[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



                 REDEFINING `FIDUCIARY': ASSESSING THE
                    IMPACT OF THE LABOR DEPARTMENT'S
                    PROPOSAL ON WORKERS AND RETIREES

=======================================================================

                                HEARING

                               before the

                        SUBCOMMITTEE ON HEALTH,
                     EMPLOYMENT, LABOR AND PENSIONS

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE

                     U.S. House of Representatives

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JULY 26, 2011

                               __________

                           Serial No. 112-34

                               __________

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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN KLINE, Minnesota, Chairman

Thomas E. Petri, Wisconsin           George Miller, California,
Howard P. ``Buck'' McKeon,             Senior Democratic Member
    California                       Dale E. Kildee, Michigan
Judy Biggert, Illinois               Donald M. Payne, New Jersey
Todd Russell Platts, Pennsylvania    Robert E. Andrews, New Jersey
Joe Wilson, South Carolina           Robert C. ``Bobby'' Scott, 
Virginia Foxx, North Carolina            Virginia
Bob Goodlatte, Virginia              Lynn C. Woolsey, California
Duncan Hunter, California            Ruben Hinojosa, Texas
David P. Roe, Tennessee              Carolyn McCarthy, New York
Glenn Thompson, Pennsylvania         John F. Tierney, Massachusetts
Tim Walberg, Michigan                Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee          David Wu, Oregon
Richard L. Hanna, New York           Rush D. Holt, New Jersey
Todd Rokita, Indiana                 Susan A. Davis, California
Larry Bucshon, Indiana               Raul M. Grijalva, Arizona
Trey Gowdy, South Carolina           Timothy H. Bishop, New York
Lou Barletta, Pennsylvania           David Loebsack, Iowa
Kristi L. Noem, South Dakota         Mazie K. Hirono, Hawaii
Martha Roby, Alabama
Joseph J. Heck, Nevada
Dennis A. Ross, Florida
Mike Kelly, Pennsylvania

                      Barrett Karr, Staff Director
                 Jody Calemine, Minority Staff Director

         SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS

                   DAVID P. ROE, Tennessee, Chairman

Joe Wilson, South Carolina           Robert E. Andrews, New Jersey
Glenn Thompson, Pennsylvania           Ranking Minority Member
Tim Walberg, Michigan                Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee          David Loebsack, Iowa
Richard L. Hanna, New York           Dale E. Kildee, Michigan
Todd Rokita, Indiana                 Ruben Hinojosa, Texas
Larry Bucshon, Indiana               Carolyn McCarthy, New York
Lou Barletta, Pennsylvania           John F. Tierney, Massachusetts
Kristi L. Noem, South Dakota         David Wu, Oregon
Martha Roby, Alabama                 Rush D. Holt, New Jersey
Joseph J. Heck, Nevada               Robert C. ``Bobby'' Scott, 
Dennis A. Ross, Florida                  Virginia















                            C O N T E N T S


                              ----------                              
                                                                   Page

Hearing held on July 26, 2011....................................     1

Statement of Members:
    Andrews, Hon. Robert E., Ranking Minority Member, 
      Subcommittee on Health, Employment, Labor and Pensions.....     4
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................     6
    Roe, Hon. David P., Chairman, Subcommittee on Health, 
      Employment, Labor and Pensions.............................     1
        Prepared statement of....................................     3
    Rokita, Hon. Todd, a Representative in Congress from the 
      State of Indiana, prepared statement of....................     6

Statement of Witnesses:
    Bentsen, Hon. Kenneth E., Jr., on behalf of the Securities 
      Industry and Financial Markets Association.................    78
        Prepared statement of....................................    80
    Borzi, Hon. Phyllis C., Assistant Secretary, Employee 
      Benefits Security Administration, U.S. Department of Labor.     8
        Prepared statement of....................................    10
    Mason, Kent A., Davis & Harman LLP...........................    52
        Prepared statement of....................................    53
    Myers, Donald J., partner, Morgan, Lewis & Bockius LLP.......    47
        Prepared statement of....................................    49
    Stein, Norman P., on behalf of the Pension Rights Center.....    61
        Prepared statement of....................................    62
    Tarbell, Jeffrey, Houlihan Lokey.............................    73
        Prepared statement of....................................    75

Additional Submissions:
    Mr. Andrews:
        ``The Fiduciary Reference,'' compilation of articles, 
          Internet address to....................................    46
        Hutcheson, Matthew D., professional independent 
          fiduciary, prepared statement of.......................    98
        The Profit Sharing/401k Council of America (PSCA), 
          prepared statement of..................................   100
        Letter, dated July 25, 2011, from Anne S. Tuttle, 
          executive vice president, Financial Engines............   102
    Ms. Borzi:
        Response to questions submitted for the record...........   144
    McCarthy, Hon. Carolyn, a Representative in Congress from the 
      State of New York:
        Letter, dated May 10, 2011, from the New Democrat 
          Coalition..............................................    32
        Questions submitted for the record.......................   142
    Chairman Roe:
        The American Council of Life Insurers (ACLI):
            Prepared statement of................................   106
            Comment letter to the Department of Labor, dated 
              February 3, 2011...................................   107
            Roberts, Tom, chief counsel, ING Insurance U.S., 
              prepared statement of..............................   116
            Clarification of earlier testimony...................   119
        Letter, dated July 25, 2011, from the American Institute 
          of Certified Public Accountants (AICPA)................   120
        Letter from the American Society of Appraisers (ASA).....   122
        Letter, dated July 26, 2011, from the Investment Company 
          Institute (ICI)........................................   124
        Letters of concern from the American Bankers Association; 
          the Financial Services Roundtable; the Financial 
          Services Institute; the Insured Retirement Institute; 
          the National Black Chamber of Commerce; and the 
          National Association of Insurance and Financial 
          Advisors...............................................   129
        Letter, dated July 29, 2011, from Steve Bartlett, 
          president and CEO, the Financial Services Roundtable...   136
        The ESOP Association (Employee Stock Ownership Plan), 
          prepared statement of..................................   137
        Letter, dated August 5, 2011, from Hon. Greg Walden, a 
          Representative in Congress from the State of Oregon....   142
        Letter, dated August 31, 2011, to Ms. Borzi with 
          additional questions submitted for the record..........   142
    Mr. Rokita:
        Questions submitted for the record.......................   143
    Mr. Stein:
        Comments filed February 3, 2011, on the Department of 
          Labor's proposed regulations...........................    64

 
                 REDEFINING `FIDUCIARY': ASSESSING THE
                    IMPACT OF THE LABOR DEPARTMENT'S
                    PROPOSAL ON WORKERS AND RETIREES

                              ----------                              


                         Tuesday, July 26, 2011

                     U.S. House of Representatives

         Subcommittee on Health, Employment, Labor and Pensions

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The subcommittee met, pursuant to call, at 10:05 a.m., in 
room 2175, Rayburn House Office Building, Hon. David P. Roe 
[chairman of the subcommittee] presiding.
    Present: Representatives Roe, Thompson, Walberg, Hanna, 
Rokita, Bucshon, Barletta, Roby, Heck, Andrews, Kucinich, 
Loebsack, Kildee, Hinojosa, McCarthy, Tierney, Holt, and Scott.
    Also present: Representatives Kline and Biggert.
    Staff present: Andrew Banducci, Professional Staff Member; 
Katherine Bathgate, Press Assistant/New Media Coordinator; 
Casey Buboltz, Coalitions and Member Services Coordinator; Ed 
Gilroy, Director of Workforce Policy; Benjamin Hoog, 
Legislative Assistant; Ryan Kearney, Legislative Assistant; 
Brian Newell, Deputy Communications Director; Krisann Pearce, 
General Counsel; Molly McLaughlin Salmi, Deputy Director of 
Workforce Policy; Linda Stevens, Chief Clerk/Assistant to the 
General Counsel; Alissa Strawcutter, Deputy Clerk; Joseph 
Wheeler, Professional Staff Member; Kate Ahlgren, Minority 
Investigative Counsel; Aaron Albright, Minority Communications 
Director for Labor; Tylease Alli, Minority Clerk; Daniel Brown, 
Minority Junior Legislative Assistant; Jody Calemine, Minority 
Staff Director; John D'Elia, Minority Staff Assistant; Brian 
Levin, Minority New Media Press Assistant; Megan O'Reilly, 
Minority General Counsel; Meredith Regine, Minority Labor 
Policy Associate; and Michele Varnhagen, Minority Chief Policy 
Advisor/Labor Policy Director.
    Chairman Roe. This hearing of the Labor and Pensions 
subcommittee will come to order.
    Good morning everyone.
    Welcome Assistant Secretary Borzi. We appreciate the time 
you have taken to be with us today.
    Recently, we learned about the challenges confronting 
retirement security of workers and retirees. The lingering 
effects of the recession and the uncertain regulatory 
environment reaffirmed the need for policy makers to tread 
carefully as they consider changes to the rules that govern 
retirement investment.
    Policies in this area should provide clear guidance that 
protect workers but also be flexible enough to permit a wide 
range of investment opportunities. Striking the right balance 
between these two competing demands remains a constant policy 
goal.
    We are here this morning to discuss the Labor Department's 
proposal to redefine the term fiduciary. The Employee 
Retirement Income Security Act (ERISA) charges fiduciaries with 
the highest level of care to individuals participating in a 
retirement plan.
    Anyone who provides investment advice should be well 
trained, committed to high ethical and professional standards, 
and devoted to the best interests of those financial resources 
are entrusted to their care. However, the dramatic shift 
proposed by the department may well disrupt stable effective 
relationships between retirement savers and service providers.
    For more than 35 years regulations surrounding fiduciary 
responsibilities have provided certainty to employees and other 
retirement plan sponsors. Currently an investment advisor is 
considered a fiduciary under the law if they offer 
individualized advice on a regular basis for a fee.
    The fiduciary's advice must be provided pursuant to a 
mutual agreement and be the primary basis for resulting 
investment decision. However, the labor department has now 
decided to rewrite the rules of the road. Among other changes 
proposed by the department, fiduciary status would no longer 
hinge on whether advice was provided regularly or served as a 
primary reason for an investment decision.
    While we support looking at ways to enhance this important 
definition, the current proposal is an ill-conceived expansion 
of the fiduciary standard. It will undermine efforts by 
employers and service providers to educate workers on the 
importance of responsible retirement planning. Regrettably, the 
proposal may deny investment opportunities and drive up cost 
for the individuals it is intended to protect.
    Remarkably, the department failed to examine all the 
potential costs of its proposal. For example, despite clear 
indications this proposal may force small business plan 
sponsors to face higher fees and receive fewer services. The 
department neglected to conduct any analysis of the potential 
ramifications.
    Similarly, the department failed to explore how its 
proposal could affect the IRA market. One study suggests that 
some IRA related fees may increase by as much as 195 percent. 
That is an unacceptable amount of money that will never make it 
into a retirement account.
    This is a difficult issue, and we should never lose sight 
of the real world impact these changes may have on the 
investments and long-term retirement security of workers and 
retirees. We need to challenge any proposal that would curb 
investment opportunities, raise the cost of investing and 
reduce the return on those investments for individuals saving 
for retirement.
    I would like to note that leaders on both sides of the 
aisle have expressed worry about the department's proposal. In 
April, Chairman Kline and other Republican committee leaders 
across the Capitol expressed their concerns and urged the 
department to re-propose the rule.
    On May 10th, members of the Democrat's Blue Dog 
coalitiondescribed a number of uncertainties raised by the 
proposal and the rushed regulatory process. And finally, 
members of the new Democrat coalitionasked the administration 
to heed public concern and begin anew.
    It is not every day that such a diverse group of lawmakers 
find common ground on an issue. Boy, will I ever second that. 
[Laughter.]
    Conceding the challenges that plague this proposal, the 
department has promised to address concerns for either targeted 
exemptions or future rulemaking. I am afraid this will only 
exacerbate the uncertainty facing investment professionals and 
increase risk for workers and retirees.
    With all due respect, Assistant Secretary, if this proposal 
is so disruptive to our system of retirement saving, then the 
department needs to take a step back and start over. I would 
like to join my Republican and Democrat colleagues in urging 
the administration to do just that.
    Once this proposal has been set aside, we believe we can 
work together on policies that will strengthen the retirement 
security of millions of Americans.
    Again, we welcome Assistant Secretary Borzi, and we look 
forward to your testimony and the testimony of our other 
witnesses.
    I will now yield to Mr. Andrews, the senior Democrat member 
of the subcommittee for his opening remarks.
    Mr. Andrews?
    [The statement of Dr. Roe follows:]

  Prepared Statement of Hon. David P. Roe, Chairman, Subcommittee on 
                 Health, Employment, Labor and Pensions

    Good morning everyone. Welcome Assistant Secretary Borzi. We 
appreciate the time you have taken to be with us today.
    Recently, we learned about the challenges confronting the 
retirement security of workers and retirees. The lingering effects of 
the recession and an uncertain regulatory environment reaffirm the need 
for policymakers to tread carefully as they consider changes to the 
rules that govern retirement investment. Policies in this area should 
provide clear guidelines that protect workers, but also be flexible 
enough to permit a wide range of investment opportunities. Striking the 
right balance between these two competing demands remains a constant 
policy goal.
    We are here this morning to discuss the Labor Department's proposal 
to redefine the term ``fiduciary.'' The Employee Retirement Income 
Security Act charges fiduciaries with the highest level of care to 
individuals participating in a retirement plan. Anyone who provides 
investment advice should be well trained, committed to high ethical and 
professional standards, and devoted to the best interests of those 
whose financial resources are entrusted to their care. However, the 
dramatic shift proposed by the department may well disrupt stable, 
effective relationships between retirement savers and service-
providers.
    For more than 35 years, regulations surrounding fiduciary 
responsibility have provided certainty to employers and other 
retirement plan sponsors. Currently, an investment adviser is 
considered a fiduciary under the law if they offer individualized 
advice on a regular basis for a fee. The fiduciary's advice must be 
provided pursuant to a mutual agreement and be the primary basis for a 
resulting investment decision.
    However, the Labor Department has now decided to rewrite the rules 
of the road. Among other changes proposed by the department, fiduciary 
status would no longer hinge on whether advice was provided regularly 
or served as the primary reason for an investment decision. While we 
support looking at ways to enhance this important definition, the 
current proposal is an ill-conceived expansion of the fiduciary 
standard. It will undermine efforts by employers and service providers 
to educate workers on the importance of responsible retirement 
planning. Regrettably, the proposal may deny investment opportunities 
and drive up costs for the individuals it is intended to protect.
    Remarkably, the department failed to examine all of the potential 
costs of its proposal. For example, despite clear indications this 
proposal may force small business plan sponsors to face higher fees and 
receive fewer services, the department neglected to conduct any 
analysis of the potential ramifications. Similarly, the department 
failed to explore how its proposal could affect the IRA market. One 
study suggests that some IRA-related fees may increase as much as 195 
percent--that's an unacceptable amount of money that will never make it 
into a retirement account.
    This is a difficult issue, and we should never lose sight of the 
real world impact these changes may have on the investments and long-
term retirement security of workers and retirees. We need to challenge 
any proposal that could curb investment opportunities, raise the costs 
of investing, and reduce the return on those investments for 
individuals saving for retirement.
    I'd like to note that leaders on both sides of the aisle have 
expressed worry about the department's proposal. In April, Chairman 
Kline and other Republican committee leaders across the Capitol 
expressed their concerns and urged the department to re-propose the 
rule. On May 10, members of the Democrats' Blue Dog coalition described 
a number of uncertainties raised by the proposal and the rushed 
regulatory process. And finally, members of the New Democrat Coalition 
asked the administration to heed public concern and begin anew. It's 
not every day such a diverse group of lawmakers find common ground on 
an issue.
    Conceding the challenges that plague this proposal, the department 
has promised to address concerns through either targeted exemptions or 
future rulemaking. I am afraid this will only exacerbate the 
uncertainty facing investment professionals and increase risk for 
workers and retirees. With all due respect, Assistant Secretary, if 
this proposal is so disruptive to our system of retirement saving, then 
the department needs to take a step back and start over. I would like 
to join my Republican and Democrat colleagues in urging the 
administration to do just that. Once this proposal has been set aside, 
I believe we can work together on policies that will strengthen the 
retirement security of millions of Americans.
    Again, welcome Assistant Secretary Borzi, we look forward to your 
testimony and the testimony of our other witnesses. I will now yield to 
Mr. Andrews, the senior Democrat member of the subcommittee, for his 
opening remarks.
                                 ______
                                 
    Mr. Andrews. Well, good morning, Chairman. I apologize to 
you, the other members, and our witnesses for my tardiness. I 
try to be prompt, and I apologize for that this morning.
    There was a survey released last week that said that about 
half the people in the country think the American dream is 
dead. That is a very sobering thought, irrespective of which 
political party we come from or what point of view we come 
from. I would think we have a very high common purpose here to 
rejuvenate the reality of the American dream and people's faith 
in the American dream.
    A big piece of that American dream for people is that they 
work very hard week after week, month after month, year after 
year, and they save money for their retirement. They count on 
that money to give them the kind of lifestyle that they have 
earned and so richly deserve in their retirement years.
    The rule we are talking about today is about protecting 
that piece of the American dream. It is about making sure that 
every one of the 70 million people, who are now really their 
own pension board of trustees, because they have a defined 
contribution account for their pension, that every single one 
of those 70 million Americans, when they get advice, are 
getting advice that is solely in their best interest and not in 
someone else's. That is a common purpose that I think we should 
share and agree with.
    Now, we are concerned about the situation where one of 
those 70 million Americans is about to make a decision about 
whether to put her retirement savings in Sam's mutual fund or 
Mary's mutual fund. That person turns to a person who is 
somehow affiliated with the retirement plan that they enroll in 
at work. They really need to know that the person giving them 
advice doesn't make more money if they steer them towards Sam's 
mutual fund or Mary's mutual fund.
    They really need to know that the advice that the advisor 
is giving them is based upon their interest and what will be 
best for their fund.
    The ERISA law has enshrined in statute this conflict of 
interest provision since its inception. Section 321 of that law 
says, ``A person is a fiduciary with respect to a plan that he 
or she renders investment advice for a fee or other 
compensation, direct or indirect, with respect to any monies or 
any property of such plan or has any authority or 
responsibility to do so.''
    Since 1974, when that statute was written, the world has 
changed. The number of people relying upon defined contribution 
accounts has skyrocketed, the complexity of investments has 
deepened, and the importance of the account has broadened for 
people.
    So the purpose of this rule, which I think we need to 
support, is that we never want one of those 70 million 
Americans to be in a position where the person giving them 
advice about whether it is Sam's mutual fund or Mary's mutual 
fund has interests that are not strictly aligned with the 
pensioner or the workers of whom they are giving advice.
    Now, we know that there are practical issues here that need 
to be addressed and resolved. And we have two terrific panels 
today. Secretary Borzi has expressed in our discussions a 
sincere willingness to address these practical issues, and I 
think she and her team are in the process of doing that.
    And the second panel is really outstanding; people who know 
this issue from their perspective as legislators, academics, or 
advocates of the field. So I am looking forward to hearing what 
both panels have to say.
    But understand this: many of us do share with the 
department a conviction that whether you are getting advice 
about what the next decision is in your work life or what the 
next decision is when you roll over your defined contribution 
plan to some other account, we want to be sure that the 
underlying principle of ERISA that avoids conflicts of interest 
in the giving of advice is universally adhered to so that piece 
of the American dream where someone can retire with the 
certainty that their assets are protected as well can become 
real again for the people of our country.
    Seventy million Americans depend on this, and I believe it 
is our obligation to make sure that their dependence is well 
placed.
    So, Mr. Chairman, I appreciate the chance to hear the 
panels.
    Chairman Roe. Thank you, Ranking Member.
    I now yield to Mr. Kildee, from Michigan, for his opening 
comments.
    Mr. Kildee. Thank you, Dr. Roe. I appreciate this courtesy.
    I came to Congress about 34-and-a-half years ago when Frank 
Thompson was your counterpart, and we had a special task force 
on ERISA. He told me one day very early, he said, ``There are 
only two people in Washington who understand ERISA, and that is 
Phyllis Borzi and John Erlenborn.''
    John was your counterpart, the Republican, and Phyllis, it 
is good to have you here again. You have been a fountain of 
wisdom for us through these years.
    Since then I can add one more, just by the good luck of 
buying a good place, my neighbor right across the street is Don 
Myers, and if I have a question coming up on ERISA, I wait 
until Don walks to his mailbox, and I will walk over there 
then.
    Stand up, Don.
    He gives me some pro bono advice on this, and I appreciate 
it.
    Mr. Andrews. Does that make him a fiduciary? I wonder about 
that, huh? [Laughter.]
    Mr. Kildee. So, anyway, thank you, Mr. Chairman.
    I will say this, Dr. Roe, if everyone conducts themselves 
around here as you, we would have a body of civility in this 
Congress. Thank you, Dr. Roe.
    Chairman Roe. Thank you, Mr. Kildee, for yielding back.
    Pursuant to committee rule 7c, all members will be 
permitted to submit written statements to be included in the 
permanent hearing record. And without objection, the hearing 
record will remain open for 14 days to allow such statements 
and other such extraneous material referenced during the 
hearing to be submitted for the official record.
    [The statement of Mr. Rokita follows:]

 Prepared Statement of Hon. Todd Rokita, a Representative in Congress 
                       From the State of Indiana

    Thank you Mr. Chairman. I would like to recognize the leadership 
this committee, and subcommittee, have taken on this issue. We are here 
talking about a proposed regulation by the Department of Labor that 
would have significant unintended consequences on the financial 
services industry, as well as active and retired workers.
    While I think we all support efforts that would modernize the 
enforcement of the rules and laws that govern retirement investment, 
moving forward with this regulation--that the Department itself 
acknowledges the costs and effects are unknown--is just foolish. 
Moreover, with the recent recession and continued problems with 
underfunded pensions, countless active and retired workers are already 
facing a number of challenges. We do not need to add to that with this 
proposed rule.
    I have significant concerns regarding the Department of Labor's 
proposal to redefine ``fiduciary.'' These concerns range from the 
process of the rulemaking--with DoL noting in the preamble of the 
regulation that its costs are unknown; to the potential impact the rule 
will have on those that can least afford it--workers and retirees. This 
rule will reduce the access of workers to financial education, increase 
the costs of administering certain retirement plans, and potentially 
decrease the return on a workers' investment.
    Approximately 90 Members of Congress, Republicans and Democrats, 
have called for DoL to listen to stakeholder feedback and go back to 
the table and redraft this regulation. While I agree that those who 
provide investment advice should be highly trained, licensed, ethical, 
and dedicated to the interests of their clients--this is a hastily 
written rule that will have far reaching implications. At a time when 
employers and workers are looking for economic certainty, Washington 
should carefully examine any proposal that could undermine the 
retirement savings of employees.
                                 ______
                                 
    [The statement of Mr. Kucinich follows:]

  Prepared Statement of Hon. Dennis J. Kucinich, a Representative in 
                    Congress From the State of Ohio

    Chairman Kline and Ranking Member Miller: I strongly support the 
Department of Labor's (DOL) proposed rule updating the circumstances 
under which individuals who provide investment advice for a fee must 
act as a fiduciary to workers. The proposed rule would modernize the 
definition of fiduciary under the Employee Retirement Income Security 
Act (ERISA) and would dramatically reduce the confusion that has long 
made hard-working Americans vulnerable to exploitation and led to the 
loss of millions of dollars of retirement assets.
    Under the current rule, any person paid to provide investment 
advice is a fiduciary, someone who must put their client's interest 
first. Yet in practice, the interpretation of the term ``paid 
investment advice'' has long been used as a giant loophole by those 
looking to flout the meaning and the spirit of the law. Advisers can 
avoid the legal responsibility of a fiduciary if they claim that they 
didn't know their advice would be used to make an investment decision, 
or that they only gave the advice once and not on a regular basis.
    When ERISA was adopted in 1975, neither Individual Retirement 
Accounts (IRAs), nor 401(k) retirement plans were in existence. The 
ERISA law simply attempted to define ``fiduciary'' in a way that tried 
to prevent self-dealing and conflicts of interest by those who provide 
financial advice. Yet today the majority of such plans are 401(k) plans 
where workers contribute a portion of their salary and the employer 
matches some or all of it. The process of investing in a 401(k) means 
that an employee places a significant amount of trust--and risk--in the 
decisions made by investment professionals selected by their employer.
    Seventy million Americans want to maximize the return on their 
hard-earned retirement savings and many of them put their trust in 
investment advisors and broker-dealers. It only makes sense that the 
laws protecting workers and their retirements should be as clear as 
possible. Those criticizing the proposed rule argue that requiring both 
the DOL and the Securities and Exchange Commission (SEC) under the 
Dodd-Frank Act to create rules regarding fiduciaries will result in 
further confusion. However, both agencies have stated publicly that 
they are working and will continue to work together to coordinate the 
rules which both agencies are promulgating.
    I recognize that those who level criticisms of the proposed rule 
are concerned about the impact of both the DOL's and the SEC's final 
rules will have on the investment industry. I believe those concerns 
are allayed by the fact that both rules are being promulgated with full 
public and Congressional input. Also mitigating the potential negative 
impact of the rules, under the Department of Labor's proposed rule, 
brokers would still be allowed to earn commissions on securities, 
mutual funds, insurance products and annuities. Brokers would still be 
allowed to act as sellers without becoming a fiduciary. They would also 
receive an exemption from the rule when they undertake transactions 
that benefit workers.
    For many Americans, especially those heading into retirement, their 
largest asset is their home. In the wake of a recession in which 
Americans watched $7 trillion worth of home values disappear, they 
deserve the most clear and reasonable protection that the law provides 
when they seek out advice from someone who represents themselves as an 
investment professional. Adopting a clear fiduciary standard will 
ensure that Americans who seek to invest their money receive advice 
that is in their best interest, regardless of their advisers' 
compensation or other interests.
                                 ______
                                 
    Chairman Roe. Today we will have two panels of witnesses. 
It is my pleasure now to introduce our first witness, Phyllis 
Borzi, well known to most people here, who is the Assistant 
Secretary of Labor of Employee Benefits Security 
Administration.
    As agency head, she oversees the administration, 
regulation, and enforcement of Title 1 of ERISA. Previously Ms. 
Borzi was a professor at George Washington University Medical 
Center School of Public Health and Health Services.
    She has also practiced law in the private sector and served 
as a pension and employee benefit counselor for the predecessor 
to this subcommittee, the House Subcommittee on Labor 
Management Relations of the Committee on Education and Labor 
for 16 years. I am glad we changed the name.
    Among numerous other professional affiliations and honors, 
Ms. Borzi is the former chair of the American Bar Associations 
Joint Committee on Employee Benefits. She holds a Master of 
Arts degree in English from Syracuse University and a J.D. from 
Catholic University Law School.
    Before I recognize you to provide your testimony, let me 
briefly explain our lighting system, which I am sure you know 
well. You have 5 minutes to present your testimony. You will 
begin and the light in front of you will turn green, at one 
minute amber, and then red we will ask you to wrap your 
testimony up at that point.
    Now, will open--have your opening statement.

STATEMENT OF HON. PHYLLIS BORZI, ASSISTANT SECRETARY, EMPLOYEE 
                BENEFITS SECURITY ADMINISTRATION

    Ms. Borzi. So, thank you and good morning, Chairman Roe, 
Ranking Member Andrews, members of the subcommittee. Thank you 
so much for inviting me to discuss the Department of Labor's 
fiduciary proposal.
    You know, a key part of EBSAs job is helping to safeguard 
the money that workers and employers set aside for workers 
retirement.
    Today the retirement universe is dominated by 401k plans 
and IRAs, both of which require individual workers to decide 
how to invest their money. The vast majority of these workers 
and probably some of us in the room are not financial experts. 
They must rely on professional advisors.
    Under both the Employee Retirement Income Security Act of 
1974 (ERISA) and the Internal Revenue code, any person paid to 
provide investment advice to plan participants or IRA owners is 
a fiduciary.
    As fiduciaries, they must refrain from self-dealing and 
that is when a fiduciary puts his or her own interest first. In 
the case of plans, they must also act prudently and in the 
participant's sole interest. This has been the loss since ERISA 
was enacted in 1974.
    So on its face the law is clear enough. When retirement 
savings are at stake, advisors should put their clients' 
interests first. But, as always, the devil is in the details. 
So the critical question is what constitutes paid investment 
advice.
    The proposal we are discussing today will amend a 35-year-
old regulatory interpretation which severely narrowed the laws 
protections. The outdated rule too frequently allows advisors 
to avoid responsibility for ill-considered recommendations and 
those involving financial conflicts of interest and self-
dealing.
    Current business practices have focused on building a trust 
relationship between the advisor and the client. However, under 
the current rule advisors are not fiduciaries if they claim 
that they didn't understand that their advice would serve as 
the primary basis for the investment decision.
    Likewise, an advisor is not a fiduciary if the advice is 
given just once and not on a regular basis. So when a worker 
nearing retirement is advised to invest both his or her savings 
to purchase a particular annuity product, the advisor is not a 
fiduciary.
    Let me put a human face on this problem. Larry Brown who 
lives in Tennessee lost one-third of his retirement savings 
after relying on conflicted broker recommendations.
    The broker promised Larry that if he retired he could 
retire at 55, withdraw an amount equal to his monthly salary at 
work and still have a nine-percent growth rate on the money he 
invested with him. Instead, to make ends meet, Larry had to 
take odd jobs for his church as a janitor and at the daycare 
center.
    The narrowness of this regulation has harmed plans, 
participants, and IRA holders. We see it in the research that 
is linked advisor conflicts with under performance. We see it 
in the SEC reviews of certain financial sales practices and in 
FINRA adjudications.
    We see it in EBSAs own enforcement experience. And finally, 
we see it in the underperformance of IRAs relative to plans.
    EBSA estimates that from 1999 to 2007 the average annual 
return for IRAs, controlling for risk in any other factors, 
were 4.5 percent compared with 5.4 percent for 401ks.
    The problems we are seeing with biased advice weren't 
contemplated when the department wrote its regulation 35 years 
ago. There were no 401k plans, congress didn't even recognize 
them until 1978, and not many IRAs.
    Today there are trillions of dollars in each of these 
markets. The variety and complexity of financial products have 
increased, innovations in products and compensation of 
multiplied opportunities for self-dealing and made fee 
arrangements far less transparent.
    Our proposal is a response to these dramatic changes to the 
market and addresses the problems that have emerged.
    Let me just quickly, I know I am running out of time, 
respond to some of the concerns.
    First, the new definition will not limit access to 
investment education or information. Second, brokers will not 
have to eliminate commission-based fee arrangements, 
restructure all their compensation as wrap fees, or convert all 
brokerage IRAs to advisory accounts. Exemptions are already on 
the books to allow brokers who provide fiduciary advice to 
receive commissions for trading the types of securities and 
funds that make up the large majority of IRA assets today.
    And finally, we are continuing to coordinate our efforts 
with the SEC, the CFTC, Treasury, and the IRS. I can assure you 
that we are working together to integrate our rules and won't 
put out final regulations that contradict each other.
    We continue to work to improve the rule with input from the 
public. The October proposal drew more than 200 comments. We 
held 2 days of hearings, left the record open for additional 
comments.
    I met with more than 20 external parties representing 
financial service providers, some of them multiple times, and 
with 30 members of Congress and their staffs. We are committed 
to developing a rule that doesn't unduly limit the financial 
industry's ability to provide valuable services, but at the 
same time we need to correct an important problem.
    Employers, employees, and IRAs investors are not well 
served by the current regulation.
    So thank you so much for the opportunity to testify. I look 
forward to working with you and your questions.
    [The statement of Ms. Borzi follows:]

   Prepared Statement of Hon. Phyllis C. Borzi, Assistant Secretary,
  Employee Benefits Security Administration, U.S. Department of Labor

    Good morning Chairman Roe, Ranking Member Andrews, and Members of 
the Subcommittee. Thank you for inviting me to discuss the Department 
of Labor's proposed amendment to its fiduciary regulation and 
activities we have undertaken to date in connection with this 
initiative. I am Phyllis C. Borzi, the Assistant Secretary of Labor for 
the Employee Benefits Security Administration (EBSA). EBSA is committed 
to pursuing policies that encourage retirement savings and promote 
retirement security for American workers.
    A key part of EBSA's job is establishing policies that safeguard 
the money that workers and employers set aside for workers' retirement. 
There are about 48,000 private-sector defined benefit plans that hold 
approximately $2.6 trillion in assets.\1\ In addition, there are nearly 
670,000 private-sector 401(k) and other defined contribution account 
plans that hold about $3.9 trillion in assets.\2\ Individual Retirement 
Accounts (IRAs) hold an additional $4.7 trillion.\3\ In fact, nearly 50 
million households own some type of IRA. That number represents more 
than 40 percent of the households in the United States.\4\ Americans' 
retirement security depends in large measure on the sound investment of
    The Employee Retirement Income Security Act of 1974 (ERISA) 
expressly provides that a person paid to provide investment advice with 
respect to assets of a private-sector employee benefit plan is a plan 
fiduciary. The Internal Revenue Code (the ``tax code'') has the same 
provision regarding investment advisers to IRAs. ERISA and the tax code 
prohibit both employee benefit plan and IRA fiduciaries from engaging 
in a variety of transactions, including self-dealing--when a fiduciary 
puts his or her own financial interests first--unless the relevant 
transaction is authorized by an ``exemption'' contained in law or 
issued administratively by the Department of Labor. In the case of an 
employee benefit plan, but not an IRA, under ERISA a fiduciary also 
owes a duty of prudence and exclusive loyalty to plan participants, and 
is personally liable for any losses that result from a breach of such 
duty. This has been the law since ERISA was enacted in 1974.
    The law on its face is simple enough: advisers should put their 
clients' interests first. But as always the devil is in the details--in 
this case, in the question of what constitutes paid investment advice. 
The Department's current initiative will amend a flawed 35-year-old 
rule under which advice about investments is not considered to be 
``investment advice'' merely because, for example, the advice was only 
given once, or because the adviser disavows any understanding that the 
advice would serve as a primary basis for the investment decision.
    Investors such as pension fund managers and workers contemplating 
investing through an IRA should be able to trust their advisers and 
rely on the impartiality of their investment advice. That is the 
promise written into law in 1974. The Department's initiative sets out 
to fulfill this promise for America's current and future retirees. The 
impact of investment advice depends on its quality. Prudent, 
disinterested advice can reduce investment errors, steering investors 
away from higher than necessary expenses and toward broad 
diversification and asset allocations consistent with the investors' 
tolerance for risk and return. Accordingly, it is imperative that good, 
impartial investment advice be accessible and affordable to plan 
sponsors and especially to the workers who need it most.
    The Department's October 2010 proposed amendment to its fiduciary 
rule represented its approach to accomplishing these goals. The 
proposal has prompted a large volume of comments and a vigorous debate. 
The Department is committed to developing and issuing a clear and 
effective rule that takes full and proper account of all stakeholder 
views, and that ensures that investment advisers can never profit from 
hidden or inappropriate conflicts of interest.
The Law
    In enacting ERISA in 1974, Congress established a number of 
provisions governing investment advice to private-sector employee 
benefit plans and IRAs. Under ERISA and the tax code, any person paid 
directly or indirectly to provide investment advice to a plan or IRA is 
a fiduciary.
    Prohibited transactions--Substantially identical provisions in 
ERISA and the tax code prohibit fiduciaries from engaging in a variety 
of transactions, including those that result in self-dealing, unless 
they fall within the terms of an exemption from the general 
prohibition. The relevant ERISA provisions apply to private-sector 
employee benefit plans, and the related tax code provisions apply to 
both plans and IRAs. In either case, fiduciaries who engage in 
prohibited transactions are subject to excise taxes. ERISA and the tax 
code each provide the same statutory exemptions from the general 
prohibition against self-dealing. The Secretary of Labor is authorized 
to issue additional exemptions.
    What is an exemption? From the fiduciary's point of view, an 
exemption is permissive: it allows the fiduciary to engage in certain 
transactions that would otherwise be prohibited. From a worker's point 
of view, an exemption should be protective, because it establishes 
rules of the road that fiduciaries must follow when they self-deal so 
that transactions are in workers' interest. In other words, if an 
investment adviser is compensated for steering a worker's retirement 
savings toward a particular financial product, the adviser must first 
satisfy conditions established by Congress or the Department to protect 
the worker's interests and rights.
    Section 102 of the Reorganization Plan No. 4 of 1978 generally 
transferred to the Department of Labor the Treasury Department's 
authority to interpret the tax code's prohibited transaction provisions 
and to issue related exemptions, thus consolidating interpretive and 
rulemaking authority for these substantially identical ERISA and tax 
code provisions in one place--the Department of Labor. At the same 
time, the IRS's general responsibility for enforcing the tax laws 
extends to excise taxes imposed on fiduciaries who engage in prohibited 
transactions. Thus, the Department shares with the IRS responsibility 
for combating self-dealing by fiduciary investment advisers to plans 
and IRAs.
    Fiduciary duties--ERISA additionally subjects fiduciaries who 
advise private-sector employee benefit plans to certain duties, 
including a duty of undivided loyalty to the interests of plan 
participants and a duty to act prudently when giving advice. 
Fiduciaries face personal liability for any losses arising from 
breaches of such duties. ERISA authorizes both participants and the 
Department to sue fiduciaries to recover such losses. These ERISA 
provisions, however, generally do not extend to fiduciaries who advise 
IRAs.
Problems with the Existing Regulation
    In 1975, the Department issued a five-part regulatory test defining 
``investment advice'' that gave a very narrow meaning to this term. The 
regulation significantly narrowed the plain language of the statute as 
enacted, so that today much of what plainly is advice about investments 
is not treated as such under ERISA and the person paid to render that 
advice is not treated as a fiduciary. Under the regulation, a person is 
a fiduciary under ERISA and/or the tax code with respect to their 
advice only if they: (1) make recommendations on investing in, 
purchasing or selling securities or other property, or give advice as 
to their value; (2) on a regular basis; (3) pursuant to a mutual 
understanding that the advice; (4) will serve as a primary basis for 
investment decisions; and (5) will be individualized to the particular 
needs of the plan.
    An investment adviser is not treated as a fiduciary unless each of 
the five elements of this test is satisfied for each instance of 
advice. For example, if a plan hires an investment professional on a 
one-time basis for advice on a large complex investment, the adviser 
has no fiduciary obligation to the plan under ERISA, because the advice 
is not given on a ``regular basis'' as the regulation requires. 
Similarly, individualized, paid advice to a worker nearing retirement 
on the purchase of an annuity is not provided on a regular basis. Thus, 
the adviser is not a fiduciary even though the advice may concern the 
investment of a worker's entire IRA or 401(k) account balance.
    In a different example, consider an IRA holder who consults 
regularly with a paid adviser, and regularly buys and sells securities 
pursuant to that person's advice. The IRA holder may rely on the advice 
as a primary or even the sole basis for investment decisions, but if 
the adviser cannot be shown to have agreed or understood that the 
advice would be a primary basis for the investment decisions--then the 
adviser avoids fiduciary status and is free to self-deal. This example 
is particularly important. Today many service providers (such as 
brokers) attempt to avoid fiduciary status simply by including 
disclaimers in their written agreements with IRA holders explaining 
that they are not acting as registered investment advisers and that 
their advice will not constitute a primary basis for the IRA holders' 
decisions.\5\ An authoritative study by RAND for the SEC demonstrated 
that consumers often do not read such agreements and do not understand 
the difference between brokers and registered advisers or the services 
they provide.\6\
    The narrowness of the existing regulation opened the door to 
serious problems, and changes in the market since the regulation was 
issued in 1975 have allowed these problems to proliferate and 
intensify. The variety and complexity of financial products have 
increased, widening the information gap between advisers and their 
clients and increasing the need for expert advice. Consolidation in the 
financial industry and innovations in products and compensation 
practices have multiplied opportunities for self-dealing and made fee 
arrangements less transparent to consumers and regulators. At the same 
time, the burden of managing retirement savings has shifted 
dramatically from large private pension fund managers to individual 
401(k) plan participants and IRA holders, many with low levels of 
financial literacy. These trends could not have been foreseen when the 
existing regulation was issued in 1975.
    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-based defined contribution plans with assets of just $74 
billion.\7\ Moreover, the great majority of defined contribution plans 
at that time were professionally 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 glaring contrast, by 
2008 defined benefit plans covered just 19 million active participants, 
while individual-account-based defined contribution plans covered over 
67 million active participants--including 60 million in 401(k)-type 
plans.\8\ Ninety-five 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.\9\ Also, in 2010, almost 50 
million households owned IRAs.\10\ In dollar terms, by 2010, defined 
benefit plans, with $2.6 trillion in assets, had been eclipsed by 
defined contribution plans which held $3.9 trillion. IRAs held the 
most: $4.7 trillion, with most of this attributable to rollovers from 
plans.\11\
    The narrowness of the regulation has harmed some plans, 
participants, and IRA holders. Research has linked adviser conflicts 
with underperformance. SEC reviews of certain financial sales practices 
may also reflect these influences. Finally, EBSA's own enforcement 
experience has demonstrated specific negative effects of conflicted 
investment advice.
    One academic study found that investors purchasing funds through 
brokers generally get lower returns, even before paying the brokers' 
fees, than those who buy them directly, and do no better at asset 
allocation. The study's authors say this might be evidence of harmful 
conflicts of interest, but might also be evidence that investors are 
buying something ``intangible'' from their brokers.\12\ Another study 
finds that advisers' compensation structures matter--those with 
conflicts give poorer advice. 13 Other research, relevant to valuation 
advice, finds that accountants value property higher when working for 
sellers than for buyers.\14\ Still other research finds that disclosure 
of conflicts fails to protect consumers. A conflicted adviser may feel 
morally licensed by disclosure to pursue his self interest, and he may 
exaggerate his advice to compensate for the possibility that a consumer 
will discount it. The consumer may be reluctant to question the advice, 
not wanting to imply that the adviser is being dishonest or come 
between the adviser and his pay.\15\
    It is worth noting that none of this research evidence necessarily 
demonstrates abuse. On the contrary, it seems to suggest that conflicts 
may color advice in some instances from honest advisers without their 
even realizing it. But whether deliberate or inadvertent, the result 
where conflicts exist is often the same: adviser conflicts are a threat 
to retirement security. Academic research suggests this, and experience 
bears it out.
    For additional evidence, consider the underperformance of IRAs 
relative to plans. Some gap might be expected, as the comparison is 
between retail and institutional customers. But the size of the gap is 
troubling. Unlike plan participants, IRA holders do not have the 
benefit of a plan fiduciary, usually their employer, to represent their 
interests in dealing with advisers. EBSA estimates that from 1998 to 
2007, the average annual returns for IRAs were 4.5 percent, compared 
with 5.4 percent for 401(k)s.\16\ Further, in a recent report, the 
Government Accountability Office stated that IRA holders often pay fees 
that can be two to three times higher than the fees paid by employee 
benefit plan participants for in-plan investments.\17\
    A 2007 SEC report provides more evidence. The report examines 
``free lunch'' sales seminars that market financial products to 
retirees. The SEC conducted 110 examinations of financial services 
firms providing ``free lunch'' seminars. Of these, only five found no 
problems or deficiencies. More than half found that materials used 
might have been misleading or exaggerated. Twenty-five found that 
unsuitable recommendations were made. Seminar attendees often may not 
have known that presenters had a financial stake in the products they 
recommended, the SEC said.\18\
    Finally, consider the evidence provided by EBSA's enforcement 
experience. Too often advisers who put their own interests first escape 
fiduciary status through a loophole in the existing regulation. For 
example, consider the following case: A financial services firm often 
recommended mutual funds that paid it revenue sharing. Even though some 
of its consulting agreements with plans acknowledged the firm's status 
as an ERISA fiduciary, it denied being a fiduciary for any ERISA 
clients. Consequently, the Department had to interview dozens of the 
clients in order to determine whether the firm's advice met the current 
regulation's five-part test. In many cases, the advice did not meet the 
``regular basis'' requirement because the firm's representatives had 
infrequent contact with plans after the selections of mutual funds. Due 
to the ambiguous nature of the evidence on the firm's fiduciary status 
under the existing rule, DOL could not pursue enforcement against it.
    Another example involves improper appraisals in connection with 
employee stock ownership plans (ESOPs). Since the early 2000s, EBSA 
began to identify issues involving ESOPs, encompassing a variety of 
different violations of ERISA and affecting over 500,000 participants. 
In many instances, the most important investment advice to a plan 
concerns how much to pay for an asset. In the case of ESOPs, in 
particular, the key decision is typically not whether to buy stock--the 
plan was established precisely to buy and hold employer stock--but 
rather what price to pay for the stock. The Department has uncovered 
abuses reflecting flawed valuation methodologies, internally 
inconsistent valuation reports, the use of unreliable and outdated 
financial data, and the apparent manipulation of numbers and 
methodologies to promote a higher stock price for the selling 
shareholders. Under ERISA, a loss remedy is only available from plan 
fiduciaries. As a result, under the current regulatory structure, 
neither the Secretary nor plan participants can hold the appraiser 
directly accountable for disloyal or imprudent advice about the 
purchase price, no matter how critical that advice was to the 
transaction. The sole recourse available to the Secretary and plan 
participants is against the trustee who relied on the advice, rather 
than against the professional financial expert who rendered the 
valuation opinion that formed the necessary basis for the transaction.
    Consequently, the Department believes there is a need to re-examine 
the types of advisory relationships that should give rise to fiduciary 
status on the part of those providing investment advice services. The 
1975 regulation contains technicalities and loopholes that allow 
advisers to easily dodge fiduciary status. Plan fiduciaries, 
participants, and IRA holders are entitled to receive impartial 
investment advice when they hire an adviser. Overview of Proposed 
Regulation
    On October 22, 2010, the Department published a proposed regulation 
defining when a person is considered to be a ``fiduciary'' by reason of 
giving investment advice for a fee with respect to assets of an 
employee benefit plan or IRA. The proposal amends the current 1975 
regulation that may inappropriately limit the circumstances that give 
rise to fiduciary status on the part of the investment adviser.\19\ The 
proposed rule takes into account significant changes in both the 
financial industry and the expectations of plan fiduciaries, 
participants and IRA holders who receive investment advice. In 
particular, it is designed to protect participants from conflicts of 
interest and self-dealing by correcting some of the current rule's more 
problematic limitations and providing a clearer understanding of when 
persons providing such advice are subject to ERISA's fiduciary 
standards, and to protect IRA holders from self-dealing by investment 
advisers.
    The proposed regulation would modify the 1975 regulation by: (1) 
replacing the five-part test with a broader definition more in keeping 
with the statutory language; and (2) providing clear exceptions for 
conduct that should not result in fiduciary status. Under the proposal, 
the following types of advice and recommendations may result in 
fiduciary status: (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; or (3) recommendations as to the management of 
securities or other property.
    To be a fiduciary, a person engaging in one of these activities 
must receive a fee and also meet at least one of the following four 
conditions. The person must: (1) represent to a plan, participant or 
beneficiary that the individual is acting as an ERISA fiduciary; (2) 
already be an ERISA fiduciary to the plan by virtue of having any 
control over the management or disposition of plan assets, or by having 
discretionary authority over the administration of the plan; (3) be an 
investment adviser under the Investment Advisers Act of 1940; or (4) 
provide the advice pursuant to an agreement or understanding that the 
advice may be considered in connection with investment or management 
decisions with respect to plan assets and will be individualized to the 
needs of the plan.
    At the same time, the proposed regulation recognizes that 
activities by certain persons should not result in fiduciary status. 
Specifically, these are: (1) persons who do not represent themselves to 
be ERISA fiduciaries, and who make it clear to the plan that they are 
acting for a purchaser/seller on the opposite side of the transaction 
from the plan rather than providing impartial advice; (2) persons who 
provide general financial/investment information, such as 
recommendations on asset allocation to 401(k) participants under 
existing Departmental guidance on investment education; (3) persons who 
market investment option platforms to 401(k) plan fiduciaries on a non-
individualized basis and disclose in writing that they are not 
providing impartial advice; and (4) appraisers who provide investment 
values to plans to use only for reporting their assets to the DOL and 
IRS.
Concerns Raised about the Proposed Regulation and the Department's 
        Preliminary Responses
    The proposed regulation has prompted a large volume of comments and 
a vigorous debate. The Department is working hard to hear and consider 
every stakeholder concern.
    The October proposal itself drew more than 200 written comments, 
many raising important and complex issues that require serious 
attention. The Department followed up by holding two days of hearings 
on March 1 and 2, providing an additional forum for 36 witnesses and 
prompting more than 60 additional, post-hearing written comments. We 
also have met individually with many groups that sought additional 
opportunities to explain their views. Altogether, the Department has 
heard from many representatives of the financial services industry, as 
well as from plan sponsors, advocates for small investors, service 
providers, academics who study the roles of financial intermediaries 
and the effects of conflicts between consumers and expert advisers, and 
interested Members of Congress. The Department is devoting a major 
effort to appropriately resolve the concerns raised by stakeholders. 
Let me offer examples of how we are thinking about some of the major 
ones.
    Coordination with Other Federal Agencies--We have received many 
comments emphasizing the importance of harmonizing the Department's 
proposed rulemaking with certain Securities and Exchange Commission 
(SEC) and Commodities Futures Trading Commission (CFTC) rulemaking 
activities under the Dodd-Frank Act, including activities related to 
SEC standards of care for providing investment advice and CFTC business 
conduct standards for swap dealers. There are concerns that 
inconsistent standards could negatively impact retirement savings by 
increasing costs and foreclosing investment options. Likewise, concerns 
have been raised about the adequacy of coordination between the 
Department and other relevant agencies, including the SEC, Treasury 
Department, and Internal Revenue Service, with respect to oversight of 
IRA products and services.
    The Department, Treasury Department, Internal Revenue Service, SEC, 
and the CFTC are actively consulting with each other and coordinating 
our efforts. Our shared goal is to harmonize our separate initiatives. 
We are also committed to ensuring that the regulated community has 
clear and sensible pathways to compliance. We are confident that these 
goals will be achieved.
    The SEC is currently considering staff recommendations to establish 
uniform fiduciary duties under the securities laws for advisers and 
brokers. While the Department and the SEC are committed to ensuring 
that any future fiduciary requirements applicable to investment 
advisers and broker-dealers under the applicable laws are properly 
harmonized, the Department is also committed to upholding the separate 
federal protections that Congress established in 1974 for plans, plan 
participants, and IRAs under ERISA and the tax code.
    The Department also plans to harmonize its fiduciary regulation 
with the CFTC's and SEC's proposed business conduct standards for swap 
dealers. The Department does not seek to impose ERISA fiduciary 
obligations on persons who are merely counterparties to plans in arm's 
length commercial transactions. Parties to such transactions routinely 
make representations to their counterparties about the value and 
benefits of proposed deals, without purporting to be impartial 
investment advisers or giving their counterparties a reasonable 
expectation of a relationship of trust. Accordingly, the Department's 
proposed regulation provides that a counterparty will not be treated as 
a fiduciary if it can demonstrate that the recipient of advice knows or 
should know that the counterparty is providing recommendations in its 
capacity as a purchaser or seller.
    Costs and Unintended Consequences for IRAs--Many comments also 
raised concerns about the proposed regulation's impact on IRAs and 
questioned whether the Department had adequately considered possible 
negative impacts. Similar concerns were voiced by other stakeholders, 
especially those providing advice in connection with brokerage 
services. Some stakeholders have provided their own estimates of high 
costs and other major negative impacts.
    The stated concerns can be summarized as follows:
     Today a large proportion of IRAs, especially smaller 
accounts, are brokerage accounts. Brokers often advise the IRA holders, 
and are compensated for that advice by means of commissions paid for 
trades and often by third parties, as with revenue sharing and 12b-1 
mutual fund fees. Though the brokers give advice, they typically 
contend that they are not fiduciaries under the Department's existing 
rule because they disclaim any understanding that their advice might 
constitute a primary basis for the IRA holders' investment 
decisions.\20\
     The proposed rule would make brokers fiduciaries because 
IRA holders will at least ``consider'' their advice. As fiduciaries, 
the brokers could not accept commissions or revenue sharing payments. 
To do so would constitute fiduciary self-dealing, a prohibited 
transaction, and would trigger a requirement to return the commissions 
or payments to their sources and to pay an excise tax.
     Brokers therefore would be forced to restructure their 
compensation as ``wrap fees'' expressed as a percentage of assets in 
the account. Receipt of wrap fees in turn would force the advisers to 
register and conduct their business as registered investment advisors 
(RIAs) under the Investment Advisers Act of 1940. IRAs would have to be 
converted from brokerage accounts to either advisory accounts (which 
cost more and deliver more service than most IRA holders want) or 
internet-based discount brokerage accounts (which offer no personalized 
advice), or be closed. Advisory accounts require high minimum balances 
so small accounts would lose all access to advice and many would be 
closed.
     The result will be dramatically higher fees and widespread 
distributions from small accounts, both of which will undermine 
retirement security.
     There will be no benefits to offset these costs and other 
negative impacts. There is no evidence that the quality of advice 
currently is diminished by the conflicts that are present, so there is 
no reason that the proposed regulation will improve advice.
     IRAs should not be treated like plans. They are retail 
accounts and should be treated like other retail accounts. IRA holders 
do not require as much protection as plan participants because they 
have unlimited choice of vendors and products and are therefore 
empowered to secure quality services.
    The Department will continue to carefully study these arguments. We 
have, however, the following observations on some of the comments.
    We did not propose to force brokers to eliminate commission-based 
fee arrangements, restructure all of their compensation as wrap fees, 
or convert all brokerage IRAs to advisory accounts. Exemptions already 
on the books authorize brokers who provide fiduciary advice to be 
compensated by commission for trading the types of securities and funds 
that make up the large majority of IRA assets today. We will attempt to 
provide this clarification in a more formal manner as we proceed in 
this process.
     The Department is considering providing interpretive 
guidance to make this clear, as well as issuing additional exemptions. 
Such additional exemptions might cover, for example, revenue sharing 
arrangements that are beneficial to plan participants and IRA holders, 
and/or so-called ``principal'' transactions, wherein a fiduciary 
adviser, rather than acting as an agent, itself buys an asset from or 
sells an asset to an advised IRA. Such exemptions would carry 
appropriate conditions to protect plan participants' and IRA holders' 
interests.
     The Department believes there is strong evidence that 
unmitigated conflicts cause substantial harm, and therefore is 
confident that the proposed fiduciary regulation would combat such 
conflicts and thus deliver significant benefits to plan participants 
and IRA holders. As noted above, this evidence is found in academic 
research, IRA underperformance, SEC examinations, and EBSA's own 
enforcement experience. While no single piece of evidence by itself 
directly demonstrates or provides a basis for quantifying the negative 
impact of conflicts on plans and IRAs, taken together the available 
evidence appears to indicate that the negative impacts are present and 
often times large. Plans, plan participants, and IRA holders will 
benefit from advice that is impartial and puts their interests first.
     The tax code itself treats IRAs differently from other 
retail accounts, bestowing favorable tax treatment, and prohibiting 
self-dealing by persons providing investment advice for a fee. In these 
respects, and in terms of societal purpose, IRAs are more like plans 
than like other retail accounts. Most IRA assets today are attributable 
to rollovers from plans.\21\ The statutory definition of fiduciary 
investment advice is the same for IRAs and plans. The proposed 
regulation therefore sensibly set forth a single consistent definition, 
addressing practical differences between the two by tailoring 
exemptions accordingly. As for the level of protection that is 
appropriate, while IRA holders have more choice, they may nonetheless 
require more protection. Unlike plan participants, IRA holders do not 
have the benefit of a plan fiduciary, usually their employer, to 
represent their interests in dealing with advisers. They cannot sue 
fiduciary advisers under ERISA for losses arising from fiduciary 
breaches, nor can the Department sue on their behalf. Compared to those 
with plan accounts, IRA holders have larger account balances and are 
more likely to be elderly. For all of these reasons, combating 
conflicts among advisers to IRAs is at least as important as combating 
those among advisers to plans.
     The Department believes that the assessment of economic 
impacts it provided with the proposed rule provided an economic basis 
for the proposal. I agree, however, that a fuller analysis is called 
for at this point, and we are undertaking such an analysis now. The 
expanded analysis will be informed by all relevant stakeholder input, 
as well as by our consultations with other federal agencies, and will 
be provided along with any final regulation pursuant to applicable 
requirements.
    Appraisals and valuations--Another issue raised by stakeholders 
relates to whether the valuation of employer securities should 
constitute ``investment advice'' as the proposed regulation would 
require. Although the current regulation includes advice as to the 
value of securities within the term ``investment advice,'' a 1976 
advisory opinion issued by the Department took the position that advice 
to an ESOP on the value of employer securities would not be so treated. 
A number of witnesses at our hearing on this proposed rule testified 
that the proposal would cause many qualified appraisers to discontinue 
ESOP valuations and would significantly increase costs of appraisals 
for small businesses that sponsor ESOPs. It is the Department's opinion 
that, in many instances, the most important investment advice to a plan 
concerns how much to pay for an asset. In the case of closely-held 
companies, ESOP trustees typically rely on professional appraisers and 
advisers to value the stock, often with little or no negotiation over 
price. Unfortunately, in our investigations and enforcement actions, 
the Department has seen many instances of improper ESOP appraisals--
often involving most or all of a plan's assets--resulting in millions 
of dollars in losses. Accordingly, we believe that employers and 
participants will benefit from being able to rely on professional 
impartial advice that adheres to the fundamental fiduciary duties of 
prudence and loyalty. However, we will continue to work with 
stakeholders to structure a rule that adheres to these duties but does 
not cause unnecessary harm or cost to small businesses.
    Distinguishing Education from Advice--A number of witnesses 
expressed confusion over how the proposed regulation will impact 
participant investor education. There were concerns about what will be 
considered financial literacy and education and what will be considered 
investment advice under the proposed regulation. In particular, there 
were concerns that the proposal appears to significantly reduce what 
constitutes financial education and raises the question as to whether 
Interpretive Bulletin 96-1 (IB 96-1) is still in effect. The Department 
believes education is important for plans and plan participants. Under 
the proposed regulation, employers who provide general financial/
investment information, such as a recommendation on asset allocation to 
401(k) participants under IB 96-1, would not be considered fiduciaries 
under the new regulation. The Department also has general education 
resources available to plans and plan participants.
Next Steps
    Our current approach to the fiduciary regulation consists of 
multiple steps.
    First, we are working to better understand how specific 
compensation arrangements would be affected by the proposed rule and 
whether clarifications of existing prohibited transactions exemptions 
would be appropriate. We have already begun to issue subregulatory 
guidance describing some of these clarifications and will continue to 
do so as necessary as we complete our analysis.
    Next, as we further develop our thinking in this rulemaking, we are 
paying special attention to the two primary exceptions to fiduciary 
status under the proposed rule: (1) clarifying the difference between 
investment education that does not give rise to fiduciary status and 
fiduciary investment advice; and (2) clarifying the scope of the so-
called ``sellers' exception'' under which sales activity is not 
fiduciary advice. In both cases, we will make sure to analyze and 
address the comments and concerns that were raised during our extensive 
public comment period.
    Finally, we are exploring a range of appropriate regulatory options 
for moving forward, taking into consideration public comments submitted 
for the record, EBSA's economic analysis, and relevant academic 
research. In so doing, we are aiming to address conflicted investment 
advice while not unnecessarily disrupting existing compensation 
practices or business models.
Conclusion
    Thank you for the opportunity to testify at this important hearing. 
The Department remains committed to protecting the security and growth 
of retirement benefits for America's workers, retirees, and their 
families.
                                endnotes
    \1\ For estimates of the number of plans, see U.S. Department of 
Labor, Private Pension Plan Bulletin Abstract of 2008 Form 5500 Annual 
Reports (Dec. 2010), at http://www.dol.gov/ebsa/PDF/
2008pensionplanbulletin.pdf. For asset estimates, EBSA projected ERISA 
covered pension assets based on the 2008 Form 5500 filings with the US 
Department of Labor (available at http://www.dol.gov/ebsa/publications/
form5500dataresearch.html), and the Federal Reserve Board's Flow of 
Funds Accounts Z1 Release (available at http://www.federalreserve.gov/
releases/z1/Current/).
    \2\ Ibid.
    \3\ Federal Reserve Board, Flow of Funds Accounts of the United 
States, June 2011, at http://www.federalreserve.gov/releases/z1/
Current/.
    \4\ Peter Brady et al., The U.S. Retirement Market, Third Quarter 
2010, Investment Company Institute, Jan. 2011, at http://www.ici.org/
pdf/ppr--11--retire--q3--10.pdf. this money. While some investment 
decisions are made by large professional money managers, today most are 
made by individual workers who must manage their own 401(k) accounts 
and IRAs. To guide their decisions, workers often rely on advice from 
trusted experts.
    \5\ The Department does not necessarily agree that the inclusion of 
such language in an agreement ensures that a broker is not a fiduciary 
under the existing regulation.
    \6\ 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.
    \7\ U.S. Department of Labor, Private Pension Plan Bulletin 
Historical Tables and Graphs, (Dec. 2010), at http://www.dol.gov/ebsa/
pdf/historicaltables.pdf.
    \8\ U.S. Department of Labor, Private Pension Plan Bulletin 
Abstract of 2008 Form 5500 Annual Reports, (Dec. 2010), at http://
www.dol.gov/ebsa/PDF/2008pensionplanbulletin.PDF.
    \9\ 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.
    \10\ Peter Brady et al., The U.S. Retirement Market, Third Quarter 
2010, Investment Company Institute, Jan. 2011, at http://www.ici.org/
pdf/ppr--11--retire--q3--10.pdf.
    \11\ Federal Reserve Board, Flow of Funds Accounts of the United 
States, June 2011, at http://www.federalreserve.gov/releases/z1/
Current/; 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.
    \12\ Daniel Bergstresser et al., Assessing the Costs and Benefits 
of Brokers in the Mutual Fund Industry, The Review of Financial 
Studies, 22, no. 10, Oct. 2009.
    \13\ Ralph, Bluethgen et al., High Quality Investment Advice 
Wanted! , SSRN Working Paper Series, Feb. 2008, at http://
papers.ssrn.com/sol3/papers.cfm?abstract--id=1102445&http://
scholar.google.com/scholar?cluster=10674815933415125485&hl=en&as--
sdt=0,9.
    \14\ Don Moore et al., Conflict of Interest and the Unconscious 
Intrusion of Bias, Judgment and Decision Making, Vol. 5, No. 1, Feb. 
2010.
    \15\ George Loewenstein et al., Pitfalls and Potential of 
Disclosing Conflicts of Interest, American Economic Review, forthcoming 
May 2011.
    \16\ EBSA's estimation approach was inspired by similar findings in 
an article using older data, see Alicia H. Munnell et al., ``Investment 
Returns: Defined Benefit vs. 401(k) Plans,'' Center for Retirement 
Research at Boston College, Issue Brief No. 52, Sep. 2006, p. 6.
    \17\ GAO, 401(k) Plans: Improved Regulation Could Better Protect 
Participants from Conflicts of Interest, Report to the Ranking Member, 
Committee on Education and the Workforce, House of Representatives, 
GAO-11-119 (Jan. 2011).
    \18\ Securities and Exchange Commission, Office of Compliance 
Inspections and Examinations, Protecting Senior Investors: Report of 
Examinations of Securities Firms Providing ``Free Lunch'' Sales 
Seminars, Sep. 2007, at http://www.sec.gov/spotlight/seniors/
freelunchreport.pdf.
    \19\ The proposed regulation would also supersede the conclusion 
set forth in Advisory Opinion 76-65A (June 7, 1976), where the 
Department held that the valuation of closely-held employer securities 
that an ESOP would rely on in purchasing the securities would not 
constitute investment advice under the regulation.
    \20\ As noted above, the Department does not necessarily agree that 
the inclusion of such language in an IRA agreement ensures that a 
broker is not a fiduciary under the existing regulation.
    \21\ 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.
                                 ______
                                 
