dol definition of the term ‘‘fiduciary’’; conflict of interest rule—retirement investment...

8/20/2019 DOL Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice

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Vol. 80 Monday,No. 75 April 20, 2015

Part III

Department of Labor

Employee Benefits Security Administration

29 CFR Parts 2509 and 2510Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—RetirementInvestment Advice; Proposed Rule

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

1By using the term ‘‘adviser,’’ the Departmentdoes not intend to limit its use to investmentadvisers registered under the Investment AdvisersAct of 1940 or under state law. For example, asused herein, an adviser can be an individual orentity who can be, among other things, arepresentative of a registered investment adviser, a bank or similar financial institution, an insurancecompany, or a broker-dealer.

DEPARTMENT OF LABOR

Employee Benefits SecurityAdministration

29 CFR Parts 2509 and 2510

RIN 1210–AB32

Definition of the Term ‘‘Fiduciary’’;Conflict of Interest Rule—RetirementInvestment Advice

AGENCY: Employee Benefits SecurityAdministration, Department of Labor.

ACTION: Notice of proposed rulemakingand withdrawal of previous proposedrule.

SUMMARY: This document contains aproposed regulation defining who is a‘‘fiduciary’’ of an employee benefit planunder the Employee Retirement IncomeSecurity Act of 1974 (ERISA) as a resultof giving investment advice to a plan or

its participants or beneficiaries. Theproposal also applies to the definition ofa ‘‘fiduciary’’ of a plan (including anindividual retirement account (IRA))under section 4975 of the InternalRevenue Code of 1986 (Code). Ifadopted, the proposal would treatpersons who provide investment adviceor recommendations to an employee

benefit plan, plan fiduciary, planparticipant or beneficiary, IRA, or IRAowner as fiduciaries under ERISA andthe Code in a wider array of advicerelationships than the existing ERISAand Code regulations, which would bereplaced. The proposed rule, and relatedexemptions, would increase consumerprotection for plan sponsors, fiduciaries,participants, beneficiaries and IRAowners. This document also withdrawsa prior proposed regulation published in2010 (2010 Proposal) concerning thissame subject matter. In connection withthis proposal, elsewhere in this issue ofthe Federal Register, the Department isproposing new exemptions andamendments to existing exemptionsfrom the prohibited transaction rulesapplicable to fiduciaries under ERISAand the Code that would allow certain

broker-dealers, insurance agents and

others that act as investment advicefiduciaries to continue to receive avariety of common forms ofcompensation that otherwise would beprohibited as conflicts of interest.

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

ADDRESSES: To facilitate the receipt andprocessing of written comment letters

on the proposed regulation, EBSAencourages interested persons to submittheir comments electronically. You maysubmit comments, identified by RIN1210–AB32, by any of the followingmethods:

Federal eRulemaking Portal: http:// www.regulations.gov. Followinstructions for submitting comments.

Email: [email protected]. Include RIN1210–AB32 in the subject line of themessage.

Mail: Office of Regulations andInterpretations, Employee BenefitsSecurity Administration, Attn: Conflictof Interest Rule, Room N–5655, U.S.Department of Labor, 200 ConstitutionAvenue NW., Washington, DC 20210.

Hand Delivery/Courier: Office ofRegulations and Interpretations,Employee Benefits SecurityAdministration, Attn: Conflict ofInterest Rule, Room N–5655, U.S.Department of Labor, 200 Constitution

Avenue NW., Washington, DC 20210.Instructions: All comments receivedmust include the agency name andRegulatory Identifier Number (RIN) forthis rulemaking (RIN 1210–AB32).Persons submitting commentselectronically are encouraged not tosubmit paper copies. All commentsreceived will be made available to thepublic, posted without change tohttp://www.regulations.gov and http:// www.dol.gov/ebsa, and made availablefor public inspection at the PublicDisclosure Room, N–1513, EmployeeBenefits Security Administration, U.S.Department of Labor, 200 Constitution

Avenue NW., Washington, DC 20210,including any personal informationprovided.

FOR FURTHER INFORMATION CONTACT:For Questions Regarding the Proposed

Rule: Contact Luisa Grillo-Chope orFred Wong, Office of Regulations andInterpretations, Employee BenefitsSecurity Administration (EBSA), (202)693–8825.

For Questions Regarding the ProposedProhibited Transaction Exemptions:Contact Karen Lloyd, Office ofExemption Determinations, EBSA, 202–693–8824.

For Questions Regarding theRegulatory Impact Analysis: Contact G.Christopher Cosby, Office of Policy andResearch, EBSA, 202–693–8425. (Theseare not toll-free numbers).SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose of the Regulatory Action

Under ERISA and the Code, a personis a fiduciary to a plan or IRA to theextent that he or she engages inspecified plan activities, including

rendering ‘‘investment advice for a feeor other compensation, direct orindirect, with respect to any moneys orother property of such plan . . . ’’ERISA safeguards plan participants byimposing trust law standards of care andundivided loyalty on plan fiduciaries,and by holding fiduciaries accountablewhen they breach those obligations. In

addition, fiduciaries to plans and IRAsare not permitted to engage in‘‘prohibited transactions,’’ which posespecial dangers to the security ofretirement, health, and other benefitplans because of fiduciaries’ conflicts ofinterest with respect to the transactions.Under this regulatory structure,fiduciary status and responsibilities arecentral to protecting the public interestin the integrity of retirement and otherimportant benefits, many of which aretax-favored.

In 1975, the Department issuedregulations that significantly narrowed

the breadth of the statutory definition offiduciary investment advice by creatinga five-part test that must, in eachinstance, be satisfied before a personcan be treated as a fiduciary adviser.This regulatory definition applies to

both ERISA and the Code. TheDepartment created the test in a verydifferent context, prior to the existenceof participant-directed 401(k) plans,widespread investments in IRAs, andthe now commonplace rollover of planassets from fiduciary-protected plans toIRAs. Today, as a result of the five-parttest, many investment professionals,consultants, and advisers 1 have noobligation to adhere to ERISA’sfiduciary standards or to the prohibitedtransaction rules, despite the criticalrole they play in guiding plan and IRAinvestments. Under ERISA and theCode, if these advisers are notfiduciaries, they may operate withconflicts of interest that they need notdisclose and have limited liability underfederal pension law for any harmsresulting from the advice they provide.Non-fiduciaries may give imprudentand disloyal advice; steer plans and IRAowners to investments based on theirown, rather than their customers’

financial interests; and act on conflictsof interest in ways that would beprohibited if the same persons werefiduciaries. In light of the breadth andintent of ERISA and the Code’s statutory


http://www.regulations.gov/http://www.regulations.gov/mailto:[email protected]://www.regulations.gov/http://www.dol.gov/ebsahttp://www.dol.gov/ebsamailto:[email protected]://www.dol.gov/ebsahttp://www.dol.gov/ebsahttp://www.regulations.gov/http://www.regulations.gov/http://www.regulations.gov/


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

2For purposes of the exemption, retail investorsinclude (1) the participants and beneficiaries ofparticipant-directed plans, (2) IRA owners, and (3)the sponsors (including employees, officers, ordirectors thereof) of non participant-directed planswith fewer than 100 participants to the extent thesponsors (including employees, officers, ordirectors thereof) act as a fiduciary with respect toplan investment decisions.

3Although referred to herein as the ‘‘seller’scarve-out,’’ we note that the carve-out provided inparagraph (b)(1)(i) of the proposal is not limited tosales and would apply to incidental adviceprovided in connection with an arm’s length sale,purchase, loan, or bilateral contract between a planinvestor with financial expertise and the adviser.

definition, the growth of participant-directed investment arrangements andIRAs, and the need for plans and IRAowners to seek out and rely onsophisticated financial advisers to makecritical investment decisions in anincreasingly complex financialmarketplace, the Department believes itis appropriate to revisit its 1975

regulatory definition as well as theCode’s virtually identical regulation.With this regulatory action, theDepartment proposes to replace the1975 regulations with a definition offiduciary investment advice that betterreflects the broad scope of the statutorytext and its purposes and better protectsplans, participants, beneficiaries, andIRA owners from conflicts of interest,imprudence, and disloyalty.

