Ralph C. Derbyshire
Senior Vice President &
Deputy General Counsel

FMR LLC Legal Department
Mail: 200 Seaport Blvd., V7A Boston, MA 02109
Office: 245 Summer Street, Boston, MA 02210
Phone: 617-563-0296 Fax: 508-357-8568
Email: ralph.derbyshire@fmr.com

SUBMITTED ELECTRONICALLY
July 21, 2015
Office of Regulations and Interpretations
Employee Benefits Security Administration
U.S. Department of Labor
Attention: Conflict of Interest Rule, Room N-5655
200 Constitution Avenue, NW
Washington, D.C. 20210
Office of Exemption Determinations
Employee Benefits Security Administration
U.S. Department of Labor
Attention: D-11712 and D-11713
200 Constitution Avenue, NW
Suite 400
Washington, D.C. 20210
Re:

Definition of the Term Fiduciary: Conflict of Interest Rule (RIN 1210-AB32);
Proposed Best Interest Contract Exemption and Principal Transactions in Debt
Securities Exemption (ZRIN: 1210-ZA25)

Ladies and Gentlemen:
Fidelity Investments1 (“Fidelity”) appreciates the opportunity to comment on the
proposed rule (“Proposed Regulation”) published by the Department of Labor (“Department”)
relating to the definition of investment advice under section 3(21)(A)(ii) of the Employee
Retirement Income Security Act of 1974 (“ERISA”) and section 4975(e)(3)(B) of the Internal
Revenue Code (“Code”). The Proposed Regulation is accompanied by a proposed class
exemption that would be based in part on a best interest contract commitment (“BIC
Exemption”), a proposed class exemption regarding principal transactions involving certain debt
securities (“Principal Transactions Exemption”) 2 and amendments to several existing class
exemptions. Taken together, the Proposed Regulation and the proposed exemptions would
create a new regulatory structure for assisting retirement plans, participants and IRA owners with
investment decisions.
1

Fidelity was founded in 1946 and is one of the world’s largest providers of financial services.
Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice; Proposed Rule 80
FR 21928 (April 20, 2015); Proposed Best Interest Contract Exemption; Proposed Rule 80 FR 21960 (April 20,
2015); Proposed Class Exemption for Principal Transactions in Certain Debt Securities between Investment Advice
Fiduciaries and Employee Benefit Plans and IRAs 80 FR 21989 (April 20, 2015). Capitalized terms not otherwise
defined have the meaning ascribed to them in the Proposed Regulation or proposed exemptions.
2

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As one of the nation’s leading retirement services providers, Fidelity has a deep and longstanding commitment to working with the Department on its rulemaking in the area of
investment education and advice. Fidelity provides recordkeeping, investment management,
brokerage and custodial/trustee services to thousands of Code section 401(k), 403(b) and other
retirement plans covering approximately 25 million participants and beneficiaries. Fidelity is the
nation’s largest provider of services to individual retirement accounts (“IRA”) with more than 7
million accounts under administration. Fidelity also provides brokerage, operational and
administrative support to approximately 5,000 third-party, unaffiliated financial services firms
(including investment advisors, broker-dealers, banks, insurance companies and third party
administrators) that may in turn provide investment advice to plans, participants and IRA
owners. Since the Department’s investment advice proposal would make fundamental changes
in the way investment advice is regulated, it could dramatically affect the services Fidelity and its
financial services clients provide to a significant portion of the nation’s retirement investors.
Rule as Proposed is Unworkable
The new regulatory structure proposed by the Department would greatly expand the
range of activities that constitute fiduciary-level investment advice subject to both a best interest
standard and, more significantly, the prohibited transaction rules of ERISA and the Code. To
address the prohibited transaction issue, the Department purports to create broad, principlesbased exemptions for regulated financial services firms that comply with the best interest
standard.
We support an appropriate expansion of the range of advice activities subject to a best
interest standard so long as it is accompanied by broad prohibited transaction relief. Fidelity
believes that it acts in the best interest of its customers and is willing to be legally accountable to
that standard when it provides investment advice. Unfortunately, the proposal fails to meet its
objectives through an overly broad definition of advice accompanied by exemptive relief that is
unnecessarily narrowed through complex limitations and conditions. As a result, the rule is
unworkable and will prevent firms like Fidelity from providing investment assistance that plans,
participants and IRA owners need to invest successfully for retirement.
We believe that the activities of firms like Fidelity are more appropriately regulated
through the primary financial services regulators and that the Department’s effort to create an
entirely new regulatory framework for investment advice services under ERISA is misguided.
However, since the Department seems committed to regulatory action in this area, we believe
there is a workable alternative that would better accomplish the Department’s objectives. In the
body of this letter, we outline a new best interest paradigm and highlight the significant problems
with the proposal that it addresses. Since understanding both our proposed paradigm and the
problems with the proposal requires analysis of the interaction between the proposed definition
of investment advice and the exemptions, we are submitting this letter to both the Office of
Regulations and Interpretations (which has responsibility for the rule itself) and the Office of

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Exemption Determinations (which has responsibility for the prohibited transaction exemptions).
More detailed comments are set forth in three attachments to this letter – Attachment A outlines
in more detail our new best interest paradigm (including suggested language for the rule and
exemption), Attachment B comments on the Proposed Regulation and Attachment C comments
on the proposed exemptions.
A New Best Interest Paradigm
Assuming the Department intends to move forward with rulemaking in this area, there is
a workable way to ensure that advice is provided in the investor’s best interest while preserving
existing business models that provide valuable assistance to retirement investors. Our proposed
best interest paradigm addresses the two foundational problems with the proposal – the overly
broad definition of investment advice under the Proposed Regulation and the limitations and
conditions of the BIC Exemption which make it ineffective in addressing the prohibited
transaction problems created by the overly broad advice definition.
The fundamental problem with the overly broad definition of investment advice under the
Proposed Regulation is that it conflates two separate acts – an investor’s engagement of an
advisor3 to provide advice and the advisor’s recommendation of investment products and
services pursuant to such engagement – and treats both as a single “recommendation” subject to
fiduciary conduct standards. By so doing, the rule proposal makes an advisor a fiduciary with
respect to establishment of its own services and compensation. This is both unprecedented in
fiduciary law and not commercially viable, potentially requiring an advisor to recommend its
competitors over itself even if its own services are wholly appropriate for the investor.
The Proposed Regulation attempts to deal with this problem in part through a limited
seller's carve-out for large plans. While we believe the carve-out approach makes sense for true
sales activity and should be applied to all investors in that context, the carve-out is an “all or
nothing” approach. When it applies under the Proposed Regulation, neither the advisor’s sales of
its own services nor the advisor’s actual investment recommendations would be held to a
fiduciary standard. Because the best interest standard does not apply to the actual investment
recommendation when the carve-out applies, the carve-out defeats the purpose of the rule. Thus,
the Department’s proposal either imposes a fiduciary duty on the sale of an advisor’s own
services (where it does not belong) or removes a fiduciary standard with respect to an investment
recommendation (where it does). We refer to this as the “sales dilemma” that is created by the
proposal. Notably, the proposal creates this dilemma not only with respect to advisors with
transaction-based compensation but also for advisors selling fee-based advisory services.
This dilemma can be avoided by separating the advisor’s establishment of its own
services and compensation – that is, the otherwise conflicted components of the relationship –
3

We generally use the term “advisor” to refer to both the regulated financial institution and/or its individual
representative, but provide greater specificity where the context requires.

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from the actual recommendations about investment products and services. These are inherently
distinct activities subject to fundamentally different duties. Following appropriate disclosure, an
investor would agree to the scope of the advice to be provided, the amount of compensation
payable to the advisor in connection with an investment recommendation or over a range of
recommendations, restrictions on the advice (such as limitations to proprietary products or
products that generate revenue sharing), and other terms and conditions of the engagement. The
investor’s agreement with respect to the service and compensation terms would be established at
arm’s length outside of the fiduciary relationship, as it historically has been in every comparable
fiduciary context. Once the terms of the engagement are established, all investment
recommendations within that framework must be in the investor’s best interest.
It is important to note that this approach of separating the terms of the engagement from
the actual investment recommendation does not apply solely at the initiation of the advisory
relationship. The terms of the engagement can later be renegotiated by the parties, or indeed can
be established on a transaction-by-transaction basis.
This approach of separating the terms of the engagement from the actual investment
advice is conceptually identical to a long-standing regulation of the Department addressing
application of the prohibited transaction exemption under ERISA section 408(b)(2) for payment
of service providers. This regulation provides that if a person who is already providing
investment advice to a plan “persuades” a plan fiduciary to extend his contract at a higher fee,
the advisor has not engaged in a prohibited transaction because the advisor has not used any of
the authority, control or responsibility which makes it a fiduciary to cause the plan to pay an
additional fee. There is no reason why this concept should not apply where the advisor’s
compensation varies based on the transactions and services recommended by the advisor, or to
other limitations and conditions on the scope of the advisor’s services.
The second foundational problem with the proposal is that its proposed exemption
structure is laden with complex limitations and conditions which narrow both the scope and
practicality of the exemptions and make them unworkable. Most of this problem can be solved
by implementing what the Department said it was going to do – create a broad, principles-based
approach to exemptions for regulated financial institutions that act in the investor’s best interest.
Notably, although the Department did not stay true to this commitment in proposing the BIC
Exemption, it does follow this approach through the "Standards of Impartial Conduct" that are
proposed as amendments to several existing exemptions in other parts of the rule proposal. For
example, the Department has proposed this approach in the amendments to PTE 77-4 which
allows a discretionary manager to invest in its own proprietary mutual funds – often cited as one
of the most conflicted transactions for an advisor. If this simple, straightforward approach is
sufficiently protective of the interests of plans, participants and IRA owners in the context of a
discretionary investment manager, it is certainly sufficient in the context of nondiscretionary
advice.

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Accordingly, our new best interest paradigm would apply this approach to the BIC
Exemption by modifying it to create a broad exemption that would reflect each of the three key
Standards of Impartial Conduct for regulated financial services firms:
•
•
•

a legally enforceable commitment to act in the best interest of the investor;
a requirement that compensation be reasonable in light of the services provided;
and
disclosure of material conflicts, including compensation payable to the financial
institution.

No further limitations or conditions on the exemption are needed.
Problems with the Proposal that Must Be Addressed
Adopting the new best interest paradigm set forth above and in Attachment A will
address most of the key problems with the proposal and preserve access to investment advice.
These key problems include:
1. Do Not Treat the Advisor’s Own Engagement as Fiduciary Advice.
The tension in the proposal between permitting routine sales activity and subjecting
investment recommendations to a best interest standard is evident throughout the rule. As
proposed, the rule attempts to address this sales dilemma through several disparate avenues,
including the creation of a limited seller’s carve-out, a platform provider carve-out that would be
of limited use and an extremely confusing provision in the BIC Exemption that permits
investment advice to be provided only with respect to a “limited range of investment options”.
None of these avenues alone or together solves the problem. As described above and in
Attachment A, the dilemma can be resolved through a new paradigm that clearly separates
compensation and other conflicted aspects of establishing the investor-advisor relationship from
the actual investment recommendation. That way the investor can agree to the framework
through which advice will be provided outside the fiduciary context and receive advice subject to
a best interest standard within that agreed-upon framework. This paradigm is consistent with the
historical treatment of the fiduciary relationship in other fields of law, and would avoid the
complex problems created by the proposal’s current approach.
2. Eliminate the Written Contract Requirement.
The ultimate objective of the regulatory effort is to ensure that investment advice is
provided in the best interest of the investor. Fiduciary status under ERISA creates an
enforceable best interest standard by operation of law. However, in the case of IRAs not subject
to ERISA, no substantive standard of conduct applies under the Code. To hold all fiduciaries
accountable to the best interest standard, both the BIC Exemption and the Principal Transactions

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Exemption would require a written contract between the individual Adviser, the Financial
Institution and the Retirement Investor.
This written contract requirement is extremely burdensome, costly and in some cases
unworkable. It requires separate written contracts between thousands of different individual
representatives with millions of plan participants and IRA owners, along with recordkeeping
systems accessible to representatives in all channels to determine whether a written contract was
signed. Contracts would need to be signed at the initiation of any interaction where investments
or distributions are discussed, including discussions with prospects who are merely inquiring
about services that may be offered. It also introduces a written contract between plan service
providers and participants where there is otherwise no contractual relationship.
A best interest standard is legally imposed and enforceable under Title I of ERISA so that
a contract is unnecessary for plans and participants in any event. With respect to IRAs, we
believe that an enforceable best interest standard can be established by much less onerous means
– a unilateral contract offer by the financial services firm, reflecting the scope of the advisory
relationship and the fees to be charged, which would be enforceable as a contract or through the
doctrine of promissory estoppel. There is no need to require a signed, written document nor
must the individual representatives be involved. Attachment C provides a more detailed legal
analysis of this approach. In short, the class exemption should require legal enforceability, but
allow reasonable flexibility with respect to the manner in which the commitment is documented.
3. Simplify and Improve Disclosure.
A key component of the exemptions is full and meaningful disclosure of all material
conflicts of interest, including compensation payable to the advisor. The BIC Exemption
contemplates a three-tiered approach involving a point-of-sale disclosure of the projected cost of
recommended investments, an annual statement summarizing in dollar amounts the
compensation actually paid to the advisor during the preceding year and a publicly available
website listing every investment the advisor might recommend and the compensation associated
with each. In addition, the contract includes warranties requiring disclosure of material conflicts,
including fees payable to the financial institution. While we fully support meaningful disclosure
of cost, compensation and material conflicts, the manner in which they are disclosed is critically
important to both the usefulness of the information to the investor and workability from the
perspective of the financial services firm.
We believe a simpler two-tiered approach would make the disclosure regime both
workable and more meaningful to investors. The first tier would be a "static" disclosure that
would explain the scope of the financial institution’s services, describe its conflicts of interest
(including potentially different compensation based on the investments recommended and
selected by the investor), and include a link to a website. This website is the second tier and
would enable the investor to obtain more detailed information about the cost and compensation
associated with all products and services offered. The website could also allow the investor to

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estimate costs and compensation over time based on assumptions input by the investor about the
amount to be invested, projected returns, etc. Under this two-tiered approach, the critical
information required by the BIC Exemption is provided but in a format that is more meaningful
for the investor and more workable for the financial institution.
In the context of our new best interest paradigm, this disclosure would be made in
establishing or changing the terms and conditions of the advice relationship. It could also
accompany, or be a component of, a unilateral contract that includes a commitment by the
advisor to act in the investor’s best interest and constitute agreement to the reasonable
compensation to be paid to the advisor, thus meeting the best interest contract requirement
contemplated by the BIC Exemption.
4. Give Small Plan Sponsors Access to Advice.
The proposal leaves the vast majority of small plans with no access to advice services
when the advisor's compensation depends in any way on the plan's investments. The seller's
carve-out is only available to plans with more than 100 participants or $100 million in assets, and
the BIC Exemption does not apply to participant-directed plans of any size. The platform
provider carve-out is simply insufficient to provide meaningful assistance on its own. Failing to
permit investment advice by the financial services firms that are involved in providing
investment and recordkeeping services to these plans will stifle plan formation in the very market
segment where the lack of plan coverage is the biggest impediment to retirement savings for
millions of American workers. The new best interest paradigm outlined above avoids this
problem by creating a single exemption that would cover advice to plans of any size as well as
individuals.
5. Preserve the Ability to Identify Investment Funds as Education.
The carve-out for investment education under the Proposed Regulation would be a
significant step back from current law under Interpretive Bulletin 96-1 ("Bulletin") because it
makes the identification of specific investment alternatives in connection with a model asset
allocation fiduciary-level investment advice. We believe that without identifying investment
alternatives, the asset allocation discussion permitted under the education carve-out is largely an
exercise in investment theory and it is not concrete enough to be useful for most individuals.
When the Bulletin was adopted, the Department understood the potential conflict of
interest that could arise in identifying investment alternatives but felt that participants’ need for
this information (with certain disclosures) outweighed the potential conflict. We do not believe
that almost twenty years of experience under the Bulletin suggests any reason to change the
balance struck between protecting against conflicts and meeting participants’ needs for more
specific information. This is particularly true in the plan context where the plan sponsor or
another independent fiduciary has usually selected the available investment funds.

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We recommend preserving the ability to identify specific investment funds within the
education carve-out. To the extent the Department has identified abuses under IB 96-1, those
could be addressed by requiring identification of several funds, if available, rather than a single
fund.
6.

Extend the Effective Date.