    Chairman Roe. Thank you. If you have any other comments, 
please go ahead.
    Ms. Borzi. No, that is okay. My written testimony is much 
more detailed. So I know that will be in the record.
    Chairman Roe. Okay.
    Ms. Borzi. I am just happy to take your questions.
    Chairman Roe. Thank you.
    Dr. Heck?
    Mr. Heck. Thank you, Mr. Chairman.
    Thank you, Madam Secretary, for your testimony and for your 
written statement.
    I know you mentioned in your comments that this will not 
cause brokers to switch from commission based to value-asset 
based. Yet, I am hearing from many brokers in my district that 
that is exactly what is going to happen is that they are going 
to have to switch.
    I would like for you to try to kind of clear that up. Why 
are so many brokers under the impression that they are going to 
have to switch if you are saying they are not?
    And if they do switch, it would appear that it would price 
out small accounts that would not be able to afford the value 
asset based commission and how are we going to take steps to 
prevent that so that people do get the advice that they need?
    Ms. Borzi. Well, we have heard that as well. And I think 
the simplest way to answer your questions is there appears to 
be a lot of concern, nervousness, misinformation perhaps, 
misunderstanding of what the current law is.
    Since brokers are not--at least they take the position that 
they are not currently fiduciaries under ERISA. Although, I 
might add that if you look at the five-part test that, I think, 
some of them even under the current five-part test who do give 
advice on a regular basis and who do understand that their 
advice is going to be taken by their clients, might still be 
fiduciaries.
    But I just think that there is a lot of misinformation. One 
of the reasons that we put these charts together is that there 
seems to be that first column in the fiduciary proposal, first 
chart, brokers would be allowed under this regulation, and 
certainly under our current regulations, to earn commissions on 
securities, mutual funds, insurance products and annuities.
    That is very important because if you look at the kinds of 
investments that small IRA investors are invested in, those are 
the kinds of things they are invested in. They are not in the 
sophisticated financial instruments by in large.
    And so, I think, to the extent that the brokers, the broker 
community doesn't understand that these kinds of transactions 
are already permitted, we have a job to do in clarifying and 
making them understand that they are. Because we are not 
intending to overturn a commission based system.
    And if I could just--the regulation does exempt traditional 
broker activities--sell--simply selling securities. So there is 
what is called a seller's exemption which says if I am your 
broker and I come to you and you understand that all I am doing 
is selling you a product, I am not giving you investment 
advice. I am not telling you to, you know, that this is the 
best product you could ever buy that does not make you a 
fiduciary.
    And to the extent that their practices beyond commissions, 
which we are hearing from some of the financial institutions, 
we are prepared to work with them to see if we can provide an 
exemption from the fiduciary prohibited transaction.
    Mr. Heck. And I appreciate that. I guess the concern is 
that the smaller investor, perhaps the more unsophisticated 
investor----
    Ms. Borzi. Exactly.
    Mr. Heck [continuing]. Sets this up so that that individual 
would have to come to the broker and say this is what I want to 
buy. Not necessarily being able to receive any type of 
comparison, let us say, between two or three different products 
that that broker might provide and then allowing the buyer to 
make a decision on which they would want to purchase.
    Ms. Borzi. Yes. I mean, the simple fact is that, as I said 
well, we have no interest. The Department of Labor has spent 
the better part of 20 years encouraging people to save for 
retirement, both inside of plans and in IRAs. So we wouldn't 
have any interest at all, and we would be very concerned about 
closing off advice to the small investors.
    What puzzles us, of course, is that the industry seems to 
take the position that there are only two methods to continue 
to survive. One would be to keep the current broker dealer 
rules or the broker dealer perception that they are not 
fiduciaries under ERISA and do nothing to address the 
conflicted advice problem or the other extreme, which is to 
convert to an investment advisor model which will be more 
expensive.
    We have talked with all of our sister agencies that 
regulate IRAs, that deal with IRAs and lots of people in the 
private sector looked at academic literature and we think that 
there is plenty of room for business models between the current 
conflicted advice model and going to a pure investment advisor 
model.
    And we were happy to work with the industry to figure out 
how to deal with that. But I think that the broker's concern is 
perhaps due to misunderstanding.
    Mr. Heck. Thank you, Madam Secretary.
    Thank you, Mr. Chair. I yield back.
    Chairman Roe. Thank you.
    Mr. Andrews?
    Mr. Andrews. Thank you, Mr. Chairman.
    Madam Secretary, thank you for your testimony and your 
openness to members of the committee and to the public to talk 
about this issue. It is characteristic of your service.
    A week from today, there is an increasing probability that 
the United States of America will lose its ability to borrow 
money to run our government. Presently, we borrow about 42 
cents of every dollar that we spend. So we will find ourselves 
in a position, if this happens, where we will have 58 cents of 
revenue and a dollars' worth of obligations.
    I am sure on a morning like this you are glad you are not 
the Secretary of the Treasury, who would have the obligation to 
figure out which bills not to pay.
    There is some debate about what the consequences of this 
calamitous event would be for the bond market and the equity 
markets. The consensus of opinion is that at some point there 
would be significant damage to each of those markets. It is not 
a unanimous opinion, but I think it is a broadly held opinion.
    I think that our near death experience with the TARP in 
2008 when Dow Jones fell by nearly 1,000 points during the 
floor vote when the TARP was not adopted is a precursor of what 
might happen.
    I know that this hearing is about fiduciary 
responsibilities, and there are fiduciaries all over the 
country who are managing pension funds, both in the private and 
public sector.
    What is your best assessment as to what the impact on 
pension funds around the country would be if the United States 
of America were to either default on its debt service 
obligations or receive a downgrade in our credit rating from 
the ratings agencies because of the present crisis?
    Ms. Borzi. Well, it is hard to really speculate because 
this has never happened before. But let me just focus on a 
couple of things.
    The first thing we know is that it would be very, very 
disruptive; create a climate of uncertainty. In a number of 
pension funds, particularly the large funds, public funds as 
well as--funds, their investment policy would require them to 
have AAA bonds.
    If the treasury bond, and most of them have treasuries in 
one form or another, and if those bonds were no longer AAA, the 
fiduciaries would certainly have to figure out how to comply 
with their investment policy guidelines without--how not to 
violate their investment policy guidelines.
    Mr. Andrews. So in other words, many trustees would find 
themselves in a position where purchasing of treasury 
securities would be prohibited by their own internal rules?
    Ms. Borzi. I am afraid that is true.
    Mr. Andrews. Which would----
    Ms. Borzi [continuing]. Certainly with the larger funds. I 
am not sure about the smaller funds.
    Mr. Andrews. My understanding is about a third of all the 
capital domestically held in the United States is in pension 
funds.
    Ms. Borzi. That sounds right to me.
    Mr. Andrews. A pretty significant cut in the demand for 
federal securities, which I assume would raise their price and 
raise their interest rates, if that were to happen.
    Ms. Borzi. Yes. I mean one other thing that concerns me 
about your question is I think this would not just have an 
effect on the investment decisions of fiduciaries. I think it 
would also have a profound effect on individuals particularly 
in the 401k plan and IRA marketplace.
    We have been, as I said, have been encouraging people to 
save for retirement. If individuals thought their ability to 
borrow outside of the retirement savings universe would be 
impaired because credit would be tightened up and, of course, 
we are still seeing that for small businesses. That is one of 
the problems with small business----
    I think they would be less likely to put money in their 
plan because once it is in there it is much more difficult to 
get it out. So I would also be concerned on the effect of the 
savings rate, which we know is much lower than other countries.
    Mr. Andrews. Of course, if people put less money in their 
plans, there are fewer equities purchased, fewer bonds 
purchased, less money available----
    Ms. Borzi. Right. I think the ripple effect in the economy 
would be very significant.
    Mr. Andrews [continuing]. Investment in corporate America.
    Would you care to add any comments further about the other 
consequences of such a risk to the U.S. economy?
    Ms. Borzi. You know, it is really very hard to figure out 
what would happen. It is very interesting to me because part of 
the debate has been that we need to get, and this ism I am now, 
this is Phyllis Borzi, public citizen. You know, I am not 
speaking for the Department of Labor or the administration on 
this----
    Mr. Andrews. We won't tell them what you said, go ahead. 
[Laughter.]
    Ms. Borzi. You won't tell anybody that I said this.
    One of the important parts of the debate has been the need 
to get certainty into, make people understand that Congress is, 
Congress and the administration is serious about reducing the 
deficit. And a default, it seems to me, would go in the 
opposite direction.
    It would certainly send a message to the American public 
that people aren't really serious about dealing with this. And 
I think that uncertainty will certainly not do anything to 
encourage businesses to add more jobs or, as I said, for people 
to save more money for retirement.
    I am not an economist. I don't play one on TV, but I think 
nothing good could come from a default in terms of the American 
public and the pension system.
    Mr. Andrews. Thank you, Madam Secretary.
    Thank you, Mr. Chairman.
    Chairman Roe. Thank you.
    Mrs. Roby?
    Mrs. Roby. Well, since my colleague brought it up, I would 
just like to make a comment and say that all the more reason 
that we get our fiscal house in order here in the federal 
government. Men and women, families all over this country have 
been tightening their belt for the past several years and it is 
time this federal government tightens their belt, too.
    Which is exactly what House Republicans are proposing, and 
we need to do all that we can to ensure the American people 
that we are removing this uncertainty so we can get Americans 
back to work.
    Ms. Borzi. Well, and the administration and the Democrats 
believe that we need to get moving on this and be serious about 
the debt as well.
    Mrs. Roby. Well, tax increases----
    Ms. Borzi. I don't think it is a partisan issue. I think 
that people have different ways of getting to the same point. 
But I think the goal is a shared goal.
    Mrs. Roby. Well, raising taxes on the American people right 
now is certainly not going to get Americans back to work.
    Madam Secretary, thank you for being here.
    Mr. Chairman, thank you.
    President Obama issued an executive order this winter he 
urged regulators to ease regulatory burdens. And with all of 
the concerns being raised around this rule, how does this 
proposal fit within the president's initiative to ensure rules 
do not have a negative impact on investors, businesses, and the 
economy?
    Ms. Borzi. Well, it fits within the president's executive 
orders, several executive orders that deal with this in a 
number of different ways.
    First of all, the president, through an executive order, 
asked us to go back and look at all the regulations that all 
the agencies had issued over the past years to determine 
whether any of them were outdated, outmoded and needed to be 
updated.
    And, honestly, that is the reason we selected this project 
because in reviewing these regulations, this is the one that is 
the linchpin to our program and it also is the one most 
obviously crying out for updating.
    Now, as far as burdens are concerned, when we propose a 
regulation we are required to look at burdens. We are required 
to make findings in the finalization of a reg, for sure, as to 
the extent of the burden, and we have to describe any 
alternative mechanisms we may have looked at to address the 
same issue.
    Our proposal was just that, a proposal. It is like a first 
draft and it was designed to get the kind of public discussion 
and debate that it is engendered. And as we move along to 
finalize the regulation, we have a responsibility to and have 
been working to do a couple of things.
    The first thing we have a responsibility to do is interact 
with the public, get public comments. Another executive order 
that was issued asked the agencies to allow people to comment 
on the comments.
    When you put forward a regulation, you seek public 
comments, and that is what we did. We gave the public 90 days 
to comment on our regulation.
    We got about 200 comments which isn't, you know, it is 
about average for the comments that we get on major regulations 
like this. We recognized from the beginning that this was a 
major regulation.
    We then had requests from the public to extend the comment 
period, which we did twice. We then scheduled 2 days of public 
hearings, wherein we had, I believe it was 38 public witnesses, 
and then we reopened the public hearing record.
    Now, typically what we do is we open the record for the 
people who testified. In this case, we opened the record to 
anybody who wanted to comment on the testimony or who wanted to 
renew comments.
    And then, 2 weeks after we opened that comment period we 
extended it for another 2 weeks because we posted the 
transcript of the hearing----
    Mrs. Roby. And let me just say this, and I appreciate that 
process but both parties, members from both parties, have 
expressed concern about the proposed rules and yet there seems 
to be increasing efforts to finalize the implementation of this 
rule by the end of this year.
    So why do you feel with all of the process that is going 
on, with all of the comments from both sides, why do you feel, 
does the administration feel that it is necessary to go ahead 
and rush ahead?
    Ms. Borzi. We are not rushing ahead. It is more important 
to get this right than to comply with the dates that we have 
set forward on our regulatory schedule.
    The reason I talk about the end of the year is because that 
is what our regulatory agenda calls for. But believe me, we are 
taking the comments that are being made by the members of 
Congress, by the public, very, very seriously.
    We are talking, as I said, we are talking with our sister 
agencies. We are trying to work through issues. But it is most 
important for us to get it right----
    Mrs. Roby. Well, I----
    Ms. Borzi [continuing]. Rather than meet that regulatory 
agenda. On the other hand, the process under the Administrative 
Procedures Act is you make a proposal and then you work towards 
finalization of that proposal.
    Mrs. Roby. Sure. And my time is out. But I just want to say 
that all of these issues, regulatory burdens, as well as the 
issues that are confronting Congress right now, today, this 
week, you are right. It is not a Democrat problem or Republican 
problem. It is an American problem and we gotta get it right.
    And with that, Mr. Chairman, I yield back.
    Chairman Roe. Thank you, gentlelady for yielding.
    Dr. Loebsack?
    Mr. Loebsack. Thank you, Dr. Roe, and thank you, Madam 
Secretary, for being here today. I am really happy that we are 
having this hearing on this important rule which updates a 35-
year-old rule.
    I think the importance of it is demonstrated by the fact 
that there are a lot of members here today. Many of us have 
probably the same concerns on both sides of the aisle, I think, 
as was already expressed.
    We know that much has changed in the last 35 years, and as 
our country struggles to recover from the worst economic 
downturn since the Great Depression, I think this proposed rule 
is all the more important and applicable, especially given that 
in recent times we have had a lot of folks see their retirement 
savings lose 40 percent of their value in some cases.
    Some saw their money disappear in risky financial gambling 
products. Recent employees, Employee Benefit Research Institute 
studies show the percent of workers saying they are very 
confident of retirement security is at its lowest level ever, 
and I think that in itself is a concern that we should all 
have.
    While we are barely seeing some slight recovery in 
retirement savings, we are reminded of how quickly and how 
easily the market can wipe out years of years of sweat, scrimp, 
and save for retirement for the average individual in America.
    Social Security does remain the bedrock of our retirement 
security in America, and it is concerning to me to think of a 
proposal to subject Social Security to future market crashes as 
well. That is another issue, but nonetheless something I think 
we should be thinking about.
    Especially when wages have not kept up with economic 
growth, and we just seen the Pew study that came out that talks 
about a wealth gap that continues to grow in this country. I 
think we need to be more vigilant than ever in ensuring that 
employee's and IRA investor's retirement savings are protected.
    There is no better standard, as I think we could all agree, 
than a fiduciary standard. So I do applaud your attempt to 
provide certainty by improving the test for investment advice 
as they relate to the fiduciary status, but I have a couple of 
concerns I would like to express.
    I know we sent a letter to the Labor Secretary, and you did 
respond on ESOPs in particular. I sent a letter to you; it was 
signed by a couple of my colleagues from Iowa as well.
    I have a number of companies in my district that are 
enthusiastic Employee Stock Ownership Plan, or ESOP, 
participants and I have heard first-hand on the buy-in from how 
the buy-in employees feel that they have in the future of that 
company as well because of that ESOP structure. I think it is 
very important.
    Again, this is a concern that cuts across party lines that 
I am going to express. I know that the IRS and DOL require 
ESOPS to receive yearly valuations performed by independent 
appraisers and this rule would now require those appraisers to 
be fiduciaries, as I understand it.
    We do need accurate information on valuations but the 
question I have is: can you explain how this rule might affect 
the cost of those valuations, and is there a way to ensure that 
the costs don't rise for the ESOP businesses and for their 
employees?
    Ms. Borzi. That is a very good question. I am happy to 
address it. The plan sponsors, employers, who want to establish 
an ESOP have to hire or typically hire an appraiser to value 
the stock that is going to be contributed to the ESOP.
    The most important decision to make that deal--the 
appraiser--the decision to invest in employer stock has already 
been made. That is the nature of an ESOP.
    But the most important decision, or the most important 
piece of information to make that deal a reality is the 
valuation decision. How much the stock is worth.
    And what we have seen over the years is a number of 
problems with the appraisers including flawed methodologies, 
including use of flawed financial data, manipulation of numbers 
and methodologies to tilt the scale one way or the other, to 
put a finger on the scale.
    It is interesting because at our public hearing we had some 
testimony on this and we had witnesses who said, ``Oh, well you 
are just talking about these sort of fly by night appraisers. 
You know if they are licensed, if they are credentialed, they 
don't do that.''
    Well, that is not our experience. The big appraisers also 
have appraisal problems. And the difficulty is that there is 
already money in the system. Money is already being paid to an 
appraiser to do a valuation of the stock.
    And if that valuation is not objective, fair, and no finger 
on the scale so that when the plan is, let me see if I can get 
this straight, when the plan is buying stock they pay too much 
because they are relying on the valuator. And when they plan is 
selling stock they get too little. That is all the purview of 
the person who performs the valuation.
    So the argument that people are making is that this is 
going to cost a lot more if people have to give valuations that 
are fair and objective and not tilted. I am not sure that I 
fully understand that because they are paying for these 
valuations now.
    And if what the argument is it will cost more if we give 
you a valuation that is fair and objective as oppose to the 
valuations they give now, I am not sure that I need to see some 
evidence of that.
    Clearly there is going to be some additional costs. I am 
not saying that there is no additional cost, but I am not sure 
of the magnitude of the cost.
    What this is all about is accountability. Accountability. 
And in my written testimony, if you look beginning on page 
eight you will see a variety of examples where appraisers have 
given faulty appraisals that have resulted in huge liabilities 
to the plan and the plan sponsor where the appraiser would not, 
could not be held accountable because of our five-part test.
    Mr. Loebsack. Okay. Thank you, Madam Secretary. We will 
keep working on this issue together. I really appreciate it.
    Ms. Borzi. Yes, absolutely.
    Mr. Loebsack. Thank you, Dr. Roe.
    Chairman Roe. Thank you.
    Mr. Rokita?
    Mr. Rokita. Thank you, Mr. Chairman. And thank you, Madam, 
for your testimony today.
    I want to follow up on the ESOP question that the last 
gentleman asked and your response.
    Ms. Borzi. Sure.
    Mr. Rokita. Back in February Secretary Solis was here in 
your seat, and I asked a question about the appraisers and the 
appraisals as well in regard to this proposed regulation.
    Just for some background, I was the Secretary of State in 
Indiana for 8 years and had regulatory responsibility over 
these very issues. And I see the value, at least from the SEC 
standpoint, in addressing the fiduciary standard issue.
    Not that I agree necessarily how it is being handled, but I 
do see the evolution that you testified about in products and 
in the way we access information and what technology has done 
for us. It empowered us as investors.
    But with regard to these appraisals, Ms. Solis' response 
said that out of 50,000 appraisals she sighted six appraisals 
that had problems. And how many do you list in your testimony?
    Ms. Borzi. I am sorry. I couldn't hear your question.
    Mr. Rokita. How many faulty appraisals that you talk about 
were listed in your testimony? You said on page eight.
    Ms. Borzi. I gave you some examples of faulty appraisals.
    Mr. Rokita. And Secretary Solis gave----
    Ms. Borzi. This isn't something that----
    Mr. Rokita [continuing]. Excuse me.
    Ms. Borzi. I am sorry.
    Mr. Rokita. And Secretary Solis gave six out of 50,000. 
They weren't examples necessarily, they were just----
    Ms. Borzi. Right.
    Mr. Rokita. So for six bad apples maybe and some that you 
list in your testimony, we have to go and re-do this whole law? 
This whole rule?
    Ms. Borzi. Well, the simple fact is just because we have 
six examples of it doesn't mean that it isn't more widespread 
than that. The----
    Mr. Rokita. But where is your quantified data to prove 
that?
    Ms. Borzi. The----
    Mr. Rokita. How do you know there is----
    Ms. Borzi. We don't have the resource----
    Mr. Rokita. Ah. Okay.
    Ms. Borzi. I mean, what you are really asking us to do is 
examine every single ESOP----
    Mr. Rokita. You don't have the resources to do that so 
based on your intuition, based on six examples----
    Ms. Borzi. This is not based on intuition. It is based on--
--
    Mr. Rokita. Where is the quantifiable data?
    Ms. Borzi. We are happy to supply you more data.
    Mr. Rokita. Oh. I thought you said you didn't have the 
resources.
    Ms. Borzi. But I can't give you an exact quantification of 
how many transactions go on and how many are faulty valuations. 
There is simply not able----
    Mr. Rokita. But that doesn't stop you from what the Oliver 
Wyman study said could be a 73 to 196 percent increase in the 
cost.
    Ms. Borzi. The Oliver Wyman study suffers from the problem 
that I was discussing with your colleague a little while ago. 
It starts from what we believe is a faulty premise that the 
only two options are keep the current conflicted system in 
place or move to an investment advisor structure which will be 
more expensive.
    As I said before, we have talked with our colleague--our 
sister agencies that regulate this marketplace that have a lot 
of enforcement expertise in this marketplace, and they have 
assured us that there are a number of other business models 
between the stark model that the Oliver Wyman study starts 
with.
    And, of course, if you start with a flawed premise--there 
are two flawed premises in the Wyman study. That one----
    Mr. Rokita. But you are acting on, excuse me, let me get my 
final----
    Ms. Borzi. Certainly.
    Mr. Rokita. You are acting on assurances or you have seen 
these other studies? Or what kind of analysis have you done?
    Ms. Borzi. We are in the process of doing much more 
thorough economic analysis that was in----
    Mr. Rokita. Okay. I will submit a question if you would 
like later, but I would like to hear you analysis and see if 
after you are done with it.
    Ms. Borzi. Sure.
    Mr. Rokita. Secondly, Ms. Solis said in response to my 
question that, and this goes along the same lines, a more full 
economic analysis of the regulation would be provided when the 
rule becomes final. Now maybe to make a crude analogy, that 
sounds a lot like you can find out what is in the bill after 
you pass it.
    Why would we be doing--I find that totally inadequate, and 
I am not trying to put her words in your mouth, but I would 
like your response to the idea that full economic analysis of 
the regulation could be provided after the rule becomes final.
    In your practice----
    Ms. Borzi. Well if you are--the final--that is what the 
requirements are. The OMB requirements are an agency cannot put 
forward a final or proposed analysis, a proposed rule for that 
matter, without some type of----
    In a proposed rule you have to have an economic analysis as 
well. It is not required to be as fulsome as in the final, I 
mean----
    Mr. Rokita. As fulsome?
    Ms. Borzi. I mean, the point of proposing a rule and 
putting out a proposed analysis is that you get public input so 
that you can refine and strengthen your analysis. I am not--
maybe the words aren't clear----
    Mr. Rokita. Oh, maybe I am taking it the wrong way and I am 
happy to stay and have that clarified, but----
    Ms. Borzi [continuing]. But what we are trying to do when 
we are--when we are trying to finalize a rule at the same time 
that the final rule is submitted to OMB, we have to have an 
economic analysis. And the procedure is----
    Mr. Rokita. But there is no intention from your agency to 
do any kind of an economic analysis after the rule becomes 
final? It will all be before?
    Ms. Borzi. No.
    Mr. Rokita. Okay.
    Ms. Borzi. It is simultaneously with it and believe me 
there is a lot of give and take within the administration 
within all the economists within the administration who have an 
opportunity to look at and work with us on the economic 
analysis.
    Mr. Rokita. How about economists outside the 
administration?
    Ms. Borzi. We solicit comments from economic, from 
economists----
    Mr. Rokita. Thank you.
    I yield back. Thank you, Chairman.
    Chairman Roe. Thank you, gentleman, for yielding.
    Mr. Kildee?
    Mr. Kildee. Thank you very much, Mr. Chairman.
    Phyllis, I am going to ask a question that is just 
tangential to this but I--my district was the headquarters at 
one time of Delphi Corporation, and there are two types of 
Delphi salaried workers--two types of workers, salaried and the 
non-salaried, the hourly.
    The hourly workers are protected by a contract with the UAW 
and General Motors, the parent corporation of what became 
Delphi. The salaried employees are not protected by that; 
therefore, they depend totally upon what help they can get from 
ERISA.
    I know this is tangential to the purpose of this, but since 
you are here, do you have any suggestions of what can be done 
to relieve some of the real pain that the salaried people have?
    Ms. Borzi. You know, this is such a hard question because 
while my heart goes out to the salary workers, you know the 
title for statutory language doesn't give them any comfort 
because everybody's benefits, both salary and hourly, in terms 
of the PBGC guarantees are the same.
    Well, I mean based on their work history, et cetera, but 
the framework is the same. And the top up, if you will, as you 
indicated, came from a side arrangement, a side negotiation in 
the 1990s between the UAW and GM.
    There certainly is nothing that the PBGC can do without 
violating the statutory provisions. The only recourse, I would 
think, that the Delphi salaried folks have is against GM. But I 
don't have any, believe me, Secretary Solis has asked me this 
question many, many, many times, and I just don't have an 
answer for them; although, I am quite sympathetic.
    If I wanted to give a glib answer, it would be that the UAW 
was smart enough to figure out that there might come a time 
that they needed this protection. At the time that they 
negotiated it, as far as I could tell from the reading that I 
have done, it wasn't clear that they needed it, but they did.
    I wish there was something that we could do because it is a 
very, very tragic situation.
    Mr. Kildee. Well, I appreciate your candor. I mean, you 
have given it exactly the only answer you can give.
    I will just throw in my own feelings on this. This 
illustrates that millions can help. The UAW looked ahead and 
saw and protected. They could see what might come, whereas the 
nonunion members did not have that foresight.
    Ms. Borzi. Well, and as I understand it, even some of the 
other unionized hourly employees, their unions didn't negotiate 
those kinds of protections. And I guess, after the fact, some 
of them have gotten some sort of a guarantee and others have 
not.
    Mr. Kildee. [Off mike.]
    Ms. Borzi. So there is no question that there is disparate 
treatment, different treatment. I don't want to use a loaded 
word in the EEOC context, but there is no question that there 
is different treatment of these retirees, and that is really 
very sad.
    Mr. Kildee. Well, I appreciate you responding to a question 
that was not really relevant to this hearing but I appreciate 
it.
    I go to the meetings of these people, and it is pretty hard 
to try to justify----
    Ms. Borzi. I know.
    Mr. Kildee [continuing]. But I appreciate your candor. 
Thank you very much.
    I yield back.
    Chairman Roe. I thank the gentleman for yielding.
    Mr. Thompson?
    Mr. Thompson. Thank you, Assistant Secretary, for being 
here.
    I want to follow up to, kind of follow along to a line of 
questioning Mr. Rokita had raised and opened.
    Your testimony states that the department is undertaking a 
``fuller,'' and that is a quote from your testimony, ``economic 
analysis'' of the impact of the proposed role.
    Will the department's forthcoming economic analysis take 
into account the substantial likelihood of increased litigation 
by the department and the plaintiff's bar and the effect that 
such litigation will have on plan costs and ultimately 
participant balances as well as the employers concerns about 
plan establishment and plan maintenance?
    Ms. Borzi. Well, our economic analysis will take into 
consideration all the internal and external factors. So that 
factor will be taken care of or will be factored in.
    It is very hard to predict what the impact will be, though, 
but for sure we will take a look at it.
    Mr. Thompson. Okay. You talked a lot about, you know, and I 
apologize for getting into the hearing late, but just the time 
I have been here I have heard a lot about trust. Trust me, 
trust us, trust us, trust us.
    And I am of the school of trust, but verify. I think that 
gives us all confidence.
    The department thought it drafted the proposed regulation 
in a manner to accomplish exactly what was intended. But, 
again, based on comments and the department's own admissions 
have fell short in that regard.
    Why are you so confident the department will get it right 
in a final regulation without further opportunity for public 
comment?
    Ms. Borzi. Well, we haven't cut off public comment. As I 
said in my statement we have met with more than 20 outside 
financial services people to get their input, some of them more 
than once. And we have met with at least 30 members of Congress 
to get their input.
    We continue to take, there isn't anybody who is a stake, 
you know, there isn't any stakeholder that is asked to meet 
with us that we don't meet with. We are very interested in 
getting public comment.
    But there comes--I said to the ERISA advisory council the 
other day when I was asked a similar question like this, there 
comes a point where, and the computer literate people will know 
what I am talking about, where you push that button on your 
computer that says close all tabs.
    There is only so much--we have been continuing to take 
public input. It has been weeks since we had any sort of new 
information given to us but we continue to take the meetings 
because we are open to that. And we still are open to that.
    But at a point you can't just keep meeting and having the 
same discussion over and over again like that movie Groundhog 
Day. At a point, you have to move forward using your best 
judgment.
    Now that doesn't mean that we aren't going to, still, as we 
develop the final rule, that we aren't going to still reach out 
and ask people for input. That is what we have done with all of 
our rules.
    We haven't--once we figure out a direction and a set of 
amendments that we might want to implement, we often reach out 
to people and, while we don't hand them over the piece of 
paper, which, you know, we are not allowed to do under the 
Administrative Procedures Act, we do have discussions.
    If we have options, we might call people and say well which 
of these options? Here is one way to go or another way to go or 
another way to go. And we still continue to get public input 
even as we move to finalize.
    But this is a very, very important problem and we think it 
needs to be addressed. If people, and we say to people who come 
in, if you recognize the problem, acknowledge the problem, and 
you have other mechanisms that we can use short of the way that 
we have gone, we are open to hearing that but so far people 
haven't come forward.
    Mr. Thompson. Well, first of all, let me say representing 
Punxsutawney, Pennsylvania, I can't get enough of Groundhog 
Day. [Laughter.]
    I am okay with it.
    Just for the record, Mr. Chairman. [Laughter.]
    But can you share with us any of the concerns that were 
identified by the ERISA advisory council on this?
    Ms. Borzi. They were just asking me about it.
    Mr. Thompson. In terms of----
    Ms. Borzi. What happens is whenever the council meets----
    Mr. Thompson. Because if they have concerns about not 
having enough public comment or input based on your----
    Ms. Borzi. No. I mean, some of them, they are all private 
sector--experts from the private sector. Some of them work for 
companies that put through comments, that filed comments.
    Their questions to me the other day were just procedural.
    Mr. Thompson. Okay. Well, thank you.
    Thank you, Chairman.
    Chairman Roe. Thank you, gentleman, for yielding.
    Mrs. McCarthy?
    Mrs. McCarthy. Thank you, Mr. Chairman. Thank you for 
calling this hearing. I think it is very important. Obviously, 
we need to know what the department's proposals are going to 
really be redefined as a fiduciary.
    I want to thank Madam Chairman. You have been terrific 
meeting with us, sitting down with different groups, and we 
appreciate your time and your staff's time. I know that we have 
spoken before on this issue, and I still will appreciate it as 
we continue our discussions.
    Listen, for matters of retirement security, especially for 
people my age and certainly my friends, accountability should 
always be paramount for your department and certainly for this 
Congress.
    Retirement options have evolved greatly over the passage of 
ERISA law in 1974, I believe. I do believe that changes can and 
must be made in order to bring further accountability for 
financial advisors and protection for investors.
    I think that we did a very good job with Dodd-Frank on 
putting in a lot of those protections. I also believe that we 
did a great job on protecting the consumer by giving them more 
information. I believe we still need to do a better job on 
financial literacy, for all ages.
    But especially because of the wide scope of ERISA, changes 
must be conducted with utmost caution and thoroughness in order 
to ensure that the intent of the changes is realized in the 
final product. I think that is what we are both working for.
    I can say wholeheartedly that I agree with your intent, and 
I do. I agree that folks deserve access to accurate and 
unbiased information, and I agree that a structure must be put 
in place that incentivizes employee's investment and long-term 
accumulation of retirement savings. That is what we have always 
worked for.
    However, I am afraid I still disagree with the process by 
which this rule came about and ultimately what will be the 
final rule should this process go forward.
    As a Democrat, this issue has been particularly difficult 
for me. In this committee and others, our friends on the other 
side of the aisle have made it a habit to assume that any and 
all agency rule makings under a Democratic administration are 
burdensome, overreaching, and are adverse to free-market 
principles.
    Luckily for us, they are wrong an overwhelming majority of 
the time. However, in this case, I still cannot defend this 
rule making process. I do not believe--I do believe it is 
overbearing and has a potential to hurt our national economy.
    This shouldn't come as a surprise because we have talked 
about this. We have had those discussions, and like I said, we 
have spoken many times at great length.
    I also worked with the new Democrats, and we sent a letter 
signed by 28 of our colleagues on the Democratic side asking 
the department to repose this rule given coordination and 
consultant concerns.
    Mr. Chairman, at this time I would like to ask unanimous 
consent of the letter that I sent to the new Democrats that was 
signed forth.
    [The information follows:]
    
    
    
