80_FR_22003 80 FR 21928 - Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice

80 FR 21928 - Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice

DEPARTMENT OF LABOR
Employee Benefits Security Administration

Federal Register Volume 80, Issue 75 (April 20, 2015)

Page Range21928-21960
FR Document2015-08831

This document contains a proposed regulation defining who is a ``fiduciary'' of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA) as a result of giving investment advice to a plan or its participants or beneficiaries. The proposal also applies to the definition of a ``fiduciary'' of a plan (including an individual retirement account (IRA)) under section 4975 of the Internal Revenue Code of 1986 (Code). If adopted, the proposal would treat persons who provide investment advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner as fiduciaries under ERISA and the Code in a wider array of advice relationships than the existing ERISA and Code regulations, which would be replaced. The proposed rule, and related exemptions, would increase consumer protection for plan sponsors, fiduciaries, participants, beneficiaries and IRA owners. This document also withdraws a prior proposed regulation published in 2010 (2010 Proposal) concerning this same subject matter. In connection with this proposal, elsewhere in this issue of the Federal Register, the Department is proposing new exemptions and amendments to existing exemptions from the prohibited transaction rules applicable to fiduciaries under ERISA and the Code that would allow certain broker- dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation that otherwise would be prohibited as conflicts of interest.

Federal Register, Volume 80 Issue 75 (Monday, April 20, 2015)
[Federal Register Volume 80, Number 75 (Monday, April 20, 2015)]
[Proposed Rules]
[Pages 21928-21960]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-08831]



[[Page 21927]]

Vol. 80

Monday,

No. 75

April 20, 2015

Part III





Department of Labor





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Employee Benefits Security Administration





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29 CFR Parts 2509 and 2510





Definition of the Term ``Fiduciary''; Conflict of Interest Rule--
Retirement Investment Advice; Proposed Rule

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

[[Page 21928]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2509 and 2510

RIN 1210-AB32


Definition of the Term ``Fiduciary''; Conflict of Interest Rule--
Retirement Investment Advice

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Notice of proposed rulemaking and withdrawal of previous 
proposed rule.

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SUMMARY: This document contains a proposed regulation defining who is a 
``fiduciary'' of an employee benefit plan under the Employee Retirement 
Income Security Act of 1974 (ERISA) as a result of giving investment 
advice to a plan or its participants or beneficiaries. The proposal 
also applies to the definition of a ``fiduciary'' of a plan (including 
an individual retirement account (IRA)) under section 4975 of the 
Internal Revenue Code of 1986 (Code). If adopted, the proposal would 
treat persons who provide investment advice or recommendations to an 
employee benefit plan, plan fiduciary, plan participant or beneficiary, 
IRA, or IRA owner as fiduciaries under ERISA and the Code in a wider 
array of advice relationships than the existing ERISA and Code 
regulations, which would be replaced. The proposed rule, and related 
exemptions, would increase consumer protection for plan sponsors, 
fiduciaries, participants, beneficiaries and IRA owners. This document 
also withdraws a prior proposed regulation published in 2010 (2010 
Proposal) concerning this same subject matter. In connection with this 
proposal, elsewhere in this issue of the Federal Register, the 
Department is proposing new exemptions and amendments to existing 
exemptions from the prohibited transaction rules applicable to 
fiduciaries under ERISA and the Code that would allow certain broker-
dealers, insurance agents and others that act as investment advice 
fiduciaries to continue to receive a variety of common forms of 
compensation that otherwise would be prohibited as conflicts of 
interest.

DATES: As of April 20, 2015, the proposed rule published October 22, 
2010 (75 FR 65263) is withdrawn. Submit written comments on the 
proposed regulation on or before July 6, 2015.

ADDRESSES: To facilitate the receipt and processing of written comment 
letters on the proposed regulation, EBSA encourages interested persons 
to submit their comments electronically. You may submit comments, 
identified by RIN 1210-AB32, by any of the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow 
instructions for submitting comments.
    Email: [email protected]. Include RIN 1210-AB32 in the subject line of 
the message.
    Mail: Office of Regulations and Interpretations, Employee Benefits 
Security Administration, Attn: Conflict of Interest Rule, Room N-5655, 
U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 
20210.
    Hand Delivery/Courier: Office of Regulations and Interpretations, 
Employee Benefits Security Administration, Attn: Conflict of Interest 
Rule, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue 
NW., Washington, DC 20210.
    Instructions: All comments received must include the agency name 
and Regulatory Identifier Number (RIN) for this rulemaking (RIN 1210-
AB32). Persons submitting comments electronically are encouraged not to 
submit paper copies. All comments received will be made available to 
the public, posted without change to http://www.regulations.gov and 
http://www.dol.gov/ebsa, and made available for public inspection at 
the Public Disclosure Room, N-1513, Employee Benefits Security 
Administration, U.S. Department of Labor, 200 Constitution Avenue NW., 
Washington, DC 20210, including any personal information provided.

FOR FURTHER INFORMATION CONTACT:
    For Questions Regarding the Proposed Rule: Contact Luisa Grillo-
Chope or Fred Wong, Office of Regulations and Interpretations, Employee 
Benefits Security Administration (EBSA), (202) 693-8825.
    For Questions Regarding the Proposed Prohibited Transaction 
Exemptions: Contact Karen Lloyd, Office of Exemption Determinations, 
EBSA, 202-693-8824.
    For Questions Regarding the Regulatory Impact Analysis: Contact G. 
Christopher Cosby, Office of Policy and Research, EBSA, 202-693-8425. 
(These are not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

A. Purpose of the Regulatory Action

    Under ERISA and the Code, a person is a fiduciary to a plan or IRA 
to the extent that he or she engages in specified plan activities, 
including rendering ``investment advice for a fee or other 
compensation, direct or indirect, with respect to any moneys or other 
property of such plan . . . '' ERISA safeguards plan participants by 
imposing trust law standards of care and undivided loyalty on plan 
fiduciaries, and by holding fiduciaries accountable when they breach 
those obligations. In addition, fiduciaries to plans and IRAs are not 
permitted to engage in ``prohibited transactions,'' which pose special 
dangers to the security of retirement, health, and other benefit plans 
because of fiduciaries' conflicts of interest with respect to the 
transactions. Under this regulatory structure, fiduciary status and 
responsibilities are central to protecting the public interest in the 
integrity of retirement and other important benefits, many of which are 
tax-favored.
    In 1975, the Department issued regulations that significantly 
narrowed the breadth of the statutory definition of fiduciary 
investment advice by creating a five-part test that must, in each 
instance, be satisfied before a person can be treated as a fiduciary 
adviser. This regulatory definition applies to both ERISA and the Code. 
The Department created the test in a very different context, prior to 
the existence of participant-directed 401(k) plans, widespread 
investments in IRAs, and the now commonplace rollover of plan assets 
from fiduciary-protected plans to IRAs. Today, as a result of the five-
part test, many investment professionals, consultants, and advisers \1\ 
have no obligation to adhere to ERISA's fiduciary standards or to the 
prohibited transaction rules, despite the critical role they play in 
guiding plan and IRA investments. Under ERISA and the Code, if these 
advisers are not fiduciaries, they may operate with conflicts of 
interest that they need not disclose and have limited liability under 
federal pension law for any harms resulting from the advice they 
provide. Non-fiduciaries may give imprudent and disloyal advice; steer 
plans and IRA owners to investments based on their own, rather than 
their customers' financial interests; and act on conflicts of interest 
in ways that would be prohibited if the same persons were fiduciaries. 
In light of the breadth and intent of ERISA and the Code's statutory

[[Page 21929]]

definition, the growth of participant-directed investment arrangements 
and IRAs, and the need for plans and IRA owners to seek out and rely on 
sophisticated financial advisers to make critical investment decisions 
in an increasingly complex financial marketplace, the Department 
believes it is appropriate to revisit its 1975 regulatory definition as 
well as the Code's virtually identical regulation. With this regulatory 
action, the Department proposes to replace the 1975 regulations with a 
definition of fiduciary investment advice that better reflects the 
broad scope of the statutory text and its purposes and better protects 
plans, participants, beneficiaries, and IRA owners from conflicts of 
interest, imprudence, and disloyalty.
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    \1\ By using the term ``adviser,'' the Department does not 
intend to limit its use to investment advisers registered under the 
Investment Advisers Act of 1940 or under state law. For example, as 
used herein, an adviser can be an individual or entity who can be, 
among other things, a representative of a registered investment 
adviser, a bank or similar financial institution, an insurance 
company, or a broker-dealer.
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    The Department has also sought to preserve beneficial business 
models for delivery of investment advice by separately proposing new 
exemptions from ERISA's prohibited transaction rules that would broadly 
permit firms to continue common fee and compensation practices, as long 
as they are willing to adhere to basic standards aimed at ensuring that 
their advice is in the best interest of their customers. Rather than 
create a highly prescriptive set of transaction-specific exemptions, 
the Department instead is proposing a set of exemptions that flexibly 
accommodate a wide range of current business practices, while 
minimizing the harmful impact of conflicts of interest on the quality 
of advice.
    In particular, the Department is proposing a new exemption (the 
``Best Interest Contract Exemption'') that would provide conditional 
relief for common compensation, such as commissions and revenue 
sharing, that an adviser and the adviser's employing firm might receive 
in connection with investment advice to retail retirement investors.\2\ 
In order to protect the interests of plans, participants and 
beneficiaries, and IRA owners, the exemption requires the firm and the 
adviser to contractually acknowledge fiduciary status, commit to adhere 
to basic standards of impartial conduct, adopt policies and procedures 
reasonably designed to minimize the harmful impact of conflicts of 
interest, and disclose basic information on their conflicts of interest 
and on the cost of their advice. Central to the exemption is the 
adviser and firm's agreement to meet fundamental obligations of fair 
dealing and fiduciary conduct--to give advice that is in the customer's 
best interest; avoid misleading statements; receive no more than 
reasonable compensation; and comply with applicable federal and state 
laws governing advice. This principles-based approach aligns the 
adviser's interests with those of the plan participant or IRA owner, 
while leaving the adviser and employing firm with the flexibility and 
discretion necessary to determine how best to satisfy these basic 
standards in light of the unique attributes of their business. The 
Department is similarly proposing to amend existing exemptions for a 
wide range of fiduciary advisers to ensure adherence to these basic 
standards of fiduciary conduct. In addition, the Department is 
proposing a new exemption for ``principal transactions'' in which 
advisers sell certain debt securities to plans and IRAs out of their 
own inventory, as well as an amendment to an existing exemption that 
would permit advisers to receive compensation for extending credit to 
plans or IRAs to avoid failed securities transactions. In addition to 
the Best Interest Contract Exemption, the Department is also seeking 
public comment on whether it should issue a separate streamlined 
exemption that would allow advisers to receive otherwise prohibited 
compensation in connection with plan, participant and beneficiary 
accounts, and IRA investments in certain high-quality low-fee 
investments, subject to fewer conditions. This is discussed in greater 
detail in the Federal Register notice related to the proposed Best 
Interest Contract Exemption.
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    \2\ For purposes of the exemption, retail investors include (1) 
the participants and beneficiaries of participant-directed plans, 
(2) IRA owners, and (3) the sponsors (including employees, officers, 
or directors thereof) of non participant-directed plans with fewer 
than 100 participants to the extent the sponsors (including 
employees, officers, or directors thereof) act as a fiduciary with 
respect to plan investment decisions.
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    This broad regulatory package aims to enable advisers and their 
firms to give advice that is in the best interest of their customers, 
without disrupting common compensation arrangements under conditions 
designed to ensure the adviser is acting in the best interest of the 
advice recipient. The proposed new exemptions and amendments to 
existing exemptions are published elsewhere in today's edition of the 
Federal Register.

B. Summary of the Major Provisions of the Proposed Rule

    The proposed rule clarifies and rationalizes the definition of 
fiduciary investment advice subject to specific carve-outs for 
particular types of communications that are best understood as non-
fiduciary in nature. Under the definition, a person renders investment 
advice by (1) providing investment or investment management 
recommendations or appraisals to an employee benefit plan, a plan 
fiduciary, participant or beneficiary, or an IRA owner or fiduciary, 
and (2) either (a) acknowledging the fiduciary nature of the advice, or 
(b) acting pursuant to an agreement, arrangement, or understanding with 
the advice recipient that the advice is individualized to, or 
specifically directed to, the recipient for consideration in making 
investment or management decisions regarding plan assets. When such 
advice is provided for a fee or other compensation, direct or indirect, 
the person giving the advice is a fiduciary.
    Although the new general definition of investment advice avoids the 
weaknesses of the current regulation, standing alone it could sweep in 
some relationships that are not appropriately regarded as fiduciary in 
nature and that the Department does not believe Congress intended to 
cover as fiduciary relationships. Accordingly, the proposed regulation 
includes a number of specific carve-outs to the general definition. For 
example, the regulation draws an important distinction between 
fiduciary investment advice and non-fiduciary investment or retirement 
education. Similarly, under the ``seller's carve-out,'' \3\ the 
proposal would not treat as fiduciary advice recommendations made to a 
plan in an arm's length transaction where there is generally no 
expectation of fiduciary investment advice, provided that the carve-
out's specific conditions are met. In addition, the proposal includes 
specific carve-outs for advice rendered by employees of the plan 
sponsor, platform providers, and persons who offer or enter into swaps 
or security-based swaps with plans. All of the rule's carve-outs are 
subject to conditions designed to draw an appropriate line between 
fiduciary and non-fiduciary communications, consistent with the text 
and purpose of the statutory provisions.
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    \3\ Although referred to herein as the ``seller's carve-out,'' 
we note that the carve-out provided in paragraph (b)(1)(i) of the 
proposal is not limited to sales and would apply to incidental 
advice provided in connection with an arm's length sale, purchase, 
loan, or bilateral contract between a plan investor with financial 
expertise and the adviser.
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    Finally, in addition to the new proposal in this Notice, the 
Department is simultaneously proposing a new Best Interest Contract 
Exemption, revising other exemptions from the prohibited transaction 
rules of ERISA and the Code and is exploring through a request for 
comments the concept of an additional low-fee exemption.

[[Page 21930]]

C. Gains to Investors and Compliance Costs

    When the Department promulgated the 1975 rule, 401(k) plans did not 
exist, IRAs had only just been authorized, and the majority of 
retirement plan assets were managed by professionals, rather than 
directed by individual investors. Today, individual retirement 
investors have much greater responsibility for directing their own 
investments, but they seldom have the training or specialized expertise 
necessary to prudently manage retirement assets on their own. As a 
result, they often depend on investment advice for guidance on how to 
manage their savings to achieve a secure retirement. In the current 
marketplace for retirement investment advice, however, advisers 
commonly have direct and substantial conflicts of interest, which 
encourage investment recommendations that generate higher fees for the 
advisers at the expense of their customers and often result in lower 
returns for customers even before fees.
    A wide body of economic evidence supports a finding that the impact 
of these conflicts of interest on retirement investment outcomes is 
large and, from the perspective of advice recipients, negative. As 
detailed in the Department's Regulatory Impact Analysis (available at 
www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf), the supporting 
evidence includes, among other things, statistical analyses of 
conflicted investment channels, experimental studies, government 
reports documenting abuse, and basic economic theory on the dangers 
posed by conflicts of interest and by the asymmetries of information 
and expertise that characterize interactions between ordinary 
retirement investors and conflicted advisers. This evidence takes into 
account existing protections under ERISA as well as other federal and 
state laws. A review of this data, which consistently points to 
substantial failures in the market for retirement advice, suggests that 
IRA holders receiving conflicted investment advice can expect their 
investments to underperform by an average of 100 basis points per year 
over the next 20 years. The underperformance associated with conflicts 
of interest--in the mutual funds segment alone--could cost IRA 
investors more than $210 billion over the next 10 years and nearly $500 
billion over the next 20 years. Some studies suggest that the 
underperformance of broker-sold mutual funds may be even higher than 
100 basis points, possibly due to loads that are taken off the top and/
or poor timing of broker sold investments. If the true underperformance 
of broker-sold funds is 200 basis points, IRA mutual fund holders could 
suffer from underperformance amounting to $430 billion over 10 years 
and nearly $1 trillion across the next 20 years. While the estimates 
based on the mutual fund market are large, the total market impact 
could be much larger. Insurance products, Exchange Traded Funds (ETFs), 
individual stocks and bonds, and other products are all sold by agents 
and brokers with conflicts of interest.
    The Department expects the proposal would deliver large gains for 
retirement investors. Because of data constraints, only some of these 
gains can be quantified with confidence. Focusing only on how load 
shares paid to brokers affect the size of loads paid by IRA investors 
holding load funds and the returns they achieve, the Department 
estimates the proposal would deliver to IRA investors gains of between 
$40 billion and $44 billion over 10 years and between $88 billion and 
$100 billion over 20 years. These estimates assume that the rule would 
eliminate (rather than just reduce) underperformance associated with 
the practice of incentivizing broker recommendations through variable 
front-end-load sharing; if the rule's effectiveness in this area is 
substantially below 100 percent, these estimates may overstate these 
particular gains to investors in the front-load mutual fund segment of 
the IRA market. The Department nonetheless believes that these gains 
alone would far exceed the proposal's compliance cost. For example, if 
only 75 percent of anticipated gains were realized, the quantified 
subset of such gains--specific to the front-load mutual fund segment of 
the IRA market--would amount to between $30 billion and $33 billion 
over 10 years. If only 50 percent were realized, this subset of 
expected gains would total between $20 billion and $22 billion over 10 
years, or several times the proposal's estimated compliance cost of 
$2.4 billion to 5.7 billion over the same 10 years. These gain 
estimates also exclude additional potential gains to investors 
resulting from reducing or eliminating the effects of conflicts in 
financial products other than front-end-load mutual funds. The 
Department invites input that would make it possible to quantify the 
magnitude of the rule's effectiveness and of any additional, not-yet-
quantified gains for investors.
    These estimates account for only a fraction of potential conflicts, 
associated losses, and affected retirement assets. The total gains to 
IRA investors attributable to the rule may be much higher than these 
quantified gains alone for several reasons. The Department expects the 
proposal to yield large, additional gains for IRA investors, including 
potential reductions in excessive trading and associated transaction 
costs and timing errors (such as might be associated with return 
chasing), improvements in the performance of IRA investments other than 
front-load mutual funds, and improvements in the performance of defined 
contribution (DC) plan investments. As noted above, under current 
rules, adviser conflicts could cost IRA investors as much as $410 
billion over 10 years and $1 trillion over 20 years, so the potential 
additional gains to IRA investors from this proposal could be very 
large.
    The following accounting table summarizes the Department's 
conclusions:

                    Table 1--Partial Gains to Investors and Compliance Costs Accounting Table
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                                 Primary                      High                      Discount       Period
          Category              estimate    Low estimate    estimate     Year dollar    rate (9%)      covered
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                                           Partial Gains to Investors
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Annualized, Monetized               $4,243        $3,830  ............          2015             7     2017-2026
 ($millions/year)...........        $5,170         4,666  ............          2015             3     2017-2026
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[[Page 21931]]

 
Notes: The proposal is expected to deliver large gains for retirement investors. Because of limitations of the
 literature and other available evidence, only some of these gains can be quantified. The estimates in this
 table focus only on how load shares paid to brokers affect the size of loads IRA investors holding load funds
 pay and the returns they achieve. These estimates assume that the rule will eliminate (rather than just reduce)
 underperformance associated with the practice of incentivizing broker recommendations through variable front-
 end-load sharing. If, however, the rule's effectiveness in reducing underperformance is substantially below 100
 percent, these estimates may overstate these particular gains to investors in the front-end-load mutual fund
 segment of the IRA market. However, these estimates account for only a fraction of potential conflicts,
 associated losses, and affected retirement assets. The total gains to IRA investors attributable to the rule
 may be higher than the quantified gains alone for several reasons. For example, the proposal is expected to
 yield additional gains for IRA investors, including potential reductions in excessive trading and associated
 transaction costs and timing errors (such as might be associated with return chasing), improvements in the
 performance of IRA investments other than front-load mutual funds, and improvements in the performance of DC
 plan investments.
The partial-gains-to-investors estimates include both economic efficiency benefits and transfers from the
 financial services industry to IRA holders.
The partial gains estimates are discounted to December 31, 2015.
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                                                Compliance Costs
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Annualized, Monetized                 $348  ............          $706          2015             7     2016-2025
 ($millions/year)...........           328  ............           664          2015             3     2016-2025
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Notes: The compliance costs of the current proposal including the cost of compliance reviews, comprehensive
 compliance and supervisory system changes, policies and procedures and training programs updates, insurance
 increases, disclosure preparation and distribution, and some costs of changes in other business practices.
 Compliance costs incurred by mutual funds or other asset providers have not been estimated.
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                                           Insurance Premium Transfers
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Annualized Monetized                   $63  ............  ............          2015             7     2016-2025
 ($millions/year)...........            63  ............  ............          2015             3     2016-2025
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From/To.....................  From: Service providers facing increased
                                 insurance premiums due to increased
                                           liability risk
                               To: Plans, participants, beneficiaries,
                              and IRA investors through the payment of
                              recoveries--funded from a portion of the
                                    increased insurance premiums
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    OMB Circular A-4 requires the presentation of a social welfare 
accounting table that summarizes a regulation's benefits, costs and 
transfers (monetized, where possible). A summary of this type would 
differ from and expand upon Table I in several ways:
     In the language of social welfare economics as reflected 
in Circular A-4, investor gains comprise two parts: Social welfare 
``benefits'' attributable to improvements in economic efficiency and 
``transfers'' of welfare to retirement investors from the financial 
services industry. Due to limitations of the literature and other 
available evidence, the investor gains estimates presented in Table I 
have not been broken down into benefits and transfer components, but 
making the distinction between these categories of impacts is key for a 
social welfare accounting statement.
     The estimates in Table I reflect only a subset of the 
gains to investors resulting from the rule, but may overstate this 
subset. As noted in Table I, the Department's estimates of partial 
gains to investors reflect an assumption that the rule will eliminate, 
rather than just reduce, underperformance associated with the practice 
of incentivizing broker recommendations through variable front-end-load 
sharing. If, however, the rule's effectiveness is substantially below 
100 percent, these estimates would overstate these partial gains to 
investors in the front-load mutual fund segment of the IRA market. The 
estimates in Table I also exclude additional potential gains to 
investors resulting from reducing or eliminating the effects of 
conflicts in financial products other than front-end-load mutual funds 
in the IRA market, and all potential gains to investors in the plan 
market. The Department invites input that would make it possible to 
quantify the magnitude of the rule's effectiveness and of any 
additional, not-yet-quantified gains for investors.
     Generally, the gains to investors consist of multiple 
parts: Transfers to IRA investors from advisers and others in the 
supply chain, benefits to the overall economy from a shift in the 
allocation of investment dollars to projects that have higher returns, 
and resource savings associated with, for example, reductions in 
excessive turnover and wasteful and unsuccessful efforts to outperform 
the market. Some of these gains are partially quantified in Table I. 
Also, the estimates in Table I assume the gains to investors arise 
gradually as the fraction of wealth invested based on conflicted 
investment advice slowly declines over time based on historical 
patterns of asset turnover. However, the estimates do not account for 
potential transition costs associated with a shift of investments to 
higher-performing vehicles. These transition costs have not been 
quantified due to lack of granularity in the literature or availability 
of other evidence on both the portion of investor gains that consists 
of resource savings, as opposed to transfers, and the amount of 
transitional cost that would be incurred per unit of resource savings.
     Other categories of costs not yet quantified include 
compliance costs incurred by mutual funds or other asset providers. 
Enforcement costs or other costs borne by the government are also not 
quantified.
    The Department requests detailed comment, data, and analysis on all 
of the issues outlined above for incorporation into the social welfare 
analysis at the finalization stage of the rulemaking process.
    For a detailed discussion of the gains to investors and compliance 
costs of the

[[Page 21932]]

current proposal, please see Section J. Regulatory Impact Analysis, 
below.

II. Overview

A. Rulemaking Background

    The market for retirement advice has changed dramatically since the 
Department first promulgated the 1975 regulation. Individuals, rather 
than large employers and professional money managers, have become 
increasingly responsible for managing retirement assets as IRAs and 
participant-directed plans, such as 401(k) plans, have supplanted 
defined benefit pensions. At the same time, the variety and complexity 
of financial products have increased, widening the information gap 
between advisers and their clients. Plan fiduciaries, plan participants 
and IRA investors must often rely on experts for advice, but are unable 
to assess the quality of the expert's advice or effectively guard 
against the adviser's conflicts of interest. This challenge is 
especially true of small retail investors who typically do not have 
financial expertise and can ill-afford lower returns to their 
retirement savings caused by conflicts. As baby boomers retire, they 
are increasingly moving money from ERISA-covered plans, where their 
employer has both the incentive and the fiduciary duty to facilitate 
sound investment choices, to IRAs where both good and bad investment 
choices are myriad and advice that is conflicted is commonplace. Such 
``rollovers'' will total more than $2 trillion over the next 5 years. 
These trends were not apparent when the Department promulgated the 1975 
rule. At that time, 401(k) plans did not yet exist and IRAs had only 
just been authorized. These changes in the marketplace, as well as the 
Department's experience with the rule since 1975, support the 
Department's efforts to reevaluate and revise the rule through a public 
process of notice and comment rulemaking.
    On October 22, 2010, the Department published a proposed rule in 
the Federal Register (75 FR 65263) (2010 Proposal) proposing to amend 
29 CFR 2510.3-21(c) (40 FR 50843, Oct. 31, 1975), which defines when a 
person renders investment advice to an employee benefit plan, and 
consequently acts as a fiduciary under ERISA section 3(21)(A)(ii) (29 
U.S.C. 1002(21)(A)(ii)). In response to this proposal, the Department 
received over 300 comment letters. A public hearing on the 2010 
Proposal was held in Washington, DC on March 1 and 2, 2011, at which 38 
speakers testified. The transcript of the hearing was made available 
for additional public comment and the Department received over 60 
additional comment letters. In addition, the Department has held many 
meetings with interested parties.
    A number of commenters urged consideration of other means to attain 
the objectives of the 2010 Proposal and of additional analysis of the 
proposal's expected costs and benefits. In light of these comments and 
because of the significance of this rule, the Department decided to 
issue a new proposed regulation. On September 19, 2011 the Department 
announced that it would withdraw the 2010 Proposal and propose a new 
rule defining the term ``fiduciary'' for purposes of section 
3(21)(A)(ii) of ERISA. This document fulfills that announcement in 
publishing both a new proposed regulation and withdrawing the 2010 
Proposal. Consistent with the President's Executive Orders 12866 and 
13563, extending the rulemaking process will give the public a full 
opportunity to evaluate and comment on the revised proposal and updated 
economic analysis. In addition, we are simultaneously publishing 
proposed new and amended exemptions from ERISA and the Code's 
prohibited transaction rules designed to allow certain broker-dealers, 
insurance agents and others that act as investment advice fiduciaries 
to nevertheless continue to receive common forms of compensation that 
would otherwise be prohibited, subject to appropriate safeguards. The 
existing class exemptions will otherwise remain in place, affording 
flexibility to fiduciaries who currently use the exemptions or who wish 
to use the exemptions in the future. The proposed new regulatory 
package takes into account robust public comment and input and 
represents a substantial change from the 2010 Proposal, balancing long 
overdue consumer protections with flexibility for the industry in order 
to minimize disruptions to current business models.
    In crafting the current regulatory package, the Department has 
benefitted from the views and perspectives expressed in public comments 
to the 2010 Proposal. For example, the Department has responded to 
concerns about the impact of the prohibited transaction rules on the 
marketplace for retail advice by proposing a broad package of 
exemptions that are intended to ensure that advisers and their firms 
make recommendations that are in the best interest of plan participants 
and IRA owners, without disrupting common fee arrangements. In response 
to commenters, the Department has also determined not to include, as 
fiduciary in nature, appraisals or valuations of employer securities 
provided to ESOPs or to certain collective investment funds holding 
assets of plan investors. On a more technical point, the Department 
also followed recommendations that it not automatically assign 
fiduciary status to investment advisers under the Advisers Act, but 
instead follow an entirely functional approach to fiduciary status. In 
light of public comments, the new proposal also makes a number of other 
changes to the regulatory proposal. For example, the Department has 
addressed concerns that it could be misread to extend fiduciary status 
to persons that prepare newsletters, television commentaries, or 
conference speeches that contain recommendations made to the general 
public. Similarly, the rule makes clear that fiduciary status does not 
extend to internal company personnel who give advice on behalf of their 
plan sponsor as part of their duties, but receive no compensation 
beyond their salary for the provision of advice. The Department is 
appreciative of the comments it received to the 2010 Proposal, and more 
fully discusses a number of the comments that influenced change in the 
sections that follow. In addition, the Department is eager to receive 
comments on the new proposal in general, and requests public comment on 
a number of specific aspects of the package as indicated below.
    The following discussion summarizes the 2010 Proposal, describes 
some of the concerns and issues raised by commenters, and explains the 
new proposed regulation, which is published with this notice.

B. The Statute and Existing Regulation

    ERISA (or the ``Act'') is a comprehensive statute designed to 
protect the interests of plan participants and beneficiaries, the 
integrity of employee benefit plans, and the security of retirement, 
health, and other critical benefits. The broad public interest in 
ERISA-covered plans is reflected in the Act's imposition of stringent 
fiduciary responsibilities on parties engaging in important plan 
activities, as well as in the tax-favored status of plan assets and 
investments. One of the chief ways in which ERISA protects employee 
benefit plans is by requiring that plan fiduciaries comply with 
fundamental obligations rooted in the law of trusts. In particular, 
plan fiduciaries must manage plan assets prudently and with undivided 
loyalty to the plans and their participants and beneficiaries.\4\ In 
addition, they must refrain from

[[Page 21933]]

engaging in ``prohibited transactions,'' which the Act does not permit 
because of the dangers to the interests of the plan and IRA posed by 
the transactions.\5\ When fiduciaries violate ERISA's fiduciary duties 
or the prohibited transaction rules, they may be held personally liable 
for any losses to the investor resulting from the breach.\6\ In 
addition, violations of the prohibited transaction rules are subject to 
excise taxes under the Code.
---------------------------------------------------------------------------

    \4\ ERISA section 404(a).
    \5\ ERISA section 406. The Act also prohibits certain 
transactions between a plan and a ``party in interest.''
    \6\ ERISA section 409; see also ERISA section 405.
---------------------------------------------------------------------------

    The Code also protects individuals who save for retirement through 
tax-favored accounts that are not generally covered by ERISA, such as 
IRAs, through a more limited regulation of fiduciary conduct. Although 
ERISA's general fiduciary obligations of prudence and loyalty do not 
govern the fiduciaries of IRAs and other plans not covered by ERISA, 
these fiduciaries are subject to the prohibited transaction rules of 
the Code. In this context, however, the sole statutory sanction for 
engaging in the illegal transactions is the assessment of an excise tax 
enforced by the Internal Revenue Service (IRS). Thus, unlike 
participants in plans covered by Title I of ERISA, IRA owners do not 
have a statutory right to bring suit against fiduciaries under ERISA 
for violation of the prohibited transaction rules and fiduciaries are 
not personally liable to IRA owners for the losses caused by their 
misconduct.
    Under this statutory framework, the determination of who is a 
``fiduciary'' is of central importance. Many of ERISA's and the Code's 
protections, duties, and liabilities hinge on fiduciary status. In 
relevant part, section 3(21)(A) of ERISA provides that a person is a 
fiduciary with respect to a plan to the extent he or she (i) exercises 
any discretionary authority or discretionary control with respect to 
management of such plan or exercises any authority or control with 
respect to management or disposition of its assets; (ii) renders 
investment advice for a fee or other compensation, direct or indirect, 
with respect to any moneys or other property of such plan, or has any 
authority or responsibility to do so; or, (iii) has any discretionary 
authority or discretionary responsibility in the administration of such 
plan. Section 4975(e)(3) of the IRC identically defines ``fiduciary'' 
for purposes of the prohibited transaction rules set forth in Code 
section 4975.
    The statutory definition contained in section 3(21)(A) deliberately 
casts a wide net in assigning fiduciary responsibility with respect to 
plan assets. Thus, ``any authority or control'' over plan assets is 
sufficient to confer fiduciary status, and any person who renders 
``investment advice for a fee or other compensation, direct or 
indirect'' is an investment advice fiduciary, regardless of whether 
they have direct control over the plan's assets, and regardless of 
their status as an investment adviser and/or broker under the federal 
securities laws. The statutory definition and associated fiduciary 
responsibilities were enacted to ensure that plans can depend on 
persons who provide investment advice for a fee to make recommendations 
that are prudent, loyal, and untainted by conflicts of interest. In the 
absence of fiduciary status, persons who provide investment advice 
would neither be subject to ERISA's fundamental fiduciary standards, 
nor accountable under ERISA or the Code for imprudent, disloyal, or 
tainted advice, no matter how egregious the misconduct or how 
substantial the losses. Plans, individual participants and 
beneficiaries, and IRA owners often are not financial experts and 
consequently must rely on professional advice to make critical 
investment decisions. The statutory definition, prohibitions on 
conflicts of interest, and core fiduciary obligations of prudence and 
loyalty, all reflect Congress' recognition in 1974 of the fundamental 
importance of such advice to protect savers' retirement nest eggs. In 
the years since then, the significance of financial advice has become 
still greater with increased reliance on participant-directed plans and 
self-directed IRAs for the provision of retirement benefits.
    In 1975, the Department issued a regulation, at 29 CFR 2510.3-21(c) 
defining the circumstances under which a person is treated as providing 
``investment advice'' to an employee benefit plan within the meaning of 
section 3(21)(A)(ii) of ERISA (the ``1975 regulation''), and the 
Department of the Treasury issued a virtually identical regulation 
under the Code.\7\ The regulation narrowed the scope of the statutory 
definition of fiduciary investment advice by creating a five-part test 
that must be satisfied before a person can be treated as rendering 
investment advice for a fee. Under the regulation, for advice to 
constitute ``investment advice,'' an adviser who is not a fiduciary 
under another provision of the statute must--(1) render advice as to 
the value of securities or other property, or make recommendations as 
to the advisability of investing in, purchasing or selling securities 
or other property (2) on a regular basis (3) pursuant to a mutual 
agreement, arrangement or understanding, with the plan or a plan 
fiduciary that (4) the advice will serve as a primary basis for 
investment decisions with respect to plan assets, and that (5) the 
advice will be individualized based on the particular needs of the plan 
or IRA. The regulation provides that an adviser is a fiduciary with 
respect to any particular instance of advice only if he or she meets 
each and every element of the five-part test with respect to the 
particular advice recipient or plan at issue.
---------------------------------------------------------------------------

    \7\ See 26 CFR 54.4975-9(c), which interprets Code section 
4975(e)(3). 40 FR 50840 (Oct. 31, 1975). Under section 102 of 
Reorganization Plan No. 4 of 1978, the authority of the Secretary of 
the Treasury to interpret section 4975 of the Code has been 
transferred, with certain exceptions not here relevant, to the 
Secretary of Labor. References in this document to sections of ERISA 
should be read to refer also to the corresponding sections of the 
Code.
---------------------------------------------------------------------------

    As the marketplace for financial services has developed in the 
years since 1975, the five-part test may now undermine, rather than 
promote, the statutes' text and purposes. The narrowness of the 1975 
regulation allows advisers, brokers, consultants and valuation firms to 
play a central role in shaping plan and IRA investments, without 
ensuring the accountability that Congress intended for persons having 
such influence and responsibility. Even when plan sponsors, 
participants, beneficiaries, and IRA owners clearly rely on paid 
advisers for impartial guidance, the regulation allows many advisers to 
avoid fiduciary status and disregard ERISA's fiduciary obligations of 
care and prohibitions on disloyal and conflicted transactions. As a 
consequence, these advisers can steer customers to investments based on 
their own self-interest (e.g., products that generate higher fees for 
the adviser even if there are identical lower-fee products available), 
give imprudent advice, and engage in transactions that would otherwise 
not be permitted by ERISA and the Code without fear of accountability 
under either ERISA or the Code.
    Instead of ensuring that trusted advisers give prudent and unbiased 
advice in accordance with fiduciary norms, the current regulation 
erects a multi-part series of technical impediments to fiduciary 
responsibility. The Department is concerned that the specific elements 
of the five-part test--which are not found in the text of the Act or 
Code--now work to frustrate statutory goals and defeat advice 
recipients' legitimate expectations. In

[[Page 21934]]

light of the importance of the proper management of plan and IRA 
assets, it is critical that the regulation defining investment advice 
draws appropriate distinctions between the sorts of advice 
relationships that should be treated as fiduciary in nature and those 
that should not. In practice, the current regulation appears not to do 
so. Instead, the lines drawn by the five-part test frequently permit 
evasion of fiduciary status and responsibility in ways that undermine 
the statutory text and purposes.
    One example of the five-part test's shortcomings is the requirement 
that advice be furnished on a ``regular basis.'' As a result of the 
requirement, if a small plan hires an investment professional or 
appraiser on a one-time basis for an investment recommendation or 
valuation opinion on a large, complex investment, the adviser has no 
fiduciary obligation to the plan under ERISA. Even if the plan is 
considering investing all or substantially all of the plan's assets, 
lacks the specialized expertise necessary to evaluate the complex 
transaction on its own, and the consultant fully understands the plan's 
dependence on his professional judgment, the consultant is not a 
fiduciary because he does not advise the plan on a ``regular basis.'' 
The plan could be investing hundreds of millions of dollars in plan 
assets, and it could be the most critical investment decision the plan 
ever makes, but the adviser would have no fiduciary responsibility 
under the 1975 regulation. While a consultant who regularly makes less 
significant investment recommendations to the plan would be a fiduciary 
if he satisfies the other four prongs of the regulatory test, the one-
time consultant on an enormous transaction has no fiduciary 
responsibility.
    In such cases, the ``regular basis'' requirement, which is not 
found in the text of ERISA or the Code, fails to draw a sensible line 
between fiduciary and non-fiduciary conduct, and undermines the law's 
protective purposes. A specific example is the one-time purchase of a 
group annuity to cover all of the benefits promised to substantially 
all of a plan's participants for the rest of their lives when a defined 
benefit plan terminates or a plan's expenditure of hundreds of millions 
of dollars on a single real estate transaction with the assistance of a 
financial adviser hired for purposes of that one transaction. Despite 
the clear importance of the decisions and the clear reliance on paid 
advisers, the advisers would not be plan fiduciaries. On a smaller 
scale that is still immensely important for the affected individual, 
the ``regular basis'' requirement also deprives individual participants 
and IRA owners of statutory protection when they seek specialized 
advice on a one-time basis, even if the advice concerns the investment 
of all or substantially all of the assets held in their account (e.g., 
as in the case of an annuity purchase or a roll-over from a plan to an 
IRA or from one IRA to another).
    Under the five-part test, fiduciary status can also be defeated by 
arguing that the parties did not have a mutual agreement, arrangement, 
or understanding that the advice would serve as a primary basis for 
investment decisions. Investment professionals in today's marketplace 
frequently market retirement investment services in ways that clearly 
suggest the provision of tailored or individualized advice, while at 
the same time disclaiming in fine print the requisite ``mutual'' 
understanding that the advice will be used as a primary basis for 
investment decisions.
    Similarly, there appears to be a widespread belief among broker-
dealers that they are not fiduciaries with respect to plans or IRAs 
because they do not hold themselves out as registered investment 
advisers, even though they often market their services as financial or 
retirement planners. The import of such disclaimers--and of the fine 
legal distinctions between brokers and registered investment advisers--
is often completely lost on plan participants and IRA owners who 
receive investment advice. As shown in a study conducted by the RAND 
Institute for Civil Justice for the Securities and Exchange Commission 
(SEC), consumers often do not read the legal documents and do not 
understand the difference between brokers and registered investment 
advisers particularly when brokers adopt such titles as ``financial 
adviser'' and ``financial manager.'' \8\
---------------------------------------------------------------------------

    \8\ Angela A. Hung, Noreen Clancy, Jeff Dominitz, Eric Talley, 
Claude Berrebi, Farrukh Suvankulov, Investor and Industry 
Perspectives on Investment Advisers and Broker-Dealers, RAND 
Institute for Civil Justice, commissioned by the U.S. Securities and 
Exchange Commission, 2008, at http://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf
---------------------------------------------------------------------------

    Even in the absence of boilerplate fine print disclaimers, however, 
it is far from evident how the ``primary basis'' element of the five-
part test promotes the statutory text or purposes of ERISA and the 
Code. If, for example, a plan hires multiple specialized advisers for 
an especially complex transaction, it should be able to rely upon all 
of the consultants' advice, regardless of whether one could 
characterize any particular consultant's advice as primary, secondary, 
or tertiary. Presumably, paid consultants make recommendations--and 
retirement investors pay for them--with the hope or expectation that 
the recommendations could, in fact, be relied upon in making important 
decisions. When a plan, participant, beneficiary, or IRA owner directly 
or indirectly pays for advice upon which it can rely, there appears to 
be little statutory basis for drawing distinctions based on a 
subjective characterization of the advice as ``primary,'' 
``secondary,'' or other.
    In other respects, the current regulatory definition could also 
benefit from clarification. For example, a number of parties have 
argued that the regulation, as currently drafted, does not encompass 
advice as to the selection of money managers or mutual funds. 
Similarly, they have argued that the regulation does not cover advice 
given to the managers of pooled investment vehicles that hold plan 
assets contributed by many plans, as opposed to advice given to 
particular plans. Parties have even argued that advice was 
insufficiently ``individualized'' to fall within the scope of the 
regulation because the advice provider had failed to prudently consider 
the ``particular needs of the plan,'' notwithstanding the fact that 
both the advice provider and the plan agreed that individualized advice 
based on the plan's needs would be provided, and the adviser actually 
made specific investment recommendations to the plan. Although the 
Department disagrees with each of these interpretations of the current 
regulation, the arguments nevertheless suggest that clarifying 
regulatory text could be helpful.
    Changes in the financial marketplace have enlarged the gap between 
the 1975 regulation's effect and the Congressional intent of the 
statutory definition. The greatest change is the predominance of 
individual account plans, many of which require participants to make 
investment decisions for their own accounts. In 1975, private-sector 
defined benefit pensions--mostly large, professionally managed funds--
covered over 27 million active participants and held assets totaling 
almost $186 billion. This compared with just 11 million active 
participants in individual account defined contribution plans with 
assets of just $74 billion.\9\ Moreover, the great majority of defined 
contribution plans at that time were professionally

[[Page 21935]]

managed, not participant-directed. In 1975, 401(k) plans did not yet 
exist and IRAs had just been authorized as part of ERISA's enactment 
the prior year. In contrast, by 2012 defined benefit plans covered just 
under 16 million active participants, while individual account-based 
defined contribution plans covered over 68 million active 
participants-- including 63 million participants in 401(k)-type plans 
that are participant-directed.\10\
---------------------------------------------------------------------------

    \9\ U.S. Department of Labor, Private Pension Plan Bulletin 
Historical Tables and Graphs, (Dec. 2014), at http://www.dol.gov/ebsa/pdf/historicaltables.pdf.
    \10\ U.S. Department of Labor, Private Pension Plan Bulletin 
Abstract of 2012 Form 5500 Annual Reports, (Jan. 2015), at http://www.dol.gov/ebsa/PDF/2012pensionplanbulletin.PDF.
---------------------------------------------------------------------------

    With this transformation, plan participants, beneficiaries and IRA 
owners have become major consumers of investment advice that is paid 
for directly or indirectly. By 2012, 97 percent of 401(k) participants 
were responsible for directing the investment of all or part of their 
own account, up from 86 percent as recently as 1999.\11\ Also, in 2013, 
more than 34 million households owned IRAs.\12\
---------------------------------------------------------------------------

    \11\ U.S. Department of Labor, Private Pension Plan Bulletin 
Abstract of 1999 Form 5500 Annual Reports, Number 12, Summer 2004 
(Apr. 2008), at http://www.dol.gov/ebsa/PDF/1999pensionplanbulletin.PDF.
    \12\ Brien, Michael J., and Constantijn W.A. Panis. Analysis of 
Financial Asset Holdings of Households on the United States: 2013 
Update. Advanced Analytic Consulting Group and Deloitte, Report 
Prepared for the U.S. Department of Labor, 2014.
---------------------------------------------------------------------------

    Many of the consultants and advisers who provide investment-related 
advice and recommendations receive compensation from the financial 
institutions whose investment products they recommend. This gives the 
consultants and advisers a strong bias, conscious or unconscious, to 
favor investments that provide them greater compensation rather than 
those that may be most appropriate for the participants. Unless they 
are fiduciaries, however, these consultants and advisers are free under 
ERISA and the Code, not only to receive such conflicted compensation, 
but also to act on their conflicts of interest to the detriment of 
their customers. In addition, plans, participants, beneficiaries, and 
IRA owners now have a much greater variety of investments to choose 
from, creating a greater need for expert advice. Consolidation of the 
financial services industry and innovations in compensation 
arrangements have multiplied the opportunities for self-dealing and 
reduced the transparency of fees.
    The absence of adequate fiduciary protections and safeguards is 
especially problematic in light of the growth of participant-directed 
plans and self-directed IRAs; the gap in expertise and information 
between advisers and the customers who depend upon them for guidance; 
and the advisers' significant conflicts of interest.
    When Congress enacted ERISA in 1974, it made a judgment that plan 
advisers should be subject to ERISA's fiduciary regime and that plan 
participants, beneficiaries and IRA owners should be protected from 
conflicted transactions by the prohibited transaction rules. More 
fundamentally, however, the statutory language was designed to cover a 
much broader category of persons who provide fiduciary investment 
advice based on their functions and to limit their ability to engage in 
self-dealing and other conflicts of interest than is currently 
reflected in the five-part test. While many advisers are committed to 
providing high-quality advice and always put their customers' best 
interests first, the 1975 regulation makes it far too easy for advisers 
in today's marketplace not to do so and to avoid fiduciary 
responsibility even when they clearly purport to give individualized 
advice and to act in the client's best interest, rather than their own.

C. The 2010 Proposal

    In 2010, the Department proposed a new regulation that would have 
replaced the five-part test with a new definition of what counted as 
fiduciary investment advice for a fee. At that time, the Department did 
not propose any new prohibited transaction exemptions and acknowledged 
uncertainty regarding whether existing exemptions would be available, 
but specifically invited comments on whether new or amended exemptions 
should be proposed. The proposal also provided carve-outs for conduct 
that would not result in fiduciary status. The general definition 
included the following types of advice: (1) Appraisals or fairness 
opinions concerning the value of securities or other property; (2) 
recommendations as to the advisability of investing in, purchasing, 
holding or selling securities or other property; and (3) 
recommendations as to the management of securities or other property. 
Reflecting the Department's longstanding interpretation of the 1975 
regulations, the 2010 Proposal made clear that investment advice under 
the proposal includes advice provided to plan participants, 
beneficiaries and IRA owners as well as to plan fiduciaries.
    Under the 2010 Proposal, a paid adviser would have been treated as 
a fiduciary if the adviser provided one of the above types of advice 
and either: (1) Represented that he or she was acting as an ERISA 
fiduciary; (2) was already an ERISA fiduciary to the plan by virtue of 
having control over the management or disposition of plan assets, or by 
having discretionary authority over the administration of the plan; (3) 
was already an investment adviser under the Investment Advisers Act of 
1940 (Advisers Act); or (4) provided the advice pursuant to an 
agreement or understanding that the advice may be considered in 
connection with plan investment or asset management decisions and would 
be individualized to the needs of the plan, plan participant or 
beneficiary, or IRA owner. The 2010 Proposal also provided that, for 
purposes of the fiduciary definition, relevant fees included any direct 
or indirect fees received by the adviser or an affiliate from any 
source. Direct fees are payments made by the advice recipient to the 
adviser including transaction-based fees, such as brokerage, mutual 
fund or insurance sales commissions. Indirect fees are payments to the 
adviser from any source other than the advice recipient such as revenue 
sharing payments from a mutual fund.
    The 2010 Proposal included specific carve-outs for the following 
actions that the Department believed should not result in fiduciary 
status. In particular, a person would not have become a fiduciary by--
    1. Providing recommendations as a seller or purchaser with 
interests adverse to the plan, its participants, or IRA owners, if the 
advice recipient reasonably should have known that the adviser was not 
providing impartial investment advice and the adviser had not 
acknowledged fiduciary status.
    2. Providing investment education information and materials in 
connection with an individual account plan.
    3. Marketing or making available a menu of investment alternatives 
that a plan fiduciary could choose from, and providing general 
financial information to assist in selecting and monitoring those 
investments, if these activities include a written disclosure that the 
adviser was not providing impartial investment advice.
    4. Preparing reports necessary to comply with ERISA, the Code, or 
regulations or forms issued thereunder, unless the report valued assets 
that lack a generally recognized market, or served as a basis for 
making plan distributions.

The 2010 Proposal applied to the definition of an ``investment advice 
fiduciary'' in section 4975(e)(3)(B) of the Code as well as to the 
parallel ERISA definition. These provisions apply to both certain ERISA 
covered plans, and certain non-ERISA plans such as individual 
retirement accounts.

[[Page 21936]]

    In the preamble to the 2010 Proposal, the Department also noted 
that it had previously interpreted the 1975 regulation as providing 
that a recommendation to a plan participant on how to invest the 
proceeds of a contemplated plan distribution was not fiduciary 
investment advice. Advisory Opinion 2005-23A (Dec. 7, 2005). The 
Department specifically asked for comments as to whether the final rule 
should include such recommendations as fiduciary advice.
    The 2010 Proposal prompted a large number of comments and a 
vigorous debate. As noted above, the Department made special efforts to 
encourage the regulated community's participation in this rulemaking. 
In addition to an extended comment period, the Department held a two-
day public hearing. Additional time for comments was allowed following 
the hearing and publication of the hearing transcript on the 
Department's Web site and Department representatives held numerous 
meetings with interested parties. Many of the comments concerned the 
Department's conclusions regarding the likely economic impact of the 
proposal, if adopted. A number of commenters urged the Department to 
undertake additional analysis of expected costs and benefits 
particularly with regard to the 2010 Proposal's coverage of IRAs. After 
consideration of these comments and in light of the significance of 
this rulemaking to the retirement plan service provider industry, plan 
sponsors and participants, beneficiaries and IRA owners, the Department 
decided to take more time for review and to issue a new proposed 
regulation for comment.

D. The New Proposal

    The new proposed rule makes many revisions to the 2010 Proposal, 
although it also retains aspects of that proposal's essential 
framework. The new proposal broadly updates the definition of fiduciary 
investment advice, and also provides a series of carve-outs from the 
fiduciary investment advice definition for communications that should 
not be viewed as fiduciary in nature. The definition generally covers 
the following categories of advice: (1) Investment recommendations, (2) 
investment management recommendations, (3) appraisals of investments, 
or (4) recommendations of persons to provide investment advice for a 
fee or to manage plan assets. Persons who provide such advice fall 
within the general definition of a fiduciary if they either (a) 
represent that they are acting as a fiduciary under ERISA or the Code 
or (b) provide the advice pursuant to an agreement, arrangement, or 
understanding that the advice is individualized or specifically 
directed to the recipient for consideration in making investment or 
investment management decisions regarding plan assets.
    The new proposal includes several carve-outs for persons who do not 
represent that they are acting as ERISA fiduciaries, some of which were 
included in some form in the 2010 Proposal but many of which were not. 
Subject to specified conditions, these carve-outs cover--
    (1) Statements or recommendations made to a ``large plan investor 
with financial expertise'' by a counterparty acting in an arm's length 
transaction;
    (2) offers or recommendations to plan fiduciaries of ERISA plans to 
enter into a swap or security-based swap that is regulated under the 
Securities Exchange Act or the Commodity Exchange Act;
    (3) statements or recommendations provided to a plan fiduciary of 
an ERISA plan by an employee of the plan sponsor if the employee 
receives no fee beyond his or her normal compensation;
    (4) marketing or making available a platform of investment 
alternatives to be selected by a plan fiduciary for an ERISA 
participant-directed individual account plan;
    (5) the identification of investment alternatives that meet 
objective criteria specified by a plan fiduciary of an ERISA plan or 
the provision of objective financial data to such fiduciary;
    (6) the provision of an appraisal, fairness opinion or a statement 
of value to an ESOP regarding employer securities, to a collective 
investment vehicle holding plan assets, or to a plan for meeting 
reporting and disclosure requirements; and
    (7) information and materials that constitute ``investment 
education'' or ``retirement education.''
    The new proposal applies the same definition of ``investment 
advice'' to the definition of ``fiduciary'' in section 4975(e)(3) of 
the Code and thus applies to investment advice rendered to IRAs. 
``Plan'' is defined in the new proposal to mean any employee benefit 
plan described in section 3(3) of the Act and any plan described in 
section 4975(e)(1)(A) of the Code. For ease of reference in this 
proposal, the term ``IRA'' has been inclusively defined to mean any 
account described in Code section 4975(e)(1)(B) through (F), such as a 
true individual retirement account described under Code section 408(a) 
and a health savings account described in section 223(d) of the 
Code.\13\
---------------------------------------------------------------------------

    \13\ As discussed below in Section E. Coverage of IRAs and Other 
Non-ERISA Plans, in recognition of differences among the various 
types of non-ERISA plan arrangements described in Code section 
4975(e)(1)(B) through (F), the Department solicits comments on 
whether it is appropriate for the regulation to cover the full range 
of these arrangements. These non-ERISA plan arrangements are tax 
favored vehicles under the Code like IRAs, but are not intended for 
retirement savings.
---------------------------------------------------------------------------

    Many of the differences between the new proposal and the 2010 
Proposal reflect the input of commenters on the 2010 Proposal as part 
of the public notice and comment process. For example, some commenters 
argued that the 2010 Proposal swept too broadly by making investment 
recommendations fiduciary in nature simply because the adviser was a 
plan fiduciary for purposes unconnected with the advice or an 
investment adviser under the Advisers Act. In their view, such status-
based criteria were in tension with the Act's functional approach to 
fiduciary status and would have resulted in unwarranted and unintended 
compliance issues and costs. Other commenters objected to the lack of a 
requirement for these status-based categories that the advice be 
individualized to the needs of the advice recipient. The new proposal 
incorporates these suggestions: An adviser's status as an investment 
adviser under the Advisers Act or as an ERISA fiduciary for reasons 
unrelated to advice are no longer factors in the definition. In 
addition, unless the adviser represents that he or she is a fiduciary 
with respect to advice, the advice must be provided pursuant to an 
agreement, arrangement, or understanding that the advice is 
individualized or specifically directed to the recipient to be treated 
as fiduciary advice.
    Furthermore, the carve-outs that treat certain conduct as non-
fiduciary in nature have been modified, clarified, and expanded in 
response to comments. For example, the carve-out for certain valuations 
from the definition of fiduciary investment advice has been modified 
and expanded. Under the 2010 Proposal, appraisals and valuations for 
compliance with certain reporting and disclosure requirements were not 
treated as fiduciary advice. The new proposal additionally provides a 
carve-out from fiduciary treatment for appraisal and fairness opinions 
for ESOPs regarding employer securities. Although, the Department 
remains concerned about valuation advice concerning an ESOP's purchase 
of employer stock and about a plan's reliance on that advice, the 
Department has concluded that the concerns regarding valuations of 
closely held employer stock in ESOP transactions raise unique issues 
that are more

[[Page 21937]]

appropriately addressed in a separate regulatory initiative. 
Additionally, the carve-out for valuations conducted for reporting and 
disclosure purposes has been expanded to include reporting and 
disclosure obligations outside of ERISA and the Code, and is applicable 
to both ERISA plans and IRAs. Many other modifications to the other 
carve-outs from fiduciary status, as well as new carve-outs and 
prohibited transaction exemptions, are described below in Section IV--
``The Provisions of the New Proposal.''

