likewise in the plan market, pension 

consultants and advisers that plan 

sponsors rely on to guide their decisions 

often avoid fiduciary status under the 

five-part test and are conflicted. For 

example, if a plan hires an investment 

professional or appraiser on a one-time 

basis for an investment recommendation 

on a large, complex investment, the 

adviser has no fiduciary obligation to 

the plan under ERISA. Even if the plan 

official, who lacks the specialized 

expertise necessary to evaluate the 

complex transaction on his or her own, 

invests all or substantially all of the 

plan’s assets in reliance on the 

consultant’s professional judgment, the 

consultant is not a fiduciary because he 

or she does not advise the plan on a 

‘‘regular basis’’ and therefore may stand 

to profit from the plan’s investment due 

to a conflict of interest that could affect 

the consultant’s best judgment. Too 

much has changed since 1975, and too 

many investment decisions are made as 

one-time decisions and not advice on a 

regular basis for the five-part test to be 

a meaningful safeguard any longer. 

The proposed definition of fiduciary 

investment advice included in this 

NPRM generally covers specific 

recommendations on investments, 

investment management, the selection 

of persons to provide investment advice 

or management, and appraisals in 

connection with investment decisions. 

Persons who provide such advice would 

fall within the proposed regulation’s 

ambit if they either (a) represent that 

they are acting as an ERISA fiduciary or 

(b) make investment recommendations 

pursuant to an agreement, arrangement, 

or understanding that the advice is 

individualized or specifically directed 

to the recipient for consideration in 

making investment or investment 

management decisions regarding plan or 

IRA assets. 

The current proposal specifically 

includes as fiduciary investment advice 

recommendations concerning the 

investment of assets that are rolled over 

or otherwise distributed from a plan. 

This would supersede guidance the 

Department provided in a 2005 advisory 

opinion,34 which concluded that such 

recommendations did not constitute 

fiduciary advice. However, the current 

proposal provides that an adviser does 

not act as a fiduciary merely by 

providing plan investors with 

information about plan distribution 

options, including the tax consequences 

associated with the available types of 

benefit distributions. 

The current proposal adopts what the 

Department intends to be a balanced 

approach to prohibited transaction 

exemptions. The proposal narrows and 

attaches new protective conditions to 

some existing PTEs. At the same time it 

includes some new PTEs with broad but 

targeted combined scope and strong 

protective conditions. These elements of 

the proposal reflect the Department’s 

effort to ensure that advice is impartial 

while avoiding larger and costlier than 

necessary disruptions to existing 

business arrangements or constraints on 

future innovation. 

In developing the current proposal, 

the Department conducted an in-depth 

economic assessment of the market for 

retirement investment advice. As further 

discussed below, the Department found 

that conflicted advice is widespread, 

causing serious harm to plan and IRA 

investors, and that disclosing conflicts 

alone would fail to adequately mitigate 

the conflicts or remedy the harm. By 

extending fiduciary status to more 

providers of advice and providing broad 

but targeted and protective PTEs, the 

Department believes the current 

proposal would mitigate conflicts, 

support consumer choice, and deliver 

substantial gains for retirement 

investors and economic benefits that 

more than justify its costs. 

Advisers’ conflicts take a variety of 

forms and can bias their advice in a 

variety of ways. For example, advisers 

often are paid more for selling some 

mutual funds than others, and to 

execute larger and more frequent trades 

of mutual fund shares or other 

securities. Broker-dealers reap price 

spreads from principal transactions, so 

advisers may be encouraged to 

recommend larger and more frequent 

trades. These and other adviser 

compensation arrangements introduce 

direct and serious conflicts of interest 

between advisers and retirement 

investors. Advisers often are paid a great 

deal more if they recommend 

investments and transactions that are 

highly profitable to the financial 

industry, even if they are not in 

investors’ best interests. These financial 

incentives can and do bias the advisers’ 

recommendations. 

Following such biased advice can 

inflict losses on investors in several 

ways. They may choose more expensive 

and/or poorer performing investments. 

They may trade too much and thereby 

incur excessive transaction costs, and 

they may incur more costly timing 

errors, which are a common 

consequence of chasing returns. 

A wide body of economic evidence, 

reviewed in the Department’s full 

Regulatory Impact Analysis (available at 

www.dol.gov/ebsa/pdf/ 

conflictsofinterestria.pdf), supports a 

finding that the impact of these conflicts 

of interest on investment outcomes is 

large and negative. The supporting 

evidence includes, among other things, 

statistical analyses of conflicted 

investment channels, experimental 

studies, government reports 

documenting abuse, and economic 

theory on the dangers posed by conflicts 

of interest and by the asymmetries of 

information and expertise that 

characterize interactions between 

ordinary retirement investors and 

conflicted advisers. A review of this 

data, which consistently points to a 

substantial failure of the market for 

retirement advice, suggests that IRA 

holders receiving conflicted investment 

advice can expect their investments to 

underperform by an average of 100 basis 

points per year over the next 20 years. 

The underperformance associated with 

conflicts of interest—in the mutual 

funds segment alone—could cost IRA 

investors more than $210 billion over 

the next 10 years and nearly $500 over 

the next 20 years. Some studies suggest 

that the underperformance of brokersold mutual funds may be even higher 

than 100 basis points. If the true 

underperformance of broker-sold funds 

is 200 basis points, IRA mutual fund 

holders could suffer from 

underperformance amounting to $430 

billion over 10 years and nearly $1 

trillion across the next 20 years. While 

the estimates based on the mutual fund 

market are large, the total market impact 

could be much larger. Insurance 

products, Exchange Traded Funds 

(ETFs), individual stocks and bonds, 

and other products are all sold by 

brokers with conflicts of interest. 

Disclosure alone has proven 

ineffective to mitigate conflicts in 

advice. Extensive research has 

demonstrated that most investors have 

little understanding of their advisers’ 

conflicts, and little awareness of what 

they are paying via indirect channels for 

the conflicted advice. Even if they 

understand the scope of the advisers’ 

conflicts, most consumers generally 

cannot distinguish good advice, or even 

good investment results, from bad. The 

same gap in expertise that makes 

investment advice necessary frequently 

also prevents investors from recognizing 

bad advice or understanding advisers’ 

disclosures. Recent research suggests 

that even if disclosure about conflicts 

could be made simple and clear, it 

would be ineffective—or even 

harmful.35

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36 GAO Report, Publication No. GAO–09–503T, 

2009. 

37 GAO Report, Publication No. GAO–11–119, 

2011. 

38See e.g. Elton et al. (2013). 

39See Pool et al. (2014). 

Excessive fees and substandard 

investment performance in DC plans or 

IRAs, which can result when advisers’ 

conflicts bias their advice, erode benefit 

security. This proposal aims to ensure 

that advice is impartial, thereby rooting 

out excessive fees and substandard 

performance otherwise attributable to 

advisers’ conflicts, producing gains for 

retirement investors. Delivering these 

gains would entail compliance costs— 

namely, the cost incurred by new 

fiduciary advisers to avoid the 

prohibited transaction rules and/or 

satisfy relevant PTE conditions. The 

Department expects investor gains 

would be very large relative to 

compliance costs, and therefore believes 

this proposal is economically justified 

and sound. 

Because of limitations of the literature 

and other evidence, only some of these 

gains can be quantified with confidence. 