                                ------                                

    Chairman Roe. Without objection.
    Mrs. McCarthy. Thank you.
    Madam Secretary, in the preamble of the proposed rule, the 
department recognizes the potential broad effects that it may 
have. In fact, the department openly admits that there may be 
an uncertainty and a large market impact that may also create a 
smaller field of service providers.
    I understand that there is always a measure of uncertainty 
regarding any potential rule making. However, I do think the 
department did not do its due diligence to ensure that it had 
the most information available to have a more accurate analysis 
of the impact.
    Madam Secretary, no request for information was issued for 
this rule. DOL has a history of issuing RFIs on issues of 
retirement security. Given the overlap with other agencies, and 
I know you talked about speaking with other agencies, the 
uncertainties in regards to the market impact and the great 
concerns you have heard from the stakeholders throughout the 
industry, I ask: why wasn't an RFI issued? In hindsight, don't 
you believe an RFI would have paved the way to a better draft 
rule for folks to comment on?
    Ms. Borzi. Well, that is a very good question. I am happy 
to answer it for you.
    The regulatory process gives an agency a variety of tools 
to gather information. The--the RFI process is typically used 
really in two circumstances.
    When an agency is not completely sure that there is a need 
to regulate or when they are thinking that there might be a 
need to regulate but that there are a wide variety of 
mechanisms to do that.
    In this case, we were not unsure. We were very sure that 
there was a problem here. And we had nearly 40 years of 
experience in our own enforcement activities to identify the 
problem.
    In addition to that, we had the benefit of an SEC study 
that was done a couple of years ago on consultants and advisors 
that confirmed, if you will, the existence of the problem. And 
in addition to that, there was lots of academic literature 
about this.
    So there was no question that this was a problem that 
needed to be solved. And given the statutory tools that we had 
to solve it, there really was only one statutory way that we 
could through regulations deal with the problem and that was 
through the prohibited transaction route.
    Now having said that, I contrast that with another process 
that we used where we used the RFI and that had to do with 
lifetime income. We were very concerned that a lot of people 
were now taking lump sums and not having the kind of lifetime 
income stream, monthly benefits, if you will. But we weren't 
sure that it necessarily was the job of the federal government 
to get in there and start making rules.
    So we did do an RFI in conjunction with our colleagues at 
the treasury and the IRS. And we are now in the process--and we 
got lots of comments. We got over 700 comments and lots of good 
information. So that is the contrast.
    We knew that there was a reason to regulate. We had limited 
pathways to do so and so we crafted the best rule we knew how, 
but we put it out for proposals.
    Mrs. McCarthy. I know my time is up, and I thank the 
Chairman for indulgence.
    I disagree with you on the SEC study, because it also shows 
that it is going to have a great impact on basically the 
brokerage relationship. But we will talk about that in the 
future.
    Ms. Borzi. Absolutely.
    Mrs. McCarthy. Thank you, Mr. Chairman.
    Chairman Roe. I thank the gentlelady.
    Mr. Barletta?
    Mr. Barletta. Thank you.
    Why has the Department of Labor decided not to make its 
plan changes available for public comment?
    Ms. Borzi. We did make the plan changes available for 
public comment. We went through extensive public comment. I 
guess I am not quite sure what you are talking about.
    Mr. Barletta. Well, you know, in light of all the questions 
and concerns would the department consider re-proposing the 
rule for the public comment and the questions and the concerns?
    Ms. Borzi. Well, we certainly never say never to anything. 
But re-proposal is typically used when you put out a proposal 
when the commentators offer alternative approaches to solve the 
same problem and the public hasn't had the opportunity to 
comment on the alternative proposals.
    We had lots of public comment. Many of the issues were 
issues we had actually flagged for ourselves. We have been 
working through the drafting issues. We have been meeting with 
lots of people.
    But aside from don't do anything, which I guess is an 
alternative structure, nobody has really suggested to us an 
alternative structure from the structure we have proposed. They 
have had criticisms and comments and they have said quite 
accurately, because we knew we had to do it, that we need to 
focus more on the cost.
    But I am not quite there yet that the kinds of public 
comments that we have gotten have suggested such a fundamental 
alternative that we need to re-propose it.
    Mr. Barletta. All right. Thank you.
    Chairman Roe. Dr. Holt?
    Mr. Holt. Thank you, Mr. Chairman.
    Thank you, Secretary Borzi, for coming. I really appreciate 
your expertise and your dedication over the years to making 
sure that the financial integrity is protected for the benefit 
of ordinary people.
    I have long been an advocate, as you know, and as I have 
told you many times, for more investment education. Clearly, 
people are not well informed. Surveys show that over and over 
again, and we see that people are ill-prepared for the tough 
times that come in their non-wage earning years. I get that 
from my constituents and lots of places.
    I appreciate the efforts of your department to help 
Americans prepare. As you know, Representative Petri from this 
committee and I have introduced the Lifetime Income Disclosure 
Act which is intended to help people understand better where 
they stand and prepare for where they need to be.
    I strongly support, you know, a regular basis test for 
increased clarity for advisors and investors so that people are 
armed with trusted, reliable information. But I have some 
questions about how we are going about this.
    I have asked you before and still have not received data. 
You know, what is the cost of this perceived problem? We must, 
and you must, I think, characterize, describe, and quantify the 
problem that you are trying to solve. It is easy for me and it 
seems to be very easy for you to imagine that people will be 
misled and hurt by this so-called conflicted advice.
    But we shouldn't make policy on what we imagine to be the 
problem. In your testimony, when you get to the part of the 
testimony where you are talking about the problem, the first 
part is sort of, sort of legalistic.
    You are saying, well, the practice out there doesn't really 
meet the test that was set up 35 years ago in ERISA. Then you 
start to give some examples and you say, well, you have 
uncovered abuses of flawed valuation methodologies and 
internally inconsistent valuation reports. No doubt. It is not 
clear that they come from the so-called conflicted advice.
    So let me ask again. How many people will be affected? What 
will be the cost? Where are the data on investor behavior? 
Where are the data on advisor behavior and dealer behavior?
    It seems to me you can break out of this, what did you call 
it, the repetitious interactions that you were talking about, 
and I won't call it Groundhog Day, by actually working harder 
to draw out the evidence and then draw out the guidance from 
that evidence.
    You know, I got into this because some years ago I 
innocently asked a few questions about where these, before you 
even started working on these regulations when other people 
were talking about it. As you said, academics have written 
about it.
    I realized that it seemed to be focused more on trying to 
restrain the investment corporations than empowering the 
employee investor. A moment ago you said there, this is, I 
think, pretty close to a quote, there is no question about the 
problem.
    I get a little bit worried when somebody is so sure that 
they will look right past the evidence. I mean the absence of 
evidence here might be a problem in itself, and you said we 
were very sure. That is what seems to be behind these 
regulations, and that is what troubles me a great deal.
    You say that there can be a model between investment 
advisor or broker dealer. Well, sketch that out for us, please. 
And----
    Ms. Borzi. I will be happy to send you some press articles 
that gave us some information on that.
    Mr. Holt [continuing]. And, yes. It is, I mean, if we are, 
you know, our job here in Congress is not to preserve the 
business model that has existed for 35 years, but if you are 
going to upset that business model, we had better know why and 
we had better know where we are going. I have yet to see that.
    So, I mean, I have not given you time to answer; I have 
been talking. But I hope you will, because these will respond 
more than you could, I mean, this will require a response of 
more than a few seconds or a few minutes anyway. I hope you 
will respond to these.
    And then ask, and then answer, you know, right now there 
are so many other regulations to be implemented by the SEC, 
through Dodd-Frank, and so forth, section 913 for example on a 
standard of conduct.
    Why, after this has been around for 35 years, has it moved 
to the head of the queue something to be dealt with now in the 
next 5 months in final form while all of these other things are 
still in play, related other things?
    So----
    Chairman Roe. If the Secretary will hold----
    Mr. Holt. With that, I should yield back. I thank you----
    Chairman Roe. If the Secretary will hold that thought, I am 
going to continue his line of the questioning.
    Ms. Borzi. Okay. Could I just answer----
    Chairman Roe. Well, I am going to continue in just a 
moment.
    Ms. Borzi. Okay.
    Chairman Roe. Dr. Bucshon?
    Mr. Bucshon. Thank you, Mr. Chairman. I am going to yield 
my time to Mr. Rokita.
    Mr. Rokita. Thank you, Mr. Chairman. I thank the gentleman 
from Indiana.
    Two quick questions just following, I have been listening 
intently to what you are talking about and, again, with my 
background I truly believe in transparency and the due process 
of rulemaking.
    And I am intrigued by the answer you gave to former Mayor 
Barletta when you talked about re-proposing and the idea that 
you re-propose a rule when there is an alternative presented 
that may not have been thought of.
    What about the comments, if there were any, that disagreed 
with your premise, your agency's premise, that there was even a 
problem? What about the comments and specifically how do you 
weight the comments that said, we don't need an alternative. We 
just don't need to do this. This is where I am headed.
    Ms. Borzi. Well, maybe you can help me out how re-proposal 
would address that we don't think there is a problem we think 
you should do nothing. What could we re-propose that would 
address that?
    Mr. Rokita. Well, that is not my question. I am just saying 
you said the only time you re-propose is when there was an 
alternative. But what about withdrawing? What about proposing 
something that was in line with the comments that were made 
that weren't just an alternative but were saying--my question 
is how do you weight the comment in your agency that says don't 
change anything?
    Ms. Borzi. We take all of the comments very seriously.
    Mr. Rokita. But how do you weight them equally with those 
proposals that say we do need to change or we have some 
alternatives or we need to----
    Ms. Borzi. There are always people who don't want any 
change and we do weigh them. I can't say that we weigh them 
equally.
    Mr. Rokita. What is your formula for weighing comments?
    Ms. Borzi. We don't have a formula for weighing it because 
we look at what the rationale behind the comments----
    Mr. Rokita. How do you judge that rationale in a comment? 
What formula do you use to judge?
    Ms. Borzi. We put it in the context of all the comments 
that we have, we weigh it against the other evidence we might 
have, and I eluded to some of it, that there is a problem, and 
then we spend a lot of time talking with people trying to 
understand exactly what their concerns are.
    Mr. Rokita. And that is my second question and then we can 
get on with the hearing. You mentioned a couple of times that 
you have met with groups, you have met with people. Are these 
private meetings? Are these meetings on the record? Is there a 
transcript of these meetings?
    Ms. Borzi. Well, they are--no, there are not transcripts.
    Mr. Rokita. Do you have a list?
    Ms. Borzi. We keep a list. I mean, we are required to keep 
a list of who we met with, who the people were at the meetings, 
and then for our own purposes we all have our own notes.
    And what we would do in the preamble to the final rule what 
we typically do is we list, you know, we talk about, because we 
are required to respond to the public comments and that is one 
way that----
    Mr. Rokita. So according to the Administrative Procedures 
Act, have you published this list of meetings?
    Ms. Borzi. Yes. We do.
    Mr. Rokita. Okay. Okay. So that is available.
    Ms. Borzi. Well, it is available in the final regulation. 
We can certainly----
    Mr. Rokita. Would you mind getting my office a copy of that 
list?
    Ms. Borzi. I am sure we could. I would have to check with 
my lawyers, but I don't see a reason that we couldn't.
    Mr. Rokita. I mean before the final rule goes out and all 
that sort of, as soon as possible?
    Ms. Borzi. Sure, we can certainly give you; it is not 
secret who we meet with.
    Mr. Rokita. Okay. Great. Thank you very much.
    I yield.
    Chairman Roe. I thank the gentleman for yielding.
    Mr. Tierney?
    Mr. Tierney. Thank you, Mr. Chairman.
    Thank you for your testimony here today, the work that you 
are doing, and the cooperation of your office in answering a 
number of questions that we have had on a variety of issues. I 
appreciate that.
    I know that a lot of material has been covered here, and 
you did speak to the ESOP issue, the Employee Stock Option 
Plan, just a little bit. But I was wondering, there is 
indication from your office that you were going to try to 
clarify that the fiduciary standard only required an impartial 
evaluation. Is that correct?
    Ms. Borzi. Yes. We have had this back and forth with the 
appraisers who seem to think that being a fiduciary means you 
have to put the finger on the scale towards participants and 
that is not how ERISAs fiduciary rules work.
    What ERISAs fiduciary rules say is that you have a duty to 
be fair, objective and meet professional standards of conduct. 
And what we have said to the appraisers is if there is any 
concern that that is not what we mean, we are more than happy 
to clarify it.
    Mr. Tierney. Do you have an idea of how it is you are going 
to clarify it?
    Ms. Borzi. I am sorry?
    Mr. Tierney. Do you have an idea of how it is that you are 
going to clarify it?
    Ms. Borzi. Well, we would put in an----
    Mr. Tierney. Specifically state that----
    Ms. Borzi [continuing]. Operative text of the regulation so 
that there would be no question about it, yes.
    Mr. Tierney. Okay. Thank you very much. I have no further 
questions.
    Chairman Roe. I thank the gentleman for yielding.
    Mr. Tierney. I yield to my--I am sorry, I will yield to my 
colleague.
    Mr. Holt. Thank you because I didn't give you a chance to 
answer. As I said, a full answer to my various questions will 
take more than either the remaining time now or even this 
morning.
    Let me add one more question to that and give you a few 
seconds to make any comments on what I said.
    What if a call center representative says, for example, a 
particular mutual fund is good for people interested in 
investing in large cap equities? Would that violate----
    Ms. Borzi. If that is all the person said, no. It would 
fall under this----
    Mr. Holt. So that is education. So you actually said 
earlier we won't limit access to education, which is great. I 
mean, it is a high principle for me.
    What if a call center representative says younger investors 
should hold some equities in their portfolio to help grow their 
savings? Is that--?
    Ms. Borzi. That is general advice. It is what we might call 
generally accepted financial and investment----
    Mr. Holt. But, well, it is reassuring to hear you say that.
    Ms. Borzi. If that is all the person said, but if the 
person went on to say, and here are three funds that would help 
you achieve that objective. That might cross the line.
    But if all they are doing is giving generalized investment 
information and honestly, that distinction that we are drawing 
in this discussion has been true since 1996 since our 
investment bulletin 96.1 was issued.
    And there are people who have asked us to be more clear as 
to what this line is between investment advice and investment 
education and that is certainly one of the things that we are 
working on in conjunction with this.
    Could I just say one thing about you question about cost?
    Mr. Holt. Please.
    Ms. Borzi. We are taking seriously your questions, and we 
are in the process of working through the cost issues, 
collecting information. And we haven't completed that process 
yet. So----
    Mr. Holt. Thank you for doing that. I am surprised that you 
didn't do that up front; that we had to ask for it, actually.
    Ms. Borzi. We did. We did. And in fact in our own 
regulation in the preamble, we asked people to help us out by 
giving us information about it and the Wyman study that some of 
your colleagues referred to is one bit of information.
    It is not the dispositive. As I said before, it is not 
dispositive because it is premised on what we think is not a 
correct two premises that the only alternative is not this 
investment advisor model.
    And the second problem with the Wyman study is that it 
assumes that commissions can no longer be paid, and that is not 
correct. But it is certainly not that we are disregarding it.
    It is certainly a piece of information and every one of the 
people who come in to talk with us, we have asked them. Do you 
have information about cost? Please give it to us so that we 
can try to make our best estimates. And we are working with 
others in the administration about that on that issue as well.
    We all have a very, very--we all consider it very, very 
important to get the best cost estimates that we can. There is 
always going to be some uncertainty in it but we are looking to 
have the most solid cost information that we can get to justify 
the rule.
    And if it turns out, I mean, that is part of what is going 
on here, if it turns out that there are features that we have 
proposed that we can figure out a less burdensome, less costly 
way of doing, that is what we will be working towards.
    Mr. Holt. Okay. Also, those data that we have asked for 
about the behavior of investors, the behavior of advisors 
versus feelers?
    Ms. Borzi. Yes. Well, we have some studies on that.
    Mr. Holt. And I thank Mr. Tierney for yielding time to give 
you a little more opportunity to elaborate.
    Thanks.
    Mr. Tierney. You bet.
    Ms. Borzi. Sure.
    Chairman Roe. I thank the gentleman for yielding.
    We have a member of the full committee here, Mrs. Biggert, 
and you are now recognized.
    Mrs. Biggert. I thank the chairman. I appreciate the being 
able to participate.
    Welcome. We have met before and we have discussed this 
issue. And I just wanted to follow up on a couple of questions 
that we have discussed before.
    In your testimony earlier this morning, you mentioned that 
you are coordinating with other agencies to ensure that your 
proposals do not conflict. And, as you are aware, Congress has 
mandated that the SEC study this matter under section 913 of 
the Dodd-Frank Act.
    Can you explain why you are moving forward with the 
regulations proposal before the SEC has finished their study 
and how does that affect the Department of Labor?
    Ms. Borzi. Well, it is my understanding that the staff 
study is completed. The commission hasn't taken any action on 
it.
    There are a couple of things. First of all, our proposal 
was preceded Dodd-Frank. We have been working on this for a 
couple of years.
    But second of all, we have two entirely different statutory 
structures. The section 913 study in Dodd-Frank, the research 
question that the staff was asked to address was whether or not 
broker dealers under the securities law should be held to the 
same standard as investment advisors under the securities law.
    Our statute is very different. Under the securities law it 
is basically a disclosure statute and our statute is not a 
disclosure statute. It is a statute that is designed to 
prohibit conduct that is potentially harmful to plan 
participants and plan sponsors unless there is an exemption 
administrative or statutory exemption for that conduct.
    So we have two fundamentally different statutory structures 
and two different we protect plan sponsors and participants. So 
we have two different statutory structures and that is why 
before our regulation, our proposed regulation was even sent 
through our own building for clearance or through OMB and the 
administration for clearance, we consulted our friends at the 
SEC.
    We sent them the draft regulation. We asked them whether 
they saw anything in the draft regulation that would conflict 
with or impair their ability to do their job under Dodd-Frank. 
And those conversations, they said no as part of those 
conversations. So we went forward.
    Mrs. Biggert. Could you elaborate a little bit more with 
your discussions with the SEC on that?
    Ms. Borzi. Well, I wasn't--it is a discussion our staff, 
our two sets of staff talked about it. They had a few 
questions, as I understand it, they had a few questions about 
some of the provisions in our regulation, but the bottom line 
was they didn't see anything that would conflict with what they 
were doing. And so we went forward.
    We have had this longtime working relationship with the SEC 
including an MOU on enforcement, and so we have continued to 
have multiple conversations with them as they move forward to 
implement their responsibilities under Dodd-Frank and as we 
move forward on this regulation. And, I must say, a variety of 
other issues including target date funds and a bunch of other 
things.
    Mrs. Biggert. Have you considered, since the SEC study has 
been completed, was there any consideration for any of the 
things that were in that study for you making your ruling?
    Ms. Borzi. Well, I mean, we certainly discussed--we had a 
briefing on the study and we certainly discussed the direction 
that the SEC believed it was going in, which was not 
incompatible with our direction, different, but they have 
different statutory mandates than we do.
    And so what I have said over and over again I said at the 
public hearing is that our job is not to let the industry have 
only one standard. There are multiple fiduciary rules that 
apply to every industry.
    But we do have an absolute responsibility, and I take it 
very seriously, that we do not put plan sponsors or financial 
institutions in the position where compliance with one set of 
rules will put them out of compliance with another set of 
rules. So that is why my pledge is they won't be conflicting 
standards. I can't promise they will be the same standards 
'cause we have got two different statutory frameworks.
    Mrs. Biggert. Okay. It just seems that, you know, the 
financial services industry is really concerned about----
    Ms. Borzi. Yes, they are.
    Mrs. Biggert [continuing]. About the consequences of this 
proposal. Do you see any way to alleviate those concerns?
    Ms. Borzi. Well, I am not sure what else except giving, I 
mean, we pledge to continue working with the SEC and we have 
done the same with CFDC. We are working with treasury and the 
IRS as well, because all of them have responsibilities under 
Dodd-Frank.
    And by working with them, I don't mean just sending paper 
or, you know. We have discussions with them. They tell us what 
they are thinking about doing. We think about and talk about 
how what one agency does will impact another, and we do promise 
that we won't, that the industry will not be subject to 
conflicting regulations because we intend to fully continue 
that harmonization process.
    But I can't guarantee that they won't wind up with 
different rules because the statutory frameworks are just too 
different sets of rules.
    We don't have any intention of trying to put anybody out of 
business. There is no interest on our part in doing anything 
but getting rid of the potential conflicts of interest because 
we think this is all about accountability, transparency, and 
eliminating conflicts of interest.
    And the SEC rules have a very different--a very different 
focus.
    Mrs. Biggert. I have asked them, too. Thank you.
    Ms. Borzi. You are welcome.
    Mrs. Biggert. I yield back.
    Chairman Roe. I will finish up this round of testimony with 
a couple of things.
    I think Dr. Holt had hit on some questions that I was going 
to have is that, I guess, what I would start out by saying is, 
and I am going to bring us back down to the real world because 
I have dealt with this as being a, and I am, I was never quite 
sure whether I was a fiduciary or not trying to interpret these 
rules, to run the pension plan in my own practice. We had about 
300 people that participated in our pension plan.
    And trying to go through these rules, and I will just tell 
you what will happen to us and what will happen to small IRA 
owners, right now we can afford to purchase financial advice 
who is a fiduciary, they would be a fiduciary, I understand 
that.
    I was never quite sure whether I was on our pension 
committee or now, whether I was a fiduciary or not, and I am 
less sure when I look at these rules that I have seen so far.
    What we do is, and to put that in perspective of what we 
have here in Congress. Here the best I can tell it is just a 
free-for-all. You pick out whatever you think will work, which 
is not a good idea.
    Education is an extremely important part. We bring all of 
our employees in. We sit down and we explain all their options 
to them. And I think that is a good thing. And I think Dr. Holt 
brought that up.
    The question I have is what problem are you trying to fix. 
And I understand this won't fix Bernie Madoff.
    Ms. Borzi. No.
    Chairman Roe. A crook is a crook. So it is not going to fix 
that. So by doing this it looks to me like it is going to be a 
little more complicated and what problem out there that you 
have identified with information? I am not talking about 
personal testimonials like I got the best doctor in the world. 
That is a personal testimonial. Maybe you do, maybe you don't.
    But real data. Are there data that you can put in this 
record right here to say that this is a problem. Not an 
individual person out there that--it is like if I give 
penicillin to somebody and one person has a reaction, it 
doesn't mean you quit using penicillin.
    Ms. Borzi. No, and we wouldn't act if we thought it was not 
an important problem.
    Chairman Roe. Well, where is the data?
    Ms. Borzi. Let me focus on your question vis-a-vis small 
business. Let me tell you what the problem is for small 
business.
    Small business owners sacrifice a lot to have pension plans 
for their employees.
    Chairman Roe. That would be me.
    Ms. Borzi. That would be you. And I will be that you are 
not the only small business owner in this room who provided a 
pension plan for your employees.
    But I also bet that you are not in the business, I know you 
are not because we talked, you were not in the business of 
providing--you weren't an investment professional.
    Chairman Roe. No.
    Ms. Borzi. So you sought assistance from an expert and you, 
I would assume, and correct me if I am wrong, you assumed when 
you hired that expert that that expert was going to give you 
the very best advice for you and for your employees. And I 
hope, and I am sure that lots of those experts do do that.
    But here is the problem. There is no guarantee that the 
person who you hired is going to give you the best advisement 
for you and your employees. I know you don't want to talk about 
cases, but we have numerous examples where the advice that was 
given was conflicted.
    The person giving the advice got additional compensation, 
enhanced compensation, because he or she steered----
    Chairman Roe. Let me interrupt you there. As long as that 
is transparent, and I do well with that advice, I don't have a 
problem with that.
    Ms. Borzi. But it is not transparent.
    Chairman Roe. Well, we talked about this last year, this 
past year on making that transparent. That is one of the things 
that we did do. And I think one of the things that the 
investment advisors that are out there is that they were like I 
was. They were trying not to break the law and yet advise 
people and give them the best investment advice that they 
could.
    And let me ask one other question real quickly because my 
time is about to expire.
    Ms. Borzi. And then may I finish my example?
    Chairman Roe. Yes, quickly, if you would.
    Ms. Borzi. So here is the problem. Then the advice that the 
small businessman has been given is inappropriate, imprudent, 
and a loss occurs to the participants in the plan. In comes the 
Department of Labor and we investigate. And we conclude, yes, 
there is been a breach of fiduciary duty. But we cannot go 
after, under the current regulation, the advisor who gave that 
employer the advice.
    We have to go after the small employer who is the victim. 
He paid for advice that was not appropriate. So that is the 
problem we are trying to solve in the plan space.
    Chairman Roe. If you have someone who is involved in a swap 
transaction, will they be a fiduciary?
    Ms. Borzi. Not under our regulation, and we have been 
working closely with the CFTC to make sure that whatever they 
do in their in their business conduct rules do not make them a 
fiduciary under ERISA.
    And in fact I sent a letter, which we can certainly provide 
from the letter, to CFTC Chair, Gary Gensler, saying that we do 
not intend that in these swap transactions they become a 
fiduciary solely for compliance in the rule. And we have said 
we will clarify that in our final regulation.
    Chairman Roe. Okay. And one last, very quick question is 
someone who does an appraisal for an ESOP, Mr. Tierney was 
asking this question, someone who does that, are they 
considered a fiduciary? Because people that have differing 
accounts of what something is worth. Look at what bank 
examiners do to certify the appraisers right now. That doesn't 
mean that anything was done wrong.
    Ms. Borzi. Well, certainly with respect to the initial 
valuation of the stock, how much is this stock worth, they 
would, yes, be fiduciaries under this rule.
    Chairman Roe. Okay. I have used up my time.
    Mr. Andrews. Mr. Chairman?
    Chairman Roe. Yes?
    Mr. Andrews. If I may, because it is relevant to this 
section of the hearing, I would ask you unanimous consent to 
submit for the record a document from the committee for the 
fiduciary standard which is selected articles on fiduciary 
duties applicable to personalized investment advice.
    [The compilation of articles may be accessed at the 
following Internet address:]

                http://thefiduciarystandard.org/images/
   2010__August_The_Fiduciary_Reference_Law_RIA_BD_Issues_final_.pdf

                                 ______
                                 
    Chairman Roe. Without objection, so ordered.
    I would like to thank you, our witness for taking your time 
this morning. Certainly it has been very helpful.
    I will now ask the second panel to come forward and you are 
excused, and thank you for being here.
    Ms. Borzi. Thank you, Mr. Chairman. I look forward to 
working with you and talking to all of you and your staff.
    Chairman Roe. Thank you.
    Ms. Borzi. Thank you.
    Chairman Roe. It is now my pleasure to introduce our second 
panel of witnesses.
    Mr. Donald Myers. Mr. Myers is a partner of Morgan, Lewis, 
& Bockius, LLP where he focuses his practice on the fiduciary 
responsibility provisions under ERISA.
    Prior to entering private practice, Mr. Myers was counsel 
for ERISA regulations and interpretations at the U.S. 
Department of Labor. He has chaired various subcommittees of 
the American Bar Association and has been an adjunct professor 
at Georgetown University Law Center.
    Mr. Myers lectures and writes extensively on employee 
benefits issues including seminal text on ERISA class 
exemptions. He earned his LL.M. in taxation from Georgetown 
University Law Center and his J.D. from Cornell Law School, and 
his B.A. from the College of the City of New York.
    Welcome.
    Mr. Kent Mason. Mr. Mason is a partner of Davis & Harmon, 
LLP where he works primarily with major employers, large plans 
and national vendors of retirement plan services. He also 
serves as a council to trade associations including the 
American Benefits Council.
    Prior to joining Davis & Harmon, Kent served as a 
legislation attorney for the joint committee on taxation as an 
attorney advisor in the office of tax policy for the U.S. 
Department of Treasury.
    Mr. Mason has a B.A. from Amherst College and received his 
J.D. magna cum laude from the University of Pennsylvania. After 
law school he served as a law clerk on the 11th Circuit.
    Mr. Norman Stein. Before joining the faculty at Drexler 
University, Professor Stein was a Douglas Arant Professor of 
Law at the University of Alabama. He is the co-author of a 
treatise on Qualified Deferred Compensation Plans.
    Professor Stein is a member of the GAOs expert panel on 
retirement security. He also served on the Department of Labor 
advisory council on Employee Welfare and Pension Benefits Plan 
and was a delegate at the White House conference on retirement 
savings.
    He is currently a member of the Board of Governors of the 
American College of Employee Benefits Council, a fellow of the 
National Academy of Social Insurance, a member of the Board of 
Advisors of BNA Pension and Benefit Reporter and a senior 
policy advisor to the Pension Rights Center.
    Professor Stein received a J.D. from Duke University School 
of Law.
    Mr. Jeffrey Tarbell. Mr. Tarbell is the Director of the 
Houlihan Lokey, San Francisco office. He is a member of the 
firm's Financial Opinions and Advisory Services Practice.
    He has 20 years of experience providing transaction related 
financial opinions and advisory services to private and 
publicly traded companies.
    Mr. Tarbell speaks frequently on securities of valuation, 
capital markets, and other financial issues. He has served as 
reviewer, editor, contributing author, or technical advisor for 
several valuation text books and publications.
    Among other professional accreditations and affiliations, 
Mr. Tarbell is an Accredited Senior Appraiser of the American 
Society of Appraisers and an elected member of its Business 
Valuation Committee.
    He is a member of the National Center of Employee Ownership 
and the Valuation Advisory Committee of ESOP Association.
    Mr. Tarbell earned a BS from the University of Oregon, an 
MBA from the University of Chicago Booth School of Business. 
And welcome.
    Kenneth Bentsen. Mr. Bentsen is the Executive Vice 
President for Public Policy and Advocacy at the Securities 
Industry and Financial Markets Association.
    From 1995 to 2003 Mr. Bentsen served as a member of the 
United States House of Representatives from Texas where he sat 
on the House Financial Services Committee and on the Budget 
Committee.
    He has extensive private sector investment banking 
experience. Mr. Bentsen has a B.A. form the University of St. 
Thomas and MPA from American University.
    And I can say, as an obstetrician, all these lawyers make 
me a little nervous. [Laughter.]
    Before I recognize you for your testimony, let me explain 
the lighting system as we did previously. The red light, excuse 
me, the green light goes on for 4 minutes, amber light for one, 
and then, please, we won't interrupt you, but if you would wind 
up your comments at the end of that time I would appreciate 
that.
    And now, I will recognize Mr. Myers for your opening 
statement.

              STATEMENT OF DONALD MYERS, PARTNER,
                  MORGAN, LEWIS & BOCKIUS, LLP

    Mr. Myers. Thank you. Chairman Roe, Ranking Member Andrews, 
other members of the subcommittee, thank you for the 
opportunity to speak today.
    I have provided a written statement, and I will just 
summarize the high points of that statement. I will briefly 
provide some background on the proposal and then talk about 
some of the process issues involved at the Department of Labor.
    The centerpiece as we heard today of the ERISA fiduciary 
rules is the fiduciary. ERISA defines the fiduciary using a 
functional test to the extent a person provides investment 
advice for a fee. To that extent, the person is a fiduciary.
    Fiduciaries are subject to ERISAs general fiduciary 
standards as well as its prohibited transaction rules. The 
latter prohibits a wide variety of transactions, many of which 
occur in the ordinary course of business.
    There are serious consequences for violating these rules. 
Where the transaction is prohibited, the fiduciary who caused 
the transaction has potential liability and the disqualified 
person involved in the transaction, which could be the 
fiduciary, would be liable for an excise tax of 15 percent of 
the amount involved in the transaction until the transaction 
were corrected. There are additional taxes and civil penalties 
that could be imposed.
    One of the major problems raised by the proposed 
redefinition of the term fiduciary is DOLs broad interpretation 
of these rules. According to DOL, if a person is a fiduciary by 
giving investment advice and receives compensation that can 
vary according to the advice, then the fiduciary would 
automatically violate ERISA even if the transaction is in the 
interest of the plan that would otherwise be prudent.
    To lessen the potential impact of the prohibited 
transaction rules, DOL has granted individual and class 
exemptions. The latter are available to anyone who can meet the 
conditions of the exemption. DOL has granted 59 class 
exemptions and several hundred individual exemptions.
    The class exemptions have created a regulatory-like 
framework that along with the statutory exemptions govern a 
significant portion of plan activities.
    The proposed regulation would apply to both IRAs and ERISA 
plans, although they are fundamentally different. Both Congress 
in enacting ERISA and DOL in issuing exemptions and regulations 
have acknowledged those differences.
    The proposal would make significant changes to the 
regulatory guidance that was adopted in 1975 and on which the 
financial services industry and others have come to rely. If 
adopted as proposed, the regulation would require fundamental 
changes in the way business is conducted.
    The impact of specific provisions will be addressed by 
other witnesses. I will now focus the remainder of my comments 
on the regulatory process.
    Many of the issues raised by the financial services 
industry stem from the concern that currently accepted and 
longstanding practices may suddenly become prohibited.
    The DOL staff has responded that these issues can be 
addressed to the exemption process. I see two problems with the 
exemptions approach.
    First, existing class exemptions would not provide 
necessary relief without a number of modifications or 
clarifications. DOL could modify or clarify existing class 
exemptions or propose a new exemption. So this by itself would 
not be an insurmountable barrier.
    The second problem is that modifying a class exemption or 
granting a new exemption can be a long, complicated process. It 
is crucial to coordinate the exemptions with the final 
regulation.
    We expect, based on the large number of comments submitted 
and the issues discussed at this hearing today, that there will 
be a number of changes to the proposal. That alone should be a 
reason for DOL to re-propose its regulation.
    There is also a need for the public to comment on whether 
any new or modified exemption effectively addresses the 
prohibited transaction issues. The affected public will have to 
determine whether the conditions of the exemptions are feasible 
or, on the other hand, too complicated or unworkable.
    This cannot be done unless the exemptions are proposed in 
conjunction with re-proposal of the regulation so that the two 
can be considered together and modified as necessary.
    For these reasons, it is my view that only by re-proposing 
the regulation at the same time as it proposes exemptive relief 
will DOL give the public sufficient opportunity to review and 
comment on all aspects of this new regulatory scheme.
    I would be happy to answer any questions.
    [The statement of Mr. Myers follows:]

            Prepared Statement of Donald J. Myers, Partner,
                      Morgan, Lewis & Bockius LLP

    Chairman Roe, Ranking Member Andrews and other members of the 
Subcommittee, I want to thank you for giving me the opportunity to 
testify today.
    My name is Donald Myers. I am a partner in the law firm of Morgan, 
Lewis & Bockius LLP in Washington DC. My practice focuses on the 
fiduciary responsibility rules of the Employee Retirement Income 
Security Act of 1974 (``ERISA''), primarily relating to investment 
matters. I assist pension plans and financial institutions in 
structuring investments for plans, and represent clients before 
government agencies, including the Department of Labor (the ``DOL''), 
on ERISA-related issues.
    Before entering private practice in 1984, I was Counsel for ERISA 
Regulation and Interpretation at the DOL. Previously, I was Assistant 
Chief of the Office of Disclosure Policy and Proceedings at the 
Securities and Exchange Commission. I have chaired various 
subcommittees of the American Bar Association dealing with employee 
benefit plans and ERISA fiduciary responsibility matters, and have been 
an Adjunct Professor at Georgetown University Law Center. In addition, 
I am a Charter Fellow of the American College of Employee Benefits 
Counsel. I have lectured and written extensively on employee benefits 
issues, with my publications including the book ERISA Class Exemptions, 
and chapters on class exemptions and trustee responsibility in the 
treatise ERISA Fiduciary Law.
    My testimony today will provide some background on the ERISA 
fiduciary rules and then focus on the DOL's regulatory and exemptions 
process in the ERISA area, based on my experience at the DOL and in 
private practice. I am speaking here today on my own behalf.
ERISA Fiduciary Rules, Prohibited Transaction Provisions and Exemptions
    The centerpiece of the ERISA framework for the administration and 
management of employee benefit plans is the role of the fiduciary. 
ERISA defines who is a fiduciary using a functional test, including the 
activities of discretionary management over plan assets and, as 
relevant to today's hearing, rendering ``investment advice'' for a fee 
or other compensation regarding plan assets.
    A person who is an ERISA fiduciary is subject to the ERISA 
fiduciary responsibility rules, which can be divided into two 
categories--the general fiduciary responsibility rules, and the 
prohibited transaction rules.
    The general fiduciary responsibility rules impose standards of 
fiduciary conduct. They require a fiduciary to act prudently and solely 
in the interest of the plan participants and beneficiaries, to 
diversify plan investments unless clearly prudent not to do so, and to 
follow the plan documents and instruments so long as they are 
consistent with ERISA.
    The prohibited transaction rules consist of two parts. The first 
part prohibits transactions between a plan and parties with certain 
relationships to the plan, so-called ``parties in interest'' or 
``disqualified persons''; these include non-fiduciary service 
providers. The second part prohibits plan fiduciaries from engaging in 
self-dealing and conflicts of interest.
    There are two sets of consequences to a breach of fiduciary duty. 
First, the breaching fiduciary can be personally liable to the plan for 
any loss suffered by the plan in the transaction that was a breach, or 
any gain received by the fiduciary as a result of the transaction. 
Second, where the transaction is prohibited, the disqualified person 
engaging in the transaction with the plan (which person may or may not 
be the fiduciary) is liable to the government for an excise tax of 15% 
of the amount involved in the transaction for each year until the 
transaction is corrected; if the transaction is not corrected, a 100% 
excise tax may be imposed. The DOL also may impose civil penalties of 
20% of the amount it recovers from a breaching fiduciary in an 
enforcement action. These are serious consequences.
    In my experience, financial services firms seek to avoid these 
potential liabilities and penalties by implementing policies and 
procedures intended to comply with DOL regulations and interpretations 
of the ERISA fiduciary rules.\1\
---------------------------------------------------------------------------
    \1\ It should be noted that, with limited exceptions, individual 
retirement accounts (``IRAs'') are not subject to ERISA, but are 
subject to the prohibited transaction rules through parallel provisions 
in the Internal Revenue Code. While fiduciaries of IRAs thus would not 
be subject to liability for a fiduciary breach under ERISA, 
disqualified persons (such as fiduciaries) of IRAs could still be 
subject to an excise tax under the Internal Revenue Code for engaging 
in prohibited transactions.
---------------------------------------------------------------------------
    This is in large part because the DOL has interpreted the 
prohibition on fiduciary self-dealing in an expansive way. According to 
the DOL, a fiduciary violates this prohibition wherever it has the 
authority to affect the amount of compensation it receives from the 
plan, or in connection with a transaction involving plan assets. Under 
this view, if a person becomes a fiduciary by giving investment advice 
for a fee for a transaction involving plan assets, and receives 
variable compensation as a result, the person has violated ERISA, even 
if the transaction is in the interests of the plan and is otherwise 
prudent.
    To lessen the potentially broad scope of the prohibited transaction 
rules, ERISA contains a series of exemptions from those rules, and 
authorizes the DOL to establish a procedure for granting exemptions. 
The DOL may grant an individual exemption to a particular party, or a 
``class'' exemption that is available to anyone in a defined class that 
is able to comply with its conditions. To grant an exemption, the DOL 
must first find that the exemption is (1) administratively feasible, 
(2) in the interests of the plan and its participants and 
beneficiaries, and (3) protective of the rights of plan participants 
and beneficiaries. Exemptions are published for comment in the Federal 
Register, and, if the exemption provides relief from the prohibited 
transaction provisions on fiduciary self-dealing and conflicts of 
interest, there must be an opportunity for a hearing. Using this 
authority, the DOL has granted 59 class exemptions, several hundred 
individual exemptions, and additional exemptive relief through an 
expedited exemption procedure. The class exemptions have given rise to 
a regulatory framework that, along with the statutory exemptions, 
governs a significant portion of plan activities.
1975 Fiduciary Regulation and Class Exemptions
    The ERISA fiduciary rules came into effect on January 1, 1975. 
According to the ERISA conference report, the conferees were concerned 
that the application of ERISA's fiduciary standard could be disruptive 
to the established business practices of financial institutions.
    In 1975, the DOL both granted an exemption, Prohibited Transaction 
Exemption (``PTE'') 75-1, covering securities brokerage transactions 
and related services, and issued a regulation defining the scope of the 
``investment advice'' prong of the fiduciary regulation. PTE 75-1 
established the conditions under which broker-dealers could continue to 
provide multiple services to plan clients without running afoul of the 
prohibited transaction rules. The regulation created a five-part test 
for determining when a ``person'' becomes a fiduciary to a plan by 
reason of providing ``investment advice.''
    For almost 36 years, this five-part test has provided certainty and 
clarity as to whether a person had entered into a relationship that 
would subject that person to the ERISA fiduciary rules. It forms the 
basis upon which financial services firms historically have based their 
compliance procedures, structured their financial products and 
services, implemented their fee and compensation arrangements, 
established their business relationships and distribution channels, and 
generally interacted with their plan clients. The five-part test has 
now been in place for nearly four decades without any objection from 
Congress that it was contrary to legislative intent.
Rules for Individual Retirement Accounts of IRAs
    There are currently more than 40 million IRAs. Most IRAs are not 
subject to ERISA or ERISA's standard of care. However, they are covered 
by the Internal Revenue Code's (the ``Code's'') prohibited transaction 
provisions, which are substantially parallel to those of ERISA. While 
responsibility for interpreting the Code's prohibited transaction 
provisions has been transferred to the DOL, the Internal Revenue 
Service (the ``IRS'') retains full enforcement authority over these 
Code provisions. Thus, DOL has no enforcement jurisdiction over the 
vast majority of IRAs.
    As individual accounts, IRAs are fundamentally different from ERISA 
plans. These accounts are generally small and are overseen by the IRA 
beneficiary, who has the ability to choose an IRA's service providers 
and can generally move the account at will. Congress recognized these 
differences when it applied a comprehensive fiduciary standard of care 
to ERISA plans and only applied the prohibited transaction rules to 
IRAs. On a number of occasions, the DOL also recognized these 
differences, applying different conditions when crafting certain of its 
prohibited transaction exemptions and regulations. For example, PTE 86-
128 (and its precursor PTE 79-1), a class exemption for securities 
brokerage, and the Interim Final regulation under ERISA section 
408(b)(2), which contains disclosure requirements, do not apply certain 
of their conditions to IRAs.
Proposed Fiduciary Regulation
    The proposed regulation that is the subject of this hearing would 
make significant changes to the regulatory guidance that was adopted in 
1975, and upon which the financial services industry has come to rely. 
I am not going to speak on the pros and cons of specific features of 
the proposal--those issues have been addressed in several hundred 
comment letters, and will be discussed further by the other witnesses 
on this panel. Instead, I am going to focus on the regulatory process.
    There is much concern in the financial services industry about 
potential ramifications if the proposal is adopted in its current form. 
Many (if not most) of the issues being raised by the financial services 
industry stem from concern that currently accepted and long-standing 
business practices may, under the new regime, suddenly become 
prohibited transactions. The DOL staff has responded that these issues 
can be addressed through the exemptions process. In view of prior DOL 
practices, this is a logical response where new-found fiduciary status 
raises concerns about violations of the ERISA prohibited transaction 
rules.
    What could facilitate this process is that there are already 
several class exemptions that could cover some of the transactions that 
would be affected by the new DOL rule. The three that come to mind are: 
(1) PTE 86-128, for a fiduciary to cause a plan to execute securities 
transactions for a fee through itself or an affiliate (i.e., agency 
brokerage); (2) PTE 84-24, for a fiduciary to cause a plan to pay the 
fiduciary or an affiliate a commission as an insurance agent or broker 
in connection with the purchase of an insurance or annuity contract 
(i.e., insurance brokerage) or as a mutual fund principal underwriter; 
and (3) PTE 75-1, Part II, for transactions in third-party mutual fund 
shares.
    The question is whether the approach of dealing with the 
anticipated impacts of the new rules through the exemptions process 
would be effective here. I see two problems with the exemptions 
approach.
    The first problem is that the existing class exemptions would not, 
without modification or clarification, provide exemptive relief for all 
transactions that would be affected by the proposal. The DOL could work 
to modify and/or clarify the existing exemptions, or propose a new 
class exemption more specifically focused on the business practices 
that would be affected. So this, standing alone, would not necessarily 
be a barrier.
    However, this leads to the second problem, which is that modifying 
a class exemption, or granting a new class exemption, can be a long, 
complicated process. On average, the process usually takes at least a 
year, and frequently longer. For more complicated transactions and 
arrangements, as could be involved here, more time may be needed to 
sort through the necessary relief and to develop conditions that are 
workable for the plan fiduciaries and service providers. Yet more time 
would be necessary if a hearing were requested, which could be the case 
for a major exemption that affects a large portion of the financial 
services industry. The point is that modifying existing exemptions 
takes time, and developing a new exemption would take even more time--
the process must allow for that.
    The timing issue is important when considering how to coordinate 
the exemptions with the finalization of the regulation. It is likely, 
based on the 201 comments that were filed with the DOL on the original 
proposal, the testimony at the DOL hearing in March and the 65 
additional comments submitted after the hearing, that there will be a 
number of significant changes to the proposal. That alone should be a 
reason for the DOL to re-propose its regulation, in order to give 
affected firms an opportunity to review the new provisions and comment 
on how they are dealing with the issues that were raised on the 
original proposal. Another reason is that the proposal did not mention 
IRAs, except for a brief reference in the opening summary, and provided 
no economic analysis of the impact on IRAs (the focus of the economic 
analysis was entirely on ERISA plans). There should be an analysis of 
the effect on IRAs, including whether there is any benefit to 
additional regulation of IRAs under the Code's prohibited transaction 
rules in light of the current regulatory regimes that govern the IRA 
market, and an opportunity to comment on that analysis.
    There also is a need for affected parties to comment on whether any 
new or modified exemption proposed by the DOL effectively addresses the 
prohibited transaction issues created by the new rules. The parties 
will have to determine whether it is feasible for them to operate under 
the conditions of the exemptions--if the conditions are too complicated 
or unworkable, the exemptions will not be of any help. This cannot be 
done unless the exemptions are proposed in conjunction with re-proposal 
of the fiduciary definition regulation, so that the two can be 
considered together and modified as necessary based upon the comments.
    For these reasons, it is my view that if the DOL elects to rely on 
exemptions to deal with the effects of an expanded fiduciary 
definition, it should re-propose the changes to the fiduciary 
definition in coordination with its proposal of exemptive relief. This 
would give affected parties sufficient opportunity to review and 
comment upon all aspects of this new regulatory structure.
    Again, thank you for giving me the opportunity to testify, and I 
would be happy to answer any questions that you may have.
                                 ______
                                 
    Chairman Roe. Thank you.
    Mr. Mason.

               STATEMENT OF KENT MASON, PARTNER,
                      DAVIS & HARMAN, LLP

    Mr. Mason. Thank you.
    My name is Kent Mason. I am with the law firm of Davis & 
Harmon, and I have to admit that having worked in the benefits 
area for almost 30 years, hard since I am, you know, just 35. 
[Laughter.]
    I want to thank you, Mr. Chairman, Ranking Member Andrews 
for holding this hearing and for inviting me to testify.
    I want to focus today on five issues. First, I want to 
focus on really on something that hasn't been talked about 
which is the common ground between the industry and the 
department.
    Second, I would like to talk about the process, third, I 
would like to talk about the issue of conflicted advice, 
fourth, I would like to talk about swaps which have been 
briefly mentioned, and fifth, I would like to talk about the 
effect on small business.
    Okay. First, although there has been a tremendous amount of 
concern articulated with respect to these proposed regulations, 
I think that there is actually a significant amount of common 
ground between the department and the industry.
    For example, I think the basic notion that we should be 
revisiting and--and reviewing a regulation that is 36 years old 
and was written at a time that was vastly different, I don't 
think that is something that I think the industry as I talk to 
them have any concern about.
    In addition, I think a number of the principles that the 
department has articulated, you know, make solid sense. For 
example, the department has said that advisors should be 
legally required to stand behind their advice. That makes 
sense.
    Another thing the department has said is that if an advisor 
tells a customer that they are a fiduciary they shouldn't be 
able to disclaim that status later on. Again, that makes sense. 
These are just examples.
    Second, I want to turn to process. Briefly, this regulation 
needs to be re-proposed. The department did not do an economic 
study of IRAs. This department in its preamble repeatedly 
indicated that they were not sure what the economic effect of 
the regulation would be.
    These economic studies need to be completed and they need 
to be available for public comment. It would not be appropriate 
for these economic studies to show up for the first time in a 
final regulation with no opportunity for public comment.
    In addition, the concern that has been noted here today 
with respect to this regulation is widespread and bipartisan. 
Republicans and Democrats have written, far more Democrats than 
Republicans, employer groups, the Consumer Federation of 
America, all have expressed the same concern that this 
regulation has the potential to greatly reduce the availability 
of investment services and thus retirement savings.
    So the question really isn't whether to re-propose. The 
question is why would anyone not want to re-propose? The 
important part is we need to get this right.
    Third, and I want to briefly talk on this, some have 
suggested that the industry position is in favor of what is 
called conflicted advice. On the contrary, the industry 
position supports the fiduciary principles articulated in Dodd-
Frank, and I don't think there are many in Congress who believe 
that Dodd-Frank stands for the principle of conflicted advice.
    Fourth, swaps. There is a direct conflict between the 
proposed fiduciary regulations and the proposed business 
conduct standards coming out of the CFTC. That conflict would 
prohibit plans from using swaps which could cost plans, large 
plans, somewhere in the neighborhood of 100 million to a 
billion dollars annually.
    The department has written a letter to the CFTC, as Phyllis 
mentioned, saying there isn't a conflict. The ask in this 
regard is very simple and that is what the department said in 
its letter needs to be reflected in binding legal guidance 
issued on or before the final business conduct standards are 
issued.
    The last thing, I want to talk about small business. Today 
broker dealers and other financial institutions provide 
critical help to small businesses in putting together their 
retirement plans. Under these regulations, that help would be 
illegal.
    In addition, under these regulations investment education, 
unless this is clarified, investment education would dry up and 
that is critical to small businesses.
    Lastly, the small business owners would face much higher 
costs and potential liabilities in forming a plan. All of this 
will sort of greatly decrease plan formation along small 
businesses and exacerbate our coverage challenges.
    Thank you, and I would be happy to take any questions.
    [The statement of Mr. Mason follows:]

