[Federal Register Volume 80, Number 75 (Monday, April 20, 2015)]
[Proposed Rules]
[Pages 21960-21989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-08832]


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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.

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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 broker-
dealers 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: <a href="/cdn-cgi/l/email-protection#e085cdafa5a4a0848f8cce878f96"><span class="__cf_email__" data-cfemail="bfda92f0fafbffdbd0d391d8d0c9">[email protected]</span></a>.
    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).

[[Page 21961]]


SUPPLEMENTARY INFORMATION: The Department is proposing this class 
exemption on its own motion, pursuant to ERISA section 408(a) and Code 
section 4975(c)(2), and in accordance with the procedures set forth in 
29 CFR part 2570 (76 FR 66637 (October 27, 2011)).
    Public Hearing: The Department plans to hold an administrative 
hearing within 30 days of the close of the comment period. 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.

Executive Summary

Purpose of Regulatory Action

    The Department is proposing this exemption in connection with its 
proposed regulation under ERISA section 3(21)(A)(ii) and Code section 
4975(e)(3)(B) (Proposed Regulation), published elsewhere in this issue 
of the Federal Register. The Proposed Regulation would amend the 
definition of a ``fiduciary'' under ERISA and the Code to specify when 
a person is a fiduciary by reason of the provision of investment advice 
for a fee or other compensation regarding assets of a plan or IRA. If 
adopted, the Proposed Regulation would replace an existing regulation 
dating to 1975. The Proposed Regulation is intended to take into 
account the advent of 401(k) plans and IRAs, the dramatic increase in 
rollovers, and other developments that have transformed the retirement 
plan landscape and the associated investment market over the four 
decades since the existing regulation was issued. In light of the 
extensive changes in retirement investment practices and relationships, 
the Proposed Regulation would update existing rules to distinguish more 
appropriately between the sorts of advice relationships that should be 
treated as fiduciary in nature and those that should not.
    The exemption proposed in this notice (``the Best Interest Contract 
Exemption'') 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. ERISA and 
the Code generally prohibit fiduciaries from receiving payments from 
third parties and from acting on conflicts of interest, including using 
their authority to affect or increase their own compensation, in 
connection with transactions involving a plan or IRA. Certain types of 
fees and compensation common in the retail market, such as brokerage or 
insurance commissions, 12b-1 fees and revenue sharing payments, fall 
within these prohibitions when received by fiduciaries as a result of 
transactions involving advice to the plan participants and 
beneficiaries, IRA owners and small plan sponsors. To facilitate 
continued provision of advice to such retail investors and under 
conditions designed to safeguard the interests of these investors, the 
exemption would allow certain investment advice fiduciaries, including 
broker-dealers and insurance agents, to receive these various forms of 
compensation that, in the absence of an exemption, would not be 
permitted under ERISA and the Code.
    Rather than create a set of highly prescriptive transaction-
specific exemptions, which has generally been the regulatory approach 
to date, the proposed exemption would flexibly accommodate a wide range 
of current business practices, while minimizing the harmful impact of 
conflicts of interest on the quality of advice. The Department has 
sought to preserve beneficial business models by taking a standards-
based approach that will broadly permit firms to continue to rely on 
common fee 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.
    ERISA section 408(a) specifically authorizes the Secretary of Labor 
to grant administrative exemptions from ERISA's prohibited transaction 
provisions.\1\ Regulations at 29 CFR 2570.30 to 2570.52 describe the 
procedures for applying for an administrative exemption. Before 
granting an exemption, the Department must find that the exemption is 
administratively feasible, in the interests of plans and their 
participants and beneficiaries and IRA owners, and protective of the 
rights of participants and beneficiaries of plans and IRA owners. 
Interested parties are permitted to submit comments to the Department 
through July 6, 2015. The Department plans to hold an administrative 
hearing within 30 days of the close of the comment period.
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    \1\ Code section 4975(c)(2) authorizes the Secretary of the 
Treasury to grant exemptions from the parallel prohibited 
transaction provisions of the Code. Reorganization Plan No. 4 of 
1978 (5 U.S.C. app. at 214 (2000)) generally transferred the 
authority of the Secretary of the Treasury to grant administrative 
exemptions under Code section 4975 to the Secretary of Labor. This 
proposed exemption would provide relief from the indicated 
prohibited transaction provisions of both ERISA and the Code.
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Summary of the Major Provisions

    The proposed exemption would apply to compensation received by 
investment advice fiduciaries--both individual ``advisers'' \2\ and the 
``financial institutions'' that employ or otherwise contract with 
them--and their affiliates and related entities that is provided in 
connection with the purchase, sale or holding of certain assets by 
plans and IRAs. In particular, the exemption would apply when 
prohibited compensation is received as a result of advice to retail 
``retirement investors'' including plan participants and beneficiaries, 
IRA owners, and plan sponsors (or their employees, officers or 
directors) of plans with fewer than 100 participants making investment 
decisions on behalf of the plans and IRAs.
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    \2\ By using the term ``adviser,'' the Department does not 
intend to limit the exemption to investment advisers registered 
under the Investment Advisers Act of 1940 or under state law. As 
explained herein, an adviser is an individual who can be a 
representative of a registered investment adviser, a bank or similar 
financial institution, an insurance company, or a broker-dealer.
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    In order to protect the interests of the plan participants and 
beneficiaries, IRA owners, and small plan sponsors, the exemption would 
require the adviser and financial institution to contractually 
acknowledge fiduciary status, commit to adhere to basic standards of 
impartial conduct, warrant 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 adviser and 
firm must commit to 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 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. All financial institutions relying 
on the exemption would be required to notify the Department in advance 
of doing so. Finally, all financial institutions making use of the 
exemption would have to maintain certain data, and make it available to 
the Department, to help

[[Page 21962]]

evaluate the effectiveness of the exemption in safeguarding the 
interests of the plan participants and beneficiaries, IRA owners, and 
small plans.

Executive Order 12866 and 13563 Statement

    Under Executive Orders 12866 and 13563, the Department must 
determine whether a regulatory action is ``significant'' and therefore 
subject to the requirements of the Executive Order and subject to 
review by the Office of Management and Budget (OMB). Executive Orders 
13563 and 12866 direct agencies to assess all costs and benefits of 
available regulatory alternatives and, if regulation is necessary, to 
select regulatory approaches that maximize net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity). Executive Order 13563 emphasizes the 
importance of quantifying both costs and benefits, of reducing costs, 
of harmonizing and streamlining rules, and of promoting flexibility. It 
also requires federal agencies to develop a plan under which they will 
periodically review their existing significant regulations to make 
regulatory programs more effective or less burdensome in achieving 
their regulatory objectives.
    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 Executive Order 
12866, 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 an ``economically significant'' 
regulatory action); (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. Pursuant to the terms of the Executive Order, 
OMB has determined that this action is ``significant'' within the 
meaning of Section 3(f)(4) of the Executive Order. Accordingly, the 
Department has undertaken an assessment of the costs and benefits of 
the proposed exemption, and OMB has reviewed this regulatory action.

Background

Proposed Regulation Defining a Fiduciary

    As explained more fully in the preamble to the Department's 
Proposed Regulation under ERISA section 3(21)(A)(ii) and Code section 
4975(e)(3)(B), also published in this issue of the Federal Register, 
ERISA 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 its imposition of 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.\3\ In addition, they must refrain from engaging in 
``prohibited transactions,'' which ERISA does not permit because of the 
dangers posed by the fiduciaries' conflicts of interest with respect to 
the transactions.\4\ When fiduciaries violate ERISA's fiduciary duties 
or the prohibited transaction rules, they may be held personally liable 
for the breach.\5\ In addition, violations of the prohibited 
transaction rules are subject to excise taxes under the Code.
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    \3\ ERISA section 404(a).
    \4\ ERISA section 406. ERISA also prohibits certain transactions 
between a plan and a ``party in interest.''
    \5\ ERISA section 409; see also ERISA section 405.
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    The Code also has rules regarding fiduciary conduct with respect to 
tax-favored accounts that are not generally covered by ERISA, such as 
IRAs. Although ERISA's general fiduciary obligations of prudence and 
loyalty do not govern the fiduciaries of IRAs, these fiduciaries are 
subject to the prohibited transaction rules. In this context, 
fiduciaries engaging in the prohibited transactions are subject to an 
excise tax enforced by the Internal Revenue Service. Unlike 
participants in plans covered by Title I of ERISA, IRA owners do not 
have a statutory right to bring suit against fiduciaries for violation 
of the prohibited transaction rules and fiduciaries are not personally 
liable to IRA owners for the losses caused by their misconduct. Nor can 
the Secretary of Labor bring suit to enforce the prohibited 
transactions rules on behalf of IRA owners. The exemption proposed 
herein, as well as the Proposed Class Exemption for Principal 
Transactions in Certain Debt Securities between Investment Advice 
Fiduciaries and Employee Benefit Plans and IRAs, published elsewhere in 
this issue of the Federal Register, would create contractual 
obligations for fiduciaries to adhere to certain standards (the 
Impartial Conduct Standards) if they want to take advantage of the 
exemption. IRA owners would have a right to enforce these new 
contractual rights.
    Under the 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, ERISA section 3(21)(A) and Code section 4975(e)(3) 
provide that a person is a fiduciary with respect to a plan or IRA to 
the extent he or she (i) exercises any discretionary authority or 
discretionary control with respect to management of such plan or IRA, 
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 IRA, or has any authority or 
responsibility to do so; or, (iii) has any discretionary authority or 
discretionary responsibility in the administration of such plan or IRA.
    The statutory definition deliberately casts a wide net in assigning 
fiduciary responsibility with respect to plan and IRA assets. Thus, 
``any authority or control'' over plan or IRA assets is sufficient to 
confer fiduciary status, and any persons who render ``investment advice 
for a fee or other compensation, direct or indirect'' are fiduciaries, 
regardless of whether they have direct control over the plan's or IRA's 
assets and regardless of their status as an investment adviser or 
broker under the federal securities laws. The statutory definition and 
associated responsibilities were enacted to ensure that plans, plan 
participants, and IRA owners can depend on persons who provide 
investment advice for a fee to provide recommendations that are 
untainted by conflicts of interest. In the absence of fiduciary status, 
the providers of investment advice are neither subject to ERISA's 
fundamental fiduciary standards, nor accountable for imprudent, 
disloyal, or tainted advice under ERISA or the Code, no matter

[[Page 21963]]

how egregious the misconduct or how substantial the losses. Retirement 
investors typically are not financial experts and consequently must 
rely on professional advice to make critical investment decisions. In 
the years since then, the significance of financial advice has become 
still greater with increased reliance on participant directed plans and 
IRAs for the provision of retirement benefits.
    In 1975, the Department issued a regulation, at 29 CFR 2510.3-
21(c)(1975), defining the circumstances under which a person is treated 
as providing ``investment advice'' to an employee benefit plan within 
the meaning of ERISA section 3(21)(A)(ii) (the ``1975 regulation'').\6\ 
The 1975 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 1975 regulation, for advice to constitute 
``investment advice,'' an adviser who does not have discretionary 
authority or control with respect to the purchase or sale of securities 
or other property of the plan 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. 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. A 1976 Department of Labor Advisory Opinion 
further limited the application of the statutory definition of 
``investment advice'' by stating that valuations of employer securities 
in connection with employee stock ownership plan (ESOP) purchases would 
not be considered fiduciary advice.\7\
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    \6\ The Department of Treasury issued a virtually identical 
regulation, at 26 CFR 54.4975-9(c), which interprets Code section 
4975(e)(3).
    \7\ Advisory Opinion 76-65A (June 7, 1976).
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    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 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 consultants for 
impartial guidance, the regulation allows many advisers to avoid 
fiduciary status and the accompanying fiduciary obligations of care and 
prohibitions on disloyal and conflicted transactions. As a consequence, 
under ERISA and the Code, these advisers can steer customers to 
investments based on their own self-interest, give imprudent advice, 
and engage in transactions that would otherwise be prohibited by ERISA 
and the Code.
    In the Department's Proposed Regulation defining a fiduciary under 
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B), the 
Department seeks to replace the existing regulation with one that more 
appropriately distinguishes between the sorts of advice relationships 
that should be treated as fiduciary in nature and those that should 
not, in light of the legal framework and financial marketplace in which 
IRAs and plans currently operate.\8\ Under the Proposed Regulation, 
plans include IRAs.
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    \8\ The Department initially proposed an amendment to its 
regulation defining a fiduciary under ERISA section 3(21)(A)(ii) and 
Code section 4975(e)(3)(B) on October 22, 2010, at 75 FR 65263. It 
subsequently announced its intention to withdraw the proposal and 
propose a new rule, consistent with the President's Executive Orders 
12866 and 13563, in order to give the public a full opportunity to 
evaluate and comment on the new proposal and updated economic 
analysis.
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    The Proposed Regulation describes the types of advice that 
constitute ``investment advice'' with respect to plan or IRA assets for 
purposes of the definition of a fiduciary at ERISA section 3(21)(A)(ii) 
and Code section 4975(e)(3)(B). The proposal provides, subject to 
certain carve-outs, that a person renders investment advice with 
respect to assets of a plan or IRA if, among other things, the person 
provides, directly to a plan, a plan fiduciary, a plan participant or 
beneficiary, IRA or IRA owner, one of the following types of advice:
    (1) 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 a plan or IRA;
    (2) 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;
    (3) 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; and
    (4) a recommendation of a person who is also going to receive a fee 
or other compensation in providing any of the types of advice described 
in paragraphs (1) through (3), above.
    In addition, to be a fiduciary, such person must either (i) 
represent or acknowledge that it is acting as a fiduciary within the 
meaning of ERISA (or the Code) with respect to the advice, or (ii) 
render 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.
    In the Proposed Regulation, the Department refers to FINRA guidance 
on whether particular communications should be viewed as 
``recommendations''\9\ within the meaning of the fiduciary definition, 
and requests comment on whether the Proposed Regulation should adhere 
to or adopt some or all of the standards developed by FINRA in defining 
communications which rise to the level of a recommendation. For more 
detailed information regarding the Proposed Regulation, see the Notice 
of the Proposed Regulation published in this issue of the Federal 
Register.
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    \9\ See NASD Notice to Members 01-23 and FINRA Regulatory 
Notices 11-02, 12-25 and 12-55.
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    For advisers who do not represent that they are acting as ERISA or 
Code fiduciaries, the Proposed Regulation provides that advice rendered 
in conformance with certain carve-outs will not cause the adviser to be 
treated as a fiduciary under ERISA or the Code. For example, under the 
seller's carve-out, counterparties in arm's length transactions with 
plans may make investment recommendations without acting as fiduciaries 
if certain conditions are met.\10\ The proposal also

[[Page 21964]]

contains a carve-out from fiduciary status for providers of appraisals, 
fairness opinions, or statements of value in specified contexts (e.g., 
with respect to ESOP transactions). The proposal additionally includes 
a carve-out from fiduciary status for the marketing of investment 
alternative platforms to plans, certain assistance in selecting 
investment alternatives and other activities. Finally, the Proposed 
Regulation carves out the provision of investment education from the 
definition of an investment advice fiduciary.
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    \10\ Although the preamble adopts the phrase ``seller's carve-
out'' as a shorthand way of referring to the carve-out and its 
terms, the regulatory carve-out is not limited to sellers but rather 
applies more broadly to counterparties in arm's length transactions 
with plan investors with financial expertise.
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Prohibited Transactions

    The Department anticipates that the Proposed Regulation will cover 
many investment professionals who do not currently consider themselves 
to be fiduciaries under ERISA or the Code. If the Proposed Regulation 
is adopted, these entities will become subject to the prohibited 
transaction restrictions in ERISA and the Code that apply specifically 
to fiduciaries. ERISA section 406(b)(1) and Code section 4975(c)(1)(E) 
prohibit a fiduciary from dealing with the income or assets of a plan 
or IRA in his own interest or his own account. ERISA section 406(b)(2) 
provides that a fiduciary shall not ``in his individual or in any other 
capacity act in any transaction involving the plan on behalf of a party 
(or represent a party) whose interests are adverse to the interests of 
the plan or the interests of its participants or beneficiaries.'' As 
this provision is not in the Code, it does not apply to transactions 
involving IRAs. ERISA section 406(b)(3) and Code section 4975(c)(1)(F) 
prohibit a fiduciary from receiving any consideration for his own 
personal account from any party dealing with the plan or IRA in 
connection with a transaction involving assets of the plan or IRA.
    Parallel regulations issued by the Departments of Labor and the 
Treasury explain that these provisions impose on fiduciaries of plans 
and IRAs a duty not to act on conflicts of interest that may affect the 
fiduciary's best judgment on behalf of the plan or IRA.\11\ The 
prohibitions extend to a fiduciary causing a plan or IRA to pay an 
additional fee to such fiduciary, or to a person in which such 
fiduciary has an interest that may affect the exercise of the 
fiduciary's best judgment as a fiduciary. Likewise, a fiduciary is 
prohibited from receiving compensation from third parties in connection 
with a transaction involving the plan or IRA, or from causing a person 
in which the fiduciary has an interest which may affect its best 
judgment as a fiduciary to receive such compensation.\12\ Given these 
prohibitions, conferring fiduciary status on particular investment 
advice activities can have important implications for many investment 
professionals.
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    \11\ Subsequent to the issuance of these regulations, 
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. (2010), divided 
rulemaking and interpretive authority between the Secretaries of 
Labor and the Treasury. The Secretary of Labor was provided 
interpretive and rulemaking authority regarding the definition of 
fiduciary in both Title I of ERISA and the Internal Revenue Code.
    \12\ 29 CFR 2550.408b-2(e); 26 CFR 54.4975-6(a)(5).
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    In particular, investment professionals typically receive 
compensation for services to retirement investors in the retail market 
through a variety of arrangements. These include commissions paid by 
the plan, participant or beneficiary, or IRA, or commissions, sales 
loads, 12b-1 fees, revenue sharing and other payments from third 
parties that provide investment products. The investment professional 
or its affiliate may receive such fees upon the purchase or sale by a 
plan, participant or beneficiary account, or IRA of the product, or 
while the plan, participant or beneficiary account, or IRA, holds the 
product. In the Department's view, receipt by a fiduciary of such 
payments would violate the prohibited transaction provisions of ERISA 
section 406(b) and Code section 4975(c)(1)(E) and (F) because the 
amount of the fiduciary's compensation is affected by the use of its 
authority in providing investment advice, unless such payments meet the 
requirements of an exemption.

Prohibited Transaction Exemptions

    ERISA and the Code counterbalance the broad proscriptive effect of 
the prohibited transaction provisions with numerous statutory 
exemptions. For example, ERISA section 408(b)(14) and Code section 
4975(d)(17) specifically exempt transactions in connection with the 
provision of fiduciary investment advice to a participant or 
beneficiary of an individual account plan or IRA owner where the 
advice, resulting transaction, and the adviser's fees meet certain 
conditions. The Secretary of Labor may grant administrative exemptions 
under ERISA and the Code on an individual or class basis if the 
Secretary finds that the exemption is (1) administratively feasible, 
(2) in the interests of plans and their participants and beneficiaries 
and IRA owners, and (3) protective of the rights of the participants 
and beneficiaries of such plans and IRA owners.
    Over the years, the Department has granted several conditional 
administrative class exemptions from the prohibited transactions 
provisions of ERISA and the Code. The exemptions focus on specific 
types of compensation arrangements. Fiduciaries relying on these 
exemptions must comply with certain conditions designed to protect the 
interests of plans and IRAs. In connection with the development of the 
Proposed Regulation, the Department has considered comments suggesting 
the need for additional prohibited transaction exemptions for the wide 
variety of compensation structures that exist today in the marketplace 
for investments. Some commentators have suggested that the lack of such 
relief may cause financial professionals to cut back on the provision 
of investment advice and the availability of products to plan 
participants and beneficiaries, IRAs, and smaller plans.
    After consideration of the issue, the Department has determined to 
propose the new class exemption described below, which applies to 
investment advice fiduciaries providing advice to plan participants and 
beneficiaries, IRAs, and certain employee benefit plans with fewer than 
100 participants (referred to as ``retirement investors''). The 
exemption would apply broadly to many common types of otherwise 
prohibited compensation that such investment advice fiduciaries may 
receive, provided the protective conditions of the exemption are 
satisfied. 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 advice 
to invest in certain high-quality low-fee investments, subject to fewer 
conditions.
    Elsewhere in this issue of the Federal Register, the Department is 
also proposing a new class exemption for ``principal transactions'' for 
investment advice fiduciaries selling certain debt securities out of 
their own inventories to plans and IRAs.
    Lastly, the Department is also proposing, elsewhere in this issue 
of the Federal Register, amendments to the following existing class 
prohibited exemptions, which are particularly relevant to broker-
dealers and other investment advice fiduciaries.