Focusing only on how load shares paid 

to brokers affect the size of loads IRA 

investors holding front-end load funds 

pay and the returns they achieve, we 

estimate the proposal would deliver to 

IRA investors gains of between $40 

billion and $44 billion over 10 years and 

between $88 and $100 billion over 20 

years. These estimates assume that the 

rule will eliminate (rather than just 

reduce) underperformance associated 

with the practice of incentivizing broker 

recommendations through variable 

front-end-load sharing; if the rule’s 

effectiveness in this area is substantially 

below 100 percent, these estimates may 

overstate these particular gains to 

investors in the front-load mutual fund 

segment of the IRA market. The 

Department nonetheless believes that 

these gains alone would far exceed the 

proposal’s compliance cost which are 

estimated to be between $2.4 billion and 

$5.7 billion over 10 years, mostly 

reflecting the cost incurred by new 

fiduciary advisers to satisfy relevant 

PTE conditions (these costs are also 

front-loaded and will be less in 

subsequent years). For example, if only 

75 percent of the potential gains were 

realized in the subset of the market that 

was analyzed (the front-load mutual 

fund segment of the IRA market), the 

gains would amount to between $30 

billion and $33 billion over 10 years. If 

only 50 percent were realized, the 

expected gains in this subset of the 

market would total between $20 billion 

and $22 billion over 10 years, still 

several times the proposal’s estimated 

compliance cost 

These estimates account for only a 

fraction of potential conflicts, associated 

losses, and affected retirement assets. 

The total gains to IRA investors 

attributable to the rule may be much 

higher than these quantified gains alone. 

The Department expects the proposal to 

yield large, additional gains for IRA 

investors, including improvements in 

the performance of IRA investments 

other than front-load mutual funds and 

potential reductions in excessive trading 

and associated transaction costs and 

timing errors (such as might be 

associated with return chasing). As 

noted above, under current rules, 

adviser conflicts could cost IRA 

investors as much as $410 billion over 

10 years and $1 trillion over 20 years, 

so the potential additional gains to IRA 

investors from this proposal could be 

very large. 

Just as with IRAs, there is evidence 

that conflicts of interest in the 

investment advice market also erode 

plan assets. For example, the U.S. 

Government Accountability Office 

(GAO) found that defined benefit 

pension plans using consultants with 

undisclosed conflicts of interest earned 

1.3 percentage points per year less than 

other plans.36 Other GAO reports point 

out how adviser conflicts may cause 

plan participants to roll plan assets into 

IRAs that charge high fees or 401(k) plan 

officials to include expensive or 

underperforming funds in investment 

menus.37 A number of academic studies 

find that 401(k) plan investment options 

underperform the market,38 and at least 

one study attributes such 

underperformance to excessive reliance 

on funds that are proprietary to plan 

service providers who may be providing 

investment advice to plan officials that 

choose the investment options.39

The Department expects the current 

proposal’s positive effects to extend 

well beyond improved investment 

results for retirement investors. The IRA 

and plan markets for fiduciary advice 

and other services may become more 

efficient as a result of more transparent 

pricing and greater certainty about the 

fiduciary status of advisers and about 

the impartiality of their advice. There 

may be benefits from the increased 

flexibility that the current proposal’s 

PTEs would provide with respect to 

fiduciary investment advice currently 

falling within the ambit of the 1975 rule. 

The current proposal’s defined 

boundaries between fiduciary advice, 

education, and sales activity directed at 

large plans, may bring greater clarity to 

the IRA and plan services markets. 

Innovation in new advice business 

models, including technology-driven 

models, may be accelerated, and nudged 

away from conflicts and toward 

transparency, thereby promoting 

healthy competition in the fiduciary 

advice market. 

A major expected positive effect of the 

current proposal in the plan advice 

market is improved compliance and 

associated improved security of plan 

assets and benefits. Clarity about 

advisers’ fiduciary status would 

strengthen EBSA’s enforcement 

activities resulting in fuller and faster 

correction, and stronger deterrence, of 

ERISA violations. 

In conclusion, the Department 

believes that the current proposal would 

mitigate adviser conflicts and thereby 

improve plan and IRA investment 

results, while avoiding greater than 

necessary disruption of existing 

business practices and would deliver 

large gains to retirement investors and a 

variety of other economic benefits, 

which would more than justify its costs. 

K. Initial Regulatory Flexibility Analysis 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (RFA) imposes 

certain requirements with respect to 

Federal rules that are subject to the 

notice and comment requirements of 

section 553(b) of the Administrative 

Procedure Act (5 U.S.C. 551 et seq.) and 

which are likely to have a significant 

economic impact on a substantial 

number of small entities. Unless an 

agency determines that a proposal is not 

likely to have a significant economic 

impact on a substantial number of small 

entities, section 603 of the RFA requires 

the agency to present an initial 

regulatory flexibility analysis (IRFA) of 

the proposed rule. The Department’s 

IRFA of the proposed rule is provided 

below. 

The Department believes that 

amending the current regulation by 

broadening the scope of service 

providers, regardless of size, that would 

be considered fiduciaries would 

enhance the Department’s ability to 

redress service provider abuses that 

currently exist in the plan service 

provider market, such as undisclosed 

fees, misrepresentation of compensation 

arrangements, and biased appraisals of 

the value of plan investments. 

The Department’s complete Initial 

Regulatory Flexibility Analysis is 

available at www.dol.gov/ebsa/pdf/ 

conflictsofinterestria.pdf. It is 

summarized below. 

The Department believes that the 

proposal would provide benefits to 

small plans and their related small 

employers and IRA holders, and impose 

costs on small service providers 

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21954 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

providing investment advice to ERISA 

plans, ERISA plan participants and IRA 

holders. Small service providers 

affected by this rule are defined to 

include broker-dealers, registered 

investment advisers, consultants, 

appraisers, and others providing 

investment advice to small ERISA plans 

and IRA that have less than $38.5 

million in revenue. 

The Department anticipates that 

broker-dealers would experience the 

largest impact from the proposed rule 

and associated proposed exemptions. 

Registered investment advisers and 

other ERISA plan service providers 

would experience less of a burden from 

the rule. The Department assumes that 

firms would utilize whichever PTEs 

would be most cost effective for their 

business models. Regardless of which 

PTEs they use, small affected entities 

would incur costs associated with 

developing and implementing new 

compliance policies and procedures to 

minimize conflicts of interest; creating 

and distributing new disclosures; 

maintaining additional compliance 

records; familiarizing and training staff 

on new requirements; and obtaining 

additional liability insurance. 

As discussed previously, the 

Department estimated the costs of 

implementing new compliance policies 

and procedures, training staff, and 

creating disclosures for small brokerdealers. The Department estimates that 

small broker-dealers could expend on 

average approximately $53,000 in the 

first year and $21,000 in subsequent 

years; small registered investment 

advisers would spend approximately 

$5,300 in the first year and $500 in 

subsequent years; and small service 

providers would spend approximately 

$5,300 in the first year and $500 in 

subsequent years. The estimated cost for 

small broker-dealers is believed to be an 

overestimate, especially for the smallest 

firms as they are believed to have on 

average simpler arrangements and they 

may have relationships with larger firms 

that help with compliance, thus 

lowering their costs. Additionally, 

broker-dealers and service providers 

would incur an expense of about $300 

in additional liability insurance 

premiums for each representative or 

other individual who would now be 

considered a fiduciary. Of this expense, 

$150 is estimated to be paid to the 

insuring firms and the other $150 is 

estimated to be paid out as 

compensation to those harmed, which is 

counted as a transfer. Any disclosures 

produced by affected entities would 

cost, on average, about $1.53 in the first 

year and about $1.15 in subsequent 

years. These per-representative and perdisclosure costs are not expected to 

disproportionately affect small entities. 