III. Coordination With Other Federal Agencies

    Many comments to the 2010 rulemaking emphasized the need to 
harmonize the Department's efforts with rulemaking activities under the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. Law No. 
111-203, 124 Stat. 1376 (2010), (Dodd-Frank Act), in particular, the 
Security and Exchange Commission's (SEC) standards of care for 
providing investment advice and the Commodity Futures Trading 
Commission's (CFTC) business conduct standards for swap dealers. While 
the 2010 Proposal discussed statutes over which the SEC and CFTC have 
jurisdiction, it did not specifically describe inter-agency 
coordination efforts. In addition, commenters questioned the adequacy 
of coordination with other agencies regarding IRA products and 
services. They argued that subjecting SEC-regulated investment advisers 
and broker-dealers to a special set of ERISA rules for plans and IRAs 
could lead to additional costs and complexities for individuals who may 
have several different types of accounts at the same financial 
institution some of which may be subject only to the SEC rules, and 
others of which may be subject to both SEC rules and new regulatory 
requirements under ERISA.
    In the course of developing the new proposal and the related 
proposed prohibited transaction exemptions, the Department has 
consulted with staff of the SEC and other regulators on an ongoing 
basis regarding whether the proposals would subject investment advisers 
and broker-dealers who provide investment advice to requirements that 
create an undue compliance burden or conflict with their obligations 
under other federal laws. As part of this consultative process, SEC 
staff has provided technical assistance and information with respect to 
retail investors, the marketplace for investment advice and 
coordinating, to the extent possible, the agencies' separate regulatory 
provisions and responsibilities. As the Department moves forward with 
this project in accordance with the specific provisions of ERISA and 
the Code, it will continue to consult with staff of the SEC and other 
regulators on its proposals and their impact on retail investors and 
other regulatory regimes. One result of these discussions, particularly 
with staff of the CFTC and SEC, is the new provision at paragraph 
(b)(1)(ii) of the proposed regulations concerning counterparty 
transactions with swap dealers, major swap participants, security-based 
swap dealers, and major security-based swap participants. Under the 
terms of that paragraph, such persons would not be treated as ERISA 
fiduciaries merely because, when acting as counterparties to swap or 
security-based swap transactions, they give information and perform 
actions required for compliance with the requirements of the business 
conduct standards of the Dodd-Frank Act and its implementing 
regulations.
    In pursuing these consultations, the Department has aimed to 
coordinate and minimize conflicting or duplicative provisions between 
ERISA, the Code and federal securities laws, to the extent possible. 
However, the governing statutes do not permit the Department to make 
the obligations of fiduciary investment advisers under ERISA and the 
Code identical to the duties of advice providers under the securities 
laws. ERISA and the Code establish consumer protections for some 
investment advice that does not fall within the ambit of federal 
securities laws, and vice versa. Even if each of the relevant agencies 
were to adopt an identical definition of ``fiduciary'', the legal 
consequences of the fiduciary designation would vary between agencies 
because of differences in the specific duties and remedies established 
by the different federal laws at issue. ERISA and the Code place 
special emphasis on the elimination or mitigation of conflicts of 
interest and adherence to substantive standards of conduct, as 
reflected in the prohibited transaction rules and ERISA's standards of 
fiduciary conduct. The specific duties imposed on fiduciaries by ERISA 
and the Code stem from legislative judgments on the best way to protect 
the public interest in tax-preferred benefit arrangements that are 
critical to workers' financial and physical health. The Department has 
taken great care to honor ERISA and the Code's specific text and 
purposes.
    At the same time, the Department has worked hard to understand the 
impact of the proposed rule on firms subject to the securities laws and 
other federal laws, and to take the effects of those laws into account 
so as to appropriately calibrate the impact of the rule on those firms. 
The proposed regulation reflects these efforts. In the Department's 
view, it neither undermines, nor contradicts, the provisions or 
purposes of the securities laws, but instead works in harmony with 
them. The Department has coordinated--and will continue to coordinate--
its efforts with other federal agencies to ensure that the various 
legal regimes are harmonized to the fullest extent possible.
    The Department has also consulted with the Department of the 
Treasury and the IRS, particularly on the subject of IRAs. Although the 
Department has responsibility for issuing regulations and prohibited 
transaction exemptions under section 4975 of the Code, which applies to 
IRAs, the IRS maintains general responsibility for enforcing the tax 
laws. The IRS' responsibilities extend to the imposition of excise 
taxes on fiduciaries who participate in prohibited transactions.\14\ As 
a result, the Department and the IRS share responsibility for combating 
self-dealing by fiduciary investment advisers to tax-qualified plans 
and IRAs. Paragraph (e) of the proposed regulation, in particular, 
recognizes this jurisdictional intersection.
---------------------------------------------------------------------------

    \14\ Reorganization Plan No. 4 of 1978.
---------------------------------------------------------------------------

    When the Department announced that it would issue a new proposal, 
it stated that it would consider proposing new and/or amended 
prohibited transaction exemptions to address the concerns of commenters 
about the broader scope of the fiduciary definition and its impact on 
the fee practices of brokers and other advisers. Commenters had 
expressed concern about whether longstanding exemptions granted by the 
Department allowing advisers, despite their fiduciary status under 
ERISA, to receive commissions in connection with mutual funds, 
securities and insurance products would remain applicable under the new 
rule. As explained more fully below, the Department is simultaneously 
publishing in the notice section of today's Federal Register proposed 
prohibited transaction class exemptions to address these concerns. The 
Department believes that existing exemptions and these new proposed 
exemptions would preserve the ability to engage in common fee 
arrangements, while protecting plan participants, beneficiaries and IRA 
owners from abusive practices that may result from conflicts of 
interest.
    The terms of these new exemptions are discussed in more detail 
below and in the preambles to the proposed

[[Page 21938]]

exemptions. While the exemptions differ in terms and coverage, each 
imposes a ``best interest'' standard on fiduciary investment advisers. 
Thus, for example, the Best Interest Contract Exemption requires the 
investment advice fiduciary and associated financial institution to 
expressly agree to provide advice that is in the ``best interest'' of 
the advice recipient. As proposed, the best interest standard is 
intended to mirror the duties of prudence and loyalty, as applied in 
the context of fiduciary investment advice under sections 404(a)(1)(A) 
and (B) of ERISA. Thus, the ``best interest'' standard is rooted in the 
longstanding trust-law duties of prudence and loyalty adopted in 
section 404 of ERISA and in the cases interpreting those standards.
    Accordingly, the Best Interest Contract Exemption provides:

    Investment advice is in the ``Best Interest'' of the Retirement 
Investor when the Adviser and Financial Institution providing the 
advice act with the care, skill, prudence, and diligence under the 
circumstances then prevailing that a prudent person would exercise 
based on the investment objectives, risk tolerance, financial 
circumstances and needs of the Retirement Investor, without regard 
to the financial or other interests of the Adviser, Financial 
Institution, any Affiliate, Related Entity, or other party.

    This ``best interest'' standard is not intended to add to or expand 
the ERISA section 404 standards of prudence and loyalty as they apply 
to the provision of investment advice to ERISA covered plans. Advisers 
to ERISA-covered plans are already required to adhere to the 
fundamental standards of prudence and loyalty, and can be held 
accountable for violations of the standards. Rather, the primary impact 
of the ``best interest'' standard is on the IRA market. Under the Code, 
advisers to IRAs are subject only to the prohibited transaction rules. 
Incorporating the best interest standard in the proposed Best Interest 
Contract Exemption effectively requires advisers to comply with these 
basic fiduciary standards as a condition of engaging in transactions 
that would otherwise be prohibited because of the conflicts of interest 
they create. Additionally, the exemption ensures that IRA owners and 
investors have a contract-based claim to hold their fiduciary advisers 
accountable if they violate these basic obligations of prudence and 
loyalty. As under current law, no private right of action under ERISA 
is available to IRA owners.

IV. The Provisions of the New Proposal

    The new proposal would amend the definition of investment advice in 
29 CFR 2510.3-21 (1975) of the regulation to replace the restrictive 
five-part test with a new definition that better comports with the 
statutory language in ERISA and the Code.\15\ As explained below, the 
proposal accomplishes this by first describing the kinds of 
communications and relationships that would generally constitute 
fiduciary investment advice if the adviser receives a fee or other 
compensation. Rather than add additional elements that must be met in 
all instances, as under the current regulation, the proposal describes 
several specific types of advice or communications that would not be 
treated as investment advice. In the Department's view, this structure 
is faithful to the remedial purpose of the statute, but avoids 
burdening activities that do not implicate relationships of trust and 
expectations of impartiality.
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    \15\ For purposes of readability, this proposed rulemaking 
republishes 29 CFR 2510.3-21 in its entirety, as revised, rather 
than only the specific amendments to this section. See 29 CFR 
2510.3-21(d)--Execution of securities transactions.
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A. Categories of Advice or Recommendations

    Paragraph (a)(1) of the proposal sets forth the following types of 
advice, which, when provided in exchange for a fee or other 
compensation, whether directly or indirectly, and given under 
circumstances described in paragraph (a)(2), would be ``investment 
advice'' unless one of the carve-outs in paragraph (b) applies. The 
listed types of advice are--
    (i) A recommendation as to the advisability of acquiring, holding, 
disposing of or exchanging securities or other property, including a 
recommendation to take a distribution of benefits or a recommendation 
as to the investment of securities or other property to be rolled over 
or otherwise distributed from the plan or IRA;
    (ii) A recommendation as to the management of securities or other 
property, including recommendations as to the management of securities 
or other property to be rolled over or otherwise distributed from the 
plan or IRA;
    (iii) An appraisal, fairness opinion, or similar statement whether 
verbal or written concerning the value of securities or other property 
if provided in connection with a specific transaction or transactions 
involving the acquisition, disposition, or exchange, of such securities 
or other property by the plan or IRA; or
    (iv) A recommendation of a person who is also going to receive a 
fee or other compensation to provide any of the types of advice 
described in paragraphs (i) through (iii) above.
    Except for the prong of the definition concerning appraisals and 
valuations discussed below, the proposal is structured so that 
communications must constitute a ``recommendation'' to fall within the 
scope of fiduciary investment advice. In that regard, as stated earlier 
in Section III concerning coordination with other Federal Agencies, the 
Department has consulted with staff of other agencies with rulemaking 
authority over investment advisers and broker-dealers. FINRA Policy 
Statement 01-23 sets forth guidelines to assist brokers in evaluating 
whether a particular communication could be viewed as a recommendation, 
thereby triggering application of FINRA's Rule 2111 that requires that 
a firm or associated person have a reasonable basis to believe that a 
recommended transaction or investment strategy involving a security or 
securities is suitable for the customer.\16\ Although the regulatory 
context for the FINRA guidance is somewhat different, the Department 
believes that it provides useful standards and guideposts for 
distinguishing investment education from investment advice under ERISA. 
Accordingly, the Department specifically solicits comments on whether 
it should adopt some or all of the standards developed by FINRA in 
defining communications that rise to the level of a recommendation for 
purposes of distinguishing between investment education and investment 
advice under ERISA.
---------------------------------------------------------------------------

    \16\ See also FINRA's Regulatory Notice 11-02, 12-25 and 12-55. 
Regulatory Notice 11-02 includes the following discussion:
    For instance, a communication's content, context and 
presentation are important aspects of the inquiry. The determination 
of whether a ``recommendation'' has been made, moreover, is an 
objective rather than subjective inquiry. An important factor in 
this regard is whether--given its content, context and manner of 
presentation--a particular communication from a firm or associated 
person to a customer reasonably would be viewed as a suggestion that 
the customer take action or refrain from taking action regarding a 
security or investment strategy. In addition, the more individually 
tailored the communication is to a particular customer or customers 
about a specific security or investment strategy, the more likely 
the communication will be viewed as a recommendation. Furthermore, a 
series of actions that may not constitute recommendations when 
viewed individually may amount to a recommendation when considered 
in the aggregate. It also makes no difference whether the 
communication was initiated by a person or a computer software 
program. These guiding principles, together with numerous litigated 
decisions and the facts and circumstances of any particular case, 
inform the determination of whether the communication is a 
recommendation for purposes of FINRA's suitability rule.
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    Additionally, as paragraph (d) of the proposal makes clear, the 
regulation does not treat the mere execution of a securities 
transaction at the direction of

[[Page 21939]]

a plan or IRA owner as fiduciary activity. This paragraph remains 
unchanged from the 1975 regulation other than to update references to 
the proposal's structure. The definition's scope remains limited to 
advice relationships, as delineated in its text and does not impact 
merely administrative or ministerial activities necessary for a plan or 
IRA's functioning. It also does not apply to order taking where no 
advice is provided.
(1) Recommendations To Distribute Plan Assets
    Paragraph (a)(1)(i) specifically includes recommendations 
concerning the investment of securities to be rolled over or otherwise 
distributed from the plan or IRA. Noting the Department's position in 
Advisory Opinion 2005-23A that it is not fiduciary advice to make a 
recommendation as to distribution options even if that is accompanied 
by a recommendation as to where the distribution would be invested, 
(Dec. 7, 2005), the 2010 Proposal did not include this type of advice, 
but the Department requested comments on whether it should be included 
in a final regulation. Some commenters stated that exclusion of this 
advice from the final rule would fail to protect participant accounts 
from conflicted advice in connection with one of the most significant 
financial decisions that participants make concerning retirement 
savings. Other commenters argued that including this advice would give 
rise to prohibited transactions that could disrupt the routine process 
that occurs when a worker leaves a job, contacts a financial services 
firm for help rolling over a 401(k) balance, and the firm explains the 
investments it offers and the benefits of a rollover.
    The proposed regulation, if finalized, would supersede Advisory 
Opinion 2005-23A. Thus, recommendations to take distributions (and 
thereby withdraw assets from existing plan or IRA investments or roll 
over into a plan or IRA) or to entrust plan or IRA assets to particular 
money managers, advisers, or investments would fall within the scope of 
covered advice. However, as the proposal's text makes clear, one does 
not act as a fiduciary merely by providing participants with 
information about plan or IRA distribution options, including the 
consequences associated with the available types of benefit 
distributions. In this regard, the new proposal draws an important 
distinction between fiduciary investment advice and non-fiduciary 
investment information and educational materials. The Department 
believes that the proposal's treatment of such non-fiduciary 
educational and informational materials adequately covers the common 
types of distribution-related information that participants find 
useful, including information relating to annuitizations and other 
forms of lifetime income payment options, but welcomes input on other 
types of information that would help clarify the line between advice 
and education in this context.
(2) Recommendations as to the Management of Plan Investments
    The preamble to the 2010 Proposal stated that the ``management of 
securities or other property'' would include advice and recommendations 
as to the exercise of rights appurtenant to shares of stock (e.g., 
voting proxies). 75 FR 65266 (Oct. 22, 2010). The Department has long 
viewed the exercise of ownership rights as a fiduciary responsibility 
because of its material effect on plan investment goals. 29 CFR 
2509.08-2 (2008). Consequently, individualized or specifically directed 
advice and recommendations on the exercise of proxy or other ownership 
rights are appropriately treated as fiduciary in nature. Accordingly, 
the proposed regulation's provision on advice regarding the management 
of securities or other property would continue to cover individualized 
advice or recommendations as to proxy voting and the management of 
retirement assets in paragraph (a)(1)(ii).
    We received comments on the 2010 proposal seeking some 
clarification regarding its application to certain practices. In this 
regard, it is the Department's view that guidelines or other 
information on voting policies for proxies that are provided to a broad 
class of investors without regard to a client's individual interests or 
investment policy, and which are not directed or presented as a 
recommended policy for the plan or IRA to adopt, would not rise to the 
level of fiduciary investment advice under the proposal. Additionally, 
a recommendation addressed to all shareholders in a proxy statement 
would not result in fiduciary status on the part of the issuer of the 
statement or the person who distributes the proxy statement. These 
positions are clarified in the proposed regulation.
(3) Appraisals
    The new proposal, like the current regulation which includes 
``advice as to the value of securities or other property,'' continues 
to cover certain appraisals and valuation reports. However, it is 
considerably more focused than the 2010 Proposal. Responding to 
comments, the proposal in paragraph (a)(1)(iii) covers only appraisals, 
fairness opinions, or similar statements that relate to a particular 
transaction. The Department also expanded the 2010 Proposal's carve-out 
for general reports or statements of value provided to satisfy required 
reporting and disclosure rules under ERISA or the Code. The carve-out 
in the 2010 proposal covered general reports or statements of value 
that merely reflected the value of an investment of a plan or a 
participant or beneficiary, and provided for purposes of compliance 
with the reporting and disclosure requirements of ERISA, the Code, and 
the regulations, forms and schedules issued thereunder, unless the 
reports involved assets for which there was not a generally recognized 
market and served as a basis on which a plan could make distributions 
to plan participants and beneficiaries. The carve-out was broadened in 
this proposal to includes valuations provided solely for purposes of 
compliance with the reporting and disclosure provisions under the Act, 
the Code, and the regulations, forms and schedules issued thereunder, 
or any applicable reporting or disclosure requirement under a Federal 
or state law, or rule or regulation or self-regulatory organization 
(e.g., FINRA) without regard to the type of asset involved. In this 
manner, the new proposal focuses on instances where the plan or IRA 
owner is looking to the appraiser for advice on the market value of an 
asset that the investor is considering to acquire, dispose, or 
exchange. In many cases the most important investment advice that an 
investor receives is advice as to how much it can or should pay for 
hard-to-value assets. In response to comments, the proposal also 
contains an entirely new carve-out at paragraph (b)(5)(ii) specifically 
addressing valuations or appraisals provided to an investment fund 
(e.g., collective investment fund or pooled separate account) holding 
assets of various investors in addition to at least one plan or IRA. 
Also, as mentioned, the Department has decided not to extend fiduciary 
coverage to valuations or appraisals for ESOPs relating to employer 
securities at this time because the Department has concluded that its 
concerns in this space raise unique issues that are more appropriately 
addressed in a separate regulatory initiative. The proposal's carve-
outs do not apply, however, if the provider of the valuation represents 
or acknowledges that it is acting as a fiduciary with respect to the 
advice.

[[Page 21940]]

    Some representatives of the appraisal industry submitted comments 
on the 2010 Proposal arguing that ERISA's fiduciary duty to act solely 
in the interest of the plan and its participants and beneficiaries is 
inconsistent with the duty of appraisers to provide objective, 
independent value determinations. The Department disagrees. A biased or 
inaccurate appraisal does not help a plan, a participant or a 
beneficiary make prudent investment decisions. Like other forms of 
investment advice, an appraisal is a tool for plan fiduciaries, 
participants, beneficiaries, and IRA owners to use in deciding what 
price to pay for assets and whether to accept or decline proposed 
transactions. An appraiser complies with his or her obligations as an 
appraiser--and as a loyal fiduciary--by giving plan fiduciaries or 
participants an impartial and accurate assessment of the value of an 
asset in accordance with appraisers' professional standard of care. 
Nothing in ERISA or this regulation should be read as compelling an 
appraiser to slant valuation opinions to reflect what the plan wishes 
the asset were worth rather than what it is really worth. As stated in 
the preamble to the 2010 Proposal, the Department would expect a 
fiduciary appraiser's determination of value to be unbiased, fair and 
objective and to be made in good faith based on a prudent investigation 
under the prevailing circumstances then known to the appraiser. In the 
Department's view, these fiduciary standards are fully consistent with 
professional standards, such as the Uniform Standards of Professional 
Appraisal Practice (USPAP).\17\
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    \17\ A number of commenters also pointed to such professional 
standards as alternatives to fiduciary treatment under ERISA. While 
the Department believes that such professional standards are fully 
consistent with the fiduciary duties, the rights, remedies and 
sanctions under both ERISA and the Code importantly turn on 
fiduciary status, and advice on the value of an asset is often the 
most critical investment advice a plan receives. As a result, 
treating appraisals as fiduciary advice provides an additional layer 
of protection for consumers without conflicting with the duties of 
appraisers.
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(4) Recommendations of a Person To Provide Investment Advice or 
Management Services
    The proposal would treat recommendations on the selection of 
investment managers or advisers as fiduciary investment advice. In the 
Department's view, the current regulation already covers such advice. 
The proposal simply revises the regulation's text to remove any 
possible ambiguity. The Department believes that such advice should be 
treated as fiduciary in nature if provided under the circumstances in 
paragraph (a)(1)(iv) and for direct or indirect compensation. Covered 
advice would include recommendations of persons to perform asset 
management services or to make investment recommendations. Advice as to 
the identity of the person entrusted with investment authority over 
retirement assets is often critical to the proper management and 
investment of those assets. On the other hand, general advice as to the 
types of qualitative and quantitative criteria to consider in hiring an 
investment manager would not rise to the level of a recommendation of a 
person to manage plan investments nor would a trade journal's 
endorsement of an investment manager. Similarly, the proposed 
regulation would not cover recommendations of administrative service 
providers, property managers, or other service providers who do not 
provide investment services.

B. The Circumstances Under Which Advice Is Provided

    As provided in paragraph (a)(2) of the proposal, unless a carve-out 
applies, a category of advice listed in the proposal would constitute 
``investment advice'' if the person providing the advice, either 
directly or indirectly (e.g., through or together with any affiliate)--
    (i) Represents or acknowledges that it is acting as a fiduciary 
within the meaning of the Act or Code with respect to the advice 
described in paragraph (a)(1); or
    (ii) Renders the advice pursuant to a written or verbal agreement, 
arrangement or understanding that the advice is individualized to, or 
that such advice is specifically directed to, the advice recipient for 
consideration in making investment or management decisions with respect 
to securities or other property of the plan or IRA.
    Under paragraph (a)(2)(i), advisers who claim fiduciary status 
under ERISA or the Code in providing advice would be taken at their 
word. They may not later argue that the advice was not fiduciary in 
nature. Nor may they rely upon the carve-outs described in paragraph 
(b) on the scope of the definition of fiduciary investment advice.
    The 2010 Proposal provided that investment recommendations provided 
by an investment adviser under the Advisers Act would, in the absence 
of a carve-out, automatically be treated as investment advice. In 
response to comments, the new proposal drops this provision. Thus, the 
proposal avoids making such persons fiduciaries based solely on their 
or an affiliate's status as an investment adviser under the Advisers 
Act. Instead, their fiduciary status would be determined by reference 
to the same functional test that applies to all persons under the 
regulation.
    Paragraph (a)(2)(ii) of the proposal avoids treating 
recommendations made to the general public, or to no one in particular, 
as investment advice and thus addresses concerns that the general 
circulation of newsletters, television talk show commentary, or remarks 
in speeches and presentations at financial industry educational 
conferences would result in the person being treated as a fiduciary. 
This paragraph requires an agreement, arrangement, or understanding 
that advice is directed to, a specific recipient for consideration in 
making investment decisions. The parties need not have a meeting of the 
minds on the extent to which the advice recipient will actually rely on 
the advice, but they must agree or understand that the advice is 
individualized or specifically directed to the particular advice 
recipient for consideration in making investment decisions. In this 
respect, paragraph (a)(2)(ii) differs significantly from its 
counterpart in the 2010 Proposal. In particular, and in response to 
comments, the proposal does not require that advice be individualized 
to the needs of the plan, participant or beneficiary or IRA owner if 
the advice is specifically directed to such recipient. Under the 
proposal, advisers could not specifically direct investment 
recommendations to individual persons, but then deny fiduciary 
responsibility on the basis that they did not, in fact, consider the 
advice recipient's individual needs or intend that the recipient base 
investment decisions on their recommendations. Nor could they continue 
the practice of advertising advice or counseling that is one-on-one or 
that a reasonable person would believe would be tailored to their 
individual needs and then disclaim that the recommendations are 
fiduciary investment advice in boilerplate language in the 
advertisement or in the paperwork provided to the client.
    Like the 2010 Proposal, and unlike the 1975 regulation, the new 
proposal does not require that advice be provided on a regular basis. 
Investment advice that meets the requirements of the proposal, even if 
provided only once, can be critical to important investment decisions. 
If the adviser received a direct or indirect fee in connection with its 
advice, the advice recipients should reasonably expect adherence to 
fiduciary standards on the same terms as other retirement investors who 
get

[[Page 21941]]

recommendations from the adviser on a more routine basis.

C. Carve-Outs From the General Definition

    The Department recognizes that in many circumstances, plan 
fiduciaries, participants, beneficiaries, and IRA owners may receive 
recommendations or appraisals that, notwithstanding the general 
definition set forth in paragraph (a) of the proposal, should not be 
treated as fiduciary investment advice. Accordingly, paragraph (b) 
contains a number of specific carve-outs from the scope of the general 
definition. The carve-out at paragraph (b)(5) of the proposal 
concerning financial reports and valuations was discussed above in 
connection with appraisals. The carve-out in paragraph (b)(5)(iii) 
covers communications to a plan, a plan fiduciary, a plan participant 
or beneficiary, an IRA or IRA owner solely for purposes of compliance 
with the reporting and disclosure provisions under the Act, the Code, 
and the regulations, forms and schedules issued thereunder, or any 
applicable reporting or disclosure requirement under a Federal or state 
law, rule or regulation or self-regulatory organization rule or 
regulation. The carve-out in paragraph (b)(6) covers education. The 
other carve-outs are limited to communications with plans and plan 
fiduciaries and do not cover communications to participants, 
beneficiaries or IRA owners. These more limited carve-outs are 
described more fully below. In each instance, the proposed carve-outs 
are for communications that the Department believes Congress did not 
intend to cover as fiduciary ``investment advice'' and that parties 
would not ordinarily view as communications characterized by a 
relationship of trust or impartiality. None of the carve-outs apply 
where the adviser represents or acknowledges that it is acting as a 
fiduciary under ERISA with respect to the advice.
(1) Seller's and Swap Carve-Outs
(a) The ``Seller's Carve-Out'' \18\
---------------------------------------------------------------------------

    \18\ Although the preamble uses the shorthand expression 
``seller's carve-out,'' we note that the carve-out provided in 
paragraph (b)(1)(i) of the proposal is not limited to sales but 
rather would apply to incidental advice provided in connection with 
an arm's length sale, purchase, loan, or bilateral contract between 
a plan investor with financial expertise and an adviser.
---------------------------------------------------------------------------

    Paragraph (b)(1)(i) of the proposed regulation provides a carve-out 
from the general definition for incidental advice provided in 
connection with an arm's length sale, purchase, loan, or bilateral 
contract between an expert plan investor and the adviser. It also 
applies in connection with an offer to enter into such a transaction or 
when the person providing the advice is acting as a representative, 
such as an agent, for the plan's counterparty. This carve-out is 
subject to the following conditions.
    First, the person must provide advice to an ERISA plan fiduciary 
who is independent of such person and who exercises authority or 
control respecting the management or disposition of the plan's assets, 
with respect to an arm's length sale, purchase, loan or bilateral 
contract between the plan and the counterparty, or with respect to a 
proposal to enter into such a sale, purchase, loan or bilateral 
contract.
    Second, either of two alternative sets of conditions must be met. 
Under alternative one, prior to providing any recommendation with 
respect to the transaction, such person:
    (1) Obtains a written representation from the plan fiduciary that 
he/she is a fiduciary who exercises authority or control with respect 
to the management or disposition of the employee benefit plan's assets 
(as described in section 3(21)(A)(i) of the Act), that the employee 
benefit plan has 100 or more participants covered under the plan, and 
that the fiduciary will not rely on the person to act in the best 
interests of the plan, to provide impartial investment advice, or to 
give advice in a fiduciary capacity;
    (2) fairly informs the plan fiduciary of the existence and nature 
of the person's financial interests in the transaction;
    (3) does not receive a fee or other compensation directly from the 
plan, or plan fiduciary, for the provision of investment advice in 
connection with the transaction (this does not preclude a person from 
receiving a fee or compensation for other services);
    (4) knows or reasonably believes that the independent plan 
fiduciary has sufficient expertise to evaluate the transaction and to 
determine whether the transaction is prudent and in the best interest 
of the plan participants (such person may rely on written 
representations from the plan or the plan fiduciary to satisfy this 
condition).
    The second alternative applies if the person knows or reasonably 
believes that the independent plan fiduciary has responsibility for 
managing at least $100 million in employee benefit plan assets (for 
purposes of this condition, when dealing with an individual employee 
benefit plan, a person may rely on the information on the most recent 
Form 5500 Annual Return/Report filed by the plan to determine the value 
of plan assets, and, in the case of an independent fiduciary acting as 
an asset manager for multiple employee benefit plans, a person may rely 
on representations from the independent plan fiduciary regarding the 
value of employee benefit plan assets under management). In that 
circumstance, the adviser need not obtain written representations from 
its counterparty to avail itself of the carve-out, but must fairly 
inform the independent plan fiduciary that the adviser is not 
undertaking to provide impartial investment advice, or to give advice 
in a fiduciary capacity; and cannot receive a fee or other compensation 
directly from the plan, or plan fiduciary, for the provision of 
investment advice in connection with the transaction. In that 
circumstance, the adviser must also reasonably believe that the 
independent plan fiduciary has sufficient expertise to prudently 
evaluate the transaction.
    The overall purpose of this carve-out is to avoid imposing ERISA 
fiduciary obligations on sales pitches that are part of arm's length 
transactions where neither side assumes that the counterparty to the 
plan is acting as an impartial trusted adviser, but the seller is 
making representations about the value and benefits of proposed deals. 
Under appropriate circumstances, reflected in the conditions to this 
carve-out, these counterparties to the plan do not suggest that they 
are an impartial fiduciary and plans do not expect a relationship of 
undivided loyalty or trust. Both sides of such transactions understand 
that they are acting at arm's length, and neither party expects that 
recommendations will necessarily be based on the buyer's best 
interests. In such a sales transaction, the buyer understands that it 
is buying an investment product, not advice about whether it is a good 
product, from a seller who has opposing financial interests. The 
seller's invitation to buy the product is understood as a sales pitch, 
not a recommendation. Also, a representative for the plan's 
counterparty, such as a broker, in such a transaction, would be able to 
use the carve-out if the conditions are met.
    Although the 2010 Proposal also had a carve-out for sellers and 
other counterparties, the carve-out in the new proposal is 
significantly different. The changes are designed to ensure that the 
carve-out appropriately distinguishes incidental advice as part of an 
arm's length transactions with no expectation of trust or acting in the 
customer's best interest, from those instances of advice where 
customers may be expecting unbiased investment advice that is in their 
best interest. For example, the seller's carve-out is unavailable to an 
adviser if the plan directly pays a fee for investment advice. If a 
plan expressly

[[Page 21942]]

pays a fee for advice, the essence of the relationship is advisory, and 
the statute clearly contemplates fiduciary status. Thus, a service 
provider may not charge the plan a direct fee to act as an adviser, and 
then disclaim responsibility as a fiduciary adviser by asserting that 
he or she is merely an arm's length counterparty.
    Commenters on the 2010 Proposal differed on whether the carve-out 
should apply to transactions involving plan participants, beneficiaries 
or IRA owners. After carefully considering the issue and the public 
comments, the Department does not believe such a carve-out can or 
should be crafted to cover recommendations to retail investors, 
including small plans, IRA owners and plan participants and 
beneficiaries. As a rule, investment recommendations to such retail 
customers do not fit the ``arm's length'' characteristics that the 
seller's carve-out is designed to preserve. Recommendations to retail 
investors and small plan providers are routinely presented as advice, 
consulting, or financial planning services. In the securities markets, 
brokers' suitability obligations generally require a significant degree 
of individualization. Research has shown that disclaimers are 
ineffective in alerting retail investors to the potential costs imposed 
by conflicts of interest, or the fact that advice is not necessarily in 
their best interest, and may even exacerbate these costs.\19\ Most 
retail investors and many small plan sponsors are not financial 
experts, are unaware of the magnitude and impact of conflicts of 
interest, and are unable effectively to assess the quality of the 
advice they receive. IRA owners are especially at risk because they 
lack the protection of having a menu of investment options chosen by a 
plan fiduciary who is charged to protect the interests of the IRA 
owner. Similarly, small plan sponsors are typically experts in the day-
to-day business of running an operating company, not in managing 
financial investments for others. In this retail market, a seller's 
carve-out would run the risk of creating a loophole that would result 
in the rule failing to improve consumer protections by permitting the 
same type of boilerplate disclaimers that some advisers now use to 
avoid fiduciary status under the current ``five-part test'' regulation. 
Persons making investment recommendations should be required to put the 
interests of the investors they serve ahead of their own. The 
Department has addressed legitimate concerns about preserving existing 
fee practices and minimizing market disruptions through proposed 
prohibited transaction exemptions detailed below, rather than through a 
blanket carve-out from fiduciary status.
---------------------------------------------------------------------------

    \19\ Loewenstein, George, Daylian Cain, Sunita Sah, The Limits 
of Transparence: Pitfalls and Potential of Disclosing Conflicts of 
Interest, American Economic Review: Papers and Proceedings 101, no. 
3 (2011).
---------------------------------------------------------------------------

    Moreover, excluding retail investors from the seller's carve-out is 
consistent with recent congressional action, the Pension Protection Act 
of 2006 (PPA). Specifically, the PPA created a new statutory exemption 
that allows fiduciaries giving investment advice to individuals 
(pension plan participants, beneficiaries and IRA owners) to receive 
compensation from investment vehicles that they recommend in certain 
circumstances. 29 U.S.C. 1108(b)(14); 26 U.S.C. 4975(d)(17). 
Recognizing the risks presented when advisers receive fees from the 
investments they recommend to individuals, Congress placed important 
constraints on such advice arrangements that are calculated to limit 
the potential for abuse and self-dealing, including requirements for 
fee-leveling or the use of independently certified computer models. The 
Department has issued regulations implementing this provision at 29 CFR 
2550.408g-1 and 408g-2. Including retail investors in the seller's 
carve-out would undermine the protections for retail investors that 
Congress required under this PPA provision.
    Although the seller's carve-out may not be available in the retail 
market, the proposal is intended to ensure that small plan fiduciaries, 
plan participants, beneficiaries and IRA owners would be able to obtain 
essential information regarding important decisions they make regarding 
their investments without the providers of that information crossing 
the line into fiduciary status. Under the platform provider carve-out 
under paragraph (b)(3), platform providers (i.e., persons that provide 
access to securities or other property through a platform or similar 
mechanism) and persons that help plan fiduciaries select or monitor 
investment alternatives for their plans can perform those services 
without incurring fiduciary status. Similarly, under the investment 
education carve-out of paragraph (b)(6), general plan information, 
financial, investment and retirement information, and information and 
education regarding asset allocation models would all be available to a 
plan, plan fiduciary, participant, beneficiary or IRA owner and would 
not constitute the provision of investment advice, irrespective of who 
receives that information. The Department invites comments on whether 
the proposed seller's carve-out should be available for advice given 
directly to plan participants, beneficiaries, and IRA owners. Further, 
the Department invites comments on the scope of the seller's carve-out 
and whether the plan size limitation of 100 plan participants and 100 
million dollar asset requirement in the proposal are appropriate 
conditions or whether other conditions would be more appropriate 
proxies for identifying persons with sufficient investment-related 
expertise to be included in a seller's carve-out.\20\ The Department is 
also interested in whether existing and proposed prohibited transaction 
exemptions eliminate or mitigate the need for any seller's carve-out.
---------------------------------------------------------------------------

    \20\ The proposed thresholds of 100 or more participants and 
assets of $100 million are consistent with thresholds used for 
similar purposes under existing rules and practices. For example, 
administrators of plans with 100 or more participants, unlike 
smaller plans, generally are required to report to the Department 
details on the identity, function, and compensation of their 
services providers; file a schedule of assets held for investments; 
and submit audit reports to the Department. Smaller plans are not 
subject to these same filing requirements that are imposed on large 
plans. The vast majority of plans with fewer than 100 participants 
have 10 or less participants. They are much more similar to 
individual retail investors than to large financially sophisticated 
institutional investors, who employ lawyers and have the time and 
expertise to scrutinize advice they receive for bias. Similarly, 
Congress established a $100 million asset threshold in enacting the 
PPA statutory cross-trading exemption under ERISA section 
408(b)(19). In the transactions covered by 408(b)(19), an investment 
manager has discretion with respect to separate client accounts that 
are on opposite sides of the trade. The cross trade can create 
efficiencies for both clients, but it also gives rise to a 
prohibited transaction under ERISA Sec.  406(b)(2) because the 
adviser or manager is ``representing'' both sides of the transaction 
and, therefore, has a conflict of interest. The exemption generally 
allows an investment manager to effect cash purchases and sales of 
securities for which market quotations are readily available between 
large sophisticated plans with at least $100 million in assets and 
another account under management by the investment manager, subject 
to certain conditions. In this context, the $100 million threshold 
serves as a proxy for identifying institutional fiduciaries that can 
be expected to have the expertise to protect their own interests in 
the conflicted transaction.
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(b) Swap and Security-Based Swap Transactions
    Paragraph (b)(1)(ii) of the proposal specifically addresses advice 
and other communications by counterparties in connection with certain 
swap or security-based swap transactions under the Commodity Exchange 
Act or the Securities Exchange Act. This broad class of financial 
transactions is defined and regulated under amendments to the Commodity 
Exchange Act and the Securities Exchange Act by the Dodd-Frank Act. 
Section 4s(h) of the Commodity Exchange Act (7 U.S.C. 6s(h)), and 
section 15F of the Securities

[[Page 21943]]

Exchange Act of 1934 (15 U.S.C. 78o-10(h) establishes similar business 
conduct standards for dealers and major participants in swaps or 
security-based swaps. Special rules apply for transactions involving 
``special entities,'' a term that includes employee benefit plans under 
ERISA, but not IRAs and other non-ERISA plans.
    In outline, paragraph (b)(1)(ii) of the proposal would allow swap 
dealers, security-based swap dealers, major swap participants and 
security-based major swap participants who make recommendations to 
plans to avoid becoming ERISA investment advice fiduciaries when acting 
as counterparties to a swap or security-based swap transaction. Under 
the swap carve out, if the person providing recommendations is a swap 
dealer or security-based swap dealer, it must not be acting as an 
adviser to the plan, within the meaning of the applicable business 
conduct standards regulations of the CFTC or the SEC. In addition, 
before providing any recommendations with respect to the transaction, 
the person providing recommendations must obtain a written 
representation from the independent plan fiduciary, that the fiduciary 
will not rely on recommendations provided by the person.
    Under the Commodity Exchange Act, swap dealers or major swap 
participants that act as counterparties to ERISA plans, must have a 
reasonable basis to believe that the plans have independent 
representatives who are fiduciaries under ERISA. 7 U.S.C. 6s(h)(5). 
Similar requirements apply for security-based swap transactions. 15 
U.S.C 78o-10(h)(4) and (5). The CFTC has issued a final rule to 
implement these requirements and the SEC has issued a proposed rule 
that would cover security-based swaps. 17 CFR 23.400 to 23.451 (2012).
    Paragraph (b)(1)(ii) reflects the Department's coordination of its 
efforts with staff of the SEC and CFTC, and is intended to provide a 
clear road-map for swap counterparties to avoid ERISA fiduciary status 
in arm's length transactions with plans. The provision addresses 
commenters' concerns that the conduct required for compliance with the 
Dodd-Frank Act's business conduct standards could constitute fiduciary 
investment advice under ERISA even in connection with arm's length 
transactions with plans that are separately represented by independent 
fiduciaries who are not looking to their counterparties for 
disinterested advice. If that were the case, swaps and security-based 
swaps with plans would often constitute prohibited transactions under 
ERISA. Commenters also argued that their obligations under the business 
conduct standards could effectively preclude them from relying on the 
carve-out for counterparties in the 2010 Proposal. Although the 
Department does not agree that the carve-out in the 2010 Proposal would 
have been unavailable to plan's swap counterparty (see letter dated 
April 28, 2011, to CFTC Chairman Gary Gensler from EBSA's Assistant 
Secretary Phyllis Borzi), the separate proposed carve-out for swap and 
security-based swap transactions in the proposal should avoid any 
uncertainty.\21\ The Department will continue to coordinate its efforts 
with staff of the SEC and CFTC to ensure that any final regulation is 
consistent with the agencies' work in connection with the Dodd-Frank 
Act's business conduct standards.
---------------------------------------------------------------------------

    \21\ http://www.dol.gov/ebsa/pdf/cftc20110428.pdf.
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(2) Employees of the Plan Sponsor
    The proposal at paragraph (b)(2) provides that employees of a plan 
sponsor of an ERISA plan would not be treated as investment advice 
fiduciaries with respect to advice they provide to the fiduciaries of 
the sponsor's plan as long as they receive no compensation for the 
advice beyond their normal compensation as employees of the plan 
sponsor. This carve-out from the scope of the fiduciary investment 
advice definition recognizes that internal employees, such as members 
of a company's human resources department, routinely develop reports 
and recommendations for investment committees and other named 
fiduciaries of the sponsors' plans, without acting as paid fiduciary 
advisers. The carve-out responds to and addresses the concerns of 
commenters who said that these personnel should not be treated as 
fiduciaries because their advice is largely incidental to their duties 
on behalf of the plan sponsor and they receive no compensation for 
these advice-related functions.
(3) Platform Providers/Selection and Monitoring Assistance
    The carve-out at paragraph (b)(3) of the proposal is directed to 
service providers, such as recordkeepers and third party 
administrators, that offer a ``platform'' or selection of investment 
vehicles to participant-directed individual account plans under ERISA. 
Under the terms of the carve-out, the plan fiduciaries must choose the 
specific investment alternatives that will be made available to 
participants for investing their individual accounts. The carve-out 
merely makes clear that persons would not act as investment advice 
fiduciaries simply by marketing or making available such investment 
vehicles, without regard to the individualized needs of the plan or its 
participants and beneficiaries, as long as they disclose in writing 
that they are not undertaking to provide impartial investment advice or 
to give advice in a fiduciary capacity.
    Similarly, a separate provision at paragraph (b)(4) carves out 
certain common activities that platform providers may carry out to 
assist plan fiduciaries in selecting and monitoring the investment 
alternatives that they make available to plan participants. Under 
paragraph (b)(4), merely identifying offered investment alternatives 
meeting objective criteria specified by the plan fiduciary or providing 
objective financial data regarding available alternatives to the plan 
fiduciary would not cause a platform provider to be a fiduciary 
investment adviser. These two carve-outs are clarifying modifications 
to the corresponding provisions of the 2010 Proposal. They address 
certain common practices that have developed with the growth of 
participant-directed individual account plans and recognize 
circumstances where the platform provider and the plan fiduciary 
clearly understand that the provider has financial or other 
relationships with the offered investments and is not purporting to 
provide impartial investment advice. It also accommodates the fact that 
platform providers often provide general financial information that 
falls short of constituting actual investment advice or 
recommendations, such as information on the historic performance of 
asset classes and of the investments available through the provider. 
The carve-outs also reflect the Department's agreement with commenters 
that a platform provider who merely identifies investment alternatives 
using objective third-party criteria (e.g., expense ratios, fund size, 
or asset type specified by the plan fiduciary) to assist in selecting 
and monitoring investment alternatives should not be considered to be 
rendering investment advice.
    While recognizing the utility of the provisions in paragraphs 
(b)(3) and (b)(4) for the effective and efficient operation of plans by 
plan sponsors, plan fiduciaries and plan service providers, the 
Department reiterates its longstanding view, recently codified in 29 
CFR 2550.404a-5(f) and 2550.404c-1(d)(2)(iv) (2010), that a fiduciary 
is always responsible for prudently selecting and monitoring providers 
of services to the plan or designated

[[Page 21944]]

investment alternatives offered under the plan.
    Several commenters also asked the Department to clarify that the 
platform provider carve-out is available in the 403(b) plan 
marketplace. In the Department's view, a 403(b) plan that is subject to 
Title I of ERISA would be an individual account plan within the meaning 
of ERISA section 3(34) of the Act for purposes of the proposed 
regulation, so the platform provider carve-out would be available with 
respect to such plans.
    Other commenters asked that the platform provider provision be 
generally extended to apply to IRAs. In the IRA context, however, there 
typically is no separate independent ``plan fiduciary'' who interacts 
with the platform provider to protect the interests of the account 
owners. As a result, it is much more difficult to conclude that the 
transaction is truly arm's length or to draw a bright line between 
fiduciary and non-fiduciary communications on investment options. 
Consequently, the proposed regulation declines to extend application of 
this carve-out to IRAs and other non-ERISA plans. As the Department 
continues its work on this regulatory project, however, it requests 
specific comment as to the types of platforms and options that may be 
offered to IRA owners, how they may be similar to or different from 
platforms offered in connection with participant-directed individual 
account plans, and whether it would be appropriate for service 
providers not to be treated as fiduciaries under this carve-out when 
marketing such platforms to IRA owners. We also invite comments, 
alternatively, on whether the scope of this carve-out should be limited 
to large plans, similar to the scope of the ``Seller's Carve-out'' 
discussed above.
    As a corollary to the proposal's restriction of the applicability 
of the platform provider carve-out to only ERISA plans, the selection 
and monitoring assistance carve-out is similarly not available in the 
IRA and other non-ERISA plans context. Commenters on the platform 
provider restriction are encouraged to offer their views on the effect 
of this restriction in the non-ERISA plan marketplace.
(4) Investment Education
    Paragraph (b)(6) of the proposed regulation is similar to a carve-
out in the 2010 Proposal for the provision of investment education 
information and materials within the meaning of an earlier Interpretive 
Bulletin issued by the Department in 1996. 29 CFR 2509.96-1 (IB 96-1). 
Paragraph (b)(6) incorporates much of IB 96-1's operative text, but 
with the important exceptions explained below. Paragraph (b)(6) of the 
proposed regulation, if finalized, would supersede IB 96-1. Consistent 
with IB 96-1, paragraph (b)(6) makes clear that furnishing or making 
available the specified categories of information and materials to a 
plan, plan fiduciary, participant, beneficiary or IRA owner will not 
constitute the rendering of investment advice, irrespective of who 
provides the information (e.g., plan sponsor, fiduciary or service 
provider), the frequency with which the information is shared, the form 
in which the information and materials are provided (e.g., on an 
individual or group basis, in writing or orally, via a call center, or 
by way of video or computer software), or whether an identified 
category of information and materials is furnished or made available 
alone or in combination with other categories of investment or 
retirement information and materials identified in paragraph (b)(6), or 
the type of plan or IRA involved. As a departure from IB 96-1, a new 
condition of the carve-out for investment education is that the 
information and materials not include advice or recommendations as to 
specific investment products, specific investment managers, or the 
value of particular securities or other property. The paragraph 
reflects the Department's view that the statutory reference to 
``investment advice'' is not meant to encompass general investment 
information and educational materials, but rather is targeted at more 
specific recommendations and advice on the investment of plan and IRA 
assets.
    Similar to IB 96-1, paragraph (b)(6) of the proposed regulation 
divides investment education information and materials into four 
general categories: (i) Plan information; (ii) general financial, 
investment and retirement information; (iii) asset allocation models; 
and (iv) interactive investment materials. The proposed regulation in 
paragraph (b)(6)(v) also adopts the provision from IB 96-1 stating that 
there may be other examples of information, materials and educational 
services which, if furnished, would not constitute investment advice or 
recommendations within the meaning of the proposed regulation and that 
no inference should be drawn regarding materials or information which 
are not specifically included in paragraph (b)(6)(i) through (iv).
    Although paragraph (b)(6) incorporates most of the relevant text of 
IB 96-1, there are important changes. One change from IB 96-1 is that 
paragraph (b)(6) makes clear that the distinction between non-fiduciary 
education and fiduciary advice applies equally to information provided 
to plan fiduciaries as well as information provided to plan 
participants and beneficiaries and IRA owners, and that it applies 
equally to participant-directed plans and other plans. In addition, the 
provision applies without regard to whether the information is provided 
by a plan sponsor, fiduciary, or service provider.
    Based on public input received in connection with its joint 
examination of lifetime income issues with the Department of the 
Treasury, the Department is persuaded that additional guidance may help 
improve retirement security by facilitating the provision of 
information and education relating to retirement needs that extend 
beyond a participant's or beneficiary's date of retirement. 
Accordingly, paragraph (b)(6) of the proposal includes specific 
language to make clear that the provision of certain general 
information that helps an individual assess and understand retirement 
income needs past retirement and associated risks (e.g., longevity and 
inflation risk), or explains general methods for the individual to 
manage those risks both within and outside the plan, would not result 
in fiduciary status under the proposal.\22\
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    \22\ Although the proposal would formally remove IB 96-1 from 
the CFR, the Department notes that paragraph (e) of IB 96-1 provides 
generalized guidance under section 405 and 404(c) of ERISA with 
respect to the selection by employers and plan fiduciaries of 
investment educators and the lack of responsibility of employers and 
fiduciaries with respect to investment educators selected by 
participants. Specifically, paragraph (e) states:
    As with any designation of a service provider to a plan, the 
designation of a person(s) to provide investment educational 
services or investment advice to plan participants and beneficiaries 
is an exercise of discretionary authority or control with respect to 
management of the plan; therefore, persons making the designation 
must act prudently and solely in the interest of the plan 
participants and beneficiaries, both in making the designation(s) 
and in continuing such designation(s). See ERISA sections 
3(21)(A)(i) and 404(a), 29 U.S.C. 1002 (21)(A)(i) and 1104(a). In 
addition, the designation of an investment advisor to serve as a 
fiduciary may give rise to co-fiduciary liability if the person 
making and continuing such designation in doing so fails to act 
prudently and solely in the interest of plan participants and 
beneficiaries; or knowingly participates in, conceals or fails to 
make reasonable efforts to correct a known breach by the investment 
advisor. See ERISA section 405(a), 29 U.S.C. 1105(a). The Department 
notes, however, that, in the context of an ERISA section 404(c) 
plan, neither the designation of a person to provide education nor 
the designation of a fiduciary to provide investment advice to 
participants and beneficiaries would, in itself, give rise to 
fiduciary liability for loss, or with respect to any breach of part 
4 of title I of ERISA, that is the direct and necessary result of a 
participant's or beneficiary's exercise of independent control. 29 
CFR 2550.404c-1(d). The Department also notes that a plan sponsor or 
fiduciary would have no fiduciary responsibility or liability with 
respect to the actions of a third party selected by a participant or 
beneficiary to provide education or investment advice where the plan 
sponsor or fiduciary neither selects nor endorses the educator or 
advisor, nor otherwise makes arrangements with the educator or 
advisor to provide such services.
    Unlike the remainder of the IB, this text does not belong in the 
investment advice regulation. Also, the principles articulated in 
paragraph (e) are generally understood and accepted such that 
retaining the paragraph as a stand-alone IB does not appear 
necessary or appropriate.

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[[Page 21945]]

    As noted, another change is that the Department is not 
incorporating the provisions at paragraph (d)(3)(iii) and (4)(iv) of IB 
96-1. Those provisions of IB 96-1 permit the use of asset allocation 
models that refer to specific investment products available under the 
plan or IRA, as long as those references to specific products are 
accompanied by a statement that other investment alternatives having 
similar risk and return characteristics may be available. Based on its 
experience with the IB 96-1 since publication, as well as views 
expressed by commenters to the 2010 Proposal, the Department now 
believes that, even when accompanied by a statement as to the 
availability of other investment alternatives, these types of specific 
asset allocations that identify specific investment alternatives 
function as tailored, individualized investment recommendations, and 
can effectively steer recipients to particular investments, but without 
adequate protections against potential abuse.\23\
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    \23\ When the Department issued IB 96-1, it expressed concern 
that service providers could effectively steer participants to a 
specific investment alternative by identifying only one particular 
fund available under the plan in connection with an asset allocation 
model. As a result, where it was possible to do so, the Department 
encouraged service providers to identify other investment 
alternatives within an asset class as part of a model. Ultimately, 
however, when asset allocation models and interactive investment 
materials identified any specific investment alternative available 
under the plan, the Department required an accompanying statement 
both indicating that other investment alternatives having similar 
risk and return characteristics may be available under the plan and 
identifying where information on those investment alternatives could 
be obtained. 61 FR 29586, 29587 (June 11, 1996).
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    In particular, the Department agrees with those commenters to the 
2010 Proposal who argued that cautionary disclosures to participants, 
beneficiaries, and IRA owners may have limited effectiveness in 
alerting them to the merit and wisdom of evaluating investment 
alternatives not used in the model. In practice, asset allocation 
models concerning hypothetical individuals, and interactive materials 
which arrive at specific investment products and plan alternatives, can 
be indistinguishable to the average retirement investor from 
individualized recommendations, regardless of caveats. Accordingly, 
paragraphs (b)(6)(iii) and (iv) relating to asset allocation models and 
interactive investment materials preclude the identification of 
specific investment alternatives available under the plan or IRA in 
order for the materials described in those paragraphs to be considered 
investment education. Thus, for example, we would not treat an asset 
allocation model as mere education if it called for a certain 
percentage of the investor's assets to be invested in large cap mutual 
funds, and accompanied that proposed allocation with the identity of a 
specific fund or provider. In that circumstance, the adviser has made a 
specific investment recommendation that should be treated as fiduciary 
advice and adhere to fiduciary standards. Further, materials that 
identify specific plan investment alternatives also appear to fall 
within the definition of ``recommendation'' in paragraph (f)(1) of the 
proposal, and could result in fiduciary status on the part of a 
provider if the other provisions of the proposal are met. The 
Department believes that effective and useful asset allocation 
education materials can be prepared and delivered to participants and 
IRA owners without including specific investment products and 
alternatives available under the plan. The Department understands that 
not incorporating the provisions of IB 96-1 at paragraph (d)(3)(iii) 
and (4)(iv) into the proposal represents a significant change in the 
information and materials that may constitute investment education. 
Accordingly, the Department invites comments on whether this change is 
appropriate.\24\
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    \24\ As indicated earlier in this Notice, the Department 
believes that FINRA's guidance in this area may provide useful 
standards and guideposts for distinguishing investment education 
from investment advice under ERISA. The Department specifically 
solicits comments on the discussion in FINRA's ``Frequently Asked 
Questions, FINRA Rule 2111 (Suitability)'' of the term 
``recommendation'' in the context of asset allocation models and 
general investment strategies.
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D. Fee or Other Compensation

    A necessary element of fiduciary status under section 3(21)(A)(ii) 
of ERISA is that the investment advice be for a ``fee or other 
compensation, direct or indirect.'' Consistent with the statute, 
paragraph (f)(6) of the proposed regulation defines this phrase to mean 
any fee or compensation for the advice received by the advice provider 
(or by an affiliate) from any source and any fee or compensation 
incident to the transaction in which the investment advice has been 
rendered or will be rendered. It further provides that the term ``fee 
or compensation'' includes, but is not limited to, brokerage fees, 
mutual fund sales, and insurance sales commissions.
    Paragraph (c)(3) of the 2010 Proposal used similar language, but it 
also provided that the term included fees and compensation based on 
multiple transactions involving different parties. Commenters found 
this provision confusing and it does not appear in the new proposal. 
The provision was intended to confirm the Department's position that 
fees charged on a so-called ``omnibus'' basis (e.g., compensation paid 
based on business placed or retained that includes plan or IRA 
business) would constitute fees and compensation for purposes of the 
rule.
    Direct or indirect compensation also includes any compensation 
received by affiliates of the adviser that is connected to the 
transaction in which the advice was provided. For example, when a 
fiduciary adviser recommends that a participant or IRA owner invest in 
a mutual fund, it is not unusual for an affiliated adviser to the 
mutual fund to receive a fee. The receipt by the affiliate of advisory 
fees from the mutual fund is indirect compensation in connection with 
the rendering of investment advice to the participant.
    Some commenters additionally suggested that call center employees 
should not be treated as investment advice fiduciaries where they are 
not specifically paid to provide investment advice and their 
compensation does not change based on their communications with 
participants and beneficiaries. The carve-out from the fiduciary 
investment advice definition for investment education provides 
guidelines under which call center staff and other employees providing 
similar investor assistance services may avoid fiduciary status. 
However, commenters stated that a specific carve-out for such call 
centers would provide a greater level of certainty so as not to inhibit 
mutual funds, insurance companies, broker-dealers, recordkeepers and 
other financial service providers from continuing to make such 
assistance available to participants and beneficiaries in 401(k) and 
similar participant-directed plans. In the Department's view, such a 
carve-out would be inappropriate. The fiduciary definition is intended 
to apply broadly to all persons who engage in the activities set forth 
in the regulation, regardless of job title or position, or whether the 
advice is rendered in person, in writing or by phone. If, in the 
performance of their jobs, call center employees make specific 
investment recommendations to plan participants or IRA owners under the 
circumstances

[[Page 21946]]

described in the proposal, it is appropriate to treat them, and 
possibly their employers, as fiduciaries unless they meet the 
conditions of one of the carve-outs set forth above.