[[Page 21965]]

    Prohibited Transaction Exemption (PTE) 86-128 \13\ currently allows 
an investment advice fiduciary to cause a 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 the 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.
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    \13\ Class Exemption for Securities Transactions Involving 
Employee Benefit Plans and Broker-Dealers, 51 FR 41686 (Nov. 18, 
1986), amended at 67 FR 64137 (Oct. 17, 2002).
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    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 Exemption. 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 Exemption 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 to 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.\14\ Part I(b) and (c) currently provide 
relief for certain non-fiduciary 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. In the Department's view, the conditions of the 
statutory exemption are more appropriate for the provision of services.
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    \14\ Exemptions 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).
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    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 to 
plans and IRAs, but only for the limited purpose of avoiding a failed 
securities transaction.
    PTE 84-24 \15\ covers transactions involving mutual fund shares, or 
insurance or annuity contracts, sold to plans or IRAs 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 IRAs. 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, or 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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    \15\ Class 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).
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    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 would instead be required to rely on the Best Interest 
Contract Exemption for 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

[[Page 21966]]

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 Exemption. 
Specifically, PTEs 75-1, Part III, 75-1, Part IV, 77-4, 80-83, and 83-
1, would be amended. Other than the amendments described above, 
however, the existing class exemptions will remain in place, affording 
additional flexibility to fiduciaries who currently use the exemptions 
or who wish to use the exemptions in the future. The Department seeks 
comment on whether additional exemptions are needed in light of the 
Proposed Regulation.

Proposed Best Interest Contract Exemption

    As noted above, the exemption proposed in this notice provides 
relief for some of the same compensation payments as the existing 
exemptions described above. It is intended, however, to flexibly 
accommodate a wide range of current business practices, while 
minimizing the harmful impact of conflicts of interest on the quality 
of advice. The exemption permits fiduciaries to continue to receive a 
wide variety of types of compensation that would otherwise be 
prohibited. It seeks to preserve beneficial business models by taking a 
standards-based approach that will broadly permit firms to continue to 
rely on common fee 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. This standards-based approach stands in 
marked contrast to existing class exemptions that generally focus on 
very specific types of investments or compensation and take a highly 
prescriptive approach to specifying conditions. The proposed exemption 
would provide relief for common investments \16\ of retirement 
investors under the umbrella of one exemption. It is intended that this 
updated approach will ease compliance costs and reduce complexity while 
promoting the provision of investment advice that is in the best 
interest of retirement investors.
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    \16\ See Section VIII(c) of the proposed exemption, defining the 
term ``Asset,'' and the preamble discussion in the ``Scope of Relief 
in the Best Interest Contract Exemption'' section below.
---------------------------------------------------------------------------

    Section I of the proposed exemption would provide relief for the 
receipt of prohibited compensation by ``Advisers,'' ``Financial 
Institutions,'' ``Affiliates'' and ``Related Entities'' for services 
provided in connection with a purchase, sale or holding of an ``Asset'' 
\17\ by a plan or IRA as a result of the Adviser's advice. The 
exemption also uses the term ``Retirement Investor'' to describe the 
types of persons who can be advice recipients under the exemption.\18\ 
These terms are defined in Section VIII of this proposed exemption. The 
following sections discuss these key definitional terms of the 
exemption as well as the scope and conditions of the proposed 
exemption.
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    \17\ See Section VIII(c) of the proposed exemption.
    \18\ While the Department uses the term ``Retirement Investor'' 
throughout this document, the proposed exemption is not limited only 
to investment advice fiduciaries of employee pension benefit plans 
and IRAs. Relief would be available for investment advice 
fiduciaries of employee welfare benefit plans as well.
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Entities Defined

1. Adviser
    The proposed exemption contemplates that an individual person, an 
Adviser, will provide advice to the Retirement Investor. An Adviser 
must be an investment advice fiduciary of a plan or IRA who is an 
employee, independent contractor, agent, or registered representative 
of a ``Financial Institution'' (discussed in the next section), and the 
Adviser must satisfy the applicable federal and state regulatory and 
licensing requirements of insurance, banking, and securities laws with 
respect to the receipt of the compensation.\19\ Advisers may be, for 
example, registered representatives of broker-dealers registered under 
the Securities Exchange Act of 1934, or insurance agents or brokers.
---------------------------------------------------------------------------

    \19\ See Section VIII(a) of the proposed exemption.
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2. Financial Institutions
    For purposes of the proposed exemption, a Financial Institution is 
the entity that employs an Adviser or otherwise retains the Adviser as 
an independent contractor, agent or registered representative.\20\ 
Financial Institutions must be registered investment advisers, banks, 
insurance companies, or registered broker-dealers.
---------------------------------------------------------------------------

    \20\ See Section VIII(e) of the proposed exemption.
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3. Affiliates and Related Entities
    Relief is also proposed for the receipt of otherwise prohibited 
compensation by ``Affiliates'' and ``Related Entities'' with respect to 
the Adviser or Financial Institution.\21\ Affiliates are (i) any person 
directly or indirectly through one or more intermediaries, controlling, 
controlled by, or under common control with the Adviser or Financial 
Institution; (ii) any officer, director, employee, agent, registered 
representative, relative, member of family, or partner in, the Adviser 
or Financial Institution; and (iii) any corporation or partnership of 
which the Adviser or Financial Institution is an officer, director or 
employee or in which the Adviser or Financial Institution is a partner. 
For this purpose, ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual. Related Entities are entities other than Affiliates in 
which an Adviser or Financial Institution has an interest that may 
affect their exercise of their best judgment as fiduciaries.
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    \21\ See Section VIII(b) and (k) of the proposed exemption.
---------------------------------------------------------------------------

4. Retirement Investor
    The proposed exemption uses the term ``Retirement Investor'' to 
describe the types of persons who can be investment advice recipients 
under the exemption. The Retirement Investor may be a plan participant 
or beneficiary with authority to direct the investment of assets in his 
or her plan account or to take a distribution; in the case of an IRA, 
the beneficial owner of the IRA (i.e., the IRA owner); or a plan 
sponsor (or an employee, officer or director thereof) of a non-
participant-directed ERISA plan that has fewer than 100 
participants.\22\
---------------------------------------------------------------------------

    \22\ See Section VIII(l) of the proposed exemption.
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Scope of Relief in the Best Interest Contract Exemption

    The Best Interest Contract Exemption set forth in Section I would 
provide prohibited transaction relief for the receipt by Advisers, 
Financial Institutions, Affiliates and Related Entities of a wide 
variety of compensation forms as a result of investment advice provided 
to the Retirement Investors, if the conditions of the exemption are 
satisfied. Specifically, Section I(b) of the proposed exemption 
provides that the exemption would permit an Adviser, Financial 
Institution and their Affiliates and Related Entities to receive 
compensation for services provided in connection with the purchase, 
sale or holding of an Asset by a plan, participant or beneficiary 
account, or IRA, as a result of an Adviser's or

[[Page 21967]]

Financial Institution's investment advice to a Retirement Investor.
    The proposed exemption would apply to the restrictions of ERISA 
section 406(b) and the sanctions imposed by Code section 4975(a) and 
(b), by reason of Code section 4975(c)(1)(E) and (F). These provisions 
prohibit conflict of interest transactions and receipt of third-party 
payments by investment advice fiduciaries.\23\ For relief to be 
available under the exemption, the Adviser and Financial Institution 
must comply with the applicable conditions, including entering into a 
contract that acknowledges fiduciary status and requires adherence to 
certain Impartial Conduct Standards.
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    \23\ Relief is also proposed from ERISA section 406(a)(1)(D) and 
Code section 4975(c)(1)(D), which prohibit transfer of plan assets 
to, or use of plan assets for the benefit of, a party in interest 
(including a fiduciary).
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    The types of compensation payments contemplated by this proposed 
exemption include commissions paid directly by the plan or IRA, as well 
as commissions, trailing commissions, sales loads, 12b-1 fees, and 
revenue sharing payments paid by the investment providers or other 
third parties to Advisers and Financial Institutions. The exemption 
also would cover other compensation received by the Adviser, Financial 
Institution or their Affiliates and Related Entities as a result of an 
investment by a plan, participant or beneficiary account, or IRA, such 
as investment management fees or administrative services fees from an 
investment vehicle in which the plan, participant or beneficiary 
account, or IRA invests.
    As proposed, the exemption is limited to otherwise prohibited 
compensation generated by investments that are commonly purchased by 
plans, participant and beneficiary accounts, and IRAs. Accordingly, the 
exemption defines the ``Assets'' that can be sold under the exemption 
as bank deposits, CDs, shares or interests in registered investment 
companies, bank collective funds, insurance company separate accounts, 
exchange-traded REITs, exchange-traded funds, corporate bonds offered 
pursuant to a registration statement under the Securities Act of 1933, 
agency debt securities as defined in FINRA Rule 6710(l) or its 
successor, U.S. Treasury securities as defined in FINRA Rule 6710(p) or 
its successor, insurance and annuity contracts (both securities and 
non-securities), guaranteed investment contracts, and equity securities 
within the meaning of 17 CFR 230.405 that are exchange-traded 
securities within the meaning of 17 CFR 242.600. However, the 
definition does not encompass any equity security that is a security 
future or a put, call, straddle, or any other option or privilege of 
buying an equity security from or selling an equity security to another 
without being bound to do so.\24\
---------------------------------------------------------------------------

    \24\ See Section VIII(c) of the proposed exemption.
---------------------------------------------------------------------------

    Prohibited compensation received for investments that fall outside 
the definition of Asset would not be covered by the exemption. Limiting 
the exemption in this manner ensures that the investments needed to 
build a basic diversified portfolio are available to plans, participant 
and beneficiary accounts, and IRAs, while limiting the exemption to 
those investments that are relatively transparent and liquid, many of 
which have a ready market price. The Department also notes that many 
investment types and strategies that would not be covered by the 
exemption can be obtained through pooled investment funds, such as 
mutual funds, that are covered by the exemption.
    Request for Comment. The Department requests comment on the 
proposed definition of Assets, in particular:
    <bullet> Do commenters agree we have identified all common 
investments of retail investors?
    <bullet> Have we defined individual investment products with enough 
precision that parties will know if they are complying with this aspect 
of the exemption?
    <bullet> Should additional investments be included in the scope of 
the exemption? Commenters urging addition of other investment products 
should fully describe the characteristics and fee structures associated 
with the products, as well as data supporting their position that the 
product is a common investment for retail investors.
    The Department encourages parties to apply to the Department for 
individual or class exemptions for types of investments not covered by 
the exemption to the extent that they believe the proposed package of 
exemptions does not adequately cover beneficial investment practices 
for which appropriate protections could be crafted in an exemption.

Limitation to Prohibited Compensation Received As a Result of Advice to 
Retirement Investors

    The Department proposed this exemption to promote the provision of 
investment advice to retail investors that is in their best interest 
and untainted by conflicts of interest. The exemption would permit 
receipt by Advisers and Financial Institutions of otherwise prohibited 
compensation commonly received in the retail market, such as 
commissions, 12b-1 fees, and revenue sharing payments, subject to 
conditions designed specifically to protect the interests of the 
investors. For consistency with these objectives, the exemption would 
apply to the receipt of such compensation by Advisers, Financial 
Institutions and their Affiliates and Related Entities only when advice 
is provided to retail Retirement Investors, including plan participants 
and beneficiaries, IRA owners, and plan sponsors (including the 
sponsor's employees, officers, and directors) acting on behalf of non-
participant-directed plans that have fewer than 100 participants. As 
discussed in the preamble to the Proposed Regulation and in the 
associated Regulatory Impact Analysis, these investors are particularly 
vulnerable to abuse. The proposed exemption is designed to protect 
these investors from the harmful impact of conflicts of interest, while 
minimizing the potential disruption to a retail market that relies upon 
many forms of compensation that ERISA would otherwise prohibit.
    The Department believes that investment advice in the institutional 
market is best addressed through other approaches. Accordingly, the 
proposed exemption does not extend to transactions involving certain 
larger ERISA plans--those with more than 100 participants. Advice 
providers to these plans are already accustomed to operating in a 
fiduciary environment and within the framework of existing prohibited 
transaction exemptions, which tightly constrain the operation of 
conflicts of interest. As a result, including large plans within the 
definition of Retirement Investor could have the undesirable 
consequence of reducing protections provided under existing law to 
these investors, without offsetting benefits. In particular, it could 
have the undesirable effect of increasing the number and impact of 
conflicts of interest, rather than reducing or mitigating them.
    While the Department believes that the Best Interest Contract 
Exemption is not the appropriate way to address any potential concerns 
about the impact of the expanded fiduciary definition on large plans, 
the Department agrees that an adjustment is necessary to accommodate 
arm's length transactions with plan investors with financial expertise. 
Accordingly, as part of this regulatory project, the Department has 
separately proposed a seller's carve-out in the Proposed Conflict of 
Interest Regulation. Under the terms of that

[[Page 21968]]

carve-out, persons who provide recommendations to certain ERISA plan 
investors with financial expertise (but not to plan participants or 
beneficiaries, or IRA owners) can avoid fiduciary status altogether. 
The seller's carve-out was developed to avoid the application of 
fiduciary status to a plan's counterparty in an arm's length commercial 
transaction in which the plan's representative has no reasonable 
expectation of impartial advice. When the carve-out's terms are 
satisfied, it is available for transactions with plans that have more 
than 100 participants.
    The Department recognizes, however, that there are smaller non-
participant-directed plans for which the plan sponsor (or an employee, 
officer or director thereof) is responsible for choosing the specific 
investments and allocations for their participating employees. The 
Department believes that these small plan fiduciaries are appropriately 
categorized with plan participants and beneficiaries and IRA owners, as 
retail investors. For this reason, the proposed exemption's definition 
of Retirement Investor includes plan sponsors (or employees, officers 
and directors thereof) of plans with fewer than 100 participants.\25\ 
As a result, the exemption would extend to advice providers to such 
smaller plans.
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    \25\ The Department notes that plan participants and 
beneficiaries in ERISA plans can be Retirement Investors regardless 
of the number of participants in such plan. Therefore, the 100-
participant limitation does not apply when advice is provided 
directly to the participants and beneficiaries.
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    The proposed threshold of fewer than 100 participants is intended 
to reasonably identify plans that will most benefit from both the 
flexibility provided by this exemption and the protections embodied in 
its conditions. The threshold also mirrors the Proposed Regulations' 
100-or-more participant threshold for the seller's carve-out. That 
threshold recognizes the generally greater sophistication possessed by 
larger plans' discretionary fiduciaries, as well as the greater 
vulnerability of retail investors, such as small plans. As explained in 
more detail in the preamble to the Proposed Regulation, investment 
recommendations to small plans, IRA owners and plan participants and 
beneficiaries do not fit the ``arms length'' characteristics that the 
seller's carve-out is designed to preserve. Recommendations to retail 
investors are routinely presented as advice, consulting, or financial 
planning services. In the securities markets, brokers' suitability 
obligations generally require a significant degree of 
individualization, and research has shown that disclaimers are 
ineffective in alerting typically unsophisticated investors to the 
dangers posed by conflicts of interest, and may even exacerbate the 
dangers. Most retail investors lack financial expertise, are unaware of 
the magnitude and impact of conflicts of interest, and are unable 
effectively to assess the quality of the advice they receive.
    The 100 or more threshold is also consistent with that applicable 
for similar purposes under existing rules and practices. 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. 
For purposes of the RFA, the Department considers a small entity to be 
an employee benefit plan with fewer than 100 participants. The basis of 
this definition is found in section 104(a)(2) of ERISA that permits the 
Secretary of Labor to prescribe simplified annual reports for pension 
plans that cover fewer than 100 participants. Under current Department 
rules, such small plans generally are eligible for streamlined 
reporting and relieved of related audit requirements.
    The Department invites comment on the proposed exemption's 
limitation to prohibited compensation received as a result of advice to 
Retirement Investors. In particular, we ask whether commenters support 
the limitation as currently formulated, whether the definitions should 
be revised, or whether there should not be an exclusion with respect to 
such larger plans at all. Commenters on this subject are also 
encouraged to address the interaction of the exemption's limitation 
with the scope of the seller's carve-out in the Proposed Regulation. 
Finally, we request comment on whether the exemption should be expanded 
to cover advice to plan sponsors (including the sponsor's employees, 
officers, and directors) of participant-directed plans with fewer than 
100 participants on the composition of the menu of investment options 
available under such plans, and if so, whether additional or different 
conditions should apply.

Exclusions in Section I(c) of the Proposed Exemption

    Section I(c) of the proposal sets forth additional exclusions from 
the exemption. Section I(c)(1) provides that the exemption would not 
apply to the receipt of prohibited compensation from a transaction 
involving an ERISA plan if the Adviser, Financial Institution or 
Affiliate is the employer of employees covered by the ERISA plan. The 
Department believes that due to the special nature of the employer/
employee relationship, an exemption permitting an Adviser and Financial 
Institution to profit from investments by employees in their employer-
sponsored plan would not be in the interest of, or protective of, the 
plans and their participants and beneficiaries. This restriction does 
not apply, however, in the case of an IRA or other similar plan that is 
not covered by Title I of ERISA. Accordingly, an Adviser or Financial 
Institution may provide advice to the beneficial owner of an IRA who is 
employed by the Adviser, its Financial Institution or an Affiliate, and 
receive prohibited compensation as a result, provided the IRA is not 
covered by Title I of ERISA.
    Section I(c)(1) further provides that the exemption does not apply 
if the Adviser or Financial Institution is a named fiduciary or plan 
administrator, as defined in ERISA section 3(16)(A)) with respect to an 
ERISA plan, or an affiliate thereof, that was selected to provide 
advice to the plan by a fiduciary who is not independent of them.\26\ 
This provision is intended to disallow selection of Advisers and 
Financial Institutions by named fiduciaries or plan administrators that 
have an interest in them.
---------------------------------------------------------------------------

    \26\ See Section VIII(f), defining the term ``Independent.''
---------------------------------------------------------------------------

    Section I(c)(2) provides that the exemption does not extend to 
prohibited compensation received when the Adviser engages in a 
principal transaction with the plan, participant or beneficiary 
account, or IRA.\27\ A principal transaction is a transaction in which 
the Adviser engages in a transaction with the plan, participant or 
beneficiary account, or IRA, on behalf of the account of the Financial 
Institution or another person directly or indirectly, through one or 
more intermediaries, controlling, controlled by, or under common 
control with the Financial Institution. Principal transactions involve 
conflicts of interest not addressed by the safeguards of this proposed 
exemption. Elsewhere in today's Federal Register, the Department is 
proposing an exemption for investment advice fiduciaries to engage in 
principal transactions involving certain debt securities. The proposed 
exemption for principal transactions contains conditions

[[Page 21969]]

specific to those transactions but is designed to align with this 
proposed exemption so as to ease parties' ability to comply with both 
exemptions with respect to the same investor.
---------------------------------------------------------------------------

    \27\ For purposes of this proposed exemption, however, the 
Department does not view a riskless principal transaction involving 
mutual fund shares as an excluded principal transaction.
---------------------------------------------------------------------------

    Section I(c)(3) provides that the exemption would not cover 
prohibited compensation that is received by an Adviser or Financial 
Institution as a result of investment advice that is generated solely 
by an interactive Web site in which computer software-based models or 
applications provide investment advice to Retirement Investors based on 
personal information each investor supplies through the Web site 
without any personal interaction or advice from an individual Adviser. 
Such computer derived advice is often referred to as ``robo-advice.'' 
While the Department believes that computer generated advice that is 
delivered in this manner may be very useful to Retirement Investors, 
relief will not be included in the proposal. As the marketplace for 
such advice is still evolving in ways that both appear to avoid 
conflicts of interest that would violate the prohibited transaction 
rules, and minimize cost, the Department believes that inclusion of 
such advice in this exemption could adversely modify the incentives 
currently shaping the market for robo-advice. Furthermore, a statutory 
prohibited transaction exemption at ERISA section 408(g) covers 
computer-generated investment advice and is available for robo-advice 
involving prohibited transactions if its conditions are satisfied. See 
29 CFR 2550.408g-1.
    Finally, Section I(c)(4) provides that the exemption is limited to 
Advisers who are fiduciaries by reason of providing investment 
advice.\28\ Advisers who have full investment discretion with respect 
to plan or IRA assets or who have discretionary authority over the 
administration of the plan or IRA, for example, are not affected by the 
Proposed Regulation and are therefore not the subject of this 
exemption.
---------------------------------------------------------------------------

    \28\ See also Section VIII(a), defining the term ``Adviser.''
---------------------------------------------------------------------------

Conditions of the Proposed Exemption

    Sections II-V of the proposal list the conditions applicable to the 
Best Interest Contract Exemption described in Section I. All applicable 
conditions must be satisfied in order to avoid application of the 
specified prohibited transaction provisions of ERISA and the Code. The 
Department believes that these conditions are necessary for the 
Secretary to find that the exemption is administratively feasible, in 
the interests of plans and of their participants and beneficiaries, and 
IRA owners and protective of the rights of the participants and 
beneficiaries of such plans and IRA owners. Under ERISA section 
408(a)(2), and Code section 4975(c)(2), the Secretary may not grant an 
exemption without making such findings. The proposed conditions of the 
exemption are described below.