Although the PTEs allow firms to 

maintain their existing business models, 

some small affected entities may 

determine that it is more cost effective 

to shift business models. In this 

scenario, some BDs might incur the 

costs of switching to becoming RIAs, 

including training, testing, and licensing 

costs, at a cost of approximately $5,600 

per representative. 

Some small service providers may 

find that the increased costs associated 

with ERISA fiduciary status outweigh 

the benefit of continuing to service the 

ERISA plan market or the IRA market. 

The Department does not believe that 

this outcome would be widespread or 

that it would result in a diminution of 

the amount or quality of advice 

available to small or other retirement 

savers. It is also possible that the 

economic impact of the rule on small 

entities would not be as significant as it 

would be for large entities, because 

anecdotal evidence indicates that some 

small entities do not have as many 

business arrangements that give rise to 

conflicts of interest. Therefore, they 

would not be confronted with the same 

costs to restructure transactions that 

would be faced by large entities. 

L. Paperwork Reduction Act 

As part of its continuing effort to 

reduce paperwork and respondent 

burden, the Department of Labor 

conducts a preclearance consultation 

program to provide the general public 

and Federal agencies with an 

opportunity to comment on proposed 

and continuing collections of 

information in accordance with the 

Paperwork Reduction Act of 1995 (PRA) 

(44 U.S.C. 3506(c)(2)(A)). This helps to 

ensure that the public understands the 

Department’s collection instructions; 

respondents can provide the requested 

data in the desired format; reporting 

burden (time and financial resources) is 

minimized; collection instruments are 

clearly understood; and the Department 

can properly assess the impact of 

collection requirements on respondents. 

Currently, the Department is soliciting 

comments concerning the proposed 

information collection requests (ICRs) 

included in the ‘‘carve-outs’’ section of 

its proposal to amend its 1975 rule that 

defines when a person who provides 

investment advice to an employee 

benefit plan becomes an ERISA 

fiduciary. A copy of the ICRs may be 

obtained by contacting the PRA 

addressee shown below or at http:// 

www.RegInfo.gov. 

The Department has submitted a copy 

of the Conflict of Interest Proposed Rule 

Carveout Disclosure Requirements to 

the Office of Management and Budget 

(OMB) in accordance with 44 U.S.C. 

3507(d) for review of its information 

collections. The Department and OMB 

are particularly interested in comments 

that: 

• Evaluate whether the collection of 

information is necessary for the proper 

performance of the functions of the 

agency, including whether the 

information would have practical 

utility; 

• Evaluate the accuracy of the 

agency’s estimate of the burden of the 

collection of information, including the 

validity of the methodology and 

assumptions used; 

• Enhance the quality, utility, and 

clarity of the information to be 

collected; and 

• Minimize the burden of the 

collection of information on those who 

are to respond, including through the 

use of appropriate automated, 

electronic, mechanical, or other 

technological collection techniques or 

other forms of information technology, 

e.g., permitting electronic submission of 

responses. 

Comments should be sent to the 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 20503; 

Attention: Desk Officer for the 

Employee Benefits Security 

Administration. OMB requests that 

comments be received within 30 days of 

publication of the Proposed Investment 

Advice Initiative to ensure their 

consideration. 

PRA Addressee: Address requests for 

copies of the ICR to G. Christopher 

Cosby, Office of Policy and Research, 

U.S. Department of Labor, Employee 

Benefits Security Administration, 200 

Constitution Avenue NW., Room N– 

5718, Washington, DC 20210. 

Telephone (202) 693–8410; Fax: (202) 

219–5333. These are not toll-free 

numbers. ICRs submitted to OMB also 

are available at http://www.RegInfo.gov. 

As discussed in detail above, 

Paragraph (b)(1)(i) of the proposed 

regulation provides a carve-out to the 

general definition for advice provided in 

connection with an arm’s length sale, 

purchase, loan, or bilateral contract 

between a sophisticated plan investor, 

which has 100 or more plan 

participants, and the adviser (‘‘seller’s 

carve-out’’). It also applies in 

connection with an offer to enter into 

such a transaction or when the person 

providing the advice is acting as an 

agent or appraiser for the plan’s 

counterparty. In order to rely on this 

carve-out, the person must provide 

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40The Department’s estimated 2015 hourly labor 

rates include wages, other benefits, and overhead 

are calculated as follows: Mean wage from the 2013 

National Occupational Employment Survey (April 

2014, Bureau of Labor Statistics http://www.bls.gov/ 

news.release/pdf/ocwage.pdf); wages as a percent of 

total compensation from the Employer Cost for 

Employee Compensation (June 2014, Bureau of 

Labor Statistics http://www.bls.gov/news.release/ 

ecec.t02.htm); overhead as a multiple of 

compensation is assumed to be 25 percent of total 

compensation for paraprofessionals, 20 percent of 

compensation for clerical, and 35 percent of 

compensation for professional; annual inflation 

assumed to be 2.3 percent annual growth of total 

labor cost since 2013 (Employment Costs Index data 

for private industry, September 2014 http:// 

www.bls.gov/news.release/eci.nr0.htm). 

advice to a plan fiduciary who is 

independent of such person and who 

exercises authority or control respecting 

the management or disposition of the 

plan’s assets, with respect to an arm’s 

length sale, purchase, loan or bilateral 

contract between the plan and the 

counterparty, or with respect to a 

proposal to enter into such a sale, 

purchase, loan or bilateral contract. 

The seller’s carve-out applies if 

certain conditions are met. Among these 

conditions are the following: The 

adviser must obtain a written 

representation from the plan fiduciary 

that (1) the plan fiduciary is a fiduciary 

who exercises authority or control 

respecting the management or 

disposition of the employee benefit 

plan’s assets (as described in section 

3(21)(A)(i) of the Act), (2) that the 

employee benefit plan has 100 or more 

participants covered under the plan, 

and that (3) the fiduciary will not rely 

on the person to act in the best interests 

of the plan, to provide impartial 

investment advice, or to give advice in 

a fiduciary capacity. 

Paragraph (b)(3) of the proposed 

regulation provides a carve-out making 

clear that persons who merely market 

and make available, securities or other 

property through a platform or similar 

mechanism to an employee benefit plan 

without regard to the individualized 

needs of the plan, its participants, or 

beneficiaries do not act as investment 

advice fiduciaries. This carve-out 

applies if the person discloses in writing 

to the plan fiduciary that the person is 

not undertaking to provide impartial 

investment advice or to give advice in 

a fiduciary capacity. 

Paragraph (b)(6) of the proposal makes 

clear that furnishing and providing 

certain specified investment educational 

information and materials (including 

certain investment allocation models 

and interactive plan materials) to a plan, 

plan fiduciary, participant, beneficiary 

or IRA owner would not constitute the 

rendering of investment advice if certain 

conditions are met. One of the 

conditions is that the asset allocation 

models or interactive materials must 

explain all material facts and 

assumptions on which the models and 

materials are based and include a 

statement indicating that, in applying 

particular asset allocation models to 

their individual situations, participants, 

beneficiaries, or IRA owners should 

consider their other assets, income, and 

investments in addition to their 

interests in the plan or IRA to the extent 

they are not taken into account in the 

model or estimate. 