E. Coverage of IRAs and Other Non-ERISA Plans

    Certain provisions of Title I of ERISA, 29 U.S.C. 1001-1108, such 
as those relating to participation, benefit accrual, and prohibited 
transactions also appear in the Code. This parallel structure ensures 
that the relevant provisions apply to all tax-qualified plans, 
including IRAs. With regard to prohibited transactions, the Title I 
provisions generally authorize recovery of losses from, and imposition 
of civil penalties on, the responsible plan fiduciaries, while the Code 
provisions impose excise taxes on persons engaging in the prohibited 
transactions. The definition of fiduciary with respect to a plan is the 
same in section 4975(e)(3)(B) of the IRC as the definition in section 
3(21)(A)(ii) of ERISA, 29 U.S.C. 1002(21)(A)(ii), and the Department's 
1975 regulation defining fiduciary investment advice is virtually 
identical to regulations that define the term ``fiduciary'' under the 
Code. 26 CFR 54.4975-9(c) (1975).
    To rationalize the administration and interpretation of dual 
provisions under ERISA and the Code, Reorganization Plan No. 4 of 1978 
divided the interpretive and rulemaking authority for these provisions 
between the Secretaries of Labor and of the Treasury, so that, in 
general, the agency with responsibility for a given provision of Title 
I of ERISA would also have responsibility for the corresponding 
provision in the Code. Among the sections transferred to the Department 
were the prohibited transaction provisions and the definition of a 
fiduciary in both Title I of ERISA and in the Code. ERISA's prohibited 
transaction rules, 29 U.S.C. 1106-1108, apply to ERISA-covered plans, 
and the Code's corresponding prohibited transaction rules, 26 U.S.C. 
4975(c), apply both to ERISA-covered pension plans that are tax-
qualified pension plans, as well as other tax-advantaged arrangements, 
such as IRAs, that are not subject to the fiduciary responsibility and 
prohibited transaction rules in ERISA.\25\
---------------------------------------------------------------------------

    \25\ The Secretary of Labor also was transferred authority to 
grant administrative exemptions from the prohibited transaction 
provisions of the Code.
---------------------------------------------------------------------------

    Given this statutory structure, and the dual nature of the 1975 
regulation, the proposal would apply to both the definition of 
``fiduciary'' in section 3(21)(A)(ii) of ERISA and the definition's 
counterpart in section 4975(e)(3)(B) of the Code. As a result, it 
applies to persons who give investment advice to IRAs. In this respect, 
the new proposal is the same as the 2010 Proposal.
    Many comments on the 2010 Proposal concerned its impact on IRAs and 
questioned whether the Department had adequately considered possible 
negative impacts. Some commenters were especially concerned that 
application of the new rule could disrupt existing brokerage 
arrangements that they believe are beneficial to customers. In 
particular, brokers often receive revenue sharing, 12b-1 fees, and 
other compensation from the parties whose investment products they 
recommend. If the brokers were treated as fiduciaries, the receipt of 
such fees could violate the Code's prohibited transaction rules, unless 
eligible for a prohibited transaction exemption. According to these 
commenters, the disruption of such current fee arrangements could 
result in a reduced level of assistance to investors, higher up-front 
fees, and less investment advice, particularly to investors with small 
accounts. In addition, some commenters expressed skepticism that the 
imposition of fiduciary standards would result in improved advice and 
questioned the view that current compensation arrangements could cause 
sub-optimal advice. Additionally, commenters stressed the need for 
coordination between the Department and other regulatory agencies, such 
as the SEC, CFTC, and Treasury.
    As discussed above, to better align the regulatory definition of 
fiduciary with the statutory provisions and underlying Congressional 
goals, the Department is proposing a definition of a fiduciary 
investment advice that would encompass investment recommendations that 
are individualized or specifically directed to plans, participants, 
beneficiaries or IRA owners, if the adviser receives a direct or 
indirect fee. Neither the relevant statutory provisions, nor the 
current regulation, draw a distinction between brokers and other 
advisers or carve brokers out of the scope of the fiduciary provisions 
of ERISA and of the Code. The relevant statutory provisions, and 
accordingly the proposed regulation, establish a functional test based 
on the service provider's actions, rather than the provider's title 
(e.g., broker or registered investment adviser). If one engages in 
specified activities, such as the provision of investment advice for a 
direct or indirect fee, the person engaging in those activities is a 
fiduciary, irrespective of labels. Moreover, the statutory definition 
of fiduciary advice is identical under both ERISA and the Code. There 
is no indication that the definition should vary between plans and 
IRAs.
    In light of this statutory framework, the Department does not 
believe it would be appropriate to carve out a special rule for IRAs, 
or for brokers or others who make specific investment recommendations 
to IRA owners or to other participants in non-ERISA plans for direct or 
indirect fees. When Congress enacted ERISA and the corresponding Code 
provisions, it chose to impose fiduciary status on persons who provide 
investment advice to plans, participants, beneficiaries and IRA owners, 
and to specifically prohibit a wide variety of transactions in which 
the fiduciary has financial interests that potentially conflict with 
the fiduciary's obligation to the plan or IRA. It did not provide a 
special carve-out for brokers or IRAs, and the Department does not 
believe it would be appropriate to write such a carve-out into the 
regulation implementing the statutory definition.
    Indeed, brokers who give investment advice to IRA owners or plan 
participants, and who otherwise meet the terms of the current five-part 
test, are already fiduciaries under the existing fiduciary regulation. 
If, for example, a broker regularly advises an individual IRA owner on 
specific investments, the IRA owner routinely follows the 
recommendations, and both parties understand that the IRA owner relies 
upon the broker's advice, the broker is almost certainly a fiduciary. 
In such circumstances, the broker is already subject to the excise tax 
on prohibited transactions if he or she receives fees from a third 
party in connection with recommendations to invest IRA assets in the 
third party's investment products, unless the broker satisfies the 
conditions of a prohibited transaction exemption that covers the 
particular fees. Indeed, broker-dealers today can provide fiduciary 
investment advice by complying with prohibited transaction exemptions 
that permit the receipt of commission-based compensation for the sale 
of mutual funds and other securities. Moreover, both ERISA and the Code 
were amended as part of the PPA to include a new prohibited transaction 
exemption that applies to investment advice in both the plan and IRA 
context. The PPA exemption clearly reflects the longstanding concern 
under ERISA and the Code about the dangers posed by conflicts of 
interest, and the need for appropriate safeguards in both the plan and 
IRA markets. Under the terms of the

[[Page 21947]]

exemption, the investment recommendations must either result from the 
application of an unbiased and independently certified computer program 
or the fiduciary's fees must be level (i.e., the fiduciary's 
compensation cannot vary based on his or her particular investment 
recommendations).
    Moreover, as discussed in the regulatory impact analysis below, 
there is substantial evidence to support the statutory concern about 
conflicts of interest. As the analysis reflects, unmitigated conflicts 
can cause significant harm to investors. The available evidence 
supports a finding that the negative impacts are present and often 
times large. The proposal would curtail the harms to investors from 
such conflicts and thus deliver significant benefits to plan 
participants and IRA owners. Plans, plan participants, beneficiaries 
and IRA owners would all benefit from advice that is impartial and puts 
their interests first. Moreover, broker-dealer interactions with plan 
fiduciaries, participants, and IRA owners present some of the most 
obvious conflict of interest problems in this area. Accordingly, in the 
Department's view, broker-dealers that provide investment advice should 
be subject to fiduciary duties to mitigate conflicts of interest and 
increase investor protections.
    Some commenters additionally suggested that the application of 
special fiduciary rules in the retail investment market to IRA 
accounts, but not savings outside of tax-preferred retirement accounts, 
is inappropriate and could lead to confusion among investors and 
service providers. The distinction between IRAs and other retail 
accounts, however, is a direct result of a statutory structure that 
draws a sensible distinction between tax-favored IRAs and other retail 
investment accounts. The Code itself treats IRAs differently, bestowing 
uniquely favorable tax treatment on such accounts and prohibiting self-
dealing by persons providing investment advice for a fee. In these 
respects, and in light of the special public interest in retirement 
security, IRAs are more like plans than like other retail accounts. 
Indeed, as noted above, the vast majority of IRA assets today are 
attributable to rollovers from plans.\26\ In addition, IRA owners may 
be at even greater risk from conflicted advice than plan participants. 
Unlike ERISA plan participants, IRA owners do not have the benefit of 
an independent plan fiduciary to represent their interests in selecting 
a menu of investment options or structuring advice arrangements. They 
cannot sue fiduciary advisers under ERISA for losses arising from 
fiduciary breaches, nor can the Department sue on their behalf. 
Compared to participants with ERISA plan accounts, IRA owners often 
have larger account balances and are more likely to be elderly. Thus, 
limiting the harms to IRA investors resulting from conflicts of 
interest of advisers is at least as important as protecting ERISA plans 
and plan participants from such harms.
---------------------------------------------------------------------------

    \26\ Peter Brady, Sarah Holden, and Erin Shon, The U.S. 
Retirement Market, 2009, Investment Company Institute, Research 
Fundamentals, Vol. 19, No. 3, May 2010, at http://www.ici.org/pdf/fm-v19n3.pdf.
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    The Department believes that it is important to address the 
concerns of brokers and others providing investment advice to IRA 
owners about undue disruptions to current fee arrangements, but also 
believes that such concerns are best resolved within a fiduciary 
framework, rather than by simply relieving advisers from fiduciary 
responsibility. As previously discussed, the proposed regulation 
permits investment professionals to provide important financial 
information and education, without acting as fiduciaries or being 
subject to the prohibited transaction rules. Moreover, ERISA and the 
Code create a flexible process that enables the Department to grant 
class and individual exemptions from the prohibited transaction rules 
for fee practices that it determines are beneficial to plan 
participants and IRA owners. For example, existing prohibited 
transaction exemptions already allow brokers who provide fiduciary 
advice to receive commissions generating conflicts of interest for 
trading the types of securities and funds that make up the large 
majority of IRA assets today. In addition, simultaneous with the 
publication of this proposed regulation, the Department is publishing 
new exemption proposals that would permit common fee practices, while 
at the same time protecting plan participants, beneficiaries and IRA 
owners from abuse and conflicts of interest. As noted above, in 
contrast with many previously adopted PTE exemptions that are 
transaction-specific, the Best Interest Contract PTE described below 
reflects a more flexible approach that accommodates a wide range of 
current business practices while minimizing the impact of conflicts of 
interest and ensuring that plans and IRAs receive investment 
recommendations that are in their best interests.
    As discussed, the Department received extensive comment on the 
application of the 2010 Proposal's provisions to IRAs, but comments 
regarding other non-ERISA plans such as Health Savings Accounts (HSAs), 
Archer Medical Savings Accounts and Coverdell Education Savings 
Accounts were less prolific. The Department notes that these accounts 
are given tax preferences as are IRAs. Further, some of the accounts, 
such as HSAs, can be used as long term savings accounts for retiree 
health care expenses. These types of accounts also are expressly 
defined by Code section 4975(e)(1) as plans that are subject to the 
Code's prohibited transaction rules. Thus, although they generally may 
hold fewer assets and may exist for shorter durations than IRAs, the 
owners of these accounts or the persons for whom these accounts were 
established are entitled to receive the same protections from 
conflicted investment advice as IRA owners. Accordingly, these accounts 
are included in the scope of covered plans in paragraph (f)(2) of the 
new proposal. However, the Department solicits specific comment as to 
whether it is appropriate to cover and treat these plans under the 
proposed regulation in a manner similar to IRAs as to both coverage and 
applicable carve-outs.

F. Administrative Prohibited Transaction Exemptions

    In addition to the new proposal in this Notice, the Department is 
also proposing, elsewhere in this edition of the Federal Register, 
certain administrative class exemptions from the prohibited transaction 
provisions of ERISA (29 U.S.C. 1106), and the Code (26 U.S.C. 
4975(c)(1)) as well as proposed amendments to previously adopted 
exemptions. The proposed exemptions and amendments would allow, subject 
to appropriate safeguards, certain broker-dealers, insurance agents and 
others that act as investment advice fiduciaries to nevertheless 
continue to receive a variety of forms of compensation that would 
otherwise violate prohibited transaction rules and trigger excise 
taxes. The proposed exemptions would supplement statutory exemptions at 
29 U.S.C. 1108 and 26 U.S.C. 4975(d), and previously adopted class 
exemptions.
    Investment advice fiduciaries to plans and plan participants must 
meet ERISA's standards of prudence and loyalty to their plan customers. 
Such fiduciaries also face taxes, remedies and other sanctions for 
engaging in certain transactions, such as self-dealing with plan assets 
or receiving payments from third parties in connection with plan 
transactions, unless the transactions are permitted by an exemption 
from ERISA's and the Code's prohibited transaction rules. IRA 
fiduciaries do not

[[Page 21948]]

have the same general fiduciary obligations of prudence and loyalty 
under the statute, but they too must adhere to the prohibited 
transaction rules or they must pay an excise tax. The prohibited 
transaction rules help ensure that investment advice provided to plan 
participants and IRA owners is not driven by the adviser's financial 
self-interest.
Proposed Best Interest Contract Exemption (Best Interest Contract PTE)
    The proposed Best Interest Contract PTE would provide broad and 
flexible relief from the prohibited transaction restrictions on certain 
compensation received by investment advice fiduciaries as a result of a 
plan's or IRA's purchase, sale or holding of specifically identified 
investments. The conditions of the exemption are generally principles-
based rather than prescriptive and require, in particular, that advice 
be provided in the best interest of the plan or IRA. This exemption was 
developed partly in response to comments received that suggested such 
an approach. It is a significant departure from existing exemptions, 
examples of which are discussed below, which are limited to much 
narrower categories of investments under more prescriptive and less 
flexible and adaptable conditions.
    The proposed Best Interest Contract PTE was developed to promote 
the provision of investment advice that is in the best interest of 
retail investors, such as plan participants and beneficiaries, IRA 
owners, and small plans. The proposed exemption would apply to 
compensation received by individual investment advice fiduciaries 
(including individual advisers \27\ and firms that employ or otherwise 
contract with such individuals) as well as their affiliates and related 
entities, that is provided in connection with the purchase, sale or 
holding of certain assets by the plans, participants and beneficiaries, 
and IRAs. In order to protect the interests of these investors, the 
exemption requires the firm and the adviser to contractually 
acknowledge fiduciary status, commit to adhere to basic standards of 
impartial conduct, warrant that they will comply with applicable 
federal and state laws governing advice and that they have adopted 
policies and procedures reasonably designed to mitigate any harmful 
impact of conflicts of interest, and disclose basic information on 
their conflicts of interest and on the cost of their advice. The 
standards of impartial conduct to which the adviser and firm must 
commit are basic obligations of fair dealing and fiduciary conduct to 
which the Department believes advisers and firms often informally 
commit--to give advice that is in the customer's best interest; avoid 
misleading statements; and receive no more than reasonable 
compensation. This standards-based approach aligns the adviser's 
interests with those of the plan or IRA customer, while leaving the 
adviser and employing firm the flexibility and discretion necessary to 
determine how best to satisfy these basic standards in light of the 
unique attributes of their business.
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    \27\ By using the term ``adviser,'' the Department does not 
intend to limit the exemption to investment advisers registered 
under the Investment Advisers Act of 1940; under the exemption an 
adviser is individual who can be a representative of a registered 
investment adviser, a bank or similar financial institution, an 
insurance company, or a broker-dealer.
---------------------------------------------------------------------------

    As an additional protection for retail investors, the exemption 
would not apply if the contract contains exculpatory provisions 
disclaiming or otherwise limiting liability of the adviser or financial 
institution for violation of the contract's terms. Adopting the 
approach taken by FINRA, the contract could require the parties to 
arbitrate individual claims, but it could not limit the rights of the 
plan, participant, beneficiary, or IRA owner to bring or participate in 
a class action against the adviser or financial institution.
    Additional conditions would apply to firms that limit the products 
that their advisers can recommend based on the receipt of third party 
payments or the proprietary nature of the products (i.e., products 
offered or managed by the firm or its affiliates) or for other reasons. 
The conditions require, among other things, that such firms provide 
notice of the limitations to plans, participants and beneficiaries and 
IRA owners, as well as make a written finding that the limitations do 
not prevent advisers from providing advice in those investors' best 
interest.
    Finally, certain notice and data collection requirements would 
apply to all firms relying on the exemption. Specifically, firms would 
be required to notify the Department in advance of doing so, and they 
would have to maintain certain data, and make it available to the 
Department upon request, to help evaluate the effectiveness of the 
exemption in safeguarding the interests of plan and IRA investors.
    The Department's intent in crafting the Best Interest Contract PTE 
is to permit common compensation structures that create conflicts of 
interest, while minimizing the costs imposed on investors by such 
conflicts. The exemption is designed both to impose broad fiduciary 
standards of conduct on advisers and financial institutions, and to 
give them sufficient flexibility to accommodate a wide range of 
business practices and compensation structures that currently exist or 
that may develop in the future.
    The Department is also considering an additional streamlined 
exemption that would apply to compensation received in connection with 
investments by plans, participants and beneficiaries, and IRA owners, 
in certain high-quality, low-fee investments, subject to fewer 
conditions than in the proposed Best Interest Contract PTE. If properly 
crafted, the streamlined exemption could achieve important goals of 
minimizing compliance burdens for advisers and financial institutions 
when they offer investment products with little potential for material 
conflicts of interest. The Department is not proposing text for such a 
streamlined exemption due to the difficulty in operationalizing this 
concept. However the Department is eager to receive comments on whether 
such an exemption would be worthwhile and, as part of the notice 
proposing the Best Interest Contract PTE, is soliciting comments on a 
number of issues relating to the design of a streamlined exemption.
Proposed Principal Transaction Exemption (Principal Transaction PTE)
    Broker-dealers and other advisers commonly sell debt securities out 
of their own inventory to plans, participants and beneficiaries and IRA 
owners in a type of transaction known as a ``principal transaction.'' 
Fiduciaries trigger taxes, remedies and other legal sanctions when they 
engage in such activities, unless they qualify for an exemption from 
the prohibited transaction rules. These principal transactions raise 
issues similar to those addressed in the Best Interest Contract PTE, 
but also raise unique concerns because the conflicts of interest are 
particularly acute. In these transactions, the adviser sells the 
security directly from its own inventory, and may be able to dictate 
the price that the plan, participant or beneficiary, or IRA owner pays.
    Because of the prevalence of the practice in the market for fixed 
income securities, the Department has proposed a separate Principal 
Transactions PTE that would permit principal transactions in certain 
debt securities between a plan or IRA owner and an investment advice 
fiduciary, under certain circumstances.

[[Page 21949]]

    The Principal Transaction PTE would include all of the contract 
requirements of the Best Interest Contract PTE. In addition, however, 
it would include specific conditions related to the price of the debt 
security involved in the transaction. The adviser would have to obtain 
two price quotes from unaffiliated counterparties for the same or a 
similar security, and the transaction would have to occur at a price at 
least as favorable to the plan or IRA as the two price quotes. 
Additionally, the adviser would have to disclose the amount of 
compensation and profit (sometimes referred to as a ``mark up'' or 
``mark down'') that it expects to receive on the transaction.
Amendments to Existing PTEs
    In addition to the Best Interest Contract PTE and the Principal 
Transaction PTE, the Department is also proposing elsewhere in the 
Federal Register amendments to certain existing PTEs.
Prohibited Transaction Exemption 86-128
    Prohibited Transaction Exemption (PTE) 86-128 \28\ currently allows 
an investment advice fiduciary to cause the recipient plan or IRA to 
pay the investment advice fiduciary or its affiliate a fee for 
effecting or executing securities transactions as agent. To prevent 
churning, the exemption does not apply if such transactions are 
excessive in either amount or frequency. The exemption also allows the 
investment advice fiduciary to act as an agent for both the plan and 
the other party to the transaction (i.e., the buyer and the seller of 
securities) and receive a reasonable fee. To use the exemption, the 
fiduciary cannot be a plan administrator or employer, unless all 
profits earned by these parties are returned to the plan. The 
conditions of the exemption require that a plan fiduciary independent 
of the investment advice fiduciary receive certain disclosures and 
authorize the transaction. In addition, the independent fiduciary must 
receive confirmations and an annual ``portfolio turnover ratio'' 
demonstrating the amount of turnover in the account during that year. 
These conditions are not presently applicable to transactions involving 
IRAs.
---------------------------------------------------------------------------

    \28\ Class Exemption for Securities Transactions Involving 
Employee Benefit Plans and Broker-Dealers, 51 FR 41686 (Nov. 18, 
1986), amended at 67 FR 64137 (Oct. 17, 2002).
---------------------------------------------------------------------------

    The Department is proposing to amend PTE 86-128 to require all 
fiduciaries relying on the exemption to adhere to the same impartial 
conduct standards required in the Best Interest Contract PTE. At the 
same time, the proposed amendment would eliminate relief for investment 
advice fiduciaries to IRA owners; instead they would be required to 
rely on the Best Interest Contract PTE for an exemption for such 
compensation. In the Department's view, the provisions in the Best 
Interest Contract Exemption better address the interests of IRAs with 
respect to transactions otherwise covered by PTE 86-128 and, unlike 
plan participants and beneficiaries, there is no separate plan 
fiduciary in the IRA market to review and authorize the transaction. 
Investment advice fiduciaries to plans would remain eligible for relief 
under the exemption, as would investment managers with full investment 
discretion over the investments of plans and IRA owners, but they would 
be required to comply with all the protective conditions, described 
above. Finally, the Department is proposing that PTE 86-128 extend to a 
new covered transaction, for fiduciaries who sell mutual fund shares 
out of their own inventory (i.e., acting as principals, rather than 
agents) to plans and IRAs and to receive commissions for doing so. This 
transaction is currently the subject of another exemption, PTE 75-1, 
Part II(2) (discussed below) that the Department is proposing to 
revoke.
    Several changes are proposed with respect to PTE 75-1, a multi-part 
exemption for securities transactions involving broker dealers and 
banks, and plans and IRAs.\29\ Part I(b) and (c) currently provide 
relief for certain non-fiduciary services to plans and IRAs. The 
Department is proposing to revoke these provisions, and require persons 
seeking to engage in such transactions to rely instead on the existing 
statutory exemptions provided in ERISA section 408(b)(2) and Code 
section 4975(d)(2), and the Department's implementing regulations at 29 
CFR 2550.408b-2. The Department believes the conditions of the 
statutory exemptions are more appropriate for the provision of these 
services.
---------------------------------------------------------------------------

    \29\ Exemptions from Prohibitions Respecting Certain Classes of 
Transactions Involving Employee Benefit Plans and Certain Broker-
Dealers, Reporting Dealers and Banks, 40 FR 50845 (Oct. 31, 1975), 
as amended at 71 FR 5883 (Feb. 3, 2006).
---------------------------------------------------------------------------

    PTE 75-1, Part II(2), currently provides relief for fiduciaries 
selling mutual fund shares to plans and IRAs in a principal transaction 
to receive commissions. PTE 75-1, Part II(2) currently provides relief 
for fiduciaries to receive commissions for selling mutual fund shares 
to plans and IRAs in a principal transaction. As described above, the 
Department is proposing to provide relief for these types of 
transactions in PTE 86-128, and so is proposing to revoke PTE 75-1, 
Part II(2), in its entirety. As discussed in more detail in the notice 
of proposed amendment/revocation, the Department believes the 
conditions of PTE 86-128 are more appropriate for these transactions.
    PTE 75-1, Part V, currently permits broker-dealers to extend credit 
to a plan or IRA in connection with the purchase or sale of securities. 
The exemption does not permit broker-dealers that are fiduciaries to 
receive compensation when doing so. The Department is proposing to 
amend PTE 75-1, Part V, to permit investment advice fiduciaries to 
receive compensation for lending money or otherwise extending credit, 
but only for the limited purpose of avoiding a failed securities 
transaction.
Prohibited Transaction Exemption 84-24
    PTE 84-24 \30\ covers transactions involving mutual fund shares, or 
insurance or annuity contracts, sold to plans or IRA investors by 
pension consultants, insurance agents, brokers, and mutual fund 
principal underwriters who are fiduciaries as a result of advice they 
give in connection with these transactions. The exemption allows these 
investment advice fiduciaries to receive a sales commission with 
respect to products purchased by plans or IRA investors. The exemption 
is limited to sales commissions that are reasonable under the 
circumstances. The investment advice fiduciary must provide disclosure 
of the amount of the commission and other terms of the transaction to 
an independent fiduciary of the plan or IRA, and obtain approval for 
the transaction. To use this exemption, the investment advice fiduciary 
may not have certain roles with respect to the plan or IRA such as 
trustee, plan administrator, fiduciary with written authorization to 
manage the plan's assets and employers. However it is available to 
investment advice fiduciaries regardless of whether they expressly 
acknowledge their fiduciary status or are simply functional or 
``inadvertent'' fiduciaries that have not expressly agreed to act as 
fiduciary advisers, provided there is no written authorization granting 
them discretion to acquire or dispose of the assets of the plan or IRA.
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    \30\ Class Exemption for Certain Transactions Involving 
Insurance Agents and Brokers, Pension Consultants, Insurance 
Companies, Investment Companies and Investment Company Principal 
Underwriters, 49 FR 13208 (Apr. 3, 1984), amended at 71 FR 5887 
(Feb. 3, 2006).

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[[Page 21950]]

    The Department is proposing to amend PTE 84-24 to require all 
fiduciaries relying on the exemption to adhere to the same impartial 
conduct standards required in the Best Interest Contract Exemption. At 
the same time, the proposed amendment would revoke PTE 84-24 in part so 
that investment advice fiduciaries to IRA owners would not be able to 
rely on PTE 84-24 with respect to (1) transactions involving variable 
annuity contracts and other annuity contracts that constitute 
securities under federal securities laws, and (2) transactions 
involving the purchase of mutual fund shares. Investment advice 
fiduciaries to IRA owners would instead be required to rely on the Best 
Interest Contract Exemption for most common forms of compensation 
received in connection with these transactions. The Department believes 
that investment advice transactions involving annuity contracts that 
are treated as securities and transactions involving the purchase of 
mutual fund shares should occur under the conditions of the Best 
Interest Contract Exemption due to the similarity of these investments, 
including their distribution channels and disclosure obligations, to 
other investments covered in the Best Interest Contract Exemption. 
Investment advice fiduciaries to ERISA plans would remain eligible for 
relief under the exemption with respect to transactions involving all 
insurance and annuity contracts and mutual fund shares and the receipt 
of commissions allowable under that exemption. Investment advice 
fiduciaries to IRAs could still receive commissions for transactions 
involving non-securities insurance and annuity contracts, but they 
would be required to comply with all the protective conditions, 
described above.
    Finally, the Department is proposing amendments to certain other 
existing class exemptions to require adherence to the impartial conduct 
standards required in the Best Interest Contract PTE. Specifically, 
PTEs 75-1, Part III, 75-1, Part IV, 77-4, 80-83, and 83-1, would be 
amended. These existing class exemptions will otherwise remain in 
place, affording flexibility to fiduciaries who currently use the 
exemptions or who wish to use the exemptions in the future.
    The proposed dates on which the new exemptions and amendments to 
existing exemptions would be effective are summarized below.

G. The Provision of Professional Services Other Than Investment Advice

    Several commenters asserted that it was unclear whether investment 
advice under the scope of the 2010 Proposal would include the provision 
of information and plan services that traditionally have been performed 
in a non-fiduciary capacity. For example, they requested that the 
proposal be revised to make clear that actuaries, accountants, and 
attorneys, who have historically not been treated as ERISA fiduciaries 
for plan clients, would not become fiduciary investment advisers by 
reason of providing actuarial, accounting and legal services. They said 
that if individuals providing these services were classified as 
fiduciaries, the associated costs would almost certainly increase 
because of the need to account for their new potential fiduciary 
liability. This was not the intent of the 2010 proposal.
    The new proposal clarifies that attorneys, accountants, and 
actuaries would not be treated as fiduciaries merely because they 
provide such professional assistance in connection with a particular 
investment transaction. Only when these professionals act outside their 
normal roles and recommend specific investments or render valuation 
opinions in connection with particular investment transactions, would 
they be subject to the proposed fiduciary definition.
    Similarly, the new proposal does not alter the principle 
articulated in ERISA Interpretive Bulletin 75-8, D-2 at 29 CFR 2509.75-
8 (1975). Under the bulletin, the plan sponsor's human resources 
personnel or plan service providers who have no power to make decisions 
as to plan policy, interpretations, practices or procedures, but who 
perform purely administrative functions for an employee benefit plan, 
within a framework of policies, interpretations, rules, practices and 
procedures made by other persons, are not fiduciaries with respect to 
the plan.

H. Effective Date; Applicability Date

Final Rule
    Commenters on the 2010 Proposal asked the Department to provide 
sufficient time for orderly and efficient compliance, and to make it 
clear that the final rule would not apply in connection with advice 
provided before the effective date of the final rule. Many commenters 
also expressed concern with the provision in the Department's 2010 
Proposal that the final regulation and class exemptions would be 
effective 90 days after their publication in the Federal Register. Some 
commenters suggested that these effective dates should be extended to 
as much as 12 months or longer following publication of the new rule to 
allow service providers sufficient time to make necessary changes in 
business practices, recordkeeping, communication materials, sales 
processes, compensation arrangements, and related agreements, as well 
as the time necessary to obtain and adjust to any additional individual 
or class exemptions. Several said that applicability of any changes in 
the 1975 regulation should be no earlier than two years after the 
promulgation of a final regulation. Other commenters thought that the 
effective dates in the 2010 proposal were reasonable and asked that the 
final rules should go into effect promptly in order to reduce ongoing 
harms to savers.
    In response to these concerns, the Department has revised the date 
by which the final rule would apply. Specifically, the final rule would 
be effective 60 days after publication in the Federal Register and the 
requirements of the final rule would generally become applicable eight 
months after publication of a final rule, with the potential exceptions 
noted below. This modification is intended to balance the concerns 
raised by commenters about the need for prompt action with concerns 
raised about the cost and burden associated with transitioning current 
and future contracts or arrangements to satisfy the requirements of the 
final rule and any accompanying prohibited transaction exemptions.
Administrative Prohibited Transaction Exemptions
    The Department proposes to make the Best Interest Contract 
Exemption, if granted, available on the final rule's applicability 
date, i.e., eight months after publication of a final rule. Further, 
the department proposes that the other new and revised PTEs that it is 
proposing go into effect as of the final rule's applicability date.\31\
---------------------------------------------------------------------------

    \31\ See the notices with respect to these proposals, published 
elsewhere in this issue of the Federal Register.
---------------------------------------------------------------------------

    For those fiduciary investment advisers who choose to avail 
themselves of the Best Interest Contract Exemption, the Department 
recognizes that compliance with certain requirements of the new 
exemption may be difficult within the eight-month timeframe. The 
Department therefore is soliciting comments on whether to delay the 
application of certain requirements of the Best Interest Contract 
Exemption for several months (for example, certain data collection 
requirements), thereby enabling firms and advisers to benefit from the 
Best Interest Contract Exemption without meeting all the

[[Page 21951]]

requirements for a limited period of time. Although the Department does 
not believe that a general delay in the application of the exemption's 
requirements is warranted, it recognizes that a short-term delay of 
some requirements may be appropriate and may not compromise the overall 
protections created by the proposed rule and exemptions. As discussed 
in more detail in the Notice proposing the Best Interest Contract 
Exemption published elsewhere in this issue of the Federal Register, 
the Department requests comments on this approach.

I. Public Hearing

    The Department plans to hold an administrative hearing within 30 
days of the close of the comment period. As with the 2010 Proposal, the 
Department will ensure ample opportunity for public comment by 
reopening the record following the hearing and publication of the 
hearing transcript. Specific information regarding the date, location 
and submission of requests to testify will be published in a notice in 
the Federal Register.

J. Regulatory Impact Analysis

    Under Executive Order 12866, ``significant'' regulatory actions are 
subject to the requirements of the Executive Order and review by the 
Office of Management and Budget (OMB). Section 3(f) of the executive 
order defines a ``significant regulatory action'' as an action that is 
likely to result in a rule (1) having an annual effect on the economy 
of $100 million or more, or adversely and materially affecting a sector 
of the economy, productivity, competition, jobs, the environment, 
public health or safety, or State, local or tribal governments or 
communities (also referred to as ``economically significant''); (2) 
creating serious inconsistency or otherwise interfering with an action 
taken or planned by another agency; (3) materially altering the 
budgetary impacts of entitlement grants, user fees, or loan programs or 
the rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. OMB has 
determined that this proposed rule is economically significant within 
the meaning of section 3(f)(1) of the Executive Order, because it would 
be likely to have an effect on the economy of $100 million in at least 
one year. Accordingly, OMB has reviewed the rule pursuant to the 
Executive Order.
    The Department's complete Regulatory Impact Analysis is available 
at www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf. It is summarized 
below.
    Tax-preferred retirement savings, in the form of private-sector, 
employer-sponsored retirement plans, such as 401(k) plans (``plans''), 
and Individual Retirement Accounts (``IRAs''), are critical to the 
retirement security of most U.S. workers. Investment professionals play 
a major role in guiding their investment decisions. However, these 
professional advisers often are compensated in ways that create 
conflicts of interest, which can bias the investment advice they render 
and erode plan and IRA investment results. In order to limit or 
mitigate conflicts of interest and thereby improve retirement security, 
the Department of Labor (``the Department'') is proposing to attach 
fiduciary status to more of the advice rendered to plan officials, 
participants, and beneficiaries (plan investors) and IRA investors.
    Since the Department issued its 1975 rule, the retirement savings 
market has changed profoundly. Financial products are increasingly 
varied and complex. Individuals, rather than large employers, are 
increasingly responsible for their investment decisions as IRAs and 
401(k)-type defined contribution plans have supplanted defined benefit 
pensions as the primary means of providing retirement security. Plan 
and IRA investors often lack investment expertise and must rely on 
experts--but are unable to assess the quality of the expert's advice or 
police its conflicts of interest. Most have no idea how ``advisers'' 
are compensated for selling them products. Many are bewildered by 
complex choices that require substantial financial literacy and welcome 
``free'' advice. The risks are growing as baby boomers retire and move 
money from plans, where their employer has both the incentive and the 
fiduciary duty to facilitate sound investment choices, to IRAs, where 
both good and bad investment choices are myriad and most advice is 
conflicted. These ``rollovers'' are expected to approach $2.5 trillion 
over the next 5 years.\32\ These rollovers, which will be one-time and 
not ``on a regular basis'' and thus not covered by the 1975 standard, 
will be the most important financial decisions that many consumers make 
in their lifetime. An ERISA plan investor who rolls her retirement 
savings into an IRA could lose 12 to 24 percent of the value of her 
savings over 30 years of retirement by accepting advice from a 
conflicted financial advisor.\33\ Timely regulatory action to redress 
advisers' conflicts is warranted to avert such losses.
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    \32\ Cerulli Associates, ``Retirement Markets 2014: Sizing 
Opportunities in Private and Public Retirement Plans,'' 2014.
    \33\ For example, an ERISA plan investor who rolls $200,000 into 
an IRA, earns a 6% nominal rate of return with 3% inflation, and 
aims to spend down her savings in 30 years, would be able to consume 
$10,204 per year for the 30 year period. A similar investor whose 
assets underperform by 1 or 2 percentage points per year would only 
be able to consume $8,930 or $7,750 per year, respectively, in each 
of the 30 years. The 1 to 2 percentage point underperformance comes 
from a careful review of a large and growing body of literature 
which consistently points to a substantial failure of the market for 
retirement advice. The literature is discussed in the Department's 
complete Regulatory Impact Analysis (available at www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf).
---------------------------------------------------------------------------

    In the retail IRA marketplace, growing consumer demand for 
personalized advice, together with competition from online discount 
brokerage firms, has pushed brokers to offer more comprehensive 
guidance services rather than just transaction support. Unfortunately, 
their traditional compensation sources--such as brokerage commissions, 
revenue shared by mutual funds and funds' asset managers, and mark-ups 
on bonds sold from their own inventory--can introduce acute conflicts 
of interest. Brokers and others advising IRA investors are often able 
to calibrate their business practices to steer around the narrow 1975 
rule and thereby avoid fiduciary status and prohibited transactions for 
accepting conflict-laden compensation. Many brokers market retirement 
investment services in ways that clearly suggest the provision of 
tailored or individualized advice, while at the same time relying on 
the 1975 rule to disclaim any fiduciary responsibility in the fine 
print of contracts and marketing materials. Thus, at the same time that 
marketing materials may characterize the financial adviser's 
relationship with the customer as one-on-one, personalized, and based 
on the client's best interest, footnotes and legal boilerplate disclaim 
the requisite mutual agreement, arrangement, or understanding that the 
advice is individualized or should serve as a primary basis for 
investment decisions. What is presented to an IRA investor as trusted 
advice is often paid for by a financial product vendor in the form of a 
sales commission or shelf-space fee, without adequate counter-balancing 
consumer protections that are designed to ensure that the advice is in 
the investor's best interest. In another variant of the same problem, 
brokers and others provide apparently tailored advice to customers 
under the guise of general education to avoid triggering fiduciary 
status and responsibility.

[[Page 21952]]

    Likewise in the plan market, pension consultants and advisers that 
plan sponsors rely on to guide their decisions often avoid fiduciary 
status under the five-part test and are conflicted. For example, if a 
plan hires an investment professional or appraiser on a one-time basis 
for an investment recommendation on a large, complex investment, the 
adviser has no fiduciary obligation to the plan under ERISA. Even if 
the plan official, who lacks the specialized expertise necessary to 
evaluate the complex transaction on his or her own, invests all or 
substantially all of the plan's assets in reliance on the consultant's 
professional judgment, the consultant is not a fiduciary because he or 
she does not advise the plan on a ``regular basis'' and therefore may 
stand to profit from the plan's investment due to a conflict of 
interest that could affect the consultant's best judgment. Too much has 
changed since 1975, and too many investment decisions are made as one-
time decisions and not advice on a regular basis for the five-part test 
to be a meaningful safeguard any longer.
    The proposed definition of fiduciary investment advice included in 
this NPRM generally covers specific recommendations on investments, 
investment management, the selection of persons to provide investment 
advice or management, and appraisals in connection with investment 
decisions. Persons who provide such advice would fall within the 
proposed regulation's ambit if they either (a) represent that they are 
acting as an ERISA fiduciary or (b) make investment recommendations 
pursuant to an agreement, arrangement, or understanding that the advice 
is individualized or specifically directed to the recipient for 
consideration in making investment or investment management decisions 
regarding plan or IRA assets.
    The current proposal specifically includes as fiduciary investment 
advice recommendations concerning the investment of assets that are 
rolled over or otherwise distributed from a plan. This would supersede 
guidance the Department provided in a 2005 advisory opinion,\34\ which 
concluded that such recommendations did not constitute fiduciary 
advice. However, the current proposal provides that an adviser does not 
act as a fiduciary merely by providing plan investors with information 
about plan distribution options, including the tax consequences 
associated with the available types of benefit distributions.
---------------------------------------------------------------------------

    \34\ DOL Advisory Opinion 2005-23A (Dec. 7, 2005).
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    The current proposal adopts what the Department intends to be a 
balanced approach to prohibited transaction exemptions. The proposal 
narrows and attaches new protective conditions to some existing PTEs. 
At the same time it includes some new PTEs with broad but targeted 
combined scope and strong protective conditions. These elements of the 
proposal reflect the Department's effort to ensure that advice is 
impartial while avoiding larger and costlier than necessary disruptions 
to existing business arrangements or constraints on future innovation.
    In developing the current proposal, the Department conducted an in-
depth economic assessment of the market for retirement investment 
advice. As further discussed below, the Department found that 
conflicted advice is widespread, causing serious harm to plan and IRA 
investors, and that disclosing conflicts alone would fail to adequately 
mitigate the conflicts or remedy the harm. By extending fiduciary 
status to more providers of advice and providing broad but targeted and 
protective PTEs, the Department believes the current proposal would 
mitigate conflicts, support consumer choice, and deliver substantial 
gains for retirement investors and economic benefits that more than 
justify its costs.
    Advisers' conflicts take a variety of forms and can bias their 
advice in a variety of ways. For example, advisers often are paid more 
for selling some mutual funds than others, and to execute larger and 
more frequent trades of mutual fund shares or other securities. Broker-
dealers reap price spreads from principal transactions, so advisers may 
be encouraged to recommend larger and more frequent trades. These and 
other adviser compensation arrangements introduce direct and serious 
conflicts of interest between advisers and retirement investors. 
Advisers often are paid a great deal more if they recommend investments 
and transactions that are highly profitable to the financial industry, 
even if they are not in investors' best interests. These financial 
incentives can and do bias the advisers' recommendations.
    Following such biased advice can inflict losses on investors in 
several ways. They may choose more expensive and/or poorer performing 
investments. They may trade too much and thereby incur excessive 
transaction costs, and they may incur more costly timing errors, which 
are a common consequence of chasing returns.
    A wide body of economic evidence, reviewed in the Department's full 
Regulatory Impact Analysis (available at www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf), supports a finding that the impact of 
these conflicts of interest on investment outcomes is large and 
negative. The supporting evidence includes, among other things, 
statistical analyses of conflicted investment channels, experimental 
studies, government reports documenting abuse, and economic theory on 
the dangers posed by conflicts of interest and by the asymmetries of 
information and expertise that characterize interactions between 
ordinary retirement investors and conflicted advisers. A review of this 
data, which consistently points to a substantial failure of the market 
for retirement advice, suggests that IRA holders receiving conflicted 
investment advice can expect their investments to underperform by an 
average of 100 basis points per year over the next 20 years. The 
underperformance associated with conflicts of interest--in the mutual 
funds segment alone--could cost IRA investors more than $210 billion 
over the next 10 years and nearly $500 over the next 20 years. Some 
studies suggest that the underperformance of broker-sold mutual funds 
may be even higher than 100 basis points. If the true underperformance 
of broker-sold funds is 200 basis points, IRA mutual fund holders could 
suffer from underperformance amounting to $430 billion over 10 years 
and nearly $1 trillion across the next 20 years. While the estimates 
based on the mutual fund market are large, the total market impact 
could be much larger. Insurance products, Exchange Traded Funds (ETFs), 
individual stocks and bonds, and other products are all sold by brokers 
with conflicts of interest.
    Disclosure alone has proven ineffective to mitigate conflicts in 
advice. Extensive research has demonstrated that most investors have 
little understanding of their advisers' conflicts, and little awareness 
of what they are paying via indirect channels for the conflicted 
advice. Even if they understand the scope of the advisers' conflicts, 
most consumers generally cannot distinguish good advice, or even good 
investment results, from bad. The same gap in expertise that makes 
investment advice necessary frequently also prevents investors from 
recognizing bad advice or understanding advisers' disclosures. Recent 
research suggests that even if disclosure about conflicts could be made 
simple and clear, it would be ineffective--or even harmful.\35\
---------------------------------------------------------------------------

    \35\ See Loewenstein et al., (2011) for a summary of some 
relevant literature.

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[[Page 21953]]

    Excessive fees and substandard investment performance in DC plans 
or IRAs, which can result when advisers' conflicts bias their advice, 
erode benefit security. This proposal aims to ensure that advice is 
impartial, thereby rooting out excessive fees and substandard 
performance otherwise attributable to advisers' conflicts, producing 
gains for retirement investors. Delivering these gains would entail 
compliance costs--namely, the cost incurred by new fiduciary advisers 
to avoid the prohibited transaction rules and/or satisfy relevant PTE 
conditions. The Department expects investor gains would be very large 
relative to compliance costs, and therefore believes this proposal is 
economically justified and sound.
    Because of limitations of the literature and other evidence, only 
some of these gains can be quantified with confidence. Focusing only on 
how load shares paid to brokers affect the size of loads IRA investors 
holding front-end load funds pay and the returns they achieve, we 
estimate the proposal would deliver to IRA investors gains of between 
$40 billion and $44 billion over 10 years and between $88 and $100 
billion over 20 years. These estimates assume that the rule will 
eliminate (rather than just reduce) underperformance associated with 
the practice of incentivizing broker recommendations through variable 
front-end-load sharing; if the rule's effectiveness in this area is 
substantially below 100 percent, these estimates may overstate these 
particular gains to investors in the front-load mutual fund segment of 
the IRA market. The Department nonetheless believes that these gains 
alone would far exceed the proposal's compliance cost which are 
estimated to be between $2.4 billion and $5.7 billion over 10 years, 
mostly reflecting the cost incurred by new fiduciary advisers to 
satisfy relevant PTE conditions (these costs are also front-loaded and 
will be less in subsequent years). For example, if only 75 percent of 
the potential gains were realized in the subset of the market that was 
analyzed (the front-load mutual fund segment of the IRA market), the 
gains would amount to between $30 billion and $33 billion over 10 
years. If only 50 percent were realized, the expected gains in this 
subset of the market would total between $20 billion and $22 billion 
over 10 years, still several times the proposal's estimated compliance 
cost
    These estimates account for only a fraction of potential conflicts, 
associated losses, and affected retirement assets. The total gains to 
IRA investors attributable to the rule may be much higher than these 
quantified gains alone. The Department expects the proposal to yield 
large, additional gains for IRA investors, including improvements in 
the performance of IRA investments other than front-load mutual funds 
and potential reductions in excessive trading and associated 
transaction costs and timing errors (such as might be associated with 
return chasing). As noted above, under current rules, adviser conflicts 
could cost IRA investors as much as $410 billion over 10 years and $1 
trillion over 20 years, so the potential additional gains to IRA 
investors from this proposal could be very large.
    Just as with IRAs, there is evidence that conflicts of interest in 
the investment advice market also erode plan assets. For example, the 
U.S. Government Accountability Office (GAO) found that defined benefit 
pension plans using consultants with undisclosed conflicts of interest 
earned 1.3 percentage points per year less than other plans.\36\ Other 
GAO reports point out how adviser conflicts may cause plan participants 
to roll plan assets into IRAs that charge high fees or 401(k) plan 
officials to include expensive or underperforming funds in investment 
menus.\37\ A number of academic studies find that 401(k) plan 
investment options underperform the market,\38\ and at least one study 
attributes such underperformance to excessive reliance on funds that 
are proprietary to plan service providers who may be providing 
investment advice to plan officials that choose the investment 
options.\39\
---------------------------------------------------------------------------

    \36\ GAO Report, Publication No. GAO-09-503T, 2009.
    \37\ GAO Report, Publication No. GAO-11-119, 2011.
    \38\ See e.g. Elton et al. (2013).
    \39\ See Pool et al. (2014).
---------------------------------------------------------------------------

    The Department expects the current proposal's positive effects to 
extend well beyond improved investment results for retirement 
investors. The IRA and plan markets for fiduciary advice and other 
services may become more efficient as a result of more transparent 
pricing and greater certainty about the fiduciary status of advisers 
and about the impartiality of their advice. There may be benefits from 
the increased flexibility that the current proposal's PTEs would 
provide with respect to fiduciary investment advice currently falling 
within the ambit of the 1975 rule. The current proposal's defined 
boundaries between fiduciary advice, education, and sales activity 
directed at large plans, may bring greater clarity to the IRA and plan 
services markets. Innovation in new advice business models, including 
technology-driven models, may be accelerated, and nudged away from 
conflicts and toward transparency, thereby promoting healthy 
competition in the fiduciary advice market.
    A major expected positive effect of the current proposal in the 
plan advice market is improved compliance and associated improved 
security of plan assets and benefits. Clarity about advisers' fiduciary 
status would strengthen EBSA's enforcement activities resulting in 
fuller and faster correction, and stronger deterrence, of ERISA 
violations.
    In conclusion, the Department believes that the current proposal 
would mitigate adviser conflicts and thereby improve plan and IRA 
investment results, while avoiding greater than necessary disruption of 
existing business practices and would deliver large gains to retirement 
investors and a variety of other economic benefits, which would more 
than justify its costs.

K. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency determines that a proposal is not 
likely to have a significant economic impact on a substantial number of 
small entities, section 603 of the RFA requires the agency to present 
an initial regulatory flexibility analysis (IRFA) of the proposed rule. 
The Department's IRFA of the proposed rule is provided below.
    The Department believes that amending the current regulation by 
broadening the scope of service providers, regardless of size, that 
would be considered fiduciaries would enhance the Department's ability 
to redress service provider abuses that currently exist in the plan 
service provider market, such as undisclosed fees, misrepresentation of 
compensation arrangements, and biased appraisals of the value of plan 
investments.
    The Department's complete Initial Regulatory Flexibility Analysis 
is available at www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf. It is 
summarized below.
    The Department believes that the proposal would provide benefits to 
small plans and their related small employers and IRA holders, and 
impose costs on small service providers

[[Page 21954]]

providing investment advice to ERISA plans, ERISA plan participants and 
IRA holders. Small service providers affected by this rule are defined 
to include broker-dealers, registered investment advisers, consultants, 
appraisers, and others providing investment advice to small ERISA plans 
and IRA that have less than $38.5 million in revenue.
    The Department anticipates that broker-dealers would experience the 
largest impact from the proposed rule and associated proposed 
exemptions. Registered investment advisers and other ERISA plan service 
providers would experience less of a burden from the rule. The 
Department assumes that firms would utilize whichever PTEs would be 
most cost effective for their business models. Regardless of which PTEs 
they use, small affected entities would incur costs associated with 
developing and implementing new compliance policies and procedures to 
minimize conflicts of interest; creating and distributing new 
disclosures; maintaining additional compliance records; familiarizing 
and training staff on new requirements; and obtaining additional 
liability insurance.
    As discussed previously, the Department estimated the costs of 
implementing new compliance policies and procedures, training staff, 
and creating disclosures for small broker-dealers. The Department 
estimates that small broker-dealers could expend on average 
approximately $53,000 in the first year and $21,000 in subsequent 
years; small registered investment advisers would spend approximately 
$5,300 in the first year and $500 in subsequent years; and small 
service providers would spend approximately $5,300 in the first year 
and $500 in subsequent years. The estimated cost for small broker-
dealers is believed to be an overestimate, especially for the smallest 
firms as they are believed to have on average simpler arrangements and 
they may have relationships with larger firms that help with 
compliance, thus lowering their costs. Additionally, broker-dealers and 
service providers would incur an expense of about $300 in additional 
liability insurance premiums for each representative or other 
individual who would now be considered a fiduciary. Of this expense, 
$150 is estimated to be paid to the insuring firms and the other $150 
is estimated to be paid out as compensation to those harmed, which is 
counted as a transfer. Any disclosures produced by affected entities 
would cost, on average, about $1.53 in the first year and about $1.15 
in subsequent years. These per-representative and per-disclosure costs 
are not expected to disproportionately affect small entities.
    Although the PTEs allow firms to maintain their existing business 
models, some small affected entities may determine that it is more cost 
effective to shift business models. In this scenario, some BDs might 
incur the costs of switching to becoming RIAs, including training, 
testing, and licensing costs, at a cost of approximately $5,600 per 
representative.
    Some small service providers may find that the increased costs 
associated with ERISA fiduciary status outweigh the benefit of 
continuing to service the ERISA plan market or the IRA market. The 
Department does not believe that this outcome would be widespread or 
that it would result in a diminution of the amount or quality of advice 
available to small or other retirement savers. It is also possible that 
the economic impact of the rule on small entities would not be as 
significant as it would be for large entities, because anecdotal 
evidence indicates that some small entities do not have as many 
business arrangements that give rise to conflicts of interest. 
Therefore, they would not be confronted with the same costs to 
restructure transactions that would be faced by large entities.

L. Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public 
understands the Department's collection instructions; respondents can 
provide the requested data in the desired format; reporting burden 
(time and financial resources) is minimized; collection instruments are 
clearly understood; and the Department can properly assess the impact 
of collection requirements on respondents.
    Currently, the Department is soliciting comments concerning the 
proposed information collection requests (ICRs) included in the 
``carve-outs'' section of its proposal to amend its 1975 rule that 
defines when a person who provides investment advice to an employee 
benefit plan becomes an ERISA fiduciary. A copy of the ICRs may be 
obtained by contacting the PRA addressee shown below or at http://www.RegInfo.gov.
    The Department has submitted a copy of the Conflict of Interest 
Proposed Rule Carveout Disclosure Requirements to the Office of 
Management and Budget (OMB) in accordance with 44 U.S.C. 3507(d) for 
review of its information collections. The Department and OMB are 
particularly interested in comments that:
     Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information would have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. OMB requests that comments 
be received within 30 days of publication of the Proposed Investment 
Advice Initiative to ensure their consideration.
    PRA Addressee: Address requests for copies of the ICR to G. 
Christopher Cosby, Office of Policy and Research, U.S. Department of 
Labor, Employee Benefits Security Administration, 200 Constitution 
Avenue NW., Room N-5718, Washington, DC 20210. Telephone (202) 693-
8410; Fax: (202) 219-5333. These are not toll-free numbers. ICRs 
submitted to OMB also are available at http://www.RegInfo.gov.
    As discussed in detail above, Paragraph (b)(1)(i) of the proposed 
regulation provides a carve-out to the general definition for advice 
provided in connection with an arm's length sale, purchase, loan, or 
bilateral contract between a sophisticated plan investor, which has 100 
or more plan participants, and the adviser (``seller's carve-out''). It 
also applies in connection with an offer to enter into such a 
transaction or when the person providing the advice is acting as an 
agent or appraiser for the plan's counterparty. In order to rely on 
this carve-out, the person must provide

[[Page 21955]]

advice to a plan fiduciary who is independent of such person and who 
exercises authority or control respecting the management or disposition 
of the plan's assets, with respect to an arm's length sale, purchase, 
loan or bilateral contract between the plan and the counterparty, or 
with respect to a proposal to enter into such a sale, purchase, loan or 
bilateral contract.
    The seller's carve-out applies if certain conditions are met. Among 
these conditions are the following: The adviser must obtain a written 
representation from the plan fiduciary that (1) the plan fiduciary is a 
fiduciary who exercises authority or control respecting the management 
or disposition of the employee benefit plan's assets (as described in 
section 3(21)(A)(i) of the Act), (2) that the employee benefit plan has 
100 or more participants covered under the plan, and that (3) the 
fiduciary will not rely on the person to act in the best interests of 
the plan, to provide impartial investment advice, or to give advice in 
a fiduciary capacity.
    Paragraph (b)(3) of the proposed regulation provides a carve-out 
making clear that persons who merely market and make available, 
securities or other property through a platform or similar mechanism to 
an employee benefit plan without regard to the individualized needs of 
the plan, its participants, or beneficiaries do not act as investment 
advice fiduciaries. This carve-out applies if the person discloses in 
writing to the plan fiduciary that the person is not undertaking to 
provide impartial investment advice or to give advice in a fiduciary 
capacity.
    Paragraph (b)(6) of the proposal makes clear that furnishing and 
providing certain specified investment educational information and 
materials (including certain investment allocation models and 
interactive plan materials) to a plan, plan fiduciary, participant, 
beneficiary or IRA owner would not constitute the rendering of 
investment advice if certain conditions are met. One of the conditions 
is that the asset allocation models or interactive materials must 
explain all material facts and assumptions on which the models and 
materials are based and include a statement indicating that, in 
applying particular asset allocation models to their individual 
situations, participants, beneficiaries, or IRA owners should consider 
their other assets, income, and investments in addition to their 
interests in the plan or IRA to the extent they are not taken into 
account in the model or estimate.
    The seller's carve-out written representation, platform provider 
carve-out disclosure, and the education carve-out disclosures for asset 
allocation models and interactive investment materials are information 
collection requests (ICRs) subject to the Paperwork Reduction Act. The 
Department has made the following assumptions in order to establish a 
reasonable estimate of the paperwork burden associated with these ICRs:
     Approximately 43,000 plans would utilize the seller's 
carve-out;
     Approximately 1,800 service providers would utilize the 
platform provider carve-out;
     Approximately 2,800 financial institutions would utilize 
the education carve-out;
     Plans and advisers using the seller's carve-out are 
entities with financial expertise and would distribute substantially 
all of the disclosures electronically via means already used in their 
normal course of business and the costs arising from electronic 
distribution would be negligible;
     Service providers using the platform provider carve-out 
already maintain contracts with their customers as a regular and 
customary business practice and the materials costs arising from 
inserting the platform provider carve-out into the existing contracts 
would be negligible;
     Materials costs arising from inserting the required 
education carve-out disclosure into existing models and interactive 
materials would be negligible;
     Advisers would use existing in-house resources to prepare 
the disclosures; and
     The tasks associated with the ICRs would be performed by 
clerical personnel at an hourly rate of $30.42 and legal professionals 
at an hourly rate of $129.94.\40\
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    \40\ The Department's estimated 2015 hourly labor rates include 
wages, other benefits, and overhead are calculated as follows: Mean 
wage from the 2013 National Occupational Employment Survey (April 
2014, Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/ocwage.pdf); wages as a percent of total compensation from the 
Employer Cost for Employee Compensation (June 2014, Bureau of Labor 
Statistics http://www.bls.gov/news.release/ecec.t02.htm); overhead 
as a multiple of compensation is assumed to be 25 percent of total 
compensation for paraprofessionals, 20 percent of compensation for 
clerical, and 35 percent of compensation for professional; annual 
inflation assumed to be 2.3 percent annual growth of total labor 
cost since 2013 (Employment Costs Index data for private industry, 
September 2014 http://www.bls.gov/news.release/eci.nr0.htm).
---------------------------------------------------------------------------

    The Department estimates that each plan would require one hour of 
legal professional time and 30 minutes of clerical time to produce the 
seller's carve-out representation. Therefore, the seller's carve-out 
representation would result in approximately 43,000 hours of legal time 
at an equivalent cost of approximately $5.6 million. It would also 
result in approximately 21,000 hours of clerical time at an equivalent 
cost of approximately $653,000. In total, the burden associated with 
the seller's carve-out representation is approximately 64,000 hours at 
an equivalent cost of $6.2 million.
    The Department estimates that each service provider using the 
platform provider carve-out would require ten minutes of legal 
professional time to draft the needed disclosure. Therefore, the 
platform provider carve-out disclosure would result in approximately 
300 hours of legal time at an equivalent cost of approximately $39,000.
    The Department estimates that each financial institution using the 
education carve-out would require twenty minutes of legal professional 
time to draft the disclosure. Therefore, this carve-out disclosure 
would result in approximately 900 hours of legal time at an equivalent 
cost of approximately $121,000.
    In total, the hour burden for the representation and disclosures 
required by the carve-outs is approximately 66,000 hours at an 
equivalent cost of $6.4 million.
    Because the Department assumes that all disclosures would be 
distributed electronically or require small amounts of space to include 
in existing materials, the Department has not associated any cost 
burden with these ICRs.
    These paperwork burden estimates are summarized as follows:
    Type of Review: New collection (Request for new OMB Control 
Number).
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Title: Conflict of Interest Proposed Rule Carveout Disclosure 
Requirements.
    OMB Control Number: 1210--NEW.
    Affected Public: Business or other for-profit.
    Estimated Number of Respondents: 47,532.
    Estimated Number of Annual Responses: 47,532.
    Frequency of Response: When engaging in excepted transaction.
    Estimated Total Annual Burden Hours: 65,631 hours.
    Estimated Total Annual Burden Cost: $0.

M. Congressional Review Act

    The proposed rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and, if finalized,

[[Page 21956]]

would be transmitted to Congress and the Comptroller General for 
review. The proposed rule is a ``major rule'' as that term is defined 
in 5 U.S.C. 804, because it is likely to result in an annual effect on 
the economy of $100 million or more.

N. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) requires each Federal agency to prepare a written statement 
assessing the effects of any Federal mandate in a proposed or final 
agency rule that may result in an expenditure of $100 million or more 
(adjusted annually for inflation with the base year 1995) in any one 
year by State, local, and tribal governments, in the aggregate, or by 
the private sector. Such a mandate is deemed to be a ``significant 
regulatory action.'' The current proposal is expected to have such an 
impact on the private sector, and the Department therefore hereby 
provides such an assessment.
    The Department is issuing the current proposal under ERISA section 
3(21)(A)(ii) (29 U.S.C. 1002(21)(a)(ii)).\41\ The Department is charged 
with interpreting the ERISA and Code provisions that attach fiduciary 
status to anyone who is paid to provide investment advice to plan or 
IRA investors. The current proposal would update and supersede the 1975 
rule \42\ that currently interprets these statutory provisions.
---------------------------------------------------------------------------

    \41\ Under section 102 of the Reorganization Plan No. 4 of 1978, 
the authority of the Secretary of the Treasury to interpret section 
4975 of the Code has been transferred, with exceptions not relevant 
here, to the Secretary of Labor.
    \42\ 29 CFR 2510.3-21(c).
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    The Department assessed the anticipated benefits and costs of the 
current proposal pursuant to Executive Order 12866 in the Regulatory 
Impact Analysis for the current proposal and concluded that its 
benefits would justify its costs. The Department's complete Regulatory 
Impact Analysis is available at www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf. To summarize, the current proposals' 
material benefits and costs generally would be confined to the private 
sector, where plans and IRA investors would, in the Department's 
estimation, benefit on net, partly at the expense of their fiduciary 
advisers and upstream financial service and product producers. The 
Department itself would benefit from increased efficiency in its 
enforcement activity. The public and overall US economy would benefit 
from increased compliance with ERISA and the Code and confidence in 
advisers, as well as from more efficient allocation of investment 
capital, and gains to investors.
    The current proposal is not expected to have any material economic 
impacts on State, local or tribal governments, or on health, safety, or 
the natural environment. The North American Securities Administrators 
Association commented in support of the Department's 2010 proposal.\43\
---------------------------------------------------------------------------

    \43\ Available at http://www.dol.gov/ebsa/pdf/1210-AB32-PH007.pdf.
---------------------------------------------------------------------------

O. Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism, and requires the adherence to specific 
criteria by Federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and States, or 
on the distribution of power and responsibilities among the various 
levels of government. This proposed rule does not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Section 514 of ERISA provides, with certain 
exceptions specifically enumerated, that the provisions of Titles I and 
IV of ERISA supersede any and all laws of the States as they relate to 
any employee benefit plan covered under ERISA. The requirements 
implemented in the proposed rule do not alter the fundamental reporting 
and disclosure requirements of the statute with respect to employee 
benefit plans, and as such have no implications for the States or the 
relationship or distribution of power between the national government 
and the States.

Statutory Authority

    This regulation is proposed pursuant to the authority in section 
505 of ERISA (Pub. L. 93-406, 88 Stat. 894; 29 U.S.C. 1135) and section 
102 of Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), effective 
December 31, 1978 (44 FR 1065, January 3, 1979), 3 CFR 1978 Comp. 332, 
and under Secretary of Labor's Order No. 1-2011, 77 FR 1088 (Jan. 9, 
2012).

Withdrawal of Proposed Regulation

    Paragraph (c) of the proposed regulation relating to the definition 
of fiduciary (proposed 29 CFR 2510.3(21)) that was published in the 
Federal Register on October 20, 2010 (75 FR 65263) is hereby withdrawn.

List of Subjects in 29 CFR Parts 2509 and 2510

    Employee benefit plans, Employee Retirement Income Security Act, 
Pensions, Plan assets.

    For the reasons set forth in the preamble, the Department is 
proposing to amend parts 2509 and 2510 of subchapters A and B of 
Chapter XXV of Title 29 of the Code of Federal Regulations as follows:

SUBCHAPTER A--GENERAL

PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE 
RETIREMENT INCOME SECURITY ACT OF 1974

0
1. The authority citation for part 2509 continues to read as follows:

    Authority:  29 U.S.C. 1135. Secretary of Labor's Order 1-2011, 
77 FR 1088 (Jan. 9, 2012). Sections 2509.75-10 and 2509.75-2 issued 
under 29 U.S.C. 1052, 1053, 1054. Sec. 2509.75-5 also issued under 
29 U.S.C. 1002. Sec. 2509.95-1 also issued under sec. 625, Pub. L. 
109-280, 120 Stat. 780.


Sec.  2509.96-1  [Removed]

0
2. Remove Sec.  2509.96-1.

SUBCHAPTER B--DEFINITIONS AND COVERAGE UNDER THE EMPLOYEE RETIREMENT 
INCOME SECURITY ACT OF 1974

PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, AND 
G OF THIS CHAPTER

0
3. The authority citation for part 2510 is revised to read as follows:

    Authority:  29 U.S.C. 1002(2), 1002(21), 1002(37), 1002(38), 
1002(40), 1031, and 1135; Secretary of Labor's Order 1-2011, 77 FR 
1088; Secs. 2510.3-21, 2510.3-101 and 2510.3-102 also issued under 
Sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 237. 
Section 2510.3-38 also issued under Pub. L. 105-72, Sec. 1(b), 111 
Stat. 1457 (1997).

0
4. Revise Sec.  2510.3-21 to read as follows:


Sec.  2510.3-21  Definition of ``Fiduciary.''

    (a) Investment advice. For purposes of section 3(21)(A)(ii) of the 
Employee Retirement Income Security Act of 1974 (Act) and section 
4975(e)(3)(B) of the Internal Revenue Code (Code), except as provided 
in paragraph (b) of this section, a person renders investment advice 
with respect to moneys or other property of a plan or IRA described in 
paragraph (f)(2) of this section if--
    (1) Such person provides, directly to a plan, plan fiduciary, plan 
participant or beneficiary, IRA, or IRA owner the

[[Page 21957]]

following types of advice in exchange for a fee or other compensation, 
whether direct or indirect:
    (i) A recommendation as to the advisability of acquiring, holding, 
disposing or exchanging securities or other property, including a 
recommendation to take a distribution of benefits or a recommendation 
as to the investment of securities or other property to be rolled over 
or otherwise distributed from the plan or IRA;
    (ii) A recommendation as to the management of securities or other 
property, including recommendations as to the management of securities 
or other property to be rolled over or otherwise distributed from the 
plan or IRA;
    (iii) An appraisal, fairness opinion, or similar statement whether 
verbal or written concerning the value of securities or other property 
if provided in connection with a specific transaction or transactions 
involving the acquisition, disposition, or exchange, of such securities 
or other property by the plan or IRA;
    (iv) A recommendation of a person who is also going to receive a 
fee or other compensation for providing any of the types of advice 
described in paragraphs (i) through (iii); and
    (2) Such person, either directly or indirectly (e.g., through or 
together with any affiliate),--
    (i) Represents or acknowledges that it is acting as a fiduciary 
within the meaning of the Act with respect to the advice described in 
paragraph (a)(1) of this section; or
    (ii) Renders the advice pursuant to a written or verbal agreement, 
arrangement or understanding that the advice is individualized to, or 
that such advice is specifically directed to, the advice recipient for 
consideration in making investment or management decisions with respect 
to securities or other property of the plan or IRA.
    (b) Carve-outs--investment advice. Except for persons described in 
paragraph (a)(2)(i) of this section, the rendering of advice or other 
communications in conformance with a carve-out set forth in paragraph 
(b)(1) through (6) of this section shall not cause the person who 
renders the advice to be treated as a fiduciary under paragraph (a) of 
this section.
    (1) Counterparties to the plan--(i) Counterparty transaction with 
plan fiduciary with financial expertise. (A) In such person's capacity 
as a counterparty (or representative of a counterparty) to an employee 
benefit plan (as described in section 3(3) of the Act), the person 
provides advice to a plan fiduciary who is independent of such person 
and who exercises authority or control with respect to the management 
or disposition of the plan's assets, with respect to an arm's length 
sale, purchase, loan or bilateral contract between the plan and the 
counterparty, or with respect to a proposal to enter into such a sale, 
purchase, loan or bilateral contract, if, prior to providing any 
recommendation with respect to the transaction, such person satisfies 
the requirements of either paragraph (b)(1)(i)(B) or (C) of this 
section.
    (B) Such person--
    (1) Obtains a written representation from the independent plan 
fiduciary that the independent fiduciary exercises authority or control 
with respect to the management or disposition of the employee benefit 
plan's assets (as described in section 3(21)(A)(i) of the Act), that 
the employee benefit plan has 100 or more participants covered under 
the plan, and that the independent fiduciary will not rely on the 
person to act in the best interests of the plan, to provide impartial 
investment advice, or to give advice in a fiduciary capacity;
    (2) Fairly informs the independent plan fiduciary of the existence 
and nature of the person's financial interests in the transaction;
    (3) Does not receive a fee or other compensation directly from the 
plan, or plan fiduciary, for the provision of investment advice (as 
opposed to other services) in connection with the transaction; and
    (4) Knows or reasonably believes that the independent plan 
fiduciary has sufficient expertise to evaluate the transaction and to 
determine whether the transaction is prudent and in the best interest 
of the plan participants (the person may rely on written 
representations from the plan or the plan fiduciary to satisfy this 
subsection (b)(1)(i)(B)(4)).
    (C) Such person--
    (1) Knows or reasonably believes that the independent plan 
fiduciary has responsibility for managing at least $100 million in 
employee benefit plan assets (for purposes of this paragraph 
(b)(1)(i)(C), when dealing with an individual employee benefit plan, a 
person may rely on the information on the most recent Form 5500 Annual 
Return/Report filed for the plan to determine the value and, in the 
case of an independent fiduciary acting as an asset manager for 
multiple employee benefit plans, a person may rely on representations 
from the independent plan fiduciary regarding the value of employee 
benefit plan assets under management);
    (2) Fairly informs the independent plan fiduciary that the person 
is not undertaking to provide impartial investment advice, or to give 
advice in a fiduciary capacity; and
    (3) Does not receive a fee or other compensation directly from the 
plan, or plan fiduciary, for the provision of investment advice (as 
opposed to other services) in connection with the transaction.
    (ii) Swap and security-based swap transactions. The person is a 
counterparty to an employee benefit plan (as described in section 3(3) 
of the Act) in connection with a swap or security-based swap, as 
defined in section 1(a) of the Commodity Exchange Act (7 U.S.C. 1(a) 
and section 3(a) of the Securities Exchange Act (15 U.S.C. 78c(a)), 
if--
    (A) The plan is represented by a fiduciary independent of the 
person;
    (B) The person is a swap dealer, security-based swap dealer, major 
swap participant, or major security-based swap participant;
    (C) The person (if a swap dealer or security-based swap dealer), is 
not acting as an advisor to the plan (within the meaning of section 
4s(h) of the Commodity Exchange Act or section 15F(h) of the Securities 
Exchange Act of 1934) in connection with the transaction; and
    (D) In advance of providing any recommendations with respect to the 
transaction, the person obtains a written representation from the 
independent plan fiduciary, that the fiduciary will not rely on 
recommendations provided by the person.
    (2) Employees. In his or her capacity as an employee of any 
employer or employee organization sponsoring the employee benefit plan 
(as described in section 3(3) of the Act), the person provides the 
advice to a plan fiduciary, and he or she receives no fee or other 
compensation, direct or indirect, in connection with the advice beyond 
the employee's normal compensation for work performed for the employer 
or employee organization.
    (3) Platform providers. The person merely markets and makes 
available to an employee benefit plan (as described in section 3(3) of 
the Act), without regard to the individualized needs of the plan, its 
participants, or beneficiaries, securities or other property through a 
platform or similar mechanism from which a plan fiduciary may select or 
monitor investment alternatives, including qualified default investment 
alternatives, into which plan participants or beneficiaries may direct 
the investment of assets held in, or contributed to, their individual 
accounts, if the person discloses in writing to the plan fiduciary that 
the person is not undertaking to provide

[[Page 21958]]

impartial investment advice or to give advice in a fiduciary capacity.
    (4) Selection and monitoring assistance. In connection with the 
activities described in paragraph (b)(3) of this section with respect 
to an employee benefit plan (as described in section 3(3) of the Act), 
the person--
    (i) Merely identifies investment alternatives that meet objective 
criteria specified by the plan fiduciary (e.g., stated parameters 
concerning expense ratios, size of fund, type of asset, credit 
quality); or
    (ii) Merely provides objective financial data and comparisons with 
independent benchmarks to the plan fiduciary.
    (5) Financial reports and valuations. The person provides an 
appraisal, fairness opinion, or statement of value to--
    (i) An employee stock ownership plan (as defined in section 
407(d)(6) of the Act) regarding employer securities (as defined section 
407(d)(5) of the Act);
    (ii) An investment fund, such as a collective investment fund or 
pooled separate account, in which more than one unaffiliated plan has 
an investment, or which holds plan assets of more than one unaffiliated 
plan under 29 CFR 2510.3-101; or
    (iii) A plan, a plan fiduciary, a plan participant or beneficiary, 
an IRA or IRA owner solely for purposes of compliance with the 
reporting and disclosure provisions under the Act, the Code, and the 
regulations, forms and schedules issued thereunder, or any applicable 
reporting or disclosure requirement under a Federal or state law, rule 
or regulation or self-regulatory organization rule or regulation.
    (6) Investment education. The person furnishes or makes available 
any of the following categories of investment-related information and 
materials described in paragraphs (b)(6)(i) through (iv) of this 
section to a plan, plan fiduciary, participant or beneficiary, IRA or 
IRA owner irrespective of who provides or makes available the 
information and materials (e.g., plan sponsor, fiduciary or service 
provider), the frequency with which the information and materials are 
provided, the form in which the information and materials are provided 
(e.g., on an individual or group basis, in writing or orally, or via 
call center, video or computer software), or whether an identified 
category of information and materials is furnished or made available 
alone or in combination with other categories of information and 
materials identified in paragraphs (b)(6)(i) through (iv), provided 
that the information and materials do not include (standing alone or in 
combination with other materials) recommendations with respect to 
specific investment products or specific plan or IRA alternatives, or 
recommendations on investment, management, or value of a particular 
security or securities, or other property.
    (i) Plan information. Information and materials that, without 
reference to the appropriateness of any individual investment 
alternative or any individual benefit distribution option for the plan 
or IRA, or a particular participant or beneficiary or IRA owner, 
describe the terms or operation of the plan or IRA, inform a plan 
fiduciary, participant, beneficiary, or IRA owner about the benefits of 
plan or IRA participation, the benefits of increasing plan or IRA 
contributions, the impact of preretirement withdrawals on retirement 
income, retirement income needs, varying forms of distributions, 
including rollovers, annuitization and other forms of lifetime income 
payment options (e.g., immediate annuity, deferred annuity, or 
incremental purchase of deferred annuity), advantages, disadvantages 
and risks of different forms of distributions, or describe investment 
objectives and philosophies, risk and return characteristics, 
historical return information or related prospectuses of investment 
alternatives under the plan or IRA.
    (ii) General financial, investment and retirement information. 
Information and materials on financial, investment and retirement 
matters that do not address specific investment products, specific plan 
or IRA alternatives or distribution options available to the plan or 
IRA or to participants, beneficiaries and IRA owners, or specific 
alternatives or services offered outside the plan or IRA, and inform 
the plan fiduciary, participant or beneficiary, or IRA owner about--
    (A) General financial and investment concepts, such as risk and 
return, diversification, dollar cost averaging, compounded return, and 
tax deferred investment;
    (B) Historic differences in rates of return between different asset 
classes (e.g., equities, bonds, or cash) based on standard market 
indices;
    (C) Effects of inflation;
    (D) Estimating future retirement income needs;
    (E) Determining investment time horizons;
    (F) Assessing risk tolerance;
    (G) Retirement-related risks (e.g., longevity risks, market/
interest rates, inflation, health care and other expenses); and
    (H) General methods and strategies for managing assets in 
retirement (e.g., systematic withdrawal payments, annuitization, 
guaranteed minimum withdrawal benefits), including those offered 
outside the plan or IRA.
    (iii) Asset allocation models. Information and materials (e.g., pie 
charts, graphs, or case studies) that provide a plan fiduciary, 
participant or beneficiary, or IRA owner with models of asset 
allocation portfolios of hypothetical individuals with different time 
horizons (which may extend beyond an individual's retirement date) and 
risk profiles, where--
    (A) Such models are based on generally accepted investments 
theories that take into account the historic returns of different asset 
classes (e.g., equities, bonds, or cash) over defined periods of time;
    (B) All material facts and assumptions on which such models are 
based (e.g., retirement ages, life expectancies, income levels, 
financial resources, replacement income ratios, inflation rates, and 
rates of return) accompany the models;
    (C) Such models do not include or identify any specific investment 
product or specific alternative available under the plan or IRA; and
    (D) The asset allocation models are accompanied by a statement 
indicating that, in applying particular asset allocation models to 
their individual situations, participants, beneficiaries, or IRA owners 
should consider their other assets, income, and investments (e.g., 
equity in a home, Social Security benefits, individual retirement plan 
investments, savings accounts and interests in other qualified and non-
qualified plans) in addition to their interests in the plan or IRA, to 
the extent those items are not taken into account in the model or 
estimate.
    (iv) Interactive investment materials. Questionnaires, worksheets, 
software, and similar materials which provide a plan fiduciary, 
participant or beneficiary, or IRA owners the means to estimate future 
retirement income needs and assess the impact of different asset 
allocations on retirement income; questionnaires, worksheets, software 
and similar materials which allow a plan fiduciary, participant or 
beneficiary, or IRA owners to evaluate distribution options, products 
or vehicles by providing information under paragraphs (b)(6)(i) and 
(ii) of this section; questionnaires, worksheets, software, and similar 
materials that provide a plan fiduciary, participant or beneficiary, or 
IRA owner the means to estimate a retirement income stream

[[Page 21959]]

that could be generated by an actual or hypothetical account balance, 
where--
    (A) Such materials are based on generally accepted investment 
theories that take into account the historic returns of different asset 
classes (e.g., equities, bonds, or cash) over defined periods of time;
    (B) There is an objective correlation between the asset allocations 
generated by the materials and the information and data supplied by the 
participant, beneficiary or IRA owner;
    (C) There is an objective correlation between the income stream 
generated by the materials and the information and data supplied by the 
participant, beneficiary or IRA owner;
    (D) All material facts and assumptions (e.g., retirement ages, life 
expectancies, income levels, financial resources, replacement income 
ratios, inflation rates, rates of return and other features and rates 
specific to income annuities or systematic withdrawal plan) that may 
affect a participant's, beneficiary's or IRA owner's assessment of the 
different asset allocations or different income streams accompany the 
materials or are specified by the participant, beneficiary or IRA 
owner;
    (E) The materials do not include or identify any specific 
investment alternative available or distribution option available under 
the plan or IRA, unless such alternative or option is specified by the 
participant, beneficiary or IRA owner; and
    (F) The materials either take into account other assets, income and 
investments (e.g., equity in a home, Social Security benefits, 
individual retirement account/annuity investments, savings accounts, 
and interests in other qualified and non-qualified plans) or are 
accompanied by a statement indicating that, in applying particular 
asset allocations to their individual situations, or in assessing the 
adequacy of an estimated income stream, participants, beneficiaries or 
IRA owners should consider their other assets, income, and investments 
in addition to their interests in the plan or IRA.
    (v) The information and materials described in paragraphs (b)(6)(i) 
through (iv) of this section represent examples of the type of 
information and materials that may be furnished to participants, 
beneficiaries and IRA owners without such information and materials 
constituting investment advice. Determinations as to whether the 
provision of any information, materials or educational services not 
described herein constitutes the rendering of investment advice must be 
made by reference to the criteria set forth in paragraph (a) of this 
section.
    (c) Scope of fiduciary duty--investment advice. A person who is a 
fiduciary with respect to an employee benefit plan or IRA by reason of 
rendering investment advice (as defined in paragraph (a) of this 
section) for a fee or other compensation, direct or indirect, with 
respect to any securities or other property of such plan, or having any 
authority or responsibility to do so, shall not be deemed to be a 
fiduciary regarding any assets of the plan or IRA with respect to which 
such person does not have any discretionary authority, discretionary 
control or discretionary responsibility, does not exercise any 
authority or control, does not render investment advice (as defined in 
paragraph (a)(1) of this section) for a fee or other compensation, and 
does not have any authority or responsibility to render such investment 
advice, provided that nothing in this paragraph shall be deemed to:
    (1) Exempt such person from the provisions of section 405(a) of the 
Act concerning liability for fiduciary breaches by other fiduciaries 
with respect to any assets of the plan; or
    (2) Exclude such person from the definition of the term ``party in 
interest'' (as set forth in section 3(14)(B) of the Act or 
``disqualified person'' as set forth in section 4975(e)(2) of the Code) 
with respect to a plan.
    (d) Execution of securities transactions. (1) A person who is a 
broker or dealer registered under the Securities Exchange Act of 1934, 
a reporting dealer who makes primary markets in securities of the 
United States Government or of an agency of the United States 
Government and reports daily to the Federal Reserve Bank of New York 
its positions with respect to such securities and borrowings thereon, 
or a bank supervised by the United States or a State, shall not be 
deemed to be a fiduciary, within the meaning of section 3(21)(A) of the 
Act or section 4975(e)(3)(B) of the Code, with respect to an employee 
benefit plan or IRA solely because such person executes transactions 
for the purchase or sale of securities on behalf of such plan in the 
ordinary course of its business as a broker, dealer, or bank, pursuant 
to instructions of a fiduciary with respect to such plan or IRA, if:
    (i) Neither the fiduciary nor any affiliate of such fiduciary is 
such broker, dealer, or bank; and
    (ii) The instructions specify:
    (A) The security to be purchased or sold;
    (B) A price range within which such security is to be purchased or 
sold, or, if such security is issued by an open-end investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1, 
et seq.), a price which is determined in accordance with Rule 22c1 
under the Investment Company Act of 1940 (17 CFR270.22c1);
    (C) A time span during which such security may be purchased or sold 
(not to exceed five business days); and
    (D) The minimum or maximum quantity of such security which may be 
purchased or sold within such price range, or, in the case of a 
security issued by an open-end investment company registered under the 
Investment Company Act of 1940, the minimum or maximum quantity of such 
security which may be purchased or sold, or the value of such security 
in dollar amount which may be purchased or sold, at the price referred 
to in paragraph (d)(1)(ii)(B) of this section.
    (2) A person who is a broker-dealer, reporting dealer, or bank 
which is a fiduciary with respect to an employee benefit plan or IRA 
solely by reason of the possession or exercise of discretionary 
authority or discretionary control in the management of the plan or 
IRA, or the management or disposition of plan or IRA assets in 
connection with the execution of a transaction or transactions for the 
purchase or sale of securities on behalf of such plan or IRA which 
fails to comply with the provisions of paragraph (d)(1) of this 
section, shall not be deemed to be a fiduciary regarding any assets of 
the plan or IRA with respect to which such broker-dealer, reporting 
dealer or bank does not have any discretionary authority, discretionary 
control or discretionary responsibility, does not exercise any 
authority or control, does not render investment advice (as defined in 
paragraph (a) of this section) for a fee or other compensation, and 
does not have any authority or responsibility to render such investment 
advice, provided that nothing in this paragraph shall be deemed to:
    (i) Exempt such broker-dealer, reporting dealer, or bank from the 
provisions of section 405(a) of the Act concerning liability for 
fiduciary breaches by other fiduciaries with respect to any assets of 
the plan; or
    (ii) Exclude such broker-dealer, reporting dealer, or bank from the 
definition of the term party in interest (as set forth in section 
3(14)(B) of the Act) or disqualified person 4975(e)(2) of the Code with 
respect to any assets of the plan or IRA.

[[Page 21960]]

    (e) Internal Revenue Code. Section 4975(e)(3) of the Code contains 
provisions parallel to section 3(21)(A) of the Act which define the 
term ``fiduciary'' for purposes of the prohibited transaction 
provisions in Code section 4975. Effective December 31, 1978, section 
102 of the Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 237 
transferred the authority of the Secretary of the Treasury to 
promulgate regulations of the type published herein to the Secretary of 
Labor. All references herein to section 3(21)(A) of the Act should be 
read to include reference to the parallel provisions of section 
4975(e)(3) of the Code. Furthermore, the provisions of this section 
shall apply for purposes of the application of Code section 4975 with 
respect to any plan described in Code section 4975(e)(1).
    (f) Definitions. For purposes of this section--
    (1) ``Recommendation'' means a communication that, based on its 
content, context, and presentation, would reasonably be viewed as a 
suggestion that the advice recipient engage in or refrain from taking a 
particular course of action.
    (2)(i) ``Plan'' means any employee benefit plan described in 
section 3(3) of the Act and any plan described in section 4975(e)(1)(A) 
of the Code, and
    (ii) ``IRA'' means any trust, account or annuity described in Code 
section 4975(e)(1)(B) through (F), including, for example, an 
individual retirement account described in section 408(a) of the Code 
and a health savings account described in section 223(d) of the Code.
    (3) ``Plan participant'' means for a plan described in section 3(3) 
of the Act, a person described in section 3(7) of the Act.
    (4) ``IRA owner'' means with respect to an IRA either the person 
who is the owner of the IRA or the person for whose benefit the IRA was 
established.
    (5) ``Plan fiduciary'' means a person described in section (3)(21) 
of the Act and 4975(e)(3) of the Code.
    (6) ``Fee or other compensation, direct or indirect'' for purposes 
of this section and section 3(21)(A)(ii) of the Act, means any fee or 
compensation for the advice received by the person (or by an affiliate) 
from any source and any fee or compensation incident to the transaction 
in which the investment advice has been rendered or will be rendered. 
The term fee or other compensation includes, for example, brokerage 
fees, mutual fund and insurance sales commissions.
    (7) ``Affiliate'' includes: Any person directly or indirectly, 
through one or more intermediaries, controlling, controlled by, or 
under common control with such person; any officer, director, partner, 
employee or relative (as defined in section 3(15) of the Act) of such 
person; and any corporation or partnership of which such person is an 
officer, director or partner.
    (8) ``Control'' for purposes of paragraph (f)(7) of this section 
means the power to exercise a controlling influence over the management 
or policies of a person other than an individual.

    Signed at Washington, DC, this 14th day of April, 2015.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2015-08831 Filed 4-15-15; 11:15 am]
BILLING CODE 4510-29-P



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

                                                     DEPARTMENT OF LABOR                                     on the proposed regulation, EBSA                       rendering ‘‘investment advice for a fee
                                                                                                             encourages interested persons to submit                or other compensation, direct or
                                                     Employee Benefits Security                              their comments electronically. You may                 indirect, with respect to any moneys or
                                                     Administration                                          submit comments, identified by RIN                     other property of such plan . . . ’’
                                                                                                             1210–AB32, by any of the following                     ERISA safeguards plan participants by
                                                     29 CFR Parts 2509 and 2510                              methods:                                               imposing trust law standards of care and
                                                                                                               Federal eRulemaking Portal: http://                  undivided loyalty on plan fiduciaries,
                                                     RIN 1210–AB32
                                                                                                             www.regulations.gov. Follow                            and by holding fiduciaries accountable
                                                     Definition of the Term ‘‘Fiduciary’’;                   instructions for submitting comments.                  when they breach those obligations. In
                                                     Conflict of Interest Rule—Retirement                      Email: e-ORI@dol.gov. Include RIN                    addition, fiduciaries to plans and IRAs
                                                     Investment Advice                                       1210–AB32 in the subject line of the                   are not permitted to engage in
                                                                                                             message.                                               ‘‘prohibited transactions,’’ which pose
                                                     AGENCY: Employee Benefits Security                        Mail: Office of Regulations and                      special dangers to the security of
                                                     Administration, Department of Labor.                    Interpretations, Employee Benefits                     retirement, health, and other benefit
                                                     ACTION: Notice of proposed rulemaking                   Security Administration, Attn: Conflict                plans because of fiduciaries’ conflicts of
                                                     and withdrawal of previous proposed                     of Interest Rule, Room N–5655, U.S.                    interest with respect to the transactions.
                                                     rule.                                                   Department of Labor, 200 Constitution                  Under this regulatory structure,
                                                                                                             Avenue NW., Washington, DC 20210.                      fiduciary status and responsibilities are
                                                     SUMMARY:    This document contains a                      Hand Delivery/Courier: Office of                     central to protecting the public interest
                                                     proposed regulation defining who is a                   Regulations and Interpretations,                       in the integrity of retirement and other
                                                     ‘‘fiduciary’’ of an employee benefit plan               Employee Benefits Security                             important benefits, many of which are
                                                     under the Employee Retirement Income                    Administration, Attn: Conflict of                      tax-favored.
                                                     Security Act of 1974 (ERISA) as a result                Interest Rule, Room N–5655, U.S.                          In 1975, the Department issued
                                                     of giving investment advice to a plan or                Department of Labor, 200 Constitution                  regulations that significantly narrowed
                                                     its participants or beneficiaries. The                  Avenue NW., Washington, DC 20210.                      the breadth of the statutory definition of
                                                     proposal also applies to the definition of                Instructions: All comments received                  fiduciary investment advice by creating
                                                     a ‘‘fiduciary’’ of a plan (including an                 must include the agency name and                       a five-part test that must, in each
                                                     individual retirement account (IRA))                    Regulatory Identifier Number (RIN) for                 instance, be satisfied before a person
                                                     under section 4975 of the Internal                      this rulemaking (RIN 1210–AB32).                       can be treated as a fiduciary adviser.
                                                     Revenue Code of 1986 (Code). If                         Persons submitting comments                            This regulatory definition applies to
                                                     adopted, the proposal would treat                       electronically are encouraged not to                   both ERISA and the Code. The
                                                     persons who provide investment advice                   submit paper copies. All comments                      Department created the test in a very
                                                     or recommendations to an employee                       received will be made available to the                 different context, prior to the existence
                                                     benefit plan, plan fiduciary, plan                      public, posted without change to                       of participant-directed 401(k) plans,
                                                     participant or beneficiary, IRA, or IRA                 http://www.regulations.gov and http://                 widespread investments in IRAs, and
                                                     owner as fiduciaries under ERISA and                    www.dol.gov/ebsa, and made available                   the now commonplace rollover of plan
                                                     the Code in a wider array of advice                     for public inspection at the Public                    assets from fiduciary-protected plans to
                                                     relationships than the existing ERISA                   Disclosure Room, N–1513, Employee                      IRAs. Today, as a result of the five-part
                                                     and Code regulations, which would be                    Benefits Security Administration, U.S.                 test, many investment professionals,
                                                     replaced. The proposed rule, and related                Department of Labor, 200 Constitution                  consultants, and advisers 1 have no
                                                     exemptions, would increase consumer                     Avenue NW., Washington, DC 20210,                      obligation to adhere to ERISA’s
                                                     protection for plan sponsors, fiduciaries,              including any personal information                     fiduciary standards or to the prohibited
                                                     participants, beneficiaries and IRA                     provided.                                              transaction rules, despite the critical
                                                     owners. This document also withdraws                    FOR FURTHER INFORMATION CONTACT:                       role they play in guiding plan and IRA
                                                     a prior proposed regulation published in                  For Questions Regarding the Proposed                 investments. Under ERISA and the
                                                     2010 (2010 Proposal) concerning this                    Rule: Contact Luisa Grillo-Chope or                    Code, if these advisers are not
                                                     same subject matter. In connection with                 Fred Wong, Office of Regulations and                   fiduciaries, they may operate with
                                                     this proposal, elsewhere in this issue of               Interpretations, Employee Benefits                     conflicts of interest that they need not
                                                     the Federal Register, the Department is                 Security Administration (EBSA), (202)                  disclose and have limited liability under
                                                     proposing new exemptions and                            693–8825.                                              federal pension law for any harms
                                                     amendments to existing exemptions                         For Questions Regarding the Proposed                 resulting from the advice they provide.
                                                     from the prohibited transaction rules                   Prohibited Transaction Exemptions:                     Non-fiduciaries may give imprudent
                                                     applicable to fiduciaries under ERISA                   Contact Karen Lloyd, Office of                         and disloyal advice; steer plans and IRA
                                                     and the Code that would allow certain                   Exemption Determinations, EBSA, 202–                   owners to investments based on their
                                                     broker-dealers, insurance agents and                    693–8824.                                              own, rather than their customers’
                                                     others that act as investment advice                      For Questions Regarding the                          financial interests; and act on conflicts
                                                     fiduciaries to continue to receive a                    Regulatory Impact Analysis: Contact G.                 of interest in ways that would be
                                                     variety of common forms of                              Christopher Cosby, Office of Policy and                prohibited if the same persons were
                                                     compensation that otherwise would be                    Research, EBSA, 202–693–8425. (These                   fiduciaries. In light of the breadth and
                                                     prohibited as conflicts of interest.                    are not toll-free numbers).                            intent of ERISA and the Code’s statutory
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                                                     DATES: As of April 20, 2015, the                        SUPPLEMENTARY INFORMATION:
                                                                                                                                                                      1 By using the term ‘‘adviser,’’ the Department
                                                     proposed rule published October 22,                     I. Executive Summary                                   does not intend to limit its use to investment
                                                     2010 (75 FR 65263) is withdrawn.                                                                               advisers registered under the Investment Advisers
                                                     Submit written comments on the                          A. Purpose of the Regulatory Action                    Act of 1940 or under state law. For example, as
                                                     proposed regulation on or before July 6,                   Under ERISA and the Code, a person                  used herein, an adviser can be an individual or
                                                     2015.                                                                                                          entity who can be, among other things, a
                                                                                                             is a fiduciary to a plan or IRA to the                 representative of a registered investment adviser, a
                                                     ADDRESSES: To facilitate the receipt and                extent that he or she engages in                       bank or similar financial institution, an insurance
                                                     processing of written comment letters                   specified plan activities, including                   company, or a broker-dealer.



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

                                                     definition, the growth of participant-                  their advice. Central to the exemption is              recommendations or appraisals to an
                                                     directed investment arrangements and                    the adviser and firm’s agreement to meet               employee benefit plan, a plan fiduciary,
                                                     IRAs, and the need for plans and IRA                    fundamental obligations of fair dealing                participant or beneficiary, or an IRA
                                                     owners to seek out and rely on                          and fiduciary conduct—to give advice                   owner or fiduciary, and (2) either (a)
                                                     sophisticated financial advisers to make                that is in the customer’s best interest;               acknowledging the fiduciary nature of
                                                     critical investment decisions in an                     avoid misleading statements; receive no                the advice, or (b) acting pursuant to an
                                                     increasingly complex financial                          more than reasonable compensation;                     agreement, arrangement, or
                                                     marketplace, the Department believes it                 and comply with applicable federal and                 understanding with the advice recipient
                                                     is appropriate to revisit its 1975                      state laws governing advice. This                      that the advice is individualized to, or
                                                     regulatory definition as well as the                    principles-based approach aligns the                   specifically directed to, the recipient for
                                                     Code’s virtually identical regulation.                  adviser’s interests with those of the plan             consideration in making investment or
                                                     With this regulatory action, the                        participant or IRA owner, while leaving                management decisions regarding plan
                                                     Department proposes to replace the                      the adviser and employing firm with the                assets. When such advice is provided
                                                     1975 regulations with a definition of                   flexibility and discretion necessary to                for a fee or other compensation, direct
                                                     fiduciary investment advice that better                 determine how best to satisfy these                    or indirect, the person giving the advice
                                                     reflects the broad scope of the statutory               basic standards in light of the unique                 is a fiduciary.
                                                     text and its purposes and better protects               attributes of their business. The
                                                     plans, participants, beneficiaries, and                 Department is similarly proposing to                      Although the new general definition
                                                     IRA owners from conflicts of interest,                  amend existing exemptions for a wide                   of investment advice avoids the
                                                     imprudence, and disloyalty.                             range of fiduciary advisers to ensure                  weaknesses of the current regulation,
                                                        The Department has also sought to                    adherence to these basic standards of                  standing alone it could sweep in some
                                                     preserve beneficial business models for                 fiduciary conduct. In addition, the                    relationships that are not appropriately
                                                     delivery of investment advice by                        Department is proposing a new                          regarded as fiduciary in nature and that
                                                     separately proposing new exemptions                     exemption for ‘‘principal transactions’’               the Department does not believe
                                                     from ERISA’s prohibited transaction                     in which advisers sell certain debt                    Congress intended to cover as fiduciary
                                                     rules that would broadly permit firms to                securities to plans and IRAs out of their              relationships. Accordingly, the
                                                     continue common fee and compensation                    own inventory, as well as an                           proposed regulation includes a number
                                                     practices, as long as they are willing to               amendment to an existing exemption                     of specific carve-outs to the general
                                                     adhere to basic standards aimed at                      that would permit advisers to receive                  definition. For example, the regulation
                                                     ensuring that their advice is in the best               compensation for extending credit to                   draws an important distinction between
                                                     interest of their customers. Rather than                plans or IRAs to avoid failed securities               fiduciary investment advice and non-
                                                     create a highly prescriptive set of                     transactions. In addition to the Best                  fiduciary investment or retirement
                                                     transaction-specific exemptions, the                    Interest Contract Exemption, the                       education. Similarly, under the ‘‘seller’s
                                                     Department instead is proposing a set of                Department is also seeking public                      carve-out,’’ 3 the proposal would not
                                                     exemptions that flexibly accommodate a                  comment on whether it should issue a                   treat as fiduciary advice
                                                     wide range of current business                          separate streamlined exemption that                    recommendations made to a plan in an
                                                     practices, while minimizing the harmful                 would allow advisers to receive                        arm’s length transaction where there is
                                                     impact of conflicts of interest on the                  otherwise prohibited compensation in                   generally no expectation of fiduciary
                                                     quality of advice.                                      connection with plan, participant and                  investment advice, provided that the
                                                        In particular, the Department is                     beneficiary accounts, and IRA                          carve-out’s specific conditions are met.
                                                     proposing a new exemption (the ‘‘Best                   investments in certain high-quality low-               In addition, the proposal includes
                                                     Interest Contract Exemption’’) that                     fee investments, subject to fewer                      specific carve-outs for advice rendered
                                                     would provide conditional relief for                    conditions. This is discussed in greater               by employees of the plan sponsor,
                                                     common compensation, such as                            detail in the Federal Register notice                  platform providers, and persons who
                                                     commissions and revenue sharing, that                   related to the proposed Best Interest                  offer or enter into swaps or security-
                                                     an adviser and the adviser’s employing                  Contract Exemption.                                    based swaps with plans. All of the rule’s
                                                     firm might receive in connection with                      This broad regulatory package aims to               carve-outs are subject to conditions
                                                     investment advice to retail retirement                  enable advisers and their firms to give                designed to draw an appropriate line
                                                     investors.2 In order to protect the                     advice that is in the best interest of their           between fiduciary and non-fiduciary
                                                     interests of plans, participants and                    customers, without disrupting common                   communications, consistent with the
                                                     beneficiaries, and IRA owners, the                      compensation arrangements under
                                                                                                                                                                    text and purpose of the statutory
                                                     exemption requires the firm and the                     conditions designed to ensure the
                                                                                                                                                                    provisions.
                                                     adviser to contractually acknowledge                    adviser is acting in the best interest of
                                                                                                             the advice recipient. The proposed new                    Finally, in addition to the new
                                                     fiduciary status, commit to adhere to                                                                          proposal in this Notice, the Department
                                                                                                             exemptions and amendments to existing
                                                     basic standards of impartial conduct,                                                                          is simultaneously proposing a new Best
                                                                                                             exemptions are published elsewhere in
                                                     adopt policies and procedures                                                                                  Interest Contract Exemption, revising
                                                                                                             today’s edition of the Federal Register.
                                                     reasonably designed to minimize the                                                                            other exemptions from the prohibited
                                                     harmful impact of conflicts of interest,                B. Summary of the Major Provisions of                  transaction rules of ERISA and the Code
                                                     and disclose basic information on their                 the Proposed Rule                                      and is exploring through a request for
                                                     conflicts of interest and on the cost of
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                                                                                                               The proposed rule clarifies and                      comments the concept of an additional
                                                       2 For purposes of the exemption, retail investors
                                                                                                             rationalizes the definition of fiduciary               low-fee exemption.
                                                     include (1) the participants and beneficiaries of
                                                                                                             investment advice subject to specific
                                                     participant-directed plans, (2) IRA owners, and (3)     carve-outs for particular types of                       3 Although referred to herein as the ‘‘seller’s

                                                     the sponsors (including employees, officers, or         communications that are best                           carve-out,’’ we note that the carve-out provided in
                                                     directors thereof) of non participant-directed plans    understood as non-fiduciary in nature.                 paragraph (b)(1)(i) of the proposal is not limited to
                                                     with fewer than 100 participants to the extent the                                                             sales and would apply to incidental advice
                                                     sponsors (including employees, officers, or
                                                                                                             Under the definition, a person renders                 provided in connection with an arm’s length sale,
                                                     directors thereof) act as a fiduciary with respect to   investment advice by (1) providing                     purchase, loan, or bilateral contract between a plan
                                                     plan investment decisions.                              investment or investment management                    investor with financial expertise and the adviser.



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

                                                     C. Gains to Investors and Compliance                     receiving conflicted investment advice                           that these gains alone would far exceed
                                                     Costs                                                    can expect their investments to                                  the proposal’s compliance cost. For
                                                                                                              underperform by an average of 100 basis                          example, if only 75 percent of
                                                        When the Department promulgated
                                                                                                              points per year over the next 20 years.                          anticipated gains were realized, the
                                                     the 1975 rule, 401(k) plans did not exist,
                                                                                                              The underperformance associated with                             quantified subset of such gains—
                                                     IRAs had only just been authorized, and
                                                                                                              conflicts of interest—in the mutual                              specific to the front-load mutual fund
                                                     the majority of retirement plan assets
                                                                                                              funds segment alone—could cost IRA                               segment of the IRA market—would
                                                     were managed by professionals, rather
                                                                                                              investors more than $210 billion over                            amount to between $30 billion and $33
                                                     than directed by individual investors.
                                                                                                              the next 10 years and nearly $500                                billion over 10 years. If only 50 percent
                                                     Today, individual retirement investors
                                                                                                              billion over the next 20 years. Some                             were realized, this subset of expected
                                                     have much greater responsibility for
                                                                                                              studies suggest that the                                         gains would total between $20 billion
                                                     directing their own investments, but
                                                                                                              underperformance of broker-sold                                  and $22 billion over 10 years, or several
                                                     they seldom have the training or                         mutual funds may be even higher than
                                                     specialized expertise necessary to                                                                                        times the proposal’s estimated
                                                                                                              100 basis points, possibly due to loads                          compliance cost of $2.4 billion to 5.7
                                                     prudently manage retirement assets on                    that are taken off the top and/or poor
                                                     their own. As a result, they often                                                                                        billion over the same 10 years. These
                                                                                                              timing of broker sold investments. If the                        gain estimates also exclude additional
                                                     depend on investment advice for                          true underperformance of broker-sold
                                                     guidance on how to manage their                                                                                           potential gains to investors resulting
                                                                                                              funds is 200 basis points, IRA mutual                            from reducing or eliminating the effects
                                                     savings to achieve a secure retirement.                  fund holders could suffer from
                                                     In the current marketplace for                                                                                            of conflicts in financial products other
                                                                                                              underperformance amounting to $430                               than front-end-load mutual funds. The
                                                     retirement investment advice, however,                   billion over 10 years and nearly $1
                                                     advisers commonly have direct and                                                                                         Department invites input that would
                                                                                                              trillion across the next 20 years. While                         make it possible to quantify the
                                                     substantial conflicts of interest, which                 the estimates based on the mutual fund
                                                     encourage investment recommendations                                                                                      magnitude of the rule’s effectiveness
                                                                                                              market are large, the total market impact                        and of any additional, not-yet-quantified
                                                     that generate higher fees for the advisers               could be much larger. Insurance
                                                     at the expense of their customers and                                                                                     gains for investors.
                                                                                                              products, Exchange Traded Funds
                                                     often result in lower returns for                                                                                            These estimates account for only a
                                                                                                              (ETFs), individual stocks and bonds,
                                                     customers even before fees.                                                                                               fraction of potential conflicts, associated
                                                                                                              and other products are all sold by agents
                                                        A wide body of economic evidence                                                                                       losses, and affected retirement assets.
                                                                                                              and brokers with conflicts of interest.
                                                     supports a finding that the impact of                       The Department expects the proposal                           The total gains to IRA investors
                                                     these conflicts of interest on retirement                would deliver large gains for retirement                         attributable to the rule may be much
                                                     investment outcomes is large and, from                   investors. Because of data constraints,                          higher than these quantified gains alone
                                                     the perspective of advice recipients,                    only some of these gains can be                                  for several reasons. The Department
                                                     negative. As detailed in the                             quantified with confidence. Focusing                             expects the proposal to yield large,
                                                     Department’s Regulatory Impact                           only on how load shares paid to brokers                          additional gains for IRA investors,
                                                     Analysis (available at www.dol.gov/                      affect the size of loads paid by IRA                             including potential reductions in
                                                     ebsa/pdf/conflictsofinterestria.pdf), the                investors holding load funds and the                             excessive trading and associated
                                                     supporting evidence includes, among                      returns they achieve, the Department                             transaction costs and timing errors (such
                                                     other things, statistical analyses of                    estimates the proposal would deliver to                          as might be associated with return
                                                     conflicted investment channels,                          IRA investors gains of between $40                               chasing), improvements in the
                                                     experimental studies, government                         billion and $44 billion over 10 years and                        performance of IRA investments other
                                                     reports documenting abuse, and basic                     between $88 billion and $100 billion                             than front-load mutual funds, and
                                                     economic theory on the dangers posed                     over 20 years. These estimates assume                            improvements in the performance of
                                                     by conflicts of interest and by the                      that the rule would eliminate (rather                            defined contribution (DC) plan
                                                     asymmetries of information and                           than just reduce) underperformance                               investments. As noted above, under
                                                     expertise that characterize interactions                 associated with the practice of                                  current rules, adviser conflicts could
                                                     between ordinary retirement investors                    incentivizing broker recommendations                             cost IRA investors as much as $410
                                                     and conflicted advisers. This evidence                   through variable front-end-load sharing;                         billion over 10 years and $1 trillion over
                                                     takes into account existing protections                  if the rule’s effectiveness in this area is                      20 years, so the potential additional
                                                     under ERISA as well as other federal                     substantially below 100 percent, these                           gains to IRA investors from this
                                                     and state laws. A review of this data,                   estimates may overstate these particular                         proposal could be very large.
                                                     which consistently points to substantial                 gains to investors in the front-load                                The following accounting table
                                                     failures in the market for retirement                    mutual fund segment of the IRA market.                           summarizes the Department’s
                                                     advice, suggests that IRA holders                        The Department nonetheless believes                              conclusions:

                                                                            TABLE 1—PARTIAL GAINS TO INVESTORS AND COMPLIANCE COSTS ACCOUNTING TABLE
                                                                                                                   Primary                                                                     Discount rate     Period
                                                                           Category                                               Low estimate        High estimate              Year dollar
                                                                                                                   estimate                                                                        (9%)         covered

                                                                                                                        Partial Gains to Investors
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                                                     Annualized, Monetized ($millions/year) ...............            $4,243             $3,830      ......................            2015               7   2017–2026
                                                                                                                       $5,170              4,666      ......................            2015               3   2017–2026




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

                                                                        TABLE 1—PARTIAL GAINS TO INVESTORS AND COMPLIANCE COSTS ACCOUNTING TABLE—Continued
                                                                                                                                    Primary                                                                          Discount rate       Period
                                                                                  Category                                                         Low estimate             High estimate              Year dollar
                                                                                                                                    estimate                                                                             (9%)           covered

                                                     Notes: The proposal is expected to deliver large gains for retirement investors. Because of limitations of the literature and other available evi-
                                                       dence, only some of these gains can be quantified. The estimates in this table focus only on how load shares paid to brokers affect the size
                                                       of loads IRA investors holding load funds pay and the returns they achieve. These estimates assume that the rule will eliminate (rather than
                                                       just reduce) underperformance associated with the practice of incentivizing broker recommendations through variable front-end-load sharing.
                                                       If, however, the rule’s effectiveness in reducing underperformance is substantially below 100 percent, these estimates may overstate these
                                                       particular gains to investors in the front-end-load mutual fund segment of the IRA market. However, these estimates account for only a frac-
                                                       tion of potential conflicts, associated losses, and affected retirement assets. The total gains to IRA investors attributable to the rule may be
                                                       higher than the quantified gains alone for several reasons. For example, the proposal is expected to yield additional gains for IRA investors,
                                                       including potential reductions in excessive trading and associated transaction costs and timing errors (such as might be associated with return
                                                       chasing), improvements in the performance of IRA investments other than front-load mutual funds, and improvements in the performance of
                                                       DC plan investments.
                                                     The partial-gains-to-investors estimates include both economic efficiency benefits and transfers from the financial services industry to IRA hold-
                                                       ers.
                                                     The partial gains estimates are discounted to December 31, 2015.