The eight month “applicability date” is grossly insufficient to implement a regulatory
change of this magnitude. The time required will obviously depend on the complexity of the
final rule. If finalized as proposed, we believe that a minimum of three years would be necessary
to implement the rule.
************
We would be pleased to respond to any questions or comments regarding this submission,
including the points covered in the Attachments.
Sincerely,

Ralph C. Derbyshire
cc: United States Securities and Exchange Commission
The Honorable Mary Jo White, Chair
The Honorable Luis A. Aguilar, Commissioner
The Honorable Daniel M. Gallagher, Commissioner
The Honorable Kara M. Stein, Commissioner
The Honorable Michael S. Piwowar, Commissioner
Financial Industry Regulatory Authority
Mr. Richard Ketchum, Chairman and Chief Executive Officer, FINRA
Mr. Robert Colby, Chief Legal Officer, FINRA
Treasury Department
J. Mark Iwry, Deputy Assistant Secretary for Retirement and Health Policy
National Economic Council
Jeffrey Zients, Director
Elizabeth A. Kelly, Senior Policy Advisor

 Attachment A
A New Best Interest Paradigm
Much of the length and complexity of the proposal derives from the overly broad
definition of investment advice and the limitations and conditions of the exemptions. Since the
new best interest paradigm suggested in the body of this letter directly addresses these two
foundational problems, it would greatly simplify both the Proposed Regulation and the proposed
exemptions. This Attachment A outlines the paradigm in more detail and suggests language for
the Proposed Regulation and BIC Exemption that could be used to implement this new
paradigm.4
Narrowing the Definition of Advice
The broad definition of investment advice under the Proposed Regulation does not
distinguish between an advisor’s discussion and sale of its own services and the advisor’s actual
recommendation of investment products and services. The rule therefore treats the advisor as a
fiduciary with respect to its own services and compensation, in some cases before a fiduciary
relationship even exists. This would be the case both for advisors with transaction-based
compensation and advisors selling fee-based advisory services. That approach is both
unprecedented in fiduciary law and not commercially viable, potentially requiring an advisor to
recommend its competitors over itself even if its own services are wholly appropriate for the
investor.
The Proposed Regulation deals with this problem in part through a limited seller's carveout for “expert plan investors”.5 We fully support the notion of a seller’s carve-out for true sales
activity and suggest that it should be applied to all investors (see comments in Attachment B).
However, the seller’s carve-out does not address the problem of a fiduciary advisor selling its
own products and services because it is an “all or nothing” approach. When it applies under the
Proposed Regulation, neither the advisor’s negotiation and sale of its own services and
compensation, nor the advisor’s actual investment recommendations would be held to a fiduciary
standard. Because the best interest standard does not apply to the actual investment
recommendation when the carve-out applies, the carve-out defeats the purpose of the rule. Thus,
the Department’s proposal either imposes a fiduciary duty on the sale of an advisor’s own
services (where it does not belong) or removes a fiduciary standard with respect to an investment
recommendation (where it does). We refer to this as the “sales dilemma” that is created by the
proposal.
The sales dilemma is not limited to transaction-based compensation like that typically
payable to a broker-dealer. The Proposed Regulation broadly defines fiduciary investment

4

Note that with respect to the provisions of the Proposed Regulation and proposed exemptions that are not covered
in this Attachment A, the Department should make the modifications/clarifications recommended in Attachments B
and C.
5
In addition to the seller’s carve-out, the Proposed Regulation also includes a platform provider carve-out that is
essentially a seller’s carve-out with respect to a specific type of investment offering for employee benefit plans.

A-1

 advice to include a recommendation of an investment advisor or manager.6 Under the
Department's historical view, the compensation received by the advisor or manager for its
services is treated as being in exchange for the recommendation. At the point of the
recommendation, all such compensation – even if it were formulated as a fixed dollar amount
that does not vary based upon the advice or investment management services to be provided –
would vary based on the recommendation to hire the advice provider or investment manager,
since the compensation would be paid only if the recommendation was adopted and the advisor
or manager was hired. ERISA prohibits a fiduciary from using its authority or control as a
fiduciary to cause itself to be paid an additional fee or other compensation. Accordingly, under
the Department’s proposal, all investment advisors and managers in the process of selling their
own services would be engaging in a prohibited self-dealing transaction. It is hard to believe that
the Department intended this result.
A conceptually simple and straightforward solution to the sales dilemma is to separate the
terms of engagement of the advisor – that is, the otherwise conflicted components of the
transaction – from the underlying investment recommendation. The framework for engaging the
advisor is agreed to by the investor after full disclosure which permits that framework to be
established outside of the fiduciary relationship. However, once that fiduciary relationship is
established, all recommendations within the framework must be in the investor’s best interest.
An advisor’s engagement has two main components: (i) the scope and nature of the
advisor’s services, and (ii) the advisor’s compensation. The first component could include
agreement about the scope of the advice to be provided (such as one-time recommendations
versus continuous advice over time), restrictions on the investments taken into account when
providing advice (such as limitations to proprietary products, products that generate revenue
sharing, or investments that are available in a plan’s fund lineup), and other terms and conditions
of the engagement, including the potential disclosure of, and the client’s consent to, the existence
of any potential conflicts of interest in the advisor’s business model. The second component
would include the amount of compensation payable to the advisor in connection with an
investment recommendation or range of recommendations. As is common in the investment
advisor sphere today, these terms of the engagement would be established at the initiation of the
advisory relationship, and could be amended with consent of the client from time to time
throughout the relationship, including on a transaction-by-transaction basis.
The BIC Exemption hints at this solution in the “Limited Range of Investment Options”
provision in Section IV(b) of the BIC Exemption. The specific limitations contemplated by
Section IV(b) of the BIC Exemption include the ability to restrict recommendations to
proprietary products or products that generate revenue sharing. Section IV(b) also includes the
requirement that the financial institution make a written finding that these limitations will not
prevent it from acting in the best interest of the investor. However, that best interest standard
requires that the advice be rendered without regard to the financial interests of the advisor. How
can that requirement be met when the very limitation is based on the advisor’s financial
6

The preamble to the Proposed Regulation characterizes this as a clarification of existing law, but the current
regulatory definition in effect only refers to recommendations with respect to securities or other assets. It is
important that the Department correct the preamble characterization to avoid any possibility of retroactive fiduciary
or prohibited transaction exposure for activity that is non-fiduciary in nature under current law.

A-2

 interests? The only way to make sense of this provision is to assume that the structuring of the
limitation itself is not subject to the best interest standard. While Section IV(b) applies this
concept only with respect to the range of Assets that may be recommended, there is no reason
this concept should not extend to other aspects of the relationship that can give rise to potential
conflicts.
This engagement concept is also analogous to a long-standing regulation of the
Department (adopted in 1977) addressing application of the exemption under ERISA section
408(b)(2) for payment of service providers. An example from this regulation is instructive:
E, an employer whose employees are covered by plan P, is a fiduciary with respect to P.
A, who is not a party in interest with respect to P, persuades E that the plan needs the
services of a professional investment adviser and that A should be hired to provide the
investment advice. Accordingly, E causes P to hire A to provide investment advice of the
type which makes A a fiduciary under § 2510.3-21(c)(1)(ii)(B). Prior to the expiration of
A's first contract with P, A persuades E to cause P to renew A's contract with P to provide
the same services for additional fees in view of the increased costs in providing such
services. During the period of A's second contract, A provides additional investment
advice services for which no additional charge is made. Prior to the expiration of A's
second contract, A persuades E to cause P to renew his contract for additional fees in
view of the additional services A is providing. A has not engaged in an act described in
section 406(b)(1) of the Act, because A has not used any of the authority, control or
responsibility which makes A a fiduciary (the provision of investment advice) to cause
the plan to pay additional fees for A's services.7
In this example, the advisor is not just informing the plan fiduciary about these terms but
persuades the fiduciary to extend the contract at a higher fee. So clearly the advisor is selling
investment advice services at a point in time when the advisor is in fact already a fiduciary with
respect to investment recommendations. However, there is no prohibited transaction because the
advisor is not causing the plan to pay an additional fee. This can only be true if the terms of the
engagement of the advisor are outside the scope of the fiduciary relationship.
This paradigm is also consistent with the determination of “independent control” under
the Department’s regulation under ERISA section 404(c). Section 404(c) relieves a plan
fiduciary from responsibility and liability for a participant’s investment decisions so long as the
participant has sufficient information and is offered sufficient breadth of investment options to
exercise independent control over his or her investments. The regulation provides that a
participant’s exercise of control is not independent if the participant is subjected to “improper
influence” by a plan fiduciary, or if the fiduciary has concealed material non-public facts
regarding the investment or accepts instructions from the participant knowing him or her to be
legally incompetent. The preamble makes clear that disclosure of material terms, including any
material conflicts of the fiduciary, will avoid improper influence and concealment and, together

7

DOL Reg. § 2550.408b-2(f), Example 4.

A-3

 with fair and reasonable transaction terms, will result in the participant exercising independent
control.8
The concept of separating the terms of engagement from the actual investment
recommendation is entirely consistent with how many advisers, including fee-based investment
advisors, negotiate their compensation today; the terms and fees associated with the relationship,
along with any potential conflicts of interest embedded in those arrangements, are fully disclosed
at the outset of the relationship with the client. At this point, the client has the opportunity to
evaluate that fee structure and associated conflicts before deciding to enter into a fiduciary
relationship with the adviser. Indeed, the seminal case articulating the scope of an investment
adviser’s fiduciary duty, SEC v. Capital Gains Research Bureau9, makes clear that a potential
client could agree to enter into a fiduciary relationship with an adviser whose business model
included certain potential conflicts, so long as those conflicts were fairly and adequately
disclosed to the client before the client agreed to engage the adviser as a fiduciary. Once so
established, the advisor provides fiduciary advice within the agreed-upon framework.
There is no principled reason why this concept should not also apply in situations where
the advisor’s compensation varies based on the transactions and services recommended by the
advisor. Whether its compensation is transaction-based or fee-based, the advisor should be free
to determine the terms of its engagement and, accompanied by appropriate disclosure, persuade
the investor that it should enter into an advice relationship under those terms and conditions.
That activity is simply not fiduciary in nature.
Once the terms and conditions of the fiduciary relationship are established,
recommendations by the advisor must be in the investor’s best interest within the framework.
The definition of “Best Interest” could remain as proposed by the Department, including the
requirement that advice be provided “without regard to the financial or other interests of the
Adviser, Financial Institution or any Affiliate, Related Entity, or other party.” This would not
impinge on the parties’ ability to agree to the advisor’s compensation or other terms of
engagement that would affect the advisor’s compensation because establishing the framework
for engaging the advisor is not itself fiduciary conduct subject to the best interest standard. For
example, following full and fair disclosure, the advisor and investor could agree that its
investment advice will be limited to proprietary funds. As this would be a term and condition of
8

Preamble to Final Regulation Regarding Participant Directed Individual Account Plans (ERISA 404(c) plans),
footnote 25, quoting the Restatement (Second) of Trusts section 216 (1959):
“(1) Except as stated in Subsections (2) and (3), a beneficiary cannot hold the trustee liable for omission of
the trustee as a breach of trust if the beneficiary prior to or at the time of the act or omission consented to it.
(2) The consent of the beneficiary does not preclude him from holding the trustee liable for a breach of
trust, if – (a) the beneficiary was under an incapacity at the time of such consent or of such act or omission;
or (b) the beneficiary, when he gave his consent, did not know of his rights and of the material facts which
the trustee did not reasonably believe that the beneficiary knew; or (c) the consent of the beneficiary was
induced by improper conduct of the trustee.
(3) Where the trustee has an adverse interest in the transaction, the consent of the beneficiary does not
preclude him from holding the trustee liable for a breach of trust not only under the circumstances stated in
Subsection (2), but also if the transaction to which the beneficiary consented involved a bargain which was
not fair and reasonable.”
9
375 U.S. 180 (1963).

A-4

 the agreed-upon advice relationship, the advisor’s subsequent recommendation of a proprietary
fund on that basis (assuming the recommended fund is otherwise in the investor’s best interest)
would not violate the best interest requirement that the advice be “without regard to” the
advisor’s compensation or other financial interests.
At the same time, the general obligations of a fiduciary would still prevent a
recommendation by the advisor of an investment within the framework that is not appropriate for
the investor. The notion of establishing the framework for the relationship outside of the
fiduciary context is similar to the trust law notion that has historically permitted beneficiaries to
waive conflicts of interest and permit a trustee to engage in acts of self-dealing. However, it is
well-settled that “no matter how broad the provisions of a trust may be in conferring power to
engage in self-dealing or other transactions involving a conflict of fiduciary and personal
interests, a trustee violates the duty of loyalty to the beneficiaries by acting in bad faith or
unfairly.”10 Similarly, a trustee is not exonerated “for a breach of trust committed in bad faith or
with indifference to the fiduciary duties of the trustee, the terms or purposes of the trust, or the
interests of the beneficiaries.”11 The framework allows the investor to waive the inherent
conflict where the fiduciary structures the terms and conditions of its engagement without
providing the fiduciary free license to recommend products and services that are clearly
inappropriate.12
This concept of a baseline fairness test for investors runs throughout the laws otherwise
applicable to regulated financial services providers, which laws themselves form an important
additional layer of protection for investors – often in circumstances where there is no explicit
fiduciary relationship. With respect to broker-dealers, the Securities and Exchange Commission
(“SEC”) states:
Under the antifraud provisions of the federal securities laws and SRO [self-regulatory
organization] rules, including SRO rules relating to just and equitable principles of trade
and high standards of commercial honor, broker-dealers are required to deal fairly with
their customers. While broker-dealers are generally not subject to a fiduciary duty under
the federal securities laws, courts have found broker-dealers to have a fiduciary duty
under certain circumstances. Moreover, broker-dealers are subject to statutory,
Commission and SRO requirements that are designed to promote business conduct that
protects customers from abusive practices, including practices that may be unethical but
may not necessarily be fraudulent.”13
In fact, these rules go far beyond the general trust standard of bad faith or unfairness. For
example, FINRA Rule 2010 requires: “A member, in the conduct of its business, shall observe
10

Restatement (Third) of Trusts § 78 cmt. c(2) (2007).
Restatement (Third) of Trusts § 96(1)(a) (2007).
12
See Sitkoff, An Economic Theory of Fiduciary Law (2014) at 10-12 (discussing the concept of mandatory rules in
fiduciary law that cannot be overridden by agreement) (published in Gold and Miller, Philisophical Foundations of
Fiduciary Law (2014) at 197 and available at
http://www.law.harvard.edu/programs/olin_center/papers/pdf/Sitkoff_769.pdf).
13
Study on Investment Advisers and Broker-Dealers, as Required by Section 913 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, a study by the Staff of the U.S. Securities and Exchange Commission,
January 2011, at iv.
11

A-5

 high standards of commercial honor and just and equitable principles of trade.”14 Similar
principles apply under the Investment Advisers Act,15 under insurance solicitation regulations,16
and under regulatory guidance applicable to banks advising retail customers in a non-brokerdealer capacity.17 The framework we propose thus would allow the advisor and investor to
structure the terms of the advisor’s engagement but would not allow the advisor to recommend
products and services that are inappropriate for the investor.
Our proposed paradigm solves the sales dilemma because, within the terms of the
engagement, the actual investment recommendation must still be in the investor’s best interest.
However, the overall framework for the engagement, including compensation payable to the
advisor, can be freely negotiated. This approach accomplishes the objectives of the
Department’s proposal, including preserving freedom of choice.
Moreover, the fact that all advisors must disclose and obtain consent of the investor to the
terms and conditions of engagement as a condition of excluding those terms and conditions from
the scope of their fiduciary responsibility should result in much better understanding by investors
about the nature of the advice they receive. Under this new paradigm, all advisors must be clear
about their business model, compensation and potential conflicts as a condition of excluding
other products and services from the scope of their best interest obligation. Every investor will
better understand the scope and context of the advice received and an advisor may provide only
investment recommendations that are in the investor’s best interest within that framework
notwithstanding the fact that the advisor may receive variable compensation in connection with
those recommendations.
Modification to Proposed Regulation: Our new best interest paradigm would provide
that the establishment of the terms of engagement between the advisor and investor is
non-fiduciary in nature by modifying section 2510.3-21(c) of the Proposed Regulation as
follows:
(c) Scope of fiduciary duty—investment advice.
(1) A person who is a fiduciary with respect to an employee benefit plan or IRA
by reason of rendering investment advice (as defined in paragraph (a) of this section)
for a fee or other compensation, direct or indirect, with respect to any securities or
other property of such plan, or having any authority or responsibility to do so, shall not
be deemed to be a fiduciary with respect to :
(i) the terms and conditions of engagement of the person, including
the scope of the obligation to provide advice, the products or services with
14

FINRA Manual, Rule 2010. Standards of Commercial Honor and Principles of Trade.
See generally Investment Advisors Act Release No. 1406 (March 16, 1994).
16
See generally National Association of Insurance Commissions (NAIC) Annuities/Variable Contracts Suitability in
Annuity Transactions Model Regulation and NAIC Annuities/Variable Contracts Disclosure Model Regulation,
applying suitability rules to transactions involving IRAs.
17
See generally OCC Bulletin 2015-2, Revised Comptroller's Handbook Booklet and Rescissions on "Retail
Nondeposit Investment Products".
15

A-6

 respect to which advice is provided and the compensation payable to the
person, provided the plan fiduciary, participant or beneficiary, or IRA
owner has consented to the terms and conditions of the engagement after
disclosure of all material aspects of such terms and conditions, including
potential conflicts of interest; or
(ii) any assets of the plan or IRA with respect to which such person
does not have any discretionary authority, discretionary control or
discretionary responsibility, does not exercise any authority or control, does
not render investment advice (as defined in paragraph (a)(1) of this section)
for a fee or other compensation, and does not have any authority or
responsibility to render such investment advice.
(2)

Nothing in this paragraph shall be deemed to:
(i) exempt such person from the provisions of section 405(a) of the
Act concerning liability for fiduciary breaches by other fiduciaries with
respect to any assets of the plan; or
(ii) exclude such person from the definition of the term “party in
interest” (as set forth in section 3(14)(B) of the Act or “disqualified person”
as set forth in section 4975(e)(2) of the Code) with respect to a plan.