Contractual Obligations Applicable to the Best Interest Contract 
Exemption (Section II)

    Section II(a) of the proposal requires that an Adviser and 
Financial Institution enter into a written contract with the Retirement 
Investor prior to recommending that the plan, participant or 
beneficiary account, or IRA, purchase, sell or hold an Asset. The 
contract must be executed by both the Adviser and the Financial 
Institution as well as the Retirement Investor. In the case of advice 
provided to a plan participant or beneficiary in a participant-directed 
individual account plan, the participant or beneficiary should be the 
Retirement Investor that is the party to the contract, on behalf of his 
or her individual account.
    The contract may be part of a master agreement with the Retirement 
Investor and does not require execution prior to each additional 
recommendation to purchase, sell or hold an Asset. The exemption, in 
particular the requirement to adhere to a best interest standard, does 
not mandate an ongoing or long-term advisory relationship, but rather 
leaves that to the parties. The terms of the contract, along with other 
representations, agreements, or understandings between the Adviser, 
Financial Institution and Retirement Investor, will govern whether the 
nature of the relationship between the parties is ongoing or not.
    The contract is the cornerstone of the proposed exemption, and the 
Department believes that by requiring a contract as a condition of the 
proposed exemption, it creates a mechanism by which a Retirement 
Investor can be alerted to the Adviser's and Financial Institution's 
obligations and be provided with a basis upon which its rights can be 
enforced. In order to comply with the exemption, the contract must 
contain every required element set forth in Section II(b)-(e) and also 
must not include any of the prohibited provisions described in Section 
II(f). It is intended that the contract creates actionable obligations 
with respect to both the Impartial Conduct Standards and the 
warranties, described below. In addition, failure to satisfy the 
Impartial Conduct Standards will result in loss of the exemption.
    It should be noted, however, that compliance with the exemption's 
conditions is necessary only with respect to transactions that 
otherwise would constitute prohibited transactions under ERISA and the 
Code. The exemption does not purport to impose conditions on the 
management of investments held outside of ERISA-covered plans and IRAs. 
Accordingly, the contract and its conditions are mandatory only with 
respect to investments held by plans and IRAs.
1. Fiduciary Status
    The proposal sets forth multiple contractual requirements. The 
first and most fundamental contractual requirement, which is set out in 
Section II(b) of proposal, is that that both the Adviser and Financial 
Institution must acknowledge fiduciary status under ERISA or the Code, 
or both, with respect to any recommendations to the Retirement Investor 
to purchase, sell or hold an Asset. If this acknowledgment of fiduciary 
status does not appear in a contract with a Retirement Investor, the 
exemption is not satisfied with respect to transactions involving that 
Retirement Investor. This fiduciary acknowledgment is critical to 
ensuring that there is no uncertainty--before or after investment 
advice is given with regard to the Asset--that both the Adviser and 
Financial Institution are acting as fiduciaries under ERISA and the 
Code with respect to that advice.
    The acknowledgment of fiduciary status in the contract is 
nonetheless limited to the advice to the Retirement Investor to 
purchase, sell or hold the Asset. The Adviser and Financial Institution 
do not become fiduciaries with respect to any other conduct by virtue 
of this contractual requirement.
2. Standards of Impartial Conduct
    Building upon the required acknowledgment of fiduciary status, the 
proposal additionally requires that both the Adviser and the Financial 
Institution contractually commit to adhering to certain specifically 
delineated Impartial Conduct Standards when providing investment advice 
to the Retirement Investor regarding Assets, and that they in fact do 
adhere to such standards. Therefore, if an Adviser and/or Financial 
Institution fail to comply with the Impartial Conduct Standards, relief 
under the exemption is no longer available and the contract is 
violated.
    Specifically, Section II(c)(1) of the proposal requires that under 
the contract the Adviser and Financial Institution provide advice 
regarding Assets that is in the ``best interest'' of

[[Page 21970]]

the Retirement Investor. Best interest is defined to mean that the 
Adviser and Financial Institution 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 the needs of the Retirement 
Investor, when providing investment advice to them. Further, under the 
best interest standard, the Adviser and Financial Institution must act 
without regard to the financial or other interests of the Adviser, 
Financial Institution or their Affiliates or any other party. Under 
this standard, the Adviser and Financial Institution must put the 
interests of the Retirement Investor ahead of the financial interests 
of the Adviser, Financial Institution or their Affiliates, Related 
Entities or any other party.
    The best interest standard set forth in this exemption is based on 
longstanding concepts derived from ERISA and the law of trusts. For 
example, ERISA section 404 requires a fiduciary to act ``solely in the 
interest of the participants . . . with the care, skill, prudence, and 
diligence under the circumstances then prevailing that a prudent man 
acting in a like capacity and familiar with such matters would use in 
the conduct of an enterprise of a like character and with like aims.'' 
Similarly, both ERISA section 404(a)(1)(A) and the trust-law duty of 
loyalty require fiduciaries to put the interests of trust beneficiaries 
first, without regard to the fiduciaries' own self-interest. 
Accordingly, the Department would expect the standard to be interpreted 
in light of forty years of judicial experience with ERISA's fiduciary 
standards and hundreds more with the duties imposed on trustees under 
the common law of trusts. In general, courts focus on the process the 
fiduciary used to reach its determination or recommendation--whether 
the fiduciaries, ``at the time they engaged in the challenged 
transactions, employed the proper procedures to investigate the merits 
of the investment and to structure the investment.'' Donovan v. 
Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983). Moreover, a fiduciary's 
investment recommendation is measured based on the circumstances 
prevailing at the time of the transaction, not on how the investment 
turned out with the benefit of hindsight.
    In this regard, the Department notes that while fiduciaries of 
plans covered by ERISA are subject to the ERISA section 404 standards 
of prudence and loyalty, the Code contains no provisions that hold IRA 
fiduciaries to these standards. However, as a condition of relief under 
the proposed exemption, both IRA and plan fiduciaries would have to 
agree to, and uphold, the best interest and Impartial Conduct 
Standards, as set forth in Section II(c). The best interest standard is 
defined to effectively mirror the ERISA section 404 duties of prudence 
and loyalty, as applied in the context of fiduciary investment advice.
    In addition to the best interest standard, the exemption imposes 
other important standards of impartial conduct in Section II(c) of the 
proposal. Section II(c)(2) requires that the Adviser and Financial 
Institution agree that they will not recommend an Asset if the total 
amount of compensation anticipated to be received by the Adviser, 
Financial Institution, and their Affiliates and Related Entities in 
connection with the purchase, sale or holding of the Asset by the plan, 
participant or beneficiary account, or IRA, will exceed reasonable 
compensation in relation to the total services they provide to the 
applicable Retirement Investor. The obligation to pay no more than 
reasonable compensation to service providers is long recognized under 
ERISA. See ERISA section 408(b)(2), 29 CFR 2550.408b-2(a)(3), and 29 
CFR 2550.408c-2. The reasonableness of the fees depends on the 
particular facts and circumstances. Finally, Section II(c)(3) requires 
that the Adviser's and Financial Institution's statements about Assets, 
fees, material conflicts of interest, and any other matters relevant to 
a Retirement Investor's investment decisions, not be misleading.
    Under ERISA section 408(a) and Code section 4975(c), the Department 
cannot grant an exemption unless it first finds that the exemption is 
administratively feasible, in the interests of plans and their 
participants and beneficiaries and IRA owners, and protective of the 
rights of participants and beneficiaries of plans and IRA owners. An 
exemption permitting transactions that violate the requirements of 
Section II(c) would be unlikely to meet these standards.
3. Warranty--Compliance With Applicable Law
    Section II(d) of the proposal requires that the contract include 
certain warranties intended to be protective of the rights of 
Retirement Investors. In particular, to satisfy the exemption, the 
Adviser, and Financial Institution must warrant that they and their 
Affiliates will comply with all applicable federal and state laws 
regarding the rendering of the investment advice, the purchase, sale or 
holding of the Asset and the payment of compensation related to the 
purchase, sale and holding. Although this warranty must be included in 
the contract, the exemption is not conditioned on compliance with the 
warranty. Accordingly, the failure to comply with applicable federal or 
state law could result in contractual liability for breach of warranty, 
but it would not result in loss of the exemption, as long as the breach 
did not involve a violation of one of the exemption's other conditions 
(e.g., the best interest standard). De minimis violations of state or 
federal law would be unlikely to violate the exemption's other 
conditions, such as the best interest standard, and would not typically 
result in the loss of the exemption.
4. Warranty--Policies and Procedures
    The Financial Institution must also contractually warrant that it 
has adopted written policies and procedures that are reasonably 
designed to mitigate the impact of material conflicts of interest that 
exist with respect to the provision of investment advice to Retirement 
Investors and ensure that individual Advisers adhere to the Impartial 
Conduct Standards described above. For purposes of the exemption, a 
material conflict of interest is deemed to exist when an Adviser or 
Financial Institution has a financial interest that could affect the 
exercise of its best judgment as a fiduciary in rendering advice to a 
Retirement Investor regarding an Asset.\29\ Like the warranty on 
compliance with applicable law, discussed above, this warranty must be 
in the contract but the exemption is not conditioned on compliance with 
the warranty. Failure to comply with the warranty could result in 
contractual liability for breach of warranty.
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    \29\ See Section VIII(h) of the proposed exemption.
---------------------------------------------------------------------------

    As part of the contractual warranty on policies and procedures, the 
Financial Institution must state that in formulating its policies and 
procedures, it specifically identified material conflicts of interest 
and adopted measures to prevent those material conflicts of interest 
from causing violations of the Impartial Conduct Standards. Further, 
the Financial Institution must state that neither it nor (to the best 
of its knowledge) its Affiliates or Related Entities will use quotas, 
appraisals, performance or personnel actions, bonuses, contests, 
special awards, differentiated compensation or other actions or 
incentives to the extent they would tend to encourage individual 
Advisers to make recommendations that are not in the best interest of 
Retirement Investors.
    While these warranties must be part of the contract between the 
Adviser and

[[Page 21971]]

Financial Institution and the Retirement Investor, the proposal does 
not mandate the specific content of the policies and procedures. This 
flexibility is intended to allow Financial Institutions to develop 
policies and procedures that are effective for their particular 
business models, within the constraints of their fiduciary obligations 
and the Impartial Conduct Standards.
    Under the proposal, a Financial Institution's policies and 
procedures must not authorize compensation or incentive systems that 
would tend to encourage individual Advisers to make recommendations 
that are not in the best interest of Retirement Investors. Consistent 
with the general approach in the proposal to the Financial 
Institution's policies and procedures, however, there are no particular 
required compensation or employment structures. Certainly, one way for 
a Financial Institution to comply is to adopt a ``level-fee'' 
structure, in which compensation for Advisers does not vary based on 
the particular investment product recommended. But the exemption does 
not mandate such a structure. The Department believes that the specific 
implementation of this requirement is best determined by the Financial 
Institution in light of its particular circumstances and business 
models.
    For further clarification, the Department sets forth the following 
examples of broad approaches to compensation structures that could help 
satisfy the contractual warranty regarding the policies and procedures. 
In connection with all these examples, it is important that the 
Financial Institution carefully monitor whether the policies and 
procedures are, in fact, working to prevent the provision of biased 
advice. The Financial Institution must correct isolated or systemic 
violations of the Impartial Conduct Standards and reasonably revise 
policies and procedures when failures are identified.
    Example 1: Independently certified computer models.\30\ The 
Adviser provides investment advice that is in accordance with an 
unbiased computer model created by an independent third party. Under 
this example, the Adviser can receive any form or amount of 
compensation so long as the advice is rendered in strict accordance 
with the model.\31\
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    \30\ These examples should not be read as retracting views the 
Department expressed in prior Advisory Opinions regarding how an 
investment advice fiduciary could avoid prohibited transactions that 
might result from differential compensation arrangements. 
Specifically, in Advisory Opinion 2001-09A, the Department concluded 
that the provision of fiduciary investment advice would not result 
in prohibited transactions under circumstances where the advice 
provided by the fiduciary with respect to investment funds that pay 
additional fees to the fiduciary is the result of the application of 
methodologies developed, maintained and overseen by a party 
independent of the fiduciary in accordance with the conditions set 
forth in the Advisory Opinion. A computer model also can be used as 
part of an advice arrangement that satisfies the conditions under 
the prohibited transaction exemption in ERISA section 408(b)(14) and 
(g), described above.
    \31\ As previously noted, this exemption is not available for 
advice generated solely by a computer model and provided to the 
Retirement Investor electronically without live advice. 
Nevertheless, this exemption remains available in the hypothetical 
because the advice is delivered by a live Adviser.
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    Example 2: Asset-based compensation. The Financial Institution 
pays the Adviser a percentage, which does not vary based on the 
types of investments, of the dollar amount of assets invested by the 
plans, participant and beneficiary accounts, and IRAs with the 
Adviser. Under this example, assume the Financial Institution 
established the percentage as 0.1% on a quarterly basis. If a plan, 
participant or beneficiary account, or IRA, invested a total of 
$10,000 with the Adviser, divided 25% in equity securities, 50% in 
proprietary mutual funds, and 25% in bonds underwritten by non-
Related Entities, and did not withdraw any of the money within the 
quarter, the Adviser would receive 0.1% of the $10,000.
    Example 3:  Fee offset. The Financial Institution establishes a 
fee schedule for its services. It accepts transaction-based payments 
directly from the plan, participant or beneficiary account, or IRA, 
and/or from third party investment providers. To the extent the 
payments from third party investment providers exceed the 
established fee for a particular service, such amounts are rebated 
to the plan, participant or beneficiary account, or IRA. To the 
extent third party payments do not satisfy the established fee, the 
plan, participant or beneficiary account, or IRA is charged directly 
for the remaining amount due.\32\
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    \32\ See footnote 31 supra. Certain types of fee-offset 
arrangements may result in avoidance of prohibited transactions 
altogether. In Advisory Opinion Nos. 97-15A and 2005-10A, the 
Department explained that a fiduciary investment adviser could 
provide investment advice to a plan with respect to investment funds 
that pay it or an affiliate additional fees without engaging in a 
prohibited transaction if those fees are offset against fees that 
the plan otherwise is obligated to pay to the fiduciary.
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    Example 4:  Differential Payments Based on Neutral Factors. The 
Financial Institution establishes payment structures under which 
transactions involving different investment products result in 
differential compensation to the Adviser based on a reasonable 
assessment of the time and expertise necessary to provide prudent 
advice on the product or other reasonable and objective neutral 
factors. For example, a Financial Institution could compensate an 
Adviser differently for advisory work relating to annuities, as 
opposed to shares in a mutual fund, if it reasonably determined that 
the time to research and explain the products differed. However, the 
payment structure must be reasonably designed to avoid incentives to 
Advisers to recommend investment transactions that are not in 
Retirement Investors' best interest.
    Example 5:  Alignment of Interests. The Financial Institution's 
policies and procedures establish a compensation structure that is 
reasonably designed to align the interests of the Adviser with the 
interests of the Retirement Investor. For example, this might 
include compensation that is primarily asset-based, as discussed in 
Example 2, with the addition of bonuses and other incentives paid to 
promote advice that is in the Best Interest of the Retirement 
Investor. While the compensation would be variable, it would align 
with the customer's best interest.