The Department has also sought topreserve beneficial business models fordelivery of investment advice byseparately proposing new exemptions

from ERISA’s prohibited transactionrules that would broadly permit firms tocontinue common fee and compensationpractices, as long as they are willing toadhere to basic standards aimed atensuring that their advice is in the bestinterest of their customers. Rather thancreate a highly prescriptive set oftransaction-specific exemptions, theDepartment instead is proposing a set ofexemptions that flexibly accommodate awide range of current businesspractices, while minimizing the harmfulimpact of conflicts of interest on thequality of advice.

In particular, the Department isproposing a new exemption (the ‘‘BestInterest Contract Exemption’’) thatwould provide conditional relief forcommon compensation, such ascommissions and revenue sharing, thatan adviser and the adviser’s employingfirm might receive in connection withinvestment advice to retail retirementinvestors.2 In order to protect theinterests of plans, participants and

beneficiaries, and IRA owners, theexemption requires the firm and theadviser to contractually acknowledgefiduciary status, commit to adhere to

basic standards of impartial conduct,

adopt policies and proceduresreasonably designed to minimize theharmful impact of conflicts of interest,and disclose basic information on theirconflicts of interest and on the cost of

their advice. Central to the exemption isthe adviser and firm’s agreement to meetfundamental obligations of fair dealingand fiduciary conduct—to give advicethat is in the customer’s best interest;avoid misleading statements; receive nomore than reasonable compensation;and comply with applicable federal andstate laws governing advice. This

principles-based approach aligns theadviser’s interests with those of the planparticipant or IRA owner, while leavingthe adviser and employing firm with theflexibility and discretion necessary todetermine how best to satisfy these

basic standards in light of the uniqueattributes of their business. TheDepartment is similarly proposing toamend existing exemptions for a widerange of fiduciary advisers to ensureadherence to these basic standards offiduciary conduct. In addition, theDepartment is proposing a newexemption for ‘‘principal transactions’’

in which advisers sell certain debtsecurities to plans and IRAs out of theirown inventory, as well as anamendment to an existing exemptionthat would permit advisers to receivecompensation for extending credit toplans or IRAs to avoid failed securitiestransactions. In addition to the BestInterest Contract Exemption, theDepartment is also seeking publiccomment on whether it should issue aseparate streamlined exemption thatwould allow advisers to receiveotherwise prohibited compensation inconnection with plan, participant and

beneficiary accounts, and IRA

investments in certain high-quality low-fee investments, subject to fewerconditions. This is discussed in greaterdetail in the Federal Register noticerelated to the proposed Best InterestContract Exemption.

This broad regulatory package aims toenable advisers and their firms to giveadvice that is in the best interest of theircustomers, without disrupting commoncompensation arrangements underconditions designed to ensure theadviser is acting in the best interest ofthe advice recipient. The proposed newexemptions and amendments to existing

exemptions are published elsewhere intoday’s edition of the Federal Register.

B. Summary of the Major Provisions ofthe Proposed Rule

The proposed rule clarifies andrationalizes the definition of fiduciaryinvestment advice subject to specificcarve-outs for particular types ofcommunications that are bestunderstood as non-fiduciary in nature.Under the definition, a person rendersinvestment advice by (1) providinginvestment or investment management

recommendations or appraisals to anemployee benefit plan, a plan fiduciary,participant or beneficiary, or an IRAowner or fiduciary, and (2) either (a)acknowledging the fiduciary nature ofthe advice, or (b) acting pursuant to anagreement, arrangement, orunderstanding with the advice recipientthat the advice is individualized to, orspecifically directed to, the recipient forconsideration in making investment ormanagement decisions regarding planassets. When such advice is providedfor a fee or other compensation, director indirect, the person giving the adviceis a fiduciary.

Although the new general definitionof investment advice avoids theweaknesses of the current regulation,standing alone it could sweep in somerelationships that are not appropriatelyregarded as fiduciary in nature and thatthe Department does not believeCongress intended to cover as fiduciaryrelationships. Accordingly, theproposed regulation includes a numberof specific carve-outs to the generaldefinition. For example, the regulationdraws an important distinction betweenfiduciary investment advice and non-fiduciary investment or retirementeducation. Similarly, under the ‘‘seller’scarve-out,’’ 3 the proposal would nottreat as fiduciary advicerecommendations made to a plan in anarm’s length transaction where there isgenerally no expectation of fiduciaryinvestment advice, provided that thecarve-out’s specific conditions are met.In addition, the proposal includesspecific carve-outs for advice rendered

by employees of the plan sponsor,platform providers, and persons whooffer or enter into swaps or security-

based swaps with plans. All of the rule’scarve-outs are subject to conditionsdesigned to draw an appropriate line

between fiduciary and non-fiduciarycommunications, consistent with thetext and purpose of the statutoryprovisions.

Finally, in addition to the newproposal in this Notice, the Department

is simultaneously proposing a new BestInterest Contract Exemption, revisingother exemptions from the prohibitedtransaction rules of ERISA and the Codeand is exploring through a request forcomments the concept of an additionallow-fee exemption.



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C. Gains to Investors and ComplianceCosts

When the Department promulgatedthe 1975 rule, 401(k) plans did not exist,IRAs had only just been authorized, andthe majority of retirement plan assetswere managed by professionals, ratherthan directed by individual investors.

Today, individual retirement investorshave much greater responsibility fordirecting their own investments, butthey seldom have the training orspecialized expertise necessary toprudently manage retirement assets ontheir own. As a result, they oftendepend on investment advice forguidance on how to manage theirsavings to achieve a secure retirement.In the current marketplace forretirement investment advice, however,advisers commonly have direct andsubstantial conflicts of interest, whichencourage investment recommendationsthat generate higher fees for the advisersat the expense of their customers andoften result in lower returns forcustomers even before fees.

A wide body of economic evidencesupports a finding that the impact ofthese conflicts of interest on retirementinvestment outcomes is large and, fromthe perspective of advice recipients,negative. As detailed in theDepartment’s Regulatory ImpactAnalysis (available at www.dol.gov/ ebsa/pdf/conflictsofinterestria.pdf ), thesupporting evidence includes, amongother things, statistical analyses ofconflicted investment channels,

experimental studies, governmentreports documenting abuse, and basiceconomic theory on the dangers posed

by conflicts of interest and by theasymmetries of information andexpertise that characterize interactions

between ordinary retirement investorsand conflicted advisers. This evidencetakes into account existing protectionsunder ERISA as well as other federaland state laws. A review of this data,which consistently points to substantialfailures in the market for retirementadvice, suggests that IRA holders

receiving conflicted investment advicecan expect their investments tounderperform by an average of 100 basispoints per year over the next 20 years.The underperformance associated withconflicts of interest—in the mutualfunds segment alone—could cost IRAinvestors more than $210 billion overthe next 10 years and nearly $500

billion over the next 20 years. Somestudies suggest that theunderperformance of broker-soldmutual funds may be even higher than100 basis points, possibly due to loadsthat are taken off the top and/or poortiming of broker sold investments. If thetrue underperformance of broker-soldfunds is 200 basis points, IRA mutualfund holders could suffer fromunderperformance amounting to $430

billion over 10 years and nearly $1trillion across the next 20 years. Whilethe estimates based on the mutual fundmarket are large, the total market impact

could be much larger. Insuranceproducts, Exchange Traded Funds(ETFs), individual stocks and bonds,and other products are all sold by agentsand brokers with conflicts of interest.

The Department expects the proposalwould deliver large gains for retirementinvestors. Because of data constraints,only some of these gains can bequantified with confidence. Focusingonly on how load shares paid to brokersaffect the size of loads paid by IRAinvestors holding load funds and thereturns they achieve, the Departmentestimates the proposal would deliver toIRA investors gains of between $40

billion and $44 billion over 10 years and between $88 billion and $100 billionover 20 years. These estimates assumethat the rule would eliminate (ratherthan just reduce) underperformanceassociated with the practice ofincentivizing broker recommendationsthrough variable front-end-load sharing;if the rule’s effectiveness in this area issubstantially below 100 percent, theseestimates may overstate these particulargains to investors in the front-loadmutual fund segment of the IRA market.The Department nonetheless believes

that these gains alone would far exceedthe proposal’s compliance cost. Forexample, if only 75 percent ofanticipated gains were realized, thequantified subset of such gains—specific to the front-load mutual fundsegment of the IRA market—wouldamount to between $30 billion and $33

billion over 10 years. If only 50 percent

were realized, this subset of expectedgains would total between $20 billionand $22 billion over 10 years, or severaltimes the proposal’s estimatedcompliance cost of $2.4 billion to 5.7

billion over the same 10 years. Thesegain estimates also exclude additionalpotential gains to investors resultingfrom reducing or eliminating the effectsof conflicts in financial products otherthan front-end-load mutual funds. TheDepartment invites input that wouldmake it possible to quantify themagnitude of the rule’s effectivenessand of any additional, not-yet-quantified

gains for investors.These estimates account for only a

fraction of potential conflicts, associatedlosses, and affected retirement assets.The total gains to IRA investorsattributable to the rule may be muchhigher than these quantified gains alonefor several reasons. The Departmentexpects the proposal to yield large,additional gains for IRA investors,including potential reductions inexcessive trading and associatedtransaction costs and timing errors (suchas might be associated with returnchasing), improvements in the

performance of IRA investments otherthan front-load mutual funds, andimprovements in the performance ofdefined contribution (DC) planinvestments. As noted above, undercurrent rules, adviser conflicts couldcost IRA investors as much as $410

billion over 10 years and $1 trillion over20 years, so the potential additionalgains to IRA investors from thisproposal could be very large.