The seller’s carve-out written 

representation, platform provider carveout disclosure, and the education carveout disclosures for asset allocation 

models and interactive investment 

materials are information collection 

requests (ICRs) subject to the Paperwork 

Reduction Act. The Department has 

made the following assumptions in 

order to establish a reasonable estimate 

of the paperwork burden associated 

with these ICRs: 

• Approximately 43,000 plans would 

utilize the seller’s carve-out; 

• Approximately 1,800 service 

providers would utilize the platform 

provider carve-out; 

• Approximately 2,800 financial 

institutions would utilize the education 

carve-out; 

• Plans and advisers using the seller’s 

carve-out are entities with financial 

expertise and would distribute 

substantially all of the disclosures 

electronically via means already used in 

their normal course of business and the 

costs arising from electronic distribution 

would be negligible; 

• Service providers using the 

platform provider carve-out already 

maintain contracts with their customers 

as a regular and customary business 

practice and the materials costs arising 

from inserting the platform provider 

carve-out into the existing contracts 

would be negligible; 

• Materials costs arising from 

inserting the required education carveout disclosure into existing models and 

interactive materials would be 

negligible; 

• Advisers would use existing inhouse resources to prepare the 

disclosures; and 

• The tasks associated with the ICRs 

would be performed by clerical 

personnel at an hourly rate of $30.42 

and legal professionals at an hourly rate 

of $129.94.40

The Department estimates that each 

plan would require one hour of legal 

professional time and 30 minutes of 

clerical time to produce the seller’s 

carve-out representation. Therefore, the 

seller’s carve-out representation would 

result in approximately 43,000 hours of 

legal time at an equivalent cost of 

approximately $5.6 million. It would 

also result in approximately 21,000 

hours of clerical time at an equivalent 

cost of approximately $653,000. In total, 

the burden associated with the seller’s 

carve-out representation is 

approximately 64,000 hours at an 

equivalent cost of $6.2 million. 

The Department estimates that each 

service provider using the platform 

provider carve-out would require ten 

minutes of legal professional time to 

draft the needed disclosure. Therefore, 

the platform provider carve-out 

disclosure would result in 

approximately 300 hours of legal time at 

an equivalent cost of approximately 

$39,000. 

The Department estimates that each 

financial institution using the education 

carve-out would require twenty minutes 

of legal professional time to draft the 

disclosure. Therefore, this carve-out 

disclosure would result in 

approximately 900 hours of legal time at 

an equivalent cost of approximately 

$121,000. 

In total, the hour burden for the 

representation and disclosures required 

by the carve-outs is approximately 

66,000 hours at an equivalent cost of 

$6.4 million. 

Because the Department assumes that 

all disclosures would be distributed 

electronically or require small amounts 

of space to include in existing materials, 

the Department has not associated any 

cost burden with these ICRs. 

These paperwork burden estimates 

are summarized as follows: 

Type of Review: New collection 

(Request for new OMB Control 

Number). 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Title: Conflict of Interest Proposed 

Rule Carveout Disclosure Requirements. 

OMB Control Number: 1210—NEW. 

Affected Public: Business or other forprofit. 

Estimated Number of Respondents: 

47,532. 

Estimated Number of Annual 

Responses: 47,532. 

Frequency of Response: When 

engaging in excepted transaction. 

Estimated Total Annual Burden 

Hours: 65,631 hours. 

Estimated Total Annual Burden Cost: 

$0. 

M. Congressional Review Act 

The proposed rule is subject to the 

Congressional Review Act provisions of 

the Small Business Regulatory 

Enforcement Fairness Act of 1996 (5 

U.S.C. 801 et seq.) and, if finalized, 

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41Under section 102 of the Reorganization Plan 

No. 4 of 1978, the authority of the Secretary of the 

Treasury to interpret section 4975 of the Code has 

been transferred, with exceptions not relevant here, 

to the Secretary of Labor. 

42 29 CFR 2510.3–21(c). 

43Available at http://www.dol.gov/ebsa/pdf/1210- 

AB32-PH007.pdf. 

would be transmitted to Congress and 

the Comptroller General for review. The 

proposed rule is a ‘‘major rule’’ as that 

term is defined in 5 U.S.C. 804, because 

it is likely to result in an annual effect 

on the economy of $100 million or 

more. 

N. Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 (Pub. L. 104–4) 

requires each Federal agency to prepare 

a written statement assessing the effects 

of any Federal mandate in a proposed or 

final agency rule that may result in an 

expenditure of $100 million or more 

(adjusted annually for inflation with the 

base year 1995) in any one year by State, 

local, and tribal governments, in the 

aggregate, or by the private sector. Such 

a mandate is deemed to be a ‘‘significant 

regulatory action.’’ The current proposal 

is expected to have such an impact on 

the private sector, and the Department 

therefore hereby provides such an 

assessment. 

The Department is issuing the current 

proposal under ERISA section 

3(21)(A)(ii) (29 U.S.C. 1002(21)(a)(ii)).41

The Department is charged with 

interpreting the ERISA and Code 

provisions that attach fiduciary status to 

anyone who is paid to provide 

investment advice to plan or IRA 

investors. The current proposal would 

update and supersede the 1975 rule 42

that currently interprets these statutory 

provisions. 

The Department assessed the 

anticipated benefits and costs of the 

current proposal pursuant to Executive 

Order 12866 in the Regulatory Impact 

Analysis for the current proposal and 

concluded that its benefits would justify 

its costs. The Department’s complete 

Regulatory Impact Analysis is available 

at www.dol.gov/ebsa/pdf/

conflictsofinterestria.pdf. To 

summarize, the current proposals’ 

material benefits and costs generally 

would be confined to the private sector, 

where plans and IRA investors would, 

in the Department’s estimation, benefit 

on net, partly at the expense of their 

fiduciary advisers and upstream 

financial service and product producers. 

The Department itself would benefit 

from increased efficiency in its 

enforcement activity. The public and 

overall US economy would benefit from 

increased compliance with ERISA and 

the Code and confidence in advisers, as 

well as from more efficient allocation of 

investment capital, and gains to 

investors. 

The current proposal is not expected 

to have any material economic impacts 

on State, local or tribal governments, or 

on health, safety, or the natural 

environment. The North American 

Securities Administrators Association 

commented in support of the 

Department’s 2010 proposal.43

O. Federalism Statement 

Executive Order 13132 (August 4, 

1999) outlines fundamental principles 

of federalism, and requires the 

adherence to specific criteria by Federal 

agencies in the process of their 

formulation and implementation of 

policies that have substantial direct 

effects on the States, the relationship 

between the national government and 

States, or on the distribution of power 

and responsibilities among the various 

levels of government. This proposed 

rule does not have federalism 

implications because it has no 

substantial direct effect on the States, on 

the relationship between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. Section 514 of 

ERISA provides, with certain exceptions 

specifically enumerated, that the 

provisions of Titles I and IV of ERISA 

supersede any and all laws of the States 

as they relate to any employee benefit 

plan covered under ERISA. The 

requirements implemented in the 

proposed rule do not alter the 

fundamental reporting and disclosure 

requirements of the statute with respect 

to employee benefit plans, and as such 

have no implications for the States or 

the relationship or distribution of power 

between the national government and 

the States. 

Statutory Authority 

This regulation is proposed pursuant 

to the authority in section 505 of ERISA 

(Pub. L. 93–406, 88 Stat. 894; 29 U.S.C. 