        Prepared Statement of Kent A. Mason, Davis & Harman LLP

    My name is Kent Mason. I am a partner in the law firm of Davis & 
Harman LLP and I have worked in the retirement plan area for almost 30 
years. I am currently working with plan sponsors, plan sponsor trade 
associations, and a wide array of financial institutions on the 
concerns that have been raised with respect to the Department of 
Labor's proposed regulation modifying the definition of a fiduciary.
    I want to thank you, Mr. Chairman and Ranking Member Andrews, for 
holding this hearing and for inviting me to testify. It is important 
that the critical issues raised by the proposed regulation be addressed 
in a robust public dialogue.
    I am speaking today on my own behalf based on extensive discussions 
with plan sponsors, plan sponsor trade associations, and numerous 
financial institutions. I have been asked to focus my comments today 
primarily on the challenges that the proposed regulation creates for 
plan sponsors. That is an area that has received less attention, and I 
am very happy to address it.
    But first I will discuss three fundamental questions: (1) should 
the definition of a fiduciary be reviewed, (2) if so, what process 
should be used to review that definition, and (3) if the proposed 
regulation is revised to address industry concerns, would harmful 
conflicted advice be permitted?
Should the Fiduciary Definition Be Reviewed?
    The threshold question is whether the definition of a fiduciary 
should be reviewed and updated. The community that I work with 
understands the desire to update a regulation that was drafted 36 years 
ago when the retirement savings world was vastly different.
    In addition, the community I work with agrees with certain basic 
objectives that the Department has set out to achieve. For example:
     Those who provide advice regarding investments should be 
required to stand behind their advice legally. I believe that that is 
generally the case already, but to the extent it is not, that should be 
made clear.
     A service provider who represents himself or herself to be 
a fiduciary should not be permitted to later contest that status if an 
investor makes a claim against the advisor. When a service provider 
purports to be a fiduciary acting exclusively for the benefit of a 
plan, participant or IRA owner, the service provider should not be able 
to retroactively disclaim that status.
     The law regarding fiduciary status needs to be clear so 
that all parties fully understand the nature of their relationship.
     It is critical to draw a distinction between selling and 
advising, so that the fiduciary rules do not preclude normal selling 
activities.
    In short, I believe that there is a vast amount of middle ground 
where the Department and the industry can come together.
The Process
    Background. The definition of a ``fiduciary'' is a critical 
component of the protections provided by ERISA. The definition can also 
trigger enormous responsibility and potential liabilities. In this 
context, it is essential that the issue be addressed deliberately 
through a full public policy dialogue.
    The Department has in recent years approached numerous topics in a 
very deliberate, inclusive manner by issuing a ``Request for 
Information'' (``RFI'') prior to issuing a proposed regulation. This 
was not done here. That put the Department at an informational 
disadvantage as it set out to draft the proposed regulation.
    This information disadvantage naturally was reflected in the 
proposed regulation:
     The Department did not perform any cost analysis with 
respect to the effect of the proposed regulation on IRAs.
     In the preamble to the proposed regulation, the Department 
repeatedly stated that it did not know the effect of the proposed 
regulation on the market.
     ``The Department's estimates of the effects of this 
proposed rule are subject to uncertainty * * * It is possible that this 
rule could have a large market impact.''
     ``For example, the Department is uncertain regarding 
whether, and to what extent, service provider costs would increase * * 
*. The Department is also uncertain whether the service provider market 
will shrink because some service providers would view the increased 
costs and liability exposure associated with ERISA fiduciary status as 
outweighing the benefit of continuing to service the ERISA plan 
market.''
     ``The Department * * * tentatively concludes that the 
proposed regulation's benefits would outweigh its costs.'' (emphasis 
added)
     ``The Department is unable to estimate the number of small 
service providers that would be affected by the proposal.''
     ``The Department also is unable to estimate the increased 
business costs small entities would incur if they were determined to be 
fiduciaries under the proposal.''
     ``It is possible that 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; 
however, the Department does not have sufficient information to 
determine the extent to which this will occur.''
     The proposed regulation has raised grave concerns across 
the political spectrum, among Democrats and Republicans, among employer 
groups and the Consumer Federation of America. The concern is that the 
proposed regulation would have very adverse unintended consequences and 
result in a dramatic decrease in both the availability of critical 
investment information for low and middle-income employees and the 
efficient delivery of workforce retirement plans.
     The existence of these unintended consequences run 
contrary to the Department's stated goal of ensuring that individuals 
have access to reliable advice, and result from the Department's 
information disadvantage; without the RFI process, the Department had 
to write the regulation in a data vacuum.
     A study in the IRA area stated that if the proposed 
regulation is finalized in its current form:
     Approximately 360,000 fewer IRAs would be established 
every year.
     Solely within the study example, over seven million IRAs 
would lose access to an investment professional. Since the study sample 
included 40% of the IRA market, this could mean that nationally 
approximately 18 million IRAs could lose such access.
     Within the study sample, it was established that there 
could be a $96 billion reduction in IRA assets through 2030; if that 
number is extrapolated to the national market, the loss would be 
approximately $240 billion.
     Costs for those who retain access to an investment 
professional would roughly double.
     The Department has informally stated on many occasions 
that in order to make the proposed regulation workable and avoid 
depriving investors of investment information, the class exemption 
rules needs to be modified. To date, no modifications have been 
proposed.
     The Department's regulations would force the restructuring 
of plan systems that have developed over 36 years based on the current 
definition of a fiduciary. To avoid widespread disruption, it is 
critical that any changes to this fundamental rule be done very 
carefully based on a full public policy dialogue. Without such a 
careful review, we are risking an enormous reduction in investment 
information and retirement savings. We could also trigger a very 
significant wave of job losses throughout the industry, including, for 
example, registered representatives who are not licensed to provide 
advice.
    Recommended process. The point here is that the proposed regulation 
could well have vast and very serious unintended consequences. In that 
context, the next steps seem clear.
     The economic studies of the effect of the proposed 
regulation need to be completed.
     Those studies need to be the subject of public comment. It 
would be strikingly inappropriate not to give the public an opportunity 
to review the economic basis for the regulation.
     At the same time that the economic study is made available 
for public comment, the regulation itself should be reproposed. In the 
light of the concerns that have been raised on a bipartisan basis and 
the importance of the topic, there would not appear to be any reason 
not to repropose. Why not get this right through a robust public 
dialogue?
     At the same time as the regulation is reproposed, all 
associated new class exemptions needed to make the regulation work need 
to be proposed. The regulation and these new class exemptions have to 
work together. To finalize the regulation and then work on the class 
exemptions does not make sense. Moreover, if the regulation is 
finalized first, financial institutions will need to immediately begin 
work on restructuring their businesses to reduce services; they cannot 
wait based on the possibility that helpful class exemptions may someday 
be adopted.
    If the proposed regulation is revised to address concerns, would 
harmful conflicted advice be permitted?
    The regulation can easily be modified to address concerns without 
permitting harmful conflicted advice.
    First, many of the concerns regarding the proposed regulation 
relate to the fact that almost any casual discussion regarding 
investments becomes fiduciary advice. For example, if an employee in a 
company's human resources department is asked whether a participant's 
investment choices resemble other employees' choices, any casual 
response--such as ``I am not an expert, but they seem similar''--would 
be fiduciary advice. This result is clearly erroneous and should be 
corrected, and correcting this type of problem cannot be said to permit 
conflicted advice.
    Second, the Department itself recognizes that there is a sharp 
difference between advising and selling, and that the elements of a 
sale may occur over a period of time, and are not just a moment in time 
event. If an entity (1) is selling products or services, (2) can 
benefit from which product or services is chosen, and (3) makes full 
disclosure regarding that potential benefit, such actions are selling, 
not advice. Clarification of that point through a reproposal process 
would be extremely helpful, without raising any possibility of 
conflicted advice.
    Third, we can all benefit from the deep consideration given to the 
fiduciary issue by Congress in the context of the Dodd-Frank Act. In 
Dodd-Frank, Congress determined that the receipt of variable 
compensation based on the investment advice given is consistent with a 
fiduciary duty and does not give rise to a harmful conflict of 
interest, provided that the variable compensation is fully disclosed. 
The industry is supportive of the principles underlying the Dodd-Frank 
provision and would be pleased to see those principles applied to the 
proposed regulation.
    In short, I believe that the modifications needed to the regulation 
will not give rise to harmful conflicts of interest.
Plan Sponsor Concerns
            Swaps
    Plan sponsors use swaps to manage the funding risks inherent in 
defined benefit plans. Without risk mitigation strategies, fluctuations 
in interest rates can cause pension liabilities to fluctuate wildly, 
leading to extremely volatile funding obligations. A company's funding 
obligations can easily move by hundreds of millions of dollars--or even 
billions of dollars--by reason of interest rate movements. This can 
jeopardize the company's stability as well as undermine the security of 
the participants' benefits.
    There are three ways to address this volatility. First, a company 
can reserve enormous amounts of cash in order to be prepared for the 
volatility. In today's economic climate, that would result in massive 
layoffs and stalled economic recovery. Second, a company can use swaps, 
which were designed for exactly this purpose. Third, a company can use 
bonds to hedge the risk; bonds are far less effective and more 
expensive than swaps. The bond approach could, for example, cost large 
companies from $100 million to $1 billion or more annually, when 
compared to swaps.
    Unfortunately, the plans' ability to use swaps is threatened by the 
Department's fiduciary definition. There is a direct conflict between 
the Department's proposed fiduciary definition and the proposed 
business conduct standards issued by the Commodity Futures Trading 
Commission (``CFTC'') pursuant to the Dodd-Frank Act. Briefly, the 
proposed business conduct standards require swaps dealers and major 
swap participants (``MSPs'') to take three actions that would, under 
the Department's proposed fiduciary regulation, convert swap dealers 
and MSPs into ERISA fiduciaries with respect to plan counterparties: 
(1) the provision of information regarding the risks of the swap, (2) 
swap valuation, such as providing mandated daily marks, and (3) a 
review of the ability of the plan's advisor to advise the plan with 
respect to the swap. Even under the Department's current investment 
advice regulations, we believe that the third action could convert swap 
dealers and MSPs into ERISA fiduciaries. If the swap dealer is a plan 
fiduciary, a swap with the plan would be a prohibited transaction and 
thus illegal. In such a case, all ERISA fiduciaries participating in 
the transaction could have liability, and the dealer or MSP could be 
subject to an excise tax equal to 15% per year of the amount involved 
in the transaction. The penalties are so severe that absent regulatory 
clarity, no one would risk them.
    The Department has written a letter to the CFTC that takes the 
position that the business conduct standards would not convert swap 
dealers and MSPs into fiduciaries under the proposed regulation, 
because of the ``seller's exception'' (also referred to as the 
counterparty exception) in the proposed Department regulation. Further, 
the Department confirms that the treatment of swaps dealers and MSPs as 
fiduciaries was not intended.
    The letter's statement of the Department's intent is helpful, as is 
the letter's analysis of the regulation. Unfortunately, the letter is 
(1) non-binding, (2) only an informal analysis of two proposed 
regulations, and (3) in the view of the private sector lawyers I have 
talked to, inconsistent with the regulatory language. Accordingly, the 
Department's letter cannot be relied on by attorneys in analyzing the 
law or giving opinions with respect to this issue. Based on extensive 
discussions with the swap industry, ERISA plans, investment advisers, 
and swap dealers would generally be unable to obtain opinions from 
internal or external counsel that a swap dealer's compliance with the 
CFTC's business conduct standards would not expose such dealers and the 
plan fiduciaries to the risk of a prohibited transaction under ERISA. 
As noted above, because of the severe penalties involved, unless the 
regulation is modified so that this issue is clear, most swaps with 
plans will likely cease. Major plans will not take a chance that they 
are entering into prohibited transactions in the face of a regulation 
that is unclear at best and adverse at worst. Plans, their fiduciaries, 
and their counterparties are meticulous in their efforts to comply with 
the Department's prohibited transaction rules. They would likely 
conclude that it would be inadvisable, from both an ERISA and business 
perspective, to rely on a non-binding letter in the face of a 
regulation that is, as noted, at best unclear and at worst adverse.
    Groups have met with the Department and have suggested that the DOL 
issue binding guidance that simply makes it clear that the two 
regulations are not in conflict. Briefly, the guidance would state that 
no action required by reason of the business conduct standards will 
make a swap dealer or major swap participant a fiduciary. The 
Department has, however, expressed reluctance to do this. That has set 
off alarm bells throughout the swap industry. If the Department is not 
comfortable stating that there is not an irreconcilable conflict 
between the regulations, it is hard to imagine that the private sector 
can get comfortable with entering into swaps involving ERISA plans.
    Very specifically, here is the language that was recommended be 
inserted in the preamble to the CFTC's final business conduct 
standards. This language can only be inserted with the Department's 
approval.
    The Department of Labor has informed the Commission that, in the 
case of a swap with a plan subject to the Employee Retirement Income 
Security Act of 1974 (``ERISA''), no action of a swap dealer or major 
swap participant that is required by reason of these business conduct 
regulations will make such swap dealer or major swap participant a 
fiduciary under ERISA with respect to such plan, either under current 
law or under the final version of the Department of Labor's proposed 
regulations with respect to the definition of a fiduciary. The 
Department of Labor has further informed the Commission that the 
Department will, within 180 days of publication of the Commission's 
final business conduct regulations, state in regulations, rules, or 
similar guidance, effective as of the effective date of the 
Commission's final business conduct regulations, that no action of a 
swap dealer or major swap participant that is required by reason of 
these business conduct regulations will make such swap dealer or major 
swap participant a fiduciary under ERISA with respect to such plan.
    If the business conduct standards are finalized without this or 
similar language, swaps with plans will generally cease. Such language 
is essential.
    In short, in order to avoid the very negative consequences to 
pension plans of being unable to use swaps, on or before the 
finalization of the business conduct standards there needs to be legal 
clarity on the fundamental point that no action required by reason of 
the business conduct standards will make a swap dealer or an MSP a 
fiduciary under current law or under the final version of the DOL's 
proposed regulations.
Effects on Small Businesses
    As discussed more fully below, the effects of the proposed 
regulation would be very adverse with respect to the retirement 
security of employees of small businesses:
     Neither broker/dealers nor other financial institutions 
would be able to assist small businesses with respect to critical 
elements of plan maintenance. If such entities cannot help small 
businesses in this regard, plan formation would fall sharply.
     Investment education, which can give employees the 
knowledge needed for them to be comfortable participating in a plan, 
would largely dry up.
     Small business owners who consider starting a plan would 
face massive increases in potential liability and uncertainty and in 
the cost of services, which would make them far less likely to adopt a 
plan.
    Plan maintenance/investment options. It is very well known that 
retirement plan coverage among small businesses is far lower than among 
all other organizations. The reasons are straightforward: cost, 
burdens, liability, and complexity. In this context, please consider 
the following scenario.
    A financial institution approaches the owner of a 12-employee 
hardware store about setting up a 401(k) plan. The owner is willing to 
consider adopting a plan as long as the plan's formation is simple and 
inexpensive and does not create any material liability for him.
    The financial institution discusses the plan terms and structure. 
Then, the subject of investment options is raised: when the plan is 
established, the owner will have to choose investment options to be 
made available to plan participants. The financial institution has, for 
example, 500 investment options, which the hardware store owner will 
need to narrow down to, for example, approximately 20 or 25, so as not 
to overwhelm the employees. Today, the financial institution could, for 
example, provide the owner with model portfolios chosen by similar 
employers and could explain the differences among the portfolios so 
that the owner can make an informed choice.
    For a plan maintained by a small business owner, in particular, the 
investments will predominantly be mutual funds. The funds pay the 
financial institution various forms of ``revenue sharing.'' The amount 
of revenue sharing will vary from fund to fund and is generally paid 
whether or not the fund is held in a retirement account. It is this 
system of revenue sharing that has made mutual funds an affordable 
investment form.
    Under the proposed regulation, helping the owner choose the plan's 
investment options would make the financial institution a fiduciary. 
This would mean that such help would be a prohibited transaction if, as 
is the norm, some options benefit the financial institution more than 
others by reason of different levels of revenue sharing and/or the 
existence of both proprietary and non-proprietary funds. The help would 
be a prohibited transaction regardless of how small any additional 
benefit may be and regardless of the soundness of the help provided by 
the financial institution.
    So the financial institution would have to tell the owner that he 
has two choices. First, the owner could review thousands of pages of 
information provided by the financial institution regarding the 500 
investment options and make his own choice, subject to fiduciary 
liability. Or second, the owner could try to find a qualified third 
party to help make the selections, pay that third party for that 
service, and continue to pay the third party indefinitely to monitor 
the investment options.
    This scenario would play out across the country if the Department's 
proposed regulation is adopted. The effect on small business retirement 
plan coverage would be very adverse.
    Plan maintenance/brokers and dealers. Brokers and dealers play a 
major role in helping small businesses adopt plans. Often, a broker/
dealer will have a relationship with a small business owner. The 
broker/dealer who handles the owner's non-retirement retail account may 
raise the possibility of the owner adopting a 401(k) plan. Like the 
financial institution situation described above, this is a very common 
means by which small business owners adopt plans.
    Unfortunately, under the proposed regulation, the commission-based 
brokerage model becomes illegal due to the broker/dealer's receipt of, 
for example, fully disclosed revenue sharing. So the broker/dealer 
cannot be compensated for helping the owner with the formation and 
operation of a 401(k) plan. Logically, then, the broker/dealer will 
instead work with the owner on her non-retirement retail account, since 
that is the only account the broker/dealer is permitted to work with.
    Investment education. It is common today for financial institutions 
to provide plan participants and plan sponsors with investment 
education. This can be very helpful in encouraging business owners to 
adopt plans and in encouraging employees to participate in those plans.
    Under current law, it is generally agreed that information about 
asset allocation principles is ``education'' and does not trigger 
fiduciary status. So investment professionals can, without becoming 
fiduciaries, educate plan participants about different asset classes, 
and what mix of asset classes is most appropriate in different 
circumstances. The basis for the understanding regarding education is 
Department Interpretive Bulletin 96-1 (``96-1''). Reliance on this 
bulletin is widespread and the concepts behind it are generally well 
received. In small businesses especially, this type of education can be 
helpful in encouraging employees to participate in a plan. If such 
education triggered fiduciary status, the provision of the education 
would largely dry up, due largely to the prohibited transaction rules, 
but also due to liability concerns.
    There is great concern that the proposed regulation would sharply 
decrease the provision of investment education. It is true that the 
proposed regulation expressly states that education under 96-1 does not 
give rise to fiduciary status. However, unlike present law, it appears 
that under the proposed regulation information about asset allocation 
would trigger fiduciary status but for the explicit exception for 96-1 
education. This has caused the following concern. If education does not 
comply precisely with 96-1, education becomes fiduciary advice. But 96-
1 is not a detailed set of rules; it is largely conceptual, which makes 
it hard to be certain of compliance.
    In this context, many education providers have expressed grave 
doubts that they would continue providing investment education if the 
proposed regulation were finalized. This is not an unfounded concern by 
any means, since 96-1 itself notes that whether information is 
education or fiduciary advice is turns on the facts and circumstances 
of the particular situation. The proposed regulation states that 
information may be advice if it ``may be considered'' in connection 
with making plan investments. Since it can reasonably be expected that 
education about investment may be considered by the recipient in making 
investment decisions, providers of needed education will likely 
restrict the information that they provide due to the chance that they 
might become fiduciaries for providing what they consider to be 
educational materials.
    Distribution education. In the preamble to the proposed 
regulations, the Department raised the possibility of modifying the law 
to treat distribution counseling and education as investment advice. 
This issue has the potential to create significant uncertainty and 
dramatically reduce the provision of basic information regarding 
distribution issues. At a minimum, any change in the law should be 
implemented through the regulatory process with an opportunity to 
comment on proposed regulatory language.
    Liability and uncertainty. Under the proposed regulation, almost 
any discussion of investments would give rise to fiduciary status. So 
small business owners would face very serious potential liabilities and 
uncertainties if they or their managers respond to any employee 
inquiries regarding plan investments. This type of exposure would be a 
very significant disincentive to plan formation and maintenance. 
Similarly, if service providers are converted into fiduciaries, the 
service providers will need to charge more to cover their increased 
potential liability. This will be another powerful disincentive to plan 
formation.
    In short, the proposed regulation would dramatically reduce small 
business plan formation by precluding financial institutions from 
assisting small businesses in this regard. Investment education would 
largely dry up, making employees far less comfortable about 
participating in a plan. And small business owners would be discouraged 
from establishing a plan by the creation of far more potential 
liability and higher costs.
Additional Plan Sponsor Concerns
    Because the proposed regulation was written without the benefit of 
prior input, the list of concerns is extremely extensive. I will simply 
provide two additional examples of plan sponsor concerns.
    Plan sponsor employees: who should be a fiduciary? By very 
significantly lowering the threshold for fiduciary status, the proposed 
regulation raises serious questions regarding which plan sponsor 
employees may be treated as fiduciaries. For example, it is, of course, 
common for a plan sponsor to form a committee of senior executives to 
oversee plan issues, including plan investment issues. It is certainly 
clear that such committee has fiduciary status. But plan sponsors have 
expressed concern about the status of other employees who perform the 
research and analysis necessary to present investment issues for the 
committee's review and resolution.
    Such other employees may provide recommendations for the committee 
to consider. This is simply how companies work. Middle-level employees 
frame issues for senior employees to resolve; issues are best presented 
in the context of a recommendation based on the advantages and 
disadvantages of any decision, so that senior employees can quickly 
appreciate the relevant factors. Many employees may participate in the 
research and the preparation of the recommendations to the committee. 
If all of these employees were fiduciaries, the effects would be 
severely negative.
     The cost of fiduciary insurance would skyrocket, if such 
insurance would be available at all for such employees.
     It would certainly become more difficult to get employees 
to work on these projects in the face of potentially staggering 
liabilities and lawsuits.
     Creative work and recommendations would likely be stifled 
as middle-level employees propose conservative approaches with less 
downside (and correspondingly less upside).
    The bottom line is that the employees preparing the reports for the 
plan committee are not the decision-makers. They are the researchers 
who prepare recommendations based on objective criteria for the 
committee members to evaluate and resolve. And the proposed regulation 
could potentially sweep in a huge number of employees, since the 
middle-managers formulate their recommendations based on the work of 
employees who in turn work for them.
    The regulation needs to address the situation where a company or 
committee within a company serves as a fiduciary with respect to 
investment decisions or recommendations. In that case, the employees 
who help the company or committee make those decisions or 
recommendations should not be fiduciaries. Otherwise, we could have a 
real problem as potentially hundreds of employees without decision-
making power become fiduciaries. This is not to suggest that employees 
of a fiduciary company cannot be a fiduciary. For example, an advisor 
company's employee may have the advisory relationship with a plan or 
participant and may become a fiduciary by reason of that relationship. 
But such cases are different. In these cases, employees involved are 
making direct investment recommendations that are not filtered through 
supervisors or entities that are fiduciaries.
    ``Management of securities or other property'': the proposed 
regulations would transform contract reviews and other non-investment 
advice into investment advice. The proposed regulation would include 
within the definition of ``investment advice'' the following: ``advice 
* * * or recommendations as to the management of securities or other 
property.'' The preamble states that:
    This would include, for instance, advice and recommendations as to 
the exercise of rights appurtenant to shares of stock (e.g., voting 
proxies), and as to selection of persons to manage plan investments.
    The broad language of the proposed regulations raises many 
questions:
     A plan decides to change trustees, chooses a new trustee, 
and begins negotiating a trust agreement with the new trustee. The plan 
asks for advice with respect to the terms of the trust agreement from 
the plan sponsor's internal and external ERISA and contract attorneys, 
as well as the plan sponsor's compliance personnel, human resources 
department, and tax department. The trustee is involved in the 
``management'' of plan assets, and the terms of the trust agreement 
affect that management. Does that mean that all of the above personnel 
advising the plan with respect to the trust agreement are fiduciaries? 
If it does, the cost of trust agreements and many other routine plan 
actions will increase exponentially with the imposition of new duties 
and large potential liabilities. Also, many of the above persons may 
refuse to work on the project without a full indemnification from the 
plan sponsor. We do not believe that this type of cost increase and 
disruption was intended.
    What about the persons working on the agreement for the new 
trustee? If such persons make any ``recommendations'' to the plan in 
the course of negotiations, they would become fiduciaries because the 
seller exemption, on its face, only appears to apply to sales of 
property and not services. Any such recommendations would thus trigger 
fiduciary status and corresponding prohibited transactions. 
Theoretically, this could chill all meaningful give-and-take during the 
negotiations, and many institutions may be unwilling to act as trustee. 
Again, we do not think that this was intended.
     A plan has decided to enter into a swap and must execute a 
swap agreement. The terms of the swap agreement will have a significant 
effect on the plan's rights with respect to the swap. The plan asks its 
internal and outside securities counsel to work on the swap agreement, 
and to consult with the plan's internal and outside ERISA counsel. The 
plan also asks its investment manager for input on the types of 
provisions that are important for plans to include (or exclude) in swap 
agreements. The plan accountant is also asked to review the agreement. 
Finally, the company's own compliance personnel, contract experts, and 
finance department also review the agreement.
    The terms of the swap agreement affect the ``management'' of the 
swap. So do all of the above personnel become fiduciaries under the 
proposed regulations? If the answer is yes, plans' cost of investments 
will skyrocket, as an enormous new set of individuals and companies 
that have little material role in plan investments become fiduciaries, 
with far greater potential liability and a higher standard to meet. In 
addition, as noted above, many persons would likely refuse to review 
the agreement absent a full indemnification by the plan sponsor.
     A plan negotiates a loan agreement in connection with an 
ESOP. Is everyone who works on the loan agreement a fiduciary? Could 
individuals working on the loan agreement for the lender become 
fiduciaries if they make any ``recommendations'' during negotiations?
    To avoid the inappropriate results described above and many other 
similar results, the regulation should provide a precise and 
appropriately narrow definition of ``management'' in the regulation. 
Under the definition, ``management'' would include:
     The selection of persons to manage investments;
     Individualized advice as to the exercise of rights 
appurtenant to shares of stock; and
     Any exercise of discretion to alter the terms of a plan 
investment in a way that affects the rights of the plan, unless such 
exercise of discretion has been specifically reviewed and agreed to by 
a plan fiduciary. In the swap context, for example, swap terms can be 
modified without plan review and consent by, for example, swap data 
repositories. If any such changes are made, anyone making those changes 
is acting for the plan and should be treated as a fiduciary. Moreover, 
such treatment is necessary in order to prevent harm to the plan.
    This would target the actions identified by the Department in the 
preamble. But it would not have the inappropriately broad consequences 
illustrated above.
Summary
    The critical message is that the decision regarding this proposed 
regulation could have a dramatic effect on the retirement security of 
millions of Americans for years to come. To rush through this project 
without adequate study, without a full public policy dialogue, and 
without all exemptions needed to make the regulation work would be very 
harmful. Reproposal of the regulation is needed, as discussed above.
                                 ______
                                 
    Chairman Roe. Thank you, Mr. Mason.
    Professor Stein?

             STATEMENT OF NORMAN STEIN, PROFESSOR,
          EARLE MACK SCHOOL OF LAW, DREXEL UNIVERSITY

    Mr. Stein. Thank you, Chairman Roe, Mr. Andrews, and 
members of the subcommittee.
    I am testifying on behalf of the Pension Rights Center this 
morning, a nonprofit consumer organization that has been 
working since 1976 to protect the retirement security of 
American workers and their families.
    The proposed regulations describe when a person who renders 
investment advice to a plan or plan participant is considered a 
fiduciary under ERISA. One of the principle congressional goals 
in enacting ERISA was to ensure that those individuals who 
provided investment advice with respect to retirement plan 
assets would be fiduciaries and as such would be subject to 
ERISAs prohibitions against fiduciaries entering in--
transactions.
    ERISA was clear and unequivocal in this issue. The term 
fiduciary is expressly defined to include any person who 
renders investment advice for a fee or other compensation, 
direct or indirect, with respect to any monies or other 
property of the plan.
    The Department of Labor's 1975 regulation, however, 
improperly narrowed this definition providing that investment 
advisors would not be considered fiduciaries unless their 
advice was provided pursuant to an agreement, arrangement or 
understanding that such services would serve as a primary basis 
for investment decisions with respect to plan assets and are 
provided on a regular basis.
    In the context of the times, however, the regulations 
inconsistency with the statute did not create serious issues. 
The retirement world was then dominated by defined benefit 
pension plans and the rules permitting today's 401k plans were 
more than 5 years away.
    Investment professionals were primarily advising 
sophisticated fiduciaries who were more capable of synthesizing 
market information and better able to identify and evaluate 
conflicts of interest than today's typical participant in a 
self-directed 401k plan.
    Today the world is different. Most people saving for 
retirement are on 401k plans and individual retirement 
accounts, which basically or most of the money there is 
rollover money from employer plans, and they have to make their 
own investment decisions despite their lack of investment 
experience or knowledge.
    They are, thus, highly dependent on the advice offered to 
them by the investment industry but unfortunately the advice 
they receive is sometimes subject to serious conflicts of 
interest.
    Indeed, today some investment advisors receive revenue 
sharing and other payments from the vendors of the products 
they recommend. ERISA would prohibit some such payments if the 
investment advisors are ERISA fiduciaries, but a significant 
part of the advice industry claims that the 1975 regulations 
shield them fiduciary status and allow them to accept such 
third party payments so long as they include metaphorical fine 
print indicating that the investment services are not provided 
under an agreement, arrangement, or understanding that the 
advice will be a primary advice for investment decisions or are 
not provided on a regular basis.
    The Government Accountability Office has shown that such 
conflicts can have significant costs to plan participants and 
401k plans.
    I thought I would put a human face on this. My own. In 
1987, while I was a visiting professor at the University of 
Texas, a man knocked at my office door. He had gotten my name 
from a colleague on the Texas faculty and he wondered whether 
he could talk with me for a moment about a 403(b) investment 
product.
    During the conversation he learned, among other things, 
that I was in my 30s and that I would be at Texas for only that 
semester and, thus, that the contributions that I made during 
the semester would be my only contributions to the product he 
advised me to purchase.
    I cannot now remember everything he told me, but he was 
charming and fun and was a University of Alabama fan where I 
was then teaching full time, and I ended up following his 
recommendation.
    During the year I contributed $1,165 dollars in salary 
reductions to this investment product. Today, 24 years later, I 
brought the statement but I left it on my desk, the value of 
the investment contract is $1,506.89 which provided me, for 
those who are interested, in annual yield of just a smidgen 
over 1 percent per year. And because of inflation, my 
investment in 1987 dollars is worth approximately $350.
    The reason that this investment performed so poorly was 
after various fees and charges relative to the investment 
earnings were substantial. The sales person should have known 
that this was a terrible investment choice for a person in my 
circumstances and my age.
    But he either knew no more than I did about investing or, 
more likely, was motivated by the amount of compensation he 
would earn by selling me that particular product rather than a 
more appropriate product.
    My real problem was that he was an investment salesman 
posing as an investment advisor. If he had been a fiduciary and 
had been free of conflicts, I would have received better 
advice.
    And if all investment advisors to ERISA plans were 
fiduciaries as Congress intended and these proposed regulations 
would provide, millions of Americans, some who were even less 
sophisticated than I was in 1987, would receive better quality 
advice.
    [The statement of Mr. Stein follows:]

        Prepared Statement of Norman P. Stein, on Behalf of the
                         Pension Rights Center

    Thank you, Chairman Roe and Mr. Andrews, and members of the 
subcommittee, for inviting me here to speak with you this morning on 
the Department of Labor's proposed regulation on the definition of 
fiduciary. I am testifying this morning on behalf of the Pension Rights 
Center. The Center is a nonprofit consumer organization that has been 
working since 1976 to protect and promote the retirement security of 
American workers, retirees, and their families.
    The proposed regulations that are the subject of today's hearing 
describe when a person who renders investment advice to a plan or plan 
participant is considered a fiduciary under Title I of ERISA and under 
the Internal Revenue Code. These regulations would replace 1975 
regulations, which reflect an improper agency constriction of the 
relevant statutory language and congressional intent. In addition, as 
the Department suggests in its preamble to the proposed regulations, 
economic and legal developments in the fields of investments and 
employee benefit plans have increased the original regulations' harmful 
impacts.
    One of the principal congressional goals in enacting ERISA was to 
ensure that those individuals who provided investment advice with 
respect to retirement plan assets would be fiduciaries, subject to 
ERISA's prohibitions against fiduciaries entering into certain 
conflict-tainted transactions. ERISA was clear and unequivocal on this 
issue: the term fiduciary is defined to include any person ``who 
renders investment advice for a fee or other compensation, direct or 
indirect, with respect to any moneys or other property'' of a plan.
    The Department of Labor's 1975 regulation narrowed this definition, 
providing that investment advisers would not be considered fiduciaries, 
unless their advice was provided ``on a regular basis'' and ``pursuant 
to an agreement, arrangement or understanding that such services will 
serve as a primary basis for investment decisions with respect to plan 
assets.'' There is nothing in the legislative history that supported 
these extra-statutory limitations on the definition of fiduciary. 
Moreover, the terms ``regular basis,'' ``mutual agreement, arrangement 
or understanding,'' and ``a primary basis'' are subjective and 
ambiguous and have created confusion.
    In the context of the times, however, the regulation's 
inconsistency with the statute did not create serious problems. The 
retirement world was then dominated by defined benefit pension plans, 
and the regulations permitting today's 401(k) plan were almost six 
years away. Investment professionals were primarily advising 
sophisticated fiduciaries, who were more capable of synthesizing market 
information and better able to identify and evaluate potential 
conflicts of interest than today's typical participant in a self-
directed 401(k) plan.
    Today, the world is different: most people saving for retirement 
are in 401(k) plans and individual retirement accounts (most of which 
hold rollover money from employer plans), and these account holders 
have to make their own investment decisions despite their lack of 
investment experience or knowledge. They are thus highly dependent on 
the advice offered to them by the multi-billion-dollar investment 
industry, but unfortunately the advice they receive is sometimes 
subject to serious conflicts of interest. Indeed, today some investment 
advisers receive payments from the vendors of the products they 
recommend.
    ERISA would prohibit some such payments if the investment advisers 
are ERISA fiduciaries, but a significant part of the advice industry 
claims that the 1975 regulation shields them from fiduciary status and 
allows them to accept all third-party payments, so long as they include 
fine print indicating that investment services rendered are not 
provided under ``an agreement, arrangement or understanding that the 
advice will be a primary basis for investment decisions'' or are not 
provided on a ``regular'' basis. The Government Accountability Office 
has shown that such conflicts can have significant costs to 
participants in 401(k) plans.
    I can tell a story from my own experience to illustrate the impact 
of such conflicts. In 1987, while I was a visiting professor at the 
University of Texas, a friendly and confident man knocked at my door. 
He had gotten my name from a colleague on the faculty, and he wondered 
whether he could talk with me about investing in a flexible premium 
fixed annuity. During the conversation he learned, among other things, 
that I would be at Texas for only that semester and thus the 
contributions I made during the semester would be my only contributions 
to the product he advised me to purchase. I am not certain now exactly 
everything he told me then, but he was a polished salesman and I ended 
up following his recommendation.
    During the year I contributed $1,165.19 in salary reductions to 
this annuity product. Today, 24 years later, the value of this 
investment contract is $1,506.89, which provided me, for those who are 
interested, an annual yield of just a smidgen over 1 percent. And 
because of inflation, my investment today, in 1987 dollars, is worth 
only $229.73. I would have done better putting my money in an insured, 
passbook savings account at my credit union.
    The reason that this investment performed so poorly for me is that 
the actual earnings under the plan were themselves very low, and the 
fees, relative to the earning, were very high. The salesperson should 
have known that this was a terrible investment choice for a person 
still in his 30s. He either knew no more than I did about investments 
or, more likely, was motivated by the amount of fees he would earn by 
selling me that particular and inappropriate product rather than 
another product. My real problem was that he was an investment salesman 
posing as my investment adviser.
    If he had been a fiduciary and had been free of conflicts, I would 
have received better advice. And if all investment advisers were 
fiduciaries, millions of Americans--some even less sophisticated than I 
was in 1987--would receive a better quality of advice.
    Some segments of the investment community have argued that the 
proposed regulations would make it impossible for broker-dealers to 
give advice or sell products to participants in 401(k) plans and 
individual retirement accounts. The proposed regulation, however, would 
not prohibit broker-dealers from giving investment advice, and indeed 
many broker-dealers today give investment advice by complying with 
statutory and regulatory exemptions to the prohibited transaction 
rules.
    The argument that broker-dealers would be excluded from giving 
investment advice apparently is based on the notion that the only 
permissible form of compensation paid to an investment adviser would be 
on a fee basis. This is not correct: the Department of Labor has a 
prohibited transaction exemption that permits fiduciaries to receive 
commission-based compensation for the sale of mutual funds, insurance 
and annuity contracts and has signaled its willingness and intent to 
issue additional exemptions. In addition, the statute itself includes a 
prohibited transaction exemption for investment advice if fees are 
leveled or if the investment advice is determined through objective 
computer programs. And broker-dealers are also free to provide 
investment education rather than investment advice.
    But it is true that under the new regulations broker-dealers will 
not be able to use certain business models in which their objectivity 
is compromised by serious conflicts of interest. Will these people 
abandon the retirement savings market? Perhaps some will, but we are 
confident, given the size and importance of that market, that most will 
adapt. And in our view, those who are unwilling to eschew serious 
conflicts have no business advising retirement-plan participants.
    Finally, we think public policy would be better served if those are 
currently trying to kill these proposed regulations instead devoted 
their efforts to working with the Department of Labor to help craft 
exemptions from the prohibited transaction rules that will accommodate 
a wide variety of reasonable compensation structures for those who 
sell, directly or indirectly, their services to participants in 401(k) 
and individual retirement plans. That would be good for participants 
and good for the industry.

    (Attached to this testimony are comments of the Pension Rights 
Center and the National Employment Lawyers Association on the 
regulations, which were submitted to the Department of Labor on 
February 3, 2011.)
                                 ______
                                 
                                    [Filed Electronically],
                                  Washington, DC, February 3, 2011.
Re: Definition of Fiduciary Proposed Rule.