    These examples are not exhaustive, and many other compensation and 
employment arrangements may satisfy the contractual warranties. The 
exemption imposes a broad standard for the warranty and policies and 
procedures requirement, not an inflexible and highly-prescriptive set 
of rules. The Financial Institution retains the latitude necessary to 
design its compensation and employment arrangements, provided that 
those arrangements promote, rather than undermine, the best interest 
and Impartial Conduct Standards.
    Whether a Financial Institution adopts one of the specific 
approaches taken in the examples above or a different approach, the 
Department expects that it will engage in a good faith process to 
prudently establish and oversee policies and procedures that will 
effectively mitigate conflicts of interest and ensure adherence to the 
Impartial Conduct Standards. To this end, Financial Institutions may 
also want to consider designating an individual or group responsible 
for addressing material conflicts of interest issues. An internal 
compliance officer or a committee could monitor adherence to the 
Impartial Conduct Standards and consider ways to ensure compliance. The 
individual or group could also develop procedures for reporting 
material conflicts of interest and for handling external and internal 
complaints within the Financial Institution, and disciplinary measures 
for non-compliance with the Impartial Conduct Standards. Additionally, 
Financial Institutions should consider how best to inform and train 
individual Advisers on the Impartial Conduct Standards and other 
requirements of the exemption.
    Additionally, Financial Institutions could consider the following 
components of effective policies and procedures relating to an 
Adviser's compensation: (i) Avoiding creating compensation thresholds 
that enable an Adviser to increase his or her

[[Page 21972]]

compensation disproportionately through an incremental increase in 
sales; (ii) monitoring activity of Advisers approaching compensation 
thresholds such as higher payout percentages, back-end bonuses, or 
participation in a recognition club, such as a President's Club; (iii) 
maintaining neutral compensation grids that pay the Adviser a flat 
payout percentage regardless of product type sold (so long as they do 
not merely transmit the Financial Institution's conflicts to the 
Adviser); (iv) refraining from providing higher compensation or other 
rewards for the sale of proprietary products or products for which the 
firm has entered into revenue sharing arrangements; (v) stringently 
monitoring recommendations around key liquidity events in the 
investor's lifecycle where the recommendation is particularly 
significant (e.g. when an investor rolls over his pension or 401(k) 
account); and (vi) developing metrics for good and bad behavior (red 
flag processes) and using clawbacks of deferred compensation to adjust 
compensation for employees who do not properly manage conflicts of 
interest.\33\
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    \33\ See FINRA Report on Conflicts of Interest, October 2013.
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    The Department seeks comments on all aspects of its discussion of 
the sorts of policies and procedures that will satisfy the required 
contractual warranties of Section II(d)(2)-(4). In particular, the 
Department requests comments on whether the exemption should be more 
prescriptive about the terms of policies and procedures, or provide 
more detailed examples of acceptable policies and procedures. In 
addition, the Department requests comments on whether commenters 
believe the examples describe policies and procedures that would 
achieve the investor-protective objectives of the exemption.
5. Contractual Disclosures
    Finally, Section II(e) of the proposal requires certain disclosures 
in the written contract. If the disclosures do not appear in a contract 
with a Retirement Investor, the exemption is not satisfied with respect 
to transactions involving that Retirement Investor. First, Section 
II(e)(1) provides that the Financial Institution and the Adviser must 
identify in the written contract any material conflicts of interest. 
This disclosure may be a general description of the types of material 
conflicts of interest applicable to the Financial Institution and 
Adviser, provided the disclosure also informs the Retirement Investor 
that a more specific description that is kept current is available on 
the Financial Institution's Web site (web address provided) and by 
mail, upon request of the Retirement Investor.
    Second, Section II(e)(2) requires that the written contract must 
inform the Retirement Investor of the right to obtain complete 
information about all of the fees currently associated with the Assets 
in which it is invested, including all of the fees payable to the 
Adviser, Financial Institution, and any Affiliates and Related Entities 
in connection with such investments. The fee information must be 
complete, and it must include both the direct and the indirect fees 
paid by the plan or IRA.\34\ Section II(e)(3) provides that the written 
contract also must disclose to the Retirement Investor whether the 
Financial Institution offers proprietary products or receives third 
party payments with respect to the purchase, sale or holding of any 
Asset. Third party payments, for purposes of this exemption, are 
defined as sales charges (when not paid directly by the plan, 
participant or beneficiary account, or IRA), 12b-1 fees, and other 
payments paid to the Adviser, Financial Institution or any Affiliate or 
Related Entity by a third party as a result of the purchase, sale or 
holding of an Asset by a plan, participant or beneficiary account, or 
IRA. A proprietary product is defined for purposes of this exemption as 
a product that is managed by the Financial Institution or any of its 
Affiliates. In conjunction with this disclosure, the contract must 
provide the address of a Web page that discloses the compensation 
arrangements entered into by the Adviser and the Financial Institution, 
as required by Section III(c) of the proposal and discussed below.
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    \34\ To the extent compliance with this information request 
requires Advisers and Financial Institutions to obtain such 
information from entities that are not closely affiliated with them, 
the Adviser or Financial Institution may supply such information to 
the Retirement Investor in compliance with the exemption provided 
the Adviser and Financial Institution act in good faith and do not 
know that the materials are incomplete or inaccurate. For purposes 
of the proposed exemption, Affiliates within the meaning of Section 
VIII(b)(1) and (2) are considered closely affiliated such that the 
good faith reliance would not apply.
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Enforcement of the Contractual Obligations

    The contractual requirements set forth in Section II of the 
proposal are enforceable. Plans, plan participants and beneficiaries, 
IRA owners, and the Department may use the contract as a tool to ensure 
compliance with the exemption. The Department notes, however, that this 
contractual tool creates different rights with respect to plans, 
participants and beneficiaries, IRA owners and the Department.
1. IRA Owners
    The contract between the IRA owner and the Adviser and Financial 
Institution forms the basis of the IRA owner's enforcement rights. As 
outlined above, the contract embodies obligations on the part of the 
Adviser and Financial Institution. The Department intends that all the 
contractual obligations (the Impartial Conduct Standards and the 
warranties) will be actionable by IRA owners. The most important of 
these contractual obligations for enforcement purposes is the 
obligation imposed on both the Adviser and the Financial Institution to 
comply with the Impartial Conduct Standards. Because these standards 
are contractually imposed, the IRA owner has a contract claim if, for 
example, the Adviser recommends an investment product that is not in 
the best interest of the IRA owner.
2. Plans, Plan Participants and Beneficiaries
    The protections of the exemption and contractual terms will also be 
enforceable by plans, plan participants and beneficiaries. 
Specifically, if an Adviser or Financial Institution received 
compensation in a prohibited transaction but failed to satisfy any of 
the Impartial Conduct Standards or any other condition of the 
exemption, the Adviser and Financial Institution would be unable to 
qualify for relief under the exemption, and, as a result, could be 
liable under ERISA section 502(a)(2) and (3). An Adviser's failure to 
comply with the exemption or the Impartial Conduct Standards would 
result in a non-exempt prohibited transaction and would likely 
constitute a fiduciary breach. As a result, a plan, plan participant or 
beneficiary would be able to sue under ERISA section 502(a)(2) or (3) 
to recover any loss in value to the plan (including the loss in value 
to an individual account), or to obtain disgorgement of any wrongful 
profits or unjust enrichment. Additionally, plans, participants and 
beneficiaries could enforce their obligations in an action based on 
breach of the agreement.
3. The Department
    In addition, the Department would be able to enforce ERISA's 
prohibited transaction and fiduciary duty provisions with respect to 
employee benefit plans, but not IRAs, in the event that the Adviser or 
Financial Institution received compensation in a prohibited transaction 
but failed to comply with the exemption or the Impartial Conduct 
Standards. If, for example, any of the

[[Page 21973]]

specific conditions of the exemption are not met, the Adviser and 
Financial Institution will have engaged in a non-exempt prohibited 
transaction, and the Department will be entitled to seek relief under 
ERISA section 502(a)(2) and (5).
4. Excise Taxes Under the Code
    In addition to the claims described above that may be brought by 
IRA owners, plans, plan participants and beneficiaries, and the 
Department, to enforce the contract and ERISA, Advisers and Financial 
Institutions that engage in prohibited transactions under the Code are 
subject to an excise tax. The excise tax is generally equal to 15% of 
the amount involved. Parties who have participated in a prohibited 
transaction for which an exemption is not available must pay the excise 
tax and file Form 5330 with the Internal Revenue Service.

Prohibited Provisions

    Finally, in order to preserve these various enforcement rights, 
Section II(f) of the proposal provides that certain provisions may not 
be part of the contract. If these provisions appear in a contract with 
a Retirement Investor, the exemption is not satisfied with respect to 
transactions involving that Retirement Investor. First, the proposal 
requires that the contract may not contain exculpatory provisions that 
disclaim or otherwise limit liability for an Adviser's or Financial 
Institution's violations of the contract's terms. Second, the contract 
may not require the Retirement Investor to agree to waive or qualify 
its right to bring or participate in a class action or other 
representative action in court in a contract dispute with the Adviser 
or Financial Institution. The right of a Retirement Investor to bring a 
class-action claim in court (and the corresponding limitation on 
fiduciaries' ability to mandate class-action arbitration) is consistent 
with FINRA's position that its arbitral forum is not the correct venue 
for class-action claims. As proposed, this section would not affect the 
ability of a Financial Institution or Adviser, and a Retirement 
Investor, to enter into a pre-dispute binding arbitration agreement 
with respect to individual contract claims. The Department expects that 
most individual arbitration claims under this exemption will be subject 
to FINRA's arbitration procedures and consumer protections. The 
Department seeks comments on whether there are certain procedures and/
or consumer protections that it should adopt or mandate for those 
disputes not covered by FINRA.

Disclosure Requirements for Best Interest Contract Exemption (Section 
III)

    In order to facilitate access to information on Financial 
Institution and Adviser compensation, the proposal requires both public 
disclosure and disclosure to Retirement Investors.
1. Web Page
    Section III(c) of the proposal requires that the Financial 
Institution maintain a public Web page that provides several different 
types of information. The Web page must show the direct and indirect 
material compensation payable to the Adviser, Financial Institution and 
any Affiliate for services provided in connection with each Asset (or, 
if uniform across a class of Assets, the class of Assets) that a plan, 
participant or beneficiary account, or an IRA, is able to purchase, 
hold, or sell through the Adviser or Financial Institution, and that a 
plan, participant or beneficiary account, or an IRA has purchased, 
held, or sold within the last 365 days, the source of the compensation, 
and how the compensation varies within and among Asset classes. The Web 
page must be updated at reasonable intervals, not less than quarterly. 
The compensation may be expressed as a monetary amount, formula or 
percentage of the assets involved in the purchase, sale or holding.
    The information provided by the Web page will provide a broad base 
of information about the various pricing and compensation structures 
adopted by Financial Institutions and Advisers. The Department believes 
that the data provided on the Web page will provide information that 
can be used by financial information companies to analyze and provide 
information comparing the practices of different Advisers and Financial 
Institutions. Such information will allow a Retirement Investor to 
evaluate costs and Advisers' and Financial Institutions' compensation 
practices.
    The Web page information must be provided in a manner that is 
easily accessible to a Retirement Investor and the general public. 
Appendix I to this notice is an exemplar of a possible web disclosure. 
In addition, the Web page must also contain a version of the same 
information that is formatted in a machine-readable manner. The 
Department recognizes that machine readable data can be formatted in 
many ways. Therefore, the Department requests comment on the format and 
data fields that should be required under such a condition.
2. Individual Transactional Disclosure
    In Section III(a), the exemption requires point of sale disclosure 
to the Retirement Investor, prior to the execution of the investment 
transaction, regarding the all-in cost and anticipated future costs of 
recommended Assets. The disclosure is designed to make as clear and 
salient as possible the total cost that the plan, participant or 
beneficiary account, or IRA will incur when following the Adviser's 
recommendation, and to provide cost information that can be compared 
across different Assets that are recommended for investment. In 
addition, the projection of the costs over various holding periods 
would inform the Retirement Investor of the cumulative impact of the 
costs over time and of potential costs when the investment is sold.
    As proposed, the disclosure requirement of Section III(a) would be 
provided in a summary chart designed to direct the Retirement 
Investor's attention to a few important data points regarding fees, in 
a time frame that would enable the Retirement Investor to discuss other 
(possibly less costly) alternatives with the Adviser prior to executing 
the transaction. The disclosure chart does not have to be provided 
again with respect to a subsequent recommendation to purchase the same 
investment product, so long as the chart was previously provided to the 
Retirement Investor within the past 12 months and the total cost has 
not materially changed.
    To the extent compliance with the point of sale disclosure requires 
Advisers and Financial Institutions to obtain cost information from 
entities that are not closely affiliated with them, they may rely in 
good faith on information and assurances from the other entities, as 
long as they do not know that the materials are incomplete or 
inaccurate. This good faith reliance applies unless the entity 
providing the information to the Adviser and Financial Institution is 
(1) a person directly or indirectly through one or more intermediaries, 
controlling, controlled by, or under common control with the Adviser or 
Financial Institution; or (2) any officer, director, employee, agent, 
registered representative, relative (as defined in ERISA section 
3(15)), member of family (as defined in Code section 4975(e)(6)) of, or 
partner in, the Adviser or Financial Institution.\35\
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    \35\ See proposed definition of Affiliate, Section VIII(b)(1) 
and (b)(2).
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    The required chart would disclose with respect to each Asset

[[Page 21974]]

recommended, the ``total cost'' to the plan, participant or beneficiary 
account, or IRA, of the investment for 1-, 5- and 10-year periods 
expressed as a dollar amount, assuming an investment of the dollar 
amount recommended by the Adviser, and reasonable assumptions about 
investment performance, which must be disclosed.
    As defined in the proposal, the ``total cost'' of investing in an 
asset means the sum of the following, as applicable: Acquisition costs, 
ongoing costs, disposition costs, and any other costs that reduce the 
asset's rate of return, are paid by direct charge to the plan, 
participant or beneficiary account, or IRA, or reduce the amounts 
received by the plan, participant or beneficiary account, or IRA (e.g., 
contingent fees, such as back-end loads, including those that phase out 
over time, with such terms explained beneath the table). The terms 
``acquisition costs,'' ``ongoing costs,'' and ``disposition costs,'' 
are defined in the proposal. Appendix II to this proposal contains a 
model chart that may be used to provide the information required under 
this section. Use of the model chart is not mandatory. However, use of 
an appropriately completed model chart will be deemed to satisfy the 
requirement of Section III(a).
    Request for comment. The Department requests comment on the design 
of this proposed point of sale disclosure, as well as issues related to 
the ability of the Adviser to provide the disclosure and whether it 
will provide information that is meaningful to Retirement Investors. In 
general, commenters are asked to address the anticipated cost of 
compliance with the point of sale disclosure and whether the disclosure 
as we have described it will provide information that is more useful to 
Retirement Investors than other similar disclosures that are required 
under existing law. As discussed below in more detail, the Department 
requests comment on whether the disclosure can be designed to provide 
information that would result in a useful comparison among Assets; 
whether it is feasible for Advisers and Financial Institutions to 
obtain reliable information to complete the chart at the time it would 
be required to be provided to the Retirement Investor; and whether the 
disclosure, without information on other characteristics of the 
investment, would improve Retirement Investors' ability to make 
informed investment decisions.
    Design. As explained above, the proposal contemplates a chart with 
the following information: All-in cost of the Asset, and the cost if 
held for 1-, 5-, and 10 years. The all-in cost would be calculated with 
the following components: ``acquisition costs,'' ``ongoing costs,'' 
``disposition costs,'' and ``other.'' The Department seeks comment on 
all aspects of this approach. In particular, we ask:
    <bullet> Are the all-in costs of the investments permitted under 
the proposal capable of being reflected accurately in the chart?
    <bullet> Are all-in costs already reflected in the summary 
prospectuses for certain investments?
    <bullet> Have we correctly identified the possible various costs 
associated with the permitted investments?
    <bullet> Should the point of sale disclosure requirement be limited 
to certain events, such as opening a new account or rolling over 
existing investments? If so, what changes would be needed to the model 
chart?
    <bullet> Are our proposed definitions of the various costs clear 
enough to result in information that is reasonably comparable across 
different Financial Institutions?
    <bullet> Is it possible to attribute all the costs to the account 
of a particular plan, participant or beneficiary, or IRA?
    <bullet> How should long-term costs be measured?
    Feasibility. The point of sale disclosure is proposed to be an 
individualized disclosure provided prior to the execution of the 
transaction. The Department seeks comment on whether there are 
practical impediments to the creation and disclosure of the chart in 
the time frame proposed. Therefore, we ask:
    <bullet> Will Advisers and Financial Institutions have access to 
the information required to be disclosed in the chart?
    <bullet> Are there existing systems at Financial Institutions that 
could produce the disclosure required in this proposal? If not, what is 
the cost of developing a system to comply?
    <bullet> What are the costs associated with providing the 
disclosure?
    <bullet> Would the costs be reduced if the Adviser and Financial 
Institution could provide the disclosure for full portfolios of 
investments, rather than for each investment recommendation separately?
    <bullet> Would the costs be reduced if the timing of the disclosure 
was more closely aligned with the SEC's disclosure requirements 
applicable to broker-dealers (i.e. at or before the completion of the 
transaction), rather than point of sale?
    <bullet> Are there particular asset classes for which this kind of 
point of sale disclosure is more feasible or less feasible? What share 
of assets held by Retirement Investors or share of transactions 
executed by Advisers and Financial Institutions fall within the asset 
classes for which the point of sale disclosure is more feasible and 
less feasible?
    <bullet> Are there particular asset classes for which all the 
information that would be required to be disclosed in the chart is 
currently required in a similar format under existing law?
    <bullet> Would the required disclosure be more feasible or less 
costly if a narrative statement were required instead of a summary 
chart?
    Impact. The point of sale disclosure would be intended to inform 
the Retirement Investor of the costs associated with the investment. 
Would such a disclosure in this simple format provide information that 
is meaningful and likely to improve a Retirement Investor's decision 
making? We ask for input on the following:
    <bullet> Would the simplified format result in the communication of 
information that is accurate, and contribute to informed investment 
decisions?
    <bullet> Do commenters recommend an alternative format or 
alternative disclosures?
    <bullet> Would the relative fees associated with different types of 
investment products, without a required disclosure of the relative 
risks of the product (i.e., mutual fund ongoing fees versus a one-time 
brokerage commission for a stock transaction) contribute to informed 
investment decisions?
    <bullet> In the absence of a required benchmark, is the disclosure 
of the all-in fees of a particular investment helpful to the Retirement 
Investor? If not, how could a benchmark be crafted for the various 
Assets permitted to be sold under the proposal?
    Alternative. Instead of the point of sale disclosure as proposed, 
would a ``cigarette warning''-style disclosure be as effective and less 
costly? For example, the disclosure could read:

Investors are urged to check loads, management fees, revenue-
sharing, commissions, and other charges before investing in any 
financial product. These fees may significantly reduce the amount 
you are able to invest over time and may also determine your 
adviser's take-home pay. If these fees are not reported in marketing 
materials or made apparent by your investment adviser, do not forget 
to ask about them.
3. Individual Annual Disclosure
    Section III(b) of the proposal requires individual disclosure in 
the form of an annual disclosure. Specifically, the proposal requires 
the Adviser or Financial Institution to provide each

[[Page 21975]]

Retirement Investor with an annual written disclosure within 45 days of 
the end of the applicable year. The annual disclosure must include: (i) 
A list identifying each Asset purchased or sold during the applicable 
period and the price at which the Asset was purchased or sold; (ii) a 
statement of the total dollar amount of all fees and expenses paid by 
the plan, participant or beneficiary account, or IRA, both directly and 
indirectly, with respect to each Asset purchased, held or sold during 
the applicable period; and (iii) a statement of the total dollar amount 
of all compensation received by the Adviser and Financial Institution, 
directly or indirectly, from any party, as a result of each Asset sold, 
purchased or held by the plan, participant or beneficiary account, or 
IRA, during the applicable period. This disclosure is intended to show 
the Retirement Investor the impact of the cost of the Adviser's advice 
on the investments by the plan, participant or beneficiary account, or 
IRA.
    The Department requests comment on this disclosure, in light of the 
potential point of sale disclosure. We are particularly interested in 
comments discussing whether both disclosures would be helpful and, if 
not, which would be more useful to Retirement Investors?
4. Non-Security Insurance and Annuity Contracts.
    Section III(a) and (b) will apply to all Assets as defined in the 
proposal. This includes insurance and annuity contracts that are 
securities under federal securities law, such as variable annuities, 
and insurance and annuity contracts that are not, such as fixed 
annuities. The Department requests comment on whether the types of 
information required in the Section III(a) and (b) disclosures are 
applicable and available with respect to insurance and annuity 
contracts that are not securities.
    In this regard, we note that PTE 84-24 \36\ is an existing 
exemption under which certain investment advice fiduciaries can receive 
commissions on insurance and annuity contracts and mutual fund shares 
that are purchased by plans and IRAs. Elsewhere in this issue of the  
Federal Register, the Department has proposed to revoke relief under 
PTE 84-24 as it applies to IRA transactions involving annuity contracts 
that are securities (including variable annuity contracts) and mutual 
fund shares. The fact that IRA owners generally do not benefit from the 
protections afforded by the fiduciary duties owed by plan sponsors to 
their employee benefit plans makes it critical that their interests are 
protected by appropriate conditions in the Department exemptions. In 
our view, this proposed Best Interest Contract Exemption contains 
conditions that are uniquely protective of IRA owners.
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    \36\ Class 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).
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    The Department has determined however that PTE 84-24 should remain 
available for investment advice fiduciaries to receive commissions for 
IRA (and plan) purchases of insurance and annuity contracts that are 
not securities. This distinction is due in part to uncertainty as to 
whether the disclosure requirements proposed herein are readily 
applicable to insurance and annuity contracts that are not securities, 
and whether the distribution methods and channels of insurance products 
that are not securities fit within this exemption's framework.
    The Department requests comment on this approach. In particular, we 
ask whether we have drawn the correct lines between insurance and 
annuity products that are securities and those that are not, in terms 
of our decision to continue to allow IRA transactions involving non-
security insurance and annuity contracts to occur under the conditions 
of PTE 84-24 while requiring IRA transactions involving securities to 
occur under the conditions of this proposed Best Interest Contract 
Exemption.
    In order for us to evaluate our approach, we request public comment 
the current disclosure requirements applicable to insurance and annuity 
contracts that are not securities. Can Section III(a) and (b) can be 
revised with respect to such non-securities insurance and annuity 
contracts to provide meaningful information to investors as to the 
costs of such investments and the overall compensation received by 
Advisers and Financial Institutions in connection with the 
transactions? In addition, the Department requests information on the 
distribution methods and channels applicable to insurance and annuity 
products that are not securities. What are common structures of 
insurance agencies?
    Finally, we request public input as to whether any conditions of 
this proposed Best Interest Contract Exemption, other than the 
disclosure conditions discussed above, would be inapplicable to non-
security insurance and annuity products? Are any aspects of this 
exemption particularly difficult for insurance companies to comply 
with?