1135) and section 102 of Plan No. 4 of 

1978 (43 FR 47713, October 17, 1978), 

effective December 31, 1978 (44 FR 

1065, January 3, 1979), 3 CFR 1978 

Comp. 332, and under Secretary of 

Labor’s Order No. 1–2011, 77 FR 1088 

(Jan. 9, 2012). 

Withdrawal of Proposed Regulation 

Paragraph (c) of the proposed 

regulation relating to the definition of 

fiduciary (proposed 29 CFR 2510.3(21)) 

that was published in the Federal 

Register on October 20, 2010 (75 FR 

65263) is hereby withdrawn. 

List of Subjects in 29 CFR Parts 2509 

and 2510 

Employee benefit plans, Employee 

Retirement Income Security Act, 

Pensions, Plan assets. 

For the reasons set forth in the 

preamble, the Department is proposing 

to amend parts 2509 and 2510 of 

subchapters A and B of Chapter XXV of 

Title 29 of the Code of Federal 

Regulations as follows: 

SUBCHAPTER A—GENERAL 

PART 2509—INTERPRETIVE 

BULLETINS RELATING TO THE 

EMPLOYEE RETIREMENT INCOME 

SECURITY ACT OF 1974 

■ 1. The authority citation for part 2509 

continues to read as follows: 

Authority: 29 U.S.C. 1135. Secretary of 

Labor’s Order 1–2011, 77 FR 1088 (Jan. 9, 

2012). Sections 2509.75–10 and 2509.75–2 

issued under 29 U.S.C. 1052, 1053, 1054. Sec. 

2509.75–5 also issued under 29 U.S.C. 1002. 

Sec. 2509.95–1 also issued under sec. 625, 

Pub. L. 109–280, 120 Stat. 780. 

§ 2509.96–1 [Removed] 

■ 2. Remove § 2509.96–1. 

SUBCHAPTER B—DEFINITIONS AND 

COVERAGE UNDER THE EMPLOYEE 

RETIREMENT INCOME SECURITY ACT OF 

1974 

PART 2510—DEFINITIONS OF TERMS 

USED IN SUBCHAPTERS C, D, E, F, 

AND G OF THIS CHAPTER 

■ 3. The authority citation for part 2510 

is revised to read as follows: 

Authority: 29 U.S.C. 1002(2), 1002(21), 

1002(37), 1002(38), 1002(40), 1031, and 1135; 

Secretary of Labor’s Order 1–2011, 77 FR 

1088; Secs. 2510.3–21, 2510.3–101 and 

2510.3–102 also issued under Sec. 102 of 

Reorganization Plan No. 4 of 1978, 5 U.S.C. 

App. 237. Section 2510.3–38 also issued 

under Pub. L. 105–72, Sec. 1(b), 111 Stat. 

1457 (1997). 

■ 4. Revise § 2510.3–21 to read as 

follows: 

§ 2510.3–21 Definition of ‘‘Fiduciary.’’ 

(a) Investment advice. For purposes of 

section 3(21)(A)(ii) of the Employee 

Retirement Income Security Act of 1974 

(Act) and section 4975(e)(3)(B) of the 

Internal Revenue Code (Code), except as 

provided in paragraph (b) of this 

section, a person renders investment 

advice with respect to moneys or other 

property of a plan or IRA described in 

paragraph (f)(2) of this section if— 

(1) Such person provides, directly to 

a plan, plan fiduciary, plan participant 

or beneficiary, IRA, or IRA owner the 

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following types of advice in exchange 

for a fee or other compensation, whether 

direct or indirect: 

(i) A recommendation as to the 

advisability of acquiring, holding, 

disposing or exchanging securities or 

other property, including a 

recommendation to take a distribution 

of benefits or a recommendation as to 

the investment of securities or other 

property to be rolled over or otherwise 

distributed from the plan or IRA; 

(ii) A recommendation as to the 

management of securities or other 

property, including recommendations as 

to the management of securities or other 

property to be rolled over or otherwise 

distributed from the plan or IRA; 

(iii) An appraisal, fairness opinion, or 

similar statement whether verbal or 

written concerning the value of 

securities or other property if provided 

in connection with a specific 

transaction or transactions involving the 

acquisition, disposition, or exchange, of 

such securities or other property by the 

plan or IRA; 

(iv) A recommendation of a person 

who is also going to receive a fee or 

other compensation for providing any of 

the types of advice described in 

paragraphs (i) through (iii); and 

(2) Such person, either directly or 

indirectly (e.g., through or together with 

any affiliate),— 

(i) Represents or acknowledges that it 

is acting as a fiduciary within the 

meaning of the Act with respect to the 

advice described in paragraph (a)(1) of 

this section; or 

(ii) Renders the advice pursuant to a 

written or verbal agreement, 

arrangement or understanding that the 

advice is individualized to, or that such 

advice is specifically directed to, the 

advice recipient for consideration in 

making investment or management 

decisions with respect to securities or 

other property of the plan or IRA. 

(b) Carve-outs—investment advice. 

Except for persons described in 

paragraph (a)(2)(i) of this section, the 

rendering of advice or other 

communications in conformance with a 

carve-out set forth in paragraph (b)(1) 

through (6) of this section shall not 

cause the person who renders the advice 

to be treated as a fiduciary under 

paragraph (a) of this section. 

(1) Counterparties to the plan—(i) 

Counterparty transaction with plan 

fiduciary with financial expertise. (A) In 

such person’s capacity as a counterparty 

(or representative of a counterparty) to 

an employee benefit plan (as described 

in section 3(3) of the Act), the person 

provides advice to a plan fiduciary who 

is independent of such person and who 

exercises authority or control with 

respect to the management or 

disposition of the plan’s assets, with 

respect to an arm’s length sale, 

purchase, loan or bilateral contract 

between the plan and the counterparty, 

or with respect to a proposal to enter 

into such a sale, purchase, loan or 

bilateral contract, if, prior to providing 

any recommendation with respect to the 

transaction, such person satisfies the 

requirements of either paragraph 

(b)(1)(i)(B) or (C) of this section. 

(B) Such person— 

(1) Obtains a written representation 

from the independent plan fiduciary 

that the independent fiduciary exercises 

authority or control with respect to the 

management or disposition of the 

employee benefit plan’s assets (as 

described in section 3(21)(A)(i) of the 

Act), that the employee benefit plan has 

100 or more participants covered under 

the plan, and that the independent 

fiduciary will not rely on the person to 

act in the best interests of the plan, to 

provide impartial investment advice, or 

to give advice in a fiduciary capacity; 

(2) Fairly informs the independent 

plan fiduciary of the existence and 

nature of the person’s financial interests 

in the transaction; 

(3) Does not receive a fee or other 

compensation directly from the plan, or 

plan fiduciary, for the provision of 

investment advice (as opposed to other 

services) in connection with the 

transaction; and 

(4) Knows or reasonably believes that 

the independent plan fiduciary has 

sufficient expertise to evaluate the 

transaction and to determine whether 

the transaction is prudent and in the 

best interest of the plan participants (the 

person may rely on written 

representations from the plan or the 

plan fiduciary to satisfy this subsection 

(b)(1)(i)(B)(4)). 