    The Pension Rights Center (the Center) and the National Employment 
Lawyers Association (NELA) submit the following comments on the 
Department of Labor's proposed regulations on the definition of 
fiduciary. The Center is a nonprofit consumer organization that has 
been working since 1976 to protect and promote the retirement security 
of American workers and their families. NELA has been advancing 
employee rights and serving lawyers who advocate for equality and 
justice in the American workplace since 1985.
    The proposed regulations would replace current regulations, adopted 
in 1975, that tightly circumscribe the circumstances under which a 
person or entity becomes a fiduciary when providing investment advice 
to a plan or participant for a fee. The regulations would also reverse 
a 1976 advisory opinion holding that a firm valuing employer stock for 
an ESOP was not a fiduciary.
    The 1975 regulation and 1976 advisory opinion were not compelled by 
the statute and, in our view, reflected an improper narrowing of the 
congressional definition of fiduciary. In addition, as the Department 
suggests in its preamble to the proposed regulations, economic and 
legal developments in the fields of investments and employee benefit 
plans have rendered the earlier positions anachronistic and, at times, 
at cross-purposes with the statute. The proposed regulations are much-
needed and long-overdue.
Background
    When Congress passed ERISA in 1974, it included rules governing the 
conduct of fiduciaries. Senator Harrison Williams, Chair of the Senate 
Labor Committee and a key co-sponsor of ERISA in the Senate, explained 
the need for these rules when he presented the ERISA Conference 
Committee resolution reconciling the House and Senate versions of 
pension reform legislation: ``Despite the value of full reporting and 
disclosure, it has become clear that such provisions are not in 
themselves sufficient to safeguard employee benefit plan assets from 
such abuses as self-dealing, imprudent investing, and misappropriation 
of plan funds.'' \1\ In other words, fiduciary standards were essential 
for the protection of participants in employee benefit plans. Congress 
crafted rules applying fiduciary standards not only to plan trustees, 
but to a range of individuals and entities whose actions affect the 
security and use of plan funds and the benefits of participants. These 
rules of conduct applied to ``fiduciaries,'' which Congress defined as 
any person who fits one of the following categories:
    (1) exercises any discretionary authority or discretionary control 
respecting management of a plan;\2\
    (2) exercises any authority or control respecting management or 
disposition of a plan's assets;\3\
    (3) renders investment advice for a fee or other compensation, 
direct or indirect, with respect to any monies or other property of a 
plan, or has any authority or responsibility to do so;\4\ or
    (4) has any discretionary authority or discretionary responsibility 
in the administration of a plan.\5\
    The 1975 regulations addressed the third aspect of the definition--
a person who renders investment advice for a fee. The regulations 
narrowed the statutory language (which broadly provided that a person 
is a fiduciary if he renders investment advice ``for a fee or other 
compensation, direct or indirect, with respect to any moneys or other 
property of'' a plan) to two narrow circumstances: first, if a person 
has discretionary authority or control with respect to purchasing or 
selling securities or other property for a plan;\6\ and second, if a 
person renders investment advice to a plan on a regular basis, pursuant 
to an agreement or understanding that the advice will be a primary 
basis for the plan's investment decisions, and that the advice is 
individualized to the particular needs of the plan.\7\ In the preamble 
to the presently proposed regulations, the Department describes this as 
a five-part test, with a person found to be a fiduciary only if all 
five parts of the test are met.
    The regulations also provided, in effect, a definition of the type 
of advice that concerned plan investments: advice concerning the value 
of securities or property, or advice concerning the advisability of 
investing in, purchasing, or selling securities or other property.
    A year after the 1975 regulations were promulgated, the Department 
held that a consultant that provided an evaluation of employer 
securities for an ESOP was not a fiduciary under the regulatory 
definition, because the valuation would not ``involve an opinion as to 
the relative merits of purchasing the particular employer securities in 
question as opposed to other securities,'' and would thus not serve as 
a ``primary basis'' for plan investment decisions nor ``constitute 
advice as to the value of securities.''
    The newly proposed regulations would substitute a simpler and more 
easily understood, enforced, and administered test that bears greater 
fidelity to the statutory language and is appropriate to developments 
over the intervening 35 years in the areas of retirement plans and 
investments. The new test would provide that a person renders 
investment advice for a fee under ERISA if the person gives certain 
types of advice to a plan, plan fiduciary, or plan participant or 
beneficiary, and also falls within one of four categories of persons.
    The types of advice covered by the proposed regulation are: (1) 
advice, appraisal, or fairness opinion concerning the value of 
securities or other property; (2) advice or recommendation as to the 
advisability of purchasing, holding, or selling securities or other 
property; and (3) advice or recommendations as to the management of 
securities or other property. The new regulations thus expand the ambit 
of covered investment advice from the 1975 regulations to fairness 
letters and appraisals of property, and eliminates the cumbersome five-
part test that depends on the proof of the details of the relationship 
between advisor and advised and eliminates from the realm of investment 
advice much that any layperson would understand to be such advice.
    By including advice as to the management of securities or other 
property in the definition of investment advice (not just advice as to 
valuation or the advisability of purchasing or selling securities), the 
Department makes explicit in the text of the regulation, its 
longstanding interpretation of the existing regulation, which included 
advice as to the selection of managers and investment options. DOL Adv. 
Op. 84-04A, 1984 WL 23419, *1-3 (Jan. 4, 1984). The regulations also 
make clear that advice as to the management of a particular asset, e.g. 
advice as to proxy voting or how to maximize the income incident to a 
piece of real property, is also fiduciary advice. In addition, they 
make explicit that investment advice gives rise to fiduciary status if 
it is furnished to a plan participant or beneficiary.
    To be considered a fiduciary under the proposed regulations, a 
person who gives such advice meets the requirement of the regulations 
if the person: (1) represents or acknowledges that it is acting as a 
fiduciary; (2) is already a fiduciary under the other legs of the 
statutory definition of fiduciary; (3) is an investment adviser under 
the Investment Advisers Act of 1940; or (4) provides advice or makes 
recommendations pursuant to an agreement, arrangement, or understanding 
between such person and the plan, plan fiduciary, participant, or 
beneficiary that such advice may be considered in connection with 
making investment or management decisions with respect to plan assets 
and will be individualized. The proposed regulations' most important 
departure from the 1975 regulations is that under the fourth category, 
the advice does not have to be rendered on a regular basis and need not 
be provided pursuant to an agreement or understanding that it will 
serve as a ``primary'' basis for investment.
    As discussed below, however, the advice must be provided pursuant 
to an agreement or understanding that such advice may be considered in 
connection with making investment management decisions and will be 
individualized to the needs of the plan, a plan fiduciary, or a 
participant or beneficiary. The existing regulations provide that 
advice be individualized to the needs of the plan. The new regulations, 
in what we understand is clarification of the Department's existing 
interpretation, make clear that the advice may be individualized to the 
needs of the plan, plan fiduciary, plan participant, or beneficiary, 
i.e. to the needs of the recipient of the advice, to distinguish such 
advice from the generalized buy recommendation that a broker might 
issue to all of its clients on a given publicly traded stock.
    The regulations also include a number of limitations on the 
regulations' coverage. One of the limitations provides that a person 
offering advice or recommendations is not an investment-adviser 
fiduciary if such person can demonstrate that the recipient of the 
advice knew, or should have known, that the person is providing the 
advice in its capacity as a purchaser or seller (or agent for a 
purchaser or seller) of securities or other property, whose interest 
are adverse to the plan or its participants or beneficiaries, and that 
the person is not undertaking to provide impartial investment advice.
    The regulations also do not apply to persons who provide only 
investment education or persons who make available to a plan a group of 
investment options from which a plan fiduciary will decide which 
options to offer. The term investment advice also does not include 
advice or an appraisal or fairness opinion for purposes of complying 
with reporting and disclosure requirements of ERISA or the Internal 
Revenue Code unless such report involves assets for which there is not 
a generally recognized market and which serves as a basis on which a 
plan may make distributions to plan participants and beneficiaries.
    The Preamble to the Regulations also invites comments on the 
question of whether a person who gives advice to participants with 
respect to distributions is providing investment advice.
Revision of the 1975 Regulations is Warranted
            Developments in Retirement Plans and Investments Since 1975
    The existing regulations were promulgated in 1975, at the dawn of 
the ERISA era. Since then, there have been significant changes in the 
retirement plan and investment universe that have undermined whatever 
justification there might have been for the regulations' cramped scope. 
As the preamble to the proposed regulations notes, there has been a 
seismic shift in the retirement plan world from defined benefit plans--
in which investment advice was generally rendered to sophisticated plan 
fiduciaries--to self-directed defined contribution plans--in which 
investment advice is issued to individual participants, many of whom 
have only rudimentary financial literacy. Mutual funds, and sellers and 
brokers for mutual funds, who played a relatively small role in 
retirement plans at the time ERISA was enacted, have become dominant 
players in the new order. The variety and complexity of investment 
products has also changed markedly over the last three decades.
    At the time of the 1976 advisory opinion on valuations of employer 
stock for ESOPs, there were only 250,000 participants in 1,600 ESOPs. 
Today ESOPs cover more than 12 million participants in over 10,000 
plans, which hold almost 1 trillion dollars in employer securities.\8\ 
The exponential growth of ESOPs has been accompanied by numerous cases 
involving improper valuations of employer stock purchased or sold by 
ESOPs.\9\ Yet, the 1976 opinion letter effectively shields these plans' 
valuation advisers from fiduciary liability.
    There have also been significant legal developments since the time 
the regulations were promulgated. The Supreme Court ruled in Mertens v. 
Hewitt Associates, 508 U.S. 248 (1993), that a participant generally is 
entitled to legal relief under ERISA only if the defendant is a 
fiduciary who caused monetary loss to a plan.\10\ A participant can sue 
a person other than a fiduciary only for equitable relief, and the 
Supreme Court has narrowly circumscribed the extent to which such 
equitable relief is available. Great West Life & Annuity Ins. Co. v. 
Knudson, 534 U.S. 204 (2002). The Labor Department, which filed amicus 
curiae briefs arguing against these positions, could not have known in 
1975 that its narrowly drawn regulations and ERISA preemption would 
effectively create an unregulated playing field for so many actors who 
have a direct and substantial impact on plan investments.
    Finally, in the period since 1975, the Department has determined 
that voting of proxies and similar issues are part of investment 
management and has concluded that investment advice as defined in the 
regulations includes advice regarding the selection of investment 
managers. This last point has caused controversy see Cohrs v. Salomon 
Smith Barney, 2010 WL 2104535 (D.Or., Aug. 31, 2005). and recently 
required the DOL to file an amicus brief to defend its interpretation 
of the old regulations. See DOL amicus brief in In Re Beacon Securities 
Litigation, 09-CV-077 (LBS), 2010 WL 3895582 S.D.N.Y. Although the 
Department's position prevailed in district court, the issue remains 
hotly contested and will likely be the subject of an appeal by 
defendants in Beacon if plaintiffs prevail on the merits. It is 
therefore appropriate for the Department to revise the regulations to 
address investment advice concerning such issues to eliminate any doubt 
in the courts that such advice should give rise to fiduciary status.
    We have heard it argued that this view, that investment advice 
should include advice regarding the selection of fiduciaries to manage 
assets, will have the baneful effect of discouraging informal advice 
about, for example, the selection of independent fiduciaries from 
trusted advisors such as plan counsel. We disagree. Advice as to the 
selection of an independent fiduciary is not legal advice if it goes 
beyond evaluating whether a particular firm meets the legal 
requirements to act as an independent fiduciary or advising as to the 
nature of a prudent selection process. If lawyers choose to go beyond 
providing legal advice and provide advice as to whom a plan should 
select to manage plan assets, then there is no reason why those lawyers 
should receive a special dispensation from fiduciary status as compared 
to a consultant who habitually makes recommendations about asset 
allocations and asset manager selections, unless we adopt the too-
convenient fiction that no one heeds the advice of lawyers who exceed 
the ambit of their professional competence. The concern that plans will 
be deprived of the unique perspective of lawyers who have experience 
working with independent fiduciaries is overblown. Lawyers can identify 
the independent fiduciaries with whom they have worked and describe 
factually their experiences with them without purporting to make a 
recommendation. Alternatively, they can make a recommendation and 
lawyers, more than anyone, understand that the implicit claim of 
competence in giving such advice will give rise to fiduciary 
responsibility.
The 1975 Regulations Improperly Narrowed the Meaning of Investment 
        Advice
    ERISA Sec.  3(21)(A) provides straightforwardly that a person is a 
fiduciary if he ``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.'' The 1975 regulations narrowed the scope of this language by 
limiting it to investment advice that was ``regular,'' rather than one-
time or episodic; advice that was rendered pursuant to an agreement or 
understanding that it would be a ``primary basis'' for investment; and 
advice that is ``individualized'' to the particular needs of the 
plan.\11\ These limitations are not consistent with the plain meaning 
of the term ``investment advice,'' and at least in retrospect can be 
said to impede rather than advance the congressional goals of limiting 
self-dealing and of assuring prudent investment of plan assets.\12\ As 
the Preamble to the Proposed Regulations notes, people providing 
investment advice not covered by the regulations have considerable 
influence on the decisions of plan fiduciaries and sometimes have 
conflicts of interest that result in lower returns and less retirement 
income for plan participants and their beneficiaries. The regulatory 
definition is also inconsistent with judicial language indicating that 
Congress generally intended the term fiduciary to be ``broadly'' 
construed.\13\
    The problems of the regulatory definition are illustrated in 
judicial decisions. In Farm King Supply, Inc. Integrated Profit Sharing 
Plan and Trust v. Edward D. Jones & Company, 884 F.2d 288 (7th Cir. 
1989), a plan followed a brokerage firm's conflicted investment advice 
and suffered a loss, but the court held that the brokerage firm was not 
a fiduciary because ``there was no mutual understanding that Jones' 
advice would be a primary basis for Plan investments.''
    In a recent district court case, Bhatia v. Dischino, 2010 WL 
1236406 (N.D. Tex. March 30, 2010), the trial court held that the 
actuarial consulting firm was not a fiduciary under the regulations, 
because the plaintiffs did not plead adequate facts to show that the 
firm ``rendered advice on a regular basis as part of a mutual agreement 
that such advice serve as the primary basis of investment decisions.''
    The Department has explained that developing proof of the elements 
of the regulations, even where proof exists, has slowed and impeded 
enforcement of ERISA for the Department of Labor. The lack of support 
in the statute for the conditions in the regulation and the 
difficulties for enforcement are reasons enough for the regulation. But 
the Center and NELA would like to point out that Congress intended that 
ERISA would be enforceable by ordinary participants and beneficiaries 
who, unlike the Department of Labor, do not have subpoena power and 
have no ready access to the documents and testimony that would 
demonstrate fiduciary status under the detailed existing regulation. 
This has always been a severe impediment to enforcement of fiduciary 
responsibility by private plaintiffs, but it has been greatly 
exacerbated in recent years because the Supreme Court has adopted a 
``plausibility'' standard for the evaluation of complaints on a motion 
to dismiss. As a consequence, complaints alleging fiduciary status may 
be dismissed if they fail to allege factual support for some element of 
the regulation, and factual support will typically be unavailable or 
limited without discovery. See e.g. Glen Ridge Surgicenter, LLC v. 
Horizon Blue Cross Blue Shield of New Jersey, Inc., No. 08-6160 (JAG), 
2009 WL 3233427, at *6 (D.N.J. Sept. 30, 2009) (``[P]roof of 
[defendant]'s fiduciary status is an element of the fiduciary duty 
claim, and `a formulaic recitation [in the complaint] of the elements 
of a cause of action will not do.' '' (quoting Bell Atl. Corp. v. 
Twombly, 550 U.S. 544 (2007)); see also Braden v. Walmart Stores, Inc., 
588 F.3d 585, 598 (8th Cir. 2009) (discussing the problem that 
participants are often without access to information that would allow 
them to plead factual support for each element of a claim).
    The new regulations recognize that investment advice is no less 
important merely because it is rendered on a one-time basis. An 
individual who advises on the purchase of employer stock with all of 
the assets of an ESOP on a one-time basis is not less worthy of 
regulation than an individual who advises quarterly on asset allocation 
in a defined benefit plan. Moreover, the regular basis requirement 
finds no support in the statute or the legislative history.
    Similarly, the requirement that advice be offered pursuant to an 
agreement or understanding that the advice will be a primary basis for 
making a decision is and always has been unsupported by the statute and 
extremely difficult to prove. As a practical matter, contracts with 
investment advisors are simply not written this way. An advisor agrees 
to provide advice of a particular sort in exchange for some form of 
compensation. There is no reason why the contract should specify how 
the advice may be used by the plan fiduciary. So while the advice may 
be the only real basis for an investment decision by the plan 
fiduciary, there will be no written agreement that the advice will be 
primary or even significant. Almost invariably, such an agreement or 
understanding will have to be inferred and will be rebutted by an 
integration clause in any written agreement providing for the advice. 
This hurdle, which the new regulations eliminate, seems to have been 
designed to give almost all advisors who did not specifically seek to 
be treated as fiduciaries a good faith argument that they are not 
fiduciaries. Consequently, this requirement in the old regulations is 
profoundly destructive of ERISA's purpose to protect participants and 
beneficiaries. The elimination of this requirement in the new 
regulations is not merely warranted, it is of critical importance.
    The new regulations do not eliminate the requirement that advice be 
individualized, but clarify that advice should be individualized to the 
needs of the plan, a plan fiduciary, or a participant or beneficiary. 
This reflects the Department's interpretation of the existing 
regulations but it is an important clarification. An enormous 
percentage of plan assets are managed in pooled vehicles holding plan 
assets of many plans. These may be master trusts, insurance separate 
accounts, fund-of-funds, and hedge funds usually organized as LLC's and 
operating pursuant to private placement memoranda. Advice that is 
``individualized'' for the fiduciaries of these pooled vehicles is not 
individualized for a particular plan, and yet such advice is no less 
worthy of regulation than advice provided to one plan at a time. If 
anything, regulation of such advice is more critical than advice given 
to a single plan with the needs of that plan in mind. Similarly, many 
investment decisions are made by participants in 401(k) plans, and the 
advice given to them should not escape regulation because individual 
participants are uniquely vulnerable to self-interested investment 
pitches.
    The decision in the new regulations to cover appraisals is 
warranted. As a practical matter, appraisers set the price of assets 
that are purchased or sold by plans, including and especially the 
closely-held employer stock that plans purchase or sell. To suggest 
that this advice is not investment advice defies common sense. Often an 
appraiser is the only outside advisor a fiduciary relies on in deciding 
to purchase an asset at a particular price.
    In an ESOP, price is the critical concern, since diversification is 
excused and the courts have been skeptical of claims that employer 
stock may be ``too risky'' to be a prudent investment. We anticipate 
that appraisers will argue that they should not be held to fiduciary 
standards when their appraisals are only used for compliance and 
distributions. We think the proposal as it stands is appropriate. Note 
that the courts seem to provide a more deferential review of decisions 
(and by extension advice) involving only distributions. See Armstrong 
v. LaSalle National Bank, 446 F.3d 728(7th Cir. 2006) (fiduciary 
setting a value for ESOP distributions is entitled to deference because 
he must balance the interests of those taking a distribution with the 
interest of those who stay in the plan).
    Equally important, the Department's longstanding interpretation of 
its regulation to exclude appraisals is difficult to defend. The 
opinions of appraisers are at least ``a primary basis'' for a typical 
plan's decision to buy or sell a hard-to-value asset at a particular 
price, and this is certainly understood by appraisers hired to value 
stock or other assets for a transaction. At best it might be argued 
that an appraiser is often hired for one transaction or one appraisal 
at a time, so an appraiser's opinion may well not be provided on a 
regular basis. Following the plain meaning of the statute, if not the 
old regulations, the advice given by appraisers that guides the 
fiduciary's decision to purchase or sell a particular asset at a 
particular price certainly falls within the plain meaning of 
``investment advice.''
The Current Regulations Create Legal Uncertainty
    The 1975 regulations also introduce inherently vague definitional 
concepts into the definition of investment advice. The regulations do 
not define what is meant by providing advice on a ``regular basis,'' 
what is meant by advice that will be ``a primary basis'' for the plan's 
investment decisions, nor what is meant by advice that is 
``individualized to the plan's'' needs. These must be determined on a 
case-by-case basis. The inherent ambiguity and subjectivity of these 
concepts creates uncertainty in the law and strains Departmental, 
judicial, and private resources in litigation of issues not related to 
the core concept of investment advice.
Comments on the Proposed Regulations
    As we earlier indicated, we strongly support the Department's 
initiative to redefine the meaning of investment advice, although we 
offer the following comments that would strengthen the proposed 
regulation and more faithfully implement Congressional intent.
    1. Section 2510-3-21(c)(ii)(D) makes a person who issues investment 
advice a fiduciary if, among other requirements, the advice ``will be 
individualized to the needs of the plan, a plan fiduciary, or a 
participant or beneficiary.'' At least in cases of individual 
participants and beneficiaries, we are not certain why a person would 
be a fiduciary only if their advice was sufficiently individualized 
(and the regulations do not discuss when advice is sufficiently 
individualized to meet the proposed regulatory requirement). We have 
doubts that a typical participant or beneficiary will be able to 
discern a difference between individualized and non-individualized 
advice.
    We are also concerned that some advisers who do not have the 
interests of participants at heart may be focused on selling a 
particular investment, rather than providing individualized advice 
about a variety of investments or strategies. In such instance, if the 
advice is directed to an individual, that advice might influence that 
individual's investment choices within a plan just as surely as advice 
that is individualized.
    Finally, this aspect of the regulation might provide a perverse 
incentive to some providers of investment advice to not tailor the 
advice to the particular needs of the individual in order to avoid 
fiduciary status. Our concern for advice given to individual 
participants is heightened when the person giving the advice has been 
given an aura of legitimacy by virtue of having been appointed to 
provide advice by a plan fiduciary or who otherwise has the imprimatur 
of the plan, e.g., a custodian or contract administrator. At least with 
respect to participants, we would prefer that the regulations provide 
that the advice be directed to a particular participant rather than 
that it be ``individualized.'' \14\
    As to advice given to plans and plan fiduciaries, the regulation 
should be modified to eliminate the requirement that there be an 
agreement to provide individualized advice.
    It should be sufficient that there is an agreement to provide 
investment advice and that the service provider performs the agreement 
by the providing individualized advice. Agreements generally do not 
specify that advice will be individualized, even when individualized 
advice is contemplated. For example, when a consultant is hired to 
recommend investment managers for a particular fund, the agreement to 
provide individualized advice may be unspoken or assumed by the 
parties--generally such a consultant will take into account the needs 
of the fund by providing more than a generic ranking of manager 
performance. Consequently, some of the very proof and investigational 
difficulties that inspired the new regulations will still be present 
unless this requirement is modified.
    Moreover, the definition of ``individualized'' should be clarified 
further. The Center and NELA understand that the Department does not 
wish to encompass within the definition of fiduciary mere brokers or 
others who provide ``research'' on stocks, bonds, and other 
investments, rating them as buys, sells or holds, calculating betas or 
other risk measures or predicting returns. But it should be clear that 
when an advisor tells a fiduciary with control of plan assets (pooled 
or not) or a participant to buy or sell a particular investment, or 
that an investment without a ready market that the fiduciary is 
considering purchasing or selling has a particular value, then that 
advice is sufficiently individualized. The distinction should be 
between saying ``you should consider buying Xerox'' and ``our firm 
rates Xerox a buy;'' the first statement should be considered 
``individualized,'' regardless of the thinking or specific intent 
behind it. A focus on portfolio composition and diversification fails 
to capture this concept. Further clarification, perhaps with examples, 
should be undertaken in the final regulations.
    2. Section 2510-3-21(c)(2)(i) provides that a person shall not be 
considered to be a fiduciary investment adviser if such person can 
demonstrate ``that the recipient of the advice knows or, under the 
circumstances, should have known, that the person is providing the 
advice or making the recommendations in its capacity as a purchaser or 
seller of a security or other property, or as an agent of, appraiser 
for, such a purchaser or seller, whose interests are adverse to the 
interests of the plan or its participants or beneficiaries, and that 
the person is not undertaking to provide impartial investment advice.''
    While we believe that this limitation may be appropriate when such 
advice is provided to a sophisticated plan fiduciary, it is not 
appropriate when the advice is given to individual participants or 
their beneficiaries. The Center and NELA have worked with participants 
for 35 and 26 years respectively, and it is our experience that most 
plan participants will not be able to discern when advice is impartial 
or conflicted. In addition, even if there is disclosure, in a one-to-
one meeting, whether in person or by phone, an unsophisticated investor 
will often regard the adviser as acting in his interest. This is 
particularly true if the participant does not have access to other 
advisers. Indeed, an adviser's success may depend on a client's belief 
that the adviser is interested primarily in the customer's welfare, 
despite a declaration of self-interest. There is the further fact that 
most participants will not be knowledgeable about the types of fees and 
benefits that can accrue to the purchaser or seller of securities. 
Thus, we strongly urge the Department to revise this limitation so that 
it only applies to advice and recommendations given to plan 
fiduciaries.\15\
    3. Section 2510-3-21(c)(2(iii) of the proposed regulations provides 
that investment advice does not include an appraisal or fairness 
opinion that reflects the value of an investment of a plan or 
participant or beneficiary, provided for purposes of reporting and 
compliance under ERISA or the Internal Revenue Code, unless such report 
involves assets for which there is not a generally recognized market 
and serves as a basis on which a plan may make distributions to plan 
participants and beneficiaries. We believe that the Department should 
consider revising the limitation so that it would not apply to 
situations when an appraisal of property for which there is not a 
generally recognized market would have a material effect on the funding 
status of a defined benefit plan. The Center and NELA recognize that 
appraisers will typically include scope limitations in their 
appraisals. For example they will say that they are relying on 
management projections in preparing a discounted cash flow. In such 
cases, it is up to the user of the appraisal to assure himself that the 
projections relied upon are reasonable. The Department should be able 
to address the concerns of appraisers by indicating that scope 
limitations will be respected, and appraisers will be held responsible 
only for the opinions that they express (complete with limitations), 
subject to section 405 of ERISA, so that an appraiser who knew that he 
was being provided with unreliable information would have a duty to 
take steps to remedy the situation.
    4. The Department asked for comment on whether and to what extent 
the final regulation should define the provision of investment advice 
to encompass recommendations related to taking a plan distribution. The 
Department has taken the position that a person providing investment 
advice to a participant in an individual account plan is a fiduciary, 
even if the person is chosen by the participant and has no other 
connection to the plan.\16\ The Department has also held that if a plan 
fiduciary responds to participant questions about the advisability of 
taking a distribution or the investment of amounts drawn from the fund, 
that fiduciary must act for the sole and exclusive benefit of the 
participant. Moreover, a fiduciary that advises the participant to 
invest in an IRA managed by the fiduciary may be in violation of the 
prohibited transaction rules of ERISA and the Internal Revenue Code.
    However, the Department has also opined that, if the person 
providing such advice on distributions is not connected with the plan, 
that person can recommend that the participant take a distribution and 
invest in a fund managed by that person and that does not constitute 
investment advice under the current regulations.\17\ We see no reason 
for this distinction and believe that the regulations should be 
changed.
    A recommendation to remove assets from the plan and invest them 
elsewhere is, in effect, a judgment about the relative merits of the 
plan options and the other investment(s). The person making the 
recommendation can have interests adverse to the plan participant and 
the recommendation can have a substantial effect on a participant's 
retirement security, both in terms of future investment performance, 
the loss of an economically efficient means of taking retirement income 
in annuity form, and tax considerations. Moreover, under the current 
interpretation, the person giving advice in these circumstances has no 
obligation under ERISA to reveal their conflict of interest. Such 
advice should be considered investment advice under the new 
regulations.
    We are especially concerned about the problem of advice given by 
plan custodians and non-fiduciary administrators. We are aware of 
participants and beneficiaries who call plans to arrange for or inquire 
about a distribution who are then solicited to invest in products 
offered by the plan service provider. At a minimum the regulations 
should address this concern by making the entities that provide this 
``advice'' fiduciaries. Participants and beneficiaries are inclined to 
believe that the persons assigned to address their inquiries regarding 
their rights in the plan have their interests at heart. In truth, they 
are unknowingly exposed to salesmen with a financial interest, whether 
disclosed or not. Persons using their privileged access to plan 
participants and beneficiaries gained through their positions (even 
ministerial positions) with a plan to steer participants and 
beneficiaries into their investment products should be held to 
fiduciary standards.
    1. Section (c)(ii)(B) of the regulations should be clarified by 
adding ``a plan fiduciary'' after ``individualized needs of the plan'' 
and ``managers'' after ``securities.'' More importantly, we are 
concerned that such menus that are excluded from investment advice be 
limited to those that give the fiduciary a broad choice to select from. 
At one extreme, if fiduciaries are presented with a specific or very 
limited lineup, it is hard to see why the individual promoting that 
lineup should be excused from being deemed a fiduciary, even if he 
discloses that he is selling a product and is not disinterested. In 
addition, such disclosure should specify the nature of the individual's 
financial interest--i.e., how is he being paid and how much he is being 
paid to recommend these alternatives.
    2. The Preamble to the Regulations should be revised to indicate 
that the Department has taken litigation and administrative positions 
prior to the issuance of the proposed regulations interpreting the 
existing regulations that investment advice to a plan encompasses; a) 
advice to plan fiduciaries, including fiduciaries of pooled vehicles; 
b) advice with regard to the selection of managers; and c) advice paid 
for by third parties, e.g., commissions. Likewise, the Department 
should clarify in the Preamble that it does not view its interpretation 
of the existing regulations' requirement of individualized advice as 
precluding advice individualized to the needs of plan fiduciaries of 
pooled vehicles rather than a particular plan. Without such 
clarification, defendants will argue that the new regulations 
implicitly recognize that such advice would not give rise to fiduciary 
status under the existing regulations.
Conclusion
    In sum, this is a much needed regulatory change that will better 
protect plans and participants and facilitate more effective 
enforcement when misconduct is uncovered. The Pension Rights Center and 
NELA applaud the Department for pursuing this initiative that will 
benefit both retirement plans and their participants and beneficiaries.
            Respectfully submitted,
                       Norman Stein, Senior Policy Adviser,
                                  Eric Loi, Staff Attorney,
                                             Pension Rights Center.
                                endnotes
    \1\ Comments of Senator Harrison Williams, Legislative History of 
the Employee Retirement Income Security Act of 1974, Vol. III, at 
4741(Aug 22, 1974)(comments concerning the Committee of Conference on 
H.R. 2).
    \2\ ERISA Sec.  3(21)(A)(i).
    \3\ ERISA Sec.  3(21)(A)(i)
    \4\ ERISA Sec.  3(21)(A)(ii)
    \5\ ERISA Sec.  3(21)(A)(iii).
    \6\ We note that a person who has such authority would be an 
investment adviser even without the ``investment advice for a fee'' 
component of the statutory definition, since the person would be 
exercising discretionary control of a plan asset.
    \7\ 29 C.F.R. Sec.  2510.3-21(c)(1)(ii)(B).
    \8\ The National Center for Employee Ownership, ``A Statistical 
Profile of Employee Ownership,'' http://www.nceo.org/main/article.php/
id/2. These figures do not include 401(k) plans with employee stock 
funds.
    \9\ See, e.g., Keach v. U.S. Trust Co., N.A., 239 F. Supp. 2d 820 
(C.D. Ill. 2002) (appraiser not a fiduciary); Clark v. Ameritas 
Investment Cor., 408 F.Supp. 2d 819, (D. Neb. 2005)(appraiser not a 
fiduciary).
    \10\ ERISA Sec. 409(a). A fiduciary who breaches its 
responsibilities under the statute is also obligated to return to the 
plan any profits the fiduciary made through the use by the fiduciary of 
plan assets. Id. In Mertens, the Court specifically held that a non-
fiduciary who knowingly participated in a breach of trust was not 
subject to section 409(a)
    \11\ The Preambles to the proposed and final 1975 regulations 
include virtually no explanation for the Department's introduction of 
these extra-statutory conditions on the meaning of investment advice. 
The few comments noted in the Preamble to the 1975 final regulations 
asked that the definition of investment advice be narrowed (the 
Department responded to these comments by adding to the final 
regulations additional limitations on the meaning of investment 
advice); asked that the meaning of ``fee or other compensation'' be 
clarified (the Department responded to these comments by indicating 
that it was still studying this issue); asked that the applicability of 
the regulations to investment companies subject to the Investment 
Company Act of 1940 be limited (the Department responded to these 
comments by adding to the final regulations some conditions and 
limitations related to the purchase and sale of securities by 
investment companies); and asked for clarification of certain issues 
involving broker-dealers and investment advice (the Department 
responded to these comments with a discussion of these issues in the 
Preamble to the final regulations). The Preamble to the final 
regulations is silent as to whether it received any comments suggesting 
that the regulations defined investment advice too narrowly, suggesting 
that it did not. From conversations we have had with other groups 
representing interests of participants, it does not appear that such 
groups submitted comments on the 1975 proposed regulations (neither the 
Center nor NELA existed in 1975). In any event, the Department, in 
response to a FOIA request, has indicated that it cannot locate the 
comments submitted on the proposed regulations.
    \12\ We also note that the Supreme Court had not yet decided 
Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 
U.S. 837 (1984). In Chevron, the Court wrote that in determining what 
deference to give to an agency decision, the first question ``always, 
is the question whether Congress has directly spoken to the precise 
question at issue. If the intent of Congress is clear, that is the end 
of the matter; for the court, as well as the agency, must give effect 
to the unambiguously expressed intent of Congress.'' There is no 
ambiguity about the meaning of the term ``investment advice'' and the 
only limitation that Congress placed on whether a person becomes a 
fiduciary because it rendered investment advice is that the investment 
advice was rendered for a fee or other compensation. Yet the 
regulations substituted a unique definition of investment advice by 
providing that the advice had to be offered on a regular basis, had to 
be a primary basis for a plan's investment decisions, and had to be 
part of an agreement to provide individualized advice.
    \13\ See, e.g., LoPresti v. Terwilliger, 126 F.3d 34, 40 (2nd Cir. 
1997).
    \14\ Non-individualized advice on asset allocation and the like, 
however, will generally be characterized as investment education rather 
than investment advice.
    \15\ We also note an additional concern: the proposed rule appears 
to undercut the prohibited transaction exemptions that apply when 
fiduciaries provide investment advice under certain limitations 
designed to protect plan participants from conflicts of interest. See 
ERISA Sec.  408(g). Under the proposed regulations, an investment 
adviser could claim that it did not become a fiduciary under the ``sale 
or purchaser'' limitation and thus was free to give investment advice 
without complying with section 408(g).
    \16\ DOL Advisory Opinion 2005-23A.
    \17\ Id. See also Walsh v. Principal Life Insurance Co., 49 EBC 
1344 (S.D. Iowa 2010).
                                 ______
                                 
    Mr. Andrews. I think the Chairman and I agree, we can say 
this because Mrs. Roby is not here, that listening to an 
Alabama fan should be a prohibited transaction----
    Chairman Roe. Should have been University of Texas----
    Mr. Andrews. It is a prohibited transaction under ERISA. 
[Laughter.]
    Chairman Roe. Should have been UT, you would have been all 
right.
    Thank you.
    Mr. Stein. Thank you.
    Chairman Roe. Mr. Tarbell.

            STATEMENT OF JEFFREY TARBELL, DIRECTOR,
                         HOULIHAN LOKEY

    Mr. Tarbell. Thank you, Chairman Roe, Ranking Member 
Andrews, and members of the committee for the opportunity to 
testify.
    I am testifying today to voice concerns regarding certain 
unintended consequences of the proposed redefinition of the 
fiduciary.
    These concerns are not simply shared by my firm, Houlihan 
Lokey, but by other providers of valuation and fairness opinion 
providers who I am representing today.
    National associations such as the American Society of 
Appraisers, the ESOP Association and the American Institute of 
Certified Public Accounts also have raised similar concerns.
    As reflected at the DOLs hearing on the subject in March, 
these concerns are two-fold. First, as you know, the White 
House issued an executive order earlier this year directing 
federal agencies to use the least burdensome tools for 
achieving regulatory ends and to select in choosing among 
alternative regulatory approaches, those approaches that 
maximize net benefits.
    However, the DOL has provided no meaningful cost-benefit 
analysis that would satisfy this directive.
    Insurance has long been used by plan fiduciaries to 
mitigate ERISA litigation risk, but no such product currently 
exists for firms like ours that provide valuation and fairness 
opinion services. Nor has the DOL produced any evidence 
projecting the cost of that insurance.
    The group of firms that I represent has estimated that cost 
to be up to $180 million annually.
    The proposed rule would also lead to a substantial increase 
in litigation costs to valuation and fairness opinion providers 
and those increase costs would translate into higher fees for 
employee benefit plans and their sponsors.
    For many firms, the cost to defend a single case, whether 
found guilty or not, would likely exceed their annual profits 
and for smaller firms is likely to put them out of business.
    Given the direct cost and increased risk, many firms, 
including my own, would find it difficult to continue providing 
these services related to ERISA plans. Thus, it wouldn't 
surprise me if many firms left the market which would result in 
reduced competition and increased cost. And, again, those 
increased costs will translate into higher fees for plans and 
plan sponsors.
    Valuation and fairness opinion providers also would need to 
retain separate ERISA counsel to represent them on ESoft 
transactions which is projected to add between $30,000 and 
$100,000 to the cost of each transaction. The total cost for 
the thousands of Esoft-owned companies is estimated to exceed 
$50 million a year.
    Second, the proposed rule directly conflicts with 
impartiality requirements under professional standards of 
valuation practice and the internal revenue code. The core 
elements of the ethical standards of the valuation profession 
require that a valuation be performed independently.
    The Uniform Standards of Professional Appraisal Practice, 
known as USPAP, which is the generally recognized ethical 
standard for the valuation profession, imposes specific conduct 
requirements on valuation providers, including an impartiality 
requirement. Federal regulations promulgated by the IRS 
incorporate these ethics standards.
    Furthermore, IRS regulations require valuations of employer 
securities to be performed by a qualified independent appraiser 
who is not a party to the transaction and is not related to any 
party to the transaction.
    An independent appraiser will be deemed to have prepared a 
qualified appraisal if the appraisal has been prepared in 
accordance with the substance of principles of USPAP according 
to the IRS.
    Thus, it is impossible for a valuation provider to provide 
an impartial opinion of value of privately held securities and 
be a fiduciary as required by the proposed regulation.
    As a fiduciary, the valuation provider's duty to act with 
loyalty that is solely in the interest of the participants and 
beneficiaries would contradict the provider's ability to act 
impartially. The unintended consequences of the DOLs proposed 
rule are not outweighed by any perceived benefits. The DOL 
claims the proposed rule is aimed at correcting a common 
problem of substantial valuation work; however, the DOL has 
provided no empirical support showing that such a problem is 
widespread and, to my knowledge, the agency has no in-house 
expertise to make such a determination.
    The agency has also provided no explanation as to the 
nature of the problem.
    The DOLs stated goal to regulate valuation and fairness 
opinion providers by making them fiduciaries will lead to 
expensive litigation brought by plaintiff's firms but it will 
not transform careless valuation providers into careful ones. 
Nor does the agency's stated goal actually articulate any 
standards by which the agency would evaluate whether valuation 
work is satisfactory or substandard.
    The DOL issued a proposed adequate consideration regulation 
more than 20 years ago that was intended to provide standards 
for plan fiduciaries in the ESOP area; however, that proposed 
guidance has never been finalized.
    Valuation and fairness opinion providers are willing to 
work with the DOL to develop guidelines on valuation issues of 
concern to the agency.
    I close by noting that valuation professionals like me 
share the DOLs desire to make sure that valuations are prepared 
carefully and appropriately. To that end, my firms and other 
firms I represent today welcome an opportunity to discuss 
standards and an appropriate enforcement framework that avoids 
the unintended consequences posed by the DOLs proposed rule.
    Thank you for the opportunity to testify, and I look 
forward to questions.
    [The statement of Mr. Tarbell follows:]

         Prepared Statement of Jeffrey Tarbell, Houlihan Lokey

    Good morning. Thank you Chairman Roe, Ranking member Andrews, and 
members of the Subcommittee for the opportunity to testify this 
morning. My name is Jeff Tarbell. I am a Director with Houlihan Lokey, 
an investment bank that, among other things, provides valuation and 
fairness opinion services related to Employee Stock Ownership Plans 
(``ESOPs''). I have more than 20 years of experience rendering 
valuations and fairness opinions, many of these related to ESOPs.
    I am testifying today to voice concerns regarding certain 
unintended consequences of the proposed regulation issued by the 
Department of Labor (``DOL''), which would amend the definition of 
``fiduciary'' under the Employee Retirement Income Security Act of 
1974, as amended (``ERISA''). These concerns are not shared simply by 
Houlihan Lokey, but by other providers of ESOP valuations and fairness 
opinion services whom I am representing today.\1\
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    \1\ The firms include: Chartwell Capital Solutions, Columbia 
Financial Advisors, Inc., ComStock Advisors, Duff & Phelps, LLC, 
Houlihan Lokey, Prairie Capital Advisors, Inc., Stout Risius Ross, and 
Willamette Management Associates.
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    As reflected at the DOL's March 1st and 2nd hearing on the subject, 
our concerns are two-fold: (1) the costs of the proposed rule on 
employee benefit plans and the employers who sponsor them would be 
significant; and (2) the proposed rule directly conflicts with 
longstanding professional and regulatory standards of valuation 
practice requiring that an appraiser provide an independent and 
impartial opinion of value. Furthermore, if the DOL's goal is to 
regulate valuation and fairness opinion providers directly, then the 
agency first needs to put in place regulatory standards governing the 
provision of valuations and fairness opinions. Houlihan Lokey and other 
providers of valuations and fairness opinions, as well as the ASA, are 
ready and willing to discuss a reasonable framework of standards and 
enforcement, but enforcement through fiduciary labeling is a misguided 
and problematic approach.
    Before specifically addressing those concerns, it should be noted 
that the DOL's proposed rule represents a sudden reversal of the 
agency's longstanding treatment of providers of valuations and fairness 
opinions related to employee benefit plans. Firms providing ESOP 
valuations and fairness opinions long have relied on the DOL's 1976 
advisory opinion that a person retained to conduct a valuation of 
privately held stock to be offered to, or held by an ESOP does not 
function as a fiduciary under ERISA. The factual bases for that 
advisory opinion continue to be true today. As the DOL noted in that 
opinion, an ESOP valuation or fairness opinion does not make a 
recommendation as to a particular investment decision, does not address 
the relative merits of purchasing particular employer securities, nor 
does the ESOP valuation or fairness opinion provider have any decision 
making authority over a trustee's decision whether to purchase or sell 
the employer securities. In other words, an ESOP valuation or fairness 
opinion does not constitute ``investment advice.'' Consequently, it is 
contrary to the DOL's 35 year-old position and unreasonable that ESOP 
valuation and fairness opinion providers, or other providers valuing 
assets belonging to ERISA plans, now should be singled out for 
fiduciary treatment.
Concerns with the DOL's Proposed Fiduciary Definition
            I. The Public Record Shows That The Costs Of The Proposed 
                    Rule Would Be Substantial To Employee Benefit Plans 
                    And Their Employer Sponsors
    As you know, earlier this year, the White House issued an Executive 
Order directing federal agencies to use ``the least burdensome tools 
for achieving regulatory ends,'' and to ``select, in choosing among 
alternative regulatory approaches, those approaches that maximize net 
benefits.'' Executive Order 13563, 76 Fed. Reg. 3821 (Jan. 18, 2011). 
However, the DOL has provided no meaningful cost-benefit analysis that 
would satisfy the Administration's directive.
    While insurance has long been used by plan fiduciaries to mitigate 
their ERISA litigation risk, the administrative record is clear that no 
such product currently exists for firms providing valuation and 
fairness opinion services related to ERISA-covered plans. Based on the 
stringent cost-benefit analysis that is now required by the executive 
branch, reliable data must be obtained to quantify the identified 
insurance cost. And yet, no evidence has been introduced by the DOL as 
to the projected cost of that insurance. The group of firms that I 
represent has attempted to estimate the cost of a valuation-specific 
insurance product by considering the cost of fiduciary insurance 
coverage for ESOP trustees, which is typically based on assets under 
management. The group understands from conversations with industry 
representatives and other information in the public domain that 
premiums range between $100 to $200 per $1 million of assets under 
management. See Fiduciary Insurance--Understanding Your Exposure, at 
12, available at http://www.naplia.com. The ESOP professional 
associations project that the total assets owned by ESOPs are roughly 
$900 billion. See National Center for Employee Ownership statistics, 
available at http://www.nceo.org/main/articl/php/id/21; The ESOP 
Association statistics, available at http://www.esopassociation.org/
media/media--statistics.asp. Using that ratio, the aggregate fiduciary 
insurance costs for valuation and fairness opinion providers would 
range from $90 million to $180 million annually.
    In addition to increased insurance costs, the proposed rule also 
would lead to a substantial increase in litigation costs to valuation 
and fairness opinion providers. As I understand it, fiduciary insurance 
policies often contain a high deductible before coverage begins. Thus, 
a provider may be faced with substantial out-of-pocket costs just to 
establish its compliance with professional standards. For many firms, 
the cost to defend a single case would likely exceed their annual 
profits. Those increased costs would translate into higher fees for the 
employee benefit plans and their sponsors.
    In addition, internal costs driven by the regulation, such as 
additional records maintenance, and the development of policies and 
procedures, also will be incurred. Valuation and fairness opinion 
providers would need to consider these new costs in pricing their 
services. These increased fees would not only impose direct, immediate, 
and incremental costs on employers, most of whom are small or mid-size 
businesses, but those costs would likely increase over time. In this 
regard, given all the direct costs and increased risk, many firms, 
including my own, would find it difficult to continue providing 
valuation and fairness opinions services relating to ERISA plans. Thus, 
commentators believe that many firms--particularly the larger, better 
capitalized firms--would have a disincentive to continue providing 
valuations and fairness opinion to ERISA plans in light of the 
increased costs and litigation risk. Such a decrease in competition 
would result in further increasing costs which, again, would translate 
into higher fees for employee benefit plans and their sponsors.
    In addition to the cost of insurance, retention and regulatory 
compliance, ESOP valuation and fairness opinion providers, as proposed 
fiduciaries, also would bear the cost of hiring their own separate 
ERISA counsel to represent them in ESOP engagements. It is projected 
that retaining ERISA counsel would add $30,000 to $100,000 to the 
overall cost of each ESOP purchase or sale transaction. This estimate 
is based on what an ESOP trustee's ERISA counsel generally charges in a 
transaction, and the cost of legal counsel retained by valuation or 
fairness opinion providers in non-ERISA transactions. One ESOP trade 
organization estimates that, on average, approximately 1,000 ESOP 
transactions occur annually. Using that figure, the projected added 
cost for ESOP transactions would range from $30,000,000 to $100,000,000 
annually. In addition, assuming the cost of retaining counsel to review 
a valuation is, on average, approximately $5,000, the total cost for 
the 11,500 existing ESOP companies would exceed $50 million a year. 
Again, these costs would be passed directly on to plans and their 
sponsors.
            II. DOL's Proposed Rule Is At Odds With Impartiality And 
                    Independence Requirements Under Professional 
                    Standards Of Valuation Practice And The Internal 
                    Revenue Code
    The core elements of the ethical standards of the valuation 
profession require a valuation to be performed independently and 
without bias in favor of any party. The Uniform Standards of 
Professional Appraisal Practice (``USPAP''), which are the generally 
recognized ethical standards of the valuation profession, contains an 
ethics rule which imposes specific conduct requirements on valuation 
providers, including an impartiality requirement. See USPAP Ethics 
Rule, http://www.uspap.org/2010USPAP/ USPAP/frwrd/uspap--toc.htm. 
(appraiser ``must not perform with bias'' and ``must not advocate the 
cause or interest of any party or issue. * * *'').
    Federal regulations promulgated by the Internal Revenue Service 
(``IRS'') incorporate these industry ethical standards. In particular, 
IRS regulations provide that an ESOP can only be considered a qualified 
trust under the Code if ``all valuations of employer securities which 
are not readily tradable on an established securities market with 
respect to activities carried on by the plan are by an independent 
appraiser,'' see Code Sec.  401(a)(28)(C), as defined in Treasury 
regulations promulgated under Code Sec.  170(a)(1) (emphasis added). A 
``qualified independent appraiser'' under these regulations is a person 
who, among other things ``is not a party to the transaction, and is not 
related to any party to the transaction.'' 26 C.F.R. Sec.  1.170A-
13(c)(5)(i)(emphasis added). Under IRS advisory guidance, a ``qualified 
appraisal'' has been conducted by a ``qualified appraiser'' within the 
meaning of Sec.  1.170A-13 only if it is done ``in accordance with 
generally accepted appraisal standards.'' I.R.B. 2006-46. The IRS has 
clarified that this would include appraisals ``consistent with the 
substance and principles of [USPAP].'' See Proposed Reg. 26 C.F.R. 
Sec.  1.170A-17(a) (1)-(2) (proposing to codify guidance under I.R.B. 
2006-46).
    It is impossible for a valuation provider to provide an impartial 
opinion of the value of privately held securities and be a fiduciary to 
the holder, purchaser or seller of those securities, as required by the 
proposed regulation. As a fiduciary, the valuation provider's fiduciary 
duty to act ``solely in the interest of the participants and 
beneficiaries'' would contradict the provider's ability to act 
impartially. For example, the valuation provider would have a fiduciary 
duty to advocate the advisability of making a particular investment. 
However, the standards under the Code and well-established professional 
standards provide that the role of such a person is not to advocate for 
a value, or an investment, on behalf of anyone, but instead provide an 
impartial opinion as to the value of a particular security, no matter 
who asks the question. Asking a valuation provider to ignore its 
ethical responsibility and be partial to plan participants is akin to 
asking a judge to be biased in handing down a verdict to his own 
client.
            III. If The DOL Wishes To Correct Any Perceived Problems 
                    With Valuation Standards Of Practice, The Agency 
                    Should Establish What Those Standards Are First 
                    Before Turning To The Question Of Enforcement
    The DOL has claimed that the proposed rule is designed to correct 
the ``common problem'' of substandard valuation and fairness opinion 
provider work. However, the DOL has provided no empirical support in 
the record showing that such a ``problem'' is widespread, and, to my 
knowledge, has no in-house expertise to even make such a determination. 
The agency also has provided no explanation as to the nature of the 
problem; that is, whether ``faulty'' valuations are the product of 
insufficient fact-gathering or analysis, computational errors, 
unreasonable use of assumptions on critical factors, or improper 
reliance on valuation methodologies that the DOL opposes as a policy 
matter.
    The DOL's stated goal to regulate valuation and fairness opinion 
providers by making them fiduciaries, will lead to expensive litigation 
brought by plaintiffs' firms, but it will not transform those careless 
valuation providers into careful ones. Nor does the agency's stated 
goal actually articulate any standards by which the agency would 
evaluate whether valuation work is satisfactory or substandard. The DOL 
issued a proposed adequate consideration regulation more than twenty 
years ago that was intended to provide standards relating to ESOP 
valuation. See Proposed Regulation Relating to the Definition of 
Adequate Consideration, 53 Fed. Reg. 17,632 (1988). Ironically, that 
proposed guidance has never been finalized. Valuation and fairness 
opinion providers are willing to work with the DOL to develop guidance 
on valuation issues of concern to the Agency. Established standards 
would be important not only for firms providing valuation and fairness 
opinion services, but for ERISA fiduciaries and DOL personnel charged 
with reviewing and evaluating such valuations or opinions. Whether that 
person is an ``internal'' fiduciary within the company, or retained 
independently, the ERISA fiduciary must conduct a prudent investigation 
as to the merits of a proposed transaction and, therefore, would need 
to have a basic understanding of governing standards.
    As it stands, the DOL's proposed rule is the proverbial example of 
putting the cart before the horse. Regulatory standards of practice 
governing valuation and fairness opinion provider services should be 
agreed upon before turning to the question of enforcement of such 
standards. With respect to enforcement, for the reasons above, making a 
valuation or fairness opinion provider a fiduciary is a misguided 
approach because it imposes unnecessary costs on the backs of ERISA 
plans and their employer sponsors, and directly contradicts established 
professional and regulatory standards.
    I close by noting that valuation professionals like me join the 
DOL's desire to make sure valuations are prepared carefully and 
appropriately. To that end, my firm and the other valuation and 
fairness opinion firms I am representing welcome an opportunity to 
discuss standards and an appropriate enforcement framework that avoids 
the unintended consequences and insurmountable conflicts posed by the 
DOL's proposed rule.
    I appreciate the opportunity to testify this morning and welcome 
any questions from you, Ranking member Andrews or other members of the 
Subcommittee at this time.
                                 ______
                                 
    Chairman Roe. I thank you.
    And, Mr. Bentsen, welcome back. And you may be glad you are 
on the other side of the dice today instead of here.

 STATEMENT OF KENNETH BENTSEN, JR., EXECUTIVE VICE PRESIDENT, 
     SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

    Mr. Bentsen. Well, I don't know. Thank you, Mr. Chairman, 
though, and I appreciate the hall pass to come around the 
corner from the Financial Services Committee.
    I appreciate, Mr. Chairman, Ranking Member Andrews, and 
members of the committee for holding this very important 
hearing.
    However well intentioned, we believe the department's 
proposed regulation has far broader impact than the problems it 
seeks to address. As has been stated numerous times, this 
proposed rule would reverse 35 years of case law enforcement 
policy and the understanding of plans and plan service 
providers as well as the manner in which products and services 
are provided to plans, plan participants and IRA account 
holders without any legislative direction to move from the 
department's contemporaneous understanding of the statute.
    And, of course, the enforcement rationale behind this 
proposed rule cannot apply to IRAs because the department has 
no enforcement authority over IRAs. I would add, however, and 
it has not been mentioned, that the SEC and FINRA do have 
enforcement authority in that area as it relates to brokers and 
advisors.
    After months of discussion with the department both in 
anticipation of the proposed rule and following its 
publication, we strongly believe the regulation should be re-
proposed, and in particular re-proposed without IRAs.
    The breadth and complexity of the provisions and many 
significant changes that need to be made and the uncertainty 
regarding the exemptions that will be required based on the 
final language underscore the need for the department to go 
back to the drawing board.
    Further, based on our numerous conversations with the 
department and their acknowledgement for the need for 
significant change to the draft, we believe such changes in and 
of themselves would require re-proposal under the 
Administrative Procedures Act.
    In addition, as has been stated, the proposed rule lacks 
sufficient cost-benefit analysis and absolutely no cost-benefit 
analysis related to its impact on IRA owners. We cannot think 
of a single reason barring re-proposal of this regulation, 
especially when the Securities and Exchange Commission will 
almost certainly be proposing a uniform fiduciary standard of 
conduct for brokers and advisors providing personalized 
investment advice pursuant to section 913 of the Dodd-Frank Act 
this fall. And that is an action that I would note that SIFMA 
has strongly supported throughout the consideration and final 
passage of Dodd-Frank.
    It is also important to note that the SEC through their 
study, through the consideration of Dodd-Frank has been working 
on many of these very issues that we believe will be in 
conflict with where the department is heading with their rule.
    By upending 35 years of established precedent and imposing 
a fiduciary status on a service provider who may have no 
relationship to a plan, the rule creates prohibited 
transactions and co-fiduciary liability on entities who have no 
understanding what the plan, or IRA, that any services at all 
will be provided. The selling exception in the puzzle does not 
even cover commissioned base sales or the selling of services 
let alone common investment transactions such as agency trades, 
futures, repurchase agreements, swaps, and security lending.
    Absent a re-proposal to address such concerns and the 
advanced promulgation of the prohibited transaction 
exhibitions, our member firms will be forced to alter and in 
many cases curtail services to their clients upon final 
publication.
    To be clear, extending the implementation timeline of any 
final rule in order to consider a draft and promulgate 
exemptions, as some have suggested, will not forestall the 
necessity of firms to adjust their business planning operations 
and service delivery based upon the rule as drafted.
    Firms must operate their businesses on rules as written, 
not based on the possibility of exemptions to come in the 
future.
    While the department asserts that IRA owners, participants, 
and beneficiaries would directly benefit from the department's 
more efficient allocation of enforcement resources than are 
available under the current regulation. No example or 
explanation of such benefits is provided that would justify the 
sweeping changes, nor the unintended negative consequences to 
IRA owners, plans, and their participants.
    And I might add that the secretary noted that while the 
premise of a lot of the studies that have been provided by 
multiple parties would suggest that there are only two business 
models, the broker-dealer commission based business model and 
the Registered Investment Advisor model and that some new model 
might come into play.
    The fact of the matter is that hasn't happened yet, and we 
would argue, we would assert that it is inappropriate to design 
a rule based upon something that hasn't happened yet. The data 
is pretty clear about where the market is here.
    Mr. Chairman, Ranking Member Andrews, I would like to close 
with this.
    Obviously, the industry has a great deal of concern about 
this and what the impact will be on our ability to serve our 
clients. But it is not just the industry that has raised 
concerns on this. I think it is important to look at what 
investor advocates have said about this.
    Over the last few weeks two prominent investor advocates 
have testified before various committees of the congress. 
Barbara Roper from the Consumer Federation who has been a 
leading advocate in the area of a uniform fiduciary standard of 
care has repeatedly stated in testimony and to the media and 
elsewhere that this rule will be harmful to investors and 
should be re-proposed and further that this rule will directly 
conflict with Congress's under Dodd-Frank with regards to 
swaps.
    In addition, Mercer Bullard from the University of 
Mississippi Law School, again a prominent investor advocate, 
testified, I believe, 3 weeks ago before the Financial Services 
Committee and also published in an article in Morningstar that 
this rule would be bad for investors and should be re-proposed.
    So we believe that the evidence is very clear that this 
rule needs to be withdrawn and re-proposed.
    Thank you for the opportunity to testify.
    [The statement of Mr. Bentsen follows:]

 Prepared Statement of Hon. Kenneth E. Bentsen, Jr., on behalf of the 
         Securities Industry and Financial Markets Association

    Good morning. I am Ken Bentsen, Executive Vice President for Public 
Policy and Advocacy at the Securities Industry and Financial Markets 
Association.\1\ We appreciate the Committee's decision to hold a 
hearing on the Department of Labor's proposed revision to the 
definition of fiduciary.
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    \1\ SIFMA brings together the shared interests of hundreds of 
securities firms, banks and asset managers. SIFMA's mission is to 
support a strong financial industry, investor opportunity, capital 
formation, job creation and economic growth, while building trust and 
confidence in the financial markets. SIFMA, with offices in New York 
and Washington, D.C., is the U.S. regional member of the Global 
Financial Markets Association. For more information, visit 
www.sifma.org.
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The Proposed Regulation
    However well intentioned, we believe the Department's proposed 
regulation has far broader impact than the problems it seeks to 
address. This proposed rule would reverse 35 years of case law, 
enforcement policy and the understanding of plans and plan service 
providers as well as the manner in which products and services are 
provided to plans, plan participants and IRA account holders, without 
any legislative direction to move from the Department's contemporaneous 
understanding of the statute, in order to make it easier for the 
Department to sue service providers. That seems to us to be an 
inadequate basis for proposing such a dramatic change. And of course, 
this enforcement rationale cannot apply to IRAs, over which the 
Department has no enforcement authority.
    After months of discussion with the Department, both in 
anticipation of the proposed rule, and following its publication, we 
strongly believe the proposed regulation should be re-proposed and in 
particular, re-proposed without IRAs. Many groups and individual 
entities representing plan sponsors, service providers, the financial 
services industry and investor advocates have raised issues about the 
proposed rule's impact on plans and participants and individual savers. 
The breadth and complexity in the provisions, the many significant 
changes that need to be made, and the uncertainty regarding the 
exemptions that will be required based on the final language, 
underscore the need for the Department to go back to the drawing board. 
Further, based on our numerous conversations with the Department, and 
their acknowledgment of the need for significant changes to the draft, 
we believe such changes in and of themselves would require re-proposal 
under the Administrative Procedures Act. In addition, the proposed rule 
lacks sufficient cost benefit analysis, and absolutely no cost benefit 
analysis related to its impact on IRA owners. We cannot think of a 
single reason barring re-proposal of this regulation, especially when 
the Securities and Exchange Commission will almost certainly be 
proposing a uniform fiduciary standard of conduct for brokers and 
advisors pursuant to Section 913 of the Dodd-Frank Act in the fall, an 
action that SIFMA strongly supports.
    By upending 35 years of established precedent and imposing a 
fiduciary status on a service provider who may have no relationship to 
a plan, the rule creates prohibited transactions and co-fiduciary 
liability on entities who have no understanding with a plan or IRA that 
any services at all will be provided. The selling exception in the 
proposal does not even cover commission based sales or the selling of 
services, let alone common investment transactions such as agency 
trades, futures, repurchase agreements, swaps and securities lending. 
It requires the seller to announce it is adverse to the client, 
contrary to where the SEC is likely to go based on their Section 913 
fiduciary study. Absent a re-proposal to address such concerns and the 
advance promulgation of prohibited transaction exemptions, our member 
firms will be forced to alter, and, in many cases, curtail services to 
their clients upon final publication of this rule. To be clear, 
extending the implementation timeline of any final rule in order to 
consider, draft and promulgate exemptions, as some have suggested, will 
not forestall the necessity of firms to adjust their business planning, 
operations and service delivery based on the rule as drafted. Firms 
must operate their businesses on the rules as written, not based on the 
possibility of exemptions to come in the future.
    While the Department asserts that IRA owners, participants and 
beneficiaries would directly benefit from the Department's more 
efficient allocation of enforcement resources than are available under 
the current regulation, no example or explanation of such benefits is 
provided that would justify these sweeping changes nor the unintended 
negative consequences to IRA owners, plans and their participants. 
Instead, we believe the individual investors who hold them will suffer 
increased costs, significantly fewer choices and greatly restricted 
access to products and services--new asset-based advisory fees to 
replace a commission/spread based structure, additional transaction 
costs, elimination of investment options and alternative vehicles, 
constriction of the dealer market, limits on permissible assets in 
IRAs, and the elimination of pricing of anything other than publicly 
traded assets. Absent a re-proposal, we have no confidence that these 
fundamental flaws will be fixed. Nor are we confident that the 
necessary exemptions will be in place before the effective date. 
Millions of savers will find that they cannot invest in the products 
and services that they have been accustomed to having available in 
their retirement accounts and that the cost of such products will 
dramatically increase.
Costs of the Change to Plans and Participants
    The proposed regulation states that the Department is uncertain 
about the cost of the proposal in its preamble. Promulgation of a broad 
and far reaching regulation, with no change in the law to prompt such 
change and no indication from Congress that a change is needed should 
not be done without adequate cost analysis. The Department's cost 
estimates focus on certain costs to service providers, and not the cost 
to plans, beneficiaries and IRA holders. While we believe the 
Department greatly underestimated such costs to service providers, more 
importantly we think this emphasis is misplaced. The real question is 
the cost to plans and their participants and the impact on their 
retirement savings. And while the Department's cost analysis leaves 
alarming gaps in what it does appear to understand or be certain about, 
its list of uncertainties does not even once mention IRAs. IRAs hold 
more than $4.3 trillion as of March 2010. The vast majority of these 
assets are in self-directed accounts. The total lack of analysis on the 
effect on these accounts is very hard to understand.
    The costs to such account holders would be significant. From data 
pulled quickly from a handful of our member companies, there are over 7 
million accounts that are under $25,000 and use a commission-based 
model. In addition, over 1 million of those accounts are under $5,000. 
These are currently commission-based accounts, not advisory fee 
accounts. This proposal will push them to an advisory model. And, most 
firms require a minimum account balance for advisory accounts that 
could result in millions of IRA account holders being dropped.
    While current exemptions to the prohibited transaction rules of 
ERISA (PTE 86-128) permits fiduciaries to select themselves or an 
affiliate to effect agency trades for a commission, there is no 
exemption that permits a fiduciary to sell a fixed income security (or 
any other asset) on a principal basis to a fiduciary account. Lack of 
exemptive relief in this area is contrary to what Congress explicitly 
stated in authorizing the SEC to promulgate a uniform fiduciary 
standard of care for brokers and advisers providing personalized 
investment advice under Section 913 of Dodd-Frank. The result of that 
conflicting prohibition is that the broker would not be able to execute 
a customer's order from his own inventory but rather purchase the order 
from another dealer, adding on a mark-up charged by the selling dealer. 
That mark-up would result in an added cost for these self-directed 
accounts, and would disproportionately fall on smaller investors, such 
as small plans and IRAs. And of even more concern, it would eliminate 
the most obvious buyer when a plan wants to sell a difficult to see 
security. Further, given that the rule would eliminate a clear 
understanding when a broker is acting as a fiduciary, and thus increase 
liability risk, it is likely that brokers will transform such accounts 
into asset based fee arrangements or wrap accounts with their brokers 
so the brokers can comply with the prohibited transaction rules that 
govern fiduciaries under ERISA and the Code. Asset based fee accounts 
or wrap accounts are designed to provide on going advice at a higher 
fee than traditional self-directed commission based accounts. However, 
most individual investors with IRA accounts and most personal brokerage 
accounts are lower cost self -directed commission based accounts. The 
result would be imposing higher costs and less choice on investors.
    This is particularly critical in assisting small businesses when 
they start up new plans. Many broker dealers help small business owners 
in their local communities establish retirement plans for their 
employees by educating them about the benefits of plans. By prohibiting 
commission-based sales, the proposal would make it economically 
unfeasible for most brokers to continue to offer this service. Payment 
of a separate advisory fee to set up a plan will likely deter many 
small businesses from providing this important employee benefit.
Intersection with Dodd Frank
    As I stated, the Department's rule is in conflict with Section 913 
of Dodd-Frank that authorizes the SEC to establish a uniform fiduciary 
standard of care for brokers and advisors when providing personalized 
investment advice. SIFMA strongly supported that provision of Dodd-
Frank and we recently submitted a letter to the SEC encouraging the 
Commission to move forward with such a rule. I have submitted our 
letter with my testimony for the record.
    Also, during consideration of the Dodd-Frank Act, Congress 
considered the question of a counterparty providing a fiduciary duty to 
plans engaging in swaps and it rejected such an approach because it 
wanted to be sure that plans could continue to engage in such 
activities principally for hedging purposes. However, as currently 
drafted, the Department's proposed rule would result in a counterparty 
being deemed a fiduciary, which would eliminate the ability for plans 
to enter into swaps. Again, the SEC and the Commodities Futures Trading 
Commission (``CFTC'') were directed by Congress to establish business 
conduct rules for dealers engaging in swaps with plans, and yet the 
Department's rule would conflict with those rules, which are currently 
in the proposal stage. Absent a significant change in the Department's 
final rule, or better a re-proposal, the Department's proposed rule 
will directly conflict with Congress expressed intent in Dodd-Frank.
Conclusion
    Finally, while financial services providers continue to express 
grave concerns about the proposed rule's impact, I would point out that 
similar views regarding the far reaching and unintended consequences 
have been voiced by leading investor protection and consumer advocates. 
Barbara Roper of the Consumer Federation of America, in testimony 
before Congress last week also called for a re-proposal and asserted 
that the proposed rule would conflict with the business conduct 
provisions under Dodd-Frank. Also, University of Mississippi law 
professor and investor advocate Mercer Bullard, both in a published 
article and testimony has said the rule is bad for investors and should 
be re-proposed.
    Mr. Chairman, Members of the Committee, SIFMA and its members have 
provided substantial comment and data to the Department as to why this 
rule must be withdrawn and re-proposed and that necessary exemptions 
must be promulgated in advance of any final rule. Further there must be 
sufficient coordination with and consideration of the SEC's likely 
action under Section 913. Otherwise, this proposal will have 
significant negative impact to millions of accountholders.
    I thank you for permitting SIFMA to testify today, and would be 
happy to answer any questions.
                                 ______
                                 