Broadening the Exemptions
To the extent that an advisor’s compensation varies with the investments it recommends
within the terms and conditions of the engagement, exemptive relief is necessary because a
potential prohibited transaction arises. The Department’s proposal includes two new exemptions
– the BIC Exemption and the Principal Transactions Exemption – and amendments to numerous
existing exemptions. The problem with this approach is that the new exemptions are laden with
complex limitations and conditions which narrow both their scope and practicality and make
them unworkable. This is contrary to the stated intent of the Department:
The Department has also sought to preserve beneficial business models for delivery of
investment advice by separately proposing new exemptions from ERISA’s prohibited
transaction rules that would broadly permit firms to continue common fee and
compensation practices, as long as they are willing to adhere to basic standards aimed at
ensuring that their advice is in the best interest of their customers. 18

18

80 FR 21929 (April 20, 2015). The Department also notes that the BIC 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” and “[r]ather 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.” 80 FR 21960 (April 20, 2015).

A-7

 Most of these problems can be solved by adhering to the Department’s stated intention to take a
broad, principles-based approach to exemptions for regulated financial institutions that act in the
investor’s best interest.
We therefore propose a single exemption containing the three key requirements:
•

a legally enforceable commitment to act in the best interest of the investor;

•

a requirement that compensation be reasonable in light of the services provided;
and

•

disclosure of material conflicts, including compensation payable to the financial
institution.

No further limitations or conditions on the exemption are needed to accomplish the Department’s
goals.
Indeed, the Department follows precisely this approach through the "Standards of
Impartial Conduct" that are proposed as amendments to several existing exemptions in other
parts of the rule proposal. For example, the Department proposed this straightforward approach
in the amendments to PTE 77-4 which allows a discretionary manager to invest in its own
proprietary mutual funds – often cited as one of the most conflicted transactions for an advisor.
If this simple approach is sufficiently protective of the interests of plans, participants and IRA
owners in the context of a discretionary investment manager, it is certainly sufficient in the
context of nondiscretionary advice.
We believe that the first requirement – a legally enforceable commitment – would be
satisfied through the unilateral best interest contract described in the main body of our letter and
in Attachment C. The remaining two requirements would be satisfied through simple, two-tiered
disclosure that would be both workable for firms and more useful for investors. The first tier
would be a “static” disclosure provided at the time recommendations are made. This disclosure
would explain the scope of the financial institution’s services, describe its potential conflicts of
interest, including that it may receive different compensation based on the investments
recommended and selected by the investor, and include a link to a website where more detailed
information about the cost and compensation associated with the products and services is
available. This website would act as the second tier of disclosure, and would enable the investor
to obtain specific information about the cost and compensation associated with all products and
services offered at the firm in a format that will allow the investor to make comparisons across
investments. The website could also allow the investor to estimate costs and compensation over
time for specific products based on assumptions input by the investor about the amount to be
invested, projected returns, etc. All of this information could also be made available in writing
upon request.19
19

The Department has repeatedly cited so-called “robo-advisers” as a means of providing advice to plan sponsors,
participants and IRA owners in a manner that meets the Department’s objectives. If a computer-based approach can
satisfy the Department’s goals with respect to an entire advice transaction, it should be reasonable and appropriate
for an advisor to disclose its potential conflicts of interest electronically.

A-8

 Modifications to the BIC Exemption: Our new best interest paradigm would simplify the
BIC Exemption to be consistent with the Standards of Impartial Conduct approach
proposed by the Department with respect to PTE 77-4 and other existing exemptions by
making the following modifications:
•
•

Section I would be modified to cover all transactions and related compensation,
including principal transactions and purchases of insurance contracts.
Section II would be modified to read as follows:
Section II—Standards of Impartial Conduct.
If the fiduciary is a fiduciary within the meaning of ERISA section 3(21)(A)(i)
or (ii), or Code section 4975(e)(3)(A), or (B), with respect to the assets of a
plan or IRA involved in the transaction, the fiduciary must comply with the
following conditions with respect to the transaction:
(a) The fiduciary is subject to a legally binding commitment to
provide advice that is in the best interest of the plan or IRA.
(b) All compensation received by the fiduciary and its Affiliates in
connection with the transaction is reasonable in relation to the total
services the fiduciary and its affiliates provide to the plan or IRA.
(c) The fiduciary's statements about recommended investments,
fees, Material Conflicts of Interest, and any other matters relevant to a
plan's or IRA owner's investment decisions, are not misleading.

•

•
•

•
•

Advisors as a practical matter would have to meet the requirements of Section
II(d) and (e) as proposed but those requirements should not be independent
conditions of the prohibited transaction exemption. Section II(f) could be
preserved as a limitation on the legally binding commitment set forth in (a) above.
Section III would be replaced with the two-tier disclosure approach described
above.
Section IV relating to the “Range of Investment Options” would be unnecessary
because every advisor would need to establish this through the terms and
conditions of its engagement in order to define the scope of its fiduciary
responsibility under the definition of advice. Alternatively, the provisions of
Article IV could be reframed as specific disclosures required to be made with
respect to the advisor’s engagement.
Sections V and IX should be omitted for the reasons set forth in Attachment C.
Section VI should be omitted as unnecessary.
A-9

 Summary
In practice, this new best interest paradigm would be workable for financial institutions
and meaningful for and protective of plans, participants and IRA owners. Before it begins
making investment recommendations, the advisor would provide the two-tiered disclosure
described above to the investor. The two-tiered disclosure would explain the scope of the
financial institution’s services, describe its conflicts of interest (including that it may receive
different compensation based on the investments recommended and selected by the investor),
and include a link to a website where more detailed information about the cost and compensation
associated with the products and services is available.
Accompanying the disclosure would be a unilateral contract pursuant to which the
advisor would agree to recommend only investments within the agreed-upon advice relationship
that are in the best interest of the investor. The unilateral contract could also incorporate the
reasonable compensation of the financial institution and other terms and conditions of the advice
relationship as disclosed through the two-tiered approach described above. The unilateral
contract would bind the advisor and provide a private right of action for the investor without the
need for a signed written contract by the parties, which would be unreasonably burdensome to
obtain.
Once the above disclosures have been made and the unilateral contract established, all
recommendations of the advisor within the agreed-upon advice relationship would be made in
the best interest of the investor. Any prohibited transaction resulting from variations in
compensation associated with the advisor’s best interest recommendations would be within the
modified BIC Exemption by reason of the foregoing disclosures and unilateral contract. If the
parties’ advice relationship evolves over time, any amendments to the terms of the engagement,
including on a transaction-by-transaction basis, would be accomplished through the same
disclosures and unilateral contracting process.

A-10

 Attachment B
Comments on Proposed Regulation

The definition of investment advice under the Proposed Regulation encompasses virtually
any communication “specifically directed to” the investor that could reasonably be viewed as a
suggestion to take (or refrain from taking) a specific course of action in making investment
decisions. It includes specific recommendations to buy, sell, hold or manage securities or other
property, recommendations relating to rollovers and distributions, and recommendations to hire
persons who will provide investment advice or management. The advice must be “in exchange
for a fee or other compensation.” However, the Department has made clear that it interprets this
requirement so broadly that it is satisfied if the advisor or any of its affiliates receives any
compensation from any source in connection with the advice transaction. The proposed definition
requires no particular level of reliance by the investor, nor any meeting of the minds betwee
n the advisor and the investor as to the fiduciary nature of the advice.
The expansive scope of activities encompassed under this definition goes beyond any
previous definition of investment advice made subject to a fiduciary standard under federal or
state law, and it will have significant negative consequences for both investors and financial
services firms unless important modifications and clarifications are made. Fidelity believes that it
acts in the best interest of its customers and is willing to be legally accountable to that standard
when it provides investment advice. However, in order for that standard to work in practice it
must be applied in a way that allows providers to offer the guidance that plan sponsors,
participants and IRA investors need to save and invest for retirement. As currently structured, the
Proposed Regulation is inappropriately expansive and, together with limitations and conditions
under the proposed exemptions on which we comment in Attachment C, will greatly inhibit the
provision of investment assistance and limit choice for retirement investors.
Accordingly, we urge the Department to adopt the new best interest paradigm described
in the main body of this letter and in Attachment A. In addition, following are the key changes
that we urge the Department to make to the Proposed Regulation many of which are inherent in
the paradigm we propose:
1. Require a Reasonable Level of Reliance by the Investor.
The Proposed Regulation would subject investment assistance to a fiduciary standard
even where there is no expectation of reliance on the advice or advisor by the investor and no
understanding or expectation on the part of the investor that such assistance is unbiased and is in
his or her best interest. Rather, there need only be an understanding that the advice “is
specifically directed to the advice recipient for consideration in making investment or
management decisions….” Nor does the Proposed Regulation provide any way for an advisor
and an individual to avoid a fiduciary relationship, even if the parties were to enter into an
express agreement to the contrary. For example, the Proposed Regulation would subject an
explicit sales pitch by a broker-dealer to an IRA owner to fiduciary status, even if both the
advisor and the IRA owner agreed that such communication was not intended to be unbiased
advice in the IRA owner’s best interest.
B-1

 Such an all-encompassing definition goes beyond traditional and well-established
principles of fiduciary law. Under common law, a fiduciary duty may arise when “either one of
the parties, in entering [a] transaction, expressly reposes a trust and confidence in the other or
because of the circumstances of the case, the nature of their dealings, or their position towards
each other, such a trust and confidence is necessarily implied.” 20 The Proposed Regulation
would impose a fiduciary duty even where the investor does not expressly or impliedly place
trust and confidence in the advisor by relying on the advice as being unbiased and in the
investor’s best interest.
The Department should align the Proposed Regulation with long-standing principles of
fiduciary law by requiring a reasonable expectation of reliance by the advice recipient. The
Department could accomplish this, for example, by modifying the definition of investment
advice to require that, based on the content, context and presentation of such advice, it is
reasonable for the advice recipient to rely on such advice as being unbiased and in the recipient’s
best interest with respect to such recipient’s investment or management decisions. This
requirement is already effectively included in the definition to the extent that the definition treats
all investment advice as fiduciary in nature where the investment advice provider states that it is
acting as a fiduciary within the meaning of ERISA. Such a statement would render it reasonable
for an advice recipient to rely on the advice as being unbiased and in the recipient’s best interest.
But, as currently proposed, there is no corollary to this rule that would treat conduct as nonfiduciary in nature even where there is an express understanding that a fiduciary relationship is
not intended.
2. Expand the Seller’s Carve-Out.
If reliance is made a component of the definition of investment advice as described
above, there is no need for a seller's carve-out because it would be clear from the context that
there is no expectation that the seller is providing unbiased advice. However, if the Department
does not introduce the component of reliance, it needs to rethink the approach taken to address
the problem the Proposed Regulation creates for any advisor selling investment products or
services. The problem is that statements made in the sales context will almost always constitute
investment advice under the proposal’s current formulation because they are directed to a person
and intended to encourage the purchase of a particular product or service.
The Department recognizes this problem and creates a seller’s carve-out so that the rule
“appropriately distinguishes incidental advice as part of an arm’s length transaction with no
expectation of trust or acting in the customer’s best interest, from those instances of advice
where investors may be expecting unbiased investment advice that is in their best interest.”
However, the seller’s carve-out does not apply to either small plans or individuals. Other aspects
of the proposal attempt to address the seller’s problem inherent in other contexts, including the
carve-out for platform providers and the BIC Exemption provision that allows investment advice
to be provided for a limited range of investment options such as proprietary-only products.
20

See United Jersey Bank v. Kensey, 306 N.J.Super. 540, 551, 704 A.2d 38 (App.Div.1997), citing Berman v.
Gurwicz, 189 N.J.Super. 89, 93, 458 A.2d 1311 (Ch.Div.1981)(internal ellipses omitted).

B-2

 As an initial matter, we note there is ambiguity as to whether the proposed seller's carveout covers certain services such as fee-based advisory and managed account services when sold
to plan sponsors. The Department should clarify that the seller's carve-out is available for all
investment products and services where a recommendation with respect to that product or service
would otherwise constitute investment advice.
As proposed, the seller’s carve-out only applies to certain arm’s length transactions with
an “expert plan investor.” The Department has proposed to use the plan’s size, either in terms of
participants or assets, as a proxy for expert plan investor status. As a result, the proposed seller’s
carve-out is effectively available only with respect to transactions involving large plan sponsors.
As the basis for this narrow approach, the Department states that “[r]esearch has shown that
disclaimers are ineffective in alerting retail investors to the potential costs imposed by conflicts
of interest, of the fact that advice is not necessarily in their best interest, and may even
exacerbate these costs.”
We disagree that the disclosures proposed by the Department – i.e., fairly informing the
counterparty of either the existence and nature of the seller’s financial interests in the transaction
or that the seller is not undertaking to provide impartial investment advice or act as a fiduciary –
would not be effective with respect to investors other than large plan sponsors. The conclusion
that retail investors are incapable of understanding this disclosure is contradicted by the
prominent role that disclosures play under the BIC Exemption which is largely intended for use
in connection with transactions involving individuals. Nor are long-standing, well-settled
principles of fiduciary law consistent with such an assumption, as they do not impose fiduciary
status on a person unless there is express or implied trust and reliance on the person by the
investor and they clearly recognize and permit the need for beneficiaries to waive fully and fairly
disclosed self-dealing conflicts.21 While financial products and services may be complex,
understanding the dynamics of a sales transaction is fundamental to the commercial activity that
is part of everyone's daily life and the ability to waive fully and fairly disclosed conflicts is
essential to the establishment and proper functioning of fiduciary relationships.
In addition, the assumption that individuals cannot understand the difference between
impartial advice and statements made in connection with sales is inconsistent with Congress’
own determination on that issue in enacting ERISA section 404(c). Section 404(c) relieves a
plan fiduciary from responsibility and liability for a participant’s investment decisions so long as
the participant has sufficient information and breadth of investment options to exercise control
over his or her investments. Where a participant has maximum investment choice and the
opportunity to obtain investment information from any source, such as in a brokerage window,
the participant necessarily must make decisions about whether the investment information on
which he or she bases investment decisions is educational, part of a sales communication, or
provided as fiduciary advice. Congress must have contemplated in enacting section 404(c) that
participants were capable of assessing those decisions or it would not have relieved the plan’s
fiduciary from liability when those decisions were being made by the participant. The
Department, however, has essentially structured the Proposed Regulation to impose on the
21

See discussion at FN 10-12 supra.

B-3

 investment advisor the same fiduciary responsibility for these assessments that Congress
determined not to impose on the plan fiduciary itself. Fixing the seller’s carve-out or imposing a
reliance requirement under the fiduciary definition would eliminate this inconsistency and align
the rule with the judgment Congress made in enacting section 404(c). However, we believe the
new best interest paradigm outlined in the main body of this letter and in Attachment A is the
best manner in which to accomplish this alignment.
3. Preserve the Ability to Identify Investment Funds as Education.
The carve-out for investment education under the Proposed Regulation would be a
significant step back from current law under Interpretive Bulletin 96-122 ("Bulletin") because it
makes the identification of specific investment funds in connection with a model asset allocation
fiduciary-level investment advice. We believe that without identifying investment funds, the
asset allocation discussion permitted under the education carve-out is largely an exercise in
investment theory and it is not concrete enough to be useful for most individuals. Further, in the
plan context, participants and beneficiaries have received communications that describe the asset
class of each investment option. For example, the comparative chart required under the
participant disclosure regulations under ERISA section 404(a) must include the type or category
of each investment option listed.23 Requiring the participant to refer to these other
communications to connect the dots is simply counterproductive.
In proposing this change, the Department appears to rely on “those commenters to the
2010 Proposed Regulation who argued that cautionary disclosures to participants, beneficiaries
and IRA owners may have limited effectiveness in alerting them to the merit and wisdom of
evaluating investment alternatives not used in the model.” The Department also states in
conclusory fashion that “[i]n practice, asset allocation models concerning hypothetical
individuals, and interactive materials which arrive at specific investment products and plan
alternatives, can be indistinguishable to the average retirement investor from individualized
recommendations, regardless of caveats.” Accordingly, this dramatic curtailment of the Bulletin
appears to be based solely on the opinions of certain prior commenters and the Department. It
does not appear to be based on empirical evidence or any record of abuse by retirement
educators.
When the Bulletin was adopted, the Department understood the potential conflict of
interest that could arise in identifying investment funds but felt that participants’ need for this
information (with certain disclosures) outweighed the potential conflict. We do not believe that
almost twenty years of experience under the Bulletin suggests any reason to change the balance
struck between protecting against conflicts and meeting participants’ needs for more specific
information. Therefore, we recommend preserving the ability to identify specific investment
funds within the education carve-out. To the extent the Department has identified abuses under
the Bulletin, those could perhaps be addressed by requiring identification of several funds within
the asset allocation category, if available, rather than just a single fund.

22
23

DOL reg. § 2509.96-1.
DOL reg. § 2550.404a-5(d)(1)(i)(B).