(C) Such person— 

(1) Knows or reasonably believes that 

the independent plan fiduciary has 

responsibility for managing at least $100 

million in employee benefit plan assets 

(for purposes of this paragraph 

(b)(1)(i)(C), when dealing with an 

individual employee benefit plan, a 

person may rely on the information on 

the most recent Form 5500 Annual 

Return/Report filed for the plan to 

determine the value and, in the case of 

an independent fiduciary acting as an 

asset manager for multiple employee 

benefit plans, a person may rely on 

representations from the independent 

plan fiduciary regarding the value of 

employee benefit plan assets under 

management); 

(2) Fairly informs the independent 

plan fiduciary that the person is not 

undertaking to provide impartial 

investment advice, or to give advice in 

a fiduciary capacity; and 

(3) Does not receive a fee or other 

compensation directly from the plan, or 

plan fiduciary, for the provision of 

investment advice (as opposed to other 

services) in connection with the 

transaction. 

(ii) Swap and security-based swap 

transactions. The person is a 

counterparty to an employee benefit 

plan (as described in section 3(3) of the 

Act) in connection with a swap or 

security-based swap, as defined in 

section 1(a) of the Commodity Exchange 

Act (7 U.S.C. 1(a) and section 3(a) of the 

Securities Exchange Act (15 U.S.C. 

78c(a)), if— 

(A) The plan is represented by a 

fiduciary independent of the person; 

(B) The person is a swap dealer, 

security-based swap dealer, major swap 

participant, or major security-based 

swap participant; 

(C) The person (if a swap dealer or 

security-based swap dealer), is not 

acting as an advisor to the plan (within 

the meaning of section 4s(h) of the 

Commodity Exchange Act or section 

15F(h) of the Securities Exchange Act of 

1934) in connection with the 

transaction; and 

(D) In advance of providing any 

recommendations with respect to the 

transaction, the person obtains a written 

representation from the independent 

plan fiduciary, that the fiduciary will 

not rely on recommendations provided 

by the person. 

(2) Employees. In his or her capacity 

as an employee of any employer or 

employee organization sponsoring the 

employee benefit plan (as described in 

section 3(3) of the Act), the person 

provides the advice to a plan fiduciary, 

and he or she receives no fee or other 

compensation, direct or indirect, in 

connection with the advice beyond the 

employee’s normal compensation for 

work performed for the employer or 

employee organization. 

(3) Platform providers. The person 

merely markets and makes available to 

an employee benefit plan (as described 

in section 3(3) of the Act), without 

regard to the individualized needs of the 

plan, its participants, or beneficiaries, 

securities or other property through a 

platform or similar mechanism from 

which a plan fiduciary may select or 

monitor investment alternatives, 

including qualified default investment 

alternatives, into which plan 

participants or beneficiaries may direct 

the investment of assets held in, or 

contributed to, their individual 

accounts, if the person discloses in 

writing to the plan fiduciary that the 

person is not undertaking to provide 

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21958 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

impartial investment advice or to give 

advice in a fiduciary capacity. 

(4) Selection and monitoring 

assistance. In connection with the 

activities described in paragraph (b)(3) 

of this section with respect to an 

employee benefit plan (as described in 

section 3(3) of the Act), the person— 

(i) Merely identifies investment 

alternatives that meet objective criteria 

specified by the plan fiduciary (e.g., 

stated parameters concerning expense 

ratios, size of fund, type of asset, credit 

quality); or 

(ii) Merely provides objective 

financial data and comparisons with 

independent benchmarks to the plan 

fiduciary. 

(5) Financial reports and valuations. 

The person provides an appraisal, 

fairness opinion, or statement of value 

to— 

(i) An employee stock ownership plan 

(as defined in section 407(d)(6) of the 

Act) regarding employer securities (as 

defined section 407(d)(5) of the Act); 

(ii) An investment fund, such as a 

collective investment fund or pooled 

separate account, in which more than 

one unaffiliated plan has an investment, 

or which holds plan assets of more than 

one unaffiliated plan under 29 CFR 

2510.3–101; or 

(iii) A plan, a plan fiduciary, a plan 

participant or beneficiary, an IRA or IRA 

owner solely for purposes of compliance 

with the reporting and disclosure 

provisions under the Act, the Code, and 

the regulations, forms and schedules 

issued thereunder, or any applicable 

reporting or disclosure requirement 

under a Federal or state law, rule or 

regulation or self-regulatory 

organization rule or regulation. 

(6) Investment education. The person 

furnishes or makes available any of the 

following categories of investmentrelated information and materials 

described in paragraphs (b)(6)(i) through 

(iv) of this section to a plan, plan 

fiduciary, participant or beneficiary, 

IRA or IRA owner irrespective of who 

provides or makes available the 

information and materials (e.g., plan 

sponsor, fiduciary or service provider), 

the frequency with which the 

information and materials are provided, 

the form in which the information and 

materials are provided (e.g., on an 

individual or group basis, in writing or 

orally, or via call center, video or 

computer software), or whether an 

identified category of information and 

materials is furnished or made available 

alone or in combination with other 

categories of information and materials 

identified in paragraphs (b)(6)(i) through 

(iv), provided that the information and 

materials do not include (standing alone 

or in combination with other materials) 

recommendations with respect to 

specific investment products or specific 

plan or IRA alternatives, or 

recommendations on investment, 

management, or value of a particular 

security or securities, or other property. 

(i) Plan information. Information and 

materials that, without reference to the 

appropriateness of any individual 

investment alternative or any individual 

benefit distribution option for the plan 

or IRA, or a particular participant or 

beneficiary or IRA owner, describe the 

terms or operation of the plan or IRA, 

inform a plan fiduciary, participant, 

beneficiary, or IRA owner about the 

benefits of plan or IRA participation, the 

benefits of increasing plan or IRA 

contributions, the impact of 

preretirement withdrawals on 

retirement income, retirement income 

needs, varying forms of distributions, 

including rollovers, annuitization and 

other forms of lifetime income payment 

options (e.g., immediate annuity, 

deferred annuity, or incremental 

purchase of deferred annuity), 

advantages, disadvantages and risks of 

different forms of distributions, or 

describe investment objectives and 

philosophies, risk and return 

characteristics, historical return 

information or related prospectuses of 

investment alternatives under the plan 

or IRA. 

(ii) General financial, investment and 

retirement information. Information and 

materials on financial, investment and 

retirement matters that do not address 

specific investment products, specific 

plan or IRA alternatives or distribution 

options available to the plan or IRA or 

to participants, beneficiaries and IRA 

owners, or specific alternatives or 

services offered outside the plan or IRA, 

and inform the plan fiduciary, 

participant or beneficiary, or IRA owner 

about— 

(A) General financial and investment 

concepts, such as risk and return, 

diversification, dollar cost averaging, 

compounded return, and tax deferred 

investment; 

(B) Historic differences in rates of 

return between different asset classes 

(e.g., equities, bonds, or cash) based on 

standard market indices; 

(C) Effects of inflation; 

(D) Estimating future retirement 

income needs; 

(E) Determining investment time 

horizons; 

(F) Assessing risk tolerance; 

(G) Retirement-related risks (e.g., 

longevity risks, market/interest rates, 

inflation, health care and other 

expenses); and 

(H) General methods and strategies for 

managing assets in retirement (e.g., 

systematic withdrawal payments, 

annuitization, guaranteed minimum 

withdrawal benefits), including those 

offered outside the plan or IRA. 

(iii) Asset allocation models. 