The following accounting tablesummarizes the Department’sconclusions:

TABLE

1—PARTIAL

GAINS TO

INVESTORS AND

COMPLIANCE

COSTS

ACCOUNTING

TABLE

Category Primaryestimate

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

Periodcovered

Partial Gains to Investors

Annualized, Monetized ($mill ions/year) ............... $4,243$5,170

$3,8304,666

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

......................20152015

73

2017–20262017–2026


http://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdfhttp://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdfhttp://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdfhttp://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdfhttp://www.dol.gov/ebsa/pdf/conflictsofinterestria.pdf


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

CategoryPrimaryestimate Low estimate High estimate Year dollar

Discount rate(9%)

Periodcovered

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 sizeof 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 behigher 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 returnchasing), improvements in the performance of IRA investments other than front-load mutual funds, and improvements in the performance ofDC 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) .. ... .. ... .. ... $348328

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

......................$706

66420152015

73

2016–20252016–2025

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) ................ $6363

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

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

20152015

73

2016–20252016–2025

From/To ................................................................ From: Service providers facing increased in-surance premiums due to increased liabilityrisk

To: Plans, participants, beneficiaries, and IRAinvestors through the payment of recov-eries—funded from a portion of the in-creased insurance premiums

OMB Circular A–4 requires thepresentation of a social welfareaccounting table that summarizes a

regulation’s benefits, costs and transfers(monetized, where possible). Asummary of this type would differ fromand expand upon Table I in severalways:

• In the language of social welfareeconomics as reflected in Circular A–4,investor gains comprise two parts:Social welfare ‘‘benefits’’ attributable toimprovements in economic efficiencyand ‘‘transfers’’ of welfare to retirementinvestors from the financial servicesindustry. Due to limitations of theliterature and other available evidence,the investor gains estimates presented in

Table I have not been broken down into benefits and transfer components, butmaking the distinction between thesecategories of impacts is key for a socialwelfare accounting statement.

• The estimates in Table I reflect onlya subset of the gains to investorsresulting from the rule, but mayoverstate this subset. As noted in TableI, the Department’s estimates of partialgains to investors reflect an assumptionthat the rule will eliminate, rather thanjust reduce, underperformanceassociated with the practice of

incentivizing broker recommendationsthrough variable front-end-load sharing.If, however, the rule’s effectiveness is

substantially below 100 percent, theseestimates would overstate these partialgains to investors in the front-loadmutual fund segment of the IRA market.The estimates in Table I also excludeadditional potential gains to investorsresulting from reducing or eliminatingthe effects of conflicts in financialproducts other than front-end-loadmutual funds in the IRA market, and allpotential gains to investors in the planmarket. The Department invites inputthat would make it possible to quantifythe magnitude of the rule’s effectivenessand of any additional, not-yet-quantified

gains for investors.• Generally, the gains to investorsconsist of multiple parts: Transfers toIRA investors from advisers and othersin the supply chain, benefits to theoverall economy from a shift in theallocation of investment dollars toprojects that have higher returns, andresource savings associated with, forexample, reductions in excessiveturnover and wasteful and unsuccessfulefforts to outperform the market. Someof these gains are partially quantified inTable I. Also, the estimates in Table I

assume the gains to investors arisegradually as the fraction of wealthinvested based on conflicted investment

advice slowly declines over time basedon historical patterns of asset turnover.However, the estimates do not accountfor potential transition costs associatedwith a shift of investments to higher-performing vehicles. These transitioncosts have not been quantified due tolack of granularity in the literature oravailability of other evidence on boththe portion of investor gains thatconsists of resource savings, as opposedto transfers, and the amount oftransitional cost that would be incurredper unit of resource savings.

• Other categories of costs not yet

quantified include compliance costsincurred by mutual funds or other assetproviders. Enforcement costs or othercosts borne by the government are alsonot quantified.

The Department requests detailedcomment, data, and analysis on all ofthe issues outlined above forincorporation into the social welfareanalysis at the finalization stage of therulemaking process.

For a detailed discussion of the gainsto investors and compliance costs of the



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4ERISA section 404(a).

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

II. Overview

A. Rulemaking Background

The market for retirement advice haschanged dramatically since theDepartment first promulgated the 1975regulation. Individuals, rather than largeemployers and professional moneymanagers, have become increasinglyresponsible for managing retirementassets as IRAs and participant-directedplans, such as 401(k) plans, havesupplanted defined benefit pensions. Atthe same time, the variety andcomplexity of financial products haveincreased, widening the information gap

between advisers and their clients. Planfiduciaries, plan participants and IRAinvestors must often rely on experts foradvice, but are unable to assess thequality of the expert’s advice oreffectively guard against the adviser’s

conflicts of interest. This challenge isespecially true of small retail investorswho typically do not have financialexpertise and can ill-afford lowerreturns to their retirement savingscaused by conflicts. As baby boomersretire, they are increasingly movingmoney from ERISA-covered plans,where their employer has both theincentive and the fiduciary duty tofacilitate sound investment choices, toIRAs where both good and badinvestment choices are myriad andadvice that is conflicted iscommonplace. Such ‘‘rollovers’’ will

total more than $2 trillion over the next5 years. These trends were not apparentwhen the Department promulgated the1975 rule. At that time, 401(k) plans didnot yet exist and IRAs had only just

been authorized. These changes in themarketplace, as well as theDepartment’s experience with the rulesince 1975, support the Department’sefforts to reevaluate and revise the rulethrough a public process of notice andcomment rulemaking.

On October 22, 2010, the Departmentpublished a proposed rule in theFederal Register (75 FR 65263) (2010

Proposal) proposing to amend 29 CFR2510.3–21(c) (40 FR 50843, Oct. 31,1975), which defines when a personrenders investment advice to anemployee benefit plan, andconsequently acts as a fiduciary underERISA section 3(21)(A)(ii) (29 U.S.C.1002(21)(A)(ii)). In response to thisproposal, the Department received over300 comment letters. A public hearingon the 2010 Proposal was held inWashington, DC on March 1 and 2,2011, at which 38 speakers testified.The transcript of the hearing was made

available for additional public commentand the Department received over 60additional comment letters. In addition,the Department has held many meetingswith interested parties.

A number of commenters urgedconsideration of other means to attainthe objectives of the 2010 Proposal andof additional analysis of the proposal’s

expected costs and benefits. In light ofthese comments and because of thesignificance of this rule, the Departmentdecided to issue a new proposedregulation. On September 19, 2011 theDepartment announced that it wouldwithdraw the 2010 Proposal andpropose a new rule defining the term‘‘fiduciary’’ for purposes of section3(21)(A)(ii) of ERISA. This documentfulfills that announcement in publishing

both a new proposed regulation andwithdrawing the 2010 Proposal.Consistent with the President’sExecutive Orders 12866 and 13563,

extending the rulemaking process willgive the public a full opportunity toevaluate and comment on the revisedproposal and updated economicanalysis. In addition, we aresimultaneously publishing proposednew and amended exemptions fromERISA and the Code’s prohibitedtransaction rules designed to allowcertain broker-dealers, insurance agentsand others that act as investment advicefiduciaries to nevertheless continue toreceive common forms of compensationthat would otherwise be prohibited,subject to appropriate safeguards. Theexisting class exemptions will otherwise

remain in place, affording flexibility tofiduciaries who currently use theexemptions or who wish to use theexemptions in the future. The proposednew regulatory package takes intoaccount robust public comment andinput and represents a substantialchange from the 2010 Proposal,

balancing long overdue consumerprotections with flexibility for theindustry in order to minimizedisruptions to current business models.