Range of Investment Options (Section IV)

    Section IV(a) of the proposal requires a Financial Institution to 
offer for purchase, sale, or holding and the Adviser to make available 
to the plan, participant or beneficiary account, or IRA, for purchase, 
sale or holding a broad range of investment options. These investment 
options should enable an Adviser to make recommendations to the 
Retirement Investor with respect to all of the asset classes reasonably 
necessary to serve the best interests of the Retirement Investor in 
light of the Retirement Investor's objectives, risk tolerance and 
specific financial circumstances. The Department believes that ensuring 
that an Adviser has a wide range of investment options at his or her 
disposal is the most likely method by which a Retirement Investor can 
be assured of developing a balanced investment portfolio.
    The Department recognizes, however, that some Financial 
Institutions limit the investment products that a Retirement Investor 
may purchase, sell or hold based on whether the products generate 
third-party payments or are proprietary products, or for other reasons 
(e.g., the firms specialize in particular asset classes or product 
types). Both Financial Institutions and Advisers often rely on the 
ability to sell proprietary products or the ability to generate 
additional revenue through third-party payments to support their 
business models. The proposal permits Financial Institutions with such 
business models to rely on the exemption provided additional conditions 
are satisfied.
    The additional conditions are set forth in Section IV(b) of the 
proposal. First, before limiting the investment products a Retirement 
Investor may purchase, sell or hold, the Financial Institution must 
make a specific written finding that the limitations do not prevent the 
Adviser from providing advice that is in the best interest of the 
Retirement Investors (i.e., advice that reflects 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 or any Affiliate, Related Entity, or 
other party) or from otherwise adhering to the Impartial Conduct 
Standards.

[[Page 21976]]

    Second, the proposal provides that the payments received in 
connection with these limited menus be reasonable in relation to the 
value of specific services provided to Retirement Investors in exchange 
for the payments and not in excess of the services' fair market value. 
This is more specific than the reasonable compensation requirement set 
forth in the contract under Section II because of the limitation placed 
by the Financial Institution on the investments available for Adviser 
recommendation. The Department intends to ensure that such additional 
payments received in connection with the advice are for specific 
services to Retirement Investors.
    The proposal additionally provides that the Financial Institution 
or Adviser, before giving any recommendations to a Retirement Investor, 
must give clear written notice to the Retirement Investor of any 
limitations placed by the Financial Institution on the investment 
products offered by the Adviser. In this regard, it is insufficient for 
the notice merely to state that the Financial Institution ``may'' limit 
investment recommendations, without specifically disclosing the extent 
to which the Financial Institution in fact does so.
    Finally, the proposal would require an Adviser or Financial 
Institution to notify the Retirement Investor if the Adviser does not 
recommend a sufficiently broad range of investment options to meet the 
Retirement Investor's needs. For example, the Department envisions the 
provision of such a notice when the Adviser and Financial Institution 
provide advice with respect to a limited class of investment products, 
but those products do not meet a particular investor's needs. The 
Department requests comment on whether it is possible to state this 
standard with more specificity, or whether more detailed guidance is 
needed for parties to determine when compliance with the condition 
would be necessary. The Department also requests comment on whether any 
specific disclosure is necessary to inform the Retirement Investor 
about the particular conflicts of interest associated with Advisers 
that recommend only proprietary products, and, if so, what the 
disclosure should say.
    The conditions of Section IV do not apply to an Adviser or 
Financial Institution with respect to the provision of investment 
advice to a participant or beneficiary of a participant directed 
individual account plan concerning the participant's or beneficiary's 
selection of designated investment options available under the plan, 
provided the Adviser and Financial Institution did not provide advice 
to the responsible plan fiduciary regarding the menu of designated 
investment options. In such circumstances, the Adviser and Financial 
Institution are not responsible for the limitations on the investment 
options.

EBSA Disclosure and Recordkeeping (Section V)

1. Notification to the Department of Reliance on the Exemption
    Before receiving prohibited compensation in reliance on Section I 
of this exemption, Section V(a) of the proposal requires that the 
Financial Institution notify the Employee Benefits Security 
Administration of the intention to rely on this exemption. The notice 
need not identify any specific plan or IRA. The notice will remain in 
effect until it is revoked in writing. The Department envisions 
accepting the notice via email and regular mail.
    This is a notice provision only and does not require any approval 
or finding by the Department that the Financial Institution is eligible 
for the exemption. Once a Financial Institution has sent the notice, it 
can immediately begin to rely on the exemption provided the conditions 
are satisfied.
2. Data Request
    Section V(b) of the proposed exemption also would require Financial 
Institutions to maintain certain data, which is specified in Section 
IX, for six years from the date of the applicable transaction. The data 
request would require Financial Institutions to maintain and disclose 
to the Department upon request specific information regarding 
purchases, sales, and holdings by Retirement Investors made pursuant to 
advice provided by Advisers and Financial Institutions relying on the 
proposed exemption. Financial Institutions may maintain this 
information in any form that may be readily analyzed by the Department 
or simply as raw data. Receipt of this additional data will assist the 
Department in assessing the effectiveness of the exemption.
    No party, other than the Financial Institution responsible for 
compliance, will be subject to the taxes imposed by Code section 
4975(a) and (b), if applicable, if the Financial Institution fails to 
maintain the data or the data are not available for examination.
    Request for Comment. The proposed data request covers certain 
information with respect to investment inflows, outflows and holdings, 
and returns, by plans, participant and beneficiary accounts, and IRAs 
and is intended to assist the Department in evaluating the 
effectiveness of the exemption. We request comment on whether these are 
the appropriate data points for the covered Assets. Are the terms used 
clear enough to result in information that is reasonably comparable 
across different Financial Institutions? Or should we include precise 
definitions of inflows, outflows, holdings, returns, etc.? If so, 
please suggest specifically how these terms should be defined. Are 
different terms needed to request comparable information regarding 
insurance and annuity contracts that are not securities?
3. General Recordkeeping
    Finally, Section V(c) and (d) of the proposal contains a general 
recordkeeping requirement applicable to the Financial Institution. The 
general recordkeeping requirement relates to the records necessary for 
the Department and certain other entities to determine whether the 
conditions of this exemption have been satisfied.

Effect of Failure To Comply With Conditions

    If the exemption is granted, relief under the Best Interest 
Contract Exemption will be available only if all applicable conditions 
described above are satisfied. Satisfaction of the conditions is 
determined on a transaction by transaction basis, however. Thus, the 
effect of noncompliance with a condition depends on whether the 
condition applies to a single transaction or multiple transactions. For 
example, if an Adviser fails to provide a transaction disclosure in 
accordance with Section III(a) with respect to an Asset purchased by a 
plan, participant or beneficiary account, or an IRA, the relief 
provided by the Best Interest Contract Exemption would be unavailable 
to the Adviser and Financial Institution only for the otherwise 
prohibited compensation received in connection with the investment in 
that specific Asset by the plan, participant or beneficiary account, or 
IRA. More broadly, if an Adviser and Financial Institution fail to 
enter into a contract with a Retirement Investor in accordance with 
Section II, relief under the Best Interest Contract Exemption would be 
unavailable solely with respect to the investments by that Retirement 
Investor, not all Retirement Investors to which the Adviser and 
Financial Institution provide advice. However, if a Financial 
Institution fails to comply with a condition that is necessary for all 
transactions involving investment advice to Retirement

[[Page 21977]]

Investors, such as the maintenance of the Web page required by Section 
III(c), the Financial Institution will not be eligible for the relief 
under the Best Interest Contract Exemption for all prohibited 
transactions entered into during the period in which the failure to 
comply existed.

Supplemental Exemptions

1. Proposed Insurance and Annuity Exemption (Section VI)
    The Best Interest Contract Exemption, as set forth above, permits 
Advisers and Financial Institutions to receive compensation that would 
otherwise be prohibited by the self-dealing and conflicts of interest 
provisions of ERISA and the Code. ERISA and the Code contain additional 
prohibitions on certain specific transactions between plans and IRAs 
and ``parties in interest'' and ``disqualified persons,'' including 
service providers. These additional prohibited transactions include: 
(i) The purchase or sale of an asset between a plan/IRA and a party in 
interest/disqualified person, and (ii) the transfer of plan/IRA assets 
to a party in interest/disqualified person. These prohibited 
transactions are subject to excise tax and personal liability for the 
fiduciary.
    A plan's or IRA's purchase of an insurance or annuity product would 
be a prohibited transaction if the insurance company has a pre-existing 
relationship with the plan/IRA as a service provider, or is otherwise a 
party in interest/disqualified person. In the Department's view, this 
circumstance is common enough in connection with recommendations by 
Advisers and Financial Institutions to warrant proposal of an exemption 
for these types of transactions in conjunction with the Best Interest 
Contract Exemption. The Department anticipates that the fiduciary that 
causes a plan's or IRA's purchase of an insurance or annuity product 
would not be the Adviser or Financial Institution but would instead be 
another fiduciary, such as a plan sponsor or IRA owner, acting on the 
Adviser's or Financial Institution's advice. Because the party 
requiring relief for this prohibited transaction is separate and 
independent of the Adviser and Financial Institution, the Department is 
proposing this exemption subject to discrete conditions described 
below.
    Although there is an existing exemption which would often cover 
these transactions, PTE 84-24, the Department is proposing elsewhere in 
this issue of the Federal Register to revoke that exemption to the 
extent it provides relief for transactions involving IRAs' purchase of 
variable annuity contracts and other annuity contracts that are 
securities under federal securities law. We have therefore decided to 
provide an exemption for these transactions as part of this document, 
both to ensure that relief is available for transactions involving IRAs 
but also for ease of compliance for transactions involving other 
Retirement Investors (i.e., plan participants, beneficiaries and small 
plan sponsors).
    As with the Best Interest Contract Exemption, relief under the 
proposed insurance and annuity exemption in Section VI would not extend 
to a plan covered by Title I of ERISA where (i) the Adviser, Financial 
Institution or any Affiliate is the employer of employees covered by 
the plan, or (ii) the Adviser or Financial Institution is a named 
fiduciary or plan administrator (as defined in ERISA section 3(16)(A)) 
with respect to the plan, or an affiliate thereof, that has not been 
selected by a fiduciary that is Independent. The conditions proposed 
for the insurance and annuity exemption are that the transaction must 
be effected by the insurance company in the ordinary course of its 
business as an insurance company, the combined total of all fees and 
compensation received by the insurance company is not in excess of 
reasonable compensation under the circumstances, the purchase is for 
cash only, and that the terms of the purchase are at least as favorable 
to the plan as the terms generally available in an arm's length 
transaction with an unrelated party.\37\

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    \37\ The condition requiring the purchase to be made for cash 
only is not intended to preclude purchases with plan or IRA 
contributions, but rather to preclude transactions effected in-kind 
through an exchange of securities or other assets. In-kind exchanges 
would not be permitted as part of this class exemption due to the 
potential need for conditions relating to valuation of the assets to 
be exchanged.
---------------------------------------------------------------------------

2. Exemption for Pre-Existing Transactions (Section VII)
    Section VII of the proposal would provide an exemption for 
Advisers, Financial Institutions, and their Affiliates and Related 
Entities in connection with transactions that occurred prior to the 
applicability date of the Proposed Regulation, if adopted. 
Specifically, the exemption would provide relief from ERISA sections 
406(a)(1)(D) and 406(b) for the receipt of prohibited compensation, 
after the applicability date of the regulation, by an Adviser, 
Financial Institution and any Affiliate or Related Entity for services 
provided in connection with the purchase, sale or holding of an Asset 
before the applicability date. The Department is proposing this 
exemption to provide relief for investment professionals that may have 
provided advice prior to the applicability date of the regulation but 
did not consider themselves fiduciaries. Their receipt after the 
applicability date of ongoing periodic payments of compensation 
attributable to a purchase, sale or holding of an Asset by a plan, 
participant or beneficiary account, or IRA, prior to the applicability 
date of the regulation might otherwise raise prohibited transaction 
concerns.
    The Department is also proposing this exemption for Advisers and 
Financial Institutions who were considered fiduciaries before the 
applicability date, but who entered into transactions involving plans 
and IRAs before the applicability date in accordance with the terms of 
a prohibited transaction exemption that has since been amended. Section 
VII would permit Advisers, Financial Institutions, and their Affiliates 
and Related Entities, to receive compensation such as 12b-1 fees, after 
the applicability date, that is attributable to a purchase, sale or 
holding of an Asset by a plan, participant or beneficiary account, or 
an IRA, that occurred prior to the applicability date.
    In order to take advantage of this relief, the exemption would 
require that the compensation must be received pursuant to an 
agreement, arrangement or understanding that was entered into prior to 
the applicability date of the regulation, and that the Adviser and 
Financial Institution not provide additional advice to the plan or IRA, 
regarding the purchase, sale or holding of the Asset after the 
applicability date of the regulation. Relief would not be extended to 
compensation that is excluded pursuant to Section I(c) of the proposal 
or to compensation received in connection with a purchase or sale 
transaction that, at the time it was entered into, was a non-exempt 
prohibited transaction. The Department requests comment on whether 
there are other areas in which exemptions would be desirable to avoid 
unforeseen consequences in connection with the timing of the 
finalization of the Proposed Regulation.
3. Low Fee Streamlined Exemption
    While the flexibility of the Best Interest Contract Exemption is 
designed to accommodate a wide range of current business practices and 
avoid the need for highly prescriptive regulation, the Department 
acknowledges that there may be actors in the industry that would

[[Page 21978]]

prefer a more prescriptive approach. The Department believes that both 
approaches could be desirable and could, if designed properly, minimize 
the harmful impact of conflicts of interest on the quality of advice. 
Accordingly, in addition to the Best Interest Contract Exemption, the 
Department is also considering issuing a separate streamlined exemption 
that would allow Advisers and Financial Institutions (and their 
Affiliates and Related Entities) to receive otherwise prohibited 
compensation in connection with plan, participant and beneficiary 
accounts, and IRA investments in certain high-quality low-fee 
investments, subject to fewer conditions. However, at this point, the 
Department has been unable to operationalize this concept and therefore 
has not proposed text for such a streamlined exemption. Instead, we 
seek public input to assist our consideration and design of the 
exemption.
    A low-fee streamlined exemption is an attractive idea that, if 
properly crafted, could achieve important goals. It could minimize the 
compliance burdens for Advisers offering high-quality low-fee 
investment products with minimal potential for material conflicts of 
interest, as discussed further below. Products that met the conditions 
of the streamlined exemption could be recommended to plans, 
participants and beneficiaries, and IRA owners, and the Adviser could 
receive variable and third-party compensation as a result of those 
recommendations, without satisfying some or all of the conditions of 
the Best Interest Contract Exemption. The streamlined exemption could 
reward and encourage best practices with respect to optimizing the 
quality, amount, and combined, all-in cost of recommended financial 
products, financial advice, and other related services. In particular, 
a streamlined exemption could be useful in enhancing access to quality, 
affordable financial products and advice by savers with smaller account 
balances. Additionally, because it would be premised on a fee 
comparison, it would apply only to investments with relatively simple 
and transparent fee structures.
    In this regard, the Department believes that certain high-quality 
investments are provided pursuant to fee structures in which the 
payments are sufficiently low that they do not present serious 
potential material conflicts of interest. In theory, a streamlined 
exemption with relatively few conditions could be constructed around 
such investments. Facilitating investments in such high-quality low-fee 
products would be consistent with the prevailing (though by no means 
universal) view in the academic literature that posits that the optimal 
investment strategy is often to buy and hold a diversified portfolio of 
assets calibrated to track the overall performance of financial 
markets. Under this view, for example, a long-term recommendation to 
buy and hold a low-priced (often passively managed) target date fund 
that is consistent with the investor's future risk appetite trajectory 
is likely to be sound. As another example, under this view, a medium-
term recommendation to buy and hold (for 5 or perhaps 10 years) an 
inexpensive, risk-matched balanced fund or combination of funds, and 
afterward to review the investor's circumstances and formulate a new 
recommendation also is likely to be sound.
    If it could be constructed appropriately, a streamlined exemption 
for high-quality low-fee investments could be subject to relatively few 
conditions, because the investments present minimal risk of abuse to 
plans, participants and beneficiaries, and IRA owners. The aim would be 
to design conditions with sufficient objectivity that Advisers and 
Financial Institutions could proceed with certainty in their business 
operations when recommending the investments. The Department does not 
anticipate that such a streamlined exemption would require Advisers and 
Financial Institutions to undertake the contractual commitments to 
adhere to the Impartial Conduct Standards or adopt anti-conflict 
policies and procedures with respect to advice given on such products, 
as is proposed in the Best Interest Contract Exemption. However, some 
of the required disclosures proposed in the Best Interest Contract 
Exemption would likely be imposed in the streamlined exemption.
    The Department has initially focused on mutual funds as the only 
type of investment widely held by Retirement Investors that would be 
readily susceptible to the type of expense calculations necessary to 
implement the low-fee streamlined exemption. This is due to the 
transparency associated with mutual fund investments and, in 
particular, the requirement that the mutual fund disclose its fees and 
operating expenses in its prospectus. Accordingly, data on mutual fund 
fees and expenses is widely available.
    Within the category of mutual fund investments, the Department is 
considering whether the streamlined exemption would be available to 
funds with all-in fees below a certain amount. However, the Department 
lacks data regarding the characteristics of mutual funds with low all-
in fees. Consequently, we are exploring whether the streamlined 
exemption should contain additional conditions to safeguard the 
interests of plans, participants and beneficiaries, and IRA owners. For 
example, the streamlined exemption could require that the investment 
product be ``broadly diversified to minimize risk for targeted 
return,'' or ``calibrated to provide a balance of risk and return 
appropriate to the investor's circumstances and preferences for the 
duration of the recommended holding period.'' However, we recognize 
that adding conditions might undercut the usefulness of the streamlined 
exemption.
    Request for Comment. The Department requests comment on these 
possible initial terms of a streamlined exemption and other questions 
relating to the technical design of such an exemption and its likely 
utility to Advisers and Financial Institutions. Additionally, the 
Department requests public input on the likely consequences of the 
establishment of a low-fee streamlined exemption.
    Design. The Department requests public input on the technical 
design challenges in defining high-quality low-fee investment products 
that would satisfy the policy goals of the streamlined exemption. We 
are concerned that there may be no single, objective way to evaluate 
fees and expenses associated with mutual funds (or other investments) 
and no single cut-off to determine when fees are sufficiently low. One 
cut-off could be too low for some investors' needs and too high for 
others'. A very low cut-off would strongly favor passively managed 
funds. A high cut-off would permit recommendations that may not be 
sound and free from bias. Multiple cut-offs for different product 
categories would be complex and would risk introducing bias between the 
categories. In addition, it is unclear whether mutual funds with the 
lowest fees necessarily represent the highest quality investments for 
Retirement Investors. As noted above, the streamlined exemption would 
not expressly contain a ``best interest'' standard.
    To further aid in the design of the streamlined exemption, the 
Department requests comments on the questions below. The Regulatory 
Impact Analysis for the Proposed Regulation, published elsewhere in 
this issue of the Federal Register, describes additional questions the 
Department is considering regarding