B-4

 We also request clarification of the application of the Proposed Regulation’s revised
education carve-out to any discussion about the suitability of an investment option for a specific
purpose. Under the Proposed Regulation, informing eligible employees or participants of the
benefit of a plan’s qualified default investment alternative or other default could be viewed as a
recommendation. To the extent that such investments have been selected by the plan’s fiduciary
as the investment alternative that will apply absent other participant direction, however, it does
not seem appropriate that such information be treated as a recommendation by an advisor other
than the plan’s fiduciary. For this reason, the Proposed Regulation should be clarified to provide
that reference to specific investment alternatives under these circumstances constitutes education
and not fiduciary advice.
Finally, we note that the preamble to the Proposed Regulation states that its education
carve-out “incorporates much of [the Bulletin’s] operative text, but with … important [identified]
exceptions”. The Proposed Regulation appears to condition applicability of the education
carve-out to plan information materials and communications on there being no “reference to … a
particular participant or beneficiary or IRA owner…". However, the Bulletin itself does not
contain this condition and it is not called out in the preamble as an important exception.
Therefore, it is unclear whether this language is intended to impose a new requirement that
advisors must meet in order for their plan information related communications to be treated as
non-fiduciary education.
For example, one possible interpretation of this new condition could be as follows. A
statement by an advisor to an employee eligible to participate in a 401(k) plan that “the plan
allows for deferral of income and provides for a 6% employer matching contribution and all
employees should contribute at least enough to receive the full match” is education. A statement
by the advisor to the employee that “you [i.e., the employee] should enroll in the plan and
contribute enough to receive the maximum matching contribution of 6%” is not education
because it refers to a particular participant (i.e., the employee to whom the advisor is speaking).
Interpreting the Proposed Regulation in this manner would represent a significant change
between the Proposed Regulation and the Bulletin. It would also obviously render educational
communications about plan information much more generic and abstract and therefore less
useful to an individual. The Department should therefore modify and/or clarify that the
Proposed Regulation is not to be interpreted as suggested above but is to be applied consistent
with the Bulletin to plan information communications and materials, regardless of whether such
communications or materials refer to the particular person or persons to whom the
communications or materials are being directed.
4. Clarify the Rule’s Application to Rollovers.
The Proposed Regulation provides that a person renders investment advice if the person
provides in exchange for a fee or other compensation “[a] recommendation as to the advisability
of acquiring, holding, disposing or exchanging securities or other property, including … a
recommendation as to the investment of securities or other property to be rolled over … from the
plan or IRA” and “a recommendation as to the management of securities or other property,
B-5

 including recommendations as to the management of securities or other property to be rolled
over … from the plan or IRA”. In many cases, however, an advisor might discuss a rollover
with a participant or IRA owner without recommending or even mentioning how amounts that
are rolled over should be invested or managed. For example, the advisor may simply state to a
plan participant that the participant should rollover his or her plan distribution to an IRA
generically or to an IRA offered by the advisor or another specific IRA provider.
It is not clear whether the Proposed Regulation includes within the definition of fiduciary
advice conversations that do not include any reference as to how rolled over securities or other
property should be invested or managed. Clarity on this point is important in part because, if
such a rollover communication were treated as fiduciary investment advice and it was not
covered by the BIC Exemption, it would effectively be prohibited by the proposal. The most
appropriate way to avoid this result is to clarify that rollover communications that do not refer to
investments in specific securities or other property are not fiduciary investment advice. Such
clarification would be consistent with the Proposed Regulation’s general focus on
recommendations with respect to investing in or managing “securities or other property.”
Likewise, the Proposed Regulation appears to acknowledge that recommendations regarding the
factors to be considered in deciding whether to rollover a plan account balance do not constitute
investment advice.24
Moreover, if the Department were to treat such communications as investment advice but
then attempt to expand the scope of the BIC Exemption to cover such advice, it would lead to
confusion and nonsensical results. The BIC Exemption is largely conditioned on an extensive
array of disclosures. All of the disclosures, however, are centered on specific recommended
investments, investments bought, sold or held by the investor, or specific investments offered by
the advisor. None of these disclosures as proposed would have any applicability to a
recommendation that by definition does not refer to any specific investment. Thus, the BIC
Exemption is simply not an appropriate means to permit non-investment specific rollover
communications.
Clarification is also needed on the Proposed Regulation’s application to two other
important transactions. First, the Proposed Regulation’s applicability to conversions from a
traditional IRA or plan to a Roth IRA and on Roth in-plan conversions is unclear. It appears that
conversions from a traditional IRA or plan to a Roth IRA should be treated the same as a rollover
from one IRA to another IRA or rollovers between a plan and traditional IRA. In-plan Roth
conversions, on the other hand, while treated as a distribution and conversion for tax purposes,
typically do not involve any change in the investments in which the participant is invested.
Rather, an in-plan Roth conversion often merely changes the tax treatment of amounts held
within the plan. Accordingly, conversations about in-plan Roth conversions and Roth
24

On the other hand, the Proposed Regulation’s education carve-out provides that information and materials that
describe varying forms of distribution, including rollovers, do not constitute fiduciary investment advice only so
long as such information and materials make no “reference to the appropriateness of … any individual benefit
distribution option for the plan or IRA, or a particular participant or beneficiary or IRA owner.” Thus, to the extent a
conversation referenced a particular IRA or suggested that a rollover to a specific or generic IRA was appropriate
for the advice recipient, the education carve-out would arguably be inapplicable.

B-6

 conversions in the IRA context which do not refer to specific investments should not constitute
fiduciary investment advice.
Second, the Proposed Regulation’s applicability to non-reportable transfers from one IRA
to another IRA, a so-called Transfer of Assets (“TOA”), should be clarified. Rollovers and
TOAs are treated differently by the IRS in certain important respects. For example, a rollover
must be reported on Form 1099-R, while a TOA is non-reportable. The IRS also recently issued
guidance announcing that, beginning in 2015, an IRA owner can make only one rollover from an
IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs
owned by the IRA owner.25 The guidance makes clear that this limitation does not apply to
TOAs.
TOAs also differ from rollovers insofar as the IRA owner never takes receipt of the IRA
assets in connection with the TOA. Rather, assets are transferred directly from one IRA trustee
or custodian to another IRA trustee or custodian. In that respect, TOAs differ from distributions
as well as rollovers, both of which can involve the IRA owner taking ownership of the assets
outside of the IRA or any other tax-deferred vehicle.
It is unclear whether the Proposed Regulation is intended to include recommendations
about TOAs within the definition of fiduciary investment advice. We recommend that the
Department clarify the Proposed Regulation such that recommendations about TOAs are treated
similarly to our proposed treatment of rollovers. That is, the Proposed Regulation should be
clarified to provide that fiduciary investment advice does not include recommendations about
TOAs if they do not include any reference to how transferred securities or other property should
be invested or managed. However, recommendations about how to invest assets once they have
been transferred through a TOA to another IRA would be fiduciary investment advice, so long as
such recommendations met the other requirements of the fiduciary definition.
5. Clarify the Rule’s Application to Distributions and Loans.
The Proposed Regulation states that a recommendation to take a distribution from a plan
or IRA is fiduciary investment advice but it is not clear whether that is the case if the
recommendation does not refer to the sale or investment of any specific security or other
property. For example, a recommendation to take (or not take) a distribution from a defined
benefit plan is not an investment transaction from the participant’s perspective. Another
example of a transaction that does not have investment implications is a discussion about the
relative merits of a participant loan over a hardship withdrawal.
The Bulletin provides that information and materials that inform a participant or
beneficiary about the benefits of plan participation do not constitute the rendering of investment
advice under ERISA. The rationale is that such information and materials “relate to the plan and
plan participation, without reference to the appropriateness of any individual investment option
for a particular participant or beneficiary under the plan.” The same rationale applies with equal
force as a participant or beneficiary considers whether to leave the plan (take a distribution). Just
25

See Announcement 2014-15 and Announcement 2014-32.

B-7

 as a decision to enroll in a plan does not dictate how to invest the resulting contributions, a
decision to leave the plan does not by itself necessarily dictate any change in investments and
thus should not be considered fiduciary investment advice. Accordingly, treating
communications that make specific reference to a plan participant, beneficiary or IRA owner in
connection with distribution discussions as investment advice would not be consistent with the
scope and application of the current Bulletin. Thus, it is necessary to clarify the Proposed
Regulation to provide that both (a) discussions about distributions, rollovers and loans that do
not make reference to any specific investments are not investment advice, and (b) that
communications do not fail to constitute education merely because they refer to a particular plan
participant, beneficiary or IRA owner.
It is also not clear whether the Proposed Regulation is intended to treat participant loans
as distributions. While participant loans are distinct from distributions, they are functionally
similar insofar as they involve the transfer of amounts from the plan. Also, loan discussions, like
distribution discussions, typically do not involve any reference to specific investments and
typically the liquidation of investment options since that is usually dictated by plan rules. So, for
the same reasons that distribution discussions without reference to investments should not be
treated as fiduciary investment advice, the Proposed Regulation should be clarified to provide
that participant loan discussions without reference to investments are not treated as fiduciary
investment advice.
This clarification is essential to prevent significant disruption in the normal
administration of many plans. It is not uncommon for participant loans to be subject to a loan
fee payable to the recordkeeper. Recordkeepers also charge distribution fees in certain
circumstances. Neither transaction appears to be covered by the BIC Exemption. Thus, if either
a loan discussion or a distribution discussion on its own (i.e., without reference to investments)
were considered to be fiduciary investment advice, recordkeepers would effectively be precluded
from discussing loans or distributions with participants, except perhaps in the most generic and
abstract way as would be permitted by the education carve-out as proposed.
6. Expand the Platform Provider Carve-Out.
The Proposed Regulation provides a carve-out for certain persons who merely market or
make available platforms of investments from which plan fiduciaries may select or monitor
investment alternatives for their plans, provided certain disclosure requirements are met. A
similar carve-out is provided that would allow such persons to identify investment alternatives
available through the platform that meet objective criteria specified by the plan fiduciary, or to
provide objective financial data and comparisons with independent benchmarks to the plan
fiduciary. These carve-outs are helpful, but as proposed they only apply with respect to
communications to plan fiduciaries. They do not apply to communications to IRA owners or
plan participants. The rule should extend these carve-outs to both IRA owners and plan
participants.
Both IRA owners and plan participants also have in interest in knowing what investment
alternatives may be available on a provider’s platform, in identifying available investment
alternatives that meet certain objective criteria, and in obtaining objective financial data and
B-8

 comparisons with independent benchmarks. IRA owners essentially stand in the same shoes as
the plan fiduciary in this regard, and plan participants should be able to obtain such information
with respect to the investments available in their plan as well as other available investment
alternatives so that they might be able to request that they be added to their plan’s investment
lineup. To the extent the carve-out provides protective disclosures that safeguard a plan
fiduciary, such disclosures should also be sufficient to safeguard an IRA owner or plan
participant.
In addition, insofar as the platform provider carve-out permits the identification of funds
meeting objective criteria or the provision of objective financial data and benchmark
comparisons, it is not clear whether the carve-out is intended to permit purely reactive
communications by platform providers or whether a platform provider may proactively
communicate such information. Requiring that platform providers only communicate this
information in response to questions by plan sponsors would be extremely limiting in practice
and would greatly reduce the efficacy of the proposed carve-out. The Department should
therefore clarify the Proposed Regulation to provide that platform providers may make these
communications either proactively or reactively. At a minimum, the Department should clarify
that the platform provider carve-out permits the offering of an investment screening tool,
including a computerized tool, which enables the user to develop lists of specific investments
available through a provider that meet certain criteria that may be identified through the tool.
Finally, it is unclear what is intended to constitute “objective financial data and
comparisons with independent benchmarks.” For example, is objective financial data different
than the “general financial information” that may be provided under the education carve-out and,
if so, how? Similarly, what comparisons may be made to independent benchmarks? For
example, it is common to select investment alternatives based on criteria such as the tenure of the
fund manager. Would such a selection criteria constitute objective financial data or may it be
compared to the tenure of other fund managers in the absence of an independent benchmark?
Clarity on these terms would be important to enable this carve-out to be used effectively.
7. Clarify the Rule’s Application to Self-Identified Fiduciaries.
The Proposed Regulation provides that a person is a fiduciary if such person “directly or
indirectly (e.g., through or together with any affiliate) … represents or acknowledges that it is
acting as a fiduciary within the meaning of the Act.” According to the preamble, “advisers who
claim fiduciary status under ERISA or the Code in providing advice would be taken at their
word”. This is a sensible and fair condition. However, it is not clear how literally the
Department intends to apply this component of the rule. It would be helpful for the Department
to clarify whether this condition requires the person to use the word “fiduciary” or to refer to
ERISA or the Code in describing his or her status, or whether it would apply to other
characterizations which may imply fiduciary status, such as “trusted advisor”. If the latter
interpretation is intended, the Department should clarify what terms other than “fiduciary” would
trigger application of this component. The purpose of such clarification is to enable advisors that
wish to avoid fiduciary status (and to not mislead their clients into believing the advisor is acting
as a fiduciary) to confidently describe their status and services without inadvertently becoming a
fiduciary by using the wrong words.
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 Note that this provision of the Proposed Regulation is unnecessary if the Department
accepts our recommendation to modify the definition of investment advice to require that, based
on the content, context and presentation of advice, it should be reasonable for the advice
recipient to rely on such advice as being unbiased and in the recipient’s best interest with respect
to such recipient’s investment or management decisions. In that case, a representation of
fiduciary status by an advice provider would create reasonable reliance on the part of the advice
recipient that the advice would be unbiased and in the recipient’s best interest and there would be
no need to separately and additionally provide that such a representation automatically gives rise
to fiduciary status.
8. Address Valuation Issues in a Separate Initiative.
The Proposed Regulation retains a portion of the 2010 Proposed Regulation regarding the
valuation of securities or other property, but only valuations performed in connection with an
investment transaction. However, the Proposed Regulation excludes appraisals regarding
employer securities purchased by an employee stock ownership plan (ESOP). The preamble to
the Proposed Regulation states that “the Department has concluded that its concerns with regard
to ESOP valuations raise unique issues that are more appropriately addressed in a separate
regulatory initiative.” We strongly urge that all valuation issues be considered in the separate
initiative, rather than deferring action only on the situation that may have the greatest impact on
plan participants.
At a minimum, however, the Proposed Regulation should be clarified to provide that the
calculation of the net asset value of a separately managed account or a collective investment trust
or similar “pooled” investment in which only one plan invests (e.g. unitized company stock fund)
does not constitute an appraisal or other valuation. Such calculations are ministerial in nature
and do not involve making the judgments or other determinations typically required for an
appraisal or valuation of property. Moreover, to transform such ministerial calculations into
fiduciary investment advice would cause significant disruption to normal and widespread
recordkeeping practices and create a significant disincentive for plans to hold such investments
or for recordkeepers to support them. As such investments are often, among other things, less
costly to investors than other investments, such disincentives would ultimately be detrimental to
retirement savers.

B-10

 Attachment C
Comments on Proposed Exemptions
Many of the problems with the proposal can be solved through a simplified approach to
the prohibited transaction exemption that is consistent with the Department's stated intent of
broad, principles-based relief for regulated financial institutions. We urge the Department to
adopt the new best interest paradigm described in the main body of this letter and in Attachment
A.
In addition, following are the key changes that we urge the Department to make to the
exemptions, many of which are inherent in the paradigm we propose:
The BIC Exemption
1. Expand the Exemption to Cover All Plans.
The BIC Exemption only applies to investment advice provided to plan participants and
beneficiaries, IRA owners, and sponsors of small plans (less than 100 participants) that are not
participant-directed. As a result, the exemption would not be available for investment advice
provided to sponsors of large plans of any type or to small participant-directed plans, which
represent the great majority of small 401(k) and other individual account plans. This is
particularly problematic for small plans because they are also not eligible for the seller's carveout in the Proposed Regulation.
This limitation on the application of the exemption would prevent small plan sponsors
from using consultants, advisors or recordkeepers for assistance in structuring fund line-ups
where the service provider receives any compensation based on the investment funds selected. It
also creates the odd dynamic in which the exemption may be used in cases where the small plan
sponsor has complete investment authority over participant accounts but not where the plan
sponsor has the more limited responsibility to construct the investment menu to be offered to
participants.
We believe this will discourage small plan formation and may result in some sponsors
terminating their plans. The BIC Exemption preamble solicited comments on this aspect of the
proposal, and we strongly recommend that the BIC Exemption be extended to cover investment
advice to small plan sponsors of participant-directed plans. In addition, while the seller's carveout is available to permit discussions with large plan sponsors, we see no reason why the BIC
Exemption should not be available in situations where the plan and the advisor want to engage in
a fiduciary-level relationship.
The preamble commented that the fund lineup could be structured under the carve-out for
platform providers. However, Fidelity offers thousands of funds on its recordkeeping platforms.
Without the ability to provide assistance in selecting funds based on something more than simple
objective criteria, we do not view the platform provider carve-out as a workable alternative.