In crafting the current regulatorypackage, the Department has benefittedfrom the views and perspectives

expressed in public comments to the2010 Proposal. For example, theDepartment has responded to concernsabout the impact of the prohibitedtransaction rules on the marketplace forretail advice by proposing a broadpackage of exemptions that are intendedto ensure that advisers and their firmsmake recommendations that are in the

best interest of plan participants andIRA owners, without disruptingcommon fee arrangements. In responseto commenters, the Department has alsodetermined not to include, as fiduciary

in nature, appraisals or valuations ofemployer securities provided to ESOPsor to certain collective investment fundsholding assets of plan investors. On amore technical point, the Departmentalso followed recommendations that itnot automatically assign fiduciary statusto investment advisers under theAdvisers Act, but instead follow an

entirely functional approach tofiduciary status. In light of publiccomments, the new proposal also makesa number of other changes to theregulatory proposal. For example, theDepartment has addressed concerns thatit could be misread to extend fiduciarystatus to persons that preparenewsletters, television commentaries, orconference speeches that containrecommendations made to the generalpublic. Similarly, the rule makes clearthat fiduciary status does not extend tointernal company personnel who giveadvice on behalf of their plan sponsor

as part of their duties, but receive nocompensation beyond their salary forthe provision of advice. The Departmentis appreciative of the comments itreceived to the 2010 Proposal, and morefully discusses a number of thecomments that influenced change in thesections that follow. In addition, theDepartment is eager to receivecomments on the new proposal ingeneral, and requests public commenton a number of specific aspects of thepackage as indicated below.

The following discussion summarizesthe 2010 Proposal, describes some of theconcerns and issues raised by

commenters, and explains the newproposed regulation, which is publishedwith this notice.

B. The Statute and Existing Regulation

ERISA (or the ‘‘Act’’) is acomprehensive statute designed toprotect the interests of plan participantsand beneficiaries, the integrity ofemployee benefit plans, and the securityof retirement, health, and other critical

benefits. The broad public interest inERISA-covered plans is reflected in theAct’s imposition of stringent fiduciaryresponsibilities on parties engaging in

important plan activities, as well as inthe tax-favored status of plan assets andinvestments. One of the chief ways inwhich ERISA protects employee benefitplans is by requiring that planfiduciaries comply with fundamentalobligations rooted in the law of trusts.In particular, plan fiduciaries mustmanage plan assets prudently and withundivided loyalty to the plans and theirparticipants and beneficiaries.4 Inaddition, they must refrain from



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5ERISA section 406. The Act also prohibitscertain transactions between a plan and a ‘‘party ininterest.’’

6ERISA section 409; see also ERISA section 405.

7See 26 CFR 54.4975–9(c), which interprets Codesection 4975(e)(3). 40 FR 50840 (Oct. 31, 1975).Under section 102 of Reorganization Plan No. 4 of1978, the authority of the Secretary of the Treasuryto interpret section 4975 of the Code has beentransferred, with certain exceptions not hererelevant, to the Secretary of Labor. References inthis document to sections of ERISA should be readto refer also to the corresponding sections of theCode.

engaging in ‘‘prohibited transactions,’’which the Act does not permit becauseof the dangers to the interests of theplan and IRA posed by thetransactions.5 When fiduciaries violateERISA’s fiduciary duties or theprohibited transaction rules, they may

be held personally liable for any lossesto the investor resulting from the

breach.6 In addition, violations of theprohibited transaction rules are subjectto excise taxes under the Code.

The Code also protects individualswho save for retirement through tax-favored accounts that are not generallycovered by ERISA, such as IRAs,through a more limited regulation offiduciary conduct. Although ERISA’sgeneral fiduciary obligations ofprudence and loyalty do not govern thefiduciaries of IRAs and other plans notcovered by ERISA, these fiduciaries aresubject to the prohibited transactionrules of the Code. In this context,

however, the sole statutory sanction forengaging in the illegal transactions isthe assessment of an excise tax enforced

by the Internal Revenue Service (IRS).Thus, unlike participants in planscovered by Title I of ERISA, IRA ownersdo not have a statutory right to bringsuit against fiduciaries under ERISA forviolation of the prohibited transactionrules and fiduciaries are not personallyliable to IRA owners for the lossescaused by their misconduct.

Under this statutory framework, thedetermination of who is a ‘‘fiduciary’’ isof central importance. Many of ERISA’sand the Code’s protections, duties, andliabilities hinge on fiduciary status. Inrelevant part, section 3(21)(A) of ERISAprovides that a person is a fiduciarywith respect to a plan to the extent heor she (i) exercises any discretionaryauthority or discretionary control withrespect to management of such plan orexercises any authority or control withrespect to management or disposition ofits assets; (ii) renders investment advicefor a fee or other compensation, director indirect, with respect to any moneysor other property of such plan, or hasany authority or responsibility to do so;or, (iii) has any discretionary authority

or discretionary responsibility in theadministration of such plan. Section4975(e)(3) of the IRC identically defines‘‘fiduciary’’ for purposes of theprohibited transaction rules set forth inCode section 4975.

The statutory definition contained insection 3(21)(A) deliberately casts awide net in assigning fiduciary

responsibility with respect to planassets. Thus, ‘‘any authority or control’’over plan assets is sufficient to conferfiduciary status, and any person whorenders ‘‘investment advice for a fee orother compensation, direct or indirect’’is an investment advice fiduciary,regardless of whether they have directcontrol over the plan’s assets, and

regardless of their status as aninvestment adviser and/or broker underthe federal securities laws. The statutorydefinition and associated fiduciaryresponsibilities were enacted to ensurethat plans can depend on persons whoprovide investment advice for a fee tomake recommendations that areprudent, loyal, and untainted byconflicts of interest. In the absence offiduciary status, persons who provideinvestment advice would neither besubject to ERISA’s fundamentalfiduciary standards, nor accountableunder ERISA or the Code for imprudent,

disloyal, or tainted advice, no matterhow egregious the misconduct or howsubstantial the losses. Plans, individualparticipants and beneficiaries, and IRAowners often are not financial expertsand consequently must rely onprofessional advice to make criticalinvestment decisions. The statutorydefinition, prohibitions on conflicts ofinterest, and core fiduciary obligationsof prudence and loyalty, all reflectCongress’ recognition in 1974 of thefundamental importance of such adviceto protect savers’ retirement nest eggs.In the years since then, the significance

of financial advice has become stillgreater with increased reliance onparticipant-directed plans and self-directed IRAs for the provision ofretirement benefits.

In 1975, the Department issued aregulation, at 29 CFR 2510.3–21(c)defining the circumstances under whicha person is treated as providing‘‘investment advice’’ to an employee

benefit plan within the meaning ofsection 3(21)(A)(ii) of ERISA (the ‘‘1975regulation’’), and the Department of theTreasury issued a virtually identicalregulation under the Code.7 Theregulation narrowed the scope of thestatutory definition of fiduciaryinvestment advice by creating a five-parttest that must be satisfied before aperson can be treated as rendering

investment advice for a fee. Under theregulation, for advice to constitute‘‘investment advice,’’ an adviser who isnot a fiduciary under another provisionof the statute must—(1) render advice asto the value of securities or otherproperty, or make recommendations asto 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 theplan or a plan fiduciary that (4) theadvice will serve as a primary basis forinvestment decisions with respect toplan assets, and that (5) the advice will

be individualized based on theparticular needs of the plan or IRA. Theregulation provides that an adviser is afiduciary with respect to any particularinstance of advice only if he or shemeets each and every element of thefive-part test with respect to theparticular advice recipient or plan at

issue.As the marketplace for financialservices has developed in the yearssince 1975, the five-part test may nowundermine, rather than promote, thestatutes’ text and purposes. Thenarrowness of the 1975 regulationallows advisers, brokers, consultantsand valuation firms to play a centralrole in shaping plan and IRAinvestments, without ensuring theaccountability that Congress intendedfor persons having such influence andresponsibility. Even when plansponsors, participants, beneficiaries,and IRA owners clearly rely on paid

advisers for impartial guidance, theregulation allows many advisers toavoid fiduciary status and disregardERISA’s fiduciary obligations of careand prohibitions on disloyal andconflicted transactions. As aconsequence, these advisers can steercustomers to investments based on theirown self-interest (e.g., products thatgenerate higher fees for the adviser evenif there are identical lower-fee productsavailable), give imprudent advice, andengage in transactions that wouldotherwise not be permitted by ERISAand the Code without fear of

accountability under either ERISA orthe Code.Instead of ensuring that trusted

advisers give prudent and unbiasedadvice in accordance with fiduciarynorms, the current regulation erects amulti-part series of technicalimpediments to fiduciary responsibility.The Department is concerned that thespecific elements of the five-part test—which are not found in the text of theAct or Code—now work to frustratestatutory goals and defeat advicerecipients’ legitimate expectations. In



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

9U.S. Department of Labor, Private Pension PlanBulletin Historical Tables and Graphs, ( Dec. 2014),at http://www.dol.gov/ebsa/pdf/historicaltables.pdf.

light of the importance of the propermanagement of plan and IRA assets, itis critical that the regulation defininginvestment advice draws appropriatedistinctions between the sorts of advicerelationships that should be treated asfiduciary in nature and those thatshould not. In practice, the currentregulation appears not to do so. Instead,

the lines drawn by the five-part testfrequently permit evasion of fiduciarystatus and responsibility in ways thatundermine the statutory text andpurposes.