                                                                                                                                               Compliance Costs

                                                     Annualized, Monetized ($millions/year) ...............                              $348      ......................                 $706                2015                7     2016–2025
                                                                                                                                          328      ......................                  664                2015                3     2016–2025

                                                     Notes: The compliance costs of the current proposal including the cost of compliance reviews, comprehensive compliance and supervisory sys-
                                                      tem changes, policies and procedures and training programs updates, insurance increases, disclosure preparation and distribution, and some
                                                      costs of changes in other business practices. Compliance costs incurred by mutual funds or other asset providers have not been estimated.

                                                                                                                                      Insurance Premium Transfers

                                                     Annualized Monetized ($millions/year) ................                                $63     ......................   ......................            2015                7     2016–2025
                                                                                                                                            63     ......................   ......................            2015                3     2016–2025

                                                     From/To ................................................................    From: Service providers facing increased in-                        To: Plans, participants, beneficiaries, and IRA
                                                                                                                                   surance premiums due to increased liability                         investors through the payment of recov-
                                                                                                                                   risk                                                                eries—funded from a portion of the in-
                                                                                                                                                                                                       creased insurance premiums



                                                        OMB Circular A–4 requires the                                           incentivizing broker recommendations                                 assume the gains to investors arise
                                                     presentation of a social welfare                                           through variable front-end-load sharing.                             gradually as the fraction of wealth
                                                     accounting table that summarizes a                                         If, however, the rule’s effectiveness is                             invested based on conflicted investment
                                                     regulation’s benefits, costs and transfers                                 substantially below 100 percent, these                               advice slowly declines over time based
                                                     (monetized, where possible). A                                             estimates would overstate these partial                              on historical patterns of asset turnover.
                                                     summary of this type would differ from                                     gains to investors in the front-load                                 However, the estimates do not account
                                                     and expand upon Table I in several                                         mutual fund segment of the IRA market.                               for potential transition costs associated
                                                     ways:                                                                      The estimates in Table I also exclude                                with a shift of investments to higher-
                                                        • In the language of social welfare                                     additional potential gains to investors                              performing vehicles. These transition
                                                     economics as reflected in Circular A–4,                                    resulting from reducing or eliminating                               costs have not been quantified due to
                                                     investor gains comprise two parts:                                         the effects of conflicts in financial                                lack of granularity in the literature or
                                                     Social welfare ‘‘benefits’’ attributable to                                products other than front-end-load                                   availability of other evidence on both
                                                     improvements in economic efficiency                                        mutual funds in the IRA market, and all                              the portion of investor gains that
                                                     and ‘‘transfers’’ of welfare to retirement                                 potential gains to investors in the plan                             consists of resource savings, as opposed
                                                     investors from the financial services                                      market. The Department invites input                                 to transfers, and the amount of
                                                     industry. Due to limitations of the                                        that would make it possible to quantify                              transitional cost that would be incurred
                                                     literature and other available evidence,                                   the magnitude of the rule’s effectiveness                            per unit of resource savings.
                                                     the investor gains estimates presented in                                  and of any additional, not-yet-quantified                               • Other categories of costs not yet
                                                     Table I have not been broken down into                                     gains for investors.                                                 quantified include compliance costs
                                                     benefits and transfer components, but                                         • Generally, the gains to investors                               incurred by mutual funds or other asset
                                                     making the distinction between these                                       consist of multiple parts: Transfers to                              providers. Enforcement costs or other
                                                     categories of impacts is key for a social                                  IRA investors from advisers and others                               costs borne by the government are also
                                                     welfare accounting statement.                                              in the supply chain, benefits to the                                 not quantified.
                                                        • The estimates in Table I reflect only
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                                                                                                                                overall economy from a shift in the
                                                     a subset of the gains to investors                                         allocation of investment dollars to                                     The Department requests detailed
                                                     resulting from the rule, but may                                           projects that have higher returns, and                               comment, data, and analysis on all of
                                                     overstate this subset. As noted in Table                                   resource savings associated with, for                                the issues outlined above for
                                                     I, the Department’s estimates of partial                                   example, reductions in excessive                                     incorporation into the social welfare
                                                     gains to investors reflect an assumption                                   turnover and wasteful and unsuccessful                               analysis at the finalization stage of the
                                                     that the rule will eliminate, rather than                                  efforts to outperform the market. Some                               rulemaking process.
                                                     just reduce, underperformance                                              of these gains are partially quantified in                              For a detailed discussion of the gains
                                                     associated with the practice of                                            Table I. Also, the estimates in Table I                              to investors and compliance costs of the


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

                                                     current proposal, please see Section J.                 available for additional public comment                in nature, appraisals or valuations of
                                                     Regulatory Impact Analysis, below.                      and the Department received over 60                    employer securities provided to ESOPs
                                                                                                             additional comment letters. In addition,               or to certain collective investment funds
                                                     II. Overview
                                                                                                             the Department has held many meetings                  holding assets of plan investors. On a
                                                     A. Rulemaking Background                                with interested parties.                               more technical point, the Department
                                                        The market for retirement advice has                    A number of commenters urged                        also followed recommendations that it
                                                     changed dramatically since the                          consideration of other means to attain                 not automatically assign fiduciary status
                                                     Department first promulgated the 1975                   the objectives of the 2010 Proposal and                to investment advisers under the
                                                     regulation. Individuals, rather than large              of additional analysis of the proposal’s               Advisers Act, but instead follow an
                                                     employers and professional money                        expected costs and benefits. In light of               entirely functional approach to
                                                                                                             these comments and because of the                      fiduciary status. In light of public
                                                     managers, have become increasingly
                                                                                                             significance of this rule, the Department              comments, the new proposal also makes
                                                     responsible for managing retirement
                                                                                                             decided to issue a new proposed                        a number of other changes to the
                                                     assets as IRAs and participant-directed
                                                                                                             regulation. On September 19, 2011 the                  regulatory proposal. For example, the
                                                     plans, such as 401(k) plans, have
                                                                                                             Department announced that it would                     Department has addressed concerns that
                                                     supplanted defined benefit pensions. At
                                                                                                             withdraw the 2010 Proposal and                         it could be misread to extend fiduciary
                                                     the same time, the variety and
                                                                                                             propose a new rule defining the term                   status to persons that prepare
                                                     complexity of financial products have
                                                                                                             ‘‘fiduciary’’ for purposes of section                  newsletters, television commentaries, or
                                                     increased, widening the information gap
                                                                                                             3(21)(A)(ii) of ERISA. This document                   conference speeches that contain
                                                     between advisers and their clients. Plan
                                                                                                             fulfills that announcement in publishing               recommendations made to the general
                                                     fiduciaries, plan participants and IRA                  both a new proposed regulation and                     public. Similarly, the rule makes clear
                                                     investors must often rely on experts for                withdrawing the 2010 Proposal.                         that fiduciary status does not extend to
                                                     advice, but are unable to assess the                    Consistent with the President’s                        internal company personnel who give
                                                     quality of the expert’s advice or                       Executive Orders 12866 and 13563,                      advice on behalf of their plan sponsor
                                                     effectively guard against the adviser’s                 extending the rulemaking process will                  as part of their duties, but receive no
                                                     conflicts of interest. This challenge is                give the public a full opportunity to                  compensation beyond their salary for
                                                     especially true of small retail investors               evaluate and comment on the revised                    the provision of advice. The Department
                                                     who typically do not have financial                     proposal and updated economic                          is appreciative of the comments it
                                                     expertise and can ill-afford lower                      analysis. In addition, we are                          received to the 2010 Proposal, and more
                                                     returns to their retirement savings                     simultaneously publishing proposed                     fully discusses a number of the
                                                     caused by conflicts. As baby boomers                    new and amended exemptions from                        comments that influenced change in the
                                                     retire, they are increasingly moving                    ERISA and the Code’s prohibited                        sections that follow. In addition, the
                                                     money from ERISA-covered plans,                         transaction rules designed to allow                    Department is eager to receive
                                                     where their employer has both the                       certain broker-dealers, insurance agents               comments on the new proposal in
                                                     incentive and the fiduciary duty to                     and others that act as investment advice               general, and requests public comment
                                                     facilitate sound investment choices, to                 fiduciaries to nevertheless continue to                on a number of specific aspects of the
                                                     IRAs where both good and bad                            receive common forms of compensation                   package as indicated below.
                                                     investment choices are myriad and                       that would otherwise be prohibited,                       The following discussion summarizes
                                                     advice that is conflicted is                            subject to appropriate safeguards. The                 the 2010 Proposal, describes some of the
                                                     commonplace. Such ‘‘rollovers’’ will                    existing class exemptions will otherwise               concerns and issues raised by
                                                     total more than $2 trillion over the next               remain in place, affording flexibility to              commenters, and explains the new
                                                     5 years. These trends were not apparent                 fiduciaries who currently use the                      proposed regulation, which is published
                                                     when the Department promulgated the                     exemptions or who wish to use the                      with this notice.
                                                     1975 rule. At that time, 401(k) plans did               exemptions in the future. The proposed
                                                     not yet exist and IRAs had only just                                                                           B. The Statute and Existing Regulation
                                                                                                             new regulatory package takes into
                                                     been authorized. These changes in the                   account robust public comment and                         ERISA (or the ‘‘Act’’) is a
                                                     marketplace, as well as the                             input and represents a substantial                     comprehensive statute designed to
                                                     Department’s experience with the rule                   change from the 2010 Proposal,                         protect the interests of plan participants
                                                     since 1975, support the Department’s                    balancing long overdue consumer                        and beneficiaries, the integrity of
                                                     efforts to reevaluate and revise the rule               protections with flexibility for the                   employee benefit plans, and the security
                                                     through a public process of notice and                  industry in order to minimize                          of retirement, health, and other critical
                                                     comment rulemaking.                                     disruptions to current business models.                benefits. The broad public interest in
                                                        On October 22, 2010, the Department                     In crafting the current regulatory                  ERISA-covered plans is reflected in the
                                                     published a proposed rule in the                        package, the Department has benefitted                 Act’s imposition of stringent fiduciary
                                                     Federal Register (75 FR 65263) (2010                    from the views and perspectives                        responsibilities on parties engaging in
                                                     Proposal) proposing to amend 29 CFR                     expressed in public comments to the                    important plan activities, as well as in
                                                     2510.3–21(c) (40 FR 50843, Oct. 31,                     2010 Proposal. For example, the                        the tax-favored status of plan assets and
                                                     1975), which defines when a person                      Department has responded to concerns                   investments. One of the chief ways in
                                                     renders investment advice to an                         about the impact of the prohibited                     which ERISA protects employee benefit
                                                     employee benefit plan, and                              transaction rules on the marketplace for               plans is by requiring that plan
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                                                     consequently acts as a fiduciary under                  retail advice by proposing a broad                     fiduciaries comply with fundamental
                                                     ERISA section 3(21)(A)(ii) (29 U.S.C.                   package of exemptions that are intended                obligations rooted in the law of trusts.
                                                     1002(21)(A)(ii)). In response to this                   to ensure that advisers and their firms                In particular, plan fiduciaries must
                                                     proposal, the Department received over                  make recommendations that are in the                   manage plan assets prudently and with
                                                     300 comment letters. A public hearing                   best interest of plan participants and                 undivided loyalty to the plans and their
                                                     on the 2010 Proposal was held in                        IRA owners, without disrupting                         participants and beneficiaries.4 In
                                                     Washington, DC on March 1 and 2,                        common fee arrangements. In response                   addition, they must refrain from
                                                     2011, at which 38 speakers testified.                   to commenters, the Department has also
                                                     The transcript of the hearing was made                  determined not to include, as fiduciary                 4 ERISA   section 404(a).



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                                                                               Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                          21933

                                                     engaging in ‘‘prohibited transactions,’’                responsibility with respect to plan                    investment advice for a fee. Under the
                                                     which the Act does not permit because                   assets. Thus, ‘‘any authority or control’’             regulation, for advice to constitute
                                                     of the dangers to the interests of the                  over plan assets is sufficient to confer               ‘‘investment advice,’’ an adviser who is
                                                     plan and IRA posed by the                               fiduciary status, and any person who                   not a fiduciary under another provision
                                                     transactions.5 When fiduciaries violate                 renders ‘‘investment advice for a fee or               of the statute must—(1) render advice as
                                                     ERISA’s fiduciary duties or the                         other compensation, direct or indirect’’               to the value of securities or other
                                                     prohibited transaction rules, they may                  is an investment advice fiduciary,                     property, or make recommendations as
                                                     be held personally liable for any losses                regardless of whether they have direct                 to the advisability of investing in,
                                                     to the investor resulting from the                      control over the plan’s assets, and                    purchasing or selling securities or other
                                                     breach.6 In addition, violations of the                 regardless of their status as an                       property (2) on a regular basis (3)
                                                     prohibited transaction rules are subject                investment adviser and/or broker under                 pursuant to a mutual agreement,
                                                     to excise taxes under the Code.                         the federal securities laws. The statutory             arrangement or understanding, with the
                                                        The Code also protects individuals                   definition and associated fiduciary                    plan or a plan fiduciary that (4) the
                                                     who save for retirement through tax-                    responsibilities were enacted to ensure                advice will serve as a primary basis for
                                                     favored accounts that are not generally                 that plans can depend on persons who                   investment decisions with respect to
                                                     covered by ERISA, such as IRAs,                         provide investment advice for a fee to                 plan assets, and that (5) the advice will
                                                     through a more limited regulation of                    make recommendations that are                          be individualized based on the
                                                     fiduciary conduct. Although ERISA’s                     prudent, loyal, and untainted by                       particular needs of the plan or IRA. The
                                                     general fiduciary obligations of                        conflicts of interest. In the absence of               regulation provides that an adviser is a
                                                     prudence and loyalty do not govern the                  fiduciary status, persons who provide                  fiduciary with respect to any particular
                                                     fiduciaries of IRAs and other plans not                 investment advice would neither be                     instance of advice only if he or she
                                                     covered by ERISA, these fiduciaries are                 subject to ERISA’s fundamental                         meets each and every element of the
                                                     subject to the prohibited transaction                   fiduciary standards, nor accountable                   five-part test with respect to the
                                                     rules of the Code. In this context,                     under ERISA or the Code for imprudent,                 particular advice recipient or plan at
                                                     however, the sole statutory sanction for                disloyal, or tainted advice, no matter                 issue.
                                                     engaging in the illegal transactions is                 how egregious the misconduct or how                       As the marketplace for financial
                                                     the assessment of an excise tax enforced                substantial the losses. Plans, individual              services has developed in the years
                                                     by the Internal Revenue Service (IRS).                  participants and beneficiaries, and IRA                since 1975, the five-part test may now
                                                     Thus, unlike participants in plans                      owners often are not financial experts                 undermine, rather than promote, the
                                                     covered by Title I of ERISA, IRA owners                 and consequently must rely on                          statutes’ text and purposes. The
                                                     do not have a statutory right to bring                  professional advice to make critical                   narrowness of the 1975 regulation
                                                     suit against fiduciaries under ERISA for                investment decisions. The statutory                    allows advisers, brokers, consultants
                                                     violation of the prohibited transaction                 definition, prohibitions on conflicts of               and valuation firms to play a central
                                                     rules and fiduciaries are not personally                interest, and core fiduciary obligations               role in shaping plan and IRA
                                                     liable to IRA owners for the losses                     of prudence and loyalty, all reflect                   investments, without ensuring the
                                                     caused by their misconduct.                             Congress’ recognition in 1974 of the                   accountability that Congress intended
                                                        Under this statutory framework, the                  fundamental importance of such advice                  for persons having such influence and
                                                     determination of who is a ‘‘fiduciary’’ is              to protect savers’ retirement nest eggs.               responsibility. Even when plan
                                                     of central importance. Many of ERISA’s                  In the years since then, the significance              sponsors, participants, beneficiaries,
                                                     and the Code’s protections, duties, and                                                                        and IRA owners clearly rely on paid
                                                                                                             of financial advice has become still
                                                     liabilities hinge on fiduciary status. In                                                                      advisers for impartial guidance, the
                                                                                                             greater with increased reliance on
                                                     relevant part, section 3(21)(A) of ERISA                                                                       regulation allows many advisers to
                                                                                                             participant-directed plans and self-
                                                     provides that a person is a fiduciary                                                                          avoid fiduciary status and disregard
                                                                                                             directed IRAs for the provision of
                                                     with respect to a plan to the extent he                                                                        ERISA’s fiduciary obligations of care
                                                                                                             retirement benefits.
                                                     or she (i) exercises any discretionary                                                                         and prohibitions on disloyal and
                                                                                                                In 1975, the Department issued a
                                                     authority or discretionary control with                                                                        conflicted transactions. As a
                                                                                                             regulation, at 29 CFR 2510.3–21(c)
                                                     respect to management of such plan or                                                                          consequence, these advisers can steer
                                                                                                             defining the circumstances under which
                                                     exercises any authority or control with                                                                        customers to investments based on their
                                                                                                             a person is treated as providing
                                                     respect to management or disposition of                                                                        own self-interest (e.g., products that
                                                                                                             ‘‘investment advice’’ to an employee                   generate higher fees for the adviser even
                                                     its assets; (ii) renders investment advice              benefit plan within the meaning of
                                                     for a fee or other compensation, direct                                                                        if there are identical lower-fee products
                                                                                                             section 3(21)(A)(ii) of ERISA (the ‘‘1975              available), give imprudent advice, and
                                                     or indirect, with respect to any moneys                 regulation’’), and the Department of the
                                                     or other property of such plan, or has                                                                         engage in transactions that would
                                                                                                             Treasury issued a virtually identical                  otherwise not be permitted by ERISA
                                                     any authority or responsibility to do so;               regulation under the Code.7 The
                                                     or, (iii) has any discretionary authority                                                                      and the Code without fear of
                                                                                                             regulation narrowed the scope of the                   accountability under either ERISA or
                                                     or discretionary responsibility in the                  statutory definition of fiduciary                      the Code.
                                                     administration of such plan. Section                    investment advice by creating a five-part                 Instead of ensuring that trusted
                                                     4975(e)(3) of the IRC identically defines               test that must be satisfied before a                   advisers give prudent and unbiased
                                                     ‘‘fiduciary’’ for purposes of the                       person can be treated as rendering                     advice in accordance with fiduciary
                                                     prohibited transaction rules set forth in
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                                                                                                                                                                    norms, the current regulation erects a
                                                     Code section 4975.                                         7 See 26 CFR 54.4975–9(c), which interprets Code
                                                                                                                                                                    multi-part series of technical
                                                        The statutory definition contained in                section 4975(e)(3). 40 FR 50840 (Oct. 31, 1975).
                                                                                                             Under section 102 of Reorganization Plan No. 4 of
                                                                                                                                                                    impediments to fiduciary responsibility.
                                                     section 3(21)(A) deliberately casts a
                                                                                                             1978, the authority of the Secretary of the Treasury   The Department is concerned that the
                                                     wide net in assigning fiduciary                         to interpret section 4975 of the Code has been         specific elements of the five-part test—
                                                                                                             transferred, with certain exceptions not here          which are not found in the text of the
                                                       5 ERISA section 406. The Act also prohibits
                                                                                                             relevant, to the Secretary of Labor. References in
                                                     certain transactions between a plan and a ‘‘party in    this document to sections of ERISA should be read
                                                                                                                                                                    Act or Code—now work to frustrate
                                                     interest.’’                                             to refer also to the corresponding sections of the     statutory goals and defeat advice
                                                       6 ERISA section 409; see also ERISA section 405.      Code.                                                  recipients’ legitimate expectations. In


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                                                     21934                    Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules

                                                     light of the importance of the proper                   individual, the ‘‘regular basis’’                      particular consultant’s advice as
                                                     management of plan and IRA assets, it                   requirement also deprives individual                   primary, secondary, or tertiary.
                                                     is critical that the regulation defining                participants and IRA owners of statutory               Presumably, paid consultants make
                                                     investment advice draws appropriate                     protection when they seek specialized                  recommendations—and retirement
                                                     distinctions between the sorts of advice                advice on a one-time basis, even if the                investors pay for them—with the hope
                                                     relationships that should be treated as                 advice concerns the investment of all or               or expectation that the
                                                     fiduciary in nature and those that                      substantially all of the assets held in                recommendations could, in fact, be
                                                     should not. In practice, the current                    their account (e.g., as in the case of an              relied upon in making important
                                                     regulation appears not to do so. Instead,               annuity purchase or a roll-over from a                 decisions. When a plan, participant,
                                                     the lines drawn by the five-part test                   plan to an IRA or from one IRA to                      beneficiary, or IRA owner directly or
                                                     frequently permit evasion of fiduciary                  another).                                              indirectly pays for advice upon which it
                                                     status and responsibility in ways that                     Under the five-part test, fiduciary                 can rely, there appears to be little
                                                     undermine the statutory text and                        status can also be defeated by arguing                 statutory basis for drawing distinctions
                                                     purposes.                                               that the parties did not have a mutual                 based on a subjective characterization of
                                                        One example of the five-part test’s                  agreement, arrangement, or                             the advice as ‘‘primary,’’ ‘‘secondary,’’
                                                     shortcomings is the requirement that                    understanding that the advice would                    or other.
                                                     advice be furnished on a ‘‘regular                      serve as a primary basis for investment                   In other respects, the current
                                                     basis.’’ As a result of the requirement, if             decisions. Investment professionals in                 regulatory definition could also benefit
                                                     a small plan hires an investment                        today’s marketplace frequently market                  from clarification. For example, a
                                                     professional or appraiser on a one-time                 retirement investment services in ways                 number of parties have argued that the
                                                     basis for an investment recommendation                  that clearly suggest the provision of                  regulation, as currently drafted, does not
                                                     or valuation opinion on a large, complex                tailored or individualized advice, while               encompass advice as to the selection of
                                                     investment, the adviser has no fiduciary                at the same time disclaiming in fine                   money managers or mutual funds.
                                                     obligation to the plan under ERISA.                     print the requisite ‘‘mutual’’                         Similarly, they have argued that the
                                                     Even if the plan is considering investing               understanding that the advice will be                  regulation does not cover advice given
                                                     all or substantially all of the plan’s                  used as a primary basis for investment                 to the managers of pooled investment
                                                     assets, lacks the specialized expertise                 decisions.                                             vehicles that hold plan assets
                                                     necessary to evaluate the complex                          Similarly, there appears to be a                    contributed by many plans, as opposed
                                                     transaction on its own, and the                         widespread belief among broker-dealers                 to advice given to particular plans.
                                                     consultant fully understands the plan’s                 that they are not fiduciaries with respect             Parties have even argued that advice
                                                     dependence on his professional                          to plans or IRAs because they do not                   was insufficiently ‘‘individualized’’ to
                                                     judgment, the consultant is not a                       hold themselves out as registered                      fall within the scope of the regulation
                                                     fiduciary because he does not advise the                investment advisers, even though they                  because the advice provider had failed
                                                     plan on a ‘‘regular basis.’’ The plan                   often market their services as financial               to prudently consider the ‘‘particular
                                                     could be investing hundreds of millions                 or retirement planners. The import of                  needs of the plan,’’ notwithstanding the
                                                     of dollars in plan assets, and it could be              such disclaimers—and of the fine legal                 fact that both the advice provider and
                                                     the most critical investment decision                   distinctions between brokers and                       the plan agreed that individualized
                                                     the plan ever makes, but the adviser                    registered investment advisers—is often                advice based on the plan’s needs would
                                                     would have no fiduciary responsibility                  completely lost on plan participants and               be provided, and the adviser actually
                                                     under the 1975 regulation. While a                      IRA owners who receive investment                      made specific investment
                                                     consultant who regularly makes less                     advice. As shown in a study conducted                  recommendations to the plan. Although
                                                     significant investment                                  by the RAND Institute for Civil Justice                the Department disagrees with each of
                                                     recommendations to the plan would be                    for the Securities and Exchange                        these interpretations of the current
                                                     a fiduciary if he satisfies the other four              Commission (SEC), consumers often do                   regulation, the arguments nevertheless
                                                     prongs of the regulatory test, the one-                 not read the legal documents and do not                suggest that clarifying regulatory text
                                                     time consultant on an enormous                          understand the difference between                      could be helpful.
                                                     transaction has no fiduciary                            brokers and registered investment                         Changes in the financial marketplace
                                                     responsibility.                                         advisers particularly when brokers                     have enlarged the gap between the 1975
                                                        In such cases, the ‘‘regular basis’’                 adopt such titles as ‘‘financial adviser’’             regulation’s effect and the Congressional
                                                     requirement, which is not found in the                  and ‘‘financial manager.’’ 8                           intent of the statutory definition. The
                                                     text of ERISA or the Code, fails to draw                   Even in the absence of boilerplate fine             greatest change is the predominance of
                                                     a sensible line between fiduciary and                   print disclaimers, however, it is far from             individual account plans, many of
                                                     non-fiduciary conduct, and undermines                   evident how the ‘‘primary basis’’                      which require participants to make
                                                     the law’s protective purposes. A specific               element of the five-part test promotes                 investment decisions for their own
                                                     example is the one-time purchase of a                   the statutory text or purposes of ERISA                accounts. In 1975, private-sector defined
                                                     group annuity to cover all of the benefits              and the Code. If, for example, a plan                  benefit pensions—mostly large,
                                                     promised to substantially all of a plan’s               hires multiple specialized advisers for                professionally managed funds—covered
                                                     participants for the rest of their lives                an especially complex transaction, it                  over 27 million active participants and
                                                     when a defined benefit plan terminates                  should be able to rely upon all of the                 held assets totaling almost $186 billion.
                                                     or a plan’s expenditure of hundreds of                  consultants’ advice, regardless of                     This compared with just 11 million
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                                                     millions of dollars on a single real estate             whether one could characterize any                     active participants in individual
                                                     transaction with the assistance of a                                                                           account defined contribution plans with
                                                     financial adviser hired for purposes of                   8 Angela A. Hung, Noreen Clancy, Jeff Dominitz,
                                                                                                                                                                    assets of just $74 billion.9 Moreover, the
                                                     that one transaction. Despite the clear                 Eric Talley, Claude Berrebi, Farrukh Suvankulov,       great majority of defined contribution
                                                     importance of the decisions and the                     Investor and Industry Perspectives on Investment
                                                                                                                                                                    plans at that time were professionally
                                                     clear reliance on paid advisers, the                    Advisers and Broker-Dealers, RAND Institute for
                                                                                                             Civil Justice, commissioned by the U.S. Securities
                                                     advisers would not be plan fiduciaries.                 and Exchange Commission, 2008, at http://                 9 U.S. Department of Labor, Private Pension Plan
                                                     On a smaller scale that is still                        www.sec.gov/news/press/2008/2008-1_                    Bulletin Historical Tables and Graphs, (Dec. 2014),
                                                     immensely important for the affected                    randiabdreport.pdf                                     at http://www.dol.gov/ebsa/pdf/historicaltables.pdf.



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                                                                              Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                             21935

                                                     managed, not participant-directed. In                   information between advisers and the                   ERISA fiduciary to the plan by virtue of
                                                     1975, 401(k) plans did not yet exist and                customers who depend upon them for                     having control over the management or
                                                     IRAs had just been authorized as part of                guidance; and the advisers’ significant                disposition of plan assets, or by having
                                                     ERISA’s enactment the prior year. In                    conflicts of interest.                                 discretionary authority over the
                                                     contrast, by 2012 defined benefit plans                    When Congress enacted ERISA in                      administration of the plan; (3) was
                                                     covered just under 16 million active                    1974, it made a judgment that plan                     already an investment adviser under the
                                                     participants, while individual account-                 advisers should be subject to ERISA’s                  Investment Advisers Act of 1940
                                                     based defined contribution plans                        fiduciary regime and that plan                         (Advisers Act); or (4) provided the
                                                     covered over 68 million active                          participants, beneficiaries and IRA                    advice pursuant to an agreement or
                                                     participants— including 63 million                      owners should be protected from                        understanding that the advice may be
                                                     participants in 401(k)-type plans that                  conflicted transactions by the prohibited              considered in connection with plan
                                                     are participant-directed.10                             transaction rules. More fundamentally,                 investment or asset management
                                                        With this transformation, plan                       however, the statutory language was                    decisions and would be individualized
                                                     participants, beneficiaries and IRA                     designed to cover a much broader                       to the needs of the plan, plan
                                                     owners have become major consumers                      category of persons who provide                        participant or beneficiary, or IRA owner.
                                                     of investment advice that is paid for                   fiduciary investment advice based on                   The 2010 Proposal also provided that,
                                                     directly or indirectly. By 2012, 97                     their functions and to limit their ability             for purposes of the fiduciary definition,
                                                     percent of 401(k) participants were                     to engage in self-dealing and other                    relevant fees included any direct or
                                                     responsible for directing the investment                conflicts of interest than is currently                indirect fees received by the adviser or
                                                     of all or part of their own account, up                 reflected in the five-part test. While                 an affiliate from any source. Direct fees
                                                     from 86 percent as recently as 1999.11                  many advisers are committed to                         are payments made by the advice
                                                     Also, in 2013, more than 34 million                     providing high-quality advice and                      recipient to the adviser including
                                                     households owned IRAs.12                                always put their customers’ best                       transaction-based fees, such as
                                                        Many of the consultants and advisers                 interests first, the 1975 regulation makes             brokerage, mutual fund or insurance
                                                     who provide investment-related advice                   it far too easy for advisers in today’s                sales commissions. Indirect fees are
                                                     and recommendations receive                             marketplace not to do so and to avoid                  payments to the adviser from any source
                                                     compensation from the financial                         fiduciary responsibility even when they                other than the advice recipient such as
                                                     institutions whose investment products                  clearly purport to give individualized                 revenue sharing payments from a
                                                     they recommend. This gives the                          advice and to act in the client’s best                 mutual fund.
                                                     consultants and advisers a strong bias,                 interest, rather than their own.                          The 2010 Proposal included specific
                                                     conscious or unconscious, to favor                                                                             carve-outs for the following actions that
                                                                                                             C. The 2010 Proposal
                                                     investments that provide them greater                                                                          the Department believed should not
                                                     compensation rather than those that                        In 2010, the Department proposed a                  result in fiduciary status. In particular,
                                                     may be most appropriate for the                         new regulation that would have                         a person would not have become a
                                                     participants. Unless they are fiduciaries,              replaced the five-part test with a new                 fiduciary by—
                                                     however, these consultants and advisers                 definition of what counted as fiduciary                   1. Providing recommendations as a
                                                     are free under ERISA and the Code, not                  investment advice for a fee. At that time,             seller or purchaser with interests
                                                     only to receive such conflicted                         the Department did not propose any                     adverse to the plan, its participants, or
                                                     compensation, but also to act on their                  new prohibited transaction exemptions                  IRA owners, if the advice recipient
                                                     conflicts of interest to the detriment of               and acknowledged uncertainty                           reasonably should have known that the
                                                     their customers. In addition, plans,                    regarding whether existing exemptions                  adviser was not providing impartial
                                                     participants, beneficiaries, and IRA                    would be available, but specifically                   investment advice and the adviser had
                                                     owners now have a much greater variety                  invited comments on whether new or                     not acknowledged fiduciary status.
                                                     of investments to choose from, creating                 amended exemptions should be                              2. Providing investment education
                                                     a greater need for expert advice.                       proposed. The proposal also provided                   information and materials in connection
                                                     Consolidation of the financial services                 carve-outs for conduct that would not                  with an individual account plan.
                                                                                                             result in fiduciary status. The general                   3. Marketing or making available a
                                                     industry and innovations in
                                                                                                             definition included the following types                menu of investment alternatives that a
                                                     compensation arrangements have
                                                                                                             of advice: (1) Appraisals or fairness                  plan fiduciary could choose from, and
                                                     multiplied the opportunities for self-
                                                                                                             opinions concerning the value of                       providing general financial information
                                                     dealing and reduced the transparency of
                                                                                                             securities or other property; (2)                      to assist in selecting and monitoring
                                                     fees.
                                                        The absence of adequate fiduciary                    recommendations as to the advisability                 those investments, if these activities
                                                                                                             of investing in, purchasing, holding or                include a written disclosure that the
                                                     protections and safeguards is especially
                                                                                                             selling securities or other property; and              adviser was not providing impartial
                                                     problematic in light of the growth of
                                                                                                             (3) recommendations as to the                          investment advice.
                                                     participant-directed plans and self-                                                                              4. Preparing reports necessary to
                                                     directed IRAs; the gap in expertise and                 management of securities or other
                                                                                                             property. Reflecting the Department’s                  comply with ERISA, the Code, or
                                                       10 U.S. Department of Labor, Private Pension Plan     longstanding interpretation of the 1975                regulations or forms issued thereunder,
                                                     Bulletin Abstract of 2012 Form 5500 Annual              regulations, the 2010 Proposal made                    unless the report valued assets that lack
                                                     Reports, (Jan. 2015), at http://www.dol.gov/ebsa/       clear that investment advice under the                 a generally recognized market, or served
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                                                     PDF/2012pensionplanbulletin.PDF.                        proposal includes advice provided to                   as a basis for making plan distributions.
                                                       11 U.S. Department of Labor, Private Pension Plan
                                                                                                             plan participants, beneficiaries and IRA               The 2010 Proposal applied to the
                                                     Bulletin Abstract of 1999 Form 5500 Annual
                                                     Reports, Number 12, Summer 2004 (Apr. 2008), at         owners as well as to plan fiduciaries.                 definition of an ‘‘investment advice
                                                     http://www.dol.gov/ebsa/PDF/                               Under the 2010 Proposal, a paid                     fiduciary’’ in section 4975(e)(3)(B) of the
                                                     1999pensionplanbulletin.PDF.                            adviser would have been treated as a                   Code as well as to the parallel ERISA
                                                       12 Brien, Michael J., and Constantijn W.A. Panis.
                                                                                                             fiduciary if the adviser provided one of               definition. These provisions apply to
                                                     Analysis of Financial Asset Holdings of Households
                                                     on the United States: 2013 Update. Advanced
                                                                                                             the above types of advice and either: (1)              both certain ERISA covered plans, and
                                                     Analytic Consulting Group and Deloitte, Report          Represented that he or she was acting as               certain non-ERISA plans such as
                                                     Prepared for the U.S. Department of Labor, 2014.        an ERISA fiduciary; (2) was already an                 individual retirement accounts.


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                                                     21936                    Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules

                                                        In the preamble to the 2010 Proposal,                arrangement, or understanding that the                    Many of the differences between the
                                                     the Department also noted that it had                   advice is individualized or specifically               new proposal and the 2010 Proposal
                                                     previously interpreted the 1975                         directed to the recipient for                          reflect the input of commenters on the
                                                     regulation as providing that a                          consideration in making investment or                  2010 Proposal as part of the public
                                                     recommendation to a plan participant                    investment management decisions                        notice and comment process. For
                                                     on how to invest the proceeds of a                      regarding plan assets.                                 example, some commenters argued that
                                                     contemplated plan distribution was not                     The new proposal includes several                   the 2010 Proposal swept too broadly by
                                                     fiduciary investment advice. Advisory                   carve-outs for persons who do not                      making investment recommendations
                                                     Opinion 2005–23A (Dec. 7, 2005). The                    represent that they are acting as ERISA                fiduciary in nature simply because the
                                                     Department specifically asked for                       fiduciaries, some of which were                        adviser was a plan fiduciary for
                                                     comments as to whether the final rule                   included in some form in the 2010                      purposes unconnected with the advice
                                                     should include such recommendations                     Proposal but many of which were not.                   or an investment adviser under the
                                                     as fiduciary advice.                                    Subject to specified conditions, these                 Advisers Act. In their view, such status-
                                                        The 2010 Proposal prompted a large                   carve-outs cover—                                      based criteria were in tension with the
                                                     number of comments and a vigorous                          (1) Statements or recommendations                   Act’s functional approach to fiduciary
                                                     debate. As noted above, the Department                  made to a ‘‘large plan investor with                   status and would have resulted in
                                                     made special efforts to encourage the                   financial expertise’’ by a counterparty                unwarranted and unintended
                                                     regulated community’s participation in                  acting in an arm’s length transaction;                 compliance issues and costs. Other
                                                     this rulemaking. In addition to an                         (2) offers or recommendations to plan               commenters objected to the lack of a
                                                     extended comment period, the                            fiduciaries of ERISA plans to enter into               requirement for these status-based
                                                     Department held a two-day public                        a swap or security-based swap that is                  categories that the advice be
                                                     hearing. Additional time for comments                   regulated under the Securities Exchange                individualized to the needs of the
                                                     was allowed following the hearing and                   Act or the Commodity Exchange Act;                     advice recipient. The new proposal
                                                     publication of the hearing transcript on                   (3) statements or recommendations                   incorporates these suggestions: An
                                                     the Department’s Web site and                           provided to a plan fiduciary of an                     adviser’s status as an investment adviser
                                                     Department representatives held                         ERISA plan by an employee of the plan                  under the Advisers Act or as an ERISA
                                                     numerous meetings with interested                       sponsor if the employee receives no fee                fiduciary for reasons unrelated to advice
                                                     parties. Many of the comments                           beyond his or her normal compensation;                 are no longer factors in the definition.
                                                     concerned the Department’s conclusions                     (4) marketing or making available a                 In addition, unless the adviser
                                                     regarding the likely economic impact of                 platform of investment alternatives to be              represents that he or she is a fiduciary
                                                     the proposal, if adopted. A number of                   selected by a plan fiduciary for an                    with respect to advice, the advice must
                                                     commenters urged the Department to                      ERISA participant-directed individual                  be provided pursuant to an agreement,
                                                     undertake additional analysis of                        account plan;                                          arrangement, or understanding that the
                                                     expected costs and benefits particularly                   (5) the identification of investment                advice is individualized or specifically
                                                     with regard to the 2010 Proposal’s                      alternatives that meet objective criteria              directed to the recipient to be treated as
                                                     coverage of IRAs. After consideration of                specified by a plan fiduciary of an                    fiduciary advice.
                                                     these comments and in light of the                      ERISA plan or the provision of objective                  Furthermore, the carve-outs that treat
                                                     significance of this rulemaking to the                  financial data to such fiduciary;                      certain conduct as non-fiduciary in
                                                     retirement plan service provider                           (6) the provision of an appraisal,                  nature have been modified, clarified,
                                                     industry, plan sponsors and                             fairness opinion or a statement of value               and expanded in response to comments.
                                                     participants, beneficiaries and IRA                     to an ESOP regarding employer                          For example, the carve-out for certain
                                                     owners, the Department decided to take                  securities, to a collective investment                 valuations from the definition of
                                                     more time for review and to issue a new                 vehicle holding plan assets, or to a plan              fiduciary investment advice has been
                                                     proposed regulation for comment.                        for meeting reporting and disclosure                   modified and expanded. Under the 2010
                                                     D. The New Proposal                                     requirements; and                                      Proposal, appraisals and valuations for
                                                                                                                (7) information and materials that                  compliance with certain reporting and
                                                        The new proposed rule makes many                     constitute ‘‘investment education’’ or                 disclosure requirements were not
                                                     revisions to the 2010 Proposal, although                ‘‘retirement education.’’                              treated as fiduciary advice. The new
                                                     it also retains aspects of that proposal’s                 The new proposal applies the same                   proposal additionally provides a carve-
                                                     essential framework. The new proposal                   definition of ‘‘investment advice’’ to the             out from fiduciary treatment for
                                                     broadly updates the definition of                       definition of ‘‘fiduciary’’ in section                 appraisal and fairness opinions for
                                                     fiduciary investment advice, and also                   4975(e)(3) of the Code and thus applies                ESOPs regarding employer securities.
                                                     provides a series of carve-outs from the                to investment advice rendered to IRAs.                 Although, the Department remains
                                                     fiduciary investment advice definition                  ‘‘Plan’’ is defined in the new proposal                concerned about valuation advice
                                                     for communications that should not be                   to mean any employee benefit plan                      concerning an ESOP’s purchase of
                                                     viewed as fiduciary in nature. The                      described in section 3(3) of the Act and               employer stock and about a plan’s
                                                     definition generally covers the following               any plan described in section                          reliance on that advice, the Department
                                                     categories of advice: (1) Investment                    4975(e)(1)(A) of the Code. For ease of                 has concluded that the concerns
                                                     recommendations, (2) investment                         reference in this proposal, the term                   regarding valuations of closely held
                                                     management recommendations, (3)                         ‘‘IRA’’ has been inclusively defined to                employer stock in ESOP transactions
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                                                     appraisals of investments, or (4)                       mean any account described in Code                     raise unique issues that are more
                                                     recommendations of persons to provide                   section 4975(e)(1)(B) through (F), such
                                                     investment advice for a fee or to manage                as a true individual retirement account                differences among the various types of non-ERISA
                                                     plan assets. Persons who provide such                   described under Code section 408(a)                    plan arrangements described in Code section
                                                     advice fall within the general definition               and a health savings account described                 4975(e)(1)(B) through (F), the Department solicits
                                                     of a fiduciary if they either (a) represent                                                                    comments on whether it is appropriate for the
                                                                                                             in section 223(d) of the Code.13                       regulation to cover the full range of these
                                                     that they are acting as a fiduciary under                                                                      arrangements. These non-ERISA plan arrangements
                                                     ERISA or the Code or (b) provide the                      13 As discussed below in Section E. Coverage of      are tax favored vehicles under the Code like IRAs,
                                                     advice pursuant to an agreement,                        IRAs and Other Non-ERISA Plans, in recognition of      but are not intended for retirement savings.



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                                                                              Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                                     21937

                                                     appropriately addressed in a separate                   and responsibilities. As the Department                laws, and to take the effects of those
                                                     regulatory initiative. Additionally, the                moves forward with this project in                     laws into account so as to appropriately
                                                     carve-out for valuations conducted for                  accordance with the specific provisions                calibrate the impact of the rule on those
                                                     reporting and disclosure purposes has                   of ERISA and the Code, it will continue                firms. The proposed regulation reflects
                                                     been expanded to include reporting and                  to consult with staff of the SEC and                   these efforts. In the Department’s view,
                                                     disclosure obligations outside of ERISA                 other regulators on its proposals and                  it neither undermines, nor contradicts,
                                                     and the Code, and is applicable to both                 their impact on retail investors and                   the provisions or purposes of the
                                                     ERISA plans and IRAs. Many other                        other regulatory regimes. One result of                securities laws, but instead works in
                                                     modifications to the other carve-outs                   these discussions, particularly with staff             harmony with them. The Department
                                                     from fiduciary status, as well as new                   of the CFTC and SEC, is the new                        has coordinated—and will continue to
                                                     carve-outs and prohibited transaction                   provision at paragraph (b)(1)(ii) of the               coordinate—its efforts with other federal
                                                     exemptions, are described below in                      proposed regulations concerning                        agencies to ensure that the various legal
                                                     Section IV—‘‘The Provisions of the New                  counterparty transactions with swap                    regimes are harmonized to the fullest
                                                     Proposal.’’                                             dealers, major swap participants,                      extent possible.
                                                                                                             security-based swap dealers, and major                    The Department has also consulted
                                                     III. Coordination With Other Federal                                                                           with the Department of the Treasury
                                                                                                             security-based swap participants. Under
                                                     Agencies                                                                                                       and the IRS, particularly on the subject
                                                                                                             the terms of that paragraph, such
                                                        Many comments to the 2010                            persons would not be treated as ERISA                  of IRAs. Although the Department has
                                                     rulemaking emphasized the need to                       fiduciaries merely because, when acting                responsibility for issuing regulations
                                                     harmonize the Department’s efforts with                 as counterparties to swap or security-                 and prohibited transaction exemptions
                                                     rulemaking activities under the Dodd-                   based swap transactions, they give                     under section 4975 of the Code, which
                                                     Frank Wall Street Reform and Consumer                   information and perform actions                        applies to IRAs, the IRS maintains
                                                     Protection Act, Pub. Law No. 111–203,                   required for compliance with the                       general responsibility for enforcing the
                                                     124 Stat. 1376 (2010), (Dodd-Frank Act),                requirements of the business conduct                   tax laws. The IRS’ responsibilities
                                                     in particular, the Security and Exchange                standards of the Dodd-Frank Act and its                extend to the imposition of excise taxes
                                                     Commission’s (SEC) standards of care                    implementing regulations.                              on fiduciaries who participate in
                                                     for providing investment advice and the                    In pursuing these consultations, the                prohibited transactions.14 As a result,
                                                     Commodity Futures Trading                               Department has aimed to coordinate and                 the Department and the IRS share
                                                     Commission’s (CFTC) business conduct                    minimize conflicting or duplicative                    responsibility for combating self-dealing
                                                     standards for swap dealers. While the                   provisions between ERISA, the Code                     by fiduciary investment advisers to tax-
                                                     2010 Proposal discussed statutes over                   and federal securities laws, to the extent             qualified plans and IRAs. Paragraph (e)
                                                     which the SEC and CFTC have                             possible. However, the governing                       of the proposed regulation, in particular,
                                                     jurisdiction, it did not specifically                   statutes do not permit the Department to               recognizes this jurisdictional
                                                     describe inter-agency coordination                      make the obligations of fiduciary                      intersection.
                                                     efforts. In addition, commenters                        investment advisers under ERISA and                       When the Department announced that
                                                     questioned the adequacy of                              the Code identical to the duties of                    it would issue a new proposal, it stated
                                                     coordination with other agencies                        advice providers under the securities                  that it would consider proposing new
                                                     regarding IRA products and services.                    laws. ERISA and the Code establish                     and/or amended prohibited transaction
                                                     They argued that subjecting SEC-                        consumer protections for some                          exemptions to address the concerns of
                                                     regulated investment advisers and                       investment advice that does not fall                   commenters about the broader scope of
                                                     broker-dealers to a special set of ERISA                within the ambit of federal securities                 the fiduciary definition and its impact
                                                     rules for plans and IRAs could lead to                  laws, and vice versa. Even if each of the              on the fee practices of brokers and other
                                                     additional costs and complexities for                   relevant agencies were to adopt an                     advisers. Commenters had expressed
                                                     individuals who may have several                        identical definition of ‘‘fiduciary’’, the             concern about whether longstanding
                                                     different types of accounts at the same                 legal consequences of the fiduciary                    exemptions granted by the Department
                                                     financial institution some of which may                 designation would vary between                         allowing advisers, despite their
                                                     be subject only to the SEC rules, and                   agencies because of differences in the                 fiduciary status under ERISA, to receive
                                                     others of which may be subject to both                  specific duties and remedies established               commissions in connection with mutual
                                                     SEC rules and new regulatory                            by the different federal laws at issue.                funds, securities and insurance products
                                                     requirements under ERISA.                               ERISA and the Code place special                       would remain applicable under the new
                                                        In the course of developing the new                  emphasis on the elimination or                         rule. As explained more fully below, the
                                                     proposal and the related proposed                       mitigation of conflicts of interest and                Department is simultaneously
                                                     prohibited transaction exemptions, the                  adherence to substantive standards of                  publishing in the notice section of
                                                     Department has consulted with staff of                  conduct, as reflected in the prohibited                today’s Federal Register proposed
                                                     the SEC and other regulators on an                      transaction rules and ERISA’s standards                prohibited transaction class exemptions
                                                     ongoing basis regarding whether the                     of fiduciary conduct. The specific duties              to address these concerns. The
                                                     proposals would subject investment                      imposed on fiduciaries by ERISA and                    Department believes that existing
                                                     advisers and broker-dealers who                         the Code stem from legislative                         exemptions and these new proposed
                                                     provide investment advice to                            judgments on the best way to protect the               exemptions would preserve the ability
                                                     requirements that create an undue                       public interest in tax-preferred benefit               to engage in common fee arrangements,
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                                                     compliance burden or conflict with                      arrangements that are critical to                      while protecting plan participants,
                                                     their obligations under other federal                   workers’ financial and physical health.                beneficiaries and IRA owners from
                                                     laws. As part of this consultative                      The Department has taken great care to                 abusive practices that may result from
                                                     process, SEC staff has provided                         honor ERISA and the Code’s specific                    conflicts of interest.
                                                     technical assistance and information                    text and purposes.                                        The terms of these new exemptions
                                                     with respect to retail investors, the                      At the same time, the Department has                are discussed in more detail below and
                                                     marketplace for investment advice and                   worked hard to understand the impact                   in the preambles to the proposed
                                                     coordinating, to the extent possible, the               of the proposed rule on firms subject to
                                                     agencies’ separate regulatory provisions                the securities laws and other federal                   14 Reorganization   Plan No. 4 of 1978.



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

                                                     exemptions. While the exemptions                        to replace the restrictive five-part test                 Except for the prong of the definition
                                                     differ in terms and coverage, each                      with a new definition that better                      concerning appraisals and valuations
                                                     imposes a ‘‘best interest’’ standard on                 comports with the statutory language in                discussed below, the proposal is
                                                     fiduciary investment advisers. Thus, for                ERISA and the Code.15 As explained                     structured so that communications must
                                                     example, the Best Interest Contract                     below, the proposal accomplishes this                  constitute a ‘‘recommendation’’ to fall
                                                     Exemption requires the investment                       by first describing the kinds of                       within the scope of fiduciary investment
                                                     advice fiduciary and associated                         communications and relationships that                  advice. In that regard, as stated earlier
                                                     financial institution to expressly agree                would generally constitute fiduciary                   in Section III concerning coordination
                                                     to provide advice that is in the ‘‘best                 investment advice if the adviser receives              with other Federal Agencies, the
                                                     interest’’ of the advice recipient. As                  a fee or other compensation. Rather than               Department has consulted with staff of
                                                     proposed, the best interest standard is                 add additional elements that must be                   other agencies with rulemaking
                                                     intended to mirror the duties of                        met in all instances, as under the                     authority over investment advisers and
                                                     prudence and loyalty, as applied in the                 current regulation, the proposal                       broker-dealers. FINRA Policy Statement
                                                     context of fiduciary investment advice                  describes several specific types of                    01–23 sets forth guidelines to assist
                                                     under sections 404(a)(1)(A) and (B) of                  advice or communications that would                    brokers in evaluating whether a
                                                     ERISA. Thus, the ‘‘best interest’’                      not be treated as investment advice. In                particular communication could be
                                                     standard is rooted in the longstanding                  the Department’s view, this structure is               viewed as a recommendation, thereby
                                                     trust-law duties of prudence and loyalty                faithful to the remedial purpose of the                triggering application of FINRA’s Rule
                                                     adopted in section 404 of ERISA and in                  statute, but avoids burdening activities               2111 that requires that a firm or
                                                     the cases interpreting those standards.                 that do not implicate relationships of                 associated person have a reasonable
                                                        Accordingly, the Best Interest                       trust and expectations of impartiality.                basis to believe that a recommended
                                                     Contract Exemption provides:                                                                                   transaction or investment strategy
                                                                                                             A. Categories of Advice or                             involving a security or securities is
                                                        Investment advice is in the ‘‘Best Interest’’        Recommendations
                                                     of the Retirement Investor when the Adviser                                                                    suitable for the customer.16 Although
                                                     and Financial Institution providing the                    Paragraph (a)(1) of the proposal sets               the regulatory context for the FINRA
                                                     advice act with the care, skill, prudence, and          forth the following types of advice,                   guidance is somewhat different, the
                                                     diligence under the circumstances then                  which, when provided in exchange for                   Department believes that it provides
                                                     prevailing that a prudent person would                  a fee or other compensation, whether                   useful standards and guideposts for
                                                     exercise based on the investment objectives,            directly or indirectly, and given under                distinguishing investment education
                                                     risk tolerance, financial circumstances and                                                                    from investment advice under ERISA.
                                                                                                             circumstances described in paragraph
                                                     needs of the Retirement Investor, without                                                                      Accordingly, the Department
                                                     regard to the financial or other interests of           (a)(2), would be ‘‘investment advice’’
                                                                                                             unless one of the carve-outs in                        specifically solicits comments on
                                                     the Adviser, Financial Institution, any
                                                     Affiliate, Related Entity, or other party.              paragraph (b) applies. The listed types                whether it should adopt some or all of
                                                                                                             of advice are—                                         the standards developed by FINRA in
                                                        This ‘‘best interest’’ standard is not                                                                      defining communications that rise to the
                                                                                                                (i) A recommendation as to the
                                                     intended to add to or expand the ERISA                                                                         level of a recommendation for purposes
                                                                                                             advisability of acquiring, holding,
                                                     section 404 standards of prudence and                                                                          of distinguishing between investment
                                                                                                             disposing of or exchanging securities or
                                                     loyalty as they apply to the provision of                                                                      education and investment advice under
                                                                                                             other property, including a
                                                     investment advice to ERISA covered                                                                             ERISA.
                                                                                                             recommendation to take a distribution
                                                     plans. Advisers to ERISA-covered plans                                                                            Additionally, as paragraph (d) of the
                                                                                                             of benefits or a recommendation as to
                                                     are already required to adhere to the                                                                          proposal makes clear, the regulation
                                                                                                             the investment of securities or other
                                                     fundamental standards of prudence and                                                                          does not treat the mere execution of a
                                                                                                             property to be rolled over or otherwise
                                                     loyalty, and can be held accountable for                                                                       securities transaction at the direction of
                                                                                                             distributed from the plan or IRA;
                                                     violations of the standards. Rather, the
                                                                                                                (ii) A recommendation as to the
                                                     primary impact of the ‘‘best interest’’                                                                           16 See also FINRA’s Regulatory Notice 11–02, 12–
                                                                                                             management of securities or other
                                                     standard is on the IRA market. Under                                                                           25 and 12–55. Regulatory Notice 11–02 includes the
                                                                                                             property, including recommendations as                 following discussion:
                                                     the Code, advisers to IRAs are subject
                                                                                                             to the management of securities or other                  For instance, a communication’s content, context
                                                     only to the prohibited transaction rules.                                                                      and presentation are important aspects of the
                                                                                                             property to be rolled over or otherwise
                                                     Incorporating the best interest standard                                                                       inquiry. The determination of whether a
                                                                                                             distributed from the plan or IRA;
                                                     in the proposed Best Interest Contract                                                                         ‘‘recommendation’’ has been made, moreover, is an
                                                                                                                (iii) An appraisal, fairness opinion, or            objective rather than subjective inquiry. An
                                                     Exemption effectively requires advisers
                                                                                                             similar statement whether verbal or                    important factor in this regard is whether—given its
                                                     to comply with these basic fiduciary                                                                           content, context and manner of presentation—a
                                                                                                             written concerning the value of
                                                     standards as a condition of engaging in                                                                        particular communication from a firm or associated
                                                                                                             securities or other property if provided               person to a customer reasonably would be viewed
                                                     transactions that would otherwise be
                                                                                                             in connection with a specific                          as a suggestion that the customer take action or
                                                     prohibited because of the conflicts of
                                                                                                             transaction or transactions involving the              refrain from taking action regarding a security or
                                                     interest they create. Additionally, the                                                                        investment strategy. In addition, the more
                                                                                                             acquisition, disposition, or exchange, of
                                                     exemption ensures that IRA owners and                                                                          individually tailored the communication is to a
                                                                                                             such securities or other property by the               particular customer or customers about a specific
                                                     investors have a contract-based claim to
                                                                                                             plan or IRA; or                                        security or investment strategy, the more likely the
                                                     hold their fiduciary advisers                                                                                  communication will be viewed as a
                                                                                                                (iv) A recommendation of a person
                                                     accountable if they violate these basic                                                                        recommendation. Furthermore, a series of actions
                                                                                                             who is also going to receive a fee or
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                                                     obligations of prudence and loyalty. As                                                                        that may not constitute recommendations when
                                                                                                             other compensation to provide any of                   viewed individually may amount to a
                                                     under current law, no private right of
                                                                                                             the types of advice described in                       recommendation when considered in the aggregate.
                                                     action under ERISA is available to IRA                                                                         It also makes no difference whether the
                                                                                                             paragraphs (i) through (iii) above.
                                                     owners.                                                                                                        communication was initiated by a person or a
                                                                                                                                                                    computer software program. These guiding
                                                     IV. The Provisions of the New Proposal                    15 For purposes of readability, this proposed        principles, together with numerous litigated
                                                                                                             rulemaking republishes 29 CFR 2510.3–21 in its         decisions and the facts and circumstances of any
                                                       The new proposal would amend the                      entirety, as revised, rather than only the specific    particular case, inform the determination of
                                                     definition of investment advice in 29                   amendments to this section. See 29 CFR 2510.3–         whether the communication is a recommendation
                                                     CFR 2510.3–21 (1975) of the regulation                  21(d)—Execution of securities transactions.            for purposes of FINRA’s suitability rule.