Information and materials (e.g., pie 

charts, graphs, or case studies) that 

provide a plan fiduciary, participant or 

beneficiary, or IRA owner with models 

of asset allocation portfolios of 

hypothetical individuals with different 

time horizons (which may extend 

beyond an individual’s retirement date) 

and risk profiles, where— 

(A) Such models are based on 

generally accepted investments theories 

that take into account the historic 

returns of different asset classes (e.g., 

equities, bonds, or cash) over defined 

periods of time; 

(B) All material facts and assumptions 

on which such models are based (e.g., 

retirement ages, life expectancies, 

income levels, financial resources, 

replacement income ratios, inflation 

rates, and rates of return) accompany 

the models; 

(C) Such models do not include or 

identify any specific investment product 

or specific alternative available under 

the plan or IRA; and 

(D) The asset allocation models are 

accompanied by a statement indicating 

that, in applying particular asset 

allocation models to their individual 

situations, participants, beneficiaries, or 

IRA owners should consider their other 

assets, income, and investments (e.g., 

equity in a home, Social Security 

benefits, individual retirement plan 

investments, savings accounts and 

interests in other qualified and nonqualified plans) in addition to their 

interests in the plan or IRA, to the 

extent those items are not taken into 

account in the model or estimate. 

(iv) Interactive investment materials. 

Questionnaires, worksheets, software, 

and similar materials which provide a 

plan fiduciary, participant or 

beneficiary, or IRA owners the means to 

estimate future retirement income needs 

and assess the impact of different asset 

allocations on retirement income; 

questionnaires, worksheets, software 

and similar materials which allow a 

plan fiduciary, participant or 

beneficiary, or IRA owners to evaluate 

distribution options, products or 

vehicles by providing information under 

paragraphs (b)(6)(i) and (ii) of this 

section; questionnaires, worksheets, 

software, and similar materials that 

provide a plan fiduciary, participant or 

beneficiary, or IRA owner the means to 

estimate a retirement income stream 

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Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 21959 

that could be generated by an actual or 

hypothetical account balance, where— 

(A) Such materials are based on 

generally accepted investment theories 

that take into account the historic 

returns of different asset classes (e.g., 

equities, bonds, or cash) over defined 

periods of time; 

(B) There is an objective correlation 

between the asset allocations generated 

by the materials and the information 

and data supplied by the participant, 

beneficiary or IRA owner; 

(C) There is an objective correlation 

between the income stream generated by 

the materials and the information and 

data supplied by the participant, 

beneficiary or IRA owner; 

(D) All material facts and assumptions 

(e.g., retirement ages, life expectancies, 

income levels, financial resources, 

replacement income ratios, inflation 

rates, rates of return and other features 

and rates specific to income annuities or 

systematic withdrawal plan) that may 

affect a participant’s, beneficiary’s or 

IRA owner’s assessment of the different 

asset allocations or different income 

streams accompany the materials or are 

specified by the participant, beneficiary 

or IRA owner; 

(E) The materials do not include or 

identify any specific investment 

alternative available or distribution 

option available under the plan or IRA, 

unless such alternative or option is 

specified by the participant, beneficiary 

or IRA owner; and 

(F) The materials either take into 

account other assets, income and 

investments (e.g., equity in a home, 

Social Security benefits, individual 

retirement account/annuity 

investments, savings accounts, and 

interests in other qualified and nonqualified plans) or are accompanied by 

a statement indicating that, in applying 

particular asset allocations to their 

individual situations, or in assessing the 

adequacy of an estimated income 

stream, participants, beneficiaries or 

IRA owners should consider their other 

assets, income, and investments in 

addition to their interests in the plan or 

IRA. 

(v) The information and materials 

described in paragraphs (b)(6)(i) through 

(iv) of this section represent examples of 

the type of information and materials 

that may be furnished to participants, 

beneficiaries and IRA owners without 

such information and materials 

constituting investment advice. 

Determinations as to whether the 

provision of any information, materials 

or educational services not described 

herein constitutes the rendering of 

investment advice must be made by 

reference to the criteria set forth in 

paragraph (a) of this section. 

(c) Scope of fiduciary duty— 

investment advice. A person who is a 

fiduciary with respect to an employee 

benefit plan or IRA by reason of 

rendering investment advice (as defined 

in paragraph (a) of this section) for a fee 

or other compensation, direct or 

indirect, with respect to any securities 

or other property of such plan, or having 

any authority or responsibility to do so, 

shall not be deemed to be a fiduciary 

regarding any assets of the plan or IRA 

with respect to which such person does 

not have any discretionary authority, 

discretionary control or discretionary 

responsibility, does not exercise any 

authority or control, does not render 

investment advice (as defined in 

paragraph (a)(1) of this section) for a fee 

or other compensation, and does not 

have any authority or responsibility to 

render such investment advice, 

provided that nothing in this paragraph 

shall be deemed to: 

(1) Exempt such person from the 

provisions of section 405(a) of the Act 

concerning liability for fiduciary 

breaches by other fiduciaries with 

respect to any assets of the plan; or 

(2) Exclude such person from the 

definition of the term ‘‘party in interest’’ 

(as set forth in section 3(14)(B) of the 

Act or ‘‘disqualified person’’ as set forth 

in section 4975(e)(2) of the Code) with 

respect to a plan. 

(d) Execution of securities 

transactions. (1) A person who is a 

broker or dealer registered under the 

Securities Exchange Act of 1934, a 

reporting dealer who makes primary 

markets in securities of the United 

States Government or of an agency of 

the United States Government and 

reports daily to the Federal Reserve 

Bank of New York its positions with 

respect to such securities and 

borrowings thereon, or a bank 

supervised by the United States or a 

State, shall not be deemed to be a 

fiduciary, within the meaning of section 

3(21)(A) of the Act or section 

4975(e)(3)(B) of the Code, with respect 

to an employee benefit plan or IRA 

solely because such person executes 

transactions for the purchase or sale of 

securities on behalf of such plan in the 

ordinary course of its business as a 

broker, dealer, or bank, pursuant to 

instructions of a fiduciary with respect 

to such plan or IRA, if: 

(i) Neither the fiduciary nor any 

affiliate of such fiduciary is such broker, 

dealer, or bank; and 

(ii) The instructions specify: 

(A) The security to be purchased or 

sold; 

(B) A price range within which such 

security is to be purchased or sold, or, 

if such security is issued by an openend investment company registered 

under the Investment Company Act of 

1940 (15 U.S.C. 80a–1, et seq.), a price 

which is determined in accordance with 

Rule 22c1 under the Investment 

Company Act of 1940 (17 CFR270.22c1); 

(C) A time span during which such 

security may be purchased or sold (not 

to exceed five business days); and 

(D) The minimum or maximum 

quantity of such security which may be 

purchased or sold within such price 

range, or, in the case of a security issued 

by an open-end investment company 

registered under the Investment 

Company Act of 1940, the minimum or 

maximum quantity of such security 

which may be purchased or sold, or the 

value of such security in dollar amount 

which may be purchased or sold, at the 

price referred to in paragraph 

(d)(1)(ii)(B) of this section. 