One example of the five-part test’sshortcomings is the requirement thatadvice be furnished on a ‘‘regular

basis.’’ As a result of the requirement, ifa small plan hires an investmentprofessional or appraiser on a one-time

basis for an investment recommendationor valuation opinion on a large, complexinvestment, the adviser has no fiduciaryobligation to the plan under ERISA.

Even if the plan is considering investingall or substantially all of the plan’sassets, lacks the specialized expertisenecessary to evaluate the complextransaction on its own, and theconsultant fully understands the plan’sdependence on his professionaljudgment, the consultant is not afiduciary because he does not advise theplan on a ‘‘regular basis.’’ The plancould be investing hundreds of millionsof dollars in plan assets, and it could bethe most critical investment decisionthe plan ever makes, but the adviserwould have no fiduciary responsibilityunder the 1975 regulation. While a

consultant who regularly makes lesssignificant investmentrecommendations to the plan would bea fiduciary if he satisfies the other fourprongs of the regulatory test, the one-time consultant on an enormoustransaction has no fiduciaryresponsibility.

In such cases, the ‘‘regular basis’’requirement, which is not found in thetext of ERISA or the Code, fails to drawa sensible line between fiduciary andnon-fiduciary conduct, and underminesthe law’s protective purposes. A specificexample is the one-time purchase of a

group annuity to cover all of the benefitspromised to substantially all of a plan’sparticipants for the rest of their liveswhen a defined benefit plan terminatesor a plan’s expenditure of hundreds ofmillions of dollars on a single real estatetransaction with the assistance of afinancial adviser hired for purposes ofthat one transaction. Despite the clearimportance of the decisions and theclear reliance on paid advisers, theadvisers would not be plan fiduciaries.On a smaller scale that is stillimmensely important for the affected

individual, the ‘‘regular basis’’requirement also deprives individualparticipants and IRA owners of statutoryprotection when they seek specializedadvice on a one-time basis, even if theadvice concerns the investment of all orsubstantially all of the assets held intheir account (e.g., as in the case of anannuity purchase or a roll-over from a

plan to an IRA or from one IRA toanother).

Under the five-part test, fiduciarystatus can also be defeated by arguingthat the parties did not have a mutualagreement, arrangement, orunderstanding that the advice wouldserve as a primary basis for investmentdecisions. Investment professionals intoday’s marketplace frequently marketretirement investment services in waysthat clearly suggest the provision oftailored or individualized advice, whileat the same time disclaiming in fineprint the requisite ‘‘mutual’’

understanding that the advice will beused as a primary basis for investmentdecisions.

Similarly, there appears to be awidespread belief among broker-dealersthat they are not fiduciaries with respectto plans or IRAs because they do nothold themselves out as registeredinvestment advisers, even though theyoften market their services as financialor retirement planners. The import ofsuch disclaimers—and of the fine legaldistinctions between brokers andregistered investment advisers—is oftencompletely lost on plan participants andIRA owners who receive investmentadvice. As shown in a study conducted

by the RAND Institute for Civil Justicefor the Securities and ExchangeCommission (SEC), consumers often donot read the legal documents and do notunderstand the difference between

brokers and registered investmentadvisers particularly when brokersadopt such titles as ‘‘financial adviser’’and ‘‘financial manager.’’ 8

Even in the absence of boilerplate fineprint disclaimers, however, it is far fromevident how the ‘‘primary basis’’element of the five-part test promotesthe statutory text or purposes of ERISA

and the Code. If, for example, a planhires multiple specialized advisers foran especially complex transaction, itshould be able to rely upon all of theconsultants’ advice, regardless ofwhether one could characterize any

particular consultant’s advice asprimary, secondary, or tertiary.Presumably, paid consultants makerecommendations—and retirementinvestors pay for them—with the hopeor expectation that therecommendations could, in fact, berelied upon in making importantdecisions. When a plan, participant,

beneficiary, or IRA owner directly orindirectly pays for advice upon which itcan rely, there appears to be littlestatutory basis for drawing distinctions

based on a subjective characterization ofthe advice as ‘‘primary,’’ ‘‘secondary,’’or other.

In other respects, the currentregulatory definition could also benefitfrom clarification. For example, anumber of parties have argued that theregulation, as currently drafted, does notencompass advice as to the selection ofmoney managers or mutual funds.Similarly, they have argued that the

regulation does not cover advice givento the managers of pooled investmentvehicles that hold plan assetscontributed by many plans, as opposedto advice given to particular plans.Parties have even argued that advicewas insufficiently ‘‘individualized’’ tofall within the scope of the regulation

because the advice provider had failedto prudently consider the ‘‘particularneeds of the plan,’’ notwithstanding thefact that both the advice provider andthe plan agreed that individualizedadvice based on the plan’s needs would

be provided, and the adviser actuallymade specific investmentrecommendations to the plan. Althoughthe Department disagrees with each ofthese interpretations of the currentregulation, the arguments neverthelesssuggest that clarifying regulatory textcould be helpful.

Changes in the financial marketplacehave enlarged the gap between the 1975regulation’s effect and the Congressionalintent of the statutory definition. Thegreatest change is the predominance ofindividual account plans, many ofwhich require participants to makeinvestment decisions for their ownaccounts. In 1975, private-sector defined

benefit pensions—mostly large,professionally managed funds—coveredover 27 million active participants andheld assets totaling almost $186 billion.This compared with just 11 millionactive participants in individualaccount defined contribution plans withassets of just $74 billion.9 Moreover, thegreat majority of defined contributionplans at that time were professionally


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10U.S. Department of Labor, Private Pension PlanBulletin Abstract of 2012 Form 5500 AnnualReports, (Jan. 2015), at http://www.dol.gov/ebsa/ PDF/2012pensionplanbulletin.PDF.

11U.S. Department of Labor, Private Pension PlanBulletin Abstract of 1999 Form 5500 AnnualReports, Number 12, Summer 2004 (Apr. 2008), athttp://www.dol.gov/ebsa/PDF/ 1999pensionplanbulletin.PDF.

12Brien, Michael J., and Constantijn W.A. Panis.Analysis of Financial Asset Holdings of Householdson the United States: 2013 Update. AdvancedAnalytic Consulting Group and Deloitte, ReportPrepared for the U.S. Department of Labor, 2014.

managed, not participant-directed. In1975, 401(k) plans did not yet exist andIRAs had just been authorized as part ofERISA’s enactment the prior year. Incontrast, by 2012 defined benefit planscovered just under 16 million activeparticipants, while individual account-

based defined contribution planscovered over 68 million active

participants— including 63 millionparticipants in 401(k)-type plans thatare participant-directed.10

With this transformation, planparticipants, beneficiaries and IRAowners have become major consumersof investment advice that is paid fordirectly or indirectly. By 2012, 97percent of 401(k) participants wereresponsible for directing the investmentof all or part of their own account, upfrom 86 percent as recently as 1999.11 Also, in 2013, more than 34 millionhouseholds owned IRAs.12

Many of the consultants and advisers

who provide investment-related adviceand recommendations receivecompensation from the financialinstitutions whose investment productsthey recommend. This gives theconsultants and advisers a strong bias,conscious or unconscious, to favorinvestments that provide them greatercompensation rather than those thatmay be most appropriate for theparticipants. Unless they are fiduciaries,however, these consultants and advisersare free under ERISA and the Code, notonly to receive such conflictedcompensation, but also to act on theirconflicts of interest to the detriment oftheir customers. In addition, plans,participants, beneficiaries, and IRAowners now have a much greater varietyof investments to choose from, creatinga greater need for expert advice.Consolidation of the financial servicesindustry and innovations incompensation arrangements havemultiplied the opportunities for self-dealing and reduced the transparency offees.