[[Page 21979]]

the development of a low-fee streamlined exemption.
    <bullet> Should the streamlined exemption cover investment products 
other than mutual funds? The streamlined exemption would be based on 
the premise that low-cost investment products distributed pursuant to 
relatively unconflicted fee structures present minimal risk of abuse to 
plans, participants and beneficiaries, and IRA owners. In order to 
design a streamlined exemption for the sale of such products, the 
products must have fee structures that are transparent, publicly 
available, and capable of being compared reliably. Are there other 
investments commonly held by Retirement Investors that meet these 
criteria?
    <bullet> How should the fee calculation be performed? How should 
fees be defined for the fee calculation to ensure a useful metric? 
Should the fee calculation include both ongoing management/
administrative fees and one-time distribution/transactional costs? What 
time period should the fee calculation cover? Should it cover fees as 
projected over future time periods (e.g., one, five and ten year 
periods) to lower the impact of one-time transactional costs such as 
sales loads? If so, what discount rate should be used to determine the 
present value of future fees?
    <bullet> How should the Department determine the fee cut-off? If 
the Department established a streamlined exemption for low-fee mutual 
funds and other products, how would the precise fee cut-off be 
determined? How often should it be updated? What are characteristics of 
mutual funds with very low fees? Should the cut-off be based on a 
percentage of the assets invested (i.e., a specified number of basis 
points) or as a percentile of the market? If a percentile, how should 
reliable data be obtained to determine fund percentiles? Are there 
available and appropriate sources of industry benchmarking data? Should 
the Department collect data for this purpose? Is the range of fees in 
the market known? Are there data that would suggest that mutual funds 
with relatively low fees are (or are not) high quality investments for 
a wide variety of Retirement Investors?
    <bullet> Should the low-fee cutoff be applied differently to 
different types of funds? Should a single fee cut-off apply broadly to 
all mutual funds, or would that exclude entire categories of funds with 
certain investment strategies? Would it be appropriate to develop sub-
categories of funds for the fee cut-offs? If so, how should the sub-
categories be defined?
    <bullet> Should ETFs be covered? Within the category of mutual 
funds, should exchange-traded funds (ETFs) be covered under the 
streamlined exemption? If so, how would the commission associated with 
an ETF transaction be incorporated into the low-fee calculation?
    <bullet> What, if any, conditions other than low fees should be 
required as part of the streamlined exemption? If the streamlined 
exemption covers only mutual funds, are conditions relating to their 
availability and transparent pricing unnecessary? Are conditions 
relating to liquidity necessary? Should funds covered by the 
streamlined exemption be required to be broadly diversified to minimize 
risk for targeted return? Should the streamlined exemption contain a 
requirement that the investment be calibrated to provide a balance of 
risk and return appropriate to the investor's circumstances and 
preferences for the duration of the recommended holding period? Should 
the funds be required to meet the requirements of a ``qualified default 
investment alternative,'' as described in 29 CFR 2550.404c-5?
    <bullet> How should the low-fee cut-off be communicated to Advisers 
and Financial Institutions? Should the initial cut-off and subsequent 
updates be written as a condition of the exemption, or publicized 
through other formats? How would Advisers and Financial Institutions be 
sure that certain funds meet the low-fee cut-off? By what means and how 
frequently should Advisers and Financial Institutions be required to 
confirm that mutual funds that they recommend (or recommended in the 
past) continue to meet the low-fee cut-off?
    <bullet> How could consumers police the low-fee cut-off? What 
enforcement mechanism could be used to assure that the Advisers taking 
advantage of such a safe harbor are correctly analyzing whether their 
products meet the cut-off?
    Utility. In addition to seeking comment on the technical design of 
the streamlined exemption, the Department asks for information on 
whether the low-fee streamlined exemption would effectively reduce the 
compliance burden for a significant number of Advisers and Financial 
Institutions. Because of its design, the low-fee streamlined exemption 
would generally apply on a product-by-product basis rather than at the 
Financial Institution level, unless the Financial Institution and its 
Advisers exclusively advise retail customers to invest in the low-fee 
products. Therefore, the Department asks:
    <bullet> Would Advisers and Financial Institutions restrict their 
business models to offer only the low-fee mutual funds that the 
Department envisions covering in the streamlined exemption? Or, would 
Advisers that offer products outside the streamlined exemption (higher-
fee mutual funds as well as other investment products such as stocks 
and bonds) rely on the streamlined exemption for the low-fee mutual 
fund investments and the Best Interest Contract Exemption for the other 
investments? If Advisers and Financial Institutions had to implement 
the safeguards required by the Best Interest Contract Exemption for 
many of their Retirement Investor customers, would the availability of 
the streamlined exemption result in material cost savings to them?
    <bullet> How do low-fee investment products compensate Advisers for 
distribution? Do low-fee funds tend to pay sales loads, revenue sharing 
and 12b-1 fees? If not, how would Advisers and Financial Institutions 
be compensated within the low-fee confines of the streamlined 
exemption?
    <bullet> What design features would be most likely to enhance the 
utility of the low-fee streamlined exemption?
    Consequences. The Department seeks the public's views on the 
potential consequences of granting a streamlined exemption for certain 
types of investments.
    <bullet> Would a streamlined exemption limited to low-fee mutual 
fund investments or other categories of investments be in the interests 
of plans and their participants and beneficiaries? Would the 
availability of the streamlined exemption discourage Advisers and 
Financial Institutions from offering other types of investments, 
including higher-cost mutual funds, even if the offering of such other 
investments would be in the best interest of the plan, participant or 
beneficiary, or IRA owner? Would the streamlined exemption have the 
beneficial effect of reducing investment costs? On the other hand, 
could the streamlined exemption result in some of the lowest-cost 
investment products increasing their fees to the cut-off threshold? 
Would it expand the number of Financial Institutions that developed 
low-fee options, making them more widely available?
    <bullet> How would the streamlined exemption affect the marketplace 
for investment products? Would a low-fee streamlined exemption have the 
unintended effect of unduly promoting certain investment styles? Which 
types of Advisers and Financial Institutions would be most affected and 
would they

[[Page 21980]]

be likely to revise their business models in response? Would there be 
increased competition among Advisers and Financial Institutions to 
offer investment products with lower fees? Would Retirement Investors 
have more choices to diversify while paying less in fees? Would 
Financial Institutions and Advisers offer other incentives to 
Retirement Investors in order to sell specific products?

Availability of Other Prohibited Transaction Exemptions

    Certain existing exemptions, including amendments thereto and 
superseding exemptions, provide relief for specific types of 
transactions that are outside of the scope of this proposed exemption. 
A person seeking relief for a transaction covered by one of those 
existing exemptions would need to comply with its requirements and 
conditions. Those exemptions are as follows:
    (1) PTE 75-1 (Part III),\38\ which provides relief for a plan's 
acquisition of securities during an underwriting or selling syndicate 
from any person other than a fiduciary who is a member of the 
syndicate.
---------------------------------------------------------------------------

    \38\ 40 FR 50845 (Oct. 31, 1975).
---------------------------------------------------------------------------

    (2) PTE 75-1 (Part V),\39\ which exempts an extension of credit to 
a plan from a party in interest.
---------------------------------------------------------------------------

    \39\ Id., as amended at 71 FR 5883 (Feb. 3, 2006).
---------------------------------------------------------------------------

    (3) PTE 83-1,\40\ which provides relief for certain transactions 
involving mortgage pool investment trusts and pass-through certificates 
evidencing interests therein.
---------------------------------------------------------------------------

    \40\ 48 FR 895 (Jan. 7, 1983).
---------------------------------------------------------------------------

    (4) PTE 2004-16,\41\ which provides relief for a fiduciary of the 
plan who is the employer of employees covered under the plan to 
establish individual retirement plans for certain mandatory 
distributions on behalf of separated employees at a financial 
institution that is itself or an affiliate, and also select a 
proprietary investment product as the initial investment for the plan.
---------------------------------------------------------------------------

    \41\ 69 FR 57964 (Sept. 28, 2004).
---------------------------------------------------------------------------

    (5) PTE 2006-16,\42\ which exempts certain loans of securities by 
plans to broker-dealers and banks and provides relief for the receipt 
of compensation by a fiduciary for services rendered in connection with 
the securities loans.
---------------------------------------------------------------------------

    \42\ 71 FR 63786 (Oct. 31, 2006).
---------------------------------------------------------------------------

Applicability Date

    The Department is proposing that compliance with the final 
regulation defining a fiduciary under ERISA section 3(21)(A)(ii) and 
Code section 4975(e)(3)(B) will begin eight months after publication of 
the final regulation in the Federal Register (Applicability Date). The 
Department proposes to make this exemption, if granted, available on 
the Applicability Date. Further, the Department is proposing to revoke 
relief for transactions involving IRAs from two existing exemptions, 
PTEs 86-128 and 84-24, as of the Applicability Date.\43\ As a result, 
Advisers and Financial Institutions, including those newly defined as 
fiduciaries, will generally have to comply with this exemption to 
receive many common forms of compensation in transactions involving 
IRAs.
---------------------------------------------------------------------------

    \43\ See the notices with respect to these proposals, published 
elsewhere in this issue of the Federal Register.
---------------------------------------------------------------------------

    The Department recognizes that complying with the requirements of 
the exemption may represent a significant adjustment for many Advisers 
and Financial Institutions, particularly in their dealings with IRA 
owners. At the same time, in the Department's view, it is essential 
that Advisers and Financial Institutions wishing to receive 
compensation under the exemption institute certain conditions for the 
protection of IRA customers as of the Applicability Date. These 
safeguards include: Acknowledging fiduciary status,\44\ complying with 
the Impartial Conduct Standards,\45\ adopting anti-conflict policies 
and procedures,\46\ notifying EBSA of the use of the exemption,\47\ and 
recordkeeping.\48\ The Department requests comment on whether Financial 
Institutions anticipate that there will be existing contractual 
obligations or other barriers that would prevent them from implementing 
the exemption's policies and procedures requirement in this time frame.
---------------------------------------------------------------------------

    \44\ See Section II(b).
    \45\ See Section II(c).
    \46\ See Section II(d)(2)-(4).
    \47\ See Section V(a).
    \48\ See Section V(c).
---------------------------------------------------------------------------

    The Department also specifically requests comment on whether it 
should delay certain other conditions of the exemption as applicable to 
IRA transactions for an additional period (e.g., three months) 
following the Applicability Date. For example, one possibility would be 
to delay the requirement that Advisers and Financial Institutions 
execute a contract with their IRA customers for an additional three-
month period, as well as the disclosure requirements in Sections III 
and the data collection requirements described in Section IX. This 
phased approach would give Financial Institutions additional time to 
review and refine their policies and procedures and to put new 
compliance systems in place, without exposure to contractual liability 
to the IRA owners.
    The Department does not believe that such additional delay would be 
warranted for Advisers and Financial Institutions with respect to 
transactions involving ERISA plan sponsors and ERISA plan participants 
and beneficiaries. Advisers and Financial Institutions to ERISA plans 
and their participants and beneficiaries are accustomed to working 
within the existing exemptions, such as PTEs 86-128 and 84-24, and such 
exemptions would remain available to them while they develop systems 
for complying with this exemption.\49\ Nevertheless, the Department 
also requests comments on the appropriate period for phasing in some or 
all of the exemption's conditions with respect to ERISA plans as well 
as IRAs.
---------------------------------------------------------------------------

    \49\ In this regard, the Department anticipates making the 
Impartial Conduct Standards amendments to PTEs 86-128 and 84-24 
effective as of the Applicability Date.
---------------------------------------------------------------------------

    The Department additionally notes that, elsewhere in this issue of 
the Federal Register, it has proposed to revoke another existing 
exemption, PTE 75-1, Part II(2), in its entirety in connection with a 
proposed amendment to PTE 86-128. The Department requests comment on 
whether this exemption is widely used and whether it should delay 
revocation for some period after the Applicability Date while Advisers 
and Financial Institutions develop systems for complying with PTE 86-
128.

No Relief Proposed From ERISA Section 406(a)(1)(C) or Code Section 
4975(c)(1)(C) for the Provision of Services

    If granted, this proposed exemption will not provide relief from a 
transaction prohibited by ERISA section 406(a)(1)(C), or from the taxes 
imposed by Code section 4975(a) and (b) by reason of Code section 
4975(c)(1)(C), regarding the furnishing of goods, services or 
facilities between a plan and a party in interest. The provision of 
investment advice to a plan under a contract with a plan fiduciary is a 
service to the plan and compliance with this exemption will not relieve 
an Adviser or Financial Institution of the need to comply with ERISA 
section 408(b)(2), Code section 4975(d)(2), and applicable regulations 
thereunder.

Paperwork Reduction Act Statement

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department conducts a preclearance consultation program to 
provide the general public and Federal

[[Page 21981]]

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 request (ICR) included in the Best 
Interest Contract Exemption (PTE) as part of its proposal to amend its 
1975 rule that defines when a person who provides investment advice to 
an employee benefit plan or IRA becomes a fiduciary. A copy of the ICR 
may be obtained by contacting the PRA addressee shown below or at 
http://www.RegInfo.gov.
    The Department has submitted a copy of the PTE 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:
    <bullet> Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    <bullet> 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;
    <bullet> Enhance the quality, utility, and clarity of the 
information to be collected; and
    <bullet> 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 PTE 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 below, the PTE would require financial 
institutions and their advisers to enter into a contractual arrangement 
with retirement investors making investment decisions on behalf of the 
plan or IRA (i.e., plan participants or beneficiaries, IRA owners, or 
small plan sponsors (or employees, officers or directors thereof)), and 
make certain disclosures to the retirement investors and the Department 
in order to receive relief from ERISA's prohibited transaction rules 
for the receipt of compensation as a result of a financial 
institution's and its adviser's advice (i.e., prohibited compensation). 
Financial institutions would be required to maintain records necessary 
to prove that the conditions of the exemption have been met. These 
requirements are 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:
    <bullet> Disclosures distributed electronically will be distributed 
via means already used by respondents in the normal course of business 
and the costs arising from electronic distribution will be negligible;
    <bullet> Financial institutions will use existing in-house 
resources to prepare the contracts and disclosures, adjust their IT 
systems, and maintain the recordkeeping systems necessary to meet the 
requirements of the exemption;
    <bullet> A combination of personnel will perform the tasks 
associated with the ICRs at an hourly wage rate of $125.95 for a 
financial manager, $30.42 for clerical personnel, $79.67 for an IT 
professional, and $129.94 for a legal professional; \50\
---------------------------------------------------------------------------

    \50\ The Department's estimated 2015 hourly labor rates include 
wages, other benefits, and overhead, and 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).
---------------------------------------------------------------------------

    <bullet> Approximately 2,800 financial institutions \51\ will take 
advantage of this exemption and they will use this exemption in 
conjunction with transactions involving nearly all of their clients 
that are small defined benefit and defined plans, participant directed 
defined contribution plans, and IRA holders.\52\ \53\ Eight percent of 
financial institutions (approximately 224) will be new firms beginning 
use of this exemption each year.
---------------------------------------------------------------------------

    \51\ As described in the regulatory impact analysis for the 
accompanying rule, the Department estimates that approximately 2,619 
broker dealers service the retirement market. The Department 
anticipates that the exemption will be used primarily, but not 
exclusively, by broker-dealers. Further, the Department assumes that 
all broker-dealers servicing the retirement market will use the 
exemption. Beyond the 2,619 broker-dealers, the Department estimates 
that almost 200 other financial institutions will use the exemption.
    \52\ The Department welcomes comment on this estimate.
    \53\ For purposes of this analysis, ``IRA holders'' include 
rollovers from ERISA plans.
---------------------------------------------------------------------------

Contract, Disclosures, and Notices

    In order to receive prohibited compensation under this PTE, Section 
II requires financial institutions and advisers to enter into a written 
contract with retirement investors affirmatively stating that they are 
fiduciaries under ERISA or the Code with respect to any recommendations 
to the retirement investor to purchase, sell or hold specified assets, 
and that the financial institution and adviser will give advice that is 
in the best interest of the retirement investor.
    Section III(a) requires the adviser to furnish the retirement 
investor with a disclosure prior to the execution of the purchase of 
the asset stating the total cost of investing in the asset. Section 
III(b) requires the adviser or financial institution to furnish the 
retirement investor with an annual statement listing all assets 
purchased or sold during the year, as well as the associated fees and 
expenses paid by the plan, participant or beneficiary account, or IRA, 
and the compensation received by the financial institution and the 
adviser. Section III(c) requires the financial institution to maintain 
a publicly available Web page displaying the compensation (including 
its source and how it varies within asset classes) that would be 
received by the adviser, the financial institution and any affiliate

[[Page 21982]]

with respect to any asset that a plan, participant or beneficiary 
account, or IRA could purchase through the adviser.
    If the financial institution limits the assets available for sale, 
Section IV requires the financial institution to furnish the retirement 
investor with a written description of the limitations placed on the 
menu. The adviser must also notify the retirement investor if it does 
not recommend a sufficiently broad range of assets to meet the 
retirement investor's needs.
    Finally, before the financial institution begins engaging in 
transactions covered under this PTE, Section V(a) requires the 
financial institution to provide notice to the Department of its intent 
to rely on this proposed PTE.

Legal Costs

    The Department estimates that drafting the PTE's contractual 
provisions, the notice to the Department, and the limited menu 
disclosure will require 60 hours of legal time for financial 
institutions during the first year that the financial institution uses 
the PTE. This legal work results in approximately 168,000 hours of 
burden during the first year and approximately 13,000 hours of burden 
during subsequent years at an equivalent cost of $21.8 million and $1.7 
million respectively.

IT Costs

    The Department estimates that updating computer systems to create 
the required disclosures, insert the contract provisions into existing 
contracts, maintain the required records, and publish information on 
the Web site will require 100 hours of IT staff time for financial 
institutions during the first year that the financial institution uses 
the PTE.\54\ This IT work results in approximately 280,000 hours of 
burden during the first year and approximately 22,000 hours of burden 
during subsequent years at an equivalent cost of $22.3 million and $1.8 
million respectively.
---------------------------------------------------------------------------

    \54\ The Department assumes that nearly all financial 
institutions already maintain Web sites and that updates to the 
disclosure required by Section III(c) could be automated. Therefore, 
the IT costs required by Section III(c) would be almost exclusively 
start-up costs. The Department invites comment on these assumptions.
---------------------------------------------------------------------------

Production and Distribution of Required Contract, Disclosures, and 
Notices

    The Department estimates that approximately 21.3 million plans and 
IRAs have relationships with financial institutions and are likely to 
engage in transactions covered under this PTE.
    The Department assumes that financial institutions already maintain 
contracts with their clients. Therefore, the required contractual 
provisions will be inserted into existing contracts with no additional 
cost for production or distribution.
    The Department assumes that financial institutions will send 
approximately 24 point-of-sale transaction disclosures each year to 
37,000 small defined benefit plans and small defined contribution plans 
that do not allow participants to direct investments. All of these 
disclosures will be sent electronically at de minimis cost. Financial 
institutions will send two point-of-sale transaction disclosures each 
year to 1.1 million defined contribution plans participants and 20.2 
million IRA holders. These disclosures will be distributed 
electronically to 75 percent of defined contribution plan participants 
and IRA holders. Paper copies of the disclosure will be given to 25 
percent of defined contribution plan participants and IRA holders. 
Further, 15 percent of the paper copies will be mailed, while the other 
85 percent will be hand-delivered during in-person meetings. The 
Department estimates that electronic distribution will result in de 
minimis cost, while paper distribution will cost approximately $1.3 
million. Paper distribution will also require one minute of clerical 
time to print the disclosure and one minute of clerical time to mail 
the disclosure, resulting in 204,000 hours at an equivalent cost of 
$6.2 million annually.
    The Department estimates that 21.3 million plans and IRAs will 
receive an annual statement. Small defined benefit and defined 
contribution plans that do not allow participants to direct investments 
will receive a ten page statement electronically at de minimis cost. 
Defined contribution plan participants and IRA holders will receive a 
two page statement. This statement will be distributed electronically 
to 38 percent of defined contribution plan participants and 50 percent 
of IRA holders. Paper statements will be mailed to 62 percent of 
defined contribution plan participants and 50 percent of IRA holders. 
The Department estimates that electronic distribution will result in de 
minimis cost, while paper distribution will cost approximately $6.3 
million. Paper distribution will also require two minutes of clerical 
time to print and mail the disclosure, resulting in 359,000 hours at an 
equivalent cost of $10.9 million annually.
    For purposes of this estimate, the Department assumes that nearly 
all financial institutions using the PTE will limit their investment 
menus in some way and provide the limited menu disclosure. Accordingly, 
during the first year of the exemption the Department estimates that 
all of the 21.3 million plans and IRAs would receive the one-page 
limited menu disclosure. In subsequent years, approximately 1.7 million 
plans and IRAs would receive the one-page limited menu disclosure. 
Small defined benefit and defined contribution plans that do not allow 
participants to direct investments would receive the disclosure 
electronically at de minimis cost. The disclosure would be distributed 
electronically to 75 percent of defined contribution plan participants 
and IRA holders. Paper copies of the disclosure would be given to 25 
percent of defined contribution plan participants and IRA holders. 
Further, 15 percent of the paper copies would be mailed, while the 
other 85 percent would be hand-delivered during in-person meetings. The 
Department estimates that electronic distribution would result in de 
minimis cost, while paper distribution would cost approximately 
$922,000 during the first year and approximately $74,000 in subsequent 
years. Paper distribution would also require one minute of clerical 
time to print the disclosure and one minute of clerical time to mail 
the disclosure, resulting in 244,000 hours in the first year and 20,000 
hours in subsequent years at an equivalent cost of $7.4 million and 
$595,000 respectively. If, as seems likely, many financial institutions 
choose not to limit the universe of investment recommendations, we 
would expect the actual costs to be substantially smaller.
    Finally, the Department estimates that all of the 2,800 financial 
institutions would mail the required one-page notice to the Department 
during the first year and approximately 224 new financial institutions 
would mail the required one-page notice to the Department in subsequent 
years. Producing and distributing this notice would cost approximately 
$1,500 during the first year and approximately $100 in subsequent 
years. Producing and distributing this notice would also require 2 
minutes of clerical time resulting in a burden of approximately 93 
hours during the first year and approximately 7 hours in subsequent 
years at an equivalent cost of $2,800 and $200 respectively.