C-1

 2. Expand the Exemption to Cover Online Only Computer Model Advice.
The BIC Exemption would exclude online-only computer model interactions (designated
in the preamble as “robo-advice”) unless an individual advisor is involved in providing the
information generated by the model to the investor. That is, online advice is covered so long as a
human advisor reads the online results to the investor rather than the investor reading the online
results himself or herself. There is no justification for excluding advice in an online format
solely because a human being has not read it out to the investor. On that basis alone, the
Department should simply expand the BIC Exemption to cover online advice outright.
Notwithstanding the foregoing, the BIC Exemption preamble purports to justify the
exclusion of online advice provided directly to an investor by stating that the advisor may rely on
the ERISA section 408(g) statutory exemption added by the Pension Protection Act of 2006
(“PPA”) (or some other approach such as that described in the Sun America advisory opinion) in
order to provide online advice as construed under the new definition. The Proposed Regulation
preamble provides the following insight:
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 the inclusion of such advice in this exemption
would adversely modify the incentives currently shaping the market for robo-advice.
The exclusion of online-only advice is designed to favor one business model over another. This
is contrary to the position expressed by Department officials in various public statements and in
the Proposed Regulation and BIC Exemption preambles. Respectfully, we also believe it is
outside the Department’s authority to favor particular business models in this manner, and that
doing so will stifle competition and inhibit innovation. There is no sound reason to deny use of
the BIC Exemption to online-only advice which is by design consistent and easy to monitor for
compliance with the exemption.
Using the PPA computer model rule is not an appropriate solution. Among other issues,
this would force reliance on two separate exemptions in the extremely common situation where
the advice recipient begins the interaction online but then calls to ask for personal assistance
from a phone representative. The legislative history of ERISA section 408(g) evidenced the
intent of Congress not to override regulatory guidance regarding alternative ways of structuring
certain permissible advice arrangements. The exclusion of online-only advice from the BIC
Exemption contradicts that approach.
3. Expand the BIC Exemption to Cover All Investment Products and Services.
The BIC Exemption applies only to “compensation for services provided in connection
with the purchase, sale or holding of an Asset”. The definition of an “Asset” only includes
specific categories of investment products and not services. As a result, it would not cover
C-2

 recommendations or suggestions regarding investment services provided to the plan or IRA
owner, including managed account and other discretionary investment management services.
The exemption needs to cover these types of services in order to provide the broad relief needed
for investment services providers. The exemption also needs to cover account fees and other
compensation payable to the financial services firm that may not be directly connected with the
purchase of an Asset.
The proposed definition of an “Asset” also omits plan separate accounts or plan-specific
custom funds from the definition even though these investment options are relatively common in
the large plan market and would warrant consideration by plan participants as an investment for
their plan account. Although these investment options may be limited to a single plan or the
master trust of two or more related plans, they are essentially equivalent to a pooled investment
vehicle from the participant’s perspective so should be within the scope of permitted
investments. In addition, the proposal as written would treat interests in plan-specific insurer
separate accounts as eligible Assets, and treating them differently compared with separate
accounts isn’t warranted.
All of these concerns could readily be addressed by a broad-based exemption as would be
the case with our new best interest paradigm described in the main body of this letter and
Attachment A.
4. Clarify the Exemption’s Application to Distributions and Rollovers.
As discussed in Attachment B, there is considerable uncertainty regarding the inclusion
of interactions regarding distributions and rollovers in the proposed definition of “investment
advice”. For example, if a suggestion regarding the benefits of rolling a plan distribution to an
IRA maintained by an affiliate of the advisor, without any mention of a specific investment, is
included in the definition, the BIC Exemption would not appear to apply to that situation.
Similarly, a suggestion whether to take a distribution may also be included in the proposed
definition, but it does not appear to be covered by the BIC Exemption.
Fidelity representatives provide assistance to many plan participants and IRA owners
regarding a possible plan or IRA distribution, including the tax and financial considerations, and
try to help the participant, beneficiary or IRA owner in his or her personal decision-making. The
breadth of the Proposed Regulation would deem some of these interactions to constitute
investment advice under ERISA and the Code. For the reasons explained in Attachment B, the
Proposed Regulation should not include such non-investment specific interactions within the
definition of fiduciary investment advice. If the Department nevertheless determines that such
interactions are covered, then the Department must include such interactions within the scope of
the BIC Exemption.
This will presumably require considerable modification of the BIC Exemption. The BIC
Exemption is largely conditioned on an extensive array of disclosures. All of the disclosures,
however, are centered on specific recommended investments, investments bought, sold or held
by the investor, or specific investments offered by the advisor. None of these disclosures would
C-3

 have any applicability as proposed to a recommendation that by definition does not refer to any
specific investment and would require special modifications with respect to non-investmentspecific related recommendations.
5. Expand Exemption to Cover Participants Employed by Financial Institutions.
The BIC Exemption would not allow a financial institution to rely on the exemption to
provide investment advice to participants in the plans that it maintains for its own employees.
The proposal preamble opines that due to the “special nature” of the employment relationship,
the financial institution should not be permitted to profit from the investments of employees
because that would not be in the best interests of the plan participants.
This approach is inconsistent with the Department's historical treatment of financial
institutions as plan sponsor. For example, the Department stated in the preamble to the ERISA
section 404(c) regulation proposed in 1991:
The Department is persuaded, however, that in the case of plans sponsored by certain
financial institutions which have appropriate professional expertise in investment
management, the designating fiduciary need not be independent. In enacting ERISA,
Congress recognized the need to accommodate such plans by fashioning special rules.
For example, section 408(b)(4) of ERISA permits a bank to invest the assets of an inhouse plan in deposits of that bank and section 408(b)(5) permits an insurance company
to issue contracts to a plan covering its own employees. The stated Congressional policy
underlying these exemptions is that it would be “contrary to normal business practice” for
a bank or insurer to purchase the products of another company of its own in-house plans.
Moreover, the Department has recognized in certain administrative exemptions that it
would be contrary to normal business practice for a company whose business is financial
management to seek financial management services from a competitor, e.g., Prohibited
Transaction Exemptions 77-3 and 82-63.26
There is no reason why these same considerations should not be reflected in the BIC
Exemption to cover investment advice provided to employees of financial institutions. In many
cases, for compliance reasons, those employees are required to maintain their financial assets
with the firm itself. Denying those firms the ability to provide employees investment advice
means they would have no access to advice whatsoever, unless a third party advice provider is
hired at additional expense.
6. Replace the Written Contract Requirement with a Unilateral Contract Requirement.
The BIC Exemption would require the individual advisor and financial institution to enter
into a signed written contract with every potential recipient of investment advice in advance of
any investment recommendation subject to the new definition. The BIC Exemption preamble
describes the contract requirement as the “cornerstone” of the proposed exemption, in part
26

56 FR 10724 (March 13, 1991).

C-4

 because it creates a mechanism for alerting the investor to the advisor’s obligations and
providing the basis upon which the investor’s rights can be enforced.
The contract as proposed must include a lengthy list of provisions:
•
•
•
•
•
•

•

•
•
•

affirmation of the advisor’s fiduciary status;
a statement that any investment advice will be in the best interest of the investor;
a statement that only reasonable compensation would be received by the advisor and
affiliates;
a commitment that there would be no misleading statements relevant to the investment
matters covered by the exemption;
a warranty that the advisor will comply with applicable laws;
a warranty that the financial institution has adopted written policies and procedures
reasonably designed to mitigate conflicts of interest, including the identification of
material conflicts of interest and measures adopted to prevent violation of the impartial
conduct standards;
a warranty that the financial institution does not use quotas, appraisals, performance or
personnel actions, bonuses, contests, special awards, differential compensation, or other
actions or incentives which would tend to encourage individual advisors to make
recommendations that are not in the investor’s best interest;
disclosure of any material conflicts of interest;
notice to the investor that he or she has the right to complete information about fees,
including direct and indirect fees payable to the advisor or financial institution; and
disclosure as to whether the advisor offers proprietary products or receives payments
from third parties and the address of a public website that discloses all the compensation
arrangements entered into by the advisor or financial institution.

It would be extremely burdensome to re-contract with millions of existing IRA owners,
many of whom would undoubtedly question why they have to enter into a contract with an
individual or institution with whom they already have an existing relationship. Our experience is
that most individuals will not sign and return documentation until such time as they want or need
services. Under a rule requiring a signed written contract, this would mean that the financial
institution would have to create a costly new tracking system (as well as training on it) so that the
firm could implement the contract when a customer first calls and asks for investment assistance.
In addition, the financial institution would need to create a firm-wide data system to ensure that
representatives know whether they can talk to a person who has called with an investment or
distribution question.
Finally, the BIC Exemption seems to assume that an investor will always deal with the
same individual advisor, but that is not the true in most of our service roles. Since Fidelity has
thousands of phone representatives, a plan participant contacting us by phone will generally get a
different representative each time that he or she calls to ask a question about his or her account or
a new product or service recently added to the plan. Even at the financial institution level,
different legal entities may be engaged in providing investment advice depending on the product
C-5

 or service involved. This dynamic would simply multiply the adverse impact of the proposed
written contract requirement.
On the plan side, recordkeepers do not have contracts with participants so introducing a
new “best interest contract” into the relationship will undoubtedly be confusing to plan sponsors
and participants alike. In addition, it seems totally unnecessary for plans subject to ERISA
because the fiduciary duty standard already applies as a matter of law. Otherwise it would be
necessary to create a database and “gate” protocol so that phone representatives could check the
system each time a participant calls with a question. Participants would generally talk to a
different representative each time they call, so that each call would be subject to a checking
process. Alternate payees and beneficiaries of deceased participants would have to go through
the same protocol.
We believe that an enforceable best interest standard can be established by much less
onerous means – a unilateral contract offer by the financial institution which would be
enforceable as a contract as well as through the doctrine of promissory estoppel. There is no
need to require a signed, written document nor must the individual Advisers be involved.
In a unilateral contract, only one of the contracting parties makes a promise; the other
party manifests assent by performance.27 Accordingly, “[t]he legal result is that the promisor is
the only party who is under an enforceable legal duty. The other party to this contract is the one
to whom the promise is made, and this promisee is the only one in whom the contract creates an
enforceable legal right.”28 Moreover, no signature is required for a unilateral contract to be
enforceable. Rather, parties may become contractually bound by indicating their assent through
a variety of other means, such as by accepting and acting upon the contract, ratifying the
contract, or accepting the performance by the other.29
The unilateral contract is supported by the same consideration that would support a
signed bilateral contract such as the best interest contract. That is, engagement of the financial
services firm by the investor constitutes sufficient consideration to create a legally binding
relationship.
The principles of the unilateral contract are perfectly-suited to the BIC Exemption, where
the goal should be to hold a single party – the financial services firm – to an enforceable legal
duty. This can be achieved by requiring firms wishing to use the exemption to post a statement
on their website (or other accessible venue) that sets forth the best interest contract standards and
27

Corbin on Contracts § 1.23 (3d ed. 2004); see also United States ex rel. Modern Elec., Inc. v. Ideal Elec. Security
Co., 81 F.3d 240, 241 (D.C. Cir. 1996) (citing the “well-recognized” principle that “in a unilateral contract,
performance constitutes acceptance of an offer”).
28
Corbin on Contracts § 1.23.
29
17A Am. Jur. Contracts § 173; see also Words, Inc. v. Xerox Corp., 205 F.3d 1336, at *1 (4th Cir. 2000) (per
curiam) (“If the party against whom the contract is being enforced has indicated through some unequivocal act or
through performance that it intends to adopt the contract, then a signature by that party is not required for the
contract to be binding.”); In re JetBlue Airways Corp. Privacy Litig., 379 F. Supp. 2d 299, 325-26 (E.D.N.Y. 2005)
(finding a contract where customers “made flight reservations in reliance on express promises contained in
[defendant’s] privacy policy” posted online).

C-6

 commits to act in accordance with those standards when providing covered investment services.
The client would be advised of this promise, the standards, and where to review them at the time
covered services were offered. This could be done orally, when the interaction is by telephone or
in person, or in writing, when the interaction is computer-based. The client would accept the
firm’s offer by proceeding to use the firm’s services, thereby forming an enforceable agreement
under basic principles of contract law.30
These principles of contract law would be sufficient to bind financial services firms to the
best interest standard without the unnecessarily cumbersome and costly difficulties associated
with an actual signed written agreement. However, the doctrine of promissory estoppel would
serve as an additional means to enforce the best interest standard. Under promissory estoppel, if
a party changes its position substantially either by acting or forbearing from acting in reliance
upon a clear and unambiguous promise, then that party can enforce the promise even though the
essential elements of a contract are not present.31
In the context of the BIC Exemption, that doctrine would apply if a firm represented to an
investor that it would abide by the best interest standards when providing services, and the
investor accepted those services in reliance on that assurance. In these circumstances, even if a
court were to determine that for some reason no enforceable contract exists, a customer could use
the doctrine of promissory estoppel to enforce the firm’s representations. And here again, the
firm could be bound even more tightly by requiring, as a condition of the exemption, that it
acknowledge on its website (or in some other publicly-accessible format) the enforceability of its
best interest promise, and the client’s reliance on that promise in engaging in the interaction.
For all of these reasons, there is no need for the Department to require a signed written
contract for the BIC Exemption. The proposed exemption should be revised to permit financial
services firms to become legally bound in the manner described above.
7. Simplify and Improve Disclosure Requirements.
A key component of the exemptions is full and meaningful disclosure of all material
conflicts of interest, including compensation payable to the advisor. The BIC Exemption
contemplates a three-tiered approach involving a point-of-sale32 disclosure of the projected cost
30

See Corbin, supra; see also Coulier v. United Airlines, Inc., 2015 WL 2452393, at *5 (S.D. Tex. May 21, 2015)
(the portion of defendant’s website guaranteeing lower price for tickets purchased on the website was a “unilateral
contract that the customer must accept by performance”); Edquist v. Bidz.com, Inc., at *1 (D. Mass. Mar. 29, 2013)
(“[A] person such as the plaintiff who accepts the terms offered by the defendant on its website by participating in
an online auction governed by those terms has entered into a contractual relationship with the defendant.”).
31
Restatement (Second) of Contracts § 90; see also Williston on Contracts § 8:7 (4th ed. 2008) (“[B]oth versions of
the Restatement recognize that in certain circumstances, a promise might be enforced despite the absence of
consideration – and, according to some courts, despite the absence of other elements necessary to form a traditional
contract – based on the promisee’s foreseeable, reasonable, justified and detrimental reliance on the promise”); Allen
v. A.G. Edwards & Sons, Inc., 606 F.2d 84, 87 (5th Cir. 1979) (recognizing promissory estoppel where brokerdealer, “[h]aving benefitted from oral agreements transacted through local agents, [ ] cannot now be heard to
complain of failure to observe formalities”).
32
The BIC Exemption provides for “Transaction Disclosure” which is to occur “prior to the execution of the
purchase of the Asset by the Plan, participant or beneficiary account, or IRA.” However, an advisor will often not

C-7

 of recommended investments, an annual statement summarizing in dollar amounts the
compensation actually paid to the advisor during the preceding year and a publicly available
website outlining all investments the advisor might recommend and the compensation associated
with each. While we have no objection in theory to disclosing this information, the manner in
which it is disclosed is critically important to both the usefulness of the information to the
investor and workability from the perspective of the financial services firm.
Point-of-sale disclosures in particular are problematic. If an advisor is recommending
one specific investment product or service a particular customer, it is perhaps feasible to develop
and produce a point-of-sale document for the recommended investment. However, most
discussions with customers cover a wide range of potential products and services as the customer
develops an investment strategy. In many cases, a customer leaves the discussion without
making a decision which means the financial services firm would be required to produce a pointof-sale disclosure for every product or service discussed since the customer may later decide to
implement the investment strategy without further discussion with a representative. More
importantly, the proposed point-of-sale disclosure addresses only the cost of recommended
investments and not the compensation payable to the advisor and therefore does not disclose the
conflict of interest.
We do not believe the proposed annual disclosure will provide meaningful information to
investors about the advisor's potential conflict of interest. An investor's account will typically
include a mix of investments and reflect a range of transactions, some of which may have been
the result of recommendations of the advisor and others of which were entered into by the
investor on their own. As a practical matter, other than transactions entered into immediately
following the recommendation, there is no practical way to distinguish between the two. As a
result, the annual statement must necessarily reflect all transactions in the account so will not in
fact represent compensation payable as a result of recommended investments. In addition,
building a system to keep track of this information at an individual account level would be
extremely costly.
Finally, the public website does not appear to be intended for use by investors and is not
directly related to the investor's decision about the specific transactions being recommended.
With respect to employee plans, the proposed website information would be less helpful than the
information already furnished to participants and beneficiaries in the form of a plan-specific
comparative chart of designated investment options, as required under DOL reg. §2550.404a-5.
Another difference is that the website would provide those investment options in combination
with information about thousands of options not included in a plan’s menu of designated
investment options. In some cases, information may be subject to confidentiality agreements
between the plan sponsor and manager. With respect to IRAs, the website would include
hundreds or thousands of institutional investment options – particularly group trust portfolios,
plan-specific separate accounts and group annuity products - that would not be available to the
retail investor as investment choices. Nevertheless, much of the information provided would be
know if or when a recommended Asset may be purchased by a customer. This means, as a practical matter, such
disclosure would likely be provided at the time the advisor provides the advice to the customer. Accordingly, it is
probably more accurately referred to as a “point-of-recommendation” disclosure.

C-8

 available under our new best interest paradigm. We believe the more simplified two-tiered
approach included in that paradiam, as described in the body of our letter and in Attachment A,
will make the disclosure regime both workable and more meaningful to investors.
The more simplified, two-tiered approach would also be far more practical for advisors
who provide advice with respect to investments not held in custody by the advisor. Much of the
information required to be disclosed under the BIC Exemption would not be available to an
advisor who does not have custody of the investor’s account. For example, the annual disclosure
includes information about all investments held in the investor’s account, not just assets
purchased pursuant to the advisor’s recommendation. But an advisor may not have knowledge
of all the investments in an account held by a third-party custodian. Similarly, the website is
required to include information about all investments offered through the advisor, but an advisor
may not have the information required to provide such disclosure about all the investments
available through the advisor on a third-party recordkeeping platform. As a result, the BIC
Exemption’s disclosure requirements could not be met by an advisor with respect to investments
held by a third-party custodian, absent an information sharing arrangement between the advisor
and the third-party custodian.33 The two-tiered disclosure, on the other hand, would only require
disclosure of information that an advisor would have at its disposal regardless of whether it held
custody of recommended investments.
Finally, the BIC Exemption preamble asks whether a “cigarette warning” could be as
effective and less costly. The sample language provided in the preamble discussion warns that
the fees “may determine your adviser’s take home pay”, which seems directly at odds with the
conditions of the BIC Exemption relating to advisor compensation, so presumably any “cigarette
label” warning would take a different form. In any event, the two-tiered approach described
above would more effectively inform the customer about the nature of an advisor's conflicts.
The two-tiered approach is also similar to the Department regulation under the PPA investment
advice exemption which includes model disclosure that would inform the investor of the
fiduciary nature of the advice and that the compensation received by the advisor may vary
(within a range) depending on the investment choices made by the investor. This squarely
addresses the “conflict” issue without inundating the investor with too much information.
8. Eliminate Special Data Production Requirements.
The BIC Exemption would authorize the Department to require the production of six
years of firm-wide aggregate data regarding purchases, sales and holding of each Asset for
retirement investors on a quarterly basis, and in each case the revenue received by the financial
institution for such Asset “disaggregated by source”. The financial institution would also need to
provide data regarding quarterly cash flows and account balances for each retirement investor.