The absence of adequate fiduciaryprotections and safeguards is especiallyproblematic in light of the growth ofparticipant-directed plans and self-

directed IRAs; the gap in expertise and

information between advisers and thecustomers who depend upon them forguidance; and the advisers’ significantconflicts of interest.

When Congress enacted ERISA in1974, it made a judgment that planadvisers should be subject to ERISA’sfiduciary regime and that planparticipants, beneficiaries and IRA

owners should be protected fromconflicted transactions by the prohibitedtransaction rules. More fundamentally,however, the statutory language wasdesigned to cover a much broadercategory of persons who providefiduciary investment advice based ontheir functions and to limit their abilityto engage in self-dealing and otherconflicts of interest than is currentlyreflected in the five-part test. Whilemany advisers are committed toproviding high-quality advice andalways put their customers’ bestinterests first, the 1975 regulation makes

it far too easy for advisers in today’smarketplace not to do so and to avoidfiduciary responsibility even when theyclearly purport to give individualizedadvice and to act in the client’s bestinterest, rather than their own.

C. The 2010 Proposal

In 2010, the Department proposed anew regulation that would havereplaced the five-part test with a newdefinition of what counted as fiduciaryinvestment advice for a fee. At that time,the Department did not propose anynew prohibited transaction exemptionsand acknowledged uncertainty

regarding whether existing exemptionswould be available, but specificallyinvited comments on whether new oramended exemptions should beproposed. The proposal also providedcarve-outs for conduct that would notresult in fiduciary status. The generaldefinition included the following typesof advice: (1) Appraisals or fairnessopinions concerning the value ofsecurities or other property; (2)recommendations as to the advisabilityof investing in, purchasing, holding orselling securities or other property; and(3) recommendations as to the

management of securities or otherproperty. Reflecting the Department’slongstanding interpretation of the 1975regulations, the 2010 Proposal madeclear that investment advice under theproposal includes advice provided toplan participants, beneficiaries and IRAowners as well as to plan fiduciaries.

Under the 2010 Proposal, a paidadviser would have been treated as afiduciary if the adviser provided one ofthe above types of advice and either: (1)Represented that he or she was acting asan ERISA fiduciary; (2) was already an

ERISA fiduciary to the plan by virtue ofhaving control over the management ordisposition of plan assets, or by havingdiscretionary authority over theadministration of the plan; (3) wasalready an investment adviser under theInvestment Advisers Act of 1940(Advisers Act); or (4) provided theadvice pursuant to an agreement or

understanding that the advice may beconsidered in connection with planinvestment or asset managementdecisions and would be individualizedto the needs of the plan, planparticipant or beneficiary, or IRA owner.The 2010 Proposal also provided that,for purposes of the fiduciary definition,relevant fees included any direct orindirect fees received by the adviser oran affiliate from any source. Direct feesare payments made by the advicerecipient to the adviser includingtransaction-based fees, such as

brokerage, mutual fund or insurance

sales commissions. Indirect fees arepayments to the adviser from any sourceother than the advice recipient such asrevenue sharing payments from amutual fund.

The 2010 Proposal included specificcarve-outs for the following actions thatthe Department believed should notresult in fiduciary status. In particular,a person would not have become afiduciary by—

1. Providing recommendations as aseller or purchaser with interestsadverse to the plan, its participants, orIRA owners, if the advice recipientreasonably should have known that the

adviser was not providing impartialinvestment advice and the adviser hadnot acknowledged fiduciary status.

2. Providing investment educationinformation and materials in connectionwith an individual account plan.

3. Marketing or making available amenu of investment alternatives that aplan fiduciary could choose from, andproviding general financial informationto assist in selecting and monitoringthose investments, if these activitiesinclude a written disclosure that theadviser was not providing impartialinvestment advice.

4. Preparing reports necessary tocomply with ERISA, the Code, orregulations or forms issued thereunder,unless the report valued assets that lacka generally recognized market, or servedas a basis for making plan distributions.The 2010 Proposal applied to thedefinition of an ‘‘investment advicefiduciary’’ in section 4975(e)(3)(B) of theCode as well as to the parallel ERISAdefinition. These provisions apply to

both certain ERISA covered plans, andcertain non-ERISA plans such asindividual retirement accounts.


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13As discussed below in Section E. Coverage ofIRAs and Other Non-ERISA Plans, in recognition of

differences among the various types of non-ERISAplan arrangements described in Code section4975(e)(1)(B) through (F), the Department solicitscomments on whether it is appropriate for theregulation to cover the full range of thesearrangements. These non-ERISA plan arrangementsare tax favored vehicles under the Code like IRAs, but are not intended for retirement savings.

In the preamble to the 2010 Proposal,the Department also noted that it hadpreviously interpreted the 1975regulation as providing that arecommendation to a plan participanton how to invest the proceeds of acontemplated plan distribution was notfiduciary investment advice. AdvisoryOpinion 2005–23A (Dec. 7, 2005). The

Department specifically asked forcomments as to whether the final ruleshould include such recommendationsas fiduciary advice.

The 2010 Proposal prompted a largenumber of comments and a vigorousdebate. As noted above, the Departmentmade special efforts to encourage theregulated community’s participation inthis rulemaking. In addition to anextended comment period, theDepartment held a two-day publichearing. Additional time for commentswas allowed following the hearing andpublication of the hearing transcript on

the Department’s Web site andDepartment representatives heldnumerous meetings with interestedparties. Many of the commentsconcerned the Department’s conclusionsregarding the likely economic impact ofthe proposal, if adopted. A number ofcommenters urged the Department toundertake additional analysis ofexpected costs and benefits particularlywith regard to the 2010 Proposal’scoverage of IRAs. After consideration ofthese comments and in light of thesignificance of this rulemaking to theretirement plan service providerindustry, plan sponsors and

participants, beneficiaries and IRAowners, the Department decided to takemore time for review and to issue a newproposed regulation for comment.

D. The New Proposal

The new proposed rule makes manyrevisions to the 2010 Proposal, althoughit also retains aspects of that proposal’sessential framework. The new proposal

broadly updates the definition offiduciary investment advice, and alsoprovides a series of carve-outs from thefiduciary investment advice definitionfor communications that should not be

viewed as fiduciary in nature. Thedefinition generally covers the followingcategories of advice: (1) Investmentrecommendations, (2) investmentmanagement recommendations, (3)appraisals of investments, or (4)recommendations of persons to provideinvestment advice for a fee or to manageplan assets. Persons who provide suchadvice fall within the general definitionof a fiduciary if they either (a) representthat they are acting as a fiduciary underERISA or the Code or (b) provide theadvice pursuant to an agreement,

arrangement, or understanding that theadvice is individualized or specificallydirected to the recipient forconsideration in making investment orinvestment management decisionsregarding plan assets.

The new proposal includes severalcarve-outs for persons who do notrepresent that they are acting as ERISA

fiduciaries, some of which wereincluded in some form in the 2010Proposal but many of which were not.Subject to specified conditions, thesecarve-outs cover—

(1) Statements or recommendationsmade to a ‘‘large plan investor withfinancial expertise’’ by a counterpartyacting in an arm’s length transaction;

(2) offers or recommendations to planfiduciaries of ERISA plans to enter intoa swap or security-based swap that isregulated under the Securities ExchangeAct or the Commodity Exchange Act;

(3) statements or recommendations

provided to a plan fiduciary of anERISA plan by an employee of the plansponsor if the employee receives no fee

beyond his or her normal compensation;(4) marketing or making available a

platform of investment alternatives to beselected by a plan fiduciary for anERISA participant-directed individualaccount plan;

(5) the identification of investmentalternatives that meet objective criteriaspecified by a plan fiduciary of anERISA plan or the provision of objectivefinancial data to such fiduciary;

(6) the provision of an appraisal,fairness opinion or a statement of value

to an ESOP regarding employersecurities, to a collective investmentvehicle holding plan assets, or to a planfor meeting reporting and disclosurerequirements; and

(7) information and materials thatconstitute ‘‘investment education’’ or‘‘retirement education.’’