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

                                                     a plan or IRA owner as fiduciary                        proposal’s treatment of such non-                      Responding to comments, the proposal
                                                     activity. This paragraph remains                        fiduciary educational and informational                in paragraph (a)(1)(iii) covers only
                                                     unchanged from the 1975 regulation                      materials adequately covers the                        appraisals, fairness opinions, or similar
                                                     other than to update references to the                  common types of distribution-related                   statements that relate to a particular
                                                     proposal’s structure. The definition’s                  information that participants find                     transaction. The Department also
                                                     scope remains limited to advice                         useful, including information relating to              expanded the 2010 Proposal’s carve-out
                                                     relationships, as delineated in its text                annuitizations and other forms of                      for general reports or statements of
                                                     and does not impact merely                              lifetime income payment options, but                   value provided to satisfy required
                                                     administrative or ministerial activities                welcomes input on other types of                       reporting and disclosure rules under
                                                     necessary for a plan or IRA’s                           information that would help clarify the                ERISA or the Code. The carve-out in the
                                                     functioning. It also does not apply to                  line between advice and education in                   2010 proposal covered general reports
                                                     order taking where no advice is                         this context.                                          or statements of value that merely
                                                     provided.                                                                                                      reflected the value of an investment of
                                                                                                             (2) Recommendations as to the
                                                     (1) Recommendations To Distribute Plan                  Management of Plan Investments                         a plan or a participant or beneficiary,
                                                     Assets                                                                                                         and provided for purposes of
                                                                                                                The preamble to the 2010 Proposal
                                                                                                                                                                    compliance with the reporting and
                                                        Paragraph (a)(1)(i) specifically                     stated that the ‘‘management of
                                                                                                                                                                    disclosure requirements of ERISA, the
                                                     includes recommendations concerning                     securities or other property’’ would
                                                                                                                                                                    Code, and the regulations, forms and
                                                     the investment of securities to be rolled               include advice and recommendations as
                                                                                                                                                                    schedules issued thereunder, unless the
                                                     over or otherwise distributed from the                  to the exercise of rights appurtenant to
                                                     plan or IRA. Noting the Department’s                    shares of stock (e.g., voting proxies). 75             reports involved assets for which there
                                                     position in Advisory Opinion 2005–23A                   FR 65266 (Oct. 22, 2010). The                          was not a generally recognized market
                                                     that it is not fiduciary advice to make                 Department has long viewed the                         and served as a basis on which a plan
                                                     a recommendation as to distribution                     exercise of ownership rights as a                      could make distributions to plan
                                                     options even if that is accompanied by                  fiduciary responsibility because of its                participants and beneficiaries. The
                                                     a recommendation as to where the                        material effect on plan investment goals.              carve-out was broadened in this
                                                     distribution would be invested, (Dec. 7,                29 CFR 2509.08–2 (2008). Consequently,                 proposal to includes valuations
                                                     2005), the 2010 Proposal did not                        individualized or specifically directed                provided solely for purposes of
                                                     include this type of advice, but the                    advice and recommendations on the                      compliance with the reporting and
                                                     Department requested comments on                        exercise of proxy or other ownership                   disclosure provisions under the Act, the
                                                     whether it should be included in a final                rights are appropriately treated as                    Code, and the regulations, forms and
                                                     regulation. Some commenters stated                      fiduciary in nature. Accordingly, the                  schedules issued thereunder, or any
                                                     that exclusion of this advice from the                  proposed regulation’s provision on                     applicable reporting or disclosure
                                                     final rule would fail to protect                        advice regarding the management of                     requirement under a Federal or state
                                                     participant accounts from conflicted                    securities or other property would                     law, or rule or regulation or self-
                                                     advice in connection with one of the                    continue to cover individualized advice                regulatory organization (e.g., FINRA)
                                                     most significant financial decisions that               or recommendations as to proxy voting                  without regard to the type of asset
                                                     participants make concerning retirement                 and the management of retirement                       involved. In this manner, the new
                                                     savings. Other commenters argued that                   assets in paragraph (a)(1)(ii).                        proposal focuses on instances where the
                                                     including this advice would give rise to                   We received comments on the 2010                    plan or IRA owner is looking to the
                                                     prohibited transactions that could                      proposal seeking some clarification                    appraiser for advice on the market value
                                                     disrupt the routine process that occurs                 regarding its application to certain                   of an asset that the investor is
                                                     when a worker leaves a job, contacts a                  practices. In this regard, it is the                   considering to acquire, dispose, or
                                                     financial services firm for help rolling                Department’s view that guidelines or                   exchange. In many cases the most
                                                     over a 401(k) balance, and the firm                     other information on voting policies for               important investment advice that an
                                                     explains the investments it offers and                  proxies that are provided to a broad                   investor receives is advice as to how
                                                     the benefits of a rollover.                             class of investors without regard to a                 much it can or should pay for hard-to-
                                                        The proposed regulation, if finalized,               client’s individual interests or                       value assets. In response to comments,
                                                     would supersede Advisory Opinion                        investment policy, and which are not                   the proposal also contains an entirely
                                                     2005–23A. Thus, recommendations to                      directed or presented as a recommended                 new carve-out at paragraph (b)(5)(ii)
                                                     take distributions (and thereby                         policy for the plan or IRA to adopt,                   specifically addressing valuations or
                                                     withdraw assets from existing plan or                   would not rise to the level of fiduciary               appraisals provided to an investment
                                                     IRA investments or roll over into a plan                investment advice under the proposal.                  fund (e.g., collective investment fund or
                                                     or IRA) or to entrust plan or IRA assets                Additionally, a recommendation                         pooled separate account) holding assets
                                                     to particular money managers, advisers,                 addressed to all shareholders in a proxy               of various investors in addition to at
                                                     or investments would fall within the                    statement would not result in fiduciary                least one plan or IRA. Also, as
                                                     scope of covered advice. However, as                    status on the part of the issuer of the                mentioned, the Department has decided
                                                     the proposal’s text makes clear, one                    statement or the person who distributes                not to extend fiduciary coverage to
                                                     does not act as a fiduciary merely by                   the proxy statement. These positions are               valuations or appraisals for ESOPs
                                                     providing participants with information                 clarified in the proposed regulation.                  relating to employer securities at this
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                                                     about plan or IRA distribution options,                                                                        time because the Department has
                                                     including the consequences associated                   (3) Appraisals                                         concluded that its concerns in this
                                                     with the available types of benefit                       The new proposal, like the current                   space raise unique issues that are more
                                                     distributions. In this regard, the new                  regulation which includes ‘‘advice as to               appropriately addressed in a separate
                                                     proposal draws an important distinction                 the value of securities or other                       regulatory initiative. The proposal’s
                                                     between fiduciary investment advice                     property,’’ continues to cover certain                 carve-outs do not apply, however, if the
                                                     and non-fiduciary investment                            appraisals and valuation reports.                      provider of the valuation represents or
                                                     information and educational materials.                  However, it is considerably more                       acknowledges that it is acting as a
                                                     The Department believes that the                        focused than the 2010 Proposal.                        fiduciary with respect to the advice.


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

                                                        Some representatives of the appraisal                such advice should be treated as                       solely on their or an affiliate’s status as
                                                     industry submitted comments on the                      fiduciary in nature if provided under                  an investment adviser under the
                                                     2010 Proposal arguing that ERISA’s                      the circumstances in paragraph (a)(1)(iv)              Advisers Act. Instead, their fiduciary
                                                     fiduciary duty to act solely in the                     and for direct or indirect compensation.               status would be determined by reference
                                                     interest of the plan and its participants               Covered advice would include                           to the same functional test that applies
                                                     and beneficiaries is inconsistent with                  recommendations of persons to perform                  to all persons under the regulation.
                                                     the duty of appraisers to provide                       asset management services or to make                      Paragraph (a)(2)(ii) of the proposal
                                                     objective, independent value                            investment recommendations. Advice as                  avoids treating recommendations made
                                                     determinations. The Department                          to the identity of the person entrusted                to the general public, or to no one in
                                                     disagrees. A biased or inaccurate                       with investment authority over                         particular, as investment advice and
                                                     appraisal does not help a plan, a                       retirement assets is often critical to the             thus addresses concerns that the general
                                                     participant or a beneficiary make                       proper management and investment of                    circulation of newsletters, television
                                                     prudent investment decisions. Like                      those assets. On the other hand, general               talk show commentary, or remarks in
                                                     other forms of investment advice, an                    advice as to the types of qualitative and              speeches and presentations at financial
                                                     appraisal is a tool for plan fiduciaries,               quantitative criteria to consider in                   industry educational conferences would
                                                     participants, beneficiaries, and IRA                    hiring an investment manager would                     result in the person being treated as a
                                                     owners to use in deciding what price to                 not rise to the level of a                             fiduciary. This paragraph requires an
                                                     pay for assets and whether to accept or                 recommendation of a person to manage                   agreement, arrangement, or
                                                     decline proposed transactions. An                       plan investments nor would a trade                     understanding that advice is directed to,
                                                     appraiser complies with his or her                      journal’s endorsement of an investment                 a specific recipient for consideration in
                                                     obligations as an appraiser—and as a                    manager. Similarly, the proposed                       making investment decisions. The
                                                     loyal fiduciary—by giving plan                          regulation would not cover                             parties need not have a meeting of the
                                                     fiduciaries or participants an impartial                recommendations of administrative                      minds on the extent to which the advice
                                                     and accurate assessment of the value of                 service providers, property managers, or               recipient will actually rely on the
                                                     an asset in accordance with appraisers’                 other service providers who do not                     advice, but they must agree or
                                                     professional standard of care. Nothing                  provide investment services.                           understand that the advice is
                                                     in ERISA or this regulation should be                                                                          individualized or specifically directed
                                                                                                             B. The Circumstances Under Which                       to the particular advice recipient for
                                                     read as compelling an appraiser to slant                Advice Is Provided
                                                     valuation opinions to reflect what the                                                                         consideration in making investment
                                                     plan wishes the asset were worth rather                    As provided in paragraph (a)(2) of the              decisions. In this respect, paragraph
                                                     than what it is really worth. As stated                 proposal, unless a carve-out applies, a                (a)(2)(ii) differs significantly from its
                                                     in the preamble to the 2010 Proposal,                   category of advice listed in the proposal              counterpart in the 2010 Proposal. In
                                                     the Department would expect a                           would constitute ‘‘investment advice’’ if              particular, and in response to
                                                     fiduciary appraiser’s determination of                  the person providing the advice, either                comments, the proposal does not
                                                     value to be unbiased, fair and objective                directly or indirectly (e.g., through or               require that advice be individualized to
                                                     and to be made in good faith based on                   together with any affiliate)—                          the needs of the plan, participant or
                                                     a prudent investigation under the                          (i) Represents or acknowledges that it              beneficiary or IRA owner if the advice
                                                     prevailing circumstances then known to                  is acting as a fiduciary within the                    is specifically directed to such recipient.
                                                     the appraiser. In the Department’s view,                meaning of the Act or Code with respect                Under the proposal, advisers could not
                                                     these fiduciary standards are fully                     to the advice described in paragraph                   specifically direct investment
                                                     consistent with professional standards,                 (a)(1); or                                             recommendations to individual persons,
                                                                                                                (ii) Renders the advice pursuant to a               but then deny fiduciary responsibility
                                                     such as the Uniform Standards of
                                                                                                             written or verbal agreement,                           on the basis that they did not, in fact,
                                                     Professional Appraisal Practice
                                                                                                             arrangement or understanding that the                  consider the advice recipient’s
                                                     (USPAP).17
                                                                                                             advice is individualized to, or that such              individual needs or intend that the
                                                     (4) Recommendations of a Person To                      advice is specifically directed to, the                recipient base investment decisions on
                                                     Provide Investment Advice or                            advice recipient for consideration in                  their recommendations. Nor could they
                                                     Management Services                                     making investment or management                        continue the practice of advertising
                                                        The proposal would treat                             decisions with respect to securities or                advice or counseling that is one-on-one
                                                     recommendations on the selection of                     other property of the plan or IRA.                     or that a reasonable person would
                                                     investment managers or advisers as                         Under paragraph (a)(2)(i), advisers                 believe would be tailored to their
                                                     fiduciary investment advice. In the                     who claim fiduciary status under ERISA                 individual needs and then disclaim that
                                                     Department’s view, the current                          or the Code in providing advice would                  the recommendations are fiduciary
                                                     regulation already covers such advice.                  be taken at their word. They may not                   investment advice in boilerplate
                                                     The proposal simply revises the                         later argue that the advice was not                    language in the advertisement or in the
                                                     regulation’s text to remove any possible                fiduciary in nature. Nor may they rely                 paperwork provided to the client.
                                                     ambiguity. The Department believes that                 upon the carve-outs described in                          Like the 2010 Proposal, and unlike
                                                                                                             paragraph (b) on the scope of the                      the 1975 regulation, the new proposal
                                                        17 A number of commenters also pointed to such       definition of fiduciary investment                     does not require that advice be provided
                                                     professional standards as alternatives to fiduciary     advice.                                                on a regular basis. Investment advice
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                                                     treatment under ERISA. While the Department                The 2010 Proposal provided that                     that meets the requirements of the
                                                     believes that such professional standards are fully     investment recommendations provided                    proposal, even if provided only once,
                                                     consistent with the fiduciary duties, the rights,
                                                     remedies and sanctions under both ERISA and the
                                                                                                             by an investment adviser under the                     can be critical to important investment
                                                     Code importantly turn on fiduciary status, and          Advisers Act would, in the absence of                  decisions. If the adviser received a
                                                     advice on the value of an asset is often the most       a carve-out, automatically be treated as               direct or indirect fee in connection with
                                                     critical investment advice a plan receives. As a        investment advice. In response to                      its advice, the advice recipients should
                                                     result, treating appraisals as fiduciary advice
                                                     provides an additional layer of protection for
                                                                                                             comments, the new proposal drops this                  reasonably expect adherence to
                                                     consumers without conflicting with the duties of        provision. Thus, the proposal avoids                   fiduciary standards on the same terms
                                                     appraisers.                                             making such persons fiduciaries based                  as other retirement investors who get


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                                                                              Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                             21941

                                                     recommendations from the adviser on a                   in connection with an offer to enter into              plans, a person may rely on
                                                     more routine basis.                                     such a transaction or when the person                  representations from the independent
                                                                                                             providing the advice is acting as a                    plan fiduciary regarding the value of
                                                     C. Carve-Outs From the General
                                                                                                             representative, such as an agent, for the              employee benefit plan assets under
                                                     Definition
                                                                                                             plan’s counterparty. This carve-out is                 management). In that circumstance, the
                                                        The Department recognizes that in                    subject to the following conditions.                   adviser need not obtain written
                                                     many circumstances, plan fiduciaries,                      First, the person must provide advice               representations from its counterparty to
                                                     participants, beneficiaries, and IRA                    to an ERISA plan fiduciary who is                      avail itself of the carve-out, but must
                                                     owners may receive recommendations                      independent of such person and who                     fairly inform the independent plan
                                                     or appraisals that, notwithstanding the                 exercises authority or control respecting              fiduciary that the adviser is not
                                                     general definition set forth in paragraph               the management or disposition of the                   undertaking to provide impartial
                                                     (a) of the proposal, should not be treated              plan’s assets, with respect to an arm’s                investment advice, or to give advice in
                                                     as fiduciary investment advice.                         length sale, purchase, loan or bilateral               a fiduciary capacity; and cannot receive
                                                     Accordingly, paragraph (b) contains a                   contract between the plan and the                      a fee or other compensation directly
                                                     number of specific carve-outs from the                  counterparty, or with respect to a                     from the plan, or plan fiduciary, for the
                                                     scope of the general definition. The                    proposal to enter into such a sale,                    provision of investment advice in
                                                     carve-out at paragraph (b)(5) of the                    purchase, loan or bilateral contract.                  connection with the transaction. In that
                                                     proposal concerning financial reports                      Second, either of two alternative sets              circumstance, the adviser must also
                                                     and valuations was discussed above in                   of conditions must be met. Under                       reasonably believe that the independent
                                                     connection with appraisals. The carve-                  alternative one, prior to providing any                plan fiduciary has sufficient expertise to
                                                     out in paragraph (b)(5)(iii) covers                     recommendation with respect to the                     prudently evaluate the transaction.
                                                     communications to a plan, a plan                        transaction, such person:                                 The overall purpose of this carve-out
                                                     fiduciary, a plan participant or                           (1) Obtains a written representation                is to avoid imposing ERISA fiduciary
                                                     beneficiary, an IRA or IRA owner solely                 from the plan fiduciary that he/she is a               obligations on sales pitches that are part
                                                     for purposes of compliance with the                     fiduciary who exercises authority or                   of arm’s length transactions where
                                                     reporting and disclosure provisions                     control with respect to the management                 neither side assumes that the
                                                     under the Act, the Code, and the                        or disposition of the employee benefit                 counterparty to the plan is acting as an
                                                     regulations, forms and schedules issued                 plan’s assets (as described in section                 impartial trusted adviser, but the seller
                                                     thereunder, or any applicable reporting                 3(21)(A)(i) of the Act), that the employee             is making representations about the
                                                     or disclosure requirement under a                       benefit plan has 100 or more                           value and benefits of proposed deals.
                                                     Federal or state law, rule or regulation                participants covered under the plan,                   Under appropriate circumstances,
                                                     or self-regulatory organization rule or                 and that the fiduciary will not rely on                reflected in the conditions to this carve-
                                                     regulation. The carve-out in paragraph                  the person to act in the best interests of             out, these counterparties to the plan do
                                                     (b)(6) covers education. The other carve-               the plan, to provide impartial                         not suggest that they are an impartial
                                                     outs are limited to communications                      investment advice, or to give advice in                fiduciary and plans do not expect a
                                                     with plans and plan fiduciaries and do                  a fiduciary capacity;                                  relationship of undivided loyalty or
                                                     not cover communications to                                (2) fairly informs the plan fiduciary of            trust. Both sides of such transactions
                                                     participants, beneficiaries or IRA                      the existence and nature of the person’s               understand that they are acting at arm’s
                                                     owners. These more limited carve-outs                   financial interests in the transaction;                length, and neither party expects that
                                                     are described more fully below. In each                    (3) does not receive a fee or other                 recommendations will necessarily be
                                                     instance, the proposed carve-outs are for               compensation directly from the plan, or                based on the buyer’s best interests. In
                                                     communications that the Department                      plan fiduciary, for the provision of                   such a sales transaction, the buyer
                                                     believes Congress did not intend to                     investment advice in connection with                   understands that it is buying an
                                                     cover as fiduciary ‘‘investment advice’’                the transaction (this does not preclude                investment product, not advice about
                                                     and that parties would not ordinarily                   a person from receiving a fee or                       whether it is a good product, from a
                                                     view as communications characterized                    compensation for other services);                      seller who has opposing financial
                                                     by a relationship of trust or impartiality.                (4) knows or reasonably believes that               interests. The seller’s invitation to buy
                                                     None of the carve-outs apply where the                  the independent plan fiduciary has                     the product is understood as a sales
                                                     adviser represents or acknowledges that                 sufficient expertise to evaluate the                   pitch, not a recommendation. Also, a
                                                     it is acting as a fiduciary under ERISA                 transaction and to determine whether                   representative for the plan’s
                                                     with respect to the advice.                             the transaction is prudent and in the                  counterparty, such as a broker, in such
                                                                                                             best interest of the plan participants                 a transaction, would be able to use the
                                                     (1) Seller’s and Swap Carve-Outs                        (such person may rely on written                       carve-out if the conditions are met.
                                                     (a) The ‘‘Seller’s Carve-Out’’ 18                       representations from the plan or the                      Although the 2010 Proposal also had
                                                        Paragraph (b)(1)(i) of the proposed                  plan fiduciary to satisfy this condition).             a carve-out for sellers and other
                                                                                                                The second alternative applies if the               counterparties, the carve-out in the new
                                                     regulation provides a carve-out from the
                                                                                                             person knows or reasonably believes                    proposal is significantly different. The
                                                     general definition for incidental advice
                                                                                                             that the independent plan fiduciary has                changes are designed to ensure that the
                                                     provided in connection with an arm’s
                                                                                                             responsibility for managing at least $100              carve-out appropriately distinguishes
                                                     length sale, purchase, loan, or bilateral
                                                                                                             million in employee benefit plan assets                incidental advice as part of an arm’s
                                                     contract between an expert plan
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                                                                                                             (for purposes of this condition, when                  length transactions with no expectation
                                                     investor and the adviser. It also applies
                                                                                                             dealing with an individual employee                    of trust or acting in the customer’s best
                                                        18 Although the preamble uses the shorthand          benefit plan, a person may rely on the                 interest, from those instances of advice
                                                     expression ‘‘seller’s carve-out,’’ we note that the     information on the most recent Form                    where customers may be expecting
                                                     carve-out provided in paragraph (b)(1)(i) of the        5500 Annual Return/Report filed by the                 unbiased investment advice that is in
                                                     proposal is not limited to sales but rather would       plan to determine the value of plan                    their best interest. For example, the
                                                     apply to incidental advice provided in connection
                                                     with an arm’s length sale, purchase, loan, or
                                                                                                             assets, and, in the case of an                         seller’s carve-out is unavailable to an
                                                     bilateral contract between a plan investor with         independent fiduciary acting as an asset               adviser if the plan directly pays a fee for
                                                     financial expertise and an adviser.                     manager for multiple employee benefit                  investment advice. If a plan expressly


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

                                                     pays a fee for advice, the essence of the               put the interests of the investors they                comments on whether the proposed
                                                     relationship is advisory, and the statute               serve ahead of their own. The                          seller’s carve-out should be available for
                                                     clearly contemplates fiduciary status.                  Department has addressed legitimate                    advice given directly to plan
                                                     Thus, a service provider may not charge                 concerns about preserving existing fee                 participants, beneficiaries, and IRA
                                                     the plan a direct fee to act as an adviser,             practices and minimizing market                        owners. Further, the Department invites
                                                     and then disclaim responsibility as a                   disruptions through proposed                           comments on the scope of the seller’s
                                                     fiduciary adviser by asserting that he or               prohibited transaction exemptions                      carve-out and whether the plan size
                                                     she is merely an arm’s length                           detailed below, rather than through a                  limitation of 100 plan participants and
                                                     counterparty.                                           blanket carve-out from fiduciary status.               100 million dollar asset requirement in
                                                        Commenters on the 2010 Proposal                         Moreover, excluding retail investors                the proposal are appropriate conditions
                                                     differed on whether the carve-out                       from the seller’s carve-out is consistent              or whether other conditions would be
                                                     should apply to transactions involving                  with recent congressional action, the                  more appropriate proxies for identifying
                                                     plan participants, beneficiaries or IRA                 Pension Protection Act of 2006 (PPA).                  persons with sufficient investment-
                                                     owners. After carefully considering the                 Specifically, the PPA created a new                    related expertise to be included in a
                                                     issue and the public comments, the                      statutory exemption that allows                        seller’s carve-out.20 The Department is
                                                     Department does not believe such a                      fiduciaries giving investment advice to                also interested in whether existing and
                                                     carve-out can or should be crafted to                   individuals (pension plan participants,                proposed prohibited transaction
                                                     cover recommendations to retail                         beneficiaries and IRA owners) to receive               exemptions eliminate or mitigate the
                                                     investors, including small plans, IRA                   compensation from investment vehicles                  need for any seller’s carve-out.
                                                     owners and plan participants and                        that they recommend in certain
                                                                                                             circumstances. 29 U.S.C. 1108(b)(14); 26               (b) Swap and Security-Based Swap
                                                     beneficiaries. As a rule, investment                                                                           Transactions
                                                     recommendations to such retail                          U.S.C. 4975(d)(17). Recognizing the
                                                     customers do not fit the ‘‘arm’s length’’               risks presented when advisers receive                    Paragraph (b)(1)(ii) of the proposal
                                                     characteristics that the seller’s carve-out             fees from the investments they                         specifically addresses advice and other
                                                     is designed to preserve.                                recommend to individuals, Congress                     communications by counterparties in
                                                     Recommendations to retail investors                     placed important constraints on such                   connection with certain swap or
                                                     and small plan providers are routinely                  advice arrangements that are calculated                security-based swap transactions under
                                                     presented as advice, consulting, or                     to limit the potential for abuse and self-             the Commodity Exchange Act or the
                                                     financial planning services. In the                     dealing, including requirements for fee-               Securities Exchange Act. This broad
                                                                                                             leveling or the use of independently                   class of financial transactions is defined
                                                     securities markets, brokers’ suitability
                                                                                                             certified computer models. The                         and regulated under amendments to the
                                                     obligations generally require a
                                                                                                             Department has issued regulations                      Commodity Exchange Act and the
                                                     significant degree of individualization.
                                                                                                             implementing this provision at 29 CFR                  Securities Exchange Act by the Dodd-
                                                     Research has shown that disclaimers are
                                                                                                             2550.408g–1 and 408g–2. Including                      Frank Act. Section 4s(h) of the
                                                     ineffective in alerting retail investors to
                                                                                                             retail investors in the seller’s carve-out             Commodity Exchange Act (7 U.S.C.
                                                     the potential costs imposed by conflicts
                                                                                                             would undermine the protections for                    6s(h)), and section 15F of the Securities
                                                     of interest, or the fact that advice is not
                                                     necessarily in their best interest, and                 retail investors that Congress required
                                                     may even exacerbate these costs.19 Most                 under this PPA provision.                                 20 The proposed thresholds of 100 or more

                                                                                                                Although the seller’s carve-out may                 participants and assets of $100 million are
                                                     retail investors and many small plan                                                                           consistent with thresholds used for similar
                                                                                                             not be available in the retail market, the             purposes under existing rules and practices. For
                                                     sponsors are not financial experts, are
                                                                                                             proposal is intended to ensure that                    example, administrators of plans with 100 or more
                                                     unaware of the magnitude and impact of                  small plan fiduciaries, plan participants,             participants, unlike smaller plans, generally are
                                                     conflicts of interest, and are unable                   beneficiaries and IRA owners would be                  required to report to the Department details on the
                                                     effectively to assess the quality of the                able to obtain essential information
                                                                                                                                                                    identity, function, and compensation of their
                                                     advice they receive. IRA owners are                                                                            services providers; file a schedule of assets held for
                                                                                                             regarding important decisions they                     investments; and submit audit reports to the
                                                     especially at risk because they lack the                make regarding their investments                       Department. Smaller plans are not subject to these
                                                     protection of having a menu of                          without the providers of that                          same filing requirements that are imposed on large
                                                     investment options chosen by a plan                     information crossing the line into
                                                                                                                                                                    plans. The vast majority of plans with fewer than
                                                     fiduciary who is charged to protect the                                                                        100 participants have 10 or less participants. They
                                                                                                             fiduciary status. Under the platform                   are much more similar to individual retail investors
                                                     interests of the IRA owner. Similarly,                  provider carve-out under paragraph                     than to large financially sophisticated institutional
                                                     small plan sponsors are typically                       (b)(3), platform providers (i.e., persons              investors, who employ lawyers and have the time
                                                     experts in the day-to-day business of                                                                          and expertise to scrutinize advice they receive for
                                                                                                             that provide access to securities or other             bias. Similarly, Congress established a $100 million
                                                     running an operating company, not in                    property through a platform or similar                 asset threshold in enacting the PPA statutory cross-
                                                     managing financial investments for                      mechanism) and persons that help plan                  trading exemption under ERISA section 408(b)(19).
                                                     others. In this retail market, a seller’s               fiduciaries select or monitor investment               In the transactions covered by 408(b)(19), an
                                                     carve-out would run the risk of creating                                                                       investment manager has discretion with respect to
                                                                                                             alternatives for their plans can perform               separate client accounts that are on opposite sides
                                                     a loophole that would result in the rule                those services without incurring                       of the trade. The cross trade can create efficiencies
                                                     failing to improve consumer protections                 fiduciary status. Similarly, under the                 for both clients, but it also gives rise to a prohibited
                                                     by permitting the same type of                          investment education carve-out of                      transaction under ERISA § 406(b)(2) because the
                                                     boilerplate disclaimers that some                                                                              adviser or manager is ‘‘representing’’ both sides of
                                                                                                             paragraph (b)(6), general plan                         the transaction and, therefore, has a conflict of
                                                     advisers now use to avoid fiduciary
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                                                                                                             information, financial, investment and                 interest. The exemption generally allows an
                                                     status under the current ‘‘five-part test’’             retirement information, and information                investment manager to effect cash purchases and
                                                     regulation. Persons making investment                   and education regarding asset allocation               sales of securities for which market quotations are
                                                     recommendations should be required to                                                                          readily available between large sophisticated plans
                                                                                                             models would all be available to a plan,               with at least $100 million in assets and another
                                                                                                             plan fiduciary, participant, beneficiary               account under management by the investment
                                                        19 Loewenstein, George, Daylian Cain, Sunita Sah,
                                                                                                             or IRA owner and would not constitute                  manager, subject to certain conditions. In this
                                                     The Limits of Transparence: Pitfalls and Potential                                                             context, the $100 million threshold serves as a
                                                     of Disclosing Conflicts of Interest, American
                                                                                                             the provision of investment advice,                    proxy for identifying institutional fiduciaries that
                                                     Economic Review: Papers and Proceedings 101, no.        irrespective of who receives that                      can be expected to have the expertise to protect
                                                     3 (2011).                                               information. The Department invites                    their own interests in the conflicted transaction.



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                                                                              Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                             21943

                                                     Exchange Act of 1934 (15 U.S.C. 78o–                    under ERISA. Commenters also argued                    persons would not act as investment
                                                     10(h) establishes similar business                      that their obligations under the business              advice fiduciaries simply by marketing
                                                     conduct standards for dealers and major                 conduct standards could effectively                    or making available such investment
                                                     participants in swaps or security-based                 preclude them from relying on the                      vehicles, without regard to the
                                                     swaps. Special rules apply for                          carve-out for counterparties in the 2010               individualized needs of the plan or its
                                                     transactions involving ‘‘special                        Proposal. Although the Department does                 participants and beneficiaries, as long as
                                                     entities,’’ a term that includes employee               not agree that the carve-out in the 2010               they disclose in writing that they are not
                                                     benefit plans under ERISA, but not IRAs                 Proposal would have been unavailable                   undertaking to provide impartial
                                                     and other non-ERISA plans.                              to plan’s swap counterparty (see letter                investment advice or to give advice in
                                                        In outline, paragraph (b)(1)(ii) of the              dated April 28, 2011, to CFTC Chairman                 a fiduciary capacity.
                                                     proposal would allow swap dealers,                      Gary Gensler from EBSA’s Assistant                        Similarly, a separate provision at
                                                     security-based swap dealers, major swap                 Secretary Phyllis Borzi), the separate                 paragraph (b)(4) carves out certain
                                                     participants and security-based major                   proposed carve-out for swap and                        common activities that platform
                                                     swap participants who make                              security-based swap transactions in the                providers may carry out to assist plan
                                                     recommendations to plans to avoid                       proposal should avoid any                              fiduciaries in selecting and monitoring
                                                     becoming ERISA investment advice                        uncertainty.21 The Department will                     the investment alternatives that they
                                                     fiduciaries when acting as                              continue to coordinate its efforts with                make available to plan participants.
                                                     counterparties to a swap or security-                   staff of the SEC and CFTC to ensure that               Under paragraph (b)(4), merely
                                                     based swap transaction. Under the swap                  any final regulation is consistent with                identifying offered investment
                                                     carve out, if the person providing                      the agencies’ work in connection with                  alternatives meeting objective criteria
                                                     recommendations is a swap dealer or                     the Dodd-Frank Act’s business conduct                  specified by the plan fiduciary or
                                                     security-based swap dealer, it must not                 standards.                                             providing objective financial data
                                                     be acting as an adviser to the plan,                                                                           regarding available alternatives to the
                                                     within the meaning of the applicable                    (2) Employees of the Plan Sponsor                      plan fiduciary would not cause a
                                                     business conduct standards regulations                     The proposal at paragraph (b)(2)                    platform provider to be a fiduciary
                                                     of the CFTC or the SEC. In addition,                    provides that employees of a plan                      investment adviser. These two carve-
                                                     before providing any recommendations                    sponsor of an ERISA plan would not be                  outs are clarifying modifications to the
                                                     with respect to the transaction, the                    treated as investment advice fiduciaries               corresponding provisions of the 2010
                                                     person providing recommendations                        with respect to advice they provide to                 Proposal. They address certain common
                                                     must obtain a written representation                    the fiduciaries of the sponsor’s plan as               practices that have developed with the
                                                     from the independent plan fiduciary,                    long as they receive no compensation                   growth of participant-directed
                                                     that the fiduciary will not rely on                     for the advice beyond their normal                     individual account plans and recognize
                                                     recommendations provided by the                         compensation as employees of the plan                  circumstances where the platform
                                                     person.                                                 sponsor. This carve-out from the scope                 provider and the plan fiduciary clearly
                                                        Under the Commodity Exchange Act,                    of the fiduciary investment advice                     understand that the provider has
                                                     swap dealers or major swap participants                 definition recognizes that internal                    financial or other relationships with the
                                                     that act as counterparties to ERISA                     employees, such as members of a                        offered investments and is not
                                                     plans, must have a reasonable basis to                  company’s human resources                              purporting to provide impartial
                                                     believe that the plans have independent                 department, routinely develop reports                  investment advice. It also
                                                     representatives who are fiduciaries                     and recommendations for investment                     accommodates the fact that platform
                                                     under ERISA. 7 U.S.C. 6s(h)(5). Similar                 committees and other named fiduciaries                 providers often provide general
                                                     requirements apply for security-based                   of the sponsors’ plans, without acting as              financial information that falls short of
                                                     swap transactions. 15 U.S.C 78o–                        paid fiduciary advisers. The carve-out                 constituting actual investment advice or
                                                     10(h)(4) and (5). The CFTC has issued                   responds to and addresses the concerns                 recommendations, such as information
                                                     a final rule to implement these                         of commenters who said that these                      on the historic performance of asset
                                                     requirements and the SEC has issued a                   personnel should not be treated as                     classes and of the investments available
                                                     proposed rule that would cover                          fiduciaries because their advice is                    through the provider. The carve-outs
                                                     security-based swaps. 17 CFR 23.400 to                  largely incidental to their duties on                  also reflect the Department’s agreement
                                                     23.451 (2012).                                          behalf of the plan sponsor and they                    with commenters that a platform
                                                        Paragraph (b)(1)(ii) reflects the                    receive no compensation for these                      provider who merely identifies
                                                     Department’s coordination of its efforts                advice-related functions.                              investment alternatives using objective
                                                     with staff of the SEC and CFTC, and is                                                                         third-party criteria (e.g., expense ratios,
                                                     intended to provide a clear road-map for                (3) Platform Providers/Selection and
                                                                                                                                                                    fund size, or asset type specified by the
                                                     swap counterparties to avoid ERISA                      Monitoring Assistance
                                                                                                                                                                    plan fiduciary) to assist in selecting and
                                                     fiduciary status in arm’s length                           The carve-out at paragraph (b)(3) of                monitoring investment alternatives
                                                     transactions with plans. The provision                  the proposal is directed to service                    should not be considered to be
                                                     addresses commenters’ concerns that                     providers, such as recordkeepers and                   rendering investment advice.
                                                     the conduct required for compliance                     third party administrators, that offer a                  While recognizing the utility of the
                                                     with the Dodd-Frank Act’s business                      ‘‘platform’’ or selection of investment                provisions in paragraphs (b)(3) and
                                                     conduct standards could constitute                      vehicles to participant-directed                       (b)(4) for the effective and efficient
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                                                     fiduciary investment advice under                       individual account plans under ERISA.                  operation of plans by plan sponsors,
                                                     ERISA even in connection with arm’s                     Under the terms of the carve-out, the                  plan fiduciaries and plan service
                                                     length transactions with plans that are                 plan fiduciaries must choose the                       providers, the Department reiterates its
                                                     separately represented by independent                   specific investment alternatives that                  longstanding view, recently codified in
                                                     fiduciaries who are not looking to their                will be made available to participants                 29 CFR 2550.404a–5(f) and 2550.404c–
                                                     counterparties for disinterested advice.                for investing their individual accounts.               1(d)(2)(iv) (2010), that a fiduciary is
                                                     If that were the case, swaps and                        The carve-out merely makes clear that                  always responsible for prudently
                                                     security-based swaps with plans would                                                                          selecting and monitoring providers of
                                                     often constitute prohibited transactions                  21 http://www.dol.gov/ebsa/pdf/cftc20110428.pdf.     services to the plan or designated


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

                                                     investment alternatives offered under                   operative text, but with the important                 distinction between non-fiduciary
                                                     the plan.                                               exceptions explained below. Paragraph                  education and fiduciary advice applies
                                                        Several commenters also asked the                    (b)(6) of the proposed regulation, if                  equally to information provided to plan
                                                     Department to clarify that the platform                 finalized, would supersede IB 96–1.                    fiduciaries as well as information
                                                     provider carve-out is available in the                  Consistent with IB 96–1, paragraph                     provided to plan participants and
                                                     403(b) plan marketplace. In the                         (b)(6) makes clear that furnishing or                  beneficiaries and IRA owners, and that
                                                     Department’s view, a 403(b) plan that is                making available the specified                         it applies equally to participant-directed
                                                     subject to Title I of ERISA would be an                 categories of information and materials                plans and other plans. In addition, the
                                                     individual account plan within the                      to a plan, plan fiduciary, participant,                provision applies without regard to
                                                     meaning of ERISA section 3(34) of the                   beneficiary or IRA owner will not                      whether the information is provided by
                                                     Act for purposes of the proposed                        constitute the rendering of investment                 a plan sponsor, fiduciary, or service
                                                     regulation, so the platform provider                    advice, irrespective of who provides the               provider.
                                                     carve-out would be available with                       information (e.g., plan sponsor,                          Based on public input received in
                                                     respect to such plans.                                  fiduciary or service provider), the                    connection with its joint examination of
                                                        Other commenters asked that the                      frequency with which the information is                lifetime income issues with the
                                                     platform provider provision be generally                shared, the form in which the                          Department of the Treasury, the
                                                     extended to apply to IRAs. In the IRA                   information and materials are provided                 Department is persuaded that additional
                                                     context, however, there typically is no                 (e.g., on an individual or group basis, in             guidance may help improve retirement
                                                     separate independent ‘‘plan fiduciary’’                 writing or orally, via a call center, or by            security by facilitating the provision of
                                                     who interacts with the platform                         way of video or computer software), or                 information and education relating to
                                                     provider to protect the interests of the                whether an identified category of                      retirement needs that extend beyond a
                                                     account owners. As a result, it is much                 information and materials is furnished                 participant’s or beneficiary’s date of
                                                     more difficult to conclude that the                     or made available alone or in                          retirement. Accordingly, paragraph
                                                     transaction is truly arm’s length or to                 combination with other categories of                   (b)(6) of the proposal includes specific
                                                     draw a bright line between fiduciary                    investment or retirement information                   language to make clear that the
                                                     and non-fiduciary communications on                     and materials identified in paragraph                  provision of certain general information
                                                     investment options. Consequently, the                   (b)(6), or the type of plan or IRA                     that helps an individual assess and
                                                     proposed regulation declines to extend                  involved. As a departure from IB 96–1,                 understand retirement income needs
                                                     application of this carve-out to IRAs and               a new condition of the carve-out for                   past retirement and associated risks
                                                     other non-ERISA plans. As the                           investment education is that the                       (e.g., longevity and inflation risk), or
                                                     Department continues its work on this                   information and materials not include                  explains general methods for the
                                                     regulatory project, however, it requests                advice or recommendations as to                        individual to manage those risks both
                                                     specific comment as to the types of                     specific investment products, specific                 within and outside the plan, would not
                                                     platforms and options that may be                       investment managers, or the value of                   result in fiduciary status under the
                                                     offered to IRA owners, how they may be                  particular securities or other property.               proposal.22
                                                     similar to or different from platforms                  The paragraph reflects the Department’s
                                                     offered in connection with participant-                 view that the statutory reference to                      22 Although the proposal would formally remove
                                                     directed individual account plans, and                  ‘‘investment advice’’ is not meant to                  IB 96–1 from the CFR, the Department notes that
                                                     whether it would be appropriate for                     encompass general investment                           paragraph (e) of IB 96–1 provides generalized
                                                     service providers not to be treated as                  information and educational materials,                 guidance under section 405 and 404(c) of ERISA
                                                                                                                                                                    with respect to the selection by employers and plan
                                                     fiduciaries under this carve-out when                   but rather is targeted at more specific                fiduciaries of investment educators and the lack of
                                                     marketing such platforms to IRA                         recommendations and advice on the                      responsibility of employers and fiduciaries with
                                                     owners. We also invite comments,                        investment of plan and IRA assets.                     respect to investment educators selected by
                                                     alternatively, on whether the scope of                     Similar to IB 96–1, paragraph (b)(6) of             participants. Specifically, paragraph (e) states:
                                                     this carve-out should be limited to large               the proposed regulation divides                           As with any designation of a service provider to
                                                                                                                                                                    a plan, the designation of a person(s) to provide
                                                     plans, similar to the scope of the                      investment education information and                   investment educational services or investment
                                                     ‘‘Seller’s Carve-out’’ discussed above.                 materials into four general categories: (i)            advice to plan participants and beneficiaries is an
                                                        As a corollary to the proposal’s                     Plan information; (ii) general financial,              exercise of discretionary authority or control with
                                                     restriction of the applicability of the                 investment and retirement information;                 respect to management of the plan; therefore,
                                                                                                                                                                    persons making the designation must act prudently
                                                     platform provider carve-out to only                     (iii) asset allocation models; and (iv)                and solely in the interest of the plan participants
                                                     ERISA plans, the selection and                          interactive investment materials. The                  and beneficiaries, both in making the designation(s)
                                                     monitoring assistance carve-out is                      proposed regulation in paragraph                       and in continuing such designation(s). See ERISA
                                                     similarly not available in the IRA and                  (b)(6)(v) also adopts the provision from               sections 3(21)(A)(i) and 404(a), 29 U.S.C. 1002
                                                                                                                                                                    (21)(A)(i) and 1104(a). In addition, the designation
                                                     other non-ERISA plans context.                          IB 96–1 stating that there may be other                of an investment advisor to serve as a fiduciary may
                                                     Commenters on the platform provider                     examples of information, materials and                 give rise to co-fiduciary liability if the person
                                                     restriction are encouraged to offer their               educational services which, if                         making and continuing such designation in doing
                                                     views on the effect of this restriction in              furnished, would not constitute                        so fails to act prudently and solely in the interest
                                                                                                                                                                    of plan participants and beneficiaries; or knowingly
                                                     the non-ERISA plan marketplace.                         investment advice or recommendations                   participates in, conceals or fails to make reasonable
                                                                                                             within the meaning of the proposed                     efforts to correct a known breach by the investment
                                                     (4) Investment Education
                                                                                                             regulation and that no inference should                advisor. See ERISA section 405(a), 29 U.S.C.
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                                                       Paragraph (b)(6) of the proposed                      be drawn regarding materials or                        1105(a). The Department notes, however, that, in
                                                     regulation is similar to a carve-out in the             information which are not specifically                 the context of an ERISA section 404(c) plan, neither
                                                                                                                                                                    the designation of a person to provide education
                                                     2010 Proposal for the provision of                      included in paragraph (b)(6)(i) through                nor the designation of a fiduciary to provide
                                                     investment education information and                    (iv).                                                  investment advice to participants and beneficiaries
                                                     materials within the meaning of an                         Although paragraph (b)(6)                           would, in itself, give rise to fiduciary liability for
                                                     earlier Interpretive Bulletin issued by                 incorporates most of the relevant text of              loss, or with respect to any breach of part 4 of title
                                                                                                                                                                    I of ERISA, that is the direct and necessary result
                                                     the Department in 1996. 29 CFR                          IB 96–1, there are important changes.                  of a participant’s or beneficiary’s exercise of
                                                     2509.96–1 (IB 96–1). Paragraph (b)(6)                   One change from IB 96–1 is that                        independent control. 29 CFR 2550.404c–1(d). The
                                                     incorporates much of IB 96–1’s                          paragraph (b)(6) makes clear that the                  Department also notes that a plan sponsor or



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                                                                               Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                            21945

                                                        As noted, another change is that the                  recommendations, regardless of caveats.               but is not limited to, brokerage fees,
                                                     Department is not incorporating the                      Accordingly, paragraphs (b)(6)(iii) and               mutual fund sales, and insurance sales
                                                     provisions at paragraph (d)(3)(iii) and                  (iv) relating to asset allocation models              commissions.
                                                     (4)(iv) of IB 96–1. Those provisions of IB               and interactive investment materials                     Paragraph (c)(3) of the 2010 Proposal
                                                     96–1 permit the use of asset allocation                  preclude the identification of specific               used similar language, but it also
                                                     models that refer to specific investment                 investment alternatives available under               provided that the term included fees
                                                     products available under the plan or                     the plan or IRA in order for the                      and compensation based on multiple
                                                     IRA, as long as those references to                      materials described in those paragraphs               transactions involving different parties.
                                                     specific products are accompanied by a                   to be considered investment education.                Commenters found this provision
                                                     statement that other investment                          Thus, for example, we would not treat                 confusing and it does not appear in the
                                                     alternatives having similar risk and                     an asset allocation model as mere                     new proposal. The provision was
                                                     return characteristics may be available.                 education if it called for a certain                  intended to confirm the Department’s
                                                     Based on its experience with the IB 96–                  percentage of the investor’s assets to be             position that fees charged on a so-called
                                                     1 since publication, as well as views                    invested in large cap mutual funds, and               ‘‘omnibus’’ basis (e.g., compensation
                                                     expressed by commenters to the 2010                      accompanied that proposed allocation                  paid based on business placed or
                                                     Proposal, the Department now believes                    with the identity of a specific fund or               retained that includes plan or IRA
                                                     that, even when accompanied by a                         provider. In that circumstance, the                   business) would constitute fees and
                                                     statement as to the availability of other                adviser has made a specific investment                compensation for purposes of the rule.
                                                     investment alternatives, these types of                  recommendation that should be treated                    Direct or indirect compensation also
                                                     specific asset allocations that identify                 as fiduciary advice and adhere to                     includes any compensation received by
                                                     specific investment alternatives                         fiduciary standards. Further, materials               affiliates of the adviser that is connected
                                                     function as tailored, individualized                     that identify specific plan investment                to the transaction in which the advice
                                                     investment recommendations, and can                      alternatives also appear to fall within               was provided. For example, when a
                                                     effectively steer recipients to particular               the definition of ‘‘recommendation’’ in               fiduciary adviser recommends that a
                                                     investments, but without adequate                        paragraph (f)(1) of the proposal, and                 participant or IRA owner invest in a
                                                     protections against potential abuse.23                   could result in fiduciary status on the               mutual fund, it is not unusual for an
                                                        In particular, the Department agrees                  part of a provider if the other provisions            affiliated adviser to the mutual fund to
                                                     with those commenters to the 2010                        of the proposal are met. The Department               receive a fee. The receipt by the affiliate
                                                     Proposal who argued that cautionary                      believes that effective and useful asset              of advisory fees from the mutual fund is
                                                     disclosures to participants,                             allocation education materials can be                 indirect compensation in connection
                                                     beneficiaries, and IRA owners may have                   prepared and delivered to participants                with the rendering of investment advice
                                                     limited effectiveness in alerting them to                and IRA owners without including                      to the participant.
                                                     the merit and wisdom of evaluating                       specific investment products and                         Some commenters additionally
                                                     investment alternatives not used in the                  alternatives available under the plan.                suggested that call center employees
                                                     model. In practice, asset allocation                     The Department understands that not                   should not be treated as investment
                                                     models concerning hypothetical                           incorporating the provisions of IB 96–1               advice fiduciaries where they are not
                                                     individuals, and interactive materials                   at paragraph (d)(3)(iii) and (4)(iv) into             specifically paid to provide investment
                                                     which arrive at specific investment                      the proposal represents a significant                 advice and their compensation does not
                                                     products and plan alternatives, can be                   change in the information and materials               change based on their communications
                                                     indistinguishable to the average                         that may constitute investment                        with participants and beneficiaries. The
                                                     retirement investor from individualized                  education. Accordingly, the Department                carve-out from the fiduciary investment
                                                                                                              invites comments on whether this                      advice definition for investment
                                                     fiduciary would have no fiduciary responsibility or      change is appropriate.24                              education provides guidelines under
                                                     liability with respect to the actions of a third party                                                         which call center staff and other
                                                     selected by a participant or beneficiary to provide      D. Fee or Other Compensation                          employees providing similar investor
                                                     education or investment advice where the plan
                                                     sponsor or fiduciary neither selects nor endorses           A necessary element of fiduciary                   assistance services may avoid fiduciary
                                                     the educator or advisor, nor otherwise makes             status under section 3(21)(A)(ii) of                  status. However, commenters stated that
                                                     arrangements with the educator or advisor to             ERISA is that the investment advice be                a specific carve-out for such call centers
                                                     provide such services.                                   for a ‘‘fee or other compensation, direct             would provide a greater level of
                                                        Unlike the remainder of the IB, this text does not
                                                     belong in the investment advice regulation. Also,
                                                                                                              or indirect.’’ Consistent with the statute,           certainty so as not to inhibit mutual
                                                     the principles articulated in paragraph (e) are          paragraph (f)(6) of the proposed                      funds, insurance companies, broker-
                                                     generally understood and accepted such that              regulation defines this phrase to mean                dealers, recordkeepers and other
                                                     retaining the paragraph as a stand-alone IB does not     any fee or compensation for the advice                financial service providers from
                                                     appear necessary or appropriate.
                                                        23 When the Department issued IB 96–1, it
                                                                                                              received by the advice provider (or by                continuing to make such assistance
                                                     expressed concern that service providers could           an affiliate) from any source and any fee             available to participants and
                                                     effectively steer participants to a specific             or compensation incident to the                       beneficiaries in 401(k) and similar
                                                     investment alternative by identifying only one           transaction in which the investment                   participant-directed plans. In the
                                                     particular fund available under the plan in              advice has been rendered or will be                   Department’s view, such a carve-out
                                                     connection with an asset allocation model. As a
                                                     result, where it was possible to do so, the              rendered. It further provides that the                would be inappropriate. The fiduciary
                                                     Department encouraged service providers to               term ‘‘fee or compensation’’ includes,                definition is intended to apply broadly
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                                                     identify other investment alternatives within an                                                               to all persons who engage in the
                                                     asset class as part of a model. Ultimately, however,       24 As indicated earlier in this Notice, the         activities set forth in the regulation,
                                                     when asset allocation models and interactive             Department believes that FINRA’s guidance in this
                                                     investment materials identified any specific
                                                                                                                                                                    regardless of job title or position, or
                                                                                                              area may provide useful standards and guideposts
                                                     investment alternative available under the plan, the     for distinguishing investment education from          whether the advice is rendered in
                                                     Department required an accompanying statement            investment advice under ERISA. The Department         person, in writing or by phone. If, in the
                                                     both indicating that other investment alternatives       specifically solicits comments on the discussion in   performance of their jobs, call center
                                                     having similar risk and return characteristics may       FINRA’s ‘‘Frequently Asked Questions, FINRA Rule
                                                     be available under the plan and identifying where        2111 (Suitability)’’ of the term ‘‘recommendation’’
                                                                                                                                                                    employees make specific investment
                                                     information on those investment alternatives could       in the context of asset allocation models and         recommendations to plan participants
                                                     be obtained. 61 FR 29586, 29587 (June 11, 1996).         general investment strategies.                        or IRA owners under the circumstances


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                                                     21946                    Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules

                                                     described in the proposal, it is                        3(21)(A)(ii) of ERISA and the                          fiduciary, irrespective of labels.
                                                     appropriate to treat them, and possibly                 definition’s counterpart in section                    Moreover, the statutory definition of
                                                     their employers, as fiduciaries unless                  4975(e)(3)(B) of the Code. As a result, it             fiduciary advice is identical under both
                                                     they meet the conditions of one of the                  applies to persons who give investment                 ERISA and the Code. There is no
                                                     carve-outs set forth above.                             advice to IRAs. In this respect, the new               indication that the definition should
                                                                                                             proposal is the same as the 2010                       vary between plans and IRAs.
                                                     E. Coverage of IRAs and Other Non-                      Proposal.                                                 In light of this statutory framework,
                                                     ERISA Plans                                                Many comments on the 2010 Proposal                  the Department does not believe it
                                                        Certain provisions of Title I of ERISA,              concerned its impact on IRAs and                       would be appropriate to carve out a
                                                     29 U.S.C. 1001–1108, such as those                      questioned whether the Department had                  special rule for IRAs, or for brokers or
                                                     relating to participation, benefit accrual,             adequately considered possible negative                others who make specific investment
                                                     and prohibited transactions also appear                 impacts. Some commenters were                          recommendations to IRA owners or to
                                                     in the Code. This parallel structure                    especially concerned that application of               other participants in non-ERISA plans
                                                     ensures that the relevant provisions                    the new rule could disrupt existing                    for direct or indirect fees. When
                                                     apply to all tax-qualified plans,                       brokerage arrangements that they                       Congress enacted ERISA and the
                                                     including IRAs. With regard to                          believe are beneficial to customers. In                corresponding Code provisions, it chose
                                                     prohibited transactions, the Title I                    particular, brokers often receive revenue              to impose fiduciary status on persons
                                                     provisions generally authorize recovery                 sharing, 12b–1 fees, and other                         who provide investment advice to
                                                     of losses from, and imposition of civil                 compensation from the parties whose                    plans, participants, beneficiaries and
                                                     penalties on, the responsible plan                      investment products they recommend. If                 IRA owners, and to specifically prohibit
                                                     fiduciaries, while the Code provisions                  the brokers were treated as fiduciaries,               a wide variety of transactions in which
                                                     impose excise taxes on persons engaging                 the receipt of such fees could violate the             the fiduciary has financial interests that
                                                     in the prohibited transactions. The                     Code’s prohibited transaction rules,                   potentially conflict with the fiduciary’s
                                                     definition of fiduciary with respect to a               unless eligible for a prohibited                       obligation to the plan or IRA. It did not
                                                     plan is the same in section 4975(e)(3)(B)               transaction exemption. According to                    provide a special carve-out for brokers
                                                     of the IRC as the definition in section                 these commenters, the disruption of                    or IRAs, and the Department does not
                                                     3(21)(A)(ii) of ERISA, 29 U.S.C.                        such current fee arrangements could                    believe it would be appropriate to write
                                                     1002(21)(A)(ii), and the Department’s                   result in a reduced level of assistance to             such a carve-out into the regulation
                                                     1975 regulation defining fiduciary                      investors, higher up-front fees, and less              implementing the statutory definition.
                                                     investment advice is virtually identical                investment advice, particularly to                        Indeed, brokers who give investment
                                                     to regulations that define the term                     investors with small accounts. In                      advice to IRA owners or plan
                                                     ‘‘fiduciary’’ under the Code. 26 CFR                    addition, some commenters expressed                    participants, and who otherwise meet
                                                     54.4975–9(c) (1975).                                    skepticism that the imposition of                      the terms of the current five-part test,
                                                        To rationalize the administration and                fiduciary standards would result in                    are already fiduciaries under the
                                                     interpretation of dual provisions under                 improved advice and questioned the                     existing fiduciary regulation. If, for
                                                     ERISA and the Code, Reorganization                      view that current compensation                         example, a broker regularly advises an
                                                     Plan No. 4 of 1978 divided the                          arrangements could cause sub-optimal                   individual IRA owner on specific
                                                     interpretive and rulemaking authority                   advice. Additionally, commenters                       investments, the IRA owner routinely
                                                     for these provisions between the                        stressed the need for coordination                     follows the recommendations, and both
                                                     Secretaries of Labor and of the Treasury,               between the Department and other                       parties understand that the IRA owner
                                                     so that, in general, the agency with                    regulatory agencies, such as the SEC,                  relies upon the broker’s advice, the
                                                     responsibility for a given provision of                 CFTC, and Treasury.                                    broker is almost certainly a fiduciary. In
                                                     Title I of ERISA would also have                           As discussed above, to better align the             such circumstances, the broker is
                                                     responsibility for the corresponding                    regulatory definition of fiduciary with                already subject to the excise tax on
                                                     provision in the Code. Among the                        the statutory provisions and underlying                prohibited transactions if he or she
                                                     sections transferred to the Department                  Congressional goals, the Department is                 receives fees from a third party in
                                                     were the prohibited transaction                         proposing a definition of a fiduciary                  connection with recommendations to
                                                     provisions and the definition of a                      investment advice that would                           invest IRA assets in the third party’s
                                                     fiduciary in both Title I of ERISA and                  encompass investment                                   investment products, unless the broker
                                                     in the Code. ERISA’s prohibited                         recommendations that are                               satisfies the conditions of a prohibited
                                                     transaction rules, 29 U.S.C. 1106–1108,                 individualized or specifically directed                transaction exemption that covers the
                                                     apply to ERISA-covered plans, and the                   to plans, participants, beneficiaries or               particular fees. Indeed, broker-dealers
                                                     Code’s corresponding prohibited                         IRA owners, if the adviser receives a                  today can provide fiduciary investment
                                                     transaction rules, 26 U.S.C. 4975(c),                   direct or indirect fee. Neither the                    advice by complying with prohibited
                                                     apply both to ERISA-covered pension                     relevant statutory provisions, nor the                 transaction exemptions that permit the
                                                     plans that are tax-qualified pension                    current regulation, draw a distinction                 receipt of commission-based
                                                     plans, as well as other tax-advantaged                  between brokers and other advisers or                  compensation for the sale of mutual
                                                     arrangements, such as IRAs, that are not                carve brokers out of the scope of the                  funds and other securities. Moreover,
                                                     subject to the fiduciary responsibility                 fiduciary provisions of ERISA and of the               both ERISA and the Code were amended
                                                                                                             Code. The relevant statutory provisions,               as part of the PPA to include a new
                                                     and prohibited transaction rules in
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                                                                                                             and accordingly the proposed                           prohibited transaction exemption that
                                                     ERISA.25
                                                        Given this statutory structure, and the              regulation, establish a functional test                applies to investment advice in both the
                                                     dual nature of the 1975 regulation, the                 based on the service provider’s actions,               plan and IRA context. The PPA
                                                     proposal would apply to both the                        rather than the provider’s title (e.g.,                exemption clearly reflects the
                                                     definition of ‘‘fiduciary’’ in section                  broker or registered investment adviser).              longstanding concern under ERISA and
                                                                                                             If one engages in specified activities,                the Code about the dangers posed by
                                                       25 The Secretary of Labor also was transferred        such as the provision of investment                    conflicts of interest, and the need for
                                                     authority to grant administrative exemptions from       advice for a direct or indirect fee, the               appropriate safeguards in both the plan
                                                     the prohibited transaction provisions of the Code.      person engaging in those activities is a               and IRA markets. Under the terms of the


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

                                                     exemption, the investment                               the benefit of an independent plan                     regarding other non-ERISA plans such
                                                     recommendations must either result                      fiduciary to represent their interests in              as Health Savings Accounts (HSAs),
                                                     from the application of an unbiased and                 selecting a menu of investment options                 Archer Medical Savings Accounts and
                                                     independently certified computer                        or structuring advice arrangements.                    Coverdell Education Savings Accounts
                                                     program or the fiduciary’s fees must be                 They cannot sue fiduciary advisers                     were less prolific. The Department notes
                                                     level (i.e., the fiduciary’s compensation               under ERISA for losses arising from                    that these accounts are given tax
                                                     cannot vary based on his or her                         fiduciary breaches, nor can the                        preferences as are IRAs. Further, some
                                                     particular investment                                   Department sue on their behalf.                        of the accounts, such as HSAs, can be
                                                     recommendations).                                       Compared to participants with ERISA                    used as long term savings accounts for
                                                        Moreover, as discussed in the                        plan accounts, IRA owners often have                   retiree health care expenses. These
                                                     regulatory impact analysis below, there                 larger account balances and are more                   types of accounts also are expressly
                                                     is substantial evidence to support the                  likely to be elderly. Thus, limiting the               defined by Code section 4975(e)(1) as
                                                     statutory concern about conflicts of                    harms to IRA investors resulting from                  plans that are subject to the Code’s
                                                     interest. As the analysis reflects,                     conflicts of interest of advisers is at least          prohibited transaction rules. Thus,
                                                     unmitigated conflicts can cause                         as important as protecting ERISA plans                 although they generally may hold fewer
                                                     significant harm to investors. The                      and plan participants from such harms.                 assets and may exist for shorter
                                                     available evidence supports a finding                      The Department believes that it is                  durations than IRAs, the owners of these
                                                     that the negative impacts are present                   important to address the concerns of                   accounts or the persons for whom these
                                                     and often times large. The proposal                     brokers and others providing investment                accounts were established are entitled to
                                                     would curtail the harms to investors                    advice to IRA owners about undue                       receive the same protections from
                                                     from such conflicts and thus deliver                    disruptions to current fee arrangements,               conflicted investment advice as IRA
                                                     significant benefits to plan participants               but also believes that such concerns are               owners. Accordingly, these accounts are
                                                     and IRA owners. Plans, plan                             best resolved within a fiduciary                       included in the scope of covered plans
                                                     participants, beneficiaries and IRA                     framework, rather than by simply                       in paragraph (f)(2) of the new proposal.
                                                     owners would all benefit from advice                    relieving advisers from fiduciary                      However, the Department solicits
                                                     that is impartial and puts their interests              responsibility. As previously discussed,               specific comment as to whether it is
                                                     first. Moreover, broker-dealer                          the proposed regulation permits                        appropriate to cover and treat these
                                                     interactions with plan fiduciaries,                     investment professionals to provide                    plans under the proposed regulation in
                                                     participants, and IRA owners present                    important financial information and                    a manner similar to IRAs as to both
                                                     some of the most obvious conflict of                    education, without acting as fiduciaries               coverage and applicable carve-outs.
                                                     interest problems in this area.                         or being subject to the prohibited
                                                                                                             transaction rules. Moreover, ERISA and                 F. Administrative Prohibited
                                                     Accordingly, in the Department’s view,                                                                         Transaction Exemptions
                                                     broker-dealers that provide investment                  the Code create a flexible process that
                                                     advice should be subject to fiduciary                   enables the Department to grant class                     In addition to the new proposal in
                                                     duties to mitigate conflicts of interest                and individual exemptions from the                     this Notice, the Department is also
                                                     and increase investor protections.                      prohibited transaction rules for fee                   proposing, elsewhere in this edition of
                                                        Some commenters additionally                         practices that it determines are                       the Federal Register, certain
                                                     suggested that the application of special               beneficial to plan participants and IRA                administrative class exemptions from
                                                     fiduciary rules in the retail investment                owners. For example, existing                          the prohibited transaction provisions of
                                                     market to IRA accounts, but not savings                 prohibited transaction exemptions                      ERISA (29 U.S.C. 1106), and the Code
                                                     outside of tax-preferred retirement                     already allow brokers who provide                      (26 U.S.C. 4975(c)(1)) as well as
                                                     accounts, is inappropriate and could                    fiduciary advice to receive commissions                proposed amendments to previously
                                                     lead to confusion among investors and                   generating conflicts of interest for                   adopted exemptions. The proposed
                                                     service providers. The distinction                      trading the types of securities and funds              exemptions and amendments would
                                                                                                             that make up the large majority of IRA                 allow, subject to appropriate safeguards,
                                                     between IRAs and other retail accounts,
                                                                                                             assets today. In addition, simultaneous                certain broker-dealers, insurance agents
                                                     however, is a direct result of a statutory
                                                                                                             with the publication of this proposed                  and others that act as investment advice
                                                     structure that draws a sensible
                                                                                                             regulation, the Department is publishing               fiduciaries to nevertheless continue to
                                                     distinction between tax-favored IRAs
                                                                                                             new exemption proposals that would                     receive a variety of forms of
                                                     and other retail investment accounts.
                                                                                                             permit common fee practices, while at                  compensation that would otherwise
                                                     The Code itself treats IRAs differently,
                                                                                                             the same time protecting plan                          violate prohibited transaction rules and
                                                     bestowing uniquely favorable tax
                                                                                                             participants, beneficiaries and IRA                    trigger excise taxes. The proposed
                                                     treatment on such accounts and
                                                                                                             owners from abuse and conflicts of                     exemptions would supplement statutory
                                                     prohibiting self-dealing by persons
                                                                                                             interest. As noted above, in contrast                  exemptions at 29 U.S.C. 1108 and 26
                                                     providing investment advice for a fee. In                                                                      U.S.C. 4975(d), and previously adopted
                                                                                                             with many previously adopted PTE
                                                     these respects, and in light of the special                                                                    class exemptions.
                                                                                                             exemptions that are transaction-specific,
                                                     public interest in retirement security,                                                                           Investment advice fiduciaries to plans
                                                                                                             the Best Interest Contract PTE described
                                                     IRAs are more like plans than like other                                                                       and plan participants must meet
                                                                                                             below reflects a more flexible approach
                                                     retail accounts. Indeed, as noted above,                                                                       ERISA’s standards of prudence and
                                                                                                             that accommodates a wide range of
                                                     the vast majority of IRA assets today are                                                                      loyalty to their plan customers. Such
                                                                                                             current business practices while
                                                     attributable to rollovers from plans.26 In
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                                                                                                             minimizing the impact of conflicts of                  fiduciaries also face taxes, remedies and
                                                     addition, IRA owners may be at even                                                                            other sanctions for engaging in certain
                                                                                                             interest and ensuring that plans and
                                                     greater risk from conflicted advice than                                                                       transactions, such as self-dealing with
                                                                                                             IRAs receive investment
                                                     plan participants. Unlike ERISA plan                                                                           plan assets or receiving payments from
                                                                                                             recommendations that are in their best
                                                     participants, IRA owners do not have                    interests.                                             third parties in connection with plan
                                                       26 Peter Brady, Sarah Holden, and Erin Shon, The
                                                                                                                As discussed, the Department                        transactions, unless the transactions are
                                                     U.S. Retirement Market, 2009, Investment Company
                                                                                                             received extensive comment on the                      permitted by an exemption from
                                                     Institute, Research Fundamentals, Vol. 19, No. 3,       application of the 2010 Proposal’s                     ERISA’s and the Code’s prohibited
                                                     May 2010, at http://www.ici.org/pdf/fm-v19n3.pdf.       provisions to IRAs, but comments                       transaction rules. IRA fiduciaries do not


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                                                     21948                     Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules

                                                     have the same general fiduciary                         reasonably designed to mitigate any                    imposed on investors by such conflicts.
                                                     obligations of prudence and loyalty                     harmful impact of conflicts of interest,               The exemption is designed both to
                                                     under the statute, but they too must                    and disclose basic information on their                impose broad fiduciary standards of
                                                     adhere to the prohibited transaction                    conflicts of interest and on the cost of               conduct on advisers and financial
                                                     rules or they must pay an excise tax.                   their advice. The standards of impartial               institutions, and to give them sufficient
                                                     The prohibited transaction rules help                   conduct to which the adviser and firm                  flexibility to accommodate a wide range
                                                     ensure that investment advice provided                  must commit are basic obligations of fair              of business practices and compensation
                                                     to plan participants and IRA owners is                  dealing and fiduciary conduct to which                 structures that currently exist or that
                                                     not driven by the adviser’s financial                   the Department believes advisers and                   may develop in the future.
                                                     self-interest.                                          firms often informally commit—to give                     The Department is also considering an
                                                                                                             advice that is in the customer’s best                  additional streamlined exemption that
                                                     Proposed Best Interest Contract
                                                                                                             interest; avoid misleading statements;                 would apply to compensation received
                                                     Exemption (Best Interest Contract PTE)
                                                                                                             and receive no more than reasonable                    in connection with investments by
                                                        The proposed Best Interest Contract                  compensation. This standards-based                     plans, participants and beneficiaries,
                                                     PTE would provide broad and flexible                    approach aligns the adviser’s interests                and IRA owners, in certain high-quality,
                                                     relief from the prohibited transaction                  with those of the plan or IRA customer,                low-fee investments, subject to fewer
                                                     restrictions on certain compensation                    while leaving the adviser and                          conditions than in the proposed Best
                                                     received by investment advice                           employing firm the flexibility and                     Interest Contract PTE. If properly
                                                     fiduciaries as a result of a plan’s or                  discretion necessary to determine how                  crafted, the streamlined exemption
                                                     IRA’s purchase, sale or holding of                      best to satisfy these basic standards in               could achieve important goals of
                                                     specifically identified investments. The                light of the unique attributes of their                minimizing compliance burdens for
                                                     conditions of the exemption are                         business.                                              advisers and financial institutions when
                                                     generally principles-based rather than                     As an additional protection for retail              they offer investment products with
                                                     prescriptive and require, in particular,                investors, the exemption would not                     little potential for material conflicts of
                                                     that advice be provided in the best                     apply if the contract contains                         interest. The Department is not
                                                     interest of the plan or IRA. This                       exculpatory provisions disclaiming or                  proposing text for such a streamlined
                                                     exemption was developed partly in                       otherwise limiting liability of the                    exemption due to the difficulty in
                                                     response to comments received that                      adviser or financial institution for                   operationalizing this concept. However
                                                     suggested such an approach. It is a                     violation of the contract’s terms.                     the Department is eager to receive
                                                     significant departure from existing                     Adopting the approach taken by FINRA,
                                                                                                                                                                    comments on whether such an
                                                     exemptions, examples of which are                       the contract could require the parties to
                                                                                                                                                                    exemption would be worthwhile and, as
                                                     discussed below, which are limited to                   arbitrate individual claims, but it could
                                                                                                                                                                    part of the notice proposing the Best
                                                     much narrower categories of                             not limit the rights of the plan,
                                                                                                                                                                    Interest Contract PTE, is soliciting
                                                     investments under more prescriptive                     participant, beneficiary, or IRA owner to
                                                                                                                                                                    comments on a number of issues
                                                     and less flexible and adaptable                         bring or participate in a class action
                                                                                                                                                                    relating to the design of a streamlined
                                                     conditions.                                             against the adviser or financial
                                                                                                                                                                    exemption.
                                                        The proposed Best Interest Contract                  institution.
                                                     PTE was developed to promote the                           Additional conditions would apply to                Proposed Principal Transaction
                                                     provision of investment advice that is in               firms that limit the products that their               Exemption (Principal Transaction PTE)
                                                     the best interest of retail investors, such             advisers can recommend based on the
                                                                                                             receipt of third party payments or the                    Broker-dealers and other advisers
                                                     as plan participants and beneficiaries,                                                                        commonly sell debt securities out of
                                                     IRA owners, and small plans. The                        proprietary nature of the products (i.e.,
                                                                                                             products offered or managed by the firm                their own inventory to plans,
                                                     proposed exemption would apply to                                                                              participants and beneficiaries and IRA
                                                     compensation received by individual                     or its affiliates) or for other reasons. The
                                                                                                             conditions require, among other things,                owners in a type of transaction known
                                                     investment advice fiduciaries (including                                                                       as a ‘‘principal transaction.’’ Fiduciaries
                                                     individual advisers 27 and firms that                   that such firms provide notice of the
                                                                                                             limitations to plans, participants and                 trigger taxes, remedies and other legal
                                                     employ or otherwise contract with such                                                                         sanctions when they engage in such
                                                     individuals) as well as their affiliates                beneficiaries and IRA owners, as well as
                                                                                                             make a written finding that the                        activities, unless they qualify for an
                                                     and related entities, that is provided in                                                                      exemption from the prohibited
                                                     connection with the purchase, sale or                   limitations do not prevent advisers from
                                                                                                             providing advice in those investors’ best              transaction rules. These principal
                                                     holding of certain assets by the plans,                                                                        transactions raise issues similar to those
                                                     participants and beneficiaries, and IRAs.               interest.
                                                                                                                Finally, certain notice and data                    addressed in the Best Interest Contract
                                                     In order to protect the interests of these                                                                     PTE, but also raise unique concerns
                                                     investors, the exemption requires the                   collection requirements would apply to
                                                                                                             all firms relying on the exemption.                    because the conflicts of interest are
                                                     firm and the adviser to contractually                                                                          particularly acute. In these transactions,
                                                     acknowledge fiduciary status, commit to                 Specifically, firms would be required to
                                                                                                             notify the Department in advance of                    the adviser sells the security directly
                                                     adhere to basic standards of impartial                                                                         from its own inventory, and may be able
                                                     conduct, warrant that they will comply                  doing so, and they would have to
                                                                                                             maintain certain data, and make it                     to dictate the price that the plan,
                                                     with applicable federal and state laws                                                                         participant or beneficiary, or IRA owner
                                                     governing advice and that they have                     available to the Department upon
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                                                                                                             request, to help evaluate the                          pays.
                                                     adopted policies and procedures
                                                                                                             effectiveness of the exemption in                         Because of the prevalence of the
                                                       27 By using the term ‘‘adviser,’’ the Department      safeguarding the interests of plan and                 practice in the market for fixed income
                                                     does not intend to limit the exemption to               IRA investors.                                         securities, the Department has proposed
                                                     investment advisers registered under the                   The Department’s intent in crafting                 a separate Principal Transactions PTE
                                                     Investment Advisers Act of 1940; under the              the Best Interest Contract PTE is to                   that would permit principal transactions
                                                     exemption an adviser is individual who can be a
                                                     representative of a registered investment adviser, a
                                                                                                             permit common compensation                             in certain debt securities between a plan
                                                     bank or similar financial institution, an insurance     structures that create conflicts of                    or IRA owner and an investment advice
                                                     company, or a broker-dealer.                            interest, while minimizing the costs                   fiduciary, under certain circumstances.


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                                                                              Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                                  21949

                                                        The Principal Transaction PTE would                  standards required in the Best Interest                provide relief for these types of
                                                     include all of the contract requirements                Contract PTE. At the same time, the                    transactions in PTE 86–128, and so is
                                                     of the Best Interest Contract PTE. In                   proposed amendment would eliminate                     proposing to revoke PTE 75–1, Part II(2),
                                                     addition, however, it would include                     relief for investment advice fiduciaries               in its entirety. As discussed in more
                                                     specific conditions related to the price                to IRA owners; instead they would be                   detail in the notice of proposed
                                                     of the debt security involved in the                    required to rely on the Best Interest                  amendment/revocation, the Department
                                                     transaction. The adviser would have to                  Contract PTE for an exemption for such                 believes the conditions of PTE 86–128
                                                     obtain two price quotes from                            compensation. In the Department’s                      are more appropriate for these
                                                     unaffiliated counterparties for the same                view, the provisions in the Best Interest              transactions.
                                                     or a similar security, and the transaction              Contract Exemption better address the                     PTE 75–1, Part V, currently permits
                                                     would have to occur at a price at least                 interests of IRAs with respect to                      broker-dealers to extend credit to a plan
                                                     as favorable to the plan or IRA as the                  transactions otherwise covered by PTE                  or IRA in connection with the purchase
                                                     two price quotes. Additionally, the                     86–128 and, unlike plan participants                   or sale of securities. The exemption
                                                     adviser would have to disclose the                      and beneficiaries, there is no separate                does not permit broker-dealers that are
                                                     amount of compensation and profit                       plan fiduciary in the IRA market to                    fiduciaries to receive compensation
                                                     (sometimes referred to as a ‘‘mark up’’                 review and authorize the transaction.                  when doing so. The Department is
                                                     or ‘‘mark down’’) that it expects to                    Investment advice fiduciaries to plans                 proposing to amend PTE 75–1, Part V,
                                                     receive on the transaction.                             would remain eligible for relief under                 to permit investment advice fiduciaries
                                                                                                             the exemption, as would investment                     to receive compensation for lending
                                                     Amendments to Existing PTEs
                                                                                                             managers with full investment                          money or otherwise extending credit,
                                                       In addition to the Best Interest                      discretion over the investments of plans               but only for the limited purpose of
                                                     Contract PTE and the Principal                          and IRA owners, but they would be                      avoiding a failed securities transaction.
                                                     Transaction PTE, the Department is also                 required to comply with all the
                                                     proposing elsewhere in the Federal                      protective conditions, described above.                Prohibited Transaction Exemption
                                                     Register amendments to certain existing                 Finally, the Department is proposing                   84–24
                                                     PTEs.                                                   that PTE 86–128 extend to a new                           PTE 84–24 30 covers transactions
                                                     Prohibited Transaction Exemption                        covered transaction, for fiduciaries who               involving mutual fund shares, or
                                                     86–128                                                  sell mutual fund shares out of their own               insurance or annuity contracts, sold to
                                                                                                             inventory (i.e., acting as principals,                 plans or IRA investors by pension
                                                        Prohibited Transaction Exemption                     rather than agents) to plans and IRAs
                                                     (PTE) 86–128 28 currently allows an                                                                            consultants, insurance agents, brokers,
                                                                                                             and to receive commissions for doing                   and mutual fund principal underwriters
                                                     investment advice fiduciary to cause the                so. This transaction is currently the
                                                     recipient plan or IRA to pay the                                                                               who are fiduciaries as a result of advice
                                                                                                             subject of another exemption, PTE 75–                  they give in connection with these
                                                     investment advice fiduciary or its                      1, Part II(2) (discussed below) that the
                                                     affiliate a fee for effecting or executing                                                                     transactions. The exemption allows
                                                                                                             Department is proposing to revoke.                     these investment advice fiduciaries to
                                                     securities transactions as agent. To                       Several changes are proposed with
                                                     prevent churning, the exemption does                                                                           receive a sales commission with respect
                                                                                                             respect to PTE 75–1, a multi-part
                                                     not apply if such transactions are                                                                             to products purchased by plans or IRA
                                                                                                             exemption for securities transactions
                                                     excessive in either amount or frequency.                                                                       investors. The exemption is limited to
                                                                                                             involving broker dealers and banks, and
                                                     The exemption also allows the                           plans and IRAs.29 Part I(b) and (c)                    sales commissions that are reasonable
                                                     investment advice fiduciary to act as an                currently provide relief for certain non-              under the circumstances. The
                                                     agent for both the plan and the other                   fiduciary services to plans and IRAs.                  investment advice fiduciary must
                                                     party to the transaction (i.e., the buyer               The Department is proposing to revoke                  provide disclosure of the amount of the
                                                     and the seller of securities) and receive               these provisions, and require persons                  commission and other terms of the
                                                     a reasonable fee. To use the exemption,                 seeking to engage in such transactions to              transaction to an independent fiduciary
                                                     the fiduciary cannot be a plan                          rely instead on the existing statutory                 of the plan or IRA, and obtain approval
                                                     administrator or employer, unless all                   exemptions provided in ERISA section                   for the transaction. To use this
                                                     profits earned by these parties are                     408(b)(2) and Code section 4975(d)(2),                 exemption, the investment advice
                                                     returned to the plan. The conditions of                 and the Department’s implementing                      fiduciary may not have certain roles
                                                     the exemption require that a plan                       regulations at 29 CFR 2550.408b–2. The                 with respect to the plan or IRA such as
                                                     fiduciary independent of the investment                 Department believes the conditions of                  trustee, plan administrator, fiduciary
                                                     advice fiduciary receive certain                        the statutory exemptions are more                      with written authorization to manage
                                                     disclosures and authorize the                           appropriate for the provision of these                 the plan’s assets and employers.
                                                     transaction. In addition, the                           services.                                              However it is available to investment
                                                     independent fiduciary must receive                         PTE 75–1, Part II(2), currently                     advice fiduciaries regardless of whether
                                                     confirmations and an annual ‘‘portfolio                 provides relief for fiduciaries selling                they expressly acknowledge their
                                                     turnover ratio’’ demonstrating the                      mutual fund shares to plans and IRAs in                fiduciary status or are simply functional
                                                     amount of turnover in the account                       a principal transaction to receive                     or ‘‘inadvertent’’ fiduciaries that have
                                                     during that year. These conditions are                  commissions. PTE 75–1, Part II(2)                      not expressly agreed to act as fiduciary
                                                     not presently applicable to transactions                currently provides relief for fiduciaries              advisers, provided there is no written
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                                                     involving IRAs.                                         to receive commissions for selling                     authorization granting them discretion
                                                        The Department is proposing to                       mutual fund shares to plans and IRAs in                to acquire or dispose of the assets of the
                                                     amend PTE 86–128 to require all                         a principal transaction. As described                  plan or IRA.
                                                     fiduciaries relying on the exemption to                 above, the Department is proposing to
                                                     adhere to the same impartial conduct                                                                              30 Class Exemption for Certain Transactions
                                                                                                               29 Exemptions  from Prohibitions Respecting          Involving Insurance Agents and Brokers, Pension
                                                       28 Class Exemption for Securities Transactions        Certain Classes of Transactions Involving Employee     Consultants, Insurance Companies, Investment
                                                     Involving Employee Benefit Plans and Broker-            Benefit Plans and Certain Broker-Dealers, Reporting    Companies and Investment Company Principal
                                                     Dealers, 51 FR 41686 (Nov. 18, 1986), amended at        Dealers and Banks, 40 FR 50845 (Oct. 31, 1975), as     Underwriters, 49 FR 13208 (Apr. 3, 1984), amended
                                                     67 FR 64137 (Oct. 17, 2002).                            amended at 71 FR 5883 (Feb. 3, 2006).                  at 71 FR 5887 (Feb. 3, 2006).



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

                                                        The Department is proposing to                       under the scope of the 2010 Proposal                   of the new rule to allow service
                                                     amend PTE 84–24 to require all                          would include the provision of                         providers sufficient time to make
                                                     fiduciaries relying on the exemption to                 information and plan services that                     necessary changes in business practices,
                                                     adhere to the same impartial conduct                    traditionally have been performed in a                 recordkeeping, communication
                                                     standards required in the Best Interest                 non-fiduciary capacity. For example,                   materials, sales processes, compensation
                                                     Contract Exemption. At the same time,                   they requested that the proposal be                    arrangements, and related agreements,
                                                     the proposed amendment would revoke                     revised to make clear that actuaries,                  as well as the time necessary to obtain
                                                     PTE 84–24 in part so that investment                    accountants, and attorneys, who have                   and adjust to any additional individual
                                                     advice fiduciaries to IRA owners would                  historically not been treated as ERISA                 or class exemptions. Several said that
                                                     not be able to rely on PTE 84–24 with                   fiduciaries for plan clients, would not                applicability of any changes in the 1975
                                                     respect to (1) transactions involving                   become fiduciary investment advisers                   regulation should be no earlier than two
                                                     variable annuity contracts and other                    by reason of providing actuarial,                      years after the promulgation of a final
                                                     annuity contracts that constitute                       accounting and legal services. They said               regulation. Other commenters thought
                                                     securities under federal securities laws,               that if individuals providing these                    that the effective dates in the 2010
                                                     and (2) transactions involving the                      services were classified as fiduciaries,               proposal were reasonable and asked that
                                                     purchase of mutual fund shares.                         the associated costs would almost                      the final rules should go into effect
                                                     Investment advice fiduciaries to IRA                    certainly increase because of the need to              promptly in order to reduce ongoing
                                                     owners would instead be required to                     account for their new potential fiduciary              harms to savers.
                                                     rely on the Best Interest Contract                      liability. This was not the intent of the                 In response to these concerns, the
                                                     Exemption for most common forms of                      2010 proposal.                                         Department has revised the date by
                                                     compensation received in connection                        The new proposal clarifies that                     which the final rule would apply.
                                                     with these transactions. The Department                 attorneys, accountants, and actuaries                  Specifically, the final rule would be
                                                     believes that investment advice                         would not be treated as fiduciaries                    effective 60 days after publication in the
                                                     transactions involving annuity contracts                merely because they provide such                       Federal Register and the requirements
                                                     that are treated as securities and                      professional assistance in connection                  of the final rule would generally become
                                                     transactions involving the purchase of                  with a particular investment                           applicable eight months after
                                                     mutual fund shares should occur under                   transaction. Only when these                           publication of a final rule, with the
                                                     the conditions of the Best Interest                     professionals act outside their normal                 potential exceptions noted below. This
                                                     Contract Exemption due to the                           roles and recommend specific                           modification is intended to balance the
                                                     similarity of these investments,                        investments or render valuation                        concerns raised by commenters about
                                                     including their distribution channels                   opinions in connection with particular                 the need for prompt action with
                                                     and disclosure obligations, to other                    investment transactions, would they be                 concerns raised about the cost and
                                                     investments covered in the Best Interest                subject to the proposed fiduciary                      burden associated with transitioning
                                                     Contract Exemption. Investment advice                   definition.                                            current and future contracts or
                                                     fiduciaries to ERISA plans would                           Similarly, the new proposal does not                arrangements to satisfy the requirements
                                                     remain eligible for relief under the                    alter the principle articulated in ERISA               of the final rule and any accompanying
                                                     exemption with respect to transactions                  Interpretive Bulletin 75–8, D–2 at 29                  prohibited transaction exemptions.
                                                     involving all insurance and annuity                     CFR 2509.75–8 (1975). Under the
                                                     contracts and mutual fund shares and                                                                           Administrative Prohibited Transaction
                                                                                                             bulletin, the plan sponsor’s human
                                                     the receipt of commissions allowable                                                                           Exemptions
                                                                                                             resources personnel or plan service
                                                     under that exemption. Investment                        providers who have no power to make                       The Department proposes to make the
                                                     advice fiduciaries to IRAs could still                  decisions as to plan policy,                           Best Interest Contract Exemption, if
                                                     receive commissions for transactions                    interpretations, practices or procedures,              granted, available on the final rule’s
                                                     involving non-securities insurance and                  but who perform purely administrative                  applicability date, i.e., eight months
                                                     annuity contracts, but they would be                    functions for an employee benefit plan,                after publication of a final rule. Further,
                                                     required to comply with all the                         within a framework of policies,                        the department proposes that the other
                                                     protective conditions, described above.                 interpretations, rules, practices and                  new and revised PTEs that it is
                                                        Finally, the Department is proposing                 procedures made by other persons, are                  proposing go into effect as of the final
                                                     amendments to certain other existing                    not fiduciaries with respect to the plan.              rule’s applicability date.31
                                                     class exemptions to require adherence                                                                             For those fiduciary investment
                                                     to the impartial conduct standards                      H. Effective Date; Applicability Date                  advisers who choose to avail themselves
                                                     required in the Best Interest Contract                  Final Rule                                             of the Best Interest Contract Exemption,
                                                     PTE. Specifically, PTEs 75–1, Part III,                                                                        the Department recognizes that
                                                     75–1, Part IV, 77–4, 80–83, and 83–1,                     Commenters on the 2010 Proposal
                                                                                                                                                                    compliance with certain requirements of
                                                     would be amended. These existing class                  asked the Department to provide
                                                                                                                                                                    the new exemption may be difficult
                                                     exemptions will otherwise remain in                     sufficient time for orderly and efficient
                                                                                                                                                                    within the eight-month timeframe. The
                                                     place, affording flexibility to fiduciaries             compliance, and to make it clear that
                                                                                                                                                                    Department therefore is soliciting
                                                     who currently use the exemptions or                     the final rule would not apply in
                                                                                                                                                                    comments on whether to delay the
                                                     who wish to use the exemptions in the                   connection with advice provided before
                                                                                                                                                                    application of certain requirements of
                                                     future.                                                 the effective date of the final rule. Many
                                                                                                                                                                    the Best Interest Contract Exemption for
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                                                        The proposed dates on which the new                  commenters also expressed concern
                                                                                                                                                                    several months (for example, certain
                                                     exemptions and amendments to existing                   with the provision in the Department’s
                                                                                                                                                                    data collection requirements), thereby
                                                     exemptions would be effective are                       2010 Proposal that the final regulation
                                                                                                                                                                    enabling firms and advisers to benefit
                                                     summarized below.                                       and class exemptions would be effective
                                                                                                                                                                    from the Best Interest Contract
                                                                                                             90 days after their publication in the
                                                     G. The Provision of Professional                                                                               Exemption without meeting all the
                                                                                                             Federal Register. Some commenters
                                                     Services Other Than Investment Advice                   suggested that these effective dates                     31 See the notices with respect to these proposals,
                                                       Several commenters asserted that it                   should be extended to as much as 12                    published elsewhere in this issue of the Federal
                                                     was unclear whether investment advice                   months or longer following publication                 Register.



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

                                                     requirements for a limited period of                    at www.dol.gov/ebsa/pdf/                               financial advisor.33 Timely regulatory
                                                     time. Although the Department does not                  conflictsofinterestria.pdf. It is                      action to redress advisers’ conflicts is
                                                     believe that a general delay in the                     summarized below.                                      warranted to avert such losses.
                                                     application of the exemption’s                             Tax-preferred retirement savings, in                   In the retail IRA marketplace, growing
                                                     requirements is warranted, it recognizes                the form of private-sector, employer-                  consumer demand for personalized
                                                     that a short-term delay of some                         sponsored retirement plans, such as                    advice, together with competition from
                                                     requirements may be appropriate and                     401(k) plans (‘‘plans’’), and Individual               online discount brokerage firms, has
                                                     may not compromise the overall                          Retirement Accounts (‘‘IRAs’’), are                    pushed brokers to offer more
                                                     protections created by the proposed rule                critical to the retirement security of                 comprehensive guidance services rather
                                                     and exemptions. As discussed in more                    most U.S. workers. Investment                          than just transaction support.
                                                     detail in the Notice proposing the Best                 professionals play a major role in                     Unfortunately, their traditional
                                                     Interest Contract Exemption published                   guiding their investment decisions.                    compensation sources—such as
                                                     elsewhere in this issue of the Federal                  However, these professional advisers                   brokerage commissions, revenue shared
                                                     Register, the Department requests                       often are compensated in ways that                     by mutual funds and funds’ asset
                                                     comments on this approach.                              create conflicts of interest, which can                managers, and mark-ups on bonds sold
                                                                                                             bias the investment advice they render                 from their own inventory—can
                                                     I. Public Hearing                                       and erode plan and IRA investment                      introduce acute conflicts of interest.
                                                        The Department plans to hold an                      results. In order to limit or mitigate                 Brokers and others advising IRA
                                                     administrative hearing within 30 days of                conflicts of interest and thereby improve              investors are often able to calibrate their
                                                     the close of the comment period. As                     retirement security, the Department of                 business practices to steer around the
                                                     with the 2010 Proposal, the Department                  Labor (‘‘the Department’’) is proposing                narrow 1975 rule and thereby avoid
                                                     will ensure ample opportunity for                       to attach fiduciary status to more of the              fiduciary status and prohibited
                                                     public comment by reopening the                         advice rendered to plan officials,                     transactions for accepting conflict-laden
                                                     record following the hearing and                        participants, and beneficiaries (plan                  compensation. Many brokers market
                                                     publication of the hearing transcript.                  investors) and IRA investors.                          retirement investment services in ways
                                                     Specific information regarding the date,                   Since the Department issued its 1975
                                                                                                                                                                    that clearly suggest the provision of
                                                     location and submission of requests to                  rule, the retirement savings market has
                                                                                                                                                                    tailored or individualized advice, while
                                                     testify will be published in a notice in                changed profoundly. Financial products
                                                                                                                                                                    at the same time relying on the 1975
                                                     the Federal Register.                                   are increasingly varied and complex.
                                                                                                                                                                    rule to disclaim any fiduciary
                                                     J. Regulatory Impact Analysis                           Individuals, rather than large
                                                                                                                                                                    responsibility in the fine print of
                                                                                                             employers, are increasingly responsible
                                                        Under Executive Order 12866,                                                                                contracts and marketing materials.
                                                                                                             for their investment decisions as IRAs
                                                     ‘‘significant’’ regulatory actions are                                                                         Thus, at the same time that marketing
                                                                                                             and 401(k)-type defined contribution
                                                     subject to the requirements of the                                                                             materials may characterize the financial
                                                                                                             plans have supplanted defined benefit
                                                     Executive Order and review by the                                                                              adviser’s relationship with the customer
                                                                                                             pensions as the primary means of
                                                     Office of Management and Budget                                                                                as one-on-one, personalized, and based
                                                                                                             providing retirement security. Plan and
                                                     (OMB). Section 3(f) of the executive                                                                           on the client’s best interest, footnotes
                                                                                                             IRA investors often lack investment
                                                     order defines a ‘‘significant regulatory                                                                       and legal boilerplate disclaim the
                                                                                                             expertise and must rely on experts—but
                                                     action’’ as an action that is likely to                                                                        requisite mutual agreement,
                                                                                                             are unable to assess the quality of the
                                                     result in a rule (1) having an annual                                                                          arrangement, or understanding that the
                                                                                                             expert’s advice or police its conflicts of
                                                     effect on the economy of $100 million                                                                          advice is individualized or should serve
                                                                                                             interest. Most have no idea how
                                                     or more, or adversely and materially                                                                           as a primary basis for investment
                                                                                                             ‘‘advisers’’ are compensated for selling
                                                     affecting a sector of the economy,                                                                             decisions. What is presented to an IRA
                                                                                                             them products. Many are bewildered by
                                                     productivity, competition, jobs, the                                                                           investor as trusted advice is often paid
                                                                                                             complex choices that require substantial
                                                     environment, public health or safety, or                                                                       for by a financial product vendor in the
                                                                                                             financial literacy and welcome ‘‘free’’
                                                     State, local or tribal governments or                                                                          form of a sales commission or shelf-
                                                                                                             advice. The risks are growing as baby
                                                     communities (also referred to as                                                                               space fee, without adequate counter-
                                                                                                             boomers retire and move money from
                                                     ‘‘economically significant’’); (2) creating                                                                    balancing consumer protections that are
                                                                                                             plans, where their employer has both
                                                     serious inconsistency or otherwise                                                                             designed to ensure that the advice is in
                                                                                                             the incentive and the fiduciary duty to
                                                     interfering with an action taken or                                                                            the investor’s best interest. In another
                                                                                                             facilitate sound investment choices, to
                                                     planned by another agency; (3)                                                                                 variant of the same problem, brokers
                                                                                                             IRAs, where both good and bad
                                                     materially altering the budgetary                                                                              and others provide apparently tailored
                                                                                                             investment choices are myriad and most
                                                     impacts of entitlement grants, user fees,                                                                      advice to customers under the guise of
                                                                                                             advice is conflicted. These ‘‘rollovers’’
                                                     or loan programs or the rights and                                                                             general education to avoid triggering
                                                                                                             are expected to approach $2.5 trillion
                                                     obligations of recipients thereof; or (4)                                                                      fiduciary status and responsibility.
                                                                                                             over the next 5 years.32 These rollovers,
                                                     raising novel legal or policy issues                    which will be one-time and not ‘‘on a
                                                     arising out of legal mandates, the                      regular basis’’ and thus not covered by
                                                                                                                                                                       33 For example, an ERISA plan investor who rolls

                                                     President’s priorities, or the principles                                                                      $200,000 into an IRA, earns a 6% nominal rate of
                                                                                                             the 1975 standard, will be the most                    return with 3% inflation, and aims to spend down
                                                     set forth in the Executive Order. OMB                   important financial decisions that many                her savings in 30 years, would be able to consume
                                                     has determined that this proposed rule                  consumers make in their lifetime. An                   $10,204 per year for the 30 year period. A similar
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                                                     is economically significant within the                  ERISA plan investor who rolls her
                                                                                                                                                                    investor whose assets underperform by 1 or 2
                                                     meaning of section 3(f)(1) of the                                                                              percentage points per year would only be able to
                                                                                                             retirement savings into an IRA could                   consume $8,930 or $7,750 per year, respectively, in
                                                     Executive Order, because it would be                    lose 12 to 24 percent of the value of her              each of the 30 years. The 1 to 2 percentage point
                                                     likely to have an effect on the economy                 savings over 30 years of retirement by                 underperformance comes from a careful review of
                                                     of $100 million in at least one year.                   accepting advice from a conflicted
                                                                                                                                                                    a large and growing body of literature which
                                                     Accordingly, OMB has reviewed the                                                                              consistently points to a substantial failure of the
                                                                                                                                                                    market for retirement advice. The literature is
                                                     rule pursuant to the Executive Order.                     32 Cerulli Associates, ‘‘Retirement Markets 2014:    discussed in the Department’s complete Regulatory
                                                        The Department’s complete                            Sizing Opportunities in Private and Public             Impact Analysis (available at www.dol.gov/ebsa/
                                                     Regulatory Impact Analysis is available                 Retirement Plans,’’ 2014.                              pdf/conflictsofinterestria.pdf).



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

                                                        Likewise in the plan market, pension                    The current proposal adopts what the                www.dol.gov/ebsa/pdf/
                                                     consultants and advisers that plan                      Department intends to be a balanced                    conflictsofinterestria.pdf), supports a
                                                     sponsors rely on to guide their decisions               approach to prohibited transaction                     finding that the impact of these conflicts
                                                     often avoid fiduciary status under the                  exemptions. The proposal narrows and                   of interest on investment outcomes is
                                                     five-part test and are conflicted. For                  attaches new protective conditions to                  large and negative. The supporting
                                                     example, if a plan hires an investment                  some existing PTEs. At the same time it                evidence includes, among other things,
                                                     professional or appraiser on a one-time                 includes some new PTEs with broad but                  statistical analyses of conflicted
                                                     basis for an investment recommendation                  targeted combined scope and strong                     investment channels, experimental
                                                     on a large, complex investment, the                     protective conditions. These elements of               studies, government reports
                                                     adviser has no fiduciary obligation to                  the proposal reflect the Department’s                  documenting abuse, and economic
                                                     the plan under ERISA. Even if the plan                  effort to ensure that advice is impartial              theory on the dangers posed by conflicts
                                                     official, who lacks the specialized                     while avoiding larger and costlier than                of interest and by the asymmetries of
                                                     expertise necessary to evaluate the                     necessary disruptions to existing                      information and expertise that
                                                     complex transaction on his or her own,                  business arrangements or constraints on                characterize interactions between
                                                     invests all or substantially all of the                 future innovation.                                     ordinary retirement investors and
                                                     plan’s assets in reliance on the                           In developing the current proposal,                 conflicted advisers. A review of this
                                                     consultant’s professional judgment, the                 the Department conducted an in-depth                   data, which consistently points to a
                                                     consultant is not a fiduciary because he                economic assessment of the market for                  substantial failure of the market for
                                                     or she does not advise the plan on a                    retirement investment advice. As further               retirement advice, suggests that IRA
                                                     ‘‘regular basis’’ and therefore may stand               discussed below, the Department found                  holders receiving conflicted investment
                                                     to profit from the plan’s investment due                that conflicted advice is widespread,                  advice can expect their investments to
                                                     to a conflict of interest that could affect             causing serious harm to plan and IRA                   underperform by an average of 100 basis
                                                     the consultant’s best judgment. Too                     investors, and that disclosing conflicts               points per year over the next 20 years.
                                                     much has changed since 1975, and too                    alone would fail to adequately mitigate                The underperformance associated with
                                                     many investment decisions are made as                   the conflicts or remedy the harm. By                   conflicts of interest—in the mutual
                                                     one-time decisions and not advice on a                  extending fiduciary status to more                     funds segment alone—could cost IRA
                                                     regular basis for the five-part test to be              providers of advice and providing broad                investors more than $210 billion over
                                                     a meaningful safeguard any longer.                      but targeted and protective PTEs, the                  the next 10 years and nearly $500 over
                                                                                                             Department believes the current                        the next 20 years. Some studies suggest
                                                        The proposed definition of fiduciary
                                                                                                             proposal would mitigate conflicts,                     that the underperformance of broker-
                                                     investment advice included in this
                                                                                                             support consumer choice, and deliver                   sold mutual funds may be even higher
                                                     NPRM generally covers specific
                                                                                                             substantial gains for retirement                       than 100 basis points. If the true
                                                     recommendations on investments,
                                                                                                             investors and economic benefits that                   underperformance of broker-sold funds
                                                     investment management, the selection
                                                                                                             more than justify its costs.                           is 200 basis points, IRA mutual fund
                                                     of persons to provide investment advice                    Advisers’ conflicts take a variety of               holders could suffer from
                                                     or management, and appraisals in                        forms and can bias their advice in a                   underperformance amounting to $430
                                                     connection with investment decisions.                   variety of ways. For example, advisers                 billion over 10 years and nearly $1
                                                     Persons who provide such advice would                   often are paid more for selling some                   trillion across the next 20 years. While
                                                     fall within the proposed regulation’s                   mutual funds than others, and to                       the estimates based on the mutual fund
                                                     ambit if they either (a) represent that                 execute larger and more frequent trades                market are large, the total market impact
                                                     they are acting as an ERISA fiduciary or                of mutual fund shares or other                         could be much larger. Insurance
                                                     (b) make investment recommendations                     securities. Broker-dealers reap price                  products, Exchange Traded Funds
                                                     pursuant to an agreement, arrangement,                  spreads from principal transactions, so                (ETFs), individual stocks and bonds,
                                                     or understanding that the advice is                     advisers may be encouraged to                          and other products are all sold by
                                                     individualized or specifically directed                 recommend larger and more frequent                     brokers with conflicts of interest.
                                                     to the recipient for consideration in                   trades. These and other adviser                           Disclosure alone has proven
                                                     making investment or investment                         compensation arrangements introduce                    ineffective to mitigate conflicts in
                                                     management decisions regarding plan or                  direct and serious conflicts of interest               advice. Extensive research has
                                                     IRA assets.                                             between advisers and retirement                        demonstrated that most investors have
                                                        The current proposal specifically                    investors. Advisers often are paid a great             little understanding of their advisers’
                                                     includes as fiduciary investment advice                 deal more if they recommend                            conflicts, and little awareness of what
                                                     recommendations concerning the                          investments and transactions that are                  they are paying via indirect channels for
                                                     investment of assets that are rolled over               highly profitable to the financial                     the conflicted advice. Even if they
                                                     or otherwise distributed from a plan.                   industry, even if they are not in                      understand the scope of the advisers’
                                                     This would supersede guidance the                       investors’ best interests. These financial             conflicts, most consumers generally
                                                     Department provided in a 2005 advisory                  incentives can and do bias the advisers’               cannot distinguish good advice, or even
                                                     opinion,34 which concluded that such                    recommendations.                                       good investment results, from bad. The
                                                     recommendations did not constitute                         Following such biased advice can                    same gap in expertise that makes
                                                     fiduciary advice. However, the current                  inflict losses on investors in several                 investment advice necessary frequently
                                                     proposal provides that an adviser does                  ways. They may choose more expensive                   also prevents investors from recognizing
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                                                     not act as a fiduciary merely by                        and/or poorer performing investments.                  bad advice or understanding advisers’
                                                     providing plan investors with                           They may trade too much and thereby                    disclosures. Recent research suggests
                                                     information about plan distribution                     incur excessive transaction costs, and                 that even if disclosure about conflicts
                                                     options, including the tax consequences                 they may incur more costly timing                      could be made simple and clear, it
                                                     associated with the available types of                  errors, which are a common                             would be ineffective—or even
                                                     benefit distributions.                                  consequence of chasing returns.                        harmful.35
                                                                                                                A wide body of economic evidence,
                                                       34 DOL Advisory Opinion 2005–23A (Dec. 7,             reviewed in the Department’s full                        35 See Loewenstein et al., (2011) for a summary

                                                     2005).                                                  Regulatory Impact Analysis (available at               of some relevant literature.