33

Note that creating such information sharing arrangements, which would involve extensive contracting and systems
build-outs among thousands of advisors and third-party custodians or recordkeepers, would be extremely timeconsuming and costly. The proposal does not appear to take any of these costs into account or to allow for the time
necessary to create these information sharing arrangements.

C-9

 The proposal preamble states that the required information concerns purchases, sales and
holdings “made pursuant to advice provided by the advisor or financial institution relying on the
exemption.” As an editorial matter, the text of the proposed exemption does not include such
“made pursuant” language. As an even more important practical matter, however, it is
particularly unclear how a firm would be able to track whether each buy, sell or hold decision
was the result of investment advice. For example, if an investor is provided with a model
portfolio illustration that includes a $20,000 investment in fund X, and two months later buys
$30,000 of fund X. how would the advisor know whether the purchase was the result of a
recommendation and, even if it knew that, how much of the purchase should be reflected in the
database as resulting from the advice?
The proposal preamble states that the receipt of such additional data will assist the
Department in assessing the effectiveness of the BIC Exemption. It is difficult to understand,
however, how the aggregate data will be useful in that regard. It seems to indicate a research
agenda (as in the case of the public website) which is unrelated to the furnishing of prohibited
transaction exemption relief.
As a compliance matter, the approach taken in the proposal would mean that a firm
would not be sure that its recommendations in a given year are covered by the BIC Exemption
for another five years, because of the possibility that the firm experiences problems in
responding to the Department’s request for data. This would be true even if the difficulty is with
respect to transactions completed in a different year!
The Department is already authorized under section 504 of ERISA to request the
production of information by a financial institution or other service provider in order to
determine whether there has been a violation of ERISA. It appears that the proposed exemption
information production requirement may be intended to expand Department inquiries into the
IRA world, but the Department has no enforcement authority there pursuant to the
Reorganization Plan No. 4 of 1978. Putting financial institutions at risk of incurring prohibited
transaction penalties if the firm has difficulty producing information unrelated to the
transaction(s) in question would be an inappropriate use of the exemption process.
The Principal Transactions Exemption
As an initial matter, we note that the new best interest paradigm set forth in the main
body of this letter and Attachment A would render the Principal Transactions Exemption
unnecessary. That paradigm would provide for a single, broad, principles-based exemption that
would cover all advice transactions, including principal transactions. We urge the Department to
adopt this paradigm. In the event that the Department does not do so, however, we offer the
following comments with respect to the proposed Principal Transactions Exemption.
Fidelity supports efforts to enhance fixed income price transparency. Pricing
transparency promotes robust competition among diverse market participants, which helps foster
innovation and allows for greater investor choice. However, we do not support the Principal
Transactions Exemption as currently drafted for the following reasons:
C-10

 •

the extensive restrictions and conditions in the exemption are not necessary if
financial institutions and advisors are held to a fiduciary best interest standard
with respect to the provision of investment advice – the BIC Exemption
(modified as described above) should cover all transactions, including principal
transactions;

•

the exemption fails to acknowledge the extensive, existing legal framework for
principal transactions promulgated by the primary regulators of financial
institutions, applicable to both retirement and non-retirement accounts; and

•

the extensive restrictions and conditions in the exemption are unnecessarily
burdensome and unworkable for advisors and financial institutions.

As currently drafted, the Principal Transactions Exemption will result in less choice and higher
costs for retirement investors and will impact liquidity in the already fragile fixed income
markets. The Principal Transactions Exemption should be revised to permit advisors to engage
in a wide spectrum of principal transactions, across security types, subject to a fiduciary best
interest standard and compliance with applicable law. Each of these comments is discussed in
more detail below.
In the preamble to the Principal Transactions Exemption, the Department recognizes that
the ability to execute principal transactions is integral to the economically efficient distribution
of fixed income securities but also notes its concern with issues associated with principal
transactions involving liquidity, pricing, transparency and a fiduciary’s possible incentive to
“dump” unwanted assets. As a threshold matter, we wish to highlight the important role of
principal trading in the capital markets. Dealers acting in a principal capacity engage in
activities beneficial to the markets, such as market making, and provide liquidity to the markets.
Regulatory obligations on market makers often require them to engage in transactions in their
own account in order to maintain a fair and orderly market. Any rulemaking that impacts
principal trading should be implemented in a way that does not inadvertently reduce liquidity,
which could increase volatility and risk in the capital markets. Moreover, if significant
disincentives to trading on a principal basis are imposed, fewer dealers may be willing to act as
principal, reducing market liquidity to the detriment of all investors.
Assuming the financial institution commits to act in the best interest of the customer,
the Principal Transactions Exemption’s additional restrictions and conditions on principal trading
are not necessary. Moreover, these restrictions and conditions may even inhibit the financial
institution’s ability to act in the best interest of a retirement investor, in contravention of the
Department’s goals. For example, the Principal Transactions Exemption does not reflect the role
of a financial institution in providing facilitation trades when a retirement investor seeks to sell a
security and cannot obtain a reasonable price from a third party or cannot obtain a ready buyer.
The Proposed Regulation and Principal Transactions Exemption would thus create a situation in
which a financial institution could offer advice in the best interest of the retirement investor to
sell a particular security, but the financial institution could not facilitate the trade in the absence
C-11

 of a reasonable price from a third-party or in the absence of other buyers. At best, we believe
this scenario will frustrate retirement investors, and at worst, work against their best interest.
Additionally, the Principal Transactions Exemption’s regulation of principal trading with
respect to the provision of advice is layered onto an already comprehensive existing legal
framework. Under the Principal Transactions Exemption, only three types of financial
institutions may engage in principal trading: (1) registered investment advisers under the
Investment Advisers Act of 1940 (the “Advisers Act”) or under the laws of the state in which the
adviser maintains its principal place of business; (2) a bank or similar financial institution
supervised by the United States or state; and (3) a broker or dealer registered under the Securities
Exchange Act of 1934. This limitation is based on the Department’s understanding that these
entities may commonly sell debt securities out of inventory.
Fidelity has both investment advisory and broker-dealer businesses and clients. We
appreciate from our experiences that both registered investment advisers and broker-dealers are
extensively regulated, supervised, and their compliance with applicable rules enforced by
numerous federal and state financial regulators and self-regulatory organizations.34 The legal
framework established by these regulators, includes rules specific to principal transactions.
Financial regulators have long recognized the potential for conflicts of interest with principal
transactions and have constructed a comprehensive legal framework carefully designed to
minimize those risks. For example:
Registered Investment Advisers: The United States Supreme Court has construed Sections
206(1) and (2) of the Advisers Act as establishing a federal fiduciary standard governing the
conduct of advisers.35 Thus, registered investment advisers are already subject to a
fiduciary standard to act in their client’s best interest. Moreover, Section 206(3) of the
Advisers Act makes it unlawful for a registered investment adviser, acting as principal for
its own account, to knowingly buy any security from or sell any security to a client,
without disclosing to such client, in writing, before the completion of each such
transaction, the capacity in which she is acting, and obtaining the consent of the client to
the transaction. Written disclosure must be provided and consent must be obtained
separately for each transaction, i.e., blanket consent for transactions is not sufficient. The
Commission staff has also taken the position that the registered investment adviser must
disclose not only the capacity in which the adviser is acting, but also any compensation that
the adviser receives for its role in such transaction.36
Broker-Dealers: Under the federal securities laws and rules of self-regulatory
organizations to which they belong, broker-dealers may engage in principal transactions
34

Fidelity has not commented on existing regulations applicable to principal trading by banks because we do not
have a bank that engages in principal trading within our corporate structure. We believe that this area should be
further explored by those familiar with the subject.
35
SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963).
36
See Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons
Who Provide Investment Advisory Services as a Component of Other Financial Services, Investment Advisers Act
Release No. 1092 (Oct. 8, 1987).

C-12

 with customers, across all security types, subject to a number of requirements. Securities
and Exchange Act (“Exchange Act”) Rule 10b-10 requires a broker-dealer effecting
customer transactions in securities (other than U.S. savings bonds or municipal securities)
to provide written notification to the customer, at or before completion of the transaction,
disclosing information specific to the transaction, including whether the broker-dealer is
acting as agent or principal. Rule 10b-10 also requires broker-dealers to disclose on
confirmations the price of the security that was bought or sold by the customer. The
Municipal Securities Rulemaking Board’s (“MSRB”) Rule G-15 requires similar
disclosures from municipal securities brokers and dealers. Working with the SEC,
FINRA and the MSRB are both currently actively engaged in rulemaking that would
require disclosure of mark-ups in certain principal transactions.37 Additionally, brokerdealers must seek to obtain best execution for principal transactions when a broker-dealer
accepts an order from a customer38 and may only receive fair compensation in both
agency and principal transactions.39 The SEC has determined that when engaging in
transactions directly with customers on a principal basis, a broker-dealer violates
Exchange Act Rule 10b-5 when it knowingly or recklessly sells a security to a customer
at a price not reasonably related to the prevailing market price and charges excessive
markups, without disclosing the fact to the customer.40
We note that investors often maintain multiple types of accounts and relationships with
financial institutions. The Principal Transactions Exemption will apply to some, but not all,
fixed income transactions in some, but not all, customer accounts held at a financial institution.
The narrow category of accounts and securities covered by the Principal Transactions Exemption
will undoubtedly prompt customer questions and confusion in contravention of the Department’s
goals to increase investors’ understanding, as well as complicate implementation efforts at
financial institutions.
To help promote investor understanding, the Department should defer to, or at a
minimum, consider, the extensive legal framework established for principal trading by the
primary regulators of financial institutions, and work with these regulators to develop consistent,
harmonized requirements and disclosures across both retirement and non-retirement accounts.
This course of action would promote legal certainty, put retirement investors on a level playing
field with other investors, reduce investor confusion, and seek to mitigate the Principal
Transactions Exemption’s potential impact to liquidity in the capital markets.
37

See FINRA Regulatory Notice 14-52; Pricing Disclosure in the Fixed Income Markets (November 2014).
(“FINRA Proposal”) and MSRB Regulatory Notice 2014-20; Request for Comment on Draft Rule Amendments to
Require Dealers to Provide Pricing Reference Information on Retail Customer Confirmations (November 2014)
(“MSRB Proposal”). We urge the Department to allow FINRA and the MSRB to take the lead in rulemaking on this
topic as their rules will apply across retirement and non-retirement accounts.
38
See FINRA Rule 5310 (“Best Execution and Interpositioning”).
39
See FINRA Rule 2121 (“Fair Prices and Commissions”) and associated Supplemental Material.01 (“Mark-Up
Policy”), and Supplemental Material .02 (“Additional Mark-Up Policy For Transactions in Debt Securities, Except
Municipal Securities”).
40
See, e.g., Grandon v. Merrill Lynch & Co., 147 F.3d 184, 189-90 (2d Cir. 1998) as discussed in SEC Staff Study
on Investment Advisers and Broker-Dealers as required by Section 913 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (January 2011) at page 70.

C-13

 Nevertheless, if the Department chooses to proceed with a third layer of regulation of
principal transactions in connection with the provision of advice after (1) already requiring
financial institutions and advisors to contractually commit to a “best interest” standard and
warrant compliance with all applicable federal and state law regarding the rendering of advice
and the purchase and sale of debt securities and (2) in recognition of the numerous rules and
regulations of other federal regulators that already apply to principal trading by financial
institutions, we offer the following specific comments on the Principal Transactions Exemption.
1. Distinguish “Principal Transactions” Executed on a Riskless Principal Basis.
The Principal Transactions Exemption does not distinguish, or even discuss, transactions
executed by a financial institution on a “riskless principal” basis versus traditional “principal”
transactions. There is an important distinction between these two types of transactions. As
described in more detail below, riskless principal transactions are unlike traditional principal
transactions because the broker-dealer does not execute the purchase or sale from the brokerdealer’s own inventory; the “principal” nature of the transaction is purely technical. The
interests of investors would be well protected if the Department permitted broker-dealers who
provide ERISA investment advice to engage in riskless principal transactions, across a broad
range of security types, subject to a fiduciary best interest standard and in compliance with
applicable rules regarding the purchase and sales of securities.
Typically, financial institutions engage in riskless principal transactions as an alternative
method of executing customer orders to buy or sell financial instruments on an agency basis.
Assuming that traditional principal transactions create a possible incentive to “dump” unwanted
assets, as the Department asserts in the preamble to the Principal Transactions Exemption,
riskless principal transactions present no similar incentive. In a typical riskless principal
transaction, a financial institution, after receiving an order to purchase (or sell) a financial
instrument from a customer, purchases (or sells) the financial instrument for its own account to
offset the contemporaneous sale of the financial instrument to (purchase from) the customer.
Because riskless principal transactions are customer-driven and dealer exposure to market risk is
limited by the brief period of actual ownership, investors generally incur lower transaction costs
as compared to pure principal transactions, similar in economic terms to agency transactions.
Benefits accrued to investors from riskless principal transactions are at risk if the
Department’s proposal is approved as drafted. For example, when a broker-dealer executes a
fixed income transaction on a riskless principal basis, the investor has a better understanding of
the true yield of the bond, because the broker-dealer’s mark-up is factored into the yield. In
contrast, when a broker-dealer executes a fixed income transaction on an agency basis, the yield
quoted is not inclusive of the commission, which offers less insight into the “real” yield of the
investment.
Moreover, systems at financial institutions are not typically designed to switch from
agency to riskless principal to principal capacity based on a trade by trade determination. If the
Department determines to treat riskless principal transactions similarly to other principal
C-14

 transactions under the Principal Transactions Exemption, broker-dealers may decide that it is
more cost effective to re-design certain systems to execute these orders on an agency basis, than
comply with the Principal Transactions Exemption’s numerous restrictions and conditions for a
limited number of retirement accounts. The cost of converting a financial institution’s systems
from a riskless principal model to a straight agency model may nevertheless be substantial, and
financial institutions may decide to pass these costs along to investors, increasing their
transactions costs, in addition to limiting their choice of execution.41
Concurrent with the Proposed Regulation and the Principal Transactions Exemption, the
Department has proposed amendments to PTE 86-128 and has also proposed to revoke PTE 75-1
Part 2(II). Among other items, the proposed amendments to PTE 86–128 include language that
is currently a component of PTE 75-1, to permit a broker-dealer fiduciary to use its authority to
cause a plan or IRA to purchase shares of a mutual fund from the broker-dealer fiduciary, acting
as principal, where the shares were acquired solely to cover the plan’s (or IRA’s) prior order, and
for the receipt of a commission by such fiduciary in connection with the transaction. The
proposed amendments to PTE 86-128 would not include relief for fiduciaries who provide
investment advice to IRAs, however (such fiduciaries would need to use the BIC Exemption).
The Department’s amendments to PTE 86-128 indicate an awareness of riskless principal
transactions and the Department’s view that the provisions of the BIC Exemption better protect
the interests of investors with respect to investment advice regarding securities transactions. The
interests of investors would be further advanced if the Department permitted broker-dealers who
provide ERISA investment advice to engage in riskless principal transactions under a simplified
BIC Exemption as proposed under our new best interest paradigm or, at a minimum, under the
Principal Transactions Exemption, across a broad range of security types, without numerous
restrictions and conditions, subject to a fiduciary best interest standard and compliance with the
rules of the SEC, FINRA and MSRB on riskless principal trades. We urge the Department to
consider these alternative approaches.
2. Expand Securities Types Covered by the Principal Transactions Exemption.
The Principal Transactions Exemption would permit a financial institution to engage in
principal transactions in connection with the provision of investment advice for only a narrow
category of debt securities. For purposes of the Principal Transactions Exemption, the term
“Debt Security” means “a ‘debt security’ as defined in Rule 10b-10 (d)(4) of the Exchange Act
that is: (1) U.S. dollar denominated, issued by a U.S. corporation and offered pursuant to a
registration statement under the Securities Act of 1933 (‘33 Act’); (2) An ‘Agency Debt
Security’ a defined in FINRA Rule 6701(l) or its successor; or (3) a ‘U.S. Treasury Security’ as
defined in FINRA Rule 6710(p) or its successor.” Our comments and concerns with this
proposed definition follow below.

41

Moreover, given the costs and complexity involved in changing technology systems, firms are unlikely to
eliminate riskless principal transactions only for a “retirement” registration type. That is, the Principal Transactions
Exemption may prompt broker-dealers to stop executing orders on a riskless principal basis across all account types,
retirement and non-retirement, potentially further impacting liquidity in the markets.