    Chairman Roe. I thank the panel.
    I will take just a couple of minutes here to ask a couple 
of questions and one recurring theme is that there was no cost 
analysis done prior to implementation of the rule, and I think 
that is one of the things the uncertainty of that, about how 
much is this thing going to cost. And then at the end, again, I 
bring back the question of what problem are you fixing?
    Now Professor Stein made a good point. Certainly there are 
outliers out there, but I know in my own dealing with my own 
small business that this was--we understand the rules basically 
now. We sort of get the rules. This is going to make it harder.
    As I listen to this rule I am playing through how I go to 
my practice to my pension committee and how I would advocate--
and it is going to be difficult.
    And especially, Mr. Bentsen, if you would bring up or any 
of the panel members would like to, what about a small IRA 
investor that has got say $10,000 or $15,000 or $20,000 or 
$25,000? What happens to them?
    I mean when you call one of these education lines the 
following question is going to be, ``Well, what do you think I 
ought to invest in?'' They may not know. So would you all? 
Anybody can take that one.
    Mr. Bentsen. Mr. Chairman, it is a very good question. The 
dilemma that this rule poses is that it changes the established 
standard that is understood by providers and how they operate.
    At the very same time that the--and as it relates to IRAs. 
At the very same time that brokers and advisors, the same 
people, are going to have their standard of care changed, 
again, something that we support, under section 913 of Dodd-
Frank.
    And the problem that exists in this rule is this rule is so 
broadly written without clarity to determine when is one giving 
advice and when is one not giving advice. And if that is not 
made clear, then the liability risk to a broker is going to be 
too great. So they will then have no choice but to move such 
accounts into advisory accounts where there is an established 
fiduciary duty.
    Advisory accounts are more expensive than basic commission 
accounts. Most IRAs are in basic commission accounts. And so it 
will raise the cost.
    But the other problem is the industry is organized, like 
any business, based upon scale and efficiency. And so most 
advisory accounts have a minimum amount, a minimum balance that 
they can have because below that it is inefficient for the firm 
or the broker or the advisor rather to operate it.
    And so what will happen, and most of those are around 
$50,000 per account. So this will force a number of accounts 
that can't move into that advisory account to go looking for 
services somewhere else and at a higher cost.
    Chairman Roe. Mr. Mason?
    Mr. Mason. Yes, I just wanted to jump in, and I completely 
agree with everything Ken was saying.
    I think the Oliver Wyman study, I want to just briefly 
mention that, it found, because of the phenomenon that Ken 
mentioned, it found sort of concrete, in response to your 
question, that within the study sample alone over 7 million 
IRAs would just be on their own.
    They would just say, the broker's would have to say you are 
on your own. There is the computer. Good luck. That is a sad 
situation.
    If you extrapolate that to the entire market, you are 
talking about 18 million IRAs being cut off and put on their 
own.
    And I want to just correct, very briefly, correct one 
thing. I would disagree with Secretary Borzi. I think she was 
saying there was a flaw in the Wyman study in the sense that it 
did not take into account the exemptions for commissions. It 
did.
    What the basis for the Wyman's study's conclusion was that 
the standard practice in the way that the brokers sort of get a 
significant amount of their compensation is through revenue 
sharing, and that there is no privative transaction for.
    The Wyman study was very accurate in that regard. So I just 
wanted to correct that point.
    Chairman Roe. Well, there is no question that a small IRA 
owner can't--$20,000 or $10,000 or whatever, can't afford to 
pay. I know our fees went down as the size of our plan went up.
    And obviously a small firm would spend most of their money 
on fees if it was a fee-based instead of----
    Mr. Myers?
    Mr. Myers. Yes, I would just like to elaborate on the 
common model today is for lots of intermediaries like brokers 
and banks to be compensated for their services to the plan from 
fees they receive from third parties like mutual funds.
    And in fact several years ago the Department of Labor was 
concerned that smaller plans were paying higher fees. And they 
conducted a study and then hearings and they learned that it 
does cost more per participant to provide services to a smaller 
plan as oppose to a larger plan. And at the same token, it 
costs more per participant to provide service to an IRA.
    And the way the system now works is these intermediaries 
get compensated for that service with the fees that they 
receive from the funds, which they would no longer be able to 
receive if there are fiduciaries in the absence of an 
exemption.
    And I would just like to elaborate or clarify a point that 
Ms. Borzi made that a lot of the class exemptions today would 
not provide the type of relief that is necessary so those 
exemptions would have to be modified or revised. So currently 
if they receive these fees in their fiduciaries, they are just 
going to have to, as explained by other panel members, just 
change their model dramatically.
    Chairman Roe. Okay. Thank you.
    Mr. Kildee?
    Mr. Kildee. Thank you, Mr. Chairman.
    First of all, I would like to see if Mr. Stein would like 
to reply, I know there is some interest there, to Mr. Mason's 
comments.
    Mr. Stein. Yes. One of the things that I think, you know, 
we often lose sight of when we talk about whether people will 
be able to afford this if people have to charge. The revenue 
sharing is a fee. Right? The revenue sharing is a fee. That is 
not understood by most participants.
    If the revenue sharing didn't take place, presumably that 
money would end up in the accounts of the people, ultimately as 
business models change, in the accounts of the people who were 
investing.
    I mean, these services are not being provided for free. 
They are being provided for money and it is just that the money 
is provided in a way that is not visible to participants and 
can result where some vendors of investment products pay more 
in revenue sharing than others. That, in my mind, has to 
influence the people who are doing the selling.
    Mr. Kildee. Thank you very much.
    Mr. Myers, could you further discuss what changes you would 
make to the proposed rule? Can it be changed? Can it be made 
whole or good? And how, then, could you, if you could improve 
it, what areas would you address?
    Mr. Myers. Well, let me go back to the original regulation 
which was adopted in 1975. And let us examine what was the 
basis for that regulation.
    When ERISA was enacted there was a real concern of the 
consequence of being a fiduciary and there was a belief at the 
time that taking on a fiduciary responsibility should not be 
thrust upon an individual but it should be as a result of some 
mutual understanding between two parties.
    And so for that reason, the regulation as adopted had that 
five part test. And what it was concerned about was that 
sending out recommendations to buy or sell a particular 
security should not cause someone to be a fiduciary.
    If a plan believes that it is getting advice from someone 
who is a fiduciary but the person giving the information 
believes it is not a fiduciary, that person who is giving the 
information shouldn't be subject to the fiduciary rules because 
they would have to change their conduct dramatically.
    So the thinking at the time was you need a mutual 
understanding between two parties. You need an ongoing 
relationship that would subject that person who would be a 
fiduciary to all these fiduciary rules.
    And so that is where--while the regulation has been 
criticized, I think it had a solid basis in what the concern 
was of the government of the time. And I think the Department 
of Labor was also reacting to concerns by the conferees that 
gave rise to ERISA that ERISA should not disrupt ordinary 
business practices.
    So taking that into account, they came up with the five-
part test, and it has worked pretty well. There are lots of 
courts have applied that definition.
    No one has questioned the regulation, and in fact there was 
a recent court case involving a Madoff related investment where 
the plaintiff argued in that case that the advisor was a 
fiduciary because it met the five-part test and gave investment 
advice.
    The other side argued no, it was not a fiduciary. The court 
went through all five parts and concluded that yes, that person 
was a fiduciary because they were giving investment advice and 
met all the conditions of the regulation.
    So despite what Department of Labor is saying, there are 
courts that are concluding that people are giving advice by 
virtually satisfying this five-part test. So basically it has 
worked pretty well, and so I don't, I would say we stick with 
the regulation.
    If the Department of Labor, despite all the comments, 
decides that it wants to go forward, as I mentioned in my 
opening statement, and I agree with other people who made the 
same point, the DOL should re-propose because it is so 
controversial, because it is going to have such an impact on 
business, because there are so many concerns about it, and it 
is likely DOL will make a number of changes to it, it should 
give the opportunity to the public to examine the re-proposed 
versions, figure out how that is going to work and how people 
can live with it.
    Mr. Stein. I agree partly with those comments that when in 
1975 when we were dealing with sophisticated plan fiduciaries 
maybe making ERISA, even though this wasn't what the statute 
contemplated, making investment advice fiduciary status 
voluntary they made sense.
    But if you are a participant in a 401k plan and you see an 
advertisement like that which says we have talked to you one-
on-one so you can develop a plan that is right for you, you get 
personalized, practical help focused on meeting your retirement 
needs, you are going to think that person is giving you 
investment advice.
    But the fine print simply quotes the regulation and says we 
are not giving advice that should be the primary basis of you 
investment decisions. It quotes the regulation word for word 
and it makes fiduciary status voluntary and there I disagree 
with Don. I don't think Congress intended ERISA fiduciary 
standards to be voluntary, and I think it is good it didn't.
    Mr. Myers. Well, I would say that maybe the solution is to 
have better transparency and better disclosure and move that 
fine print further up into the body of the commercial. It 
doesn't necessarily require a wholesale change in the 
regulation.
    Mr. Stein. Well, if the regulation is not changed I am not 
sure how you can get that stuff higher up in the commercial.
    Chairman Roe. Okay. I thank you gentleman for yielding.
    Dr. Heck?
    Mr. Heck. Thank you, Mr. Chairman.
    My question is for Mr. Bentsen. Do broker-dealers who 
provide advisory programs charge an advisory fee?
    Mr. Bentsen. Most broker-dealers will, or many broker-
dealers will either provide brokerage services on a commission 
basis and often will also provide advisory services. They are 
two different--they are definitely regulated, they are 
definitely registered. And many firms are duly registered, not 
all. But they operate under different rules.
    Now, as Mrs. Biggert mentioned, this is something that 
frankly the administration in their original white paper back 
in 2009 and the Congress subsequently changed to authorize the 
SEC to establish a new uniform standard of care between brokers 
and advisors operating under two different statutes.
    And, in fact, we believe strongly, based upon what the SEC 
has told us, that they will do so, that they will promulgate a 
rule this fall establishing that.
    Mr. Heck. Well, we have seen that throughout this process. 
The DOL doesn't quite understand that issue. And I was 
wondering, have you advised DOL on this issue and if so, what 
is been their response?
    Mr. Bentsen. Absolutely. We have raised it with DOL. I 
think many others have raised it with DOL. I think that the 
members of Congress have raised it with DOL, and I think that 
it is important. The secretary said, well, look, we have been 
working on this before Dodd-Frank came around.
    But again, Dodd-Frank began in the administrations white 
paper in response to the financial crisis in May of 2009. I am 
not sure when the DOL started working on this proposed rule.
    But the House worked on Dodd-Frank through 2009. This was 
in the House bill, section 913. There was a similar provision 
in the Senate bill. This was going to happen.
    And our concern, as we have said repeatedly, is let this 
process play itself out and then see where it all fits together 
because our member firms will have to operate under all these 
rules.
    Mr. Heck. Great. Thank you very much.
    Thank you, Mr. Chairman. I yield back.
    Chairman Roe. Mrs. McCarthy?
    Mrs. McCarthy. Thank you, Mr. Chairman, and thank you for 
your testimony. I appreciate it.
    I happen to sit on not only this committee but the 
Financial Services Committee, and when we were working through 
the Dodd-Frank bill, especially here, we spent a year-and-one-
half looking at every piece that we could, because when we did 
the first section we had to make sure that the first section 
wouldn't interfere with the second section and go forth.
    One of the things that many of us on the committee, 
bipartisanly, felt very, very strongly about was the consumer 
financial literacy part. I think that is extremely important 
for people to know.
    That is something that I certainly worked on here on this 
committee, but I also worked on it on Dodd-Frank.
    One of the things that concerns me most is that when the 
president put out an executive order, he emphasized the need 
for more interagency cooperation, and we heard the secretary 
talk about that.
    But as far as what we number of us as members, by meeting 
with her and talking with her and asking her direct questions. 
Has she talked to the SEC? Has she talked to your group? Has 
she talked to those interested parties?
    As far as I am concerned, I don't see how this proposal has 
really followed the spirit of the executive order, and that is 
one of the things that I am concerned about.
    But I think that what I would like from you gentleman, you 
heard her testimony. Most of you were sitting here through it. 
To me there were some discrepancies in her testimony from when 
we had talked to her, some of our colleagues, when we had met 
with her a couple of times.
    So I guess I want to give you guys an opportunity to 
basically talk about where again you might disagree, where the 
DOL is going, where we are trying to go to come to an answer.
    And the final thing I will say to you is that I think the 
majority of us on both sides of the aisle want to certainly 
protect all investors. I believe that with all my heart and 
soul.
    ERISA has been something there, in my opinion, that has 
been there to protect. But again, things have changed over the 
last 30 years plus, and I think that we have to move with that 
to give our constituents who certainly are better informed 
today than they ever were.
    Mr. Stein, I understand where you were going back years 
ago. I probably would have said I was the same way. But then, 
when I started saving, I had to look to see what were the best 
investments.
    I think the first thing I would have done if someone came 
knocking at my door, I would have said no thank you.
    So with that I will open it up.
    Mr. Stein. That is what I should have done but people don't 
do that. Some people don't and some people do, and ERISAs there 
to protect those who don't.
    Mrs. McCarthy. I agree, and that is what we are still 
trying to do is protect ERISA.
    But again with legislation that we have gone through with 
the Dodd-Frank and basically where we are today, I happen to 
think that the rule that the DOL is coming through is going to 
be, in my opinion, difficult for people to get the advice that 
they need, and I think that is something that we need to do, 
because financial literacy is the only way they are going to 
learn.
    The consumer still has, in my opinion, due diligence to 
learn as much as possible. One of the other things in Dodd-
Frank was also to give the consumers an idea what it was 
costing them, and those regulations are being put forward.
    If anyone looks at any of their statements, there is 
paperwork coming through now in the mail telling you what it is 
costing you to be in certain plans, what the commission--I 
mean, that is transparency. That is when somebody can make up 
their mind.
    Mr. Bentsen. Congresswoman, if I could just make two points 
to respond and you know this from your work on Dodd-Frank. The 
secretary said that this proposal would not ban commission 
business but, in fact, in our view, it would.
    In particular, it would in direct conflict with something 
that you all did in Dodd-Frank in section 913 in which you said 
there could be principal transaction very explicitly within the 
act under this new fiduciary standard.
    But under the standard as proposed by the department, if I 
am engaging with my broker for my IRA my broker will not, as it 
is written right now without any exemption, my broker will not 
be able to sell me a bond from his or her inventory. He will 
have to sell it to me on an agency basis where I will have to 
pay a mark-up outside of where he has to go buy it from the 
street.
    And that raises the cost to the transaction. That is 
something that the committee in the Congress recognized in 
drafting 913 that the department in their proposal doesn't 
recognize. And so I think it is just one area where there is a 
direct conflict in the rule.
    Mr. Mason. If I could just jump in for one quick comment.
    I think the question is sort of what take-aways did I have 
from the secretary's discussion this morning, which I thought 
she was both eloquent and spirited and passionate. I think the 
one take-away was there wasn't, in the testimony this morning, 
in the written testimony as well as the oral, a significant 
amount of new data, new studies, new information.
    I think what we, in some sense, I found the testimony 
reinforcing the need for re-proposal because we need to have a 
dialogue about those, that new information, that new data that 
we have never seen before.
    It raised interesting points but it is the way our process 
works. The process is intended to allow that data, that 
information to be subject to public comment.
    Mr. Myers. Let me just elaborate on that.
    I think there was one thing I found comforting is she said 
she wants to get it--oh, I am sorry.
    Chairman Roe. I thank the gentlelady for yielding.
    Mrs. Roby?
    Mrs. Roby. Well, thank you. I am sorry. I missed my 
colleague's comments earlier, but Mr. Stein, I don't have any 
questions for you, but I would tell you, Roll Tide. [Laughter.]
    So I have many concerns relating to this proposed 
regulation and I have one specific concern related to the 
Employee Stock Ownership Plan or ESOP.
    And I recently met with Mr. Spencer Coates who is the 
president of Houchens Industries and even though he is not a 
constituent of mine he is a constituent of our colleague 
Representative Guthrie from Kentucky. But almost 400 of my 
constituents back in the 2nd district of Alabama are employed 
by him.
    And if this proposed regulation goes into effect it would 
make finding a valuation firm more expensive, it would 
substantially increase the cost of the transaction for 
companies, such as Houchens Industries as they expand by 
acquiring non-ESOP companies.
    So for Mr. Tarbell, if you wouldn't mind answering just a 
couple of questions for me.
    Is the ESOP appraisal valuation business sufficiently 
lucrative to justify assuming fiduciary liability and if not, 
are firms comparable to your firm driven from the market due to 
liability concerns who will then be left in the valuation 
space?
    Mr. Tarbell. Okay. Well, the ESOP valuation world is a 
subsegment of all the various reasons valuations are performed, 
and I would characterize it as one of the rather low margin 
businesses. I have not heard the word lucrative used to 
describe it ever in 21 years.
    I don't believe that there are room for advisors to absorb 
significant fees and remain in that business. I think 
consistent with past practice and common sense additional fees 
will be passed on to the client. You don't incur the risk if 
you don't incur the client, and so the client will pay for the 
risk.
    But there will always be risks that cannot be passed on. 
You know, the risk of the first part of litigation, for 
example, that is not covered by insurance. And these costs are 
such that I think it is quite easily predictable that the fees 
charged on appraisals will increase, perhaps dramatically. They 
can't not increase.
    Mrs. Roby. I mean it was even suggested to me by Mr. Coates 
who I referenced that it could go from a $300,000 fee upwards 
of a million to $3 million because of the increased risk 
associated with the appraisal.
    Mr. Tarbell. Your ratios are correct, but the realistic fee 
level for ESOP appraisals is more like going from $20,000 to 
$30,000. It would be a rare, rare ESOP that has a fee of the 
numbers you quoted.
    This is a small appraisal business. The fees are not 
dramatic and one of the reasons they are not dramatic is 
because we have enjoyed not being the fiduciary in those 
transactions. That isn't to say, though, that there isn't a 
fiduciary; there is.
    Mrs. Roby. If you became the fiduciary then that could----
    Mr. Tarbell. Well, of course. There is a fiduciary in an 
ESOP valuation. It is the trustee. So there is a system already 
in place and one of the concepts that is a matter of law but 
has been ignored by the DOL on this is that it is the trustee, 
not the appraisal firm, who is responsible for determining the 
value of the stock.
    We provide advice and they make a choice among a range of 
values we provide. Choosing to accept our valuation as, for 
example, as the middle of the range is as much of a choice as 
choosing one end of the range.
    Mrs. Roby. Well, and so to further expand on that can you 
discuss the importance of your independence in the appraisal 
profession that why would it be so bad to put a thumb on the 
scale? And this is just expounding on what you have already 
said.
    Mr. Tarbell. Well, you know, the DOL says that they are not 
putting a thumb on the scale, but I would say that that is, you 
know, that is just patently wrong. This regulation as it is 
written would absolutely force us to render an appraisal that 
is biased, that is in favor of one party, being the plan 
participants.
    I don't understand the logic of the discussion that all 
they are looking for is for us to be fair and balanced. First 
of all, that is what we already do.
    Mrs. Roby. I was about to say, that is what you are doing 
right now.
    Mr. Tarbell. And so if that is all we are, if that is what 
we are doing right now I don't know how making us fiduciary 
will make us do appraisals any differently.
    But secondly, this concept of asking us to be fair and 
balanced is only half of the equation. Being a fiduciary 
requires care but it also requires loyalty and it is that 
aspect of the fiduciary duty that has been ignored by the DOL, 
in my opinion, asking us to be loyal to the plan, act in their 
best interest, yet render an unbiased and impartial opinion of 
value is just fundamentally inconsistent and incurable.
    Mrs. Roby. Thank you so much.
    And Mr. Chairman, I yield back.
    Chairman Roe. I thank the gentlelady for yielding.
    Mr. Scott?
    Mr. Scott. Thank you, Mr. Chairman.
    And Mr. Bentsen, it is good to see you again.
    I think one of the things about the discussion is really a 
question of what perspective we are taking in this debate, and 
I think as legislators our perspective ought to be how these 
laws apply or affect unsophisticated investors that may not 
have the fundamental information about how to invest and how we 
protect them from bad advice.
    I mean, there is kind of generally accepted theories of how 
a young person, how a middle-aged person, and how an older 
person ought to be investing pension funds. I guess the first 
question is: do we, in fact, have a responsibility to 
unsophisticated investors, or should we just let the 
marketplace do what it does?
    Mr. Bentsen. I will start with that. I think the real 
question here comes down to when someone is giving advice on 
which someone is making a decision and when they are not and, 
again, I am going to go back like a broken record that Congress 
did feel it was responsible, was appropriate to do so section 
913 of Dodd-Frank as it related to individual investors.
    And so Congress did act in that regard. I think that was 
appropriate. We thought it was appropriate. We supported that 
effort. We support the SEC going forward. In fact, we wrote the 
SEC the other day and said they should go forward with that.
    I think in this instance, frankly, this is such a far-
reaching proposal that lacks clarity, that has raised a number 
of questions that the secretary even has said she intends to--
--
    Mr. Bentsen [continuing]. That she intends to fix that 
actually given the breadth of the change it is probably 
appropriate for Congress to insert itself here because it 
almost rises to a legislative type change.
    Mr. Stein. Yes. One of the things I think is sort of 
interesting, if this regulation, the 1975 regulation didn't 
exist and we were simply dealing with statutory language, that 
was a congressional judgment. And the congressional judgment 
was that people who give investment advice should be subject to 
ERISAs fiduciary standards.
    The 1975 regulations, at least to my mind, clearly narrowed 
that without any justification. If these 1975 regulations were 
simply withdrawn and these proposed regulations were withdrawn, 
I think there would be considerably more difficulty for the 
industry than these new regulations propose, than these 
regulations could conceivably create.
    Mr. Scott. Let me ask a more specific question, then. If 
somebody is selling what is essentially an S&P 500 mutual fund 
at a 2 percent annual fee when you can get exactly the same 
product at a .2 percent fee, and it is suggested that this is a 
good investment, I mean shouldn't people be protected from that 
kind of advice?
    Mr. Stein. Well, I certainly think they should, and I think 
that is what ERISA was about. ERISA is a different statute than 
the securities laws and had a different underlying purpose and 
the underlying purpose of ERISA is this is going to cover lots 
and lots and lots of people with relatively small investments 
going into their account, under 401k plans now, every month. 
All right?
    And those are the people who need the protection of ERISA 
and the protections of the securities acts, while important, 
are not sufficient.
    And the idea that these statutes are somehow the same 
animal and that there is a uniform concern running through 
these statutes of protecting all investors, I just think is 
inaccurate.
    Mr. Myers. Let me just say, I don't think it is an issue of 
this regulation or no regulation. The question is whether 
considering the regulatory scheme already in place that covers 
brokers who deal with customers, do we need another layer of 
regulation?
    A broker is subject to FINRA rules, which is the self-
regulatory organization, security law regulations, they have an 
obligation to----
    Mr. Scott. I am going to ask: what does the designation of 
not being a fiduciary, what does that allow the person to 
inflict onto an unsophisticated investor?
    Mr. Stein. One of the things it allows is somebody to sell 
a product because they are going to make more money selling you 
that particular product than they would if they sold you a 
different product. Rather than evaluating the products that 
their offering and saying this is, in fact, right for you.
    We know, right, human nature, people have an ability to 
rationalize what they are doing that is in their own self-
interest and believe that it is actually in their customer's 
self-interest also.
    And what I think happens in the market, and I think this 
was a judgment that Congress, not the Department of Labor 
today, made in 1974 is that these kinds of conflicts are going 
to hurt people and we need to prevent them.
    Mr. Mason. I just wanted to jump in. We want to protect 
that person, that sort of low income person who doesn't have a 
lot of access to services and investment education.
    And, just as Donald was saying, it is not as though current 
law has no protections. What we are saying is this current rule 
actually is severely counterproductive for exactly the persons 
you are trying to protect because it will say to them we can't, 
the financial services industry will not be able to provide you 
these services at all.
    So you are on your own, and that is the danger. So we need 
to find that sort of sweet spot where the folks are protected 
but not with the regulation that sort of eliminates the ability 
to provide investment services and investment education for the 
people who need it the most.
    Mr. Stein. But it doesn't protect, prevent the ability to 
give investment education and information. It simply prevents 
you from, if you have a conflict of interest from selling a 
product, a specific product, not giving investment education.
    Chairman Roe. We can carry this on afterwards. [Laughter.]
    Mrs. Biggert?
    Mrs. Biggert. Thank you, Mr. Chairman.
    I guess I am beginning to sound like a broken record 
because I have been asking this question.
    But, Mr. Bentsen, could you discuss a little bit the 
potential benefits of harmonizing the fiduciary regulations 
between DOL and the SEC?
    Mr. Bentsen. Well, brokers and advisers who are providing 
personalized retail investment advice, brokers and advisors 
generally have to organize their operations based upon who they 
are regulated by.
    So brokers are regulated by the SEC, they are regulated by 
FINRA, to the extent they are engaged by ERISA products they 
are regulated by the Department of Labor.
    Registered investment advisors are regulated by the SEC and 
they are regulated by the Department of Labor to the extent 
they are in ERISA products, and they are also both under 
different statutes.
    Having a uniform standard given the fact that you have many 
firms that operate in both camps allows firms to have a more 
efficient operation and compliance mechanism in place.
    So we think that that is one of the reasons why we thought 
going to a uniform standard of care made sense and why we 
supported it.
    Now having one uniform standard of care as it relates to 
the SEC and another standard of care as it comes from the 
Department of Labor that applies to the same client and having 
a brokerage account with multiple accounts.
    So a client who may have a purely commissioned based 
account, personalized investment account, they may have an IRA 
account most likely, based upon the data, a self-directed IRA 
account because most IRAs are invest and hold, and then they 
may have a discretionary account that all of these operating 
under different statutes and different rules should be 
harmonized so the client gets the best service they can from 
their financial advisor.
    Mrs. Biggert. So you think that that is possible to do 
that?
    Mr. Mason. One example? Sort of a simple example that we 
have been dealing with is a situation where say a customer 
comes to me as a broker and says I have got $30,000 in my 
retail account and $30,000 in my IRA.
    He says what should I do with my regular retail account? I 
give some advice under the, sort of consistent with the SEC 
rules. And then they turn to me and say, well, what do I do in 
my IRA?
    And I say, I can't, first of all I can't speak to you about 
that, and second of all you have to disregard everything I just 
said about the retail account in thinking about investments in 
thinking about investments in the IRA.
    That is the kind of unworkable situation that this rule 
would thrust us into.
    Mr. Bentsen. And just to add to that further, that is a 
very good point. These are issues that the SEC is dealing with 
right now and it is not easy. But they are having to say, for 
instance, the customer comes and says, ``I want my commission 
account but I also have an account that I am bringing of stock 
that I own because I worked for GE forever. And if I am going 
into an advisory account then I am going to have a 
concentration problem related to that.''
    And so the SEC is trying to work through all these, and 
they will. And then you are going to have the DOL come around 
with a completely different rule that is going to lay over this 
that is going to make it very difficult to operate these 
businesses efficiently.
    Mrs. Biggert. And I want to get to that because what is 
bothering me is particularly, I think, the Assistant Secretary 
said she wants to finalize this by the end of the year and at 
the same time do class exemptions.
    So all of the sudden there is going to be a rule but then 
there is going to be all these exemptions and how will that 
affect the SEC rulings and how--if there is going to be such a 
wide group that is going to be exempt to this it seems like 
that is not really fair as far as putting all of this together.
    And I know, Mr. Myers, that you said something about this--
--
    Mr. Myers. Yes, and, you know, it was comforting to hear 
the secretary say she wants to get it right. And I think, as a 
regulator, and I did that for many years, you really are 
concerned that you get it right and that is the whole purpose 
of the public comment process so you can make sure that while 
you are acting consistent with your statutory mandate you are 
not disrupting normal business practice.
    And so particularly since there are lots of comments, she 
is talking about proposing a class exemption, it just seems 
like the reasonable thing to do.
    Mrs. Biggert. Well, when you are talking about a class 
exemption, what does that mean? What class is this?
    Mr. Myers. Well, a class exemption is--the Department of 
Labor has the authority to provide relief or exemptions for 
some of these prohibited transactions that we have been 
discussing today. And the Department of Labor has issued a lot 
of individual exemptions and a number of class exemptions that 
are like regulations.
    And so DOL has said that they are considering issuing some 
class exemptions to deal with these various issues that have 
been discussed today, for example, to allow principal 
transactions or to allow payment of revenue sharing payments or 
other types of conditions. But that is a fairly complicated 
process.
    And so while they are considering the regulation, and 
exemption is supposed to take care of the problem created by 
the regulation. So since the exemption is supposed to do that 
it seems to a lot of us it makes sense to re-propose the 
regulation at the same time you are proposing the class 
exemption so people can see how they work together and then 
come up with a final solution for both. To do one before the 
other I don't think makes--makes sense as the way to go.
    Mrs. Biggert. And thank you. My time is expired.
    Chairman Roe. Mr. Andrews?
    Mr. Andrews. Mr. Chairman, I would like to thank you, our 
colleagues, and the members of the panel for what I anticipated 
and hoped would be a very edifying discussion, and I have not 
been disappointed.
    This really has been an oasis of rationality in a sea of 
chaos around here, so we appreciate that.
    Ken, it is great to have you back. We miss you here and 
appreciate your contribution as a public servant and now in 
your new iteration.
    The rest of the panel, predictably, was great.
    Mr. Myers, obviously your stellar legal education helped 
you give very trenchant testimony, but I hear two broad points 
of consensus and one area of reason disagreement here.
    The first is that I think there is broad consensus that the 
law should protect investors and workers against conflicted 
advice and that people should have a good, solid advice when 
they make decisions. Secondly, I hear people saying that there 
will no doubt be some unintended consequences of this rule that 
could do real harm in the marketplace, and we have to address 
that.
    Where there is disagreement is the procedure by which we 
might avoid those unintended consequences, and I would like to 
focus, Mr. Mason, on your example of the swaps transactions.
    Now, if I understand the fact pattern now correctly, I 
agree with you that sponsors and others who involve in swaps 
transactions should be outside the parameters of this rule.
    They are really not, in my view, interacting with the 
participants in a way that would impose fiduciary 
responsibilities, and in fact, they are providing liquidity and 
risk management for plan sponsors in a way that benefits 
everyone. I think you are correct in that conclusion.
    You suggested that the Secretary's letter to the CFTC was 
encouraging but what you wanted, I think I got the phrasing 
right, was authoritative guidance that would have the force of 
law. Did I get that right? And if I did, what would that be? In 
what legal iteration would that manifest itself?
    Mr. Mason. Yes, and let me sort of just back up for one 
second. One of the things that we did after the secretary wrote 
the letter to Chairman Gensler was I actually worked with a 
group of about eight or nine of the largest pension plans in 
the country and I said to them, ``Are you going to be able to 
rely on this letter?''
    And the answer from them and their legal teams was a 
unanimous no.
    Mr. Andrews. So what would they like instead?
    Mr. Mason. Excuse me?
    Mr. Andrews. What would they want instead of the letter?
    Mr. Mason. And that was exactly what, when we met with the 
department, they said that is what we need to know. And we gave 
them precise language and it is actually language. It is a 
system that is actually very common in the Department of Labor 
working with the IRS because they sort of do so many things 
together. It is not as common DOL and other agencies because 
they are rarely working in conjunction.
    Mr. Andrews. Right.
    Mr. Mason. And we gave them this preamble language stating 
in the preamble to the CFTCs final business conduct standards 
to say the Department of Labor has informed us that its final 
regulations will state that no action taken by a swap dealer 
solely to comply with the business conduct standards will make 
that swap dealer a fiduciary.
    Mr. Andrews. So they are really asking for two things, if I 
understand this correctly. The first would be the preamble 
language at CFTC would have this--incorporate the point you 
just made.
    Mr. Mason. Correct.
    Mr. Andrews. Then secondly, that the final rule promulgated 
by DOL would in fact reflect that preamble.
    Mr. Mason. Correct.
    Mr. Andrews. I understand that is not the only issue you 
have, but I understand.
    Now, let me come back to something Mr. Myers said, because 
he makes the argument that modification of class exemptions or 
the creation of new class exemptions is a process that is too 
timely and cumbersome, and marketplace participants cannot rely 
upon it; therefore, it would still have the problems that we 
talked about before.
    Did I correctly state your view?
    Mr. Myers. Let me just modify. It is a complicated, time 
consuming process but it can be a solution if there is no 
regulation that is already in effect. If the regulation is in 
effect, then people have to live with the regulation and you 
can at that time propose exemptions.
    But if the regulation is re-proposed at the same time, 
Department of Labor could propose class exemptions to deal with 
lots of these issues.
    Mr. Andrews. Is there a middle course here? In other words, 
if the new regulation went into effect, hypothetically, and 
there were discussions of these modifications, is there some 
instrument like a guidance letter that would serve the same 
function in the marketplace? In other words, an enforcement 
policy that would be consistent with your views?
    Mr. Myers. That wouldn't work, in fact--works at the SEC. 
The problem with prohibited transactions, if one engages in a 
prohibited transaction it is automatically a violation of the 
law. It automatically gives rise to an excise tax and there is 
nothing that the Department of Labor could do absent of an 
exemption.
    Mr. Andrews. Does the department have any discretion to 
define what that prohibitive transaction is?
    Mr. Myers. Well, it has the ability, it has interpretive--
--
    Mr. Myers. I am sorry?
    Mr. Andrews. In terms of its prosecutorial decisions?
    Mr. Myers. Well, see, it doesn't impose the excise tax so 
it is imposed by the IRS and so the Department of Labor has no 
authority to control what the IRS is going to do.
    The Department of Labor could take an interpretive position 
that something is not prohibited or grant a class exemption.
    Mr. Andrews. I see my time has expired.
    Mr. Chairman, I do think there is a fruitful area here for 
us mutually to talk about about some procedure. I know the 
witnesses, many of them want the rule withdrawn, and I 
understand that.
    But in the eventuality that doesn't happen, I am not saying 
it won't, but in the eventuality it doesn't happen, I don't 
think we should abandon our mutual effort to find responses to 
these unintended consequences that I have made reference to.
    I thank the witnesses for their testimony.
    Chairman Roe. I thank the gentleman for yielding.
    Dr. Holt?
    Mr. Holt. Thank you, Mr. Chairman.
    Forgive me for having to duck out. I got word that several 
dozen people had occupied my office. They were all concerned 
citizens, but I am pleased to report they were friendly. 
[Laughter.]
    But I did get to hear----
    Mr. Andrews. Could you send them to my office, then? 
[Laughter.]
    Mr. Holt. I did get to hear all of the testimony and it was 
very helpful.
    Mr. Bentsen, again, good to see you. You have been a good 
friend to many of us for a long time.
    One sentence in your testimony caught my attention. ``That 
firms must operate their business on the rules as written not 
based on the possibility of exemptions to come in the future.'' 
Sseveral people have told me that in their conversations with 
the Department of Labor, the Department has said that, well, 
after the regulation is finalized, we surely can work out a lot 
of the problems about prohibited transactions.
    It seems to me a little bit backwards, and I just wanted to 
ask you to elaborate a little bit on your statement.
    Mr. Bentsen. Thank you, Congressman. And I think this fits 
in as well with what Mr. Andrews was talking about also.
    What our members have told us is regardless of what the 
implementation time period is once there is a final rule, the 
firms will have to organize based upon that final rule.
    So even given the comments by the secretary today and many 
of us have talked to the secretary and her staff about where we 
think there would need to be prohibitive transaction exemptions 
made. In our second comment letter we listed a number of areas. 
We have been in to meet with the staff on this issue; I know 
others have as well.
    But because of the points that Don raised, our firms can't 
take the risk. First of all, as he points out the law is very 
explicit and there is no exception except through a PTE 
structure that can be done.
    So our firms have to operate under the rule as written, not 
as the rule that may be modified by a PTE later. If the PTE 
comes out later, then they can make the adjustment but they 
have to organize their compliance operations, their training of 
their people, their communications with their clients and it 
takes time.
    So they can't wait if there is a long, you know, say there 
is a year implementation period, they can't wait 6 months, 8 
months, and think that this PTE will be promulgated. Hence the 
reason why we suggested re-propose, put the PTEs out now, and 
take all the comments at this point in time. What is the rush?
    Mr. Holt. Okay. Thank you.
    Earlier I tried to put to the Secretary some comments or 
actions to ask whether they might run afoul of the regulation 
being considered.
    Can any of the witnesses give me examples of comments or 
actions that might run afoul that you think would be desirable 
comments or actions but would run afoul of the way you see the 
regulations going now?
    There won't be time, but I would like to hear from any of 
you whether you see a model that is somewhere between the 
personal financial advisor that we would all like to have and 
the impersonal so-called conflicted dealer salesperson model.
    Two different questions, but the first one first, please.
    Mr. Mason. I think one of the questions, and this goes back 
to something that I think Norman raised a little bit ago which 
is the question of what does this regulation do to investment 
education?
    And there have been very disparate sort of views on that 
point. Here is the concern of the industry is that under the 
prior law, or current law, there is sort of investment advice 
in one place and there is sort of a principally different 
investment education and people have felt comfortable, their 
over here in the investment education world.
    This regulation actually takes a different tact. It takes, 
technically, it takes a tact that says that sort of everything 
is investment advice, you know, implicitly, including 
investment education. And then carves out investment 
education----
    Mr. Holt. You know, what I was hoping was for something 
more specific. Something that a simple thinker like me could 
say----
    Mr. Mason. Well, I guess what I am saying is investment 
education, for example, people asking a question, can I get, as 
a sort of 32-year-old, can I get information about what sort of 
asset allocation I should do.
    Should I be heavily in bonds or should I be heavily in 
equities? And the answer, unfortunately, from the industry at 
this point under this regulation is I can't answer your 
question because of the lack of clarity that I was just 
describing.
    Current law, they can say to you, yes, for someone at your 
age with your risk tolerance you should be 60 percent in 
equities, 30 percent in bonds, and 10 percent in cash or 
whatever sort of, they can give you sort of a breakdown.
    Under this, because of the way it is structured, and I do 
think it is not hard to fix, but it needs to be fixed, the 
professionals that I have talked to would be very hesitant to 
even answer that question, which is a critical question and an 
important question they need answers to.
    Mr. Holt. I thought the Secretary was saying that was not a 
problem, but thank you.
    Chairman Roe. I thank the gentleman for yielding back.
    And, again, would like to thank all the witnesses. It has 
been a great panel. Thank you for being here.
    And I will recognize the Ranking Member for any closing 
comments.
    Mr. Andrews. Well, first, Mr. Chairman, I would ask consent 
for three letters to be entered into the record pertaining to 
today's discussion.
    [The information follows:]

              Prepared Statement of Matthew D. Hutcheson,
                   Professional Independent Fiduciary

    My name is Matthew Hutcheson. I am a professional fiduciary 
(professional decision maker) for over 900 employers, consisting of 
401(k), profit sharing, and traditional pension plans. Over 2.5 million 
American workers collectively participate in those plans.
    The fiduciary duty debate is an important one. The debate is about 
when fiduciary duty applies, to whom it applies, and whether 
individuals saving for retirement are entitled to those protections (or 
not), and why. It is also about which type of professional is entitled 
to exemptions, and which ones are not.
    Having pondered this matter deeply for several years, I have come 
to several conclusions. First, our retirement system is severely under 
served. There are over 30 million American workers without access to a 
quality retirement plan. Second, many of those might never have access 
unless more professionals are willing to enter into the qualified 
retirement plan profession. Third, those barriers must be removed 
without injuring vulnerable plan participants.
    That challenge may be easier to solve than one might think.
    It is understood that independent SEC registered advice givers 
(Registered Investment Advisors) are not more honorable than 
representatives of a broker-dealer or insurance company. Both can be 
equally honorable, educated, astute, etc.
    Registered Investment Advisors by law must place the interests of 
their clients above their own. Representatives of financial 
institutions are expected to place the interests of their employer 
above their own. If we look at this too narrowly, we may incorrectly 
presume that with respect to interacting with plan participants, one is 
good, and the other is bad. I've come to the conclusion that it's not 
either or; but rather both are good and both have their place.
    The challenge before us is not about who should or should not be 
able to interact with participants. Rather, the answer to the challenge 
is providing participants with an easy way to discern whether he or she 
needs general information, needs advice, or wants/needs plan decisions 
to be made for them by a discretionary fiduciary on their behalf.
    A plan could actually be sufficiently diverse that all three 
(general information, advice, decisions made automatically) are needed 
by plan participants at one point or other. In such a scenario, a 
Registered Investment Advisor, a Registered Representative, and a 
discretional fiduciary could work side-by-side on the same plan, 
harmoniously, each providing a specific needed service. Thus, this 
debate should not be viewed as one approach is better than the other. 
Each might be required at some point for a given need.
    Therefore, this debate should be about encouraging more individuals 
to enter the retirement plan profession; thus contributing to the 
greater good of society, coupled with a simple way to help a 
participant (or plan sponsor) know when one approach is needed over 
another. Professional understanding and courtesy between plan sponsors, 
plan participants, and professional service providers is required to 
make it easy for the transition to occur from one approach to another.
    Defining when a retirement plan professional is treated explicitly 
or implicitly as a fiduciary is difficult to do, and hence exemptions 
have been proposed to clarify the role of one that simply sells 
retirement plans and provides the accompanying information necessary 
for a participant to understand. The challenge with such exemptions is 
that participants find it difficult to discern between advice and 
information, and are usually unable to tell when that line has been 
crossed.
    The line is frequently crossed as a registered representative 
becomes a trusted ``advisor'' to the plan participants; frequently 
discussing personal matters about finances, retirement, etc., even 
though the representative believes he or she is not giving ``advice'' 
as defined in ERISA.
    When that line is crossed, the plan participant becomes vulnerable 
because a relationship of trust exists. The participant begins to 
personally rely on the information shared by the registered 
representative, with the expectation of favorable outcomes. 
Vulnerability, Reliance, and Expectation together create a fiduciary 
relationship.
    For example, a plan participant may share personal financial 
information with a non-fiduciary registered representative. Sharing 
personal information usually conveys or creates vulnerability on the 
part of the participant.
    Perhaps a feeling of vulnerability exists that he or she will not 
be able to retire when they had hoped and are sharing that 
vulnerability with the representative in the hope information will be 
shared he or she can rely upon.
    If the information is acted upon, it is because he or she relied 
upon it because of the trust that exists between the parties, and the 
expectation that something good will occur as a result of that 
reliance.
    If a participant is unable to discern that they are personally 
vulnerable, the registered representative has a professional obligation 
to point it out, and to refer him or her to a fiduciary for specific 
advice.
    If a non-fiduciary professional will adhere to that professional 
standard of care, it is reasonable to conclude they are not acting as a 
fiduciary, but rather a professor of information, not advice.
    The following model disclosure would solve virtually every element 
of this debate:
Disclosure of professional duty
    My name is Jane Representative. My employer is ABC Broker Dealer, 
and I am obligated to be loyal them just as you are to your current 
employer. In other words, my first responsibility is to help my firm 
succeed.
    In accordance with that responsibility, I have a professional duty 
to provide you with accurate and relevant information. It is your 
responsibility to consider that information in light of your 
experience, knowledge, understanding, and objectives.
    During our interaction, it will be your responsibility to inform me 
immediately if you ever feel vulnerable because you do not understand 
the information I have shared with you, or you are unsure how to 
implement it. In such an instance, you may require advice specifically 
suited to your personal circumstances. We will then introduce you to 
one or more independent SEC register investment advice givers.
    We will always be here to serve, and we also understand that there 
are times where specific, reliable advice is required to meet specific 
individual needs or expectations.
    If at any time you feel vulnerable due to a lack of understanding 
about how information shared applies to you personally, and you need 
customized information upon which you can trust and rely with the 
expectation of specific outcomes, we will immediately introduce you to 
a Registered Investment Advisors.
    It is your responsibility to tell us and your employer (or its 
designated fiduciary) when you are experiencing those feelings so we 
can involve another professional to provide the advice you require.
    If you do not request individualized advice in writing, we will 
presume you understand the information conveyed, and that no further 
clarification or elaboration is required.
                                 ______
                                 
    In conclusion, there is a great need for many more individuals to 
enter the retirement plan profession. It is an honorable profession 
that has greatly improved the lives of tens of millions.
    There are different roles professionals can play, including:
     Conveyors of general information (non-fiduciary)
     Advice givers (fiduciary)
     Decision makers (fiduciary)
    If a conveyor of general information is approached by a participant 
that has questions about their personal situation, and feels 
vulnerable, needs to rely on specific information, and will expect a 
favorable outcome for having relied on that information, then a 
fiduciary advice giver should be brought in.
    Exemptions that permit a general conveyor of information to cross 
over into the life-impacting realm of advice giving without being held 
to the high level responsibility that accompanies that advice (that of 
fiduciary), should be against public policy.
    There's enough room at the table for all of the different types of 
service providers. It may not be ``either/or,'' but it could be 
``both.'' In other words, a plan may need two or more types of service 
providers to serve the needs of the participants and beneficiaries. 
This can easily be done without increasing the overall cost of the 
plan. In fact, it could decrease total costs, and I have participated 
in just that scenario hundreds of times.
    Registered Representatives or agents should not be expected to be 
mind-readers. If a conventional 401(k) plan requires a participant to 
choose individual funds from a complex and diverse menu, then the 
participant should also be responsible for knowing when they need 
fiduciary assistance. If fiduciary advice is not immediately available, 
the registered representative or agent should facilitate that advice to 
clearly delineate between their services and that of a fiduciary advice 
giver.
    This simple solution does not impugn a non-fiduciary 
representative, nor does it impair their ability to compete. Such a 
representative can continue in their client relationship management 
role just as they have in the past. They need only to explain that 
given the participant's vulnerability, need for reliance, and 
expectation of a favorable outcome, a fiduciary advice giver is 
required in that specific instance. There are many Registered 
Investment Advisors that will provide such advice on an as-needed 
basis.
    That solution solves the dilemma without adding complexity that is 
difficult to understand, remember, or implement.
                                 ______
                                 

Prepared Statement of the Profit Sharing/401k Council of America (PSCA)

    The Profit Sharing / 401k Council of America (PSCA) supports the 
Department of Labor's proposed rule amending the definition of a 
fiduciary adviser, with some recommendations for changes and 
clarifications.
    For more than sixty years, PSCA, a national non-profit association 
of 1,000 companies and their six million employees, has advocated 
increased retirement security through profit sharing, 401(k), and 
403(b) defined contribution programs to federal policymakers. PSCA 
provides practical assistance to our members on plan design, 
administration, investment, compliance, and communication. PSCA is 
based on the principle that ``defined contribution partnership in the 
workplace fits today's reality.'' PSCA's services are tailored to meet 
the needs of both large and small companies with members ranging in 
size from Fortune 100 firms to small entrepreneurial businesses.
    The elimination of the subjective ``regular basis'' and ``primary 
basis'' tests in the proposed rule will reduce uncertainty for plan 
sponsors, participants and beneficiaries, and service providers. Today, 
the potential exists for plan fiduciaries and participants to believe 
that they are receiving impartial advice while the advice provider 
believes that ERISA's fiduciary standards are not applicable. PSCA 
believes that removing this misunderstanding by applying the fiduciary 
standard regardless of the regularity of the advice or to what degree 
the recipient will consider it is a very positive development.
    In the preamble to the proposed rule, the Department of Labor 
requested comments on whether it should reexamine its current position 
that a recommendation to take a distribution, even when combined with a 
recommendation as to how the distribution should be invested, may not 
constitute investment advice.
    PSCA, in its formal comments on the proposed rule, urged the 
Department to reverse its position. The decision by a participant or 
beneficiary to request a distribution of their account assets, and how 
to subsequently invest those assets, can profoundly affect an 
individual's retirement. We believe the public policy benefit of our 
position is self-evident and that a recommendation to take a 
distribution constitutes a recommendation to sell a particular plan 
investment.
    The expansion of activities that will be considered advice under 
the proposed rule raises concerns that the provision of marketing, 
informational, and educational materials will be constrained by new 
liability concerns. PSCA believes that the Department shares our 
concerns, as evidenced by provisions in the proposed rule relating to 
limitations for selling activities, educational activities pursuant to 
Interpretive Bulletin 96-1, and marketing and assistance provided under 
a platform arrangement. We made several suggestions in this regard.
     The Department should clarify in the preamble and the body 
of the final rule that educating participants about distribution 
options, including discussions of the advantages and disadvantages of 
seeking a distribution and managing retirement assets outside the plan, 
does not constitute advice. As long as these communications do not 
include a clear recommendation to seek a distribution, they should not 
be treated as advice.
     Education, information, and advice regarding the tax 
effects of taking a distribution should not constitute the provision of 
advice under the proposed rule. This important information is 
frequently sought by or provided to plan participants that are 
contemplating taking a distribution of their plan assets.
     In the course of the Department's joint inquiry with the 
Department of the Treasury on lifetime income products, the agencies 
requested comments regarding the provision of information to help 
participants make choices regarding management and spend down of 
retirement benefits. PSCA and several other organizations identified 
the expansion and clarification of Interpretive Bulletin 96--1 to 
explicitly apply to the provision of information to help participants 
and beneficiaries make better-informed retirement income decisions. We 
urged the Department to take this action in conjunction with the 
development of this rule.
     The proposed rule specifies in subparagraph (c)(2)(ii)(B) 
that marketing or making available securities or other property from 
which a plan fiduciary may designate investment alternatives under a 
fund platform or similar arrangement does not constitute the provision 
of advice if certain disclosures are made. Subparagraph (c)(2)(ii)(C) 
provides that general financial information and data to assist a plan 
fiduciary's selection or monitoring of such securities or property does 
not constitute the provision of advice if certain disclosures are made. 
PSCA strongly supports these provisions and urged the Department to 
retain and expand them in the final rule. The relief provided for the 
provision of general financial information and data is currently 
limited to information provided in conjunction with a platform 
arrangement. It should be available for all plans, regardless of 
whether or not it is offered in conjunction with a platform 
arrangement.
     It is common for a fund investment manager to provide 
newsletters, economic market analyses, and forecasts to plan 
fiduciaries. For example, the recent worldwide debt crisis and its 
effect on capital markets, the economic impact of political crises in 
the Middle East and Africa, or reports about emerging markets such as 
China or Brazil might be discussed in these reports. Another common 
topic of analysis is the Washington political environment and its 
potential impact on industries and markets. These reports and analyses 
may influence a plan fiduciary's decision about the selection and 
monitoring of plan investments. PSCA believes that the Department does 
not intend that these activities constitute the provision of advice. We 
requested that the final rule include specific provisions that clarify 
our interpretation.
    Under the proposed rule, the provision of advice, or an appraisal 
or fairness opinion, concerning the value of securities or other 
property of an employee benefit plan constitutes the provision of 
advice. The Department simultaneously announced that the proposed rule 
supersedes its position in Advisory Opinion 76-65A, where it held that 
making valuations to be used in establishing an ESOP does not establish 
a fiduciary relationship because a plan did not yet exist; and that 
advice provided to an existing ESOP regarding the value of employer 
securities does not constitute the provision of advice.
    These changes will result in creating a new fiduciary relationship 
for a large group of service providers that provide valuation and 
appraisal services for all types of retirement plans. According to the 
preamble of the proposed rule, ``The Department would expect a 
fiduciary appraiser's determination of value to be unbiased, fair, and 
objective, and to be made in good faith and based on a prudent 
investigation under the prevailing circumstances then known to the 
appraiser.'' PSCA supports this standard of conduct and generally 
supports the assumption of fiduciary status by plan service providers 
that deal with plan investments. However, we also share the significant 
concerns in the retirement plan community about the increased costs 
that may result from the proposed changes. For example, questions have 
been raised if the Department's standard of impartiality is consistent 
with a fiduciary duty of loyalty. The magnitude of the costs and the 
willingness of providers to provide valuation services under the 
proposed rule are, we believe, undetermined. PSCA urged the Department 
to carefully consider these issues when formulating a final rule.
    At a minimum, valuations, fairness opinions, and appraisals of 
assets traded on ``generally recognized markets'' should never be 
considered the provision of advice. Additionally, the Department's 
position in Advisory Opinion 76-65A that ``Where a plan is not yet in 
existence, a fiduciary relationship within the meaning of section 
3(21)(A) cannot be established'' is widely recognized as established 
law that applies to all retirement plans subject to ERISA. We urged the 
Department to clarify that it is not superseding this particular 
finding in the Advisory Opinion.
                                 ______
                                 
