EBSA Proposed Rules

Definition of the Term ``Fiduciary''; Conflict of Interest Rule--Retirement Investment Advice   [4/20/2015]
[PDF]
Federal Register, Volume 80 Issue 75 (Monday, April 20, 2015)
[Federal Register Volume 80, Number 75 (Monday, April 20, 2015)]
[Proposed Rules]
[Pages 21927-21960]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-08831]



[[Page 21927]]

Vol. 80

Monday,

No. 75

April 20, 2015

Part III





Department of Labor





-----------------------------------------------------------------------





Employee Benefits Security Administration





-----------------------------------------------------------------------





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]]


-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2509 and 2510

RIN 1210-AB32


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

AGENCY: Employee Benefits Security Administration, Department of Labor.

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

-----------------------------------------------------------------------

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

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

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

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

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

A. Purpose of the Regulatory Action

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

[[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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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
----------------------------------------------------------------------------------------------------------------
                                 Primary                      High                      Discount       Period
          Category              estimate    Low estimate    estimate     Year dollar    rate (9%)      covered
----------------------------------------------------------------------------------------------------------------
                                           Partial Gains to Investors
----------------------------------------------------------------------------------------------------------------
Annualized, Monetized               $4,243        $3,830  ............          2015             7     2017-2026
 ($millions/year)...........        $5,170         4,666  ............          2015             3     2017-2026
----------------------------------------------------------------------------------------------------------------

[[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.
----------------------------------------------------------------------------------------------------------------
                                                Compliance Costs
----------------------------------------------------------------------------------------------------------------
Annualized, Monetized                 $348  ............          $706          2015             7     2016-2025
 ($millions/year)...........           328  ............           664          2015             3     2016-2025
----------------------------------------------------------------------------------------------------------------
Notes: The compliance costs of the current proposal including the cost of compliance reviews, comprehensive
 compliance and supervisory system changes, policies and procedures and training programs updates, insurance
 increases, disclosure preparation and distribution, and some costs of changes in other business practices.
 Compliance costs incurred by mutual funds or other asset providers have not been estimated.
----------------------------------------------------------------------------------------------------------------
                                           Insurance Premium Transfers
----------------------------------------------------------------------------------------------------------------
Annualized Monetized                   $63  ............  ............          2015             7     2016-2025
 ($millions/year)...........            63  ............  ............          2015             3     2016-2025
----------------------------------------------------------------------------------------------------------------
From/To.....................  From: Service providers facing increased
                                 insurance premiums due to increased
                                           liability risk
                               To: Plans, participants, beneficiaries,
                              and IRA investors through the payment of
                              recoveries--funded from a portion of the
                                    increased insurance premiums
----------------------------------------------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

[[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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.

---------------------------------------------------------------------------

[[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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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