C-15

 First, only corporate debt registered under the ’33 Act would be permitted to be
principally traded in connection with the offering of investment advice.42 We understand that
there are practical difficulties that will inhibit a dealer to systematically determine whether bonds
trading in the secondary market were issued pursuant to a registration statement. For example,
Section 3(a)(2) bank note offerings (which are generally rated investment grade notes issued by
banks) are often not registered. These notes are commonly held in retirement accounts. We urge
the Department to allow corporate debt to be principally traded in connection with investment
advice regardless of whether it is registered under the ’33 Act as long as it is offered in the best
interest of the investor and in compliance with applicable rules regarding the purchase and sale
of securities.
We also note that there are several additional categories of securities commonly held by
investors and primarily sold in principal transactions that are not included in the Principal
Transactions Exemption. The omission of these security types from the Principal Transactions
Exemption means that financial institutions cannot trade these securities as principal in
connection with the provision of investment advice to retirement accounts. Given the Proposed
Regulation’s extremely broad definition of “investment advice”, we anticipate that virtually any
communication regarding these securities would be considered “investment advice”, prohibiting
the normal purchase and sale processing of these securities. We discuss the specific
characteristics of some of these securities, and proposed safeguards that would apply to an
exemption permitting their sale in a principal transaction, below.
Brokered CDs. The Department has not included brokered certificates of deposit
(“CDs”) in the definition of “Debt Security” in the Principal Transactions Exemption. Brokered
CDs are CDs issued by banks for the customers of brokerage firms. The CDs are usually issued
in large denominations and the brokerage firm divides them into smaller denominations for
resale to its customers. Because the deposits are obligations of the issuing bank, and not the
brokerage firm, FDIC insurance applies. A brokered CD is similar to a bank CD in many ways.
Both pay a set interest rate that is generally higher than a regular savings account. Both are debt
obligations of an issuing bank and both replay principal with interest if they are held to maturity.
More importantly, both are FDIC-insured up to $250,000 (per account owner, per institution).
Unlike a bank CD, a brokered CD can be traded on the secondary market, meaning that investors
don’t necessarily have to hold them to maturity.
Brokered CDs are offered through two main venues – as new issue offerings and from the
secondary market. They are most often sold on a principal basis and are commonly held in
IRAs. We see no clear reason why brokered CDs should be excluded from the definition of Debt
42

FINRA has proposed, and intends to pursue, a proposal that would require disclosure of mark-ups in certain
principal transactions for corporate and agency securities. The FINRA Proposal defines “corporate debt security” as
“a debt security that is United States (U.S.) dollar denominated and issued by a U.S. or foreign private issuer and, if a
“restricted security” as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A, but
does not include a Money Market Instrument as defined in Rule 6710(o).” Given the overlapping obligations of the
Principal Transactions Exemption and FINRA Proposal on Financial institutions, we urge the Department and
FINRA to develop a consistent definition of corporate debt security for purposes of the Principal Transactions
Exemption and FINRA Proposal.

C-16

 Security under the Principal Transactions Exemption, particularly since CDs are considered
“Assets” for purposes of the Department’s BIC Exemption. We recommend the Department
correct this oversight.
New Issue Offerings of Equity Securities. The Department has chosen to exclude equity
securities from the Principal Transactions Exemption under the reasoning that “equity
securities…are widely available through agency transactions that do not involve the particular
conflicts of interest associated with principal transactions.” We do not agree with this assertion,
particularly with regard to new issue equity, which is typically traded on a principal basis.
Fidelity invites eligible retirement and non-retirement customers to participate in new
issue offerings, including initial public offerings (“IPOs”) as well as follow-on secondary
offerings. We clearly communicate that customers should read the offering prospectus carefully,
and make their own determination of whether an investment in the offering is consistent with
their investment objectives, financial situation, and risk tolerance. Given the Proposed
Regulation’s extremely broad definition of “investment advice”, we anticipate that virtually any
announcement of the availability of these securities to retirement investors would be considered
“investment advice”. The Department’s limitations on securities that may be principally traded
will prevent retirement investors, who have chosen to seek out new issue offerings of equity
securities for good investment reasons, from purchasing these products.
Ultimately, the interests of investors would be further advanced if the Department simply
permitted financial institutions that provide fiduciary investment advice to engage in principal
transactions, across a broad range of security types, subject to a fiduciary obligation to act in the
best interest of their customer and compliance with applicable rules regarding the purchase and
sale of securities. Moreover, limitations on types of securities that can be principally traded in
retirement accounts, may work against retirement investors’ best interests. We urge the
Department to adopt this alternative approach.
Municipal Securities. The Department has similarly not included municipal securities in
the definition of Debt Securities in the Principal Transactions Exemption. Municipal Securities
are debt obligations issued by states, cities, counties, and other public entities that use the loans
to fund public projects, such as the construction of schools, hospitals, highways, sewers, and
universities. Municipal securities can be bought either as new issues that are sold by
underwriters to investors or can be purchased in the secondary market where they are traded
over-the-counter. Municipal securities are heavily regulated by the SEC, FINRA, IRS and the
MSRB, which is charged under the Securities and Exchange Act to propose rules governing the
municipal securities markets.43
43

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by
promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the
municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities.
To further protect market participants, the MSRB provides market transparency through its Electronic Municipal
Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also
serves as an objective resource on the municipal market, conducts extensive education and outreach to market
stakeholders, and provides market leadership on key issues. The MSRB is a Congressionally-chartered, self-

C-17

 The municipal bond market is a dealer-driven market. The bulk of the bonds offered for
sale via any online bond search are typically owned by dealers. Since the dealers actually own
the bonds, the entire market operates on a principal basis, meaning that dealers buy bonds at one
price and offer them for sale at a higher price, also known as a “spread”. The profit a bond dealer
earns is the difference between what the dealer paid for the bonds and the price at which the
dealer ultimately sells the bond.
Municipal securities can play an important role in retirement accounts, both on a taxable
and non-taxable basis. Taxable municipal bonds, such as the Build America Bonds, are not
exempt from federal, state or local taxes. Depending on a number of factors including, the
interest rate environment, offered yield, potential need for diversification of credit, and
individual tax situation, it may be in the investor’s best interest to hold a taxable municipal bond
in his or her IRA. We acknowledge that taxable municipal bonds are more typically purchased
in retirement accounts as compared to tax-exempt bonds, which are exempt from federal, state or
local taxes. However, on an absolute yield basis, tax-exempt municipal bonds may be
appropriate for retirement investors during certain time periods in the market.
Given that municipal securities are typically principally traded, the Department’s
omission of municipal securities in the Principal Transactions Exemption can be viewed as a
determination that municipal securities are never appropriate for any retirement investor. We
respectfully believe that such a judgment is not an appropriate exercise of the Department’s
regulatory authority, and we recommend that rather than limit retirement investors’ access to
these securities, the determination of whether an investment in a municipal security is in a
retirement investors’ best interest should be left to financial institutions and advisors who have a
better understanding of the individual needs of the retirement investors they serve. We
recommend the Department include municipal securities in the definition of Debt Security in the
Principal Transactions Exemption, subject to a fiduciary best interest standard and in compliance
with applicable rules regarding the purchase and sale of securities.
3. Replace the Written Contract Requirement with a Unilateral Contract Requirement.
For all of the reasons set forth above with respect to the written contract requirement of
the BIC Exemption, we recommend a flexible approach where the contractual commitment can
be established through a unilateral contract offer by the financial services firm which would be
enforceable as a contract or through the doctrine of promissory estoppel. There is no need to
require a signed, written document nor must the individual advisors be involved.
In addition, as part of the proposed written contract, the financial institution must agree
that it will not enter into a principal transaction if the price (including the mark-up/mark-down)
is unreasonable under the circumstances. If this provision is retained, the Department should

regulatory organization governed by a 21-member board of directors that has a majority of public members, in
addition to representatives of regulated entities. The MSRB is subject to oversight by the Securities and Exchange
Commission.

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 include its interpretation of circumstances in which a price of a Debt Security is unreasonable to
avoid confusion following FINRA and MSRB guidance on this point.44
4. Eliminate or Clarify Requirements Regarding the Quality of Debt Securities.
Under the Principal Transactions Exemption, an adviser and financial institution may
only recommend debt securities that possess no greater than moderate credit risk and are
sufficiently liquid that the debt security could be sold at or near its fair market value within a
reasonably short period of time. The Department notes that debt securities subject to moderate
credit risk should possess at least average creditworthiness relative to other similar debt issues
and that moderate credit risk would denote current low expectations of default risk, with an
adequate capacity for payment of principal and interest. As reference, the Department notes that
the SEC has established similar standards of creditworthiness applicable to debt securities under
Rule 6a-5 of the Investment Company Act of 1940.45
We disagree that SEC Rule 6a-5 is similar to the Department’s proposal. The SEC’s
amended Rule 6a–5 replaced a credit rating requirement (removed by Congress as part of the
Dodd-Frank Act) applicable to debt securities in which certain business and industrial
development companies (‘‘BIDCOs’’) relying on the Investment Company Act exemption in
section 6(a)(5) may invest. Under amended Rule 6a–5, a BIDCO that relies on the exemption in
section 6(a)(5) may invest in certain debt securities, provided that the BIDCO board determines,
at the time of purchase, that the debt security is (1) of no greater than moderate credit risk and (2)
is sufficiently liquid. The standard for liquidity under the rules is whether the security can be sold
at or near its carrying value within a reasonably short period of time.
The Department has replaced the SEC’s “carrying value” standard for liquidity with a
“fair market value” standard. Fair market value is the price that can be obtained in the market.
Given that the fair market value for a security cannot be ascertained until one attempts to buy or
sell a security, it is difficult to understand how market participants can meet this condition.
Moreover, in making credit quality determinations, the SEC’s rule permits a BIDCO to consider
credit quality reports prepared by outside sources, including ratings of a nationally recognized
statistical rating organization that the board or board members conclude are credible and reliable
for credit quality determinations. The Principal Transactions Exemption contains no such
additional criteria. Given that the financial institution would already be subject to a best interest
standard and applicable law on the purchase and sale of securities when engaging in a Principal
Transaction, detailed requirements on the types of securities that may be principally traded is not
necessary, particularly when the requirements are not workable.
If the Department proceeds with this requirement, the Department should clarify how a
financial institution should determine and measure the degree to which a debt security is
“sufficiently liquid” such that it could be sold at or near its fair market value within a reasonably
44

See discussion of pricing information and a dealer’s best execution obligations infra.
See Purchase of Certain Debt Securities by Business and Industrial Development Companies Relying on an
Investment Company Act Exemption, Investment Company Act Release No. 30268 (Nov. 19, 2012) [77 FR 70117
(Nov. 23, 2012)].
45

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 short period of time. The Principal Transactions Exemption requires the advisor and financial
institution, among other items, to obtain a pricing quote for the debt security offered by two
ready and willing counterparties that are not affiliates. We recommend the Department take the
position that if a financial institution or advisor can obtain two independent quotes for a
particular debt security, that debt security is sufficiently liquid for purposes of the Principal
Transactions Exemption.
Moreover, because the financial institution cannot predict the liquidity status of the debt
security at a future point in time, the Department must clarify that any assessment of liquidity
must be based only upon information that is readily available at the time the advice is offered.
The regulatory environment of the past several years has had a significant impact on liquidity in
the trading markets, particularly for debt securities. The Volcker Rule as well as liquidity and
capital requirements included within the Dodd-Frank Act and Basel III have transformed the
structure and functioning of the fixed income markets. These regulatory proposals have served
to reduce risk in the markets, but have also reduced liquidity. Given the uncertainties of liquidity
in future debt markets, we urge the Department to clarify that an assessment of liquidity status is
made at the time the investment advice is offered.
5. Eliminate Pricing Information Requirements.
Section III of the Principal Transactions Exemption provides that the purchase or sale of
the debt security (1) must be executed at a price that the financial institution reasonably believes
is at least as favorable to the investor than the price available to the investor in a transaction that
is not a principal transaction and (2) must be at least as favorable to the investor as the
contemporaneous price for the debt security, or a similar security if a price is not available with
respect to the same debt security, offered by two ready and willing counterparties that are not
affiliates in agency transactions.
The Department notes that when evaluating the price offered by the counterparties, the
financial institution may take into account the resulting price to the investor including
commissions. The Department intends that the proposal should allow a comparison between the
actual cost to the investor of the principal transaction (including the mark-up or mark-down) and
the actual cost to the investor of a non-principal transaction (e.g., an agency transaction) in the
same or a similar debt security, including a commission.
We note several practical difficulties to the Department’s proposed approach. First, the
Principal Transactions Exemption requires that the financial institution obtain two quotes on the
debt security or a similar security offered by two ready and willing counterparties that are not
affiliates in agency transactions. The underlying assumption is that two prices can be obtained.
We anticipate that obtaining two quotes for treasury and agency debt securities may be
achievable; however obtaining two quotes for a corporate debt security may be more difficult.
Currently, corporate debt securities are liquid, but could be less liquid at a future point in time
depending on market conditions.

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 Second, the Principal Transactions Exemption requires financial institutions to determine
the commission, including mark-up or mark-down, of a counterparty to compare quotes. From a
practical standpoint, a counterparty may be unwilling to share this information and the financial
institution has limited means to compel it.
Most importantly, the Principal Transactions Exemption may impair a broker-dealer’s
ability to exercise reasonable diligence under FINRA and MSRB rules by adding a significant
hurdle for dealers to act in a principal capacity. FINRA’s Best Execution rule46 and MSRB’s
approved but not yet effective Best Execution rule47 require that dealers exercise reasonable
diligence to ascertain the best market for the subject security and to buy or sell in that market so
that the resultant price to the customer is as favorable as possible under prevailing market
conditions. FINRA and MSRB provide a list of factors that will be considered when determining
whether a dealer exercised reasonable diligence. The duty of best execution applies whether a
broker-dealer is acting as an agent or a principal and applies across retirement and non-retirement
accounts. The Department’s proposed pricing information requirements conflict with a dealer’s
best execution obligations, in that if a dealer has used reasonable diligence and determined that
its own principal inventory is the best available market under prevailing market conditions, under
FINRA and MSRB rules it must execute in that market.
Moreover, given the existing FINRA and MSRB obligations on broker-dealers to obtain
favorable prices for customers, on which regulators regularly perform surveillance and
examinations, and on which financial institutions would be required to warrant compliance, we
question why additional requirements and conditions are necessary to help ensure investors
receive a favorable price for a particular security.
6. Eliminate the Pre-Transaction Disclosure.
The Principal Transactions Exemption provides that the advisor or financial institution
must provide a pre-transaction disclosure to the investor, either orally or in writing. The
disclosure must notify the investor that the trade will be executed on a principal basis and
provide the investor with any available pricing information regarding the debt security, including

46

For example, FINRA Rule 5310 (“Best Execution and Interpositioning”) which provides that in any transaction
for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall
use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that
the resultant price to the customer is as favorable as possible under prevailing market conditions. Among the factors
that will be considered in determining whether a member has used “reasonable diligence” are: (A) the character of
the market for the security, e.g., price, volatility, relative liquidity, and pressure on available communications; (B)
the size and type of transaction; (C) the number of markets checked; (D) accessibility of the quotation; and (E) the
terms and conditions of the order which result in the transaction, as communicated to the member and persons
associated with the member.
47
Amendments to MSRB Rule G–18 will require municipal securities dealers to seek the most favorable terms
reasonably available for their retail customers’ transactions. These amendments are added to long-standing MSRB
rules regarding unfair pricing practices and will take effect December 7, 2015.

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 the two quotes obtained from unaffiliated third parties. The disclosure would also include the
mark-up or mark-down48 to be charged in connection with the transaction.
From a practical standpoint, assuming that a financial institution can even obtain two
independent quotes from counterparties to fulfil the pre-transaction disclosure requirements, the
financial institution will then need to circle back to the investor to obtain his or her consent prior
to proceeding with the transaction. Given potential delays in this process and the passage of
time, there is a risk that the quoted price may no longer be available, and the entire process
required to be started again, frustrating all parties involved. These types of disclosures will
impede trading and result in timing and opportunity losses for smaller retirement accounts. We
urge the Department to withdraw this portion of the pre-transaction disclosure requirements.
7. Coordinate Written Confirmation Requirements with Other Financial Regulators.
The Principal Transactions Exemption would further require the financial institution to
provide a written confirmation of the principal transaction in accordance with Rule 10b-10 under
the Securities Exchange Act of 1934 that also includes disclosure of the mark-up, mark-down or
other payment to the advisor, financial institution or affiliate in connection with the transaction.
We note that Rule 10b-10 does not currently require disclosure of mark-ups in principal
transactions; however disclosure of mark-ups in principal transactions is a current focus of
several regulatory and legislative efforts. FINRA and the MSRB, at SEC direction, recently
issued concurrent rule proposals concerning disclosure of mark-ups in riskless principal
transactions49 and Senator Mark Warner and Senator Ron Coburn introduced legislation50 in
113th Congress that would require bond dealers to disclose to customer the difference between
the dealer’s price and the customer’s price before completion of a riskless principal transaction.
Changes to disclosure that customers receive should be viewed in totality across
regulatory agencies to help ensure that the sum of such disclosure is coordinated, consistent,
helpful and appropriate. More disclosure does not always result in a more informed investor.
The Principal Transactions Exemption uses different terminology and disclosures from the
FINRA and MSRB Proposals to meet the same regulatory goal. Moreover the Department’s
proposal applies only to retirement accounts in which fiduciary investment advice has been
offered, while the FINRA and MSRB Proposals that would apply across retirement and nonretirement accounts, regardless of whether advice was offered. We urge the Department to
carefully consider retirement investors need for additional disclosure, specific to retirement
48

The Department is considering defining mark-ups and mark-downs as amount in excess or deficit of the
“prevailing market price” that a customer receives for the debt security. The Department is considering whether to
define the “prevailing market price” by reference to FINRA Rule 2121 which sets forth a methodology for
determining the prevailing market price. We encourage the Department use the definition of “prevailing market
price” in FINRA Rule 2121. This approach will help promote legal certainty and reduce confusion over terms used
by different rules in the same context.
49
FINRA Proposal and MSRB Proposal as discussed infra.
50
S.2114 - Bond Transparency Act of 2014; a bill “to amend the Securities Exchange Act of 1934 with respect to
disclosures to investors in municipal and corporate debt securities, and for other purposes.”