Recordkeeping Requirement

    Section V(b) requires financial institutions to maintain investment 
return data in a manner accessible for examination by the Department 
for six years. Section V(c) and (d) requires

[[Page 21983]]

financial institutions to maintain or cause to be maintained for six 
years and disclosed upon request the records necessary for the 
Department, Internal Revenue Service, plan fiduciary, contributing 
employer or employee organization whose members are covered by the 
plan, and participants, beneficiaries and IRA owners to determine 
whether the conditions of this exemption have been met in a manner that 
is accessible for audit and examination.
    Most of the data retention requirements in Section V(b) are 
consistent with data retention requirements made by the SEC and FINRA. 
In addition, the data retention requirements correspond to the six year 
statute of limitations in Section 413 of ERISA. Insofar as the data 
retention time requirements in Section V(b) are lengthier than those 
required by the SEC and FINRA, the Department assumes that retaining 
data for an additional time period is a de minimis additional burden.
    The records required in Section V(c) and Section V(d) are generally 
kept as regular and customary business practices. Therefore, the 
Department has estimated that the additional time needed to maintain 
records consistent with the exemption will only require about one-half 
hour, on average, annually for a financial manager to organize and 
collate the documents or else draft a notice explaining that the 
information is exempt from disclosure, and an additional 15 minutes of 
clerical time to make the documents available for inspection during 
normal business hours or prepare the paper notice explaining that the 
information is exempt from disclosure. Thus, the Department estimates 
that a total of 45 minutes of professional time per Financial 
Institution would be required for a total hour burden of 2,100 hours at 
an equivalent cost of $198,000.
    In connection with this recordkeeping and disclosure requirements 
discussed above, Section V(d)(2) and (3) provide that financial 
institutions relying on the exemption do not have to disclose trade 
secrets or other confidential information to members of the public 
(i.e., plan fiduciaries, contributing employers or employee 
organizations whose members are covered by the plan, participants and 
beneficiaries and IRA owners), but that in the event a financial 
institution refuses to disclose information on this basis, it must 
provide a written notice to the requester advising of the reasons for 
the refusal and advising that the Department may request such 
information. The Department's experience indicates that this provision 
is not commonly invoked, and therefore, the written notice is rarely, 
if ever, generated. Therefore, the Department believes the cost burden 
associated with this clause is de minimis. No other cost burden exists 
with respect to recordkeeping.

Overall Summary

    Overall, the Department estimates that in order to meet the 
conditions of this PTE, 2,800 financial institutions will produce 86 
million disclosures and notices during the first year of this PTE and 
66.4 million disclosures and notices during subsequent years. These 
disclosures and notices will result in 1.3 million burden hours during 
the first year and 620,000 burden hours in subsequent years, at an 
equivalent cost of $68.9 million and $21.4 million respectively. The 
disclosures and notices in this exemption will also result in a total 
cost burden for materials and postage of $8.6 million during the first 
year and $7.7 million during subsequent years.
    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.
    Titles: (1) Proposed Best Interest Contract Exemption.
    OMB Control Number: 1210-NEW.
    Affected Public: Business or other for-profit.
    Estimated Number of Respondents: 2,800.
    Estimated Number of Annual Responses: 85,985,156 in the first year 
and 66,394,985 in subsequent years.
    Frequency of Response: Initially, Annually, and When engaging in 
exempted transaction.
    Estimated Total Annual Burden Hours: 1,256,862 during the first 
year and 619,766 in subsequent years.
    Estimated Total Annual Burden Cost: $8,582,764 during the first 
year and $7,733,247 in subsequent years.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under ERISA section 408(a) and Code section 4975(c)(2) does not relieve 
a fiduciary or other party in interest or disqualified person with 
respect to a plan or IRA from certain other provisions of ERISA and the 
Code, including any prohibited transaction provisions to which the 
exemption does not apply and the general fiduciary responsibility 
provisions of ERISA section 404 which require, among other things, that 
a fiduciary discharge his or her duties respecting the plan solely in 
the interests of the participants and beneficiaries of the plan. 
Additionally, the fact that a transaction is the subject of an 
exemption does not affect the requirement of Code section 401(a) that 
the plan must operate for the exclusive benefit of the employees of the 
employer maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under ERISA section 408(a) 
and Code section 4975(c)(2), the Department must find that the 
exemption is administratively feasible, in the interests of plans and 
their participants and beneficiaries and IRA owners, and protective of 
the rights of participants and beneficiaries of the plan and IRA 
owners;
    (3) If granted, the proposed exemption is applicable to a 
particular transaction only if the transaction satisfies the conditions 
specified in the exemption; and
    (4) The proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of ERISA and the Code, 
including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.

Written Comments

    The Department invites all interested persons to submit written 
comments on the proposed exemption to the address and within the time 
period set forth above. All comments received will be made a part of 
the record. Comments should state the reasons for the writer's interest 
in the proposed exemption. Comments received will be available for 
public inspection at the above address.

Proposed Exemption

Section I--Best Interest Contract Exemption

    (a) In general. ERISA and the Internal Revenue Code prohibit 
fiduciary advisers to employee benefit plans (Plans) and individual 
retirement plans (IRAs) from receiving compensation that varies based 
on their investment recommendations. Similarly, fiduciary advisers are 
prohibited from receiving compensation from third parties in connection 
with their advice. This exemption permits certain persons who provide 
investment advice to Retirement Investors, and their associated 
financial institutions,

[[Page 21984]]

affiliates and other related entities, to receive such otherwise 
prohibited compensation as described below.
    (b) Covered transactions. This exemption permits Advisers, 
Financial Institutions, and their Affiliates and Related Entities to 
receive compensation for services provided in connection with a 
purchase, sale or holding of an Asset by a Plan, participant or 
beneficiary account, or IRA, as a result of the Adviser's and Financial 
Institution's advice to any of the following ``Retirement Investors:''
    (1) A participant or beneficiary of a Plan subject to Title I of 
ERISA with authority to direct the investment of assets in his or her 
Plan account or to take a distribution;
    (2) The beneficial owner of an IRA acting on behalf of the IRA; or
    (3) A plan sponsor as described in ERISA section 3(16)(B) (or any 
employee, officer or director thereof) of a non-participant-directed 
Plan subject to Title I of ERISA with fewer than 100 participants, to 
the extent it acts as a fiduciary who has authority to make investment 
decisions for the Plan.
    As detailed below, parties seeking to rely on the exemption must 
contractually agree to adhere to Impartial Conduct Standards in 
rendering advice regarding Assets; warrant that they have adopted 
policies and procedures designed to mitigate the dangers posed by 
Material Conflicts of Interest; disclose important information relating 
to fees, compensation, and Material Conflicts of Interest; and retain 
documents and data relating to investment recommendations regarding 
Assets. The exemption provides relief from the restrictions of ERISA 
section 406(a)(1)(D) and 406(b) and the sanctions imposed by Code 
section 4975(a) and (b), by reason of Code section 4975(c)(1)(D), (E) 
and (F). The Adviser and Financial Institution must comply with the 
conditions of Sections II-V to rely on this exemption.
    (c) Exclusions. This exemption does not apply if:
    (1) The Plan is covered by Title I of ERISA, and (i) the Adviser, 
Financial Institution or any Affiliate is the employer of employees 
covered by the Plan, or (ii) the Adviser or Financial Institution is a 
named fiduciary or plan administrator (as defined in ERISA section 
3(16)(A)) with respect to the Plan, or an affiliate thereof, that was 
selected to provide advice to the Plan by a fiduciary who is not 
Independent;
    (2) The compensation is received as a result of a transaction in 
which the Adviser is acting on behalf of its own account or the account 
of the Financial Institution, or the account of a person directly or 
indirectly, through one or more intermediaries, controlling, controlled 
by, or under common control with the Financial Institution (i.e., a 
principal transaction);
    (3) The compensation is received as a result of investment advice 
to a Retirement Investor generated solely by an interactive Web site in 
which computer software-based models or applications provide investment 
advice based on personal information each investor supplies through the 
Web site without any personal interaction or advice from an individual 
Adviser (i.e., ``robo advice''); or
    (4) The Adviser (i) exercises any discretionary authority or 
discretionary control respecting management of the Plan or IRA assets 
involved in the transaction or exercises any authority or control 
respecting management or disposition of the assets, or (ii) has any 
discretionary authority or discretionary responsibility in the 
administration of the Plan or IRA.

Section II--Contract, Impartial Conduct, and Other Requirements

    (a) Contract. Prior to recommending that the Plan, participant or 
beneficiary account, or IRA purchase, sell or hold the Asset, the 
Adviser and Financial Institution enter into a written contract with 
the Retirement Investor that incorporates the terms required by Section 
II(b)-(e).
    (b) Fiduciary. The written contract affirmatively states that the 
Adviser and Financial Institution are fiduciaries under ERISA or the 
Code, or both, with respect to any investment recommendations to the 
Retirement Investor.
    (c) Impartial Conduct Standards. The Adviser and the Financial 
Institution affirmatively agree to, and comply with, the following:
    (1) When providing investment advice to the Retirement Investor 
regarding the Asset, the Adviser and Financial Institution will provide 
investment advice that is in the Best Interest of the Retirement 
Investor (i.e., advice that reflects 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 or any Affiliate, Related Entity, or other party);
    (2) When providing investment advice to the Retirement Investor 
regarding the Asset, the Adviser and Financial Institution will not 
recommend an Asset if the total amount of compensation anticipated to 
be received by the Adviser, Financial Institution, Affiliates and 
Related Entities in connection with the purchase, sale or holding of 
the Asset by the Plan, participant or beneficiary account, or IRA, will 
exceed reasonable compensation in relation to the total services they 
provide to the Retirement Investor; and
    (3) The Adviser's and Financial Institution's statements about the 
Asset, fees, Material Conflicts of Interest, and any other matters 
relevant to a Retirement Investor's investment decisions, will not be 
misleading.
    (d) Warranties. The Adviser and Financial Institution affirmatively 
warrant the following:
    (1) The Adviser, Financial Institution, and Affiliates will comply 
with all applicable federal and state laws regarding the rendering of 
the investment advice, the purchase, sale and holding of the Asset, and 
the payment of compensation related to the purchase, sale and holding 
of the Asset;
    (2) The Financial Institution has adopted written policies and 
procedures reasonably designed to mitigate the impact of Material 
Conflicts of Interest and ensure that its individual Advisers adhere to 
the Impartial Conduct Standards set forth in Section II(c);
    (3) In formulating its policies and procedures, the Financial 
Institution has specifically identified Material Conflicts of Interest 
and adopted measures to prevent the Material Conflicts of Interest from 
causing violations of the Impartial Conduct Standards set forth in 
Section II(c); and
    (4) Neither the Financial Institution nor (to the best of its 
knowledge) any Affiliate or Related Entity uses quotas, appraisals, 
performance or personnel actions, bonuses, contests, special awards, 
differential compensation or other actions or incentives to the extent 
they would tend to encourage individual Advisers to make 
recommendations that are not in the Best Interest of the Retirement 
Investor. Notwithstanding the foregoing, the contractual warranty set 
forth in this Section II(d)(4) does not prevent the Financial 
Institution or its Affiliates and Related Entities from providing 
Advisers with differential compensation based on investments by Plans, 
participant or beneficiary accounts, or IRAs, to the extent such 
compensation would not encourage advice that runs counter to the Best 
Interest of the Retirement Investor (e.g., differential compensation 
based on such neutral factors as the difference in time and analysis 
necessary to provide prudent advice with respect to different types of 
investments would be permissible).

[[Page 21985]]

    (e) Disclosures. The written contract must specifically:
    (1) Identify and disclose any Material Conflicts of Interest;
    (2) Inform the Retirement Investor that the Retirement Investor has 
the right to obtain complete information about all the fees currently 
associated with the Assets in which it is invested, including all of 
the direct and indirect fees paid payable to the Adviser, Financial 
Institution, and any Affiliates; and
    (3) Disclose to the Retirement Investor whether the Financial 
Institution offers Proprietary Products or receives Third Party 
Payments with respect to the purchase, sale or holding of any Asset, 
and of the address of the Web site required by Section III(c) that 
discloses the compensation arrangements entered into by Advisers and 
the Financial Institution.
    (f) Prohibited Contractual Provisions. The written contract shall 
not contain the following:
    (1) Exculpatory provisions disclaiming or otherwise limiting 
liability of the Adviser or Financial Institution for a violation of 
the contract's terms; and
    (2) A provision under which the Plan, IRA or Retirement Investor 
waives or qualifies its right to bring or participate in a class action 
or other representative action in court in a dispute with the Adviser 
or Financial Institution.

Section III--Disclosure Requirements

    (a) Transaction Disclosure.
    (1) Disclosure. Prior to the execution of the purchase of the Asset 
by the Plan, participant or beneficiary account, or IRA, the Adviser 
furnishes to the Retirement Investor a chart that provides, with 
respect to each Asset recommended, the Total Cost to the Plan, 
participant or beneficiary account, or IRA, of investing in the Asset 
for 1-, 5- and 10-year periods expressed as a dollar amount, assuming 
an investment of the dollar amount recommended by the Adviser and 
reasonable assumptions about investment performance that are disclosed.
    The disclosure chart required by this section need not be provided 
with respect to a subsequent recommendation to purchase the same 
investment product if the chart was previously provided to the 
Retirement Investor within the past twelve months and the Total Cost 
has not materially changed.
    (2) Total Cost. The ``Total Cost'' of investing in an Asset means 
the sum of the following, as applicable:
    (A) Acquisition costs. Any costs of acquiring the Asset that are 
paid by direct charge to the Plan, participant or beneficiary account, 
or IRA, or that reduce the amount invested in the Asset (e.g., any 
loads, commissions, or mark-ups on Assets bought from dealers, and 
account opening fees, if applicable).
    (B) Ongoing costs. Any ongoing (e.g., annual) costs attributable to 
fees and expenses charged for the operation of an Asset that is a 
pooled investment fund (e.g., mutual fund, bank collective investment 
fund, insurance company pooled separate account) that reduces the 
Asset's rate of return (e.g., amounts attributable to a mutual fund 
expense ratio and account fees). This includes amounts paid by the 
pooled investment fund to intermediaries, such as sub-TA fees, sub-
accounting fees, etc.
    (C) Disposition costs. Any costs of disposing of or redeeming an 
interest in the Asset that are paid by direct charge to the Plan, 
participant or beneficiary account, or IRA, or that reduce the amounts 
received by the Plan, participant or beneficiary account, or IRA (e.g., 
surrender fees, back-end loads, etc., that are always applicable (i.e., 
do not sunset), mark-downs on assets sold to dealers, and account 
closing fees, if applicable).
    (D) Others. Any costs not described in (A)-(C) that reduce the 
Asset's rate of return, are paid by direct charge to the Plan, 
participant or beneficiary account, or IRA, or reduce the amounts 
received by the Plan, participant or beneficiary account, or IRA (e.g., 
contingent fees, such as back-end loads that phase out over time (with 
such terms explained beneath the table)).
    (3) Model Chart. Appendix II to this exemption contains a model 
chart that may be used to provide the information required under this 
Section III(a). Use of the model chart is not mandatory. However, use 
of an appropriately completed model chart will be deemed to satisfy the 
requirements of this Section III(a).
    (b) Annual Disclosure. The Adviser or Financial Institution 
provides the following written information to the Retirement Investor, 
annually, within 45 days of the end of the applicable year, in a 
succinct single disclosure:
    (1) A list identifying each Asset purchased or sold during the 
applicable period and the price at which the Asset was purchased or 
sold;
    (2) A statement of the total dollar amount of all fees and expenses 
paid by the Plan, participant or beneficiary account, or IRA (directly 
and indirectly) with respect to each Asset purchased, held or sold 
during the applicable period; and
    (3) A statement of the total dollar amount of all compensation 
received by the Adviser and Financial Institution, directly or 
indirectly, from any party, as a result of each Asset sold, purchased 
or held by the Plan, participant or beneficiary account, or IRA during 
the applicable period.
    (c) Web page.
    (1) The Financial Institution maintains a Web page, freely 
accessible to the public, which shows the following information:
    (A) The direct and indirect material compensation payable to the 
Adviser, Financial Institution and any Affiliate for services provided 
in connection with each Asset (or, if uniform across a class of Assets, 
the class of Assets) that a Plan, participant or beneficiary account, 
or an IRA is able to purchase, hold, or sell through the Adviser or 
Financial Institution, and that a Plan, participant or beneficiary 
account, or an IRA has purchased, held, or sold within the last 365 
days. The compensation may be expressed as a monetary amount, formula 
or percentage of the assets involved in the purchase, sale or holding; 
and
    (B) The source of the compensation, and how the compensation varies 
within and among Assets.
    (2) The Financial Institution's Web page provides access to the 
information in (1)(A) and (B) in a machine readable format.

Section IV--Range of Investment Options

    (a) General. The Financial Institution offers for purchase, sale or 
holding, and the Adviser makes available to the Plan, participant or 
beneficiary account, or IRA for purchase, sale or holding, a range of 
Assets that is broad enough to enable the Adviser to make 
recommendations with respect to all of the asset classes reasonably 
necessary to serve the Best Interests of the Retirement Investor in 
light of its investment objectives, risk tolerance, and specific 
financial circumstances.
    (b) Limited Range of Investment Options. Section (a) 
notwithstanding, a Financial Institution may limit the Assets available 
for purchase, sale or holding based on whether the Assets are 
Proprietary Products, generate Third Party Payments, or for other 
reasons, and still rely on the exemption, provided that:
    (1) The Financial Institution makes a specific written finding that 
the limitations it has placed on the Assets made available to an 
Adviser for purchase, sale or holding by Plans, participant and 
beneficiary accounts, and IRAs do not prevent the Adviser

[[Page 21986]]

from providing advice that is in the Best Interest of the Retirement 
Investor (i.e., advice that reflects 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 or any Affiliate, Related Entity, or other party) or 
otherwise adhering to the Impartial Conduct Standards;
    (2) Any compensation received in connection with a purchase, sale 
or holding of the Asset by a Plan, participant or beneficiary account, 
or an IRA, is reasonable in relation to the value of the specific 
services provided to the Retirement Investor in exchange for the 
payments and not in excess of the services' fair market value;
    (3) Before giving investment recommendations to Retirement 
Investors, the Adviser or Financial Institution gives the Retirement 
Investor clear written notice of the limitations placed on the Assets 
that the Adviser may offer for purchase, sale or holding by a Plan, 
participant or beneficiary account, or an IRA. Notice is insufficient 
if it merely states that the Financial Institution or Adviser ``may'' 
limit investment recommendations based on whether the Assets are 
Proprietary Products or generate Third Party Payments, or for other 
reasons, without specific disclosure of the extent to which 
recommendations are, in fact, limited on that basis; and
    (4) The Adviser notifies the Retirement Investor if the Adviser 
does not recommend a sufficiently broad range of Assets to meet the 
Retirement Investor's needs.
    (c) ERISA plan participants and beneficiaries. Some Advisers and 
Financial Institutions provide advice to participants in ERISA-covered 
participant directed individual account Plans in which the menu of 
investment options is selected by an Independent Plan fiduciary. In 
such cases, provided the Adviser and Financial Institution did not 
provide investment advice to the Plan fiduciary regarding the 
composition of the menu, the Adviser and Financial Institution do not 
have to comply with Section IV(a)-(c) in connection with their advice 
to individual participants and beneficiaries on the selection of Assets 
from the menu provided. This exception is not available for advice with 
respect to investments within open brokerage windows or otherwise 
outside the Plan's designated investment options.