The new proposal applies the samedefinition of ‘‘investment advice’’ to thedefinition of ‘‘fiduciary’’ in section4975(e)(3) of the Code and thus appliesto investment advice rendered to IRAs.‘‘Plan’’ is defined in the new proposalto mean any employee benefit plan

described in section 3(3) of the Act andany plan described in section4975(e)(1)(A) of the Code. For ease ofreference in this proposal, the term‘‘IRA’’ has been inclusively defined tomean any account described in Codesection 4975(e)(1)(B) through (F), suchas a true individual retirement accountdescribed under Code section 408(a)and a health savings account describedin section 223(d) of the Code.13

Many of the differences between thenew proposal and the 2010 Proposalreflect the input of commenters on the2010 Proposal as part of the publicnotice and comment process. Forexample, some commenters argued thatthe 2010 Proposal swept too broadly bymaking investment recommendationsfiduciary in nature simply because the

adviser was a plan fiduciary forpurposes unconnected with the adviceor an investment adviser under theAdvisers Act. In their view, such status-

based criteria were in tension with theAct’s functional approach to fiduciarystatus and would have resulted inunwarranted and unintendedcompliance issues and costs. Othercommenters objected to the lack of arequirement for these status-basedcategories that the advice beindividualized to the needs of theadvice recipient. The new proposalincorporates these suggestions: An

adviser’s status as an investment adviserunder the Advisers Act or as an ERISAfiduciary for reasons unrelated to adviceare no longer factors in the definition.In addition, unless the adviserrepresents that he or she is a fiduciarywith respect to advice, the advice must

be provided pursuant to an agreement,arrangement, or understanding that theadvice is individualized or specificallydirected to the recipient to be treated asfiduciary advice.

Furthermore, the carve-outs that treatcertain conduct as non-fiduciary innature have been modified, clarified,and expanded in response to comments.

For example, the carve-out for certainvaluations from the definition offiduciary investment advice has beenmodified and expanded. Under the 2010Proposal, appraisals and valuations forcompliance with certain reporting anddisclosure requirements were nottreated as fiduciary advice. The newproposal additionally provides a carve-out from fiduciary treatment forappraisal and fairness opinions forESOPs regarding employer securities.Although, the Department remainsconcerned about valuation adviceconcerning an ESOP’s purchase of

employer stock and about a plan’sreliance on that advice, the Departmenthas concluded that the concernsregarding valuations of closely heldemployer stock in ESOP transactionsraise unique issues that are more



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14Reorganization Plan No. 4 of 1978.

appropriately addressed in a separateregulatory initiative. Additionally, thecarve-out for valuations conducted forreporting and disclosure purposes has

been expanded to include reporting anddisclosure obligations outside of ERISAand the Code, and is applicable to bothERISA plans and IRAs. Many othermodifications to the other carve-outs

from fiduciary status, as well as newcarve-outs and prohibited transactionexemptions, are described below inSection IV—‘‘The Provisions of the NewProposal.’’

III. Coordination With Other FederalAgencies

Many comments to the 2010rulemaking emphasized the need toharmonize the Department’s efforts withrulemaking activities under the Dodd-Frank Wall Street Reform and ConsumerProtection Act, Pub. Law No. 111–203,124 Stat. 1376 (2010), (Dodd-Frank Act),in particular, the Security and ExchangeCommission’s (SEC) standards of carefor providing investment advice and theCommodity Futures TradingCommission’s (CFTC) business conductstandards for swap dealers. While the2010 Proposal discussed statutes overwhich the SEC and CFTC havejurisdiction, it did not specificallydescribe inter-agency coordinationefforts. In addition, commentersquestioned the adequacy ofcoordination with other agenciesregarding IRA products and services.They argued that subjecting SEC-regulated investment advisers and

broker-dealers to a special set of ERISArules for plans and IRAs could lead toadditional costs and complexities forindividuals who may have severaldifferent types of accounts at the samefinancial institution some of which may

be subject only to the SEC rules, andothers of which may be subject to bothSEC rules and new regulatoryrequirements under ERISA.

In the course of developing the newproposal and the related proposedprohibited transaction exemptions, theDepartment has consulted with staff ofthe SEC and other regulators on an

ongoing basis regarding whether theproposals would subject investmentadvisers and broker-dealers whoprovide investment advice torequirements that create an unduecompliance burden or conflict withtheir obligations under other federallaws. As part of this consultativeprocess, SEC staff has providedtechnical assistance and informationwith respect to retail investors, themarketplace for investment advice andcoordinating, to the extent possible, theagencies’ separate regulatory provisions

and responsibilities. As the Departmentmoves forward with this project inaccordance with the specific provisionsof ERISA and the Code, it will continueto consult with staff of the SEC andother regulators on its proposals andtheir impact on retail investors andother regulatory regimes. One result ofthese discussions, particularly with staff

of the CFTC and SEC, is the newprovision at paragraph (b)(1)(ii) of theproposed regulations concerningcounterparty transactions with swapdealers, major swap participants,security-based swap dealers, and majorsecurity-based swap participants. Underthe terms of that paragraph, suchpersons would not be treated as ERISAfiduciaries merely because, when actingas counterparties to swap or security-

based swap transactions, they giveinformation and perform actionsrequired for compliance with therequirements of the business conduct

standards of the Dodd-Frank Act and itsimplementing regulations.In pursuing these consultations, the

Department has aimed to coordinate andminimize conflicting or duplicativeprovisions between ERISA, the Codeand federal securities laws, to the extentpossible. However, the governingstatutes do not permit the Department tomake the obligations of fiduciaryinvestment advisers under ERISA andthe Code identical to the duties ofadvice providers under the securitieslaws. ERISA and the Code establishconsumer protections for someinvestment advice that does not fall

within the ambit of federal securitieslaws, and vice versa. Even if each of therelevant agencies were to adopt anidentical definition of ‘‘fiduciary’’, thelegal consequences of the fiduciarydesignation would vary betweenagencies because of differences in thespecific duties and remedies established

by the different federal laws at issue.ERISA and the Code place specialemphasis on the elimination ormitigation of conflicts of interest andadherence to substantive standards ofconduct, as reflected in the prohibitedtransaction rules and ERISA’s standards

of fiduciary conduct. The specific dutiesimposed on fiduciaries by ERISA andthe Code stem from legislativejudgments on the best way to protect thepublic interest in tax-preferred benefitarrangements that are critical toworkers’ financial and physical health.The Department has taken great care tohonor ERISA and the Code’s specifictext and purposes.

At the same time, the Department hasworked hard to understand the impactof the proposed rule on firms subject tothe securities laws and other federal

laws, and to take the effects of thoselaws into account so as to appropriatelycalibrate the impact of the rule on thosefirms. The proposed regulation reflectsthese efforts. In the Department’s view,it neither undermines, nor contradicts,the provisions or purposes of thesecurities laws, but instead works inharmony with them. The Department

has coordinated—and will continue tocoordinate—its efforts with other federalagencies to ensure that the various legalregimes are harmonized to the fullestextent possible.

The Department has also consultedwith the Department of the Treasuryand the IRS, particularly on the subjectof IRAs. Although the Department hasresponsibility for issuing regulationsand prohibited transaction exemptionsunder section 4975 of the Code, whichapplies to IRAs, the IRS maintainsgeneral responsibility for enforcing thetax laws. The IRS’ responsibilities

extend to the imposition of excise taxeson fiduciaries who participate inprohibited transactions.14 As a result,the Department and the IRS shareresponsibility for combating self-dealing

by fiduciary investment advisers to tax-qualified plans and IRAs. Paragraph (e)of the proposed regulation, in particular,recognizes this jurisdictionalintersection.

When the Department announced thatit would issue a new proposal, it statedthat it would consider proposing newand/or amended prohibited transactionexemptions to address the concerns ofcommenters about the broader scope of

the fiduciary definition and its impacton the fee practices of brokers and otheradvisers. Commenters had expressedconcern about whether longstandingexemptions granted by the Departmentallowing advisers, despite theirfiduciary status under ERISA, to receivecommissions in connection with mutualfunds, securities and insurance productswould remain applicable under the newrule. As explained more fully below, theDepartment is simultaneouslypublishing in the notice section oftoday’s Federal Register proposedprohibited transaction class exemptions

to address these concerns. TheDepartment believes that existingexemptions and these new proposedexemptions would preserve the abilityto engage in common fee arrangements,while protecting plan participants,

beneficiaries and IRA owners fromabusive practices that may result fromconflicts of interest.