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 accounts, in light of the comprehensive disclosure proposals currently under consideration for
the same transactions and to coordinate its effort with other financial regulators.
The post–transaction disclosure requirements in the Principal Transactions Exemption
will be operationally challenging for market participants, particularly for clearing broker-dealers.
The Principal Transactions Exemption would require financial institutions to build a significant
new system, at considerable cost, to identify principal trades in retirement accounts executed
pursuant to investment advice versus principal transactions executed at the request of selfdirected investors.
The operational challenges of the proposals are especially significant for clearing brokerdealers that would likely be required to coordinate and rely on third parties for data necessary for
compliance. Fully-disclosed clearing broker-dealers clear and settle millions of securities
transactions each day for thousands of introducing broker-dealers.51 Clearing broker-dealers do
not sell securities to retail customers. Rather, a fully-disclosed clearing broker-dealer provides
routine and ministerial “back office” processing services -- clearance and settlement and custody
services -- to introducing broker-dealers. The relationship between the clearing broker-dealer
and the introducing broker-dealer and the division of responsibilities between them is set forth in
a fully disclosed clearing agreement, which is filed with and approved by FINRA before any
clearing services may begin.
Among other back-office functions, clearing broker-dealers settle fixed income trades
and print and mail end-customer confirmation statements for introducing broker-dealers. Under
the Principal Transactions Exemption, an introducing broker-dealer would need to submit
information on a particular principal trade made pursuant to the provision of investment advice
in a retirement account to its clearing broker-dealer, after the introducing broker-dealer has
marked this information itself. All of this work would need to be performed, without error or
delay, before the established deadlines for passing files to the trade confirmation engine to allow
the clearing broker-dealer to print and mail the statement to the end-customer within established
regulatory timeframes. We anticipate this process to be challenging at best and in some cases
unworkable.
8. Eliminate Duplicative Annual Disclosure Requirement.
In addition to pre-transaction disclosure and post-transaction disclosure confirming the
transaction, the financial institution would further be required to provide the investor with an
annual statement, within 45 days after the end of a calendar year, that lists the principal
transactions engaged in during the year, provides the prevailing market price at which the debt
security was purchased or sold and provides the applicable mark-up or mark-down or other
payment for each debt security.
51

Because many introducing broker-dealers (aka “correspondents”) do not have the net capital, resources,
technology, personnel or expertise to clear and settle their own trades, introducing broker-dealers often contract with
a third-party clearing broker-dealers to carry their proprietary accounts (if any) and its end-customer accounts and
perform back office functions on a fully-disclosed basis (i.e., disclosed to the introducing firm’s end customers).

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 The Principal Transactions Exemption’s annual statement requirement is duplicative of
the pre-and post-transaction disclosure requirements and as such does not appear to serve any
practical or useful purpose. Moreover, it makes no distinction between principal transactions
executed in a retirement account versus principal transactions executed in a retirement account
pursuant to the provision of investment advice. We assume that this disclosure only pertains to
those principal transactions executed in a retirement account pursuant to the provision of
investment advice and if the Department determines to proceed with this requirement, we ask the
Department to clarify this point.
Also, the 45 day time period to provide the annual statement is too short a period of time
to provide this information to all of the financial institution’s retirement investors. Given that
retirement investors will have already received this information in pre-transaction disclosure and
in post-transaction confirmation disclosure, we do not believe that a shorter period of time is
necessary. If the Department determines to proceed with this requirement, we request a 90 day
period to provide the annual statement.
High-Quality Low-Fee Streamlined Exemption Concept
The Department has requested comments on whether it should create a streamlined
exemption for "high-quality low-fee" investment options. We strongly encourage the
Department to adopt instead the new best interest paradigm described in the main body of this
letter and in Attachment A which would provide for a single streamlined best interest contract
exemption for all transactions associated with the Proposed Regulation. However, we are
commenting on the specifics of the Department’s proposed high-quality low-fee approach
because we believe it would be extremely problematic and we urge the Department not to move
forward with the concept.
As the Department recognizes, establishing objective criteria to determine what
investments are “high-quality low-fee” would be very difficult, if not impossible. If the
Department determines to proceed with a streamlined exemption approach where specific criteria
are utilized to determine which investments meet the definition for purposes of an exemption, the
Department should first issue a comprehensive Request for Information or proposed exemption
for review and public comment. Given the extraordinary challenges of identifying such options,
there simply is not sufficient time to provide comprehensive analysis for the Department to
review as part of the BIC Exemption.
Following are specific comments outlining our concerns.
1. Challenges in Identifying “Low-Fee” Investments.
The Department is correct that mutual fund operating expenses are highly transparent.
However, a fund’s expense ratio does not always reflect the full cost that an investor may incur
because of the various ways investors may purchase funds. Just as the Department asks how
commissions associated with ETFs could be incorporated into a low-fee calculation, the
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 Department should recognize broker-dealers may assess a transaction fee—which is not reflected
in a fund’s expense ratio—for the purchase or sale of a fund. These transaction fees can apply to
very low-cost mutual funds, which are less likely to fully compensate third-parties for the costs
of servicing fund shareholders. Therefore, relying on a fund’s disclosed expenses may not
capture all investor costs.
Even if these external fees are ignored, determining whether a particular fund is “lowfee” still requires a standard against which to measure, yet fees vary significantly by asset class.
Median total expense ratios in 2014 were 1.18% for value equity funds, 1.39% for world equity
funds, 0.86% for bond funds, and 0.10% for money market funds.52 Adopting a single fee
threshold may discourage advisors from recommending a fully diversified portfolio, which
would normally include relatively higher-cost asset classes for which low cost passive options
are few or non-existent, such as high yield, for example.
Abandoning a single “low-fee” threshold and instead devising multiple thresholds that
vary based on asset class, while better, would still present additional challenges. First, there is
no standard methodology for categorizing mutual funds. Even independent mutual fund data
providers such as Morningstar and Lipper categorize funds differently. Second, given the rapid
pace of innovation and evolution in the industry, the number and types of fund categories and the
classification of funds into categories changes frequently. The mutual fund industry has long
wrestled with the challenges of selecting an appropriate fee benchmark for comparison, and that
explains why there is wide variation in the practices that independent mutual fund boards follow
to satisfy their duties with respect to annual renewal of mutual fund management fee contracts.
There is no reason to believe that competitive fee comparisons for purposes of the streamlined
exemption can be standardized and also remain meaningful.
This issue is magnified when other investment products such as ETFs are considered for
inclusion. If ETFs are included, trading fees/commissions would need to be considered as part
of the exemption which adds further complexity. For example, there would be a significant
effective cost difference between a participant investing a large position for a long-term
investment versus a participant making smaller incremental periodic investments in their
retirement plan.
2. Challenges in Identifying “High-Quality” Investments.
While questions posed by the Department seek insight on what might be considered a
“low-fee” investment, it does not similarly inquire into how “high-quality” would be
determined. Fidelity believes that while the quality of a fund is as important a consideration as
its cost, this term is even more murky and elusive than “low-fee”. Clearly, any measure of
“quality” would encompass far more than an investment’s costs, potentially including such
other factors as performance, consistency, portfolio management process, liquidity, risk
management and oversight. Unless the Department were to empower a third-party rating
agency to judge an investment’s quality and thereby exert undue influence on the use of the
52

According to the Investment Company Institute’s 2015 Investment Company Fact Book, Figure 5.7.

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 streamlined exemption—which we do not recommend—it is hard to imagine how this can be
put into practice. Removing “high-quality” from the criteria would result in fees being the only
factor used to assess whether a fund qualifies for the exemption which would not result in the
best range of choices available to consumers. Implementing an exemption that makes it easier
to recommend a poorer range of options is not in the best interest of the investors that the
overall rule is meant to serve.
As the Department has recognized, fees should not be the sole criteria for investment
selection. The regulation under ERISA section 404(a) mandates that fiduciaries provide
participants with various disclosures in a participant-directed plan, including a comparative chart
of the plan’s investment options. This regulation requires that a statement be included in the
disclosure that indicates “fees and expenses are only one of several factors that participants and
beneficiaries should consider when making investment decisions.”53
3. Active vs. Passive Investments.
The Department’s proposal correctly acknowledges that an exemption based on fees
would strongly favor passively managed index funds and that there is no consensus in academic
literature that an optimal investment strategy comprises only passively managed funds. Actively
managed funds and passive index funds both offer value to consumers, and a customer-centered
rule should not favor one over the other. In fact, Fidelity’s own research reinforces the view that
actively managed funds can benefit investors more than index funds as explained below.
It is often claimed that on average and in every market, active management after fees
does not add value for investors. Occasionally, this point is extended to say that passive index
funds outperform active funds, on average. The assertion is demonstrably incorrect. Our
analysis of Morningstar data, including the returns of every registered active and passive fund for
more than two decades (to eliminate survivorship bias), shows that in U.S. small-cap equity and
international large-cap equity investing, the average actively managed fund outperformed its
benchmark after fees by 1.11% and 0.86% respectively, while the average passive index fund
underperformed after fees by 0.35% and 0.32% respectively. These results are before any type of
filter for “high-quality” or “low-cost” is applied.
Passive index funds offer low-cost exposure to the return and risk characteristics of an
underlying benchmark index, and as such, are not intended to outperform the index after fees.
Judicious active management offers investors the opportunity to outperform both a benchmark
index and the passive index funds matched to that benchmark. This active outperformance can
aid investors in reaching their financial goals. In addition, there are several investment asset
classes or approaches for which true passive index funds do not exist, such as in the fixed income
asset class which we discuss in more detail below. An exemption that effectively allows only
passive index funds could restrict the recommendation of a diversified portfolio or strategy that
may be in the best interest of the investor. Consequently, we believe that any streamlined

53

DOL reg. § 2550.404a-5(d)(1)(iv)(A)(4).

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 exemption designed to benefit investors should be structured to allow for active as well as
passive funds.
Even if, in spite of these facts and the Department’s limited regulatory mandate under
ERISA and the Code, the Department wanted to afford special treatment to passively managed
funds, variations in investment strategies can obfuscate the distinction between active and
passive investment strategies. For example, some funds are designed to adhere closely to the
index but with slight overweights and underweights. Other funds, so-called “strategic beta” or
“smart beta” funds are passively managed to track an index that itself is actively constructed to
emphasize specific factors (e.g., low volatility or high earnings quality). Many fixed-income
index funds seek to track the performance of the Barclays U.S. Aggregate Index, which contains
more than 8,000 securities, many of which are illiquid, making it impossible for funds to
replicate the index. Instead, they adopt an active selection process to mirror the characteristics of
the benchmark index.
4. Use of Streamlined Exemption in Defined Contribution Plans.
It is unclear whether a streamlined exemption would be useful in defined contribution
plans where plan sponsors typically offer to plan participants only a discrete line-up of
investment options. First, many financial advisors believe an investor’s portfolio should
diversify across a variety of asset classes, including large cap equities, small cap equities,
developed international equities, emerging market equities, high yield bonds, investment grade
bonds, short-term bonds or cash equivalents, and perhaps even extended asset classes such as
real estate, commodities, inflation-protected securities, and floating rate loans. If the plan lineup does not include “high-quality low-fee” investment options for each of these asset classes, a
financial advisor would have to choose between abandoning the streamlined exemption or
limiting the scope of its advice. Alternatively, the advisor would need to seek to use another
exemption (e.g., the BIC Exemption) to provide advice on the participant’s entire account which
would result in a confusing and suboptimal customer experience.
Furthermore, many plans offer collective investment trusts or separate accounts instead of
mutual funds. The fees for these unregistered investment products are less transparent than
comparable mutual funds because they are not subject to the same SEC disclosure rules.
However, they are also often less expensive than comparable mutual funds for a variety of
reasons. If these investments are excluded from the streamlined exemption, participants in such
plans could be less likely to receive investment advice.
5.

Application of Best Interest Standard in Streamlined Exemption.

The Department contemplates that the best interest standard would not “expressly” be
included in the streamlined exemption. Presumably the Department believes that options that
meet the “high-quality low-fee” criteria would always be in the best interest of an investor. As
discussed above, there are significant challenges for determining what criteria could be used for
such a determination. Even if conditions could be established and a streamlined exemption
created, the advisor should still be required to act in the best interest of the investor when
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 providing the recommendation. While an investment may be “high-quality low-fee”, that does
not mean it necessarily is in the best interest of a particular investor. For example, a recent
college graduate at age 21 does not typically need to invest any portion of his or her newly
established 401(k) account in a bond or money market fund. However, without imposing the
best interest standard as a condition of the exemption, advisors could recommend such
investments to a participant and not be held responsible for such advice, so long as they were
considered to be high-quality and low-fee.
6. Additional Considerations in Developing a Streamlined Exemption.
The Department inquires as to what other conditions should be imposed in addition to
low fees as part of the exemption. As discussed above, an assessment of “high-quality” should
be included in addition to “low-fees”. Regarding other potential conditions, the Department
suggests that “broadly diversified” can mean different things in different contexts, and is no
guarantee of minimizing risk for a targeted return. If the goal is to eliminate highly concentrated
or highly specialized funds from a streamlined exemption, this will need to be approached
carefully. A sector fund may be broadly diversified within its sector, but not as diversified as,
for example, a general small-cap stock fund. However, holding that fund as an investor’s only
investment might not represent an optimally diversified portfolio. The implication of the
question, however, is whether the exemption should include only multi-asset class funds (e.g.
“target date,” “lifecycle,” “target risk” or “balanced” funds). Limiting an exemption to such
funds could greatly circumscribe the ability of broker-dealers to recommend responsible and
appropriate diversified portfolios for investors with particular needs and inclinations.
The Department asks whether only investments that meet the definition of a qualified
default investment alternative (“QDIA”) within the meaning of 2550.404c-5 be included in the
streamlined exemption. Presumably, such a requirement would potentially address the concerns
related to diversification if other investments were not available to allow for recommendations
on a plan participant’s entire account. Most plans use a target date fund series as their QDIA54.
We believe target date funds are excellent solutions for many investors. However, with the
Department’s emphasis on low-fee and passive management, we believe there may be some
confusion about the actual structure and implementation of these types of funds and note the
following for consideration:
The “optimal investment strategy” the Department references is sometimes called
“strategic asset allocation.” It involves looking at market inputs (including the historical and
projected return, risk, and correlations of assets) and evaluating the investor’s risk tolerance, in
order to create a portfolio of diversified assets that will maximize the expected investment return
for the desired level of risk. Strategic asset allocation is inherently active – there is no passive
“formula” for optimizing allocation for a given individual or group of individuals, because it
depends on the return objectives and risk tolerance being assumed. Research has shown that for
multi-asset class portfolios, the strategic asset allocation is the main driver of investor outcomes.
54

As of March 2015, nearly 84% of the corporate defined contribution plans recordkept by Fidelity used a target
date fund as the QDIA.

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 In other words, simply deciding on the right balance between stocks, bonds, and other asset
classes for a given investor’s needs is more significant than which particular stocks and bonds
are selected.
The view of optimal strategy described in the language is, importantly, theoretical only;
there is no such thing as an investable market portfolio that is a passive “diversified portfolio of
assets calibrated to track the overall performance of financial markets.” Target date funds, rather
than optimizing for an individual investor at a single point in time, set up parameters for strategic
asset allocation that are followed according to a schedule, usually connected to the investor’s
anticipated time until retirement. This schedule of investment allocations is called a “glide path.”
Glide paths vary widely among investment providers, in large part because each glide path is an
active decision based on the manager’s risk management approach, savings behavior/retirement
age assumptions, and the performance expectations for various assets classes, among other
factors. The construction and management of the asset allocation parameters and the glide path
is an inherently active endeavor.
The strategic asset allocation can also be actively managed in response to market
conditions, by tilting the weights of various asset classes in response to periods when they have
become over- or undervalued relative to history or to expectations. This is called “tactical asset
allocation,” and is an inherently active approach.
In addition, the underlying investments in a target date fund or in a balanced fund can be
either actively or passively managed funds. By selecting underlying investments with the
potential to outperform comparable index funds after fees, actively managed multi-asset class
funds can potentially earn more returns for investors.
There are several asset classes that are considered part of a diversified portfolio that do
not have properly representative index fund options (e.g., emerging market equity and debt), or
for which actively managed funds tend to outperform passive (e.g., U.S. small-cap equity). To
optimize a portfolio and achieve the best investment results using these asset classes, many
portfolio managers include actively managed funds in their target date funds.
7. Business Model Implications of a Streamlined Exemption.
The Department asks a series of questions regarding certain business models and how
they would potentially react to a high-quality low-fee exemption. While it is impossible to
predict how such an exemption would be utilized in practice, there are potential concerns based
on an advisor’s business model that could affect use of a streamlined exemption. For example,
as stated above, a broker-dealer may charge an additional fee for a given fund that could be
included in the exemption. Should that fee be considered in a determination of high-quality lowfee funds? That would prevent a “master” list of funds that fall within the exemption and create
the need for advisors to develop a mechanism to screen and track funds. Further, fees for funds
can change over time and thus funds that meet the exemption criteria could change and would
therefore require frequent monitoring.

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