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                                                                              Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                            21953

                                                        Excessive fees and substandard                       higher than these quantified gains alone.              models, including technology-driven
                                                     investment performance in DC plans or                   The Department expects the proposal to                 models, may be accelerated, and nudged
                                                     IRAs, which can result when advisers’                   yield large, additional gains for IRA                  away from conflicts and toward
                                                     conflicts bias their advice, erode benefit              investors, including improvements in                   transparency, thereby promoting
                                                     security. This proposal aims to ensure                  the performance of IRA investments                     healthy competition in the fiduciary
                                                     that advice is impartial, thereby rooting               other than front-load mutual funds and                 advice market.
                                                     out excessive fees and substandard                      potential reductions in excessive trading                 A major expected positive effect of the
                                                     performance otherwise attributable to                   and associated transaction costs and                   current proposal in the plan advice
                                                     advisers’ conflicts, producing gains for                timing errors (such as might be                        market is improved compliance and
                                                     retirement investors. Delivering these                  associated with return chasing). As                    associated improved security of plan
                                                     gains would entail compliance costs—                    noted above, under current rules,                      assets and benefits. Clarity about
                                                     namely, the cost incurred by new                        adviser conflicts could cost IRA                       advisers’ fiduciary status would
                                                     fiduciary advisers to avoid the                         investors as much as $410 billion over                 strengthen EBSA’s enforcement
                                                     prohibited transaction rules and/or                     10 years and $1 trillion over 20 years,                activities resulting in fuller and faster
                                                     satisfy relevant PTE conditions. The                    so the potential additional gains to IRA               correction, and stronger deterrence, of
                                                     Department expects investor gains                       investors from this proposal could be                  ERISA violations.
                                                     would be very large relative to                         very large.                                               In conclusion, the Department
                                                     compliance costs, and therefore believes                   Just as with IRAs, there is evidence                believes that the current proposal would
                                                     this proposal is economically justified                 that conflicts of interest in the                      mitigate adviser conflicts and thereby
                                                     and sound.                                              investment advice market also erode                    improve plan and IRA investment
                                                        Because of limitations of the literature             plan assets. For example, the U.S.                     results, while avoiding greater than
                                                     and other evidence, only some of these                  Government Accountability Office                       necessary disruption of existing
                                                     gains can be quantified with confidence.                (GAO) found that defined benefit                       business practices and would deliver
                                                     Focusing only on how load shares paid                   pension plans using consultants with                   large gains to retirement investors and a
                                                     to brokers affect the size of loads IRA                 undisclosed conflicts of interest earned               variety of other economic benefits,
                                                     investors holding front-end load funds                  1.3 percentage points per year less than               which would more than justify its costs.
                                                     pay and the returns they achieve, we                    other plans.36 Other GAO reports point                 K. Initial Regulatory Flexibility Analysis
                                                     estimate the proposal would deliver to                  out how adviser conflicts may cause
                                                     IRA investors gains of between $40                                                                                The Regulatory Flexibility Act (5
                                                                                                             plan participants to roll plan assets into             U.S.C. 601 et seq.) (RFA) imposes
                                                     billion and $44 billion over 10 years and               IRAs that charge high fees or 401(k) plan
                                                     between $88 and $100 billion over 20                                                                           certain requirements with respect to
                                                                                                             officials to include expensive or                      Federal rules that are subject to the
                                                     years. These estimates assume that the                  underperforming funds in investment
                                                     rule will eliminate (rather than just                                                                          notice and comment requirements of
                                                                                                             menus.37 A number of academic studies                  section 553(b) of the Administrative
                                                     reduce) underperformance associated                     find that 401(k) plan investment options
                                                     with the practice of incentivizing broker                                                                      Procedure Act (5 U.S.C. 551 et seq.) and
                                                                                                             underperform the market,38 and at least                which are likely to have a significant
                                                     recommendations through variable                        one study attributes such
                                                     front-end-load sharing; if the rule’s                                                                          economic impact on a substantial
                                                                                                             underperformance to excessive reliance                 number of small entities. Unless an
                                                     effectiveness in this area is substantially             on funds that are proprietary to plan
                                                     below 100 percent, these estimates may                                                                         agency determines that a proposal is not
                                                                                                             service providers who may be providing                 likely to have a significant economic
                                                     overstate these particular gains to
                                                                                                             investment advice to plan officials that               impact on a substantial number of small
                                                     investors in the front-load mutual fund
                                                                                                             choose the investment options.39                       entities, section 603 of the RFA requires
                                                     segment of the IRA market. The
                                                                                                                The Department expects the current                  the agency to present an initial
                                                     Department nonetheless believes that
                                                                                                             proposal’s positive effects to extend                  regulatory flexibility analysis (IRFA) of
                                                     these gains alone would far exceed the
                                                                                                             well beyond improved investment                        the proposed rule. The Department’s
                                                     proposal’s compliance cost which are
                                                                                                             results for retirement investors. The IRA              IRFA of the proposed rule is provided
                                                     estimated to be between $2.4 billion and
                                                                                                             and plan markets for fiduciary advice                  below.
                                                     $5.7 billion over 10 years, mostly
                                                                                                             and other services may become more                        The Department believes that
                                                     reflecting the cost incurred by new
                                                                                                             efficient as a result of more transparent              amending the current regulation by
                                                     fiduciary advisers to satisfy relevant
                                                     PTE conditions (these costs are also                    pricing and greater certainty about the                broadening the scope of service
                                                     front-loaded and will be less in                        fiduciary status of advisers and about                 providers, regardless of size, that would
                                                     subsequent years). For example, if only                 the impartiality of their advice. There                be considered fiduciaries would
                                                     75 percent of the potential gains were                  may be benefits from the increased                     enhance the Department’s ability to
                                                     realized in the subset of the market that               flexibility that the current proposal’s                redress service provider abuses that
                                                     was analyzed (the front-load mutual                     PTEs would provide with respect to                     currently exist in the plan service
                                                     fund segment of the IRA market), the                    fiduciary investment advice currently                  provider market, such as undisclosed
                                                     gains would amount to between $30                       falling within the ambit of the 1975 rule.             fees, misrepresentation of compensation
                                                     billion and $33 billion over 10 years. If               The current proposal’s defined                         arrangements, and biased appraisals of
                                                     only 50 percent were realized, the                      boundaries between fiduciary advice,                   the value of plan investments.
                                                     expected gains in this subset of the                    education, and sales activity directed at                 The Department’s complete Initial
                                                                                                             large plans, may bring greater clarity to
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                                                     market would total between $20 billion                                                                         Regulatory Flexibility Analysis is
                                                     and $22 billion over 10 years, still                    the IRA and plan services markets.                     available at www.dol.gov/ebsa/pdf/
                                                     several times the proposal’s estimated                  Innovation in new advice business                      conflictsofinterestria.pdf. It is
                                                     compliance cost                                           36 GAO Report, Publication No. GAO–09–503T,
                                                                                                                                                                    summarized below.
                                                        These estimates account for only a                                                                             The Department believes that the
                                                                                                             2009.
                                                     fraction of potential conflicts, associated               37 GAO Report, Publication No. GAO–11–119,           proposal would provide benefits to
                                                     losses, and affected retirement assets.                 2011.                                                  small plans and their related small
                                                     The total gains to IRA investors                          38 See e.g. Elton et al. (2013).                     employers and IRA holders, and impose
                                                     attributable to the rule may be much                      39 See Pool et al. (2014).                           costs on small service providers


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

                                                     providing investment advice to ERISA                    disclosure costs are not expected to                   Carveout Disclosure Requirements to
                                                     plans, ERISA plan participants and IRA                  disproportionately affect small entities.              the Office of Management and Budget
                                                     holders. Small service providers                           Although the PTEs allow firms to                    (OMB) in accordance with 44 U.S.C.
                                                     affected by this rule are defined to                    maintain their existing business models,               3507(d) for review of its information
                                                     include broker-dealers, registered                      some small affected entities may                       collections. The Department and OMB
                                                     investment advisers, consultants,                       determine that it is more cost effective               are particularly interested in comments
                                                     appraisers, and others providing                        to shift business models. In this                      that:
                                                     investment advice to small ERISA plans                  scenario, some BDs might incur the                       • Evaluate whether the collection of
                                                     and IRA that have less than $38.5                       costs of switching to becoming RIAs,                   information is necessary for the proper
                                                     million in revenue.                                     including training, testing, and licensing             performance of the functions of the
                                                        The Department anticipates that                      costs, at a cost of approximately $5,600               agency, including whether the
                                                     broker-dealers would experience the                     per representative.                                    information would have practical
                                                     largest impact from the proposed rule                      Some small service providers may                    utility;
                                                     and associated proposed exemptions.                     find that the increased costs associated                 • Evaluate the accuracy of the
                                                     Registered investment advisers and                      with ERISA fiduciary status outweigh                   agency’s estimate of the burden of the
                                                     other ERISA plan service providers                      the benefit of continuing to service the               collection of information, including the
                                                     would experience less of a burden from                  ERISA plan market or the IRA market.                   validity of the methodology and
                                                     the rule. The Department assumes that                   The Department does not believe that                   assumptions used;
                                                     firms would utilize whichever PTEs                      this outcome would be widespread or                      • Enhance the quality, utility, and
                                                     would be most cost effective for their                  that it would result in a diminution of                clarity of the information to be
                                                     business models. Regardless of which                    the amount or quality of advice                        collected; and
                                                     PTEs they use, small affected entities                  available to small or other retirement                   • Minimize the burden of the
                                                     would incur costs associated with                       savers. It is also possible that the                   collection of information on those who
                                                     developing and implementing new                         economic impact of the rule on small                   are to respond, including through the
                                                     compliance policies and procedures to                   entities would not be as significant as it             use of appropriate automated,
                                                     minimize conflicts of interest; creating                would be for large entities, because                   electronic, mechanical, or other
                                                     and distributing new disclosures;                       anecdotal evidence indicates that some                 technological collection techniques or
                                                     maintaining additional compliance                       small entities do not have as many                     other forms of information technology,
                                                     records; familiarizing and training staff               business arrangements that give rise to                e.g., permitting electronic submission of
                                                     on new requirements; and obtaining                      conflicts of interest. Therefore, they                 responses.
                                                     additional liability insurance.                         would not be confronted with the same                    Comments should be sent to the
                                                        As discussed previously, the                         costs to restructure transactions that                 Office of Information and Regulatory
                                                     Department estimated the costs of                       would be faced by large entities.                      Affairs, Office of Management and
                                                     implementing new compliance policies                                                                           Budget, Room 10235, New Executive
                                                                                                             L. Paperwork Reduction Act                             Office Building, Washington, DC 20503;
                                                     and procedures, training staff, and
                                                     creating disclosures for small broker-                     As part of its continuing effort to                 Attention: Desk Officer for the
                                                     dealers. The Department estimates that                  reduce paperwork and respondent                        Employee Benefits Security
                                                     small broker-dealers could expend on                    burden, the Department of Labor                        Administration. OMB requests that
                                                     average approximately $53,000 in the                    conducts a preclearance consultation                   comments be received within 30 days of
                                                     first year and $21,000 in subsequent                    program to provide the general public                  publication of the Proposed Investment
                                                     years; small registered investment                      and Federal agencies with an                           Advice Initiative to ensure their
                                                     advisers would spend approximately                      opportunity to comment on proposed                     consideration.
                                                     $5,300 in the first year and $500 in                    and continuing collections of                            PRA Addressee: Address requests for
                                                     subsequent years; and small service                     information in accordance with the                     copies of the ICR to G. Christopher
                                                     providers would spend approximately                     Paperwork Reduction Act of 1995 (PRA)                  Cosby, Office of Policy and Research,
                                                     $5,300 in the first year and $500 in                    (44 U.S.C. 3506(c)(2)(A)). This helps to               U.S. Department of Labor, Employee
                                                     subsequent years. The estimated cost for                ensure that the public understands the                 Benefits Security Administration, 200
                                                     small broker-dealers is believed to be an               Department’s collection instructions;                  Constitution Avenue NW., Room N–
                                                     overestimate, especially for the smallest               respondents can provide the requested                  5718, Washington, DC 20210.
                                                     firms as they are believed to have on                   data in the desired format; reporting                  Telephone (202) 693–8410; Fax: (202)
                                                     average simpler arrangements and they                   burden (time and financial resources) is               219–5333. These are not toll-free
                                                     may have relationships with larger firms                minimized; collection instruments are                  numbers. ICRs submitted to OMB also
                                                     that help with compliance, thus                         clearly understood; and the Department                 are available at http://www.RegInfo.gov.
                                                     lowering their costs. Additionally,                     can properly assess the impact of                        As discussed in detail above,
                                                     broker-dealers and service providers                    collection requirements on respondents.                Paragraph (b)(1)(i) of the proposed
                                                     would incur an expense of about $300                       Currently, the Department is soliciting             regulation provides a carve-out to the
                                                     in additional liability insurance                       comments concerning the proposed                       general definition for advice provided in
                                                     premiums for each representative or                     information collection requests (ICRs)                 connection with an arm’s length sale,
                                                     other individual who would now be                       included in the ‘‘carve-outs’’ section of              purchase, loan, or bilateral contract
                                                     considered a fiduciary. Of this expense,                its proposal to amend its 1975 rule that               between a sophisticated plan investor,
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                                                     $150 is estimated to be paid to the                     defines when a person who provides                     which has 100 or more plan
                                                     insuring firms and the other $150 is                    investment advice to an employee                       participants, and the adviser (‘‘seller’s
                                                     estimated to be paid out as                             benefit plan becomes an ERISA                          carve-out’’). It also applies in
                                                     compensation to those harmed, which is                  fiduciary. A copy of the ICRs may be                   connection with an offer to enter into
                                                     counted as a transfer. Any disclosures                  obtained by contacting the PRA                         such a transaction or when the person
                                                     produced by affected entities would                     addressee shown below or at http://                    providing the advice is acting as an
                                                     cost, on average, about $1.53 in the first              www.RegInfo.gov.                                       agent or appraiser for the plan’s
                                                     year and about $1.15 in subsequent                         The Department has submitted a copy                 counterparty. In order to rely on this
                                                     years. These per-representative and per-                of the Conflict of Interest Proposed Rule              carve-out, the person must provide


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                                                                              Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                            21955

                                                     advice to a plan fiduciary who is                       out disclosure, and the education carve-               result in approximately 43,000 hours of
                                                     independent of such person and who                      out disclosures for asset allocation                   legal time at an equivalent cost of
                                                     exercises authority or control respecting               models and interactive investment                      approximately $5.6 million. It would
                                                     the management or disposition of the                    materials are information collection                   also result in approximately 21,000
                                                     plan’s assets, with respect to an arm’s                 requests (ICRs) subject to the Paperwork               hours of clerical time at an equivalent
                                                     length sale, purchase, loan or bilateral                Reduction Act. The Department has                      cost of approximately $653,000. In total,
                                                     contract between the plan and the                       made the following assumptions in                      the burden associated with the seller’s
                                                     counterparty, or with respect to a                      order to establish a reasonable estimate               carve-out representation is
                                                     proposal to enter into such a sale,                     of the paperwork burden associated                     approximately 64,000 hours at an
                                                     purchase, loan or bilateral contract.                   with these ICRs:                                       equivalent cost of $6.2 million.
                                                        The seller’s carve-out applies if                      • Approximately 43,000 plans would                      The Department estimates that each
                                                     certain conditions are met. Among these                 utilize the seller’s carve-out;                        service provider using the platform
                                                     conditions are the following: The                         • Approximately 1,800 service                        provider carve-out would require ten
                                                     adviser must obtain a written                           providers would utilize the platform                   minutes of legal professional time to
                                                     representation from the plan fiduciary                  provider carve-out;                                    draft the needed disclosure. Therefore,
                                                     that (1) the plan fiduciary is a fiduciary                • Approximately 2,800 financial                      the platform provider carve-out
                                                     who exercises authority or control                      institutions would utilize the education               disclosure would result in
                                                     respecting the management or                            carve-out;                                             approximately 300 hours of legal time at
                                                     disposition of the employee benefit                       • Plans and advisers using the seller’s              an equivalent cost of approximately
                                                     plan’s assets (as described in section                  carve-out are entities with financial                  $39,000.
                                                     3(21)(A)(i) of the Act), (2) that the                   expertise and would distribute                            The Department estimates that each
                                                     employee benefit plan has 100 or more                   substantially all of the disclosures                   financial institution using the education
                                                     participants covered under the plan,                    electronically via means already used in               carve-out would require twenty minutes
                                                     and that (3) the fiduciary will not rely                their normal course of business and the                of legal professional time to draft the
                                                     on the person to act in the best interests              costs arising from electronic distribution             disclosure. Therefore, this carve-out
                                                     of the plan, to provide impartial                       would be negligible;                                   disclosure would result in
                                                     investment advice, or to give advice in                   • Service providers using the                        approximately 900 hours of legal time at
                                                     a fiduciary capacity.                                   platform provider carve-out already                    an equivalent cost of approximately
                                                        Paragraph (b)(3) of the proposed                     maintain contracts with their customers                $121,000.
                                                     regulation provides a carve-out making                  as a regular and customary business                       In total, the hour burden for the
                                                     clear that persons who merely market                    practice and the materials costs arising               representation and disclosures required
                                                     and make available, securities or other                 from inserting the platform provider                   by the carve-outs is approximately
                                                     property through a platform or similar                  carve-out into the existing contracts                  66,000 hours at an equivalent cost of
                                                     mechanism to an employee benefit plan                   would be negligible;                                   $6.4 million.
                                                     without regard to the individualized                      • Materials costs arising from                          Because the Department assumes that
                                                     needs of the plan, its participants, or                 inserting the required education carve-                all disclosures would be distributed
                                                     beneficiaries do not act as investment                  out disclosure into existing models and                electronically or require small amounts
                                                     advice fiduciaries. This carve-out                      interactive materials would be                         of space to include in existing materials,
                                                     applies if the person discloses in writing              negligible;                                            the Department has not associated any
                                                     to the plan fiduciary that the person is                  • Advisers would use existing in-                    cost burden with these ICRs.
                                                     not undertaking to provide impartial                    house resources to prepare the                            These paperwork burden estimates
                                                     investment advice or to give advice in                  disclosures; and                                       are summarized as follows:
                                                     a fiduciary capacity.                                     • The tasks associated with the ICRs                    Type of Review: New collection
                                                        Paragraph (b)(6) of the proposal makes               would be performed by clerical                         (Request for new OMB Control
                                                     clear that furnishing and providing                     personnel at an hourly rate of $30.42                  Number).
                                                     certain specified investment educational                and legal professionals at an hourly rate                 Agency: Employee Benefits Security
                                                     information and materials (including                    of $129.94.40                                          Administration, Department of Labor.
                                                     certain investment allocation models                      The Department estimates that each                      Title: Conflict of Interest Proposed
                                                     and interactive plan materials) to a plan,              plan would require one hour of legal                   Rule Carveout Disclosure Requirements.
                                                     plan fiduciary, participant, beneficiary                professional time and 30 minutes of                       OMB Control Number: 1210—NEW.
                                                     or IRA owner would not constitute the                   clerical time to produce the seller’s                     Affected Public: Business or other for-
                                                     rendering of investment advice if certain               carve-out representation. Therefore, the               profit.
                                                     conditions are met. One of the                          seller’s carve-out representation would                   Estimated Number of Respondents:
                                                     conditions is that the asset allocation                                                                        47,532.
                                                     models or interactive materials must                      40 The Department’s estimated 2015 hourly labor         Estimated Number of Annual
                                                     explain all material facts and                          rates include wages, other benefits, and overhead      Responses: 47,532.
                                                     assumptions on which the models and                     are calculated as follows: Mean wage from the 2013        Frequency of Response: When
                                                     materials are based and include a                       National Occupational Employment Survey (April
                                                                                                             2014, Bureau of Labor Statistics http://www.bls.gov/
                                                                                                                                                                    engaging in excepted transaction.
                                                     statement indicating that, in applying                  news.release/pdf/ocwage.pdf); wages as a percent of       Estimated Total Annual Burden
                                                     particular asset allocation models to                   total compensation from the Employer Cost for          Hours: 65,631 hours.
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                                                     their individual situations, participants,              Employee Compensation (June 2014, Bureau of               Estimated Total Annual Burden Cost:
                                                     beneficiaries, or IRA owners should                     Labor Statistics http://www.bls.gov/news.release/      $0.
                                                                                                             ecec.t02.htm); overhead as a multiple of
                                                     consider their other assets, income, and                compensation is assumed to be 25 percent of total
                                                     investments in addition to their                                                                               M. Congressional Review Act
                                                                                                             compensation for paraprofessionals, 20 percent of
                                                     interests in the plan or IRA to the extent              compensation for clerical, and 35 percent of             The proposed rule is subject to the
                                                     they are not taken into account in the                  compensation for professional; annual inflation        Congressional Review Act provisions of
                                                                                                             assumed to be 2.3 percent annual growth of total
                                                     model or estimate.                                      labor cost since 2013 (Employment Costs Index data
                                                                                                                                                                    the Small Business Regulatory
                                                        The seller’s carve-out written                       for private industry, September 2014 http://           Enforcement Fairness Act of 1996 (5
                                                     representation, platform provider carve-                www.bls.gov/news.release/eci.nr0.htm).                 U.S.C. 801 et seq.) and, if finalized,


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                                                     21956                    Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules

                                                     would be transmitted to Congress and                    investment capital, and gains to                       Register on October 20, 2010 (75 FR
                                                     the Comptroller General for review. The                 investors.                                             65263) is hereby withdrawn.
                                                     proposed rule is a ‘‘major rule’’ as that                 The current proposal is not expected                 List of Subjects in 29 CFR Parts 2509
                                                     term is defined in 5 U.S.C. 804, because                to have any material economic impacts                  and 2510
                                                     it is likely to result in an annual effect              on State, local or tribal governments, or
                                                     on the economy of $100 million or                       on health, safety, or the natural                        Employee benefit plans, Employee
                                                     more.                                                   environment. The North American                        Retirement Income Security Act,
                                                                                                             Securities Administrators Association                  Pensions, Plan assets.
                                                     N. Unfunded Mandates Reform Act
                                                                                                             commented in support of the                              For the reasons set forth in the
                                                        Title II of the Unfunded Mandates                    Department’s 2010 proposal.43                          preamble, the Department is proposing
                                                     Reform Act of 1995 (Pub. L. 104–4)                                                                             to amend parts 2509 and 2510 of
                                                     requires each Federal agency to prepare                 O. Federalism Statement                                subchapters A and B of Chapter XXV of
                                                     a written statement assessing the effects                                                                      Title 29 of the Code of Federal
                                                                                                                Executive Order 13132 (August 4,
                                                     of any Federal mandate in a proposed or                                                                        Regulations as follows:
                                                                                                             1999) outlines fundamental principles
                                                     final agency rule that may result in an
                                                                                                             of federalism, and requires the                        SUBCHAPTER A—GENERAL
                                                     expenditure of $100 million or more
                                                                                                             adherence to specific criteria by Federal
                                                     (adjusted annually for inflation with the
                                                                                                             agencies in the process of their                       PART 2509—INTERPRETIVE
                                                     base year 1995) in any one year by State,
                                                                                                             formulation and implementation of                      BULLETINS RELATING TO THE
                                                     local, and tribal governments, in the
                                                     aggregate, or by the private sector. Such               policies that have substantial direct                  EMPLOYEE RETIREMENT INCOME
                                                     a mandate is deemed to be a ‘‘significant               effects on the States, the relationship                SECURITY ACT OF 1974
                                                     regulatory action.’’ The current proposal               between the national government and
                                                                                                             States, or on the distribution of power                ■ 1. The authority citation for part 2509
                                                     is expected to have such an impact on                                                                          continues to read as follows:
                                                     the private sector, and the Department                  and responsibilities among the various
                                                     therefore hereby provides such an                       levels of government. This proposed                       Authority: 29 U.S.C. 1135. Secretary of
                                                     assessment.                                             rule does not have federalism                          Labor’s Order 1–2011, 77 FR 1088 (Jan. 9,
                                                                                                             implications because it has no                         2012). Sections 2509.75–10 and 2509.75–2
                                                        The Department is issuing the current
                                                                                                             substantial direct effect on the States, on            issued under 29 U.S.C. 1052, 1053, 1054. Sec.
                                                     proposal under ERISA section                                                                                   2509.75–5 also issued under 29 U.S.C. 1002.
                                                     3(21)(A)(ii) (29 U.S.C. 1002(21)(a)(ii)).41             the relationship between the national
                                                                                                                                                                    Sec. 2509.95–1 also issued under sec. 625,
                                                     The Department is charged with                          government and the States, or on the
                                                                                                                                                                    Pub. L. 109–280, 120 Stat. 780.
                                                     interpreting the ERISA and Code                         distribution of power and
                                                     provisions that attach fiduciary status to              responsibilities among the various                     § 2509.96–1      [Removed]
                                                     anyone who is paid to provide                           levels of government. Section 514 of                   ■   2. Remove § 2509.96–1.
                                                     investment advice to plan or IRA                        ERISA provides, with certain exceptions
                                                                                                             specifically enumerated, that the                      SUBCHAPTER B—DEFINITIONS AND
                                                     investors. The current proposal would                                                                          COVERAGE UNDER THE EMPLOYEE
                                                     update and supersede the 1975 rule 42                   provisions of Titles I and IV of ERISA                 RETIREMENT INCOME SECURITY ACT OF
                                                     that currently interprets these statutory               supersede any and all laws of the States               1974
                                                     provisions.                                             as they relate to any employee benefit
                                                        The Department assessed the                          plan covered under ERISA. The                          PART 2510—DEFINITIONS OF TERMS
                                                     anticipated benefits and costs of the                   requirements implemented in the                        USED IN SUBCHAPTERS C, D, E, F,
                                                     current proposal pursuant to Executive                  proposed rule do not alter the                         AND G OF THIS CHAPTER
                                                     Order 12866 in the Regulatory Impact                    fundamental reporting and disclosure
                                                     Analysis for the current proposal and                   requirements of the statute with respect               ■  3. The authority citation for part 2510
                                                     concluded that its benefits would justify               to employee benefit plans, and as such                 is revised to read as follows:
                                                     its costs. The Department’s complete                    have no implications for the States or                   Authority: 29 U.S.C. 1002(2), 1002(21),
                                                     Regulatory Impact Analysis is available                 the relationship or distribution of power              1002(37), 1002(38), 1002(40), 1031, and 1135;
                                                     at www.dol.gov/ebsa/pdf/                                between the national government and                    Secretary of Labor’s Order 1–2011, 77 FR
                                                     conflictsofinterestria.pdf. To                          the States.                                            1088; Secs. 2510.3–21, 2510.3–101 and
                                                                                                                                                                    2510.3–102 also issued under Sec. 102 of
                                                     summarize, the current proposals’
                                                                                                             Statutory Authority                                    Reorganization Plan No. 4 of 1978, 5 U.S.C.
                                                     material benefits and costs generally                                                                          App. 237. Section 2510.3–38 also issued
                                                     would be confined to the private sector,                   This regulation is proposed pursuant                under Pub. L. 105–72, Sec. 1(b), 111 Stat.
                                                     where plans and IRA investors would,                    to the authority in section 505 of ERISA               1457 (1997).
                                                     in the Department’s estimation, benefit                 (Pub. L. 93–406, 88 Stat. 894; 29 U.S.C.               ■ 4. Revise § 2510.3–21 to read as
                                                     on net, partly at the expense of their                  1135) and section 102 of Plan No. 4 of                 follows:
                                                     fiduciary advisers and upstream                         1978 (43 FR 47713, October 17, 1978),
                                                     financial service and product producers.                effective December 31, 1978 (44 FR                     § 2510.3–21      Definition of ‘‘Fiduciary.’’
                                                     The Department itself would benefit                     1065, January 3, 1979), 3 CFR 1978                       (a) Investment advice. For purposes of
                                                     from increased efficiency in its                        Comp. 332, and under Secretary of                      section 3(21)(A)(ii) of the Employee
                                                     enforcement activity. The public and                    Labor’s Order No. 1–2011, 77 FR 1088                   Retirement Income Security Act of 1974
                                                     overall US economy would benefit from                   (Jan. 9, 2012).                                        (Act) and section 4975(e)(3)(B) of the
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                                                     increased compliance with ERISA and                                                                            Internal Revenue Code (Code), except as
                                                     the Code and confidence in advisers, as                 Withdrawal of Proposed Regulation
                                                                                                                                                                    provided in paragraph (b) of this
                                                     well as from more efficient allocation of                  Paragraph (c) of the proposed                       section, a person renders investment
                                                                                                             regulation relating to the definition of               advice with respect to moneys or other
                                                       41 Under section 102 of the Reorganization Plan
                                                                                                             fiduciary (proposed 29 CFR 2510.3(21))                 property of a plan or IRA described in
                                                     No. 4 of 1978, the authority of the Secretary of the
                                                     Treasury to interpret section 4975 of the Code has
                                                                                                             that was published in the Federal                      paragraph (f)(2) of this section if—
                                                     been transferred, with exceptions not relevant here,                                                             (1) Such person provides, directly to
                                                     to the Secretary of Labor.                               43 Available at http://www.dol.gov/ebsa/pdf/1210-     a plan, plan fiduciary, plan participant
                                                       42 29 CFR 2510.3–21(c).                               AB32-PH007.pdf.                                        or beneficiary, IRA, or IRA owner the


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                                                                              Federal Register / Vol. 80, No. 75 / Monday, April 20, 2015 / Proposed Rules                                            21957

                                                     following types of advice in exchange                   respect to the management or                           investment advice, or to give advice in
                                                     for a fee or other compensation, whether                disposition of the plan’s assets, with                 a fiduciary capacity; and
                                                     direct or indirect:                                     respect to an arm’s length sale,                          (3) Does not receive a fee or other
                                                        (i) A recommendation as to the                       purchase, loan or bilateral contract                   compensation directly from the plan, or
                                                     advisability of acquiring, holding,                     between the plan and the counterparty,                 plan fiduciary, for the provision of
                                                     disposing or exchanging securities or                   or with respect to a proposal to enter                 investment advice (as opposed to other
                                                     other property, including a                             into such a sale, purchase, loan or                    services) in connection with the
                                                     recommendation to take a distribution                   bilateral contract, if, prior to providing             transaction.
                                                     of benefits or a recommendation as to                   any recommendation with respect to the                    (ii) Swap and security-based swap
                                                     the investment of securities or other                   transaction, such person satisfies the                 transactions. The person is a
                                                     property to be rolled over or otherwise                 requirements of either paragraph                       counterparty to an employee benefit
                                                     distributed from the plan or IRA;                       (b)(1)(i)(B) or (C) of this section.                   plan (as described in section 3(3) of the
                                                        (ii) A recommendation as to the                         (B) Such person—                                    Act) in connection with a swap or
                                                     management of securities or other                          (1) Obtains a written representation                security-based swap, as defined in
                                                     property, including recommendations as                  from the independent plan fiduciary                    section 1(a) of the Commodity Exchange
                                                     to the management of securities or other                that the independent fiduciary exercises               Act (7 U.S.C. 1(a) and section 3(a) of the
                                                     property to be rolled over or otherwise                 authority or control with respect to the               Securities Exchange Act (15 U.S.C.
                                                     distributed from the plan or IRA;                       management or disposition of the                       78c(a)), if—
                                                        (iii) An appraisal, fairness opinion, or             employee benefit plan’s assets (as                        (A) The plan is represented by a
                                                     similar statement whether verbal or                     described in section 3(21)(A)(i) of the                fiduciary independent of the person;
                                                     written concerning the value of                         Act), that the employee benefit plan has                  (B) The person is a swap dealer,
                                                     securities or other property if provided                100 or more participants covered under                 security-based swap dealer, major swap
                                                     in connection with a specific                           the plan, and that the independent                     participant, or major security-based
                                                     transaction or transactions involving the               fiduciary will not rely on the person to               swap participant;
                                                     acquisition, disposition, or exchange, of               act in the best interests of the plan, to                 (C) The person (if a swap dealer or
                                                     such securities or other property by the                provide impartial investment advice, or                security-based swap dealer), is not
                                                     plan or IRA;                                            to give advice in a fiduciary capacity;                acting as an advisor to the plan (within
                                                        (iv) A recommendation of a person                       (2) Fairly informs the independent                  the meaning of section 4s(h) of the
                                                     who is also going to receive a fee or                   plan fiduciary of the existence and                    Commodity Exchange Act or section
                                                     other compensation for providing any of                 nature of the person’s financial interests             15F(h) of the Securities Exchange Act of
                                                     the types of advice described in                        in the transaction;                                    1934) in connection with the
                                                     paragraphs (i) through (iii); and                          (3) Does not receive a fee or other                 transaction; and
                                                        (2) Such person, either directly or                  compensation directly from the plan, or                   (D) In advance of providing any
                                                     indirectly (e.g., through or together with              plan fiduciary, for the provision of                   recommendations with respect to the
                                                     any affiliate),—                                        investment advice (as opposed to other                 transaction, the person obtains a written
                                                        (i) Represents or acknowledges that it               services) in connection with the                       representation from the independent
                                                     is acting as a fiduciary within the                     transaction; and                                       plan fiduciary, that the fiduciary will
                                                     meaning of the Act with respect to the                     (4) Knows or reasonably believes that               not rely on recommendations provided
                                                     advice described in paragraph (a)(1) of                 the independent plan fiduciary has                     by the person.
                                                     this section; or                                        sufficient expertise to evaluate the                      (2) Employees. In his or her capacity
                                                        (ii) Renders the advice pursuant to a                transaction and to determine whether                   as an employee of any employer or
                                                     written or verbal agreement,                            the transaction is prudent and in the                  employee organization sponsoring the
                                                     arrangement or understanding that the                   best interest of the plan participants (the            employee benefit plan (as described in
                                                     advice is individualized to, or that such               person may rely on written                             section 3(3) of the Act), the person
                                                     advice is specifically directed to, the                 representations from the plan or the                   provides the advice to a plan fiduciary,
                                                     advice recipient for consideration in                   plan fiduciary to satisfy this subsection              and he or she receives no fee or other
                                                     making investment or management                         (b)(1)(i)(B)(4)).                                      compensation, direct or indirect, in
                                                     decisions with respect to securities or                    (C) Such person—                                    connection with the advice beyond the
                                                     other property of the plan or IRA.                         (1) Knows or reasonably believes that               employee’s normal compensation for
                                                        (b) Carve-outs—investment advice.                    the independent plan fiduciary has                     work performed for the employer or
                                                     Except for persons described in                         responsibility for managing at least $100              employee organization.
                                                     paragraph (a)(2)(i) of this section, the                million in employee benefit plan assets                   (3) Platform providers. The person
                                                     rendering of advice or other                            (for purposes of this paragraph                        merely markets and makes available to
                                                     communications in conformance with a                    (b)(1)(i)(C), when dealing with an                     an employee benefit plan (as described
                                                     carve-out set forth in paragraph (b)(1)                 individual employee benefit plan, a                    in section 3(3) of the Act), without
                                                     through (6) of this section shall not                   person may rely on the information on                  regard to the individualized needs of the
                                                     cause the person who renders the advice                 the most recent Form 5500 Annual                       plan, its participants, or beneficiaries,
                                                     to be treated as a fiduciary under                      Return/Report filed for the plan to                    securities or other property through a
                                                     paragraph (a) of this section.                          determine the value and, in the case of                platform or similar mechanism from
                                                        (1) Counterparties to the plan—(i)                   an independent fiduciary acting as an                  which a plan fiduciary may select or
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                                                     Counterparty transaction with plan                      asset manager for multiple employee                    monitor investment alternatives,
                                                     fiduciary with financial expertise. (A) In              benefit plans, a person may rely on                    including qualified default investment
                                                     such person’s capacity as a counterparty                representations from the independent                   alternatives, into which plan
                                                     (or representative of a counterparty) to                plan fiduciary regarding the value of                  participants or beneficiaries may direct
                                                     an employee benefit plan (as described                  employee benefit plan assets under                     the investment of assets held in, or
                                                     in section 3(3) of the Act), the person                 management);                                           contributed to, their individual
                                                     provides advice to a plan fiduciary who                    (2) Fairly informs the independent                  accounts, if the person discloses in
                                                     is independent of such person and who                   plan fiduciary that the person is not                  writing to the plan fiduciary that the
                                                     exercises authority or control with                     undertaking to provide impartial                       person is not undertaking to provide


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

                                                     impartial investment advice or to give                  or in combination with other materials)                   (H) General methods and strategies for
                                                     advice in a fiduciary capacity.                         recommendations with respect to                        managing assets in retirement (e.g.,
                                                        (4) Selection and monitoring                         specific investment products or specific               systematic withdrawal payments,
                                                     assistance. In connection with the                      plan or IRA alternatives, or                           annuitization, guaranteed minimum
                                                     activities described in paragraph (b)(3)                recommendations on investment,                         withdrawal benefits), including those
                                                     of this section with respect to an                      management, or value of a particular                   offered outside the plan or IRA.
                                                     employee benefit plan (as described in                  security or securities, or other property.                (iii) Asset allocation models.
                                                     section 3(3) of the Act), the person—                      (i) Plan information. Information and               Information and materials (e.g., pie
                                                        (i) Merely identifies investment                     materials that, without reference to the               charts, graphs, or case studies) that
                                                     alternatives that meet objective criteria               appropriateness of any individual                      provide a plan fiduciary, participant or
                                                     specified by the plan fiduciary (e.g.,                  investment alternative or any individual               beneficiary, or IRA owner with models
                                                     stated parameters concerning expense                    benefit distribution option for the plan               of asset allocation portfolios of
                                                     ratios, size of fund, type of asset, credit             or IRA, or a particular participant or                 hypothetical individuals with different
                                                     quality); or                                            beneficiary or IRA owner, describe the                 time horizons (which may extend
                                                        (ii) Merely provides objective                       terms or operation of the plan or IRA,                 beyond an individual’s retirement date)
                                                     financial data and comparisons with                     inform a plan fiduciary, participant,                  and risk profiles, where—
                                                     independent benchmarks to the plan                      beneficiary, or IRA owner about the                       (A) Such models are based on
                                                     fiduciary.                                              benefits of plan or IRA participation, the             generally accepted investments theories
                                                        (5) Financial reports and valuations.
                                                                                                             benefits of increasing plan or IRA                     that take into account the historic
                                                     The person provides an appraisal,
                                                                                                             contributions, the impact of                           returns of different asset classes (e.g.,
                                                     fairness opinion, or statement of value
                                                                                                             preretirement withdrawals on                           equities, bonds, or cash) over defined
                                                     to—
                                                        (i) An employee stock ownership plan                 retirement income, retirement income                   periods of time;
                                                     (as defined in section 407(d)(6) of the                 needs, varying forms of distributions,                    (B) All material facts and assumptions
                                                     Act) regarding employer securities (as                  including rollovers, annuitization and                 on which such models are based (e.g.,
                                                     defined section 407(d)(5) of the Act);                  other forms of lifetime income payment                 retirement ages, life expectancies,
                                                        (ii) An investment fund, such as a                   options (e.g., immediate annuity,                      income levels, financial resources,
                                                     collective investment fund or pooled                    deferred annuity, or incremental                       replacement income ratios, inflation
                                                     separate account, in which more than                    purchase of deferred annuity),                         rates, and rates of return) accompany
                                                     one unaffiliated plan has an investment,                advantages, disadvantages and risks of                 the models;
                                                     or which holds plan assets of more than                 different forms of distributions, or                      (C) Such models do not include or
                                                     one unaffiliated plan under 29 CFR                      describe investment objectives and                     identify any specific investment product
                                                     2510.3–101; or                                          philosophies, risk and return                          or specific alternative available under
                                                        (iii) A plan, a plan fiduciary, a plan               characteristics, historical return                     the plan or IRA; and
                                                     participant or beneficiary, an IRA or IRA               information or related prospectuses of                    (D) The asset allocation models are
                                                     owner solely for purposes of compliance                 investment alternatives under the plan                 accompanied by a statement indicating
                                                     with the reporting and disclosure                       or IRA.                                                that, in applying particular asset
                                                     provisions under the Act, the Code, and                    (ii) General financial, investment and              allocation models to their individual
                                                     the regulations, forms and schedules                    retirement information. Information and                situations, participants, beneficiaries, or
                                                     issued thereunder, or any applicable                    materials on financial, investment and                 IRA owners should consider their other
                                                     reporting or disclosure requirement                     retirement matters that do not address                 assets, income, and investments (e.g.,
                                                     under a Federal or state law, rule or                   specific investment products, specific                 equity in a home, Social Security
                                                     regulation or self-regulatory                           plan or IRA alternatives or distribution               benefits, individual retirement plan
                                                     organization rule or regulation.                        options available to the plan or IRA or                investments, savings accounts and
                                                        (6) Investment education. The person                 to participants, beneficiaries and IRA                 interests in other qualified and non-
                                                     furnishes or makes available any of the                 owners, or specific alternatives or                    qualified plans) in addition to their
                                                     following categories of investment-                     services offered outside the plan or IRA,              interests in the plan or IRA, to the
                                                     related information and materials                       and inform the plan fiduciary,                         extent those items are not taken into
                                                     described in paragraphs (b)(6)(i) through               participant or beneficiary, or IRA owner               account in the model or estimate.
                                                     (iv) of this section to a plan, plan                    about—                                                    (iv) Interactive investment materials.
                                                     fiduciary, participant or beneficiary,                     (A) General financial and investment                Questionnaires, worksheets, software,
                                                     IRA or IRA owner irrespective of who                    concepts, such as risk and return,                     and similar materials which provide a
                                                     provides or makes available the                         diversification, dollar cost averaging,                plan fiduciary, participant or
                                                     information and materials (e.g., plan                   compounded return, and tax deferred                    beneficiary, or IRA owners the means to
                                                     sponsor, fiduciary or service provider),                investment;                                            estimate future retirement income needs
                                                     the frequency with which the                               (B) Historic differences in rates of                and assess the impact of different asset
                                                     information and materials are provided,                 return between different asset classes                 allocations on retirement income;
                                                     the form in which the information and                   (e.g., equities, bonds, or cash) based on              questionnaires, worksheets, software
                                                     materials are provided (e.g., on an                     standard market indices;                               and similar materials which allow a
                                                     individual or group basis, in writing or                   (C) Effects of inflation;                           plan fiduciary, participant or
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                                                     orally, or via call center, video or                       (D) Estimating future retirement                    beneficiary, or IRA owners to evaluate
                                                     computer software), or whether an                       income needs;                                          distribution options, products or
                                                     identified category of information and                     (E) Determining investment time                     vehicles by providing information under
                                                     materials is furnished or made available                horizons;                                              paragraphs (b)(6)(i) and (ii) of this
                                                     alone or in combination with other                         (F) Assessing risk tolerance;                       section; questionnaires, worksheets,
                                                     categories of information and materials                    (G) Retirement-related risks (e.g.,                 software, and similar materials that
                                                     identified in paragraphs (b)(6)(i) through              longevity risks, market/interest rates,                provide a plan fiduciary, participant or
                                                     (iv), provided that the information and                 inflation, health care and other                       beneficiary, or IRA owner the means to
                                                     materials do not include (standing alone                expenses); and                                         estimate a retirement income stream


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

                                                     that could be generated by an actual or                 reference to the criteria set forth in                    (B) A price range within which such
                                                     hypothetical account balance, where—                    paragraph (a) of this section.                         security is to be purchased or sold, or,
                                                        (A) Such materials are based on                         (c) Scope of fiduciary duty—                        if such security is issued by an open-
                                                     generally accepted investment theories                  investment advice. A person who is a                   end investment company registered
                                                     that take into account the historic                     fiduciary with respect to an employee                  under the Investment Company Act of
                                                     returns of different asset classes (e.g.,               benefit plan or IRA by reason of                       1940 (15 U.S.C. 80a–1, et seq.), a price
                                                     equities, bonds, or cash) over defined                  rendering investment advice (as defined                which is determined in accordance with
                                                     periods of time;                                        in paragraph (a) of this section) for a fee            Rule 22c1 under the Investment
                                                        (B) There is an objective correlation                or other compensation, direct or                       Company Act of 1940 (17 CFR270.22c1);
                                                     between the asset allocations generated                 indirect, with respect to any securities                  (C) A time span during which such
                                                     by the materials and the information                    or other property of such plan, or having              security may be purchased or sold (not
                                                     and data supplied by the participant,                   any authority or responsibility to do so,              to exceed five business days); and
                                                     beneficiary or IRA owner;                               shall not be deemed to be a fiduciary                     (D) The minimum or maximum
                                                        (C) There is an objective correlation                regarding any assets of the plan or IRA                quantity of such security which may be
                                                     between the income stream generated by                  with respect to which such person does                 purchased or sold within such price
                                                     the materials and the information and                   not have any discretionary authority,                  range, or, in the case of a security issued
                                                     data supplied by the participant,                       discretionary control or discretionary                 by an open-end investment company
                                                     beneficiary or IRA owner;                               responsibility, does not exercise any                  registered under the Investment
                                                        (D) All material facts and assumptions               authority or control, does not render                  Company Act of 1940, the minimum or
                                                     (e.g., retirement ages, life expectancies,              investment advice (as defined in                       maximum quantity of such security
                                                     income levels, financial resources,                     paragraph (a)(1) of this section) for a fee            which may be purchased or sold, or the
                                                     replacement income ratios, inflation                    or other compensation, and does not                    value of such security in dollar amount
                                                     rates, rates of return and other features               have any authority or responsibility to                which may be purchased or sold, at the
                                                     and rates specific to income annuities or               render such investment advice,                         price referred to in paragraph
                                                     systematic withdrawal plan) that may                    provided that nothing in this paragraph                (d)(1)(ii)(B) of this section.
                                                     affect a participant’s, beneficiary’s or                shall be deemed to:                                       (2) A person who is a broker-dealer,
                                                     IRA owner’s assessment of the different                    (1) Exempt such person from the                     reporting dealer, or bank which is a
                                                     asset allocations or different income                   provisions of section 405(a) of the Act                fiduciary with respect to an employee
                                                     streams accompany the materials or are                  concerning liability for fiduciary                     benefit plan or IRA solely by reason of
                                                     specified by the participant, beneficiary               breaches by other fiduciaries with                     the possession or exercise of
                                                     or IRA owner;                                           respect to any assets of the plan; or                  discretionary authority or discretionary
                                                        (E) The materials do not include or                     (2) Exclude such person from the                    control in the management of the plan
                                                     identify any specific investment                        definition of the term ‘‘party in interest’’           or IRA, or the management or
                                                     alternative available or distribution                   (as set forth in section 3(14)(B) of the               disposition of plan or IRA assets in
                                                     option available under the plan or IRA,                 Act or ‘‘disqualified person’’ as set forth            connection with the execution of a
                                                     unless such alternative or option is                    in section 4975(e)(2) of the Code) with                transaction or transactions for the
                                                     specified by the participant, beneficiary               respect to a plan.                                     purchase or sale of securities on behalf
                                                     or IRA owner; and                                          (d) Execution of securities                         of such plan or IRA which fails to
                                                        (F) The materials either take into                   transactions. (1) A person who is a                    comply with the provisions of
                                                     account other assets, income and                        broker or dealer registered under the                  paragraph (d)(1) of this section, shall not
                                                     investments (e.g., equity in a home,                    Securities Exchange Act of 1934, a                     be deemed to be a fiduciary regarding
                                                     Social Security benefits, individual                    reporting dealer who makes primary                     any assets of the plan or IRA with
                                                     retirement account/annuity                              markets in securities of the United                    respect to which such broker-dealer,
                                                     investments, savings accounts, and                      States Government or of an agency of                   reporting dealer or bank does not have
                                                     interests in other qualified and non-                   the United States Government and                       any discretionary authority,
                                                     qualified plans) or are accompanied by                  reports daily to the Federal Reserve                   discretionary control or discretionary
                                                     a statement indicating that, in applying                Bank of New York its positions with                    responsibility, does not exercise any
                                                     particular asset allocations to their                   respect to such securities and                         authority or control, does not render
                                                     individual situations, or in assessing the              borrowings thereon, or a bank                          investment advice (as defined in
                                                     adequacy of an estimated income                         supervised by the United States or a                   paragraph (a) of this section) for a fee or
                                                     stream, participants, beneficiaries or                  State, shall not be deemed to be a                     other compensation, and does not have
                                                     IRA owners should consider their other                  fiduciary, within the meaning of section               any authority or responsibility to render
                                                     assets, income, and investments in                      3(21)(A) of the Act or section                         such investment advice, provided that
                                                     addition to their interests in the plan or              4975(e)(3)(B) of the Code, with respect                nothing in this paragraph shall be
                                                     IRA.                                                    to an employee benefit plan or IRA                     deemed to:
                                                        (v) The information and materials                    solely because such person executes                       (i) Exempt such broker-dealer,
                                                     described in paragraphs (b)(6)(i) through               transactions for the purchase or sale of               reporting dealer, or bank from the
                                                     (iv) of this section represent examples of              securities on behalf of such plan in the               provisions of section 405(a) of the Act
                                                     the type of information and materials                   ordinary course of its business as a                   concerning liability for fiduciary
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                                                     that may be furnished to participants,                  broker, dealer, or bank, pursuant to                   breaches by other fiduciaries with
                                                     beneficiaries and IRA owners without                    instructions of a fiduciary with respect               respect to any assets of the plan; or
                                                     such information and materials                          to such plan or IRA, if:                                  (ii) Exclude such broker-dealer,
                                                     constituting investment advice.                            (i) Neither the fiduciary nor any                   reporting dealer, or bank from the
                                                     Determinations as to whether the                        affiliate of such fiduciary is such broker,            definition of the term party in interest
                                                     provision of any information, materials                 dealer, or bank; and                                   (as set forth in section 3(14)(B) of the
                                                     or educational services not described                      (ii) The instructions specify:                      Act) or disqualified person 4975(e)(2) of
                                                     herein constitutes the rendering of                        (A) The security to be purchased or                 the Code with respect to any assets of
                                                     investment advice must be made by                       sold;                                                  the plan or IRA.


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

                                                        (e) Internal Revenue Code. Section                   controlled by, or under common control                 and beneficiaries, and IRA owners. The
                                                     4975(e)(3) of the Code contains                         with such person; any officer, director,               proposed exemption would affect
                                                     provisions parallel to section 3(21)(A) of              partner, employee or relative (as defined              participants and beneficiaries of plans,
                                                     the Act which define the term                           in section 3(15) of the Act) of such                   IRA owners and fiduciaries with respect
                                                     ‘‘fiduciary’’ for purposes of the                       person; and any corporation or                         to such plans and IRAs.
                                                     prohibited transaction provisions in                    partnership of which such person is an                 DATES: Comments: Written comments
                                                     Code section 4975. Effective December                   officer, director or partner.                          concerning the proposed class
                                                     31, 1978, section 102 of the                              (8) ‘‘Control’’ for purposes of                      exemption must be received by the
                                                     Reorganization Plan No. 4 of 1978, 5                    paragraph (f)(7) of this section means                 Department on or before July 6, 2015.
                                                     U.S.C. App. 237 transferred the                         the power to exercise a controlling                       Applicability: The Department
                                                     authority of the Secretary of the                       influence over the management or                       proposes to make this exemption
                                                     Treasury to promulgate regulations of                   policies of a person other than an                     available eight months after publication
                                                     the type published herein to the                        individual.                                            of the final exemption in the Federal
                                                     Secretary of Labor. All references herein                 Signed at Washington, DC, this 14th day of           Register. We request comment below on
                                                     to section 3(21)(A) of the Act should be                April, 2015.                                           whether the applicability date of certain
                                                     read to include reference to the parallel               Phyllis C. Borzi,                                      conditions should be delayed.
                                                     provisions of section 4975(e)(3) of the                                                                        ADDRESSES: All written comments
                                                                                                             Assistant Secretary, Employee Benefits
                                                     Code. Furthermore, the provisions of                    Security Administration, Department of                 concerning the proposed class
                                                     this section shall apply for purposes of                Labor.                                                 exemption should be sent to the Office
                                                     the application of Code section 4975                    [FR Doc. 2015–08831 Filed 4–15–15; 11:15 am]           of Exemption Determinations by any of
                                                     with respect to any plan described in                                                                          the following methods, identified by
                                                                                                             BILLING CODE 4510–29–P
                                                     Code section 4975(e)(1).                                                                                       ZRIN: 1210–ZA25:
                                                        (f) Definitions. For purposes of this                                                                          Federal eRulemaking Portal: http://
                                                     section—                                                DEPARTMENT OF LABOR                                    www.regulations.gov at Docket ID
                                                        (1) ‘‘Recommendation’’ means a                                                                              number: EBSA–2014–0016. Follow the
                                                     communication that, based on its                        Employee Benefits Security                             instructions for submitting comments.
                                                     content, context, and presentation,                     Administration                                            Email to: e-OED@dol.gov.
                                                     would reasonably be viewed as a                                                                                   Fax to: (202) 693–8474.
                                                     suggestion that the advice recipient                    29 CFR Part 2550                                          Mail: Office of Exemption
                                                     engage in or refrain from taking a                                                                             Determinations, Employee Benefits
                                                     particular course of action.                            [Application No. D–11712]                              Security Administration, (Attention: D–
                                                        (2)(i) ‘‘Plan’’ means any employee                   ZRIN 1210–ZA25                                         11712), U.S. Department of Labor, 200
                                                     benefit plan described in section 3(3) of                                                                      Constitution Avenue NW., Suite 400,
                                                     the Act and any plan described in                       Proposed Best Interest Contract                        Washington DC 20210.
                                                     section 4975(e)(1)(A) of the Code, and                  Exemption                                                 Hand Delivery/Courier: Office of
                                                        (ii) ‘‘IRA’’ means any trust, account or                                                                    Exemption Determinations, Employee
                                                     annuity described in Code section                       AGENCY: Employee Benefits Security                     Benefits Security Administration,
                                                     4975(e)(1)(B) through (F), including, for               Administration (EBSA), U.S.                            (Attention: D–11712), U.S. Department
                                                     example, an individual retirement                       Department of Labor.                                   of Labor, 122 C St. NW., Suite 400,
                                                     account described in section 408(a) of                  ACTION: Notice of Proposed Class                       Washington DC 20001.
                                                     the Code and a health savings account                   Exemption.                                                Instructions. All comments must be
                                                     described in section 223(d) of the Code.                                                                       received by the end of the comment
                                                        (3) ‘‘Plan participant’’ means for a                 SUMMARY:   This document contains a                    period. The comments received will be
                                                     plan described in section 3(3) of the Act,              notice of pendency before the U.S.                     available for public inspection in the
                                                     a person described in section 3(7) of the               Department of Labor of a proposed                      Public Disclosure Room of the
                                                     Act.                                                    exemption from certain prohibited                      Employee Benefits Security
                                                        (4) ‘‘IRA owner’’ means with respect                 transactions provisions of the Employee                Administration, U.S. Department of
                                                     to an IRA either the person who is the                  Retirement Income Security Act of 1974                 Labor, Room N–1513, 200 Constitution
                                                     owner of the IRA or the person for                      (ERISA) and the Internal Revenue Code                  Avenue NW., Washington, DC 20210.
                                                     whose benefit the IRA was established.                  (the Code). The provisions at issue                    Comments will also be available online
                                                        (5) ‘‘Plan fiduciary’’ means a person                generally prohibit fiduciaries with                    at www.regulations.gov, at Docket ID
                                                     described in section (3)(21) of the Act                 respect to employee benefit plans and                  number: EBSA–2014–0016 and
                                                     and 4975(e)(3) of the Code.                             individual retirement accounts (IRAs)                  www.dol.gov/ebsa, at no charge.
                                                        (6) ‘‘Fee or other compensation, direct              from engaging in self-dealing and                         Warning: All comments will be made
                                                     or indirect’’ for purposes of this section              receiving compensation from third                      available to the public. Do not include
                                                     and section 3(21)(A)(ii) of the Act,                    parties in connection with transactions                any personally identifiable information
                                                     means any fee or compensation for the                   involving the plans and IRAs. The                      (such as Social Security number, name,
                                                     advice received by the person (or by an                 exemption proposed in this notice                      address, or other contact information) or
                                                     affiliate) from any source and any fee or               would allow entities such as broker-                   confidential business information that
                                                     compensation incident to the                            dealers and insurance agents that are                  you do not want publicly disclosed. All
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                                                     transaction in which the investment                     fiduciaries by reason of the provision of              comments may be posted on the Internet
                                                     advice has been rendered or will be                     investment advice to receive such                      and can be retrieved by most Internet
                                                     rendered. The term fee or other                         compensation when plan participants                    search engines.
                                                     compensation includes, for example,                     and beneficiaries, IRA owners, and                     FOR FURTHER INFORMATION CONTACT:
                                                     brokerage fees, mutual fund and                         certain small plans purchase, hold or                  Karen E. Lloyd or Brian L. Shiker, Office
                                                     insurance sales commissions.                            sell certain investment products in                    of Exemption Determinations, Employee
                                                        (7) ‘‘Affiliate’’ includes: Any person               accordance with the fiduciaries’ advice,               Benefits Security Administration, U.S.
                                                     directly or indirectly, through one or                  under protective conditions to safeguard               Department of Labor (202) 693–8824
                                                     more intermediaries, controlling,                       the interests of the plans, participants               (this is not a toll-free number).


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Document Created: 2018-02-21 10:12:35
Document Modified: 2018-02-21 10:12:35
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionProposed Rules
ActionNotice of proposed rulemaking and withdrawal of previous proposed rule.
DatesAs of April 20, 2015, the proposed rule published October 22, 2010 (75 FR 65263) is withdrawn. Submit written comments on the proposed regulation on or before July 6, 2015.
ContactFor Questions Regarding the Proposed Rule: Contact Luisa Grillo- Chope or Fred Wong, Office of Regulations and Interpretations, Employee Benefits Security Administration (EBSA), (202) 693-8825.
FR Citation80 FR 21928 
RIN Number1210-AB32
CFR Citation29 CFR 2509
29 CFR 2510
CFR AssociatedEmployee Benefit Plans; Employee Retirement Income Security Act; Pensions and Plan Assets

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