The terms of these new exemptionsare discussed in more detail below andin the preambles to the proposed



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15For purposes of readability, this proposedrulemaking republishes 29 CFR 2510.3–21 in itsentirety, as revised, rather than only the specificamendments to this section. See 29 CFR 2510.3–21(d)—Execution of securities transactions.

16See also FINRA’s Regulatory Notice 11–02, 12–25 and 12–55. Regulatory Notice 11–02 includes thefollowing discussion:

For instance, a communication’s content, contextand presentation are important aspects of theinquiry. The determination of whether a‘‘recommendation’’ has been made, moreover, is anobjective rather than subjective inquiry. Animportant factor in this regard is whether—given itscontent, context and manner of presentation—aparticular communication from a firm or associatedperson to a customer reasonably would be viewedas a suggestion that the customer take action orrefrain from taking action regarding a security or

investment strategy. In addition, the moreindividually tailored the communication is to aparticular customer or customers about a specificsecurity or investment strategy, the more likely thecommunication will be viewed as arecommendation. Furthermore, a series of actionsthat may not constitute recommendations whenviewed individually may amount to arecommendation when considered in the aggregate.It also makes no difference whether thecommunication was initiated by a person or acomputer software program. These guidingprinciples, together with numerous litigateddecisions and the facts and circumstances of anyparticular case, inform the determination ofwhether the communication is a recommendationfor purposes of FINRA’s suitability rule.

exemptions. While the exemptionsdiffer in terms and coverage, eachimposes a ‘‘best interest’’ standard onfiduciary investment advisers. Thus, forexample, the Best Interest ContractExemption requires the investmentadvice fiduciary and associatedfinancial institution to expressly agreeto provide advice that is in the ‘‘best

interest’’ of the advice recipient. Asproposed, the best interest standard isintended to mirror the duties ofprudence and loyalty, as applied in thecontext of fiduciary investment adviceunder sections 404(a)(1)(A) and (B) ofERISA. Thus, the ‘‘best interest’’standard is rooted in the longstandingtrust-law duties of prudence and loyaltyadopted in section 404 of ERISA and inthe cases interpreting those standards.

Accordingly, the Best InterestContract Exemption provides:

Investment advice is in the ‘‘Best Interest’’of the Retirement Investor when the Adviser

and Financial Institution providing theadvice act with the care, skill, prudence, anddiligence under the circumstances thenprevailing that a prudent person wouldexercise based on the investment objectives,risk tolerance, financial circumstances andneeds of the Retirement Investor, withoutregard to the financial or other interests ofthe Adviser, Financial Institution, anyAffiliate, Related Entity, or other party.

This ‘‘best interest’’ standard is notintended to add to or expand the ERISAsection 404 standards of prudence andloyalty as they apply to the provision ofinvestment advice to ERISA coveredplans. Advisers to ERISA-covered plans

are already required to adhere to thefundamental standards of prudence andloyalty, and can be held accountable forviolations of the standards. Rather, theprimary impact of the ‘‘best interest’’standard is on the IRA market. Underthe Code, advisers to IRAs are subjectonly to the prohibited transaction rules.Incorporating the best interest standardin the proposed Best Interest ContractExemption effectively requires advisersto comply with these basic fiduciarystandards as a condition of engaging intransactions that would otherwise beprohibited because of the conflicts of

interest they create. Additionally, theexemption ensures that IRA owners andinvestors have a contract-based claim tohold their fiduciary advisersaccountable if they violate these basicobligations of prudence and loyalty. Asunder current law, no private right ofaction under ERISA is available to IRAowners.

IV. The Provisions of the New Proposal

The new proposal would amend thedefinition of investment advice in 29CFR 2510.3–21 (1975) of the regulation

to replace the restrictive five-part testwith a new definition that bettercomports with the statutory language inERISA and the Code.15 As explained

below, the proposal accomplishes this by first describing the kinds ofcommunications and relationships thatwould generally constitute fiduciaryinvestment advice if the adviser receives

a fee or other compensation. Rather thanadd additional elements that must bemet in all instances, as under thecurrent regulation, the proposaldescribes several specific types ofadvice or communications that wouldnot be treated as investment advice. Inthe Department’s view, this structure isfaithful to the remedial purpose of thestatute, but avoids burdening activitiesthat do not implicate relationships oftrust and expectations of impartiality.

A. Categories of Advice orRecommendations

Paragraph (a)(1) of the proposal setsforth the following types of advice,which, when provided in exchange fora fee or other compensation, whetherdirectly or indirectly, and given undercircumstances described in paragraph(a)(2), would be ‘‘investment advice’’unless one of the carve-outs inparagraph (b) applies. The listed typesof advice are—

(i) A recommendation as to theadvisability of acquiring, holding,disposing of or exchanging securities orother property, including arecommendation to take a distributionof benefits or a recommendation as tothe investment of securities or otherproperty to be rolled over or otherwisedistributed from the plan or IRA;

(ii) A recommendation as to themanagement of securities or otherproperty, including recommendations asto the management of securities or otherproperty to be rolled over or otherwisedistributed from the plan or IRA;

(iii) An appraisal, fairness opinion, orsimilar statement whether verbal orwritten concerning the value ofsecurities or other property if providedin connection with a specifictransaction or transactions involving the

acquisition, disposition, or exchange, ofsuch securities or other property by theplan or IRA; or

(iv) A recommendation of a personwho is also going to receive a fee orother compensation to provide any ofthe types of advice described inparagraphs (i) through (iii) above.

Except for the prong of the definitionconcerning appraisals and valuationsdiscussed below, the proposal isstructured so that communications mustconstitute a ‘‘recommendation’’ to fallwithin the scope of fiduciary investmentadvice. In that regard, as stated earlierin Section III concerning coordinationwith other Federal Agencies, the

Department has consulted with staff ofother agencies with rulemakingauthority over investment advisers and

broker-dealers. FINRA Policy Statement01–23 sets forth guidelines to assist

brokers in evaluating whether aparticular communication could beviewed as a recommendation, therebytriggering application of FINRA’s Rule2111 that requires that a firm orassociated person have a reasonable

basis to believe that a recommendedtransaction or investment strategyinvolving a security or securities issuitable for the customer.16 Although

the regulatory context for the FINRAguidance is somewhat different, theDepartment believes that it providesuseful standards and guideposts fordistinguishing investment educationfrom investment advice under ERISA.Accordingly, the Departmentspecifically solicits comments onwhether it should adopt some or all ofthe standards developed by FINRA indefining communications that rise to thelevel of a recommendation for purposesof distinguishing between investmenteducation and investment advice underERISA.

Additionally, as paragraph (d) of the

proposal makes clear, the regulationdoes not treat the mere execution of asecurities transaction at the direction of



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a plan or IRA owner as fiduciaryactivity. This paragraph remainsunchanged from the 1975 regulationother than to update references to theproposal’s structure. The definition’sscope remains limited to advicerelationships, as delineated in its textand does not impact merelyadministrative or ministerial activities

necessary for a plan or IRA’sfunctioning. It also does not apply toorder taking where no advice isprovided.

(1) Recommendations To Distribute PlanAssets

Paragraph (a)(1)(i) specificallyincludes recommendations concerningthe investment of securities to be rolledover or otherwise distributed from theplan or IRA. Noting the Department’sposition in Advisory Opinion 2005–23Athat it is not fiduciary advice to makea recommendation as to distributionoptions even if that is accompanied bya recommendation as to where thedistribution would be invested, (Dec. 7,2005), the 2010 Proposal did notinclude this type of advice, but theDepartment requested comments onwhether it should be included in a finalregulation. Some commenters statedthat exclusion of this advice from thefinal rule would fail to protectparticipant accounts from conflictedadvice in connection with one of themost significant financial decisions thatparticipants make concerning retirementsavings. Other commenters argued thatincluding this advice would give rise to

prohibited transactions that coulddisrupt the routine process that occurswhen a worker leaves a job, contacts afinancial services firm for help rollingover a 401(k) balance, and the firmexplains the investments it offers andthe benefits of a rollover.

The proposed regulation, if finalized,would supersede Advisory Opinion2005–23A. Thus, recommendations totake distrib

dol definition of the term ‘‘fiduciary’’; conflict of interest rule—retirement investment...

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