Section V--Disclosure to the Department and Recordkeeping

    (a) EBSA Disclosure. Before receiving compensation in reliance on 
the exemption in Section I, the Financial Institution notifies the 
Department of Labor of the intention to rely on this class exemption. 
The notice will remain in effect until revoked in writing by the 
Financial Institution. The notice need not identify any Plan or IRA.
    (b) Data Request. The Financial Institution maintains the data that 
is subject to request pursuant to Section IX in a manner that is 
accessible for examination by the Department for six (6) years from the 
date of the transaction subject to relief hereunder. No party, other 
than the Financial Institution responsible for complying with this 
paragraph (b), will be subject to the taxes imposed by Code section 
4975(a) and (b), if applicable, if the data is not maintained or not 
available for examination as required by paragraph (b).
    (c) Recordkeeping. The Financial Institution maintains for a period 
of six (6) years, in a manner that is accessible for examination, the 
records necessary to enable the persons described in paragraph (d) of 
this Section to determine whether the conditions of this exemption have 
been met, except that:
    (1) If such records are lost or destroyed, due to circumstances 
beyond the control of the Financial Institution, then no prohibited 
transaction will be considered to have occurred solely on the basis of 
the unavailability of those records; and
    (2) No party, other than the Financial Institution responsible for 
complying with this paragraph (c), will be subject to the civil penalty 
that may be assessed under ERISA section 502(i) or the taxes imposed by 
Code section 4975(a) and (b), if applicable, if the records are not 
maintained or are not available for examination as required by 
paragraph (d), below.
    (d) (1) Except as provided in paragraph (d)(2) of this Section, and 
notwithstanding any provisions of ERISA section 504(a)(2) and (b), the 
records referred to in paragraph (c) of this Section are 
unconditionally available at their customary location for examination 
during normal business hours by:
    (A) Any authorized employee or representative of the Department or 
the Internal Revenue Service;
    (B) Any fiduciary of a Plan that engaged in a purchase, sale or 
holding of an Asset described in this exemption, or any authorized 
employee or representative of such fiduciary;
    (C) Any contributing employer and any employee organization whose 
members are covered by a Plan described in paragraph (d)(1)(B), or any 
authorized employee or representative of these entities; or
    (D) Any participant or beneficiary of a Plan described in paragraph 
(B), IRA owner, or the authorized representative of such participant, 
beneficiary or owner; and
    (2) None of the persons described in paragraph (d)(1)(B)-(D) of 
this Section are authorized to examine privileged trade secrets or 
privileged commercial or financial information, of the Financial 
Institution, or information identifying other individuals.
    (3) Should the Financial Institution refuse to disclose information 
on the basis that the information is exempt from disclosure, the 
Financial Institution must, by the close of the thirtieth (30th) day 
following the request, provide a written notice advising the requestor 
of the reasons for the refusal and that the Department may request such 
information.

Section VI--Insurance and Annuity Contract Exemption

    (a) In general. In addition to prohibiting fiduciaries from 
receiving compensation from third parties and compensation that varies 
on the basis of the fiduciaries' investment advice, ERISA and the 
Internal Revenue Code prohibit the purchase by a Plan, participant or 
beneficiary account, or IRA of an insurance or annuity product from an 
insurance company that is a service provider to the Plan or IRA. This 
exemption permits a Plan, participant or beneficiary account, or IRA to 
purchase an Asset that is an insurance or annuity contract in 
accordance with an Adviser's advice, from a Financial Institution that 
is an insurance company and that is a service provider to the Plan or 
IRA. This exemption is provided because purchases of insurance and 
annuity products are often prohibited purchases and sales involving 
insurance companies that have a pre-existing party in interest 
relationship to the Plan or IRA.
    (b) Covered transaction. The restrictions of ERISA section 
406(a)(1)(A) and (D), and the sanctions imposed by Code section 4975(a) 
and (b), by reason of Code section 4975(c)(1)(A) and (D), shall not 
apply to a fiduciary's causing the purchase of an Asset that is an 
insurance or annuity contract by a non-participant-directed Plan 
subject to Title I of ERISA that has fewer than 100 participants, 
participant or beneficiary account, or IRA, from a Financial 
Institution that is an

[[Page 21987]]

insurance company and that is a party in interest or disqualified 
person, if:
    (1) The transaction is effected by the insurance company in the 
ordinary course of its business as an insurance company;
    (2) The combined total of all fees and compensation received by the 
insurance company and any Affiliate is not in excess of reasonable 
compensation under the circumstances;
    (3) The purchase is for cash only; and
    (4) The terms of the purchase are at least as favorable to the 
Plan, participant or beneficiary account, or IRA as the terms generally 
available in an arm's length transaction with an unrelated party.
    (c) Exclusion: The exemption in this Section VI does not apply if 
the Plan is covered by Title I of ERISA, and (i) the Adviser, Financial 
Institution or any Affiliate is the employer of employees covered by 
the Plan, or (ii) the Adviser and Financial Institution is a named 
fiduciary or plan administrator (as defined in ERISA section 3(16)(A)) 
with respect to the Plan, or an affiliate thereof, that was selected to 
provide advice to the plan by a fiduciary who is not Independent.

Section VII--Exemption for Pre-Existing Transactions

    (a) In general. ERISA and the Internal Revenue Code prohibit 
Advisers, Financial Institutions and their Affiliates and Related 
Entities from receiving variable or third-party compensation as a 
result of the Adviser's and Financial Institution's advice to a Plan, 
participant or beneficiary, or IRA owner. Some Advisers and Financial 
Institutions did not consider themselves fiduciaries within the meaning 
of 29 CFR 2510-3.21 before the applicability date of the amendment to 
29 CFR 2510-3.21 (the Applicability Date). Other Advisers and Financial 
Institutions entered into transactions involving Plans, participant or 
beneficiary accounts, or IRAs before the Applicability Date, in 
accordance with the terms of a prohibited transaction exemption that 
has since been amended. This exemption permits Advisers, Financial 
Institutions, and their Affiliates and Related Entities, to receive 
compensation, such as 12b-1 fees, in connection with the purchase, sale 
or holding of an Asset by a Plan, participant or beneficiary account, 
or an IRA, as a result of the Adviser's and Financial Institution's 
advice, that occurred prior to the Applicability Date, as described and 
limited below.
    (b) Covered transaction. Subject to the applicable conditions 
described below, the restrictions of ERISA section 406(a)(1)(D) and 
406(b) and the sanctions imposed by Code section 4975(a) and (b), by 
reason of Code section 4975(c)(1)(D), (E) and (F), shall not apply to 
the receipt of compensation by an Adviser, Financial Institution, and 
any Affiliate and Related Entity, for services provided in connection 
with the purchase, holding or sale of an Asset, as a result of the 
Adviser's and Financial Institution's advice, that was purchased, sold, 
or held by a Plan, participant or beneficiary account, or an IRA before 
the Applicability Date if:
    (1) The compensation is not excluded pursuant to Section I(c) of 
the Best Interest Contract Exemption;
    (2) The compensation is received pursuant to an agreement, 
arrangement or understanding that was entered into prior to the 
Applicability Date;
    (3) The Adviser and Financial Institution do not provide additional 
advice to the Plan regarding the purchase, sale or holding of the Asset 
after the Applicability Date; and
    (4) The purchase or sale of the Asset was not a non-exempt 
prohibited transaction pursuant to ERISA section 406 and Code section 
4975 on the date it occurred.

Section VIII--Definitions

    For purposes of these exemptions:
    (a) ``Adviser'' means an individual who:
    (1) Is a fiduciary of a Plan or IRA solely by reason of the 
provision of investment advice described in ERISA section 3(21)(A)(ii) 
or Code section 4975(e)(3)(B), or both, and the applicable regulations, 
with respect to the Assets involved in the transaction;
    (2) Is an employee, independent contractor, agent, or registered 
representative of a Financial Institution; and
    (3) Satisfies the applicable federal and state regulatory and 
licensing requirements of insurance, banking, and securities laws with 
respect to the covered transaction.
    (b) ``Affiliate'' of an Adviser or Financial Institution means--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the Adviser or Financial Institution. For this purpose, 
``control'' means the power to exercise a controlling influence over 
the management or policies of a person other than an individual;
    (2) Any officer, director, employee, agent, registered 
representative, relative (as defined in ERISA section 3(15)), member of 
family (as defined in Code section 4975(e)(6)) of, or partner in, the 
Adviser or Financial Institution; and
    (3) Any corporation or partnership of which the Adviser or 
Financial Institution is an officer, director or employee or in which 
the Adviser or Financial Institution is a partner.
    (c) An ``Asset,'' for purposes of this exemption, includes only the 
following investment products: Bank deposits, certificates of deposit 
(CDs), shares or interests in registered investment companies, bank 
collective funds, insurance company separate accounts, exchange-traded 
REITs, exchange-traded funds, corporate bonds offered pursuant to a 
registration statement under the Securities Act of 1933, agency debt 
securities as defined in FINRA Rule 6710(l) or its successor, U.S. 
Treasury securities as defined in FINRA Rule 6710(p) or its successor, 
insurance and annuity contracts, guaranteed investment contracts, and 
equity securities within the meaning of 17 CFR 230.405 that are 
exchange-traded securities within the meaning of 17 CFR 242.600. 
Excluded from this definition is any equity security that is a security 
future or a put, call, straddle, or other option or privilege of buying 
an equity security from or selling an equity security to another 
without being bound to do so.
    (d) 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 
or any Affiliate, Related Entity, or other party.
    (e) ``Financial Institution'' means the entity that employs the 
Adviser or otherwise retains such individual as an independent 
contractor, agent or registered representative and that is:
    (1) Registered as an investment adviser under the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or under the laws of the 
state in which the adviser maintains its principal office and place of 
business;
    (2) A bank or similar financial institution supervised by the 
United States or state, or a savings association (as defined in section 
3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)), 
but only if the advice resulting in the compensation is provided 
through a trust department of the bank or similar financial institution 
or savings association which is subject to periodic examination and 
review by federal or state banking authorities;

[[Page 21988]]

    (3) An insurance company qualified to do business under the laws of 
a state, provided that such insurance company:
    (A) Has obtained a Certificate of Authority from the insurance 
commissioner of its domiciliary state which has neither been revoked 
nor suspended,
    (B) Has undergone and shall continue to undergo an examination by 
an Independent certified public accountant for its last completed 
taxable year or has undergone a financial examination (within the 
meaning of the law of its domiciliary state) by the state's insurance 
commissioner within the preceding 5 years, and
    (C) Is domiciled in a state whose law requires that actuarial 
review of reserves be conducted annually by an Independent firm of 
actuaries and reported to the appropriate regulatory authority; or
    (4) A broker or dealer registered under the Securities Exchange Act 
of 1934 (15 U.S.C. 78a et seq.).
    (f) ``Independent'' means a person that:
    (1) Is not the Adviser, the Financial Institution or any Affiliate 
relying on the exemption,
    (2) Does not receive compensation or other consideration for his or 
her own account from the Adviser, the Financial Institution or 
Affiliate; and
    (3) Does not have a relationship to or an interest in the Adviser, 
the Financial Institution or Affiliate that might affect the exercise 
of the person's best judgment in connection with transactions described 
in this exemption.
    (g) ``Individual Retirement Account'' or ``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.
    (h) A ``Material Conflict of Interest'' exists when an Adviser or 
Financial Institution has a financial interest that could affect the 
exercise of its best judgment as a fiduciary in rendering advice to a 
Retirement Investor regarding an Asset.
    (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.
    (j) ``Proprietary Product'' means a product that is managed by the 
Financial Institution or any of its Affiliates.
    (k) ``Related Entity'' means any entity other than an Affiliate in 
which the Adviser or Financial Institution has an interest which may 
affect the exercise of its best judgment as a fiduciary.
    (l) ``Retirement Investor'' means--
    (1) A participant or beneficiary of a Plan subject to Title I of 
ERISA with authority to direct the investment of assets in his or her 
Plan account or to take a distribution,
    (2) The beneficial owner of an IRA acting on behalf of the IRA, or
    (3) A plan sponsor as described in ERISA section 3(16)(B) (or any 
employee, officer or director thereof), of a non-participant-directed 
Plan subject to Title I of ERISA that has fewer than 100 participants, 
to the extent it acts as a fiduciary with authority to make investment 
decisions for the Plan.
    (m) ``Third-Party Payments'' mean sales charges when not paid 
directly by the Plan, participant or beneficiary account, or IRA, 12b-1 
fees and other payments paid to the Financial Institution or an 
Affiliate or Related Entity by a third party as a result of the 
purchase, sale or holding of an Asset by a Plan, participant or 
beneficiary account, or IRA.

Section IX--Data Request

    Upon request by the Department, a Financial Institution that relies 
on the exemption in Section I shall provide, within a reasonable time, 
but in no event longer than six (6) months, after receipt of the 
request, the following information for the preceding six (6) year 
period:
    (a) Inflows. At the Financial Institution level, for each Asset 
purchased, for each quarter:
    (1) The aggregate number and identity of shares/units bought;
    (2) The aggregate dollar amount invested and the cost to the Plan, 
participant or beneficiary account, or IRA associated with the 
purchase;
    (3) The revenue received by the Financial Institution and any 
Affiliate in connection with the purchase of each Asset disaggregated 
by source; and
    (4) The identity of each revenue source (e.g., mutual fund, mutual 
fund adviser) and the reason the compensation was paid.
    (b) Outflows. At the Financial Institution level for each Asset 
sold, for each quarter:
    (1) The aggregate number of and identity of shares/units sold;
    (2) The aggregate dollar amount received and the cost to the Plan, 
participant or beneficiary account, or IRA, associated with the sale;
    (3) The revenue received by the Financial Institution and any 
Affiliate in connection with the sale of each Asset disaggregated by 
source; and
    (4) The identity of each revenue source (e.g., mutual fund, mutual 
fund adviser) and the reason the compensation was paid.
    (c) Holdings. At the Financial Institution level for each Asset 
held at any time during each quarter:
    (1) The aggregate number and identity of shares/units held at the 
end of such quarter;
    (2) The aggregate cost incurred by the Plan, participant or 
beneficiary account, or IRA, during such quarter in connection with the 
holdings;
    (3) The revenue received by the Financial Institution and any 
Affiliate in connection with the holding of each Asset during such 
quarter for each Asset disaggregated by source; and
    (4) The identity of each revenue source (e.g., mutual fund, mutual 
fund adviser) and the reason the compensation was paid.
    (d) Returns. At the Retirement Investor level:
    (1) The identity of the Adviser;
    (2) The beginning-of-quarter value of the Retirement Investor's 
Portfolio;
    (3) The end-of-quarter value of the Retirement Investor's 
Portfolio; and
    (4) Each external cash flow to or from the Retirement Investor's 
Portfolio during the quarter and the date on which it occurred.
    For purposes of this subparagraph (d), ``Portfolio'' means the 
Retirement Investor's combined holding of assets held in a Plan account 
or IRA advised by the Adviser.
    (e) Public Disclosure. The Department reserves the right to 
publicly disclose information provided by the Financial Institution 
pursuant to subparagraph (d). If publicly disclosed, such information 
would be aggregated at the Adviser level, and the Department would not 
disclose any individually identifiable financial information regarding 
Retirement Investor accounts.

    Signed at Washington, DC, this 14th day of April, 2015.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.

[[Page 21989]]



                                                              Appendix I Financial Institution ABC--Web site Disclosure Model Form
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Transactional                                             Ongoing
                                Provider, name, -------------------------------------------------------------------------------------------------------------
      Type of investment           sub-type          Charges to      Compensation to   Compensation to     Charges to      Compensation to   Compensation to      Affiliate       Special rules
                                                      investor            firm             adviser          investor            firm             adviser
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-Proprietary Mutual Fund    XYZ MF Large Cap  [ <bullet> ]%      [ <bullet> ]%     [ <bullet> ]% of  [ <bullet> ]%     [ <bullet> ]%     [ <bullet> ]% of  N/A.............  Breakpoints (as
 (Load Fund).                   Fund, Class A     sales load as      dealer            transactional     expense ratio.    12b-1 fee,        ongoing fees.                       applicable)
                                Class B Class C.  applicable.        concession.       fee Extent                          revenue sharing  Extent                              Contingent
                                                                                       considered in                       (paid by fund/    considered in                       deferred shares
                                                                                       annual bonus.                       affiliate).       annual bonus.                       charge (as
                                                                                                                                                                                 applicable)
Proprietary Mutual Fund (No    ABC MF Large Cap  No upfront charge  N/A.............  N/A.............  [ <bullet> ]%     [ <bullet> ]%     [ <bullet> ]% of  [ <bullet> ]%     N/A
 load).                         Fund.                                                                    expense ratio.    asset-based       ongoing fees      asset-based
                                                                                                                           annual fee for    Extent            investment
                                                                                                                           shareholder       considered in     advisory fee
                                                                                                                           servicing (paid   annual bonus.     paid by fund to
                                                                                                                           by fund/                            affiliate of
                                                                                                                           affiliate).                         Financial
                                                                                                                                                               Institution.
Equities, ETFs, Fixed Income.  ................  $[ <bullet> ]      $[ <bullet> ]     [ <bullet> ]% of  N/A.............  N/A.............  N/A Extent        N/A.............  N/A
                                                  commission per     commission per    commission                                            considered in
                                                  transaction.       transaction.      Extent                                                annual bonus.
                                                                                       considered in
                                                                                       annual bonus.
Annuities (Fixed and           Insurance         No upfront charge  $[ <bullet> ]     [ <bullet> ]% of  [ <bullet> ]%     $[ <bullet> ]     [ <bullet> ]% of  N/A.............  Surrender charge
 Variable).                     Company A.        on amount          commission        commission        M&E fee [         Ongoing           ongoing fees
                                                  invested.          (paid by          Extent            <bullet> ]%       trailing          Extent
                                                                     insurer).         considered in     underlying        commission        considered in
                                                                                       annual bonus.     expense ratio.    (paid by          annual bonus.
                                                                                                                           underlying
                                                                                                                           investment
                                                                                                                           providers).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


   Appendix II Financial Institution XZY--Transaction Disclosure Model
                                  Chart
------------------------------------------------------------------------
                                      Total cost of your investment if
                                                  held for:
                  Your investment  -------------------------------------
                                      1 year      5 years      10 years
------------------------------------------------------------------------
Asset 1          .................  ..........  ...........  ...........
Asset 2          .................  ..........  ...........  ...........
Asset 3          .................  ..........  ...........  ...........
Account fees     .................  ..........  ...........  ...........
                --------------------------------------------------------
    Total        .................  ..........  ...........  ...........
------------------------------------------------------------------------

[FR Doc. 2015-08832 Filed 4-15-15; 11:15 am]
BILLING CODE 4510-29-P


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