                                 
                                 
                                 
                                ------                                

    Chairman Roe. Without objection, so ordered.
    Mr. Andrews. Second, I, again, would like to thank you, our 
colleagues, and the witnesses for a really well, and Secretary 
Borzi as well, for really well-reasoned information which lets 
us approach this problem. Again, it is refreshing to hear 
people actually speak about solving a problem instead of 
reading their talking points. So, not that any of us would ever 
do that. [Laughter.]
    Thank you very much.
    Chairman Roe. Just as I close I want to make one closing 
comment, I would like to make. I want to thank all of you all 
for the education process you have done here.
    And, quite frankly, just listening for a long time I guess 
I will use a medical metaphor, it sounds like we are doing a 
heart transplant when all you need to do is get up off the 
couch and walk around the block. [Laughter.]
    And, I mean we want to protect people from bad advice, 
Professor Stein, as you pointed out. No question that we want 
to do that. And yet, we want to make this system as efficient 
for people like me that have been out there trying to run a 
pension plan to maximize, and I can assure you no one had more 
interest in making it work than me because my retirement 
savings was also invested there.
    So, thank you for this information. I think we do need to 
step back and re-look this rule. I appreciate you being here.
    Being no further business, this meeting is adjourned.
    [Additional submissions of Dr. Roe follow:]

   Prepared Statement of the American Council of Life Insurers (ACLI)

    The American Council of Life Insurers (ACLI) commends this 
subcommittee for holding this hearing on the Department of Labor's 
(DoL) proposed rule on the definition of ``fiduciary'' for purposes of 
offering investment advice. We applaud Chairman Phil Roe (R-TN) and 
Ranking Member Rob Andrews (D-NJ) for holding this hearing to receive 
testimony from the Assistant Secretary of the Employee Benefit Security 
Administration, DoL, Phyllis Borzi, and various stakeholders on the 
impact this proposal would have on individuals saving for retirement 
and small businesses ability to provide investment education to their 
plan participants. Members on this subcommittee from both parties have 
already urged DoL to re-propose the rule to address a substantial 
number of revisions that need to be made to it to ensure the rule does 
not negatively impact these savers or businesses. We thank these 
members for their efforts and urge them to reach out to the 
Administration to share these concerns.
    The American Council of Life Insurers is a national trade 
organization with over 300 members that represent more than 90% of the 
assets and premiums of the U.S. life insurance and annuity industry. 
ACLI member companies offer insurance contracts and investment products 
and services to qualified retirement plans, including defined benefit 
pension, 401(k), 403(b) and 457 arrangements and to individuals through 
individual retirement arrangements (IRAs) or on a non-qualified basis. 
ACLI member companies' also are employer sponsors of retirement plans 
for their employees.
    Consistent with the comments submitted by stakeholders and concerns 
raised by Members of Congress, we have urged the DoL to re-propose the 
rule so that stakeholders have an opportunity to review and comment on 
the DoL revisions to address these comments and concerns. A re- 
proposal will provide an opportunity to ensure that plan sponsors, plan 
participants and IRA owners continue to have affordable access to 
investment education and investment choices. We have urged the DoL to 
address prohibited transaction exemptions (PTEs) in conjunction with 
its development of a new rule. Lastly, we also urge the DoL to re-
propose the rule so that stakeholders will be able to review and 
provide comment on DoL's economic analysis of the impact the proposal 
would have on IRA holders, plans and plan participants.
Background
    On October 22, 2010, the DoL proposed a new rule to expand the 
definition of fiduciary with respect to the provision of investment 
advice. The proposed rule broadens the definition, for example, by 
removing the ``regular'' and ``primary'' basis conditions necessary for 
advice to be considered fiduciary advice. The DoL received over 200 
public comment letters in response to the proposal.
    There have been over 25 bipartisan, bicameral letters sent to the 
Administration outlining Members of Congress concerns about the impact 
the proposal would have on their constituents. These letters represent 
over 80 Members. Most notably, the Chairman and Ranking Member of the 
following Committees have sent letters to the agency heads expressing 
their concern about the proposal: Senate HELP, House Education and 
Workforce, Senate Banking, House Financial Services, Senate 
Agriculture, House Agriculture, Senate Finance and the House Ways and 
Means Committee.
DoL Should Re-propose the Rule so that Stakeholders Can Have an 
        Opportunity to Review How It Plans to Address Comments and 
        Concerns Raised
    We recognize the DoL's authority to review its rules, especially in 
light of the responsibilities individuals have to plan for their 
retirement. We also appreciate the DoL's willingness to listen to 
stakeholders concerns about the proposal. However, the rule's expansion 
of who would be considered a fiduciary will interfere with employers 
and their management of plans and investment sales and distribution 
practices that are customary in the marketplace, well understood, and 
commonly relied upon by financial services providers, plans and 
participants alike. We are concerned that these changes will result in 
plans, plan participants, and IRA owners having less access to 
investment information and investment choices. We want to make sure 
that this result does not occur. We have offered comments to the DoL 
that seek to preserve the DoL's enforcement objective and avoid 
unnecessary disruption and negative impacts to plans, participants and 
individuals. Despite these efforts, we are unsure of whether and, if 
so, how the DoL will address these comments, and therefore seek to 
review its efforts once again to make sure the rule does not negatively 
impact individuals or small businesses.
    Additionally, the DoL has acknowledged that it will need to revise 
a number of existing prohibited transaction exemptions (PTEs) which 
financial providers currently rely upon. ACLI has asked the DoL to 
issue a new proposal together with any proposed changes to or 
confirmations of exemptive relief. ACLI believes it is important to 
review and comment on these together. Absent a re-proposal, these 
revisions will be presented in conjunction with a final rule which may 
or may not address the concerns raised by ACLI, other organizations and 
companies. Stakeholders need an opportunity to review any proposed PTEs 
in conjunction with a proposed rule and provide comment as to whether 
they are workable within the newly revised rule.
DoL Should Re-propose the Rule so that Stakeholders Can Review and 
        Provide Comment on DoL's New Economic Analysis
    Assistant Secretary Borzi has recently announced that she will 
include a complete economic analysis on the impact of the rule on IRA 
holders, plans and plan participants in the final rule. Unfortunately, 
if issued as a final rule, stakeholders would not be able to comment 
upon the DoL's analysis. Given the rule's potential impact, such 
regulatory action should not occur without stakeholder review and 
comment.
    A recent report issued by Oliver Wyman outlined the tremendous 
negative impact this proposed rule would have on IRA owners, especially 
those with smaller balances. Nearly 40% of IRAs in the study sample had 
less than $10,000 in their accounts. 98% of investor accounts with less 
than $25,000 were in brokerage relationships. This proposed rule would 
lead IRA providers to offer these small account owners either a higher 
fee-based advisory account or a no service account in order to comply 
with the proposal. Many low to middle income IRA owners would not be 
able to afford the estimated 75--195% increase in cost to pay for the 
advisory account. The DoL failed to include a similar analysis in its 
proposal, and needs to fully consider such analysis before initiating a 
rulemaking.
    As an addenda to this statement, ACLI has attached a copy of its 
initial comment letter on this issue to the DoL dated February 3, 2011, 
its statement that it provided at DoL's public hearing on March 1, 
2011, and additional comments in response to hearing questions dated 
April 12, 2011.
    We look forward to working with this subcommittee, the larger 
committee, and DoL to address the concerns raised in this statement and 
to ensure Americans have abundant access to investment education and 
appropriate investment advice. (See attached addenda.)

              ACLI Comment Letter to DOL February 3, 2011

    On behalf of the American Council of Life Insurers (``ACLI''), we 
are writing to comment on the proposed rule promulgated under Section 
3(21)(A)(ii) of the Employee Retirement Income Security Act 
(``ERISA''), which was published at 75 Fed. Reg. 65263 (October 22, 
2010) (``Proposed Rule'' or ``Rule''). The Proposed Rule would 
dramatically enlarge the universe of persons who owe duties of 
undivided loyalty to ERISA plans and to whom the prohibited transaction 
restrictions of ERISA and the Internal Revenue Code would apply1, by 
re-defining and substantially broadening the concept of rendering 
``investment advice for a fee'' within the meaning of ERISA Section 
3(21)(a)(ii).
    The American Council of Life Insurers is a national trade 
organization with more than 300 members that represent more than 90% of 
the assets and premiums of the U.S. life insurance and annuity 
industry. ACLI member companies offer insurance contracts and other 
investment products and services to qualified retirement plans, 
including defined benefit pension, 401(k) and 403(b) arrangements, and 
to individuals through individual retirement arrangements (IRAs) or on 
a non-qualified basis. ACLI member companies also are employer sponsors 
of retirement plans for their own employees.
    1. Although not covered under Title I of ERISA, individual 
retirement accounts and annuities (``IRAs'') fall within the scope of 
the prohibited transaction excise tax provisions of Code Section 4975. 
The Proposed Rule would similarly enlarge the universe of persons 
defined as fiduciaries for purposes of applying Section 4975 to 
transactions involving IRAs.
    2. Subject, of course, to any limitations on marketing and 
promotional practices imposed on sales of financial products generally.
    3. ERISA Sec. 3(21)(A)(ii)
    ACLI appreciates the Department's concern that under some 
circumstances the current rule impinges the Department's ability to 
bring enforcement actions in situations that are clearly abusive. We 
share the Department's interest in seeing that plans and participants 
who seek out and are promised advice that is impartial and 
disinterested ultimately receive advice that adheres to the rigorous 
standards imposed by ERISA. At the same time, we are concerned that the 
Proposed Rule's pursuit of this objective interferes with investment 
sales and distribution practices that are customary in the marketplace, 
well understood, and commonly relied upon by financial services 
providers, plans and participants alike. We are concerned that these 
changes will result in plans, plan participants, and IRA owners having 
less access to investment information. Our comments seek to preserve 
the Department's enforcement objective while avoiding unnecessary 
disruption and negative impacts to plans, participants and individuals.
    Persons engaged in the sale and distribution of investment product 
and services need to have confidence that ordinary course sales 
recommendations will not, in hindsight, be subjected to a fiduciary 
standard that disallows the payment of sales commissions and other 
traditional forms of distribution-related compensation. Please note 
that regulatory efforts are underway by the Securities and Exchange 
Commission (``SEC'') regarding the standard of care under the 
securities laws for broker-dealers and investment advisers that provide 
investment advice about securities to retail customers. On January 21, 
2011, the SEC issued a study on broker-dealers and investment advisers. 
We are reviewing this study which may lead to additional comments on 
the Proposed Rule. We urge the Department to provide the public 
sufficient opportunity to consider the SEC's regulatory efforts and 
offer additional comments on the Proposed Rule.
    Parties engaged in transactions with ERISA plans and IRAs need 
clear, unambiguous rules by which to determine their duties and 
obligations in order for the marketplace to function efficiently and to 
ensure that plans, plan participants and IRA owners continue to have a 
broad range of investment products and services available to them, 
including investment advice and educational services. We offer these 
comments to assist in the development of such rules.
1. Recommendations Made by Sellers
    Firms seeking to sell investments and investment products to plans 
and plan participants should be able to both (1) promote their products 
and recommend them to prospective purchasers,2 and (2) benefit 
financially from the successful sale of those products. Without a 
financial interest, economic activity is stifled and opportunities for 
buyers and sellers to meet and transact are lost.
    Sales activities naturally include recommendations to purchase and 
invest in products and services offered by the seller. For that reason, 
the seller's limitation provided by paragraph (c)(2)(i) (the ``seller's 
limitation'') recognizes financial institutions such as life insurers 
and their sales representatives should not be categorized as 
fiduciaries under ERISA or Code section 4975(e)(3)(B) when they are 
engaged in selling activities and are clear that they are acting in a 
sales capacity. The seller's limitation is a critical component of the 
Department's Proposed Rule.
    Sales Activites. We believe it is absolutely critical to make sure 
that the wording of the seller's limitation be sufficiently inclusive 
to encompass the full scope of ordinary course selling and distribution 
activity. As written, the wording of the seller's limitation, which 
describes sellers and their agents, raises some uncertainties about the 
availability of the seller's limitation for other distribution 
channels, such as independent insurance agents, insurance affiliated 
and unaffiliated broker-dealers and registered investment advisers that 
offer life insurer products, whether exclusively or as one of many 
other products from a variety of different product manufacturers.
    Impartial, not ``Adverse.'' Our membership is deeply troubled by 
the wording of the paragraph requiring that the recipient of the advice 
know or have a basis for knowing that the interests of the selling firm 
and its distributors are ``adverse'' to the interests of the plan and 
its participants. While the seller of a financial product has a 
financial interest in the outcome of a transaction, we think it is 
inappropriate to describe that financial interest as necessarily 
entailing broad adversity of interest. As responsible providers, we 
have an interest in seeing that our customers are well served, are 
happy with our products and services, and that our customers found 
those products and services useful to the attainment of their financial 
goals.
    The process whereby purchasers and sellers bargain for and agree 
upon the terms of a proposed transaction is fundamental to the 
efficient operation of a market transaction. Adversity of interests 
exists in the area of price negotiation, where the seller of a product 
or service has an interest in maximizing profit and the purchaser has 
in interest in minimizing cost.
    We believe the seller's limitation needs to parse this key 
distinction. It should make the point that a seller of an investment or 
an investment product has a financial interest in the transaction it is 
recommending and, if applicable, that less costly versions of an 
investment product may be available. So long as purchasers are provided 
with that information, they will have the requisite basis for 
evaluating the recommended transaction in light of the seller's 
financial interest, and will be in a position to understand that the 
selling firm's recommendation is not impartial.
    Illustrate with Examples. The rule should provide an example or 
examples of circumstances in which a person would reasonably 
demonstrate that the recipient of information knows that a 
recommendation is being made by someone in a capacity as a seller. For 
example, a written representation would suffice if it clearly notes 
that the person is a seller of products and services, that the person 
and, if applicable, its affiliates, will receive compensation in the 
event the plan, plan fiduciary or participant/individual selects the 
product and services, and that such compensation may vary depending 
upon which product is purchased or which investments under a product or 
products are selected. This type of representation would provide a 
clear indication to the plan, plan fiduciary or participant/individual 
that the person is a non-impartial seller of products and services. It 
would also address the Department's stated concern about undisclosed 
conflicts of interest. Again, ACLI urges the Department to adopt a rule 
that leaves the nature of the relationship unambiguous to all parties.
    Ongoing Sales Relationship. The Department should clarify that the 
seller's limitation covers all aspects of both an initial sale and the 
subsequent ongoing relationship between a plan, plan fiduciary or 
individual and an investment provider or any agent, broker, and/or 
registered investment adviser involved with the sale of the investment 
provider's products and services. This would include information and 
recommendations regarding the use of a product, e.g., advice regarding 
the choice of investments available under a product's menu of 
investments. It is common for defined contribution plans to request of 
potential investment providers a sample menu of investments from among 
a provider's available investments which, in the opinion of the 
provider, best match the plan's current investment options. There 
should be no expectation that any such recommendation is impartial or 
that the plan seeks advice upon which it will rely for its investment 
decisions. The nature of this relationship should not change after a 
sale. A product provider, agent, broker, and/or registered investment 
adviser may continue to make recommendations regarding products and 
services. There should be no expectation that these recommendations 
differ in nature following the initial sale.
2. Representations of ERISA Fiduciary Status Should be Written
    In its preamble, the Department expresses the belief that 
explicitly claiming ERISA fiduciary status, orally or in writing, 
enhances the adviser's influence and forms a basis for the advice 
recipient's expectation that the advice rendered will be impartial. The 
Proposed Rule reflects that view by applying fiduciary status to all 
persons affording those acknowledgments and disallowing the 
availability of the paragraph (c)(2)(i) seller's limitation to such 
persons.
    We are concerned about the potential proof issues inherent in 
claims that an adviser provided oral representations of fiduciary 
status. Advisers may be hard put to dispute erroneous or otherwise 
fictitious claims by plans that oral assurances of fiduciary status 
were provided. At the same time we think prudence dictates that where a 
plan, plan participant or individual seeks out impartial, disinterested 
advice delivered in a manner consistent with ERISA's fiduciary standard 
of conduct, then the plan, plan participant or individual should obtain 
the appropriate acknowledgment in writing in order to secure the 
acknowledgement in a permanent form.
    For these reasons, we strongly suggest that paragraph (c)(1)(ii)(A) 
be modified to apply only to persons who represent or acknowledge in 
writing (electronic or otherwise) that they are acting as a fiduciary 
within the meaning of ERISA with respect to the advice they are 
providing to the person or persons for whom they are so acting. This 
concept is consistent with the recently promulgated section 408(b)(2) 
regulations which require that a service provider acting in a fiduciary 
capacity acknowledge such in writing.
3. Separately Consider a Rule for Individual Retirement Arrangements
    ACLI requests that the Department take additional time to study the 
IRA and Keogh/one-participant plan markets and carefully consider the 
economic impact of the Proposed Rule on both individuals and providers 
of products and services. We ask the Department to consider IRAs and 
these Keogh plans apart from the scope of a final rule for time to 
consider the IRA and Keogh market place, changes in its regulatory 
environment, the economic impact of a change to the current rules to 
the non-ERISA marketplace, a meaningful investment education safe 
harbor tailored to this marketplace, and to clarify the application of 
existing exemptions and/or issued new exemptions tailored to this 
marketplace. We believe that this would be similar to the Department's 
decision to separately consider welfare benefit plans under the 
recently issued 408(b)(2) regulations. The Department has held hearings 
and is close to issuing newly proposed regulations governing fee 
disclosure for welfare benefit plans. We urge the Department to 
consider a similar approach for IRAs and Keogh plans.
    Unlike employer sponsored 401(k) plans that generally provide a 
limited number of investment options selected by a plan fiduciary, IRAs 
and Keogh plans offer individuals a practically unlimited number of 
options. Brokers and registered investment advisers who prefer to offer 
a wide range of options find it impossible to create a level sales 
compensation structure. Because that universe of investments is 
virtually unlimited, it is nearly impossible to design a computer model 
to take into the account every possible option. The rights of IRA 
owners are protected by way of their individual agreements and direct 
relationships with financial institutions.
    Seller's limitation. We believe that the Department should confirm 
that the seller's limitation applies to IRAs. It is common for advisors 
and agents to engage clients and prospective client on their particular 
goals and objectives to better understand their product and service 
needs. Based on these conversations, an advisor might explain the pros 
and cons of various investment vehicles including variable annuities, 
mutual funds, brokerage accounts, banking products, fixed annuities, 
alternative investments and several types of advisory accounts. Within 
each of these types of securities and property, advisors/agents can 
usually recommend several different specific securities that may have 
different features. It is extremely difficult to design different 
product types so that the product pays the advisor the same 
compensation regardless of the investment allocation within the 
product. It is virtually impossible to do so across product types. For 
instance, compensation charged for executing a stock trade will differ 
from compensation received for selling a variable annuity. Absent a 
seller's limitation, it would be next to impossible to provide 
recommendations as to products and services because generally fees are 
not level.
    For example, a broker may receive 50 bps if the individual invests 
in Product A (a large cap growth fund), 25 bps if the individual 
invests in Product B (a bond fund) or 0 bps if the individual invests 
in Product C (a money market account). For an individual with $10,000 
in her account, a recommendation to put all assets into Product A would 
result in compensation of $50. A recommendation to use two products, 
60% to Product A and 40% to Product B would result in compensation of 
$40. If the seller's limitation is too narrow, a broker may avoid 
making a recommendation, thereby leaving the individual without any 
professional assistance. The individual could instead pay a fee-only 
advisor (typically $500) to get the recommendations that may well be 
identical to the recommendations the broker would otherwise have 
provided at a far lower cost. The economics of small plans and small 
accounts make it so that the only advice available is often the 
incidental advice provided by brokers. Absent a broad seller's 
limitation, the average individual may receive no advice at all.
    Other Limitations--The limitations provided at Section 2510.3-
21(c)(2)(ii) should be available to IRAs. The Proposed Rule carves out 
from the definition specific acts related to the dissemination of 
investment information and defined contribution plan ``platforms.'' 
However, these carve outs are limited to individual account plans as 
defined in ERISA Sec. 3(34). ACLI urges the Department to explicitly 
extend these carve outs to include IRAs.
    Insurers issue variable IRAs (IRC Sec.  408(b) Individual 
Retirement Annuities) that invest in insurance company separate 
accounts. These accounts may offer a variety of investment options in 
different asset classes to address a range of possible investment 
objectives or asset allocations of different annuity owners all within 
a single separate account. The limited number of the funds in the 
separate account is similar to the ``platform'' of funds available to a 
defined contribution plan participant. The principal of the 
``platform'' limitations described in 2510.3-21(c)(2)(ii)(B) & (C) 
should be equally applicable to IRAs.
    Regarding education, the Department has provided considerable 
guidance regarding the line between activities that would result in 
fiduciary investment advice as opposed to activities that would be 
deemed non-fiduciary investment education. The Proposed Rule 
specifically references Interpretive Bulletin 96-1 (29 CFR 2509.96-1) 
to preserve this guidance for ERISA individual account plans, but does 
not provide a limitation for these activities to IRAs. Interpretive 
Bulletin 96-1 assumes that the investment education being provided 
relates to an ERISA individual account plan with a limited number of 
investment options. It addresses asset allocation models, but does not 
address the range of choices available for IRAs or Keogh plans such as 
annuity products, mutual funds, REITs, brokerage accounts, or an 
advisory wrap program to name just a few. Information that models the 
use of these various arrangements by hypothetical individuals should be 
viewed as ``investment education'' rather than investment advice.
    Furthermore, the educational activities that apply to individual 
account plans are even more important with regard to IRAs. As indicated 
above, the investment options available to IRA owners could almost be 
limitless, as compared to employer sponsored plans which generally have 
limited options. The typical IRA owner needs help in picking the 
investment options needed to achieve their retirement goals and the 
concepts of IB 96-1 are therefore very important to IRA owners. We 
request that prior to issuing a final rule applicable to the IRA and 
Keogh plan marketplace, the Department issue a Field Bulletin that 
addresses investment education in IRAs and Keogh plans and make it 
clear that the ``education limitation'' applies to model information 
regarding the use of these various types of investment arrangements and 
asset allocation models for IRAs and Keogh plans.
    Consumer Impacts--ACLI is extremely concerned that the Rule, if 
adopted as proposed, will negatively impact the very people the 
Department seeks to protect. We believe that the Rule may lead to less 
choice, reduced access and increased costs for products and services. 
Compensation structures vary by investment products for a variety of 
reasons, for example, to account for the increased time needed to 
explain a product that is not well understood or more complex than 
another. Sales agents must be able to address the needs of their 
customers. The Rule must permit this or, we fear, there will be fewer 
opportunities for IRA customers to learn about and consider a range of 
products and services.
    We are not aware of a computer model that would advise an 
individual as to choices among different IRA product types. If typical 
sales activities, including recommendations regarding one or more IRA 
products under varied compensation structures, are not permitted by the 
final rule, IRA customers may find that advice is only available under 
a ``wrap program.'' Under these arrangements, a set fee, either on a 
dollar or percentage formula basis, is paid for advice on the assets 
within the arrangement. Wrap programs are generally not available to 
individuals with small accounts. In many instances, wrap programs are 
more expensive than commission-based accounts, yet may be appropriate 
for certain IRA account holders. However, they are not necessarily as 
suitable a choice for other IRA account holders, such as buy and hold 
investors. Guaranteed lifetime income products are a ``buy and hold'' 
investment on which an ongoing wrap fee would not be a good fit. As 
annuities are sold on a commission basis, they are generally not 
available under a wrap program.
    Individuals should not be limited in making IRA rollover decisions. 
A provider should be able to sell and an individual should be able to 
purchase an IRA insurance product even when the provider's products are 
used to fund the plan from which a rollover will be made. Fiduciary 
status should not be applied in a way that would restrict the options 
available to the participant seeking to purchase a rollover product. As 
we noted in section 1 above, so long as it is clear that the provider 
seeks to sell products, the seller's limitation in the Proposed Rule 
must apply here.
4. Recommendations to Take Distributions Not Investment Advice
    The Department has requested comment on whether and to what extent 
the final rule should define ``investment advice'' to include 
recommendations related to the taking of a plan distribution. A 
decision by the participant to effect a distribution cannot be assumed 
to be an investment decision with respect to the plan as the Department 
noted in Advisory Opinion 2005-23A. A recommendation regarding whether 
to take a distribution from a plan might include advice which results 
in a new investment outside the plan (e.g., ``you should rollover your 
benefit to your new employer's plan) or on what such distribution 
should be spent (e.g., ``you may be eligible to take a hardship 
distribution to cover our repair to your home''), but it should not be 
construed to be advice ``with respect to any moneys or other property 
of the plan.''3 While a plan may need to liquidate various investments 
to make the distribution, liquidation of plan assets is merely 
incidental to the primary transaction which is a distribution from the 
plan. In addition, a distribution will not necessarily result in a 
liquidation of assets if the plan distributes cash or other investments 
in-kind, i.e., no change in investment. To the extent that a 
recommendation to effect a distribution is also accompanied by specific 
advice regarding the plan's investments (e.g., to liquidate certain 
plan investments but retain others), the provision of such investment 
advice would be subject to the Proposed Rule. However, a recommendation 
regarding whether to contribute to or take a distribution from a plan 
is not investment advice and should not be considered investment advice 
regardless of the fiduciary status of the financial professional making 
the contribution or distribution recommendation.
            Fiduciary Responsibilities can be Limited by Agreement
    In the preamble, the Department cited Advisory Opinion 2005-23A and 
noted its position that a recommendation to a participant to take a 
distribution does not constitute investment advice within the meaning 
of the regulation. We urge the Department to use the preamble to the 
final regulation to clarify an important issue raised by question 2 of 
the advisory opinion, i.e., the extent to which responses by a party 
who is ``already a fiduciary'' to participant questions regarding 
distributions are the exercise of discretionary authority regarding 
management of the plan which is subject to ERISA fiduciary 
restrictions. Specifically, we ask the Department to clarify that 
responding to a participant's question regarding plan distribution is 
not subject to fiduciary standards merely because the party responding 
to the question or its affiliate provides fiduciary services under a 
written agreement with the plan that are separate and unrelated to 
participant distributions. Such a clarification would be consistent 
with the understanding that fiduciary responsibilities can be limited 
by agreement and that no party is an all-purpose fiduciary merely 
because it or its affiliate has entered into an agreement to perform 
specific fiduciary services. More specifically, ERISA uses a functional 
definition of fiduciary. Therefore a person is only a fiduciary to the 
extent the person performs a specific fiduciary function. For example, 
an agent is a fiduciary due to an arrangement to provide plan 
participants with investment advice regarding designated plan 
investments. If that agent recommends that a participant take a 
distribution from the plan, this action is separate and apart from the 
scope of the fiduciary's duties under the arrangement. We urge the 
Department to confirm this functional definition of fiduciary and 
clarify that activities such as a recommendation to contribute to a 
plan or take a distribution from the plan, whether directly or via an 
IRA roll-over, do not fall within the scope of a fiduciary's duties 
merely because the person is a fiduciary for other purposes, e.g., 
participant level investment advice. We also urge the Department to 
confirm that the seller's limitation is available to persons 
recommending IRA arrangements to a plan participant or individual to 
receive a rollover from a plan or another IRA.
5. Status as RIA Alone Should Not Give Rise to Fiduciary Duty
    Absent the application of the limitations in paragraph (2), section 
2510.3-21(c)(1)(ii)(C) of the Proposed Rule provides that all 
registered investment advisors (``RIA'') are ERISA fiduciaries. ACLI 
believes that this provision is both unnecessary and unworkable. We 
find the provision unnecessary as paragraph (D) of that subsection 
already includes any person that provides advice or makes 
recommendations to plans and plan participants as described. The 
provision is unworkable as its application in conjunction with the 
affiliate rule leads to fiduciary status even when no advice or 
recommendations have been made to the plan or plan participants.
    Should the final rule include the provisions of section 2510.3-
21(c)(1)(ii)(C), ACLI requests that the rule limit the application of 
the affiliate provision to only those instances in which an affiliate 
engages in actions or has authority with respect to the plan that is 
sufficient to cause a reasonable plan fiduciary to believe it is 
receiving fiduciary-level investment advice. Under the Proposed Rule, 
the mere affiliation with an RIA would result in fiduciary status. 
Specifically, the Proposed Rule says that a person may attain this 
status ``directly or indirectly (e.g., through or together with any 
affiliate).'' Affiliation with an RIA should not trigger ERISA 
fiduciary status unless the RIA is providing advice services to the 
plan. If the RIA is not providing advice services to the plan, the 
affiliate should be able to rely on the multi-factor test in section 
2510.3-21(c)(1)(ii)(D) of the Proposed Rule in determining its 
fiduciary status.
    Similarly, affiliation with, or even direct status as, an ERISA 
fiduciary other than by providing investment advice should not trigger 
the presumption that a person is an investment advice fiduciary unless 
such status would give plans and participants a reasonable expectation 
of impartial investment advice and the person is in a position to 
influence investment decisions. Thus, for example, status as an ERISA 
fiduciary for a limited purpose unrelated to investment decisions 
(e.g., directed trustee, investment manager of a ``plan asset'' 
investment vehicle in which a plan invests such as an insurance company 
separate account or collective trust), either directly or through an 
affiliate, should not trigger the presumption of investment advice 
fiduciary status because the fiduciary's limited status alone would not 
give rise to a reasonable expectation that the fiduciary should provide 
impartial investment advice and does not put the fiduciary in a 
position to influence investment decisions. To impose investment advice 
fiduciary status on these persons solely because of these other limited 
and unrelated functions would be contrary to the functional nature of 
fiduciary status under ERISA, which generally only imposes fiduciary 
responsibility on persons to the extent of their fiduciary activities 
with respect to the plan.
    ACLI understands that the language assigning fiduciary status 
through an affiliate relationship is in the existing rule today so it 
may seem reasonable to continue this concept in the Proposed Rule. 
However, the difference between the existing rule and the Proposed Rule 
is that the existing rule is primarily focused on activity, not status. 
For example, under the current rule, the mere affiliation of a person 
with an RIA or a directed trustee would not trigger fiduciary status. 
Instead, the affiliate would have to engage in actions or have 
authority with respect to the plan that is sufficient to cause a 
reasonable plan fiduciary to believe it is receiving fiduciary-level 
investment advice. Because the Proposed Rule would presume fiduciary 
status based on status alone in some cases, extending that presumption 
based solely on the status of an affiliate is inappropriate.
6. Reasonable Expectations for Fiduciary Status
    The Department should revise section 2510.3-21(c)(1)(ii)(D) to 
provide greater clarity as to which arrangements lead to fiduciary 
status. ACLI believes that fiduciary status should not apply when 
advice merely ``may be considered.'' The current rule provides that a 
person will be a fiduciary when the person and the plan agree that the 
advice ``will serve as a primary basis'' for investment decisions with 
respect to plan assets. ACLI believes that this is reasonable and in 
keeping with the intent of ERISA. The fiduciary standards of ERISA 
should only apply when the parties reasonably expect that the advice 
given and received will serve as a basis for a decision. That 
reasonable expectation should be evidenced by a written agreement 
between the parties or a written disclosure from the provider. Due to 
the nature of such a relationship, this advice should be subject to the 
fiduciary duties and responsibilities of ERISA. However, the Proposed 
Rule would subject such duties and responsibilities to persons whose 
advice or opinions hold no such import. A plan may solicit advice from 
a number of persons without engaging any one to serve as an advisor. 
When a plan's interest in the advice is cursory at best, there is 
clearly not a relationship which would warrant the extension of ERISA 
obligations to the advisor.
7. Platform Provider Limitation
    The Department should provide greater clarity on the ``platform 
provider'' limitation in section 2510.3-21(c)(2)(ii)(B) as it pertains 
to ``individualization'' in the context of the sales, marketing and 
retention activities of platform providers. In particular, we believe 
the platform provider limitation should be clear that platform 
providers are not providing investment advice for a fee when they 
suggest to plans sample menus, or otherwise, when the platform provider 
(1) does not hold itself out as a plan fiduciary, (2) discloses that 
its recommendations are not intended to be impartial advice, and (3) 
discloses that it has a financial interest in the transaction, which 
may include indirect compensation paid to the platform provider or its 
affiliates from investment fund complexes.
    This is important to platform providers because in the ordinary 
course of selecting a platform provider, or determining whether to 
continue a contract with a platform provider, plan sponsors often 
require, either through a formal request for proposal or by means of an 
informal request by an intermediary acting for the plan such as a 
broker or consultant, that a platform provider supply a sample menu of 
investment funds (e.g., a subset of funds available from the provider's 
investment platform) for consideration by the plan sponsor and its 
advisers. Platform providers that fail to respond to such requests are 
often excluded from the sales opportunity, or fail to retain an 
existing plan customer.
    In some cases, such requests may be accompanied by certain criteria 
or parameters supplied by the plan sponsor or its intermediary, to 
guide the platform provider such as the plan's investment policy, fund 
performance history requirements, Morningstar classifications and other 
similar criteria. Often, however, the plan sponsor's (or its 
intermediary's) request may be simply that the platform provider supply 
a suggested list of funds from the provider's platform that are 
substantially identical or closely comparable to the plan's existing 
designated investment funds.
    In responding to these requests, platform providers engage in non-
fiduciary sales activity. Platform providers strive to suggest sample 
menus that are consistent with the goals and objectives communicated to 
the platform provider by the plan sponsor, and consistent with the 
economic needs of the platform provider's non-fiduciary business model. 
Therefore, similar to the activity described in the seller's limitation 
at section 2510.3-21(c)(2)(i), the platform provider will typically 
attempt to respond to these requests by suggesting a sample menu or 
suggested list of funds that both (1) attempts to reasonably satisfy 
any criteria accompanying the request and (2) meets the platform 
provider's target revenue needs. Accordingly, we believe it is 
important that the limitation in section 2510.3-21(c)(2)(ii)(B) be 
clarified to include these types of sales activities.
8. Investment Product Offerings are not Investment Advice
    The Department should clarify in a final rule or its preamble that 
the development and offer of an investment product with a limited 
investment menu, e.g., a bond fund, a stock fund and a balanced fund, 
is not a provision of investment advice. Investment providers such as 
insurers should have the flexibility to offer a range of products with 
varied investment menus.
9. Confirm Status of Existing Exemptions
    The last time a new fiduciary standard was created to govern sales 
of products by brokers and other investment advisers, the Department 
responded immediately issuing a number of exemptions applicable to 
broker-dealer activity to protect certain activities. Creating a 
bright-line test to determine who is an advice fiduciary is a laudable 
goal. However, the bright-line test should not end at the determination 
of who is a fiduciary, but rather extend to the determination as to 
whether such advice creates a prohibited transaction when the broker or 
other financial professional receives fully disclosed direct or 
indirect compensation from such sale or service.
    It is difficult to assess the impact of the Proposed Rule without a 
clear understanding of whether prior exemptions would continue to apply 
and whether new exemptions are contemplated. The Department has 
provided a broad exemption for the sale of annuities (PTE 84-24). We 
would appreciate the Department's confirmation that this exemption is 
still available and would cover sales of affiliated and unaffiliated 
annuities as well as any compensation, direct or indirect, received by 
an affiliated insurance company, affiliated money managers of variable 
annuity subaccounts, and any revenue sharing paid to the broker. 
Further, we seek the Department's confirmation that if the requirements 
of PTE 84-24 are met that the exemption covers the provision of 
investment advice. The Department should also confirm the status of 
exemptions such as PTE 75-1 and 86-128. In particular, it should 
confirm that these exemptions apply to the provision of investment 
advice. Product providers, agents and brokers need to know that these 
exemptions still apply, and cover advisory programs which meet the 
requirements of the exemption.
    Finally, the Department has issued Advisory Opinions to investment 
providers that also provide investment advice to ERISA plan 
participants on whether the receipt of compensation under the 
arrangements in question result in prohibited transactions. In both 
Advisory Opinion 97-15A (the ``Frost'' letter) and Advisory Opinion 
2001-09A (``the SunAmerica'' letter), the Department concluded that, 
based upon the facts, the receipt of compensation described under these 
arrangements did not result in a prohibited transaction under ERISA 
Sec. 406(b). ACLI members agree with the Department's conclusions in 
these Opinions. We ask that Department continue to support these 
conclusions and leave no doubt as to the status of these Opinions under 
a final rule.
10. Valuations are not Investment Advice
    ACLI requests that the Department remove the provision of appraisal 
services from the rule. ERISA section 3(21)(A)(ii) provides that a 
person is a fiduciary if he or she ``renders investment advice for a 
fee * * *'' The determination of the current price of an asset is not 
``investment advice,'' i.e., it is not a recommendation to purchase or 
sell property or securities nor an opinion regarding the merits or 
value of investing in such property or security. The Department 
elaborated on the matter shortly after it issued the current rule in 
Advisory Opinion 76--65A, clarifying that the provision of valuation 
services is not ``investment advice.'' The Department noted, absent an 
opinion as to the relative merits of purchasing a particular asset as 
opposed to some other asset or assets, the valuation of securities is 
neither investment advice, nor advice as to the value of securities.
    There are good reasons for not treating appraisal services as 
investment advice. When a plan fiduciary directly engages an appraiser 
to obtain current prices on property or securities that are under 
consideration for purchase or sale or for assets already held by the 
plan, the fiduciary must act prudently in selecting and monitoring the 
appraiser. A plan's service arrangement with an appraiser is subject to 
the provisions of ERISA Sec. 408(b)(2). As for the Department's 
concerns regarding undisclosed conflicts of interests, the interim 
final rule under ERISA Sec. 408(b)(2) makes clear that to satisfy the 
prohibited transaction exemption under ERISA Sec. 408(b)(2), an 
appraiser who provides services for indirect compensation must disclose 
to the fiduciary any and all indirect compensation it expects to 
receive for services rendered to the plan. Thus, with respect to 
appraisals, there already is a plan fiduciary to ensure that appraisal 
activities are performed under an arrangement and in a manner that 
protects the interests of the plan and its participants and 
beneficiaries.
    Extending fiduciary status to appraisers under this Proposed Rule 
would, at the very least, substantially raise the costs of what are 
already objective independent valuations for no discernible purpose. 
For appraisal work performed for insurance company separate accounts, 
it would make such appraisers fiduciaries to all ERISA covered plans 
that invest in these separate accounts. In general, these appraisers 
would have no direct relationship with or knowledge of these ERISA 
plans. ACLI members expect many appraisers to avoid ERISA plans and 
investment vehicles in which plans invest altogether if this Proposed 
Rule take effect. In that event, there would be severe market 
disruption for both plans seeking to invest in separate accounts and 
other non-publicly traded securities. At best, we anticipate fewer 
appraisers and increased valuation fees due to the reduction in the 
number of willing appraisers and the need for willing appraisers to 
insure against potential law suits, all of which are costs that will 
ultimately be borne by plans and their participants.
    If the Department extends the definition to include appraisal 
services, we note that the limitation on the application of the 
Proposed Rule at (c)(2)(iii) raises two key concerns. First, the scope 
of the exclusion for ``general reports * * * provided for purposes of 
compliance with the reporting and disclosure requirements'' is too 
narrow. It is common for insurers to prepare and provide reports and 
statements more frequently than ERISA's minimum reporting requirements. 
For example, it is common to provide access to daily online account 
values to plan participants. It is also common for interim reports to 
be prepared for a plan's investment committee. Second, and more 
importantly to insurers, the rule's exclusion for reports on assets for 
which there is ``not a generally recognized market'' is quite 
problematic.
    Both a plan's equity investment in an insurer's separate account 
(units of the separate account) and an undivided interest in the 
separate account's investment in other vehicles (e.g., units of the 
separate accounts investments in real estate funds, hedge funds, 
private equity funds) are ``plan assets.'' Accordingly, any party 
passing along information to the separate account investment manager 
(the insurer or its affiliate) on the value of the separate account's 
investment in the underlying investment vehicles (units in the 
underlying fund) or on assets of that vehicle that are used in 
computing unit values of that vehicle is potentially a fiduciary under 
the Proposed Rule because it is giving advice on the value of 
securities or other property owned or to be purchased by a plan. This 
would be true whether the underlying investment vehicle invests in 
publicly offered securities or in non-public assets (with values 
determined by appraisal). The parties swept into the fiduciary 
definition include investment managers of underlying investment 
vehicles, custodians or sub-custodians and appraisers.
    Many insurers offer real estate separate accounts and hire 
appraisers to determine the values of separate account holdings. Those 
values are used for client reporting purposes and to set unit values 
used for a plan's purchase or sale of separate account units. The 
Proposed Rule would impose fiduciary status and liability on real 
estate appraisers to separate accounts in which ERISA plans invest. By 
valuing the underlying properties of a real estate fund, an appraiser 
would be advising the real estate fund manager on the value of fund 
units, an ERISA ``plan asset,'' because the appraisal is for an 
underlying asset of the insurer's separate account.
    Units of a non-registered separate account are not publicly offered 
securities. This is true even when the underlying assets of the 
separate accounts are registered securities. Under the Proposed Rule, 
establishing separate account unit values would be a fiduciary act of 
``advice,'' leading an insurer to become a fiduciary for purposes of 
the valuation. Insurers typically hire sub-custodians who have no 
direct contact with any plan investor to handle recordkeeping as well 
as the calculation of separate account unit values. The Proposed Rule 
would make these sub-custodians ERISA fiduciaries.
    The Department should not use this proposed rule to attempt to 
extend the definition of fiduciary under ERISA 3(21)(A)(ii) to persons 
providing appraisal services because such services do not constitute 
the rendering of investment advice. This portion of the proposal along 
with the ``limitation'' in the Proposed Rule at (c)(2)(iii) should be 
dropped. If the Department finds it necessary to study valuation issues 
more broadly, ACLI suggests that Department issue a Request for 
Information.
11. Effective Date
    ACLI believes that an effective date of at least one year following 
the publication of a final rule is necessary and reasonable. The 
Proposed Rule states that final rule would be effective 180 days 
following publication. As indicated in our comments above, the 
implications of the new rule would require significant changes. Our 
members will need sufficient time to fully understand and address a new 
regulatory regime, particularly given that any violations would result 
in a prohibited transaction. Should the Rule be implemented as 
proposed, in addition to time required for compliance review, there may 
be significant changes required to information technology 
infrastructure, sales processes and compensation arrangements and other 
agreements.