(2) A person who is a broker-dealer, 

reporting dealer, or bank which is a 

fiduciary with respect to an employee 

benefit plan or IRA solely by reason of 

the possession or exercise of 

discretionary authority or discretionary 

control in the management of the plan 

or IRA, or the management or 

disposition of plan or IRA assets in 

connection with the execution of a 

transaction or transactions for the 

purchase or sale of securities on behalf 

of such plan or IRA which fails to 

comply with the provisions of 

paragraph (d)(1) of this section, shall not 

be deemed to be a fiduciary regarding 

any assets of the plan or IRA with 

respect to which such broker-dealer, 

reporting dealer or bank does not have 

any discretionary authority, 

discretionary control or discretionary 

responsibility, does not exercise any 

authority or control, does not render 

investment advice (as defined in 

paragraph (a) of this section) for a fee or 

other compensation, and does not have 

any authority or responsibility to render 

such investment advice, provided that 

nothing in this paragraph shall be 

deemed to: 

(i) Exempt such broker-dealer, 

reporting dealer, or bank from the 

provisions of section 405(a) of the Act 

concerning liability for fiduciary 

breaches by other fiduciaries with 

respect to any assets of the plan; or 

(ii) Exclude such broker-dealer, 

reporting dealer, or bank from the 

definition of the term party in interest 

(as set forth in section 3(14)(B) of the 

Act) or disqualified person 4975(e)(2) of 

the Code with respect to any assets of 

the plan or IRA. 

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21960 Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules 

(e) Internal Revenue Code. Section 

4975(e)(3) of the Code contains 

provisions parallel to section 3(21)(A) of 

the Act which define the term 

‘‘fiduciary’’ for purposes of the 

prohibited transaction provisions in 

Code section 4975. Effective December 

31, 1978, section 102 of the 

Reorganization Plan No. 4 of 1978, 5 

U.S.C. App. 237 transferred the 

authority of the Secretary of the 

Treasury to promulgate regulations of 

the type published herein to the 

Secretary of Labor. All references herein 

to section 3(21)(A) of the Act should be 

read to include reference to the parallel 

provisions of section 4975(e)(3) of the 

Code. Furthermore, the provisions of 

this section shall apply for purposes of 

the application of Code section 4975 

with respect to any plan described in 

Code section 4975(e)(1). 

(f) Definitions. For purposes of this 

section— 

(1) ‘‘Recommendation’’ means a 

communication that, based on its 

content, context, and presentation, 

would reasonably be viewed as a 

suggestion that the advice recipient 

engage in or refrain from taking a 

particular course of action. 

(2)(i) ‘‘Plan’’ means any employee 

benefit plan described in section 3(3) of 

the Act and any plan described in 

section 4975(e)(1)(A) of the Code, and 

(ii) ‘‘IRA’’ means any trust, account or 

annuity described in Code section 

4975(e)(1)(B) through (F), including, for 

example, an individual retirement 

account described in section 408(a) of 

the Code and a health savings account 

described in section 223(d) of the Code. 

(3) ‘‘Plan participant’’ means for a 

plan described in section 3(3) of the Act, 

a person described in section 3(7) of the 

Act. 

(4) ‘‘IRA owner’’ means with respect 

to an IRA either the person who is the 

owner of the IRA or the person for 

whose benefit the IRA was established. 

(5) ‘‘Plan fiduciary’’ means a person 

described in section (3)(21) of the Act 

and 4975(e)(3) of the Code. 

(6) ‘‘Fee or other compensation, direct 

or indirect’’ for purposes of this section 

and section 3(21)(A)(ii) of the Act, 

means any fee or compensation for the 

advice received by the person (or by an 

affiliate) from any source and any fee or 

compensation incident to the 

transaction in which the investment 

advice has been rendered or will be 

rendered. The term fee or other 

compensation includes, for example, 

brokerage fees, mutual fund and 

insurance sales commissions. 

(7) ‘‘Affiliate’’ includes: Any person 

directly or indirectly, through one or 

more intermediaries, controlling, 

controlled by, or under common control 

with such person; any officer, director, 

partner, employee or relative (as defined 

in section 3(15) of the Act) of such 

person; and any corporation or 

partnership of which such person is an 

officer, director or partner. 

(8) ‘‘Control’’ for purposes of 

paragraph (f)(7) of this section means 

the power to exercise a controlling 

influence over the management or 

policies of a person other than an 

individual. 

Signed at Washington, DC, this 14th day of 

April, 2015. 

Phyllis C. Borzi, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. 2015–08831 Filed 4–15–15; 11:15 am] 

BILLING CODE 4510–29–P 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

[Application No. D–11712] 

ZRIN 1210–ZA25 

Proposed Best Interest Contract 

Exemption 

AGENCY: Employee Benefits Security 

Administration (EBSA), U.S. 

Department of Labor. 

ACTION: Notice of Proposed Class 

Exemption. 

SUMMARY: This document contains a 

notice of pendency before the U.S. 

Department of Labor of a proposed 

exemption from certain prohibited 

transactions provisions of the Employee 

Retirement Income Security Act of 1974 

(ERISA) and the Internal Revenue Code 

(the Code). The provisions at issue 

generally prohibit fiduciaries with 

respect to employee benefit plans and 

individual retirement accounts (IRAs) 

from engaging in self-dealing and 

receiving compensation from third 

parties in connection with transactions 

involving the plans and IRAs. The 

exemption proposed in this notice 

would allow entities such as brokerdealers and insurance agents that are 

fiduciaries by reason of the provision of 

investment advice to receive such 

compensation when plan participants 

and beneficiaries, IRA owners, and 

certain small plans purchase, hold or 

sell certain investment products in 

accordance with the fiduciaries’ advice, 

under protective conditions to safeguard 

the interests of the plans, participants 

and beneficiaries, and IRA owners. The 

proposed exemption would affect 

participants and beneficiaries of plans, 

IRA owners and fiduciaries with respect 

to such plans and IRAs. 

DATES: Comments: Written comments 

concerning the proposed class 

exemption must be received by the 

Department on or before July 6, 2015. 

Applicability: The Department 

proposes to make this exemption 

available eight months after publication 

of the final exemption in the Federal 

Register. We request comment below on 

whether the applicability date of certain 

conditions should be delayed. 

ADDRESSES: All written comments 

concerning the proposed class 

exemption should be sent to the Office 

of Exemption Determinations by any of 

the following methods, identified by 

ZRIN: 1210–ZA25: 

Federal eRulemaking Portal: http://

www.regulations.gov at Docket ID 

number: EBSA–2014–0016. Follow the 

instructions for submitting comments. 

Email to: e-OED@dol.gov. 

Fax to: (202) 693–8474. 

Mail: Office of Exemption 

Determinations, Employee Benefits 

Security Administration, (Attention: D– 

11712), U.S. Department of Labor, 200 

Constitution Avenue NW., Suite 400, 

Washington DC 20210. 

Hand Delivery/Courier: Office of 

Exemption Determinations, Employee 

Benefits Security Administration, 

(Attention: D–11712), U.S. Department 

of Labor, 122 C St. NW., Suite 400, 

Washington DC 20001. 

Instructions. All comments must be 

received by the end of the comment 

period. The comments received will be 

available for public inspection in the 

Public Disclosure Room of the 

Employee Benefits Security 

Administration, U.S. Department of 

Labor, Room N–1513, 200 Constitution 

Avenue NW., Washington, DC 20210. 

Comments will also be available online 

at www.regulations.gov, at Docket ID 

number: EBSA–2014–0016 and 

www.dol.gov/ebsa, at no charge. 

Warning: All comments will be made 

available to the public. Do not include 

any personally identifiable information 

(such as Social Security number, name, 

address, or other contact information) or 

confidential business information that 

you do not want publicly disclosed. All 

comments may be posted on the Internet 

and can be retrieved by most Internet 

search engines. 

FOR FURTHER INFORMATION CONTACT: 

Karen E. Lloyd or Brian L. Shiker, Office 

of Exemption Determinations, Employee 

Benefits Security Administration, U.S. 

Department of Labor (202) 693–8824 

(this is not a toll-free number). 

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