                                 ______
                                 
    On behalf of the ACLI member companies, thank you for consideration 
of these comments. We welcome the opportunity to discuss these comments 
and engage in a productive dialogue with the Department on these 
important issues.
            Sincerely yours,
                                           Walter C. Welsh,
             Executive Vice President, Taxes & Retirement Security.
                                          James H. Szostek,
                       Vice President, Taxes & Retirement Security.
                                           Shannon Salinas,
                              Counsel, Taxes & Retirement Security.
                                 ______
                                 

          Prepared Statement of Tom Roberts, on Behalf of the
                   American Council of Life Insurers

    Good morning. My name is Tom Roberts and I am Chief Counsel at ING 
Insurance U.S., testifying on behalf of the American Council of Life 
Insurers. ACLI member companies represent more than 90% of the assets 
and premiums of the US life insurance and annuity industry, and offer 
insurance contracts and other investment products and services to 
qualified retirement plans, including defined benefit pension and 
401(k) arrangements, and to individuals through individual retirement 
arrangements (IRAs) or on a nonqualified basis. ACLI member companies 
also are employer sponsors of retirement plans for their own employees.
    We appreciate this opportunity to offer our views of the proposed 
rule with the Department. ACLI submitted written comments describing 
eleven key concerns. Today, I focus on three of them: the importance of 
the seller's limitation; our suggestions to ensure all interested 
parties clearly understand when advice is subject to ERISA; and our 
concerns regarding the proposed rule's applicability to IRAs and the 
need for further inquiry on the nature of these programs and the 
products and services offered to support them.
    The Proposed Rule would dramatically enlarge the universe of 
persons who owe duties of undivided loyalty to ERISA plans and to whom 
the prohibited transaction restrictions of ERISA and the Internal 
Revenue Code would apply. It substantially broadens the concept of 
rendering ``investment advice for a fee.''
    ACLI appreciates the Department's concern that under some 
circumstances the current rule impinges the Department's ability to 
bring enforcement actions in situations that are clearly abusive. We 
share the Department's interest in seeing that plans and participants 
who seek out and are promised advice that is impartial ultimately 
receive advice that adheres to the rigorous standards imposed by ERISA. 
At the same time, we are concerned that the Proposed Rule's pursuit of 
this objective interferes with investment sales and distribution 
practices that are customary in the marketplace, well understood, and 
commonly relied upon by financial services providers, plans and 
participants alike. We are concerned that these changes will result in 
plans, plan participants, and IRA owners having less access to 
investment information and or increased costs. Our comments seek to 
preserve the Department's enforcement objective while avoiding 
unnecessary disruption and negative impacts to plans, participants and 
individuals.
Seller's Limitation on fiduciary status
    In the preamble to the proposed rule, the Department notes that, in 
the context of selling to a purchaser, communications with the 
purchaser may involve advice or recommendations and that such 
communications ordinarily should not result in fiduciary status. This 
point is critical to the development of a workable rule. Persons 
engaged in the sale and distribution of investment product and services 
need to have confidence that ordinary course sales recommendations will 
not, in hindsight, be subjected to a fiduciary standard that disallows 
the payment of sales commissions and other traditional forms of 
distribution-related compensation. Parties engaged in transactions with 
ERISA plans and IRAs need clear, unambiguous rules by which to 
determine their duties and obligations.
    Financial institutions such as life insurers and their sales 
representatives should not be treated as fiduciaries under ERISA when 
they are engaged in selling activities and are clear that they are 
acting in a sales capacity.
    As written, the wording of the seller's limitation, which describes 
sellers and their agents, raises some uncertainties about the 
availability of the seller's limitation for other distribution 
channels, such as independent insurance agents, insurance affiliated 
and unaffiliated broker-dealers and registered investment advisers that 
offer life insurer products, whether exclusively or as one of many 
other products from a variety of different product manufacturers. These 
parties must be covered by the limitation.
    The seller's limitation is only available when the recipient of the 
advice knows or has a basis for knowing that the interests of the 
selling firm and its distributors are ``adverse'' to the interests of 
the plan and its participants. We think that the word ``adverse'' is 
not right word to explain that a seller is not impartial. While the 
seller of a financial product has a financial interest in the outcome 
of a transaction, we think it is inappropriate to describe that 
financial interest as necessarily entailing broad adversity of 
interest. As responsible providers, we have an interest in seeing that 
our customers are well served, are happy with our products and 
services, and that our customers find them useful to the attainment of 
their financial goals.
    We believe the seller's limitation should make the point that a 
seller of an investment or an investment product has a financial 
interest in the transaction it is recommending. So long as purchasers 
are provided with that information, they will have the requisite basis 
for evaluating the recommended transaction in light of the seller's 
financial interest, and will be in a position to understand that the 
selling firm's recommendation is not impartial.
    The rule should provide an example or examples of circumstances in 
which a person reasonably demonstrates that the recipient of 
information knows that a recommendation is being made by a ``seller.'' 
For example, a written representation would suffice if it clearly notes 
that the person is a seller of products and services, that the person 
and, if applicable, its affiliates, will receive compensation for the 
selection of the product and services, and that such compensation may 
vary depending upon which product is purchased or which investments 
under a product or products are selected. This type of representation 
would provide a clear indication to the plan, plan fiduciary or 
participant that the person is a non-impartial seller of products and 
services. It would also address the Department's stated concern about 
undisclosed conflicts of interest.
    The Department should clarify that the seller's limitation covers 
all aspects of both an initial sale and the subsequent ongoing 
relationship between a plan, plan fiduciary or individual and an 
investment provider or any agent, broker, and/or registered investment 
adviser involved with the sale of the investment provider's products 
and services. This would include information and recommendations 
regarding the use of a product, for example, advice regarding the 
choice of investments available under a product's menu of investments. 
It is common for defined contribution plans to request of potential 
investment providers a sample menu of investments from among a 
provider's available investments which, in the opinion of the provider, 
best match the plan's current investment options. There should be no 
expectation that any such recommendation is impartial or that the plan 
seeks advice upon which it will rely for its investment decisions. The 
nature of this relationship should not change after a sale. A product 
provider, agent, broker, and/or registered investment adviser may 
continue to make recommendations regarding products and services. There 
should be no expectation that these recommendations differ in nature 
following the initial sale.
Written Representations
    In its preamble, the Department expresses the belief that 
explicitly claiming ERISA fiduciary status, orally or in writing, 
enhances the adviser's influence and forms a basis for the advice 
recipient's expectation that the advice rendered will be impartial. The 
Proposed Rule reflects that view by applying fiduciary status to all 
persons affording those acknowledgments and disallowing the 
availability of the seller's limitation to such persons.
    We think prudence dictates that where a plan, plan participant or 
individual seeks out impartial, disinterested advice delivered in a 
manner consistent with ERISA's fiduciary standard of conduct, then the 
plan, plan participant or individual should obtain the appropriate 
acknowledgment in writing in order to secure the acknowledgement in a 
permanent form. We are concerned about the potential proof issues 
inherent in claims that an adviser provided oral representations of 
fiduciary status. Advisers may be hard put to dispute erroneous or 
otherwise fictitious claims that oral assurances of fiduciary status 
were provided.
    For these reasons, we request that the rule be modified to apply 
only to persons who represent or acknowledge in writing, electronic or 
otherwise, that they are acting as a fiduciary within the meaning of 
ERISA with respect to the advice they are providing to the person or 
persons for whom they are so acting. This concept is consistent with 
the recently promulgated section 408(b)(2) regulations that require 
that a service provider acting in a fiduciary capacity acknowledge such 
in writing.
Separately Consider Rule for IRAs
    ACLI requests that the Department take additional time to study the 
IRA and self-employed plan markets and carefully consider the economic 
impact of the Proposed Rule on both individuals and providers of 
products and services. The Department is separately considering welfare 
benefit plans under the recently issued 408(b)(2) regulations. We ask 
the Department to do likewise for IRAs and self-employed plans and hold 
them apart from the scope of a final rule. The Department should take 
time to consider the IRA and Keogh market place, and the economic 
impact a change to the current rules would have on this retail 
marketplace.
    In addition, the Department should consider changes in the 
regulatory environment affecting retail products. In particular, there 
are regulatory efforts are underway by the Securities and Exchange 
Commission regarding the standard of care under the securities laws for 
broker-dealers and investment advisers that provide personalized 
investment advice about securities to retail customers. On January 21, 
2011, the SEC issued a study on broker-dealers and investment advisers. 
It is important that the SEC and DOL efforts lead to rules that are 
complimentary in nature. We urge the Department to provide the public 
sufficient opportunity to consider the SEC's regulatory efforts and 
offer additional comments on the Proposed Rule.
    The Department should consider a meaningful investment education 
safe harbor tailored to this marketplace. The Department should also 
clarify the application of existing exemptions and/or issued new 
exemptions tailored to this marketplace.
    As we read the proposed regulation, the seller's limitation applies 
to IRAs. It is common for advisors and agents to engage customers and 
prospective customers on their particular goals and objectives to 
better understand their product and service needs. Based on these 
conversations, an advisor might explain the pros and cons of various 
investment vehicles including variable annuities, mutual funds, 
brokerage accounts, banking products, fixed annuities, alternative 
investments and several types of advisory accounts. Within each of 
these types of securities and property, advisors/agents can usually 
recommend several different specific securities that may have different 
features. The compensation paid by product and service will vary. For 
instance, compensation charged for executing a stock trade will differ 
from compensation received for selling an annuity. The seller's 
limitation, with an appropriate indication of the seller's interest, 
makes it possible to recommend products and services to customers.
                                 ______
                                 
    I want to thank the Department again for holding this hearing, and 
for inviting ACLI to testify. I am happy to answer any questions you 
may have.
                                 ______
                                 

                ACLI Clarification of Earlier Testimony

    On behalf of the American Council of Life Insurers\1\ (``ACLI''), 
we write to you today on the proposed rule promulgated under Section 
3(21)(A)(ii) of the Employee Retirement Income Security Act 
(``ERISA''), which was published at 75 Fed. Reg. 65263 (October 22, 
2010) (``Proposed Rule'' or ``Rule'') and to offer a response to 
questions raised at the March 1st hearing by DOL staff to our witness 
Thomas Roberts.
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    \1\ The American Council of Life Insurers is a national trade 
organization with more than 300 members that represent more than 90% of 
the assets and premiums of the U.S. life insurance and annuity 
industry. ACLI member companies offer insurance contracts and other 
investment products and services to qualified retirement plans, 
including defined benefit pension, 401(k) and 403(b) arrangements, and 
to individuals through individual retirement arrangements (IRAs) or on 
a non-qualified basis. ACLI member companies also are employer sponsors 
of retirement plans for their own employees.
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Clarification of Seller's Limitation
    In our February 3rd comment letter and in our testimony, we asked 
that the proposal be modified to provide examples of circumstances that 
would reasonably demonstrate that the recipient of information knows 
that a recommendation is being made by a ``seller.'' One example would 
be a representation that:
    The person is a seller of products and services, that the person 
and, if applicable, its affiliates, will receive compensation in the 
event the plan, plan fiduciary or participant/individual selects the 
products and services, and that such compensation may vary depending 
upon which product is purchased or which investments under a product or 
products are selected.
    The proposed regulation provides that the seller's limitation is 
not applicable to a person ``who represents or acknowledges that it is 
an ERISA Fiduciary.'' Our letter states that this constraint on the 
seller's limitation should only apply if the seller has represented or 
acknowledged in writing (electronic or otherwise) that it was a 
fiduciary.
    During our testimony it was suggested that the seller's limitation 
might be protected by some form of disclosure stating that the seller 
was not an ERISA Fiduciary. Such a disclosure could be added to the 
representation (described above) that the ``person is a seller * * *.''
    In addition to examples, the rule could include one or more safe 
harbor model notices. For example:
    I, (Name), am a representative of (Agency/Company). I would like to 
be of assistance to you. Before we proceed, I need to be clear with you 
that my firm and I may have a financial interest in the sale of any 
product or transaction that we might recommend to you. Our financial 
incentive to recommend a particular product or investment may vary by 
asset class, investment choices or product type, or according to the 
particular investments available within a given asset class or product 
type. My firm and I do not agree to act as your ERISA fiduciary 
investment advice provider. An ERISA fiduciary is not permitted to take 
its own financial interests into account when making a recommendation.
    In certain circumstances, it may be appropriate to bifurcate this 
disclosure to make clear that, while the selling firm does not agree to 
serve as an ERISA fiduciary investment advice provider in connection 
with recommendations made by the particular representative making the 
disclosure, it may agree to serve as an ERISA fiduciary investment 
advice provider in connection with recommendations made outside of the 
scope of the relationship between the representative and the plan, plan 
fiduciary or participant/individual to whom the disclosure is made. In 
such cases, the disclosure should be revised to remove all references 
to the selling firm and add the following:
    I also need to be clear with you that my firm may have a financial 
interest in the sale of any product or transaction that I might 
recommend to you and my firm does not agree to act as your ERISA 
fiduciary investment advisor in connection with any of my 
recommendations.
    This type of representation would provide a clear indication to the 
plan, plan fiduciary or participant that the person is a non-impartial 
seller of products and services. It would also address the Department's 
stated concern about undisclosed conflicts of interest.
    As you are aware, regulatory efforts are underway by the Securities 
and Exchange Commission (``SEC'') regarding the standard of care for 
broker-dealers and investment advisers that provide investment advice 
about securities to retail customers. Depending upon the SEC's actions, 
there may be a need to expand this ``seller's'' disclosure to describe 
the seller's status and obligations under federal securities law 
including whether the seller is a fiduciary under federal securities 
law.
    Finally, the Department should clarify that, for purposes of the 
seller's limitation, the ``recipient'' of advice or recommendations may 
be the plan, the plan's sponsor or other plan fiduciary, plan 
participant, plan beneficiary or an individual (in the case of an 
individual retirement arrangement).
Proposed Rule and Exemptive Relief
    In light of the substantive comment letters and testimony at the 
hearing, we expect that the Department will make a number of useful 
revisions to the Proposed Rule. With substantive revisions, the 
Department should provide the public with an opportunity to review and 
comment on the next iteration of the rule before a final rule is 
promulgated. The current Proposed Rule would dramatically enlarge the 
universe of persons who owe duties of undivided loyalty to ERISA plans 
and to whom the prohibited transaction restrictions of ERISA and the 
Internal Revenue Code would apply, by re-defining and substantially 
broadening the concept of rendering ``investment advice for a fee'' 
within the meaning of ERISA Section 3(21)(a)(ii).
    At the hearing, we were asked about compensation disclosure and 
noted that the Prohibited Transaction Exemption 84-24 requires such 
disclosure. We note this exchange to emphasize the need for the 
Department to confirm the status of current exemptions and solicit 
public input on whether amendments are needed to existing exemptions 
and/or whether new exemptions are in order.
    We ask that the Department issue a new proposal together with any 
proposed changes to or confirmations of exemptive relief. We believe it 
is important to review and comment on these together. We remain 
committed to offering comments that seek to preserve the Department's 
enforcement objective while avoiding unnecessary disruption and 
negative impacts to plans, participants and individuals.
                                 ______
                                 
    On behalf of the ACLI member companies, thank you for consideration 
of these comments. We welcome the opportunity to discuss these comments 
and engage in a productive dialogue with the Department on these 
important issues.
                                 ______
                                 
                                                     July 25, 2011.
Hon. Phil Roe, Chairman; Hon. Robert Andrews, Ranking Member,
Subcommittee on Health, Employment, Labor and Pensions, Committee on 
        Education and the Workforce, U.S. House of Representatives, 
        Washington, DC 20515.
    Dear Chairman Roe and Ranking Member Andrews: Tomorrow, the House 
Subcommittee on Health, Employment, Labor and Pensions is holding a 
hearing entitled ``Redefining `Fiduciary': Assessing the Impact of the 
Labor Department's Proposal on Workers and Retirees.'' On behalf of the 
American Institute of Certified Public Accountants (AICPA) Forensic and 
Valuation Services Executive Committee, I am writing to express 
significant concern and reiterate our position regarding the approach 
being taken by the Department of Labor (DOL) in its Proposed Rule 
(``Proposal'') \1\ that would broaden the DOL's interpretation of a 
``fiduciary'' under the Employee Retirement Income and Security Act 
(ERISA). Specifically, the Proposal would significantly expand the 
circumstances under which a person would be considered a ``fiduciary'' 
under ERISA by reason of providing an appraisal or fairness opinion 
concerning the value of securities or other property. As currently 
drafted, certified public accountants (CPAs) and others who perform 
appraisal services for Employee Stock Option Plans (ESOPs) would be 
included in this new definition of fiduciary. While we appreciate the 
concerns which have been expressed by the DOL regarding the quality of 
some appraisals performed for ESOPs, we believe that the Proposal 
raises significant legal issues, which are set forth below.
    The AICPA believes that the Proposal's treatment of appraisers as 
fiduciaries would create a clear conflict between an ERISA fiduciary's 
strict duty of loyalty to plan participants and beneficiaries, and an 
appraiser's obligation, pursuant to professional appraisal standards 
and the Internal Revenue Code (IRC), to perform assignments with 
impartiality, objectivity and independence. ERISA requires plan 
fiduciaries to act ``solely in the interest'' of, and for the 
``exclusive purpose of'' providing plan benefits to plan participants 
and beneficiaries. Thus, the capacity in which a fiduciary is bound to 
act cannot be described as independent.
    During public hearings on the Proposal, DOL officials asserted that 
there is no conflict between an appraiser's obligation to act with 
independence and fiduciary status because ERISA does not require a 
fiduciary to serve as an advocate. We disagree. Fiduciaries have a 
clear obligation to constantly and single-mindedly consider and 
represent the interests of the plan participants and beneficiaries. One 
cannot adequately represent--or act for the exclusive benefit of--the 
interests of a party without, in some way, being an advocate.
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    \1\ 75 Federal Register 65,263 (October 22, 2010)
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    DOL officials also stated during recent hearings that appraiser 
independence and fiduciary status are not mutually exclusive because an 
``independent appraiser'' and ``fiduciary appraiser'' have the same 
goal: to ascertain the correct valuation of ESOP securities. While such 
a conclusion may be warranted in circumstances where there is only one 
``right'' answer (e.g., single figure), valuations are typically stated 
in terms of a reasonable range. Notwithstanding that a great deal of 
judgment is involved, the valuation analyst must be able to fully 
support and document any number within that range.
    To illustrate this point, consider an ESOP's first purchase of 
stock from an employer. ERISA would require a ``fiduciary appraiser'' 
to assist the plan fiduciary negotiating the purchase by generating an 
appraisal that resolves each and every judgment call in favor of the 
plan participants and beneficiaries (within a reasonable range) rather 
than steer a middle course. In comparison, an independent appraiser/
valuation analyst would not necessarily take into consideration best 
interests of the plan participants and beneficiaries but would, 
instead, consider the best objective criteria regarding the value of 
the stock. We do not see how a fiduciary appraiser can reconcile his or 
her duty to act for the exclusive benefit of one party with the 
requirement that he or she make independent and disinterested judgment 
calls at various stages in the appraisal process.
    The AICPA further believes that the elevation of an appraiser to 
fiduciary status under ERISA, a consequence of the DOL's Proposal if 
approved, is incompatible with Section 401(a)(28)(C) of the Internal 
Revenue Code, which requires ESOPs to obtain valuations from an 
``independent appraiser'' for employer securities that are not readily 
tradable on an established market.\2\ For purposes of IRC Section 
401(a)(28)(C), the term ``independent appraiser'' is defined as ``any 
appraiser meeting requirements similar to the requirements prescribed 
under IRC Section 170(a)(1).'' Under Section 170, as interpreted by the 
IRS, we believe it is reasonably clear that a fiduciary could not serve 
as ``qualified appraiser.'' IRS regulations3 which set forth guidance 
on the definition of ``qualified appraiser'' specify that one is 
disqualified as serving as a ``qualified appraiser'' if he or she has 
prohibited relationships with parties who have a direct interest in the 
property being valued. In the context of a valuation of an ESOP's 
securities that are not readily tradable, the interested parties 
include the ESOP and the plan's participants and beneficiaries. We 
believe that being a fiduciary to an interested party disqualifies a 
person from being a ``qualified appraiser.''
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    \2\ 26 U.S.C. Sec. 401(a)(28)(C) 3 Section 1.170A-13(c)(5)(iv) of 
the Income Tax Regulations.
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    The clear and significant conflicts raised by this Proposal also go 
against Executive Order 13563 which directs regulators to promote 
coordination across agencies, consider the combined effect of their 
regulations on particular sectors and industries and reduce the 
burdens, redundancies and conflict created by such requirements. This 
Proposal would put appraisers in an untenable position with respect to 
valuations performed for all employee benefit plans, and ESOPs in 
particular because of a clear conflict between the DOL Proposal and the 
IRS Rules.
    Importantly, we believe that this change would have a direct 
adverse effect on CPAs and other appraisers and, more significantly, on 
the employees covered by the employee benefit plans. By defining 
valuation preparers as fiduciaries, preparers would face increased 
insurance rates and risk premiums resulting from increased liability 
risk. Such increases would necessarily be passed on to employers 
requiring the valuations and ultimately to plan participants.
    Finally, the AICPA also believes that the DOL's proposed change 
does not address the underlying issue: sponsor company valuations can 
currently be performed by any individual, regardless of qualifications. 
The AICPA believes a better solution would be for the DOL to mirror 
other regulatory agencies regarding regulation of appraisers and 
require proper qualifications and standards for performing valuation 
services. Specifically, we recommend that the DOL implement rules that 
would require appraisers to meet minimum specialized training 
requirements, hold relevant credentials, and comply with applicable 
professional standards.
    We understand that the DOL anticipates completing its Final Rule 
soon. We hope that our concerns regarding the inconsistency between the 
requirement to remain independent under the Internal Revenue Code and 
the duties owed as a fiduciary as contemplated by the DOL's proposed 
rule can be resolved. Please contact Diana Huntress Deem at 
202.434.9276 in our Washington office if you have any questions 
regarding our concerns.
            Sincerely,
                    Thomas Burrage, CPA/ABV/CFF, CVA Chair,
         AICPA Forensic and Valuation Services Executive Committee.
                                 ______
                                 
Hon. Phil Roe, Chairman; Hon. Robert Andrews, Ranking Member,
Subcommittee on Health, Employment, Labor and Pensions, Committee on 
        Education and the Workforce, U.S. House of Representatives, 
        Washington, DC 20515.
    Dear Chairman Roe and Ranking Member Andrews: The American Society 
of Appraisers (ASA) \1\ is writing to express its appreciation to the 
Subcommittee for today's hearing into the Labor Department's proposed 
fiduciary rule; and, to express our profound concerns over that portion 
of the rule which mandates the inclusion of appraisers who perform ESOP 
valuations within the definition of ``fiduciary''.
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    \1\ ASA is a multidiscipline professional appraisal society which 
teaches, tests and credentials its members for professional appraisal 
practice in the areas of business valuation, commercial and residential 
real property and the valuation of tangible and intangible personal 
property, such as fine art and machinery and technical equipment.
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    ASA, many of whose credentialed business appraisers provide ESOP 
valuation services, has worked closely and successfully with many 
federal agencies to establish regulatory requirements that improve 
their ability to ensure the integrity of appraisals they oversee and 
sanction appraisers for abusive or unprofessional valuations. We 
mention our record of support for strengthened federal agency oversight 
of valuations in the hope it will demonstrate to Subcommittee members 
our organization's unwavering commitment to federal appraisal reforms 
that hold out the promise of effectiveness. Regrettably, we do not 
believe DOL's proposed rule holds out that promise. Instead, its 
inevitable effect will be to greatly increase the costs of ESOP 
valuations without doing anything to improve the competency of 
appraisers practicing before the agency or the reliability of their 
valuations.
    ASA's reasons for strongly opposing the appraiser-as-fiduciary 
provisions of the proposed rule are summarized below:
    First, making appraisers fiduciaries is fundamentally irrelevant to 
DOL's stated public policy objective, which is to improve the 
reliability and integrity of appraisals performed in connection with 
ESOPs or other pension plans. While making appraisers fiduciaries will 
expose them to the likelihood of endless law suits, it will do nothing 
to improve their valuation skills or the quality of the appraisals 
themselves;
    Second, DOL's proposal is totally out-of-sync with the appraisal 
enforcement programs of every other federal agency. These agencies--
including IRS which shares ERISA enforcement authority with DOL--have 
improved the reliability of appraisals they oversee by requiring 
appraisers to meet rigorous qualification requirements (e.g., 
experience, training, education and testing in connection with specific 
categories of property) and by mandating that they adhere to uniform 
appraisal standards (i.e., the Uniform Standards of Professional 
Appraisal Practice or USPAP) . The appraisal reform requirements 
adopted throughout the federal government are consistent with the 
appraiser qualifications and appraisal standards promulgated by the 
Congressionally-recognized Appraisal Foundation. As stated above, ASA 
has played an active role with many federal agencies to modernize and 
reform their appraisal regulatory programs. We would like to continue 
that role with DOL and have so advised them;
    Third, a DOL rule making appraisers fiduciaries would directly 
violate the Ethics obligation of all professional appraisers under the 
Uniform Standards of Professional Appraisal Practice to be completely 
independent of all parties and interests to a transaction for which a 
valuation is performed. An appraiser cannot be a fiduciary and, 
simultaneously, be independent of all parties. DOL's proposed rule, if 
finalized, would cause a severe breach in an independence requirement 
that goes to the essence of professional appraisal practice. This is 
not only the opinion of ASA, it is the conclusion of the Appraisal 
Standards Board of The Appraisal Foundation--the Congressionally 
recognized arbiter of appraisal standards in federally-related 
transactions. The Foundation has written DOL and urged the agency not 
to adopt the appraiseras-fiduciary proposal. It would be ironic if DOL, 
which is deeply committed to preventing conflicts of interest by those 
involved in ESOPs, were to adopt a rule that undermines the ethical 
obligation of every professional appraiser to avoid any and all 
conflicts of interest.
    Moreover, if DOL's proposal were to become law, it would put an 
agency of the federal government--for the first time--in direct 
conflict with the enforcement responsibilities of the real estate 
appraiser licensing boards in the 50 states and territories; and, with 
the Ethics Committees of the professional appraisal organizations, like 
ours, which credential professional appraisers. Both the state 
appraiser licensing agencies (pursuant to state laws) and the 
professional appraisal organizations (pursuant to contractual agreement 
with their credentialed members) are obligated to take disciplinary 
action against appraisers who violate USPAP's independence provision;
    Fourth, if a central purpose of DOL's proposed rule is to make 
appraisers accountable for abusive valuations, that purpose has already 
been accomplished. Appraisers are already subject to serious sanctions 
for ethical lapses or improper appraisals under a wide variety of 
federal and state laws, as well as under the Ethics agreements they 
enter into with professional credentialing organizations. State real 
estate appraiser licensing boards regularly bring enforcement actions 
against their licensees for such infractions, as do the professional 
credentialing organizations, such as ours. Even without an appraiser-
as-fiduciary rule, there are numerous ways DOL could seek sanctions 
against appraisers for improper ESOP valuations: They could refer such 
cases to IRS which shares ERISA authority with DOL and has effective 
sanctioning authority against appraisers; to state appraiser licensing 
agencies (for improper real estate appraisals) and to professional 
appraisal credentialing organizations when infractions are committed by 
their members;
    Fifth, the proposed DOL rule would require appraisers to obtain 
fiduciary errors and omissions insurance--a product which does not even 
currently exist and which, if it were developed, would be prohibitively 
expensive. The inevitable result would be a large increase in the cost 
of ESOP and other pension plan appraisals--a cost which would have to 
be borne by the ESOP plans and their beneficiaries. It would be ironic 
indeed if the federal agency responsible for safeguarding the financial 
interests of pension plan beneficiaries were to adopt a rule which 
would greatly--and unnecessarily--raise the costs of operating and 
administering the plans.
    In order to avoid the negative consequences of the proposed 
appraiser-as-fiduciary rule, ASA has urged DOL to adopt the proven and 
successful appraisal reform blueprint which exists at many federal 
agencies (and referenced in item ``Two'' above). Adopting that 
blueprint would effectively address DOL concerns about the reliability 
of ESOP appraisals but without the dramatic increase in appraisal costs 
that the proposed rule would cause; and, without the other disruptions 
to the ESOP valuation process that would result.
    ASA respectfully requests that this letter be made part of the 
hearing record. If the Subcommittee has any questions or seeks 
additional information, please call me at my Philadelphia office (1-
484-270-1240) or email me at [email protected]. Alternatively, 
please contact ASA's Government Relations Consultant in Washington, 
D.C., Peter Barash, at 202-466-2221 or [email protected], or 
John Russell, ASA's Director of Government Relations at 703-733-2103 or 
[email protected].
                                     Jay Fishman, Chairman,
                                    Government Relations Committee.
                                 ______
                                 
                                 
                                 
                                 
                                ------                                


 Prepared Statement of the American Bankers Association; the Financial 
  Services Roundtable; the Financial Services Institute; the Insured 
 Retirement Institute; the National Black Chamber of Commerce; and the 
        National Association of Insurance and Financial Advisors

I. We support retirement security
    The undersigned organizations\1\ share the Congress' and the Obama 
Administration's goal of increasing opportunities for Americans to save 
and plan for their retirement. We support increased incentives and 
opportunities for Americans to save and invest. It is our belief that 
providing these opportunities for Americans is important because 
savings increase domestic investment, encourage economic growth, and 
result in higher wages, financial freedom, and a better standard of 
living. We believe that most Americans should approach retirement with 
a comprehensive strategy that incorporates a number of retirement 
vehicles. Consumer education about retirement savings products can help 
consumers make sound investment decisions and allow them to maximize 
their retirement savings.\2\ Further gains can be achieved through 
better use of investment advice, and by promoting policies that provide 
for more diversified, dynamic asset allocation, and exploration of new 
and innovative methods to help individuals make better investment 
decisions.
    As a partner with the Congress and the Obama Administration in our 
collective efforts to protect Americans' retirement security, we 
strongly believe that one of the largest challenges currently 
confronting pension plans, plan sponsors, small business owners, 
individual retirement account owners, employees, and retirees is the 
Department of Labor's (the ``Department'') proposed rule that would 
expand the definition of the term fiduciary\3\ under Title I of the 
Employee Retirement Income Security Act of 1974 (``ERISA'').\4\ In our 
view, the Department's Proposal will negatively impact the ability of 
hard-working Americans to save and plan for their retirement. Moreover, 
the Department's Proposal would substantially increase the categories 
of service providers who would be deemed fiduciaries for purposes of 
ERISA,\5\ and thereby decrease the availability of retirement planning 
options for all Americans.\6\ We respectfully request the Department 
formally withdraw its proposed definition of fiduciary\7\ and re-
propose a more narrow definition of fiduciary that targets specific 
abuses.
II. We believe that the proposed expansion of the definition of 
        fiduciary would jeopardize the retirement security of millions 
        of Americans
    Most Americans rely on retirement plans to supplement Social 
Security and private savings.\8\ For instance, Americans have increased 
their participation in 401(k) plans by 250 percent over the last 
twenty-five years.\9\ In addition, a 2009 study showed that over two-
thirds of ``U.S. households had retirement plans through their 
employers or individual retirement accounts (``IRAs'').'' \10\
    IRAs are the fastest growing retirement savings accounts.\11\ IRAs 
are widely held by small investors\12\ who seek to maximize return by 
minimizing overhead on their accounts. According to the OLIVER WYMAN 
REPORT, smaller investors overwhelmingly prefer to use a brokerage 
account for their IRAs (rather than an advisory account) \13\ because 
of the lower operating costs associated with brokerage accounts. In 
fact, 98% of IRAs with less than $25,000 in assets are serviced by 
securities brokers.\14\
    We believe that the sheer breadth of the proposed expansion of the 
definition of fiduciary would have the unintended--but entirely 
foreseeable--consequence of reducing alternatives available to hard-
working Americans to help them save for retirement, and increasing the 
costs of remaining retirement savings alternatives. The resulting 
increase in the number of persons who could be subject to fiduciary 
duties, increased costs, and increased uncertainty for retirement 
services providers will very likely reduce the level and types of 
services available to benefit plan participants and IRA investors by 
making benefit plans and IRAs more costly and less efficient.\15\
    Thus, if the Department were to adopt the expanded definition of 
fiduciary in its present form,\16\ we believe it is clear that fewer 
Americans would have access to the advice they need to help them make 
prudent investment decisions that reflect their financial goals and 
tolerance for risk as they prepare for their retirement because of 
their reluctance to pay the increased costs that will likely be 
associated with professional investment advice.\17\
    We also are concerned that the Department's Proposal could lead to 
lower investment returns, and ultimately, a reduced amount of savings 
for retirement.\18\ Moreover, if the Department were to adopt its 
expanded definition of fiduciary in its present form, millions of hard-
working Americans are likely to have reduced access to meaningful 
investment services or help from an investment professional,\19\ and 
likely would incur greater expense to access the broad range of product 
types associated with brokerage accounts.\20\ We find the potentially 
adverse consequences that the Department's proposed expanded definition 
of fiduciary would have on our nation's retirement system and the 
retirement security of all Americans to be untenable.
    In summary, our specific concerns with the Department's proposed 
expansion of the definition of fiduciary are:
    The Department has not demonstrated that the current definition 
needs to be completely re-written.
    The proposed expansion of the fiduciary definition to encompass 
IRAs is ineffective and counterproductive.
    The Department's rule could result in significantly fewer 
retirement accounts and less retirement savings.
    The Department has not evaluated the economic impact on small 
business owners.
    Consultation and coordination with each of the relevant regulatory 
authorities is needed, including without limitation the Securities and 
Exchange Commission and the Commodity Futures Trading Commission.
    The Department provided insufficient regulatory analyses.
    Given the substantive concerns raised in the public comment record 
concerning the adverse impact of the rule, the Department should 
publish notice of its proposed revisions to the definition of 
fiduciary, and solicit public comment on the proposed revisions.
    1. The Department has not demonstrated that the current definition 
needs to be completely re-written.
    Despite 35 years of experience with the current definition of 
fiduciary,\21\ the Department has not provided adequate justification 
for its wholesale revisions to the current definition.
    The Department's stated rationale is to pursue bad actors (i.e., 
pension consultants and appraisers) who allegedly have provided 
substandard services and who failed to recognize or disclose conflicts 
of interest.\22\ If this is the goal, then the Department should more 
narrowly tailor the proposed changes to reach those particular bad 
actors.
    The Department also should consider whether other regulations 
(including those enforced by other authorities) already provide 
adequate safeguards. For example, the Department's recent disclosure 
regulations will require pension consultants to disclose all direct and 
indirect compensation they receive before entering into a service 
arrangement with a plan.\23\ This may address the Department's 
concerns.
    2. The proposed expansion of the fiduciary definition to encompass 
IRAs is ineffective and counterproductive.
    The proposed expansion of the definition of fiduciary would 
constrain the availability of lower-cost commission-based IRAs, which 
would increase costs for IRA owners and reduce retirement savings.\24\
    The Department previously expressed the view that regulatory 
initiatives designed for ERISA employee benefit plans were neither 
necessary nor appropriate for IRAs.\25\
    Sales practices for IRAs currently are subject to oversight by the 
Securities and Exchange Commission and FINRA. If the Department is 
concerned about oversight of sales practices, it should work together 
with those regulators to address those concerns, as opposed to 
overhauling a much broader regulatory regime.
    Service providers to IRAs should be expressly excluded from any 
definition of fiduciary for purposes of Title I of ERISA.
    3. The Department's rule could result in significantly fewer 
retirement accounts and less retirement savings.
    The Department issued the Proposal without having done any study or 
survey--or providing any data--on the Proposal's projected impact or 
effect on IRA owners or IRA service providers.\26\
    According to the OLIVER WYMAN REPORT, the effect of the 
Department's rule ``could well result in hundreds of thousands of fewer 
IRAs opened per year.'' \27\
    ``Nearly 90% of IRA investors will be impacted by the proposed 
rule.'' \28\
    The Department's Proposal would make service providers fiduciaries 
when merely providing a valuation of a security or other asset held in 
the account. This may lead service providers to withdraw from providing 
valuation services for real estate, venture capital interests, swaps, 
or other hard to value assets. As a consequence, investors will have 
far fewer investment choices available to diversify assets in their 
accounts as they seek to increase their retirement savings.
    4. The Department has not evaluated the economic impact on small 
business owners.
    Small plan sponsors are not likely to be able to absorb the 
potentially substantial increase in costs arising from the expanded 
definition of fiduciary.\29\
    Small business owners are struggling to recover in the U.S. 
economy.\30\
    We urge the Department to ensure that its regulations not only 
protect retirement plan participants and beneficiaries, but also remove 
undue burdens that constrain the feasibility for small business owners 
to provide retirement plans for their employees.
    5. Consultation and coordination with each of the relevant 
regulatory authorities are needed, including without limitation the 
Securities and Exchange Commission,\31\ FINRA, and the Commodity 
Futures Trading Commission.
    Investors and retirement services providers need a regulatory 
regime that provides clarity and certainty.
    Regulations that establish conflicting rules create confusion, 
increase costs to service providers, and tend to lessen the 
availability of retirement services overall.
    6. The Department provided insufficient regulatory analyses.
    The Department was obligated under Executive Order 12866 \32\ to 
determine whether its proposed expansion of the definition of fiduciary 
was a ``significant'' regulatory action.\33\ Even though the Office of 
Management and Budget determined the Department's proposed definition 
was economically significant,\34\ the Department performed an 
insufficient Regulatory Impact Analysis of the Proposal.\35\
    The Department stated ``it is uncertain about the magnitude of 
[the] benefits and potential costs'' of its regulatory action.\36\ Yet, 
the Department failed to provide any data whatsoever in support of its 
Regulatory Impact Analysis, in which the Department ``tentatively 
conclude[d] that the proposed regulation's benefits would justify its 
costs.'' \37\
    The Department's Initial Regulatory Flexibility Analysis failed to 
provide either an estimate of the number of affected small entities\38\ 
or the increased business costs small entities would incur if they were 
determined to be fiduciaries under the proposal as required by the 
Regulatory Flexibility Act.\39\ As a consequence, it appears that the 
Department of Labor performed an insufficient analysis under the 
Regulatory Flexibility Act when it estimated the impact of its rule 
proposal on small businesses, a segment of the market also impacted by 
the proposed expansion of the definition of fiduciary.
    On January 18, 2011, President Barack Obama issued Executive Order 
13563 ``Improving Regulation and Regulatory Review.'' \40\ The Order 
explains the Administration's goal of creating a regulatory system that 
protects the ``public health, welfare, safety, and our environment 
while promoting economic growth, innovation, competitiveness, and job 
creation,'' \41\ while using ``the best, most innovative, and least 
burdensome tools for achieving regulatory ends.'' \42\
    The Department's Proposal contravenes the Obama Administration's 
publicly articulated goal to ``identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public.'' \43\
    7. Given the substantive concerns raised in the public comment 
record concerning the adverse impact of the rule, the Department should 
publish notice of its proposed revisions to the definition of 
fiduciary, and solicit public comment on the proposed revisions.
    The definition as proposed would require substantial changes to 
address concerns identified in the public comment file.\44\
    It is likely that class exemptions will be necessary and should be 
part of the rule itself, so that hard-working Americans do not lose 
access to investment products they need to fund their retirement while 
the financial services markets wait for the Department to adopt the 
required prohibited transaction class exemptions.
    The current definition of fiduciary\45\ has informed almost 35 
years of Department guidance on investment advice for ERISA retirement 
plans and IRAs. Revisions to such a mature rule ordinarily should not 
require ancillary exemptions in order for the final rule to work in the 
real world.
III. In light of the substantive concerns raised by the public, we 
        believe the department should withdraw its proposed expansion 
        of the definition of fiduciary, and re-propose a defintion of 
        fiduciary that addresses deficiences noted in the public 
        comment file
    We and other parties have filed comments and supplemental materials 
with the Department that generally have raised these and other concerns 
about the adverse impact of the Proposal.\46\ At present, it is our 
understanding that the Department is considering substantial revisions 
to its Proposal in response to the views expressed during the public 
comment period.\47\
    It is in the interest of the millions of hard-working Americans who 
are saving for retirement that the Obama Administration and the 
Congress collaborate actively with the private sector--in particular, 
the small business community and the retirement security community--to 
develop a regulatory regime that will benefit consumers and expand 
Americans' retirement savings.
IV. Conclusion
    In closing, strengthening the retirement security of all Americans 
is our priority. Strong and vibrant retirement programs benefit 
employees and their beneficiaries. As well, it strengthens the 
financial health and well-being of our nation. We, therefore, reiterate 
our request that the Department withdraw and re-propose a definition of 
the term fiduciary.
    While we support policies that encourage safeguards in retirement 
savings programs to protect consumers and our markets from fraudulent 
practices, we vigorously oppose regulations that would discourage 
participation by employers and employees in retirement programs or 
would imperil retirement security for millions of hard-working 
Americans.
    We urge policymakers to work with us to preserve a retirement 
system that helps strengthen retirement security for all Americans. We 
encourage the Congress to support policies that help promote retirement 
savings and enable the financial services industry to better meet the 
long-term retirement needs of hard-working Americans.
    We stand ready to work with you and the Department on this 
important issue.
                                endnotes
    \1\ The American Bankers Association represents banks of all sizes 
and charters and is the voice for the nation's $13 trillion banking 
industry and its two million employees. Many of these banks are plan 
service providers, providing trust, custody, and other services for 
institutional clients, including employee benefit plans covered by the 
Employee Retirement Income Security Act of 1974. As of year-end 2010, 
banks held over $8 trillion in defined benefit, defined contribution, 
and retirement-related accounts (Source: FDIC Quarterly Banking 
Profile, Table VIII-A (Dec. 2010)).
    The Financial Services Roundtable represents 100 of the largest 
integrated financial services companies providing banking, insurance, 
and investment products and services to the American consumer. Among 
the Roundtable's Core Values are fairness (``We will engage in 
practices that provide a benefit and promote fairness to our customers, 
employees or other partners.''); integrity (``[E]verything we do [as an 
industry] is built on trust. That trust is earned and renewed based on 
every customer relationship.''); and respect (``We will treat the 
people on whom our businesses depend with the respect they deserve in 
each and every interaction.''). See Roundtable Statement of Core 
Values, available at http://www.fsround.org/. Roundtable member 
companies participate through the Chief Executive Officer and other 
senior executives nominated by the CEO. Roundtable member companies 
provide fuel for America's economic engine, accounting directly for 
$92.7 trillion in managed assets, $1.2 trillion in revenue, and 2.3 
million jobs.
    The Financial Services Institute, which was founded in 2004, is the 
only advocacy organization working on behalf of independent broker-
dealers and independent financial advisors. Our vision is that all 
individuals have access to competent and affordable financial advice, 
products, and services delivered by a growing network of independent 
financial advisors affiliated with independent financial services 
firms. Our mission is to create a healthier regulatory environment for 
independent broker-dealers and their affiliated independent financial 
advisors through aggressive and effective advocacy, education, and 
public awareness. Our strategy supports our vision and mission through 
robust involvement in FINRA governance, constructive engagement in the 
regulatory process, and effective influence on the legislative process.
    The Insured Retirement Institute has been called the ``primary 
trade association for annuities'' by U.S. News and World Report and is 
the only association that represents the entire supply chain of insured 
retirement strategies. Our members are the major insurers, asset 
managers, broker dealers and financial advisors. IRI is a not-for-
profit organization that brings together the interests of the industry, 
financial advisors and consumers under one umbrella. Our official 
mission is to: encourage industry adherence to highest ethical 
principles; promote better understanding of the insured retirement 
value proposition; develop and promote best practice standards to 
improve value delivery; and to advocate before public policy makers on 
critical issues affecting insured retirement strategies. We currently 
have over 500 member companies which include more than 70,000 financial 
advisors and 10,000 home office financial professionals.
    National Association of Insurance and Financial Advisors 
(``NAIFA'') comprises more than 700 state and local associations 
representing the interests of approximately 200,000 agents and their 
associates nationwide. NAIFA is one of the only insurance organizations 
with members from every Congressional district in the United States. 
Members focus their practices on one or more of the following: life 
insurance and annuities, health insurance and employee benefits, 
multiline, and financial advising and investments. According to a Fall 
2010 survey, nearly two-thirds of NAIFA members are licensed to sell 
securities, and 89% of NAIFA member clients are ``main street'' 
investors who have less than $250,000 in household income. The 
Association's mission is to advocate for a positive legislative and 
regulatory environment, enhance business and professional skills, and 
promote the ethical conduct of its members.
    The National Black Chamber of Commerce The NBCC is a nonprofit, 
nonpartisan, nonsectarian organization dedicated to the economic 
empowerment of African American communities. 140 affiliated chapters 
are locally based throughout the nation as well as international 
affiliate chapters based in Bahamas, Brazil, Colombia, Ghana and 
Jamaica and Businesses as well as individuals who may have chose to be 
direct members with the national office. In essence, the NBCC is a 
501(c)3 corporation that is on the leading edge of educating and 
training Black communities on the need to participate vigorously in 
this great capitalistic society known as America. The NBCC reaches 
100,000 Black owned businesses. There are 1.9 million Black owned 
businesses in the United States. Black businesses account for over $1 
trillion in expendable income each year according to the US Bureau of 
Census. The National Black Chamber of Commerce(r) is dedicated to 
economically empowering and sustaining African American communities 
through entrepreneurship and capitalistic activity within the United 
States.
    \2\ The financial services industry has developed numerous 
financial literacy initiatives, including initiatives directed toward 
elementary and high school students and programs presented to investors 
in the local community. See The Financial Services Roundtable, 
COMMUNITY SERVICE IMPACT REPORT at 64-69 (2010), available at http://
www.fsround.org/publications/pdfs/CS10-ImpactReport.pdf; Insured 
Retirement Institute, Retirement Planning Resources for Consumers, 
available at http://www.irionline.org/consumers/
retirementPlanningResources; Securities Industry and Financial Markets 
Association Foundation, available at http://www.sifma.org/Education/
SIFMA-Foundation/About-the-SIFMA-Foundation/; Investment Company 
Institute, available at http://ici.org/#investor--education; and FINRA, 
available at http://www.finra.org/Investors/.
    \3\ Definition of the Term ``Fiduciary'' [RIN: 1210--AB32], 75 Fed. 
Reg. 65263 (Oct. 22, 2010) (the ``Proposal'').
    \4\ 29 U.S.C. Sec.  1001, et seq.
    \5\ See Oliver Wyman, Inc., OLIVER WYMAN REPORT: ASSESSMENT OF THE 
IMPACT OF THE DEPARTMENT OF LABOR'S PROPOSED ``FIDUCIARY'' DEFINITION 
RULE ON IRA CONSUMERS at 13 (Apr. 12, 2011) (the ``OLIVER WYMAN 
REPORT''), available at http://www.dol.gov/ebsa/pdf/1210-AB32-PH060.pdf 
(noting that ``practically every investment-related conversation or 
interaction with a client [could become] subject to [a] fiduciary 
duty''). ``Even * * * discussions with call center and branch staff[ ] 
could be curtailed (so as to avoid inadvertently establishing a 
fiduciary duty.'' Id. at 15. The OLIVER WYMAN REPORT is based on 
aggregate proprietary data furnished by ``[twelve] financial services 
firms that offer services to retail investors.'' Id. at 1. These firms 
``represent over 19 million IRA holders who hold $1.79 trillion in 
assets through 25.3 million IRA accounts [or roughly forty percent 
(40%) of IRAs in the United States and forty percent (40%) of IRA 
assets].'' Id.
    \6\ OLIVER WYMAN REPORT, supra note 5 at 19-20. If the Department 
were to adopt the Proposal, the likely result would be a ``[r]educed 
choice of investment professional, level of investment guidance, and 
investment products,'' according to the OLIVER WYMAN REPORT. Id. at 19.
    \7\ It also would afford the Department an opportunity to receive 
further information and analyses from the public on the effectiveness 
of the proposed revisions. See Natural Resources Defense Council v. 
Environmental Protection Agency, 279 F.3d 1180, 1186 (9th Cir. 2002) 
(reviewing the ``notice and comment'' requirements, the court stated 
that ``one of the salient questions is `whether a new round of notice 
and comment would provide the first opportunity for interested parties 
to offer comments that could persuade the agency to modify its rule' 
'').
    \8\ Insurance Information Institute and The Financial Services 
Roundtable, THE FINANCIAL SERVICES FACT BOOK at 37 (2011) (``THE 
FINANCIAL SERVICES FACT BOOK''), available at http://www.fsround.org/
publications/pdfs/2011/Financial--Services--Factbook--2011[1].pdf.
    \9\ Retirement Security: 401(k)s (Sept. 23, 2010) (``Retirement 
Security''), available at http://www.fsround.org/fsr/pdfs/fast-facts/
2010-09-23-RetirementSecurity.pdf. In 2009, $2,121 billion of 
retirement assets were held in defined benefit plans compared to $3,336 
billion of assets in defined contribution plans. THE FINANCIAL SERVICES 
FACT BOOK, supra note 8 at 43 (2011) (Source: Securities Industry and 
Financial Markets Association).
    \10\ THE FINANCIAL SERVICES FACT BOOK, supra note 8 at 37.
    \11\ OLIVER WYMAN REPORT, supra note 5 at 4.
    \12\ Id. at 10 (``[A]pproximately half of IRA investors in the 
report sample have less than $25,000 in IRA assets, and over a third 
have less than $10,000.'').
    \13\ Id. at 12. Investors who hold IRA assets in a brokerage 
account pay commissions to the brokers who buy or sell securities for 
their IRAs. In the alternative, investors can hold IRA assets in an 
``advisory'' account and pay a fee that is a percentage of the assets 
held in the IRA. A study of 7,800 households conducted by Cerulli 
Associates found that more affluent investors also ``prefer paying 
commissions.'' See Fee vs. commission: No doubt which investors prefer, 
BLOOMBERG (June 8, 2011), http://www.investmentnews.com/apps/pbcs.dll/
article?AID=/20110608/FREE/110609950 (reporting that the survey 
examined ``households with more than $50,000 in annual income or more 
than $250,000 in * * * assets'').
    \14\ OLIVER WYMAN REPORT, supra note 5 at 2.
    \15\ Id. at 19-22.
    \16\ Proposal, supra note 3 at 65277-78.
    \17\ See OLIVER WYMAN REPORT, supra note 5 at 2; Fee vs. 
commission, supra note 13.
    \18\ OLIVER WYMAN REPORT, supra note 5 at 22 (``These increased 
investment costs would serve as a drag on long-term investment gains, 
and therefore on the ultimate retirement savings available to impacted 
[IRA] holders.'').
    \19\ Id. at 19.
    \20\ Id. at 20.
    \21\ 40 Fed. Reg. 50842 (Oct. 31, 1975). See also, Mercer Bullard, 
DOL's Fiduciary Proposal Misses the Mark (June 14, 2011), available at 
http://news.morningstar.com/articlenet/article.aspx?id=384065 (``It is 
unfair to the industry because it disregards decades of administrative 
law and practice under ERISA. It is bad for investors because it strips 
them of fiduciary protections when they are needed most.'').
    \22\ Proposal, supra note 3 at 65271 (citing a Securities and 
Exchange Commission staff report that found a majority of the 24 
pension consultants examined in 2002-2003 ``had business relationships 
with broker-dealers that raised a number of concerns about potential 
harm to pension plans''); GAO, Conflicts of Interest Can Affect Defined 
Benefit and Defined Contribution Plans, GAO-09-503T, Testimony Before 
the Subcommittee on Health, Employment, Labor and Pensions, Education 
and Labor Committee, House of Representatives at 4 (Mar. 24, 2009), 
available at http://www.gao.gov/new.items/d09503t.pdf (noting that 13 
of the 24 pension consultants examined by the Securities and Exchange 
Commission's staff ``had failed to disclose significant ongoing 
conflicts of interest to their pension fund clients'').
    \23\ Fiduciary Requirements for Disclosure in Participant-Directed 
Individual Account Plans; Final Rule [RIN: 1210--AB07], 75 Fed. Reg. 
64910 at 64937 (Oct. 20, 2010).
    \24\ OLIVER WYMAN REPORT, supra note 5 at 2 (noting that 
``estimated direct costs would increase by approximately 75% to 195% 
for these investors'').
    \25\ See Preamble to Interim Final 408(b)(2) Regulations, 75 Fed. 
Reg. 136 (July 16, 2010).
    ``The Department does not believe that IRAs should be subject to 
the final rule, which is designed with fiduciaries of employee benefit 
plans in mind. An IRA account-holder is responsible only for his or her 
own plan's security and asset accumulation. They should not be held to 
the same fiduciary duties to scrutinize and monitor plan service 
providers and their total compensation as are plan sponsors and other 
fiduciaries of pension plans under Title I of ERISA, who are 
responsible for protecting the retirement security of greater numbers 
of plan participants. Moreover, IRAs generally are marketed alongside 
other personal investment vehicles. Imposing the regulation's 
disclosure regime on IRAs could increase the costs associated with IRAs 
relative to similar vehicles that are not covered by the regulation. 
Therefore, although the final rule cross references the parallel 
provisions of section 4975 of the [Internal Revenue] Code, paragraph 
(c)(1)(ii) provides explicitly that IRAs and certain other accounts and 
plans are not covered plans for purposes of the rule.'' Id.
    \26\ Proposal, supra note 3 at 65274-76.
    \27\ OLIVER WYMAN REPORT, supra note 5 at 2.
    \28\ Id. at 19-20 (IRA holders who cannot qualify for an ``advisory 
account'' would be ``forced to migrate to a purely `low support' 
brokerage model * * * and have little access to investment services, 
research and tools'' to support their IRA savings goals.). See also, 
Most Americans Haven't Planned for Retirement and Other Areas of 
Concern, WALL ST. J., June 6, 2011, available at http://blogs.wsj.com/
economics/2011/06/06/most-americans-havent-planned-for-retirement-and-
other-areas-of-concern/ (``Efforts to make people essentially their own 
money managers may also be futile. Only 21% to 25% of respondents said 
they have used information sent to them from Social Security.'')
    \29\ While the costs associated with providing various employee 
benefits (including retirement plans) impact all employers, smaller 
companies typically are more sensitive to the costs associated with 
these programs. To the extent that service providers' expenses 
increase, those costs are passed through to their clientele. An example 
of expenses associated with the Department's Proposal is the legal cost 
associated with the initial ``compliance review.'' According to the 
Department, the cost of legal review would average sixteen (16) hours 
of time at a rate of $119 per hour. Proposal, supra note 3 at 65274. 
This rate, however, is significantly lower than the average billing 
rate of $295 per hour for 10,913 lawyers surveyed by the National Law 
Journal. SURVEY OF LAW FIRM ECONOMICS, NAT'L L. J. (2010) (``LAW FIRM 
SURVEY''), available at http://www.alm.com/pressroom/2011/02/10/alm-
legal-intelligence-releases-2011-survey-of-billing-and-practices-for-
small-and-midsize-law-firms/.
    \30\ See, Kelly Greene, Retirement Plans Make Comeback, With 
Limits, WALL ST. J., June 14, 2011, available at http://
professional.wsj.com/article/
SB10001424052702303714704576384072497942338.html (reporting that in the 
face of a ``slowly improving job market, [many companies] seek to 
balance the need to retain highly skilled workers with the need to 
limit costs'').
    \31\ The Securities and Exchange Commission released a study 
evaluating the regulatory regimes applicable to investment advisers and 
broker-dealers who provide advice to retail customers, as required by 
section 913 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act [Pub. L. No. 111-203, Sec.  913, 124 Stat. 1824 (2010) 
(the ``Dodd-Frank Act'')]. STUDY ON INVESTMENT ADVISERS AND BROKER-
DEALERS AS REQUIRED BY SECTION 913 OF THE DODD-FRANK WALL STREET REFORM 
AND CONSUMER PROTECTION ACT (Jan. 21, 2011), available at http://
sec.gov/news/studies/2011/913studyfinal.pdf. Section 913(f) authorized 
the Commission to engage in rulemaking to address the legal or 
regulatory standards of care applicable to investment professionals who 
provide ``personalized investment advice about securities'' to retail 
customers. Section 913(f) of the Dodd-Frank Act, 124 Stat.1827-28.
    \32\ 58 Fed. Reg. 51735.
    \33\ 75 Fed. Reg. at 65269.
    \34\ Id. (According to the Office of Management and Budget, the 
Department's proposed rule ``is likely to have an effect on the economy 
of $100 million in any one year.'').
    \35\ For example, the Department estimated that service providers 
would incur about sixteen (16) hours of legal review at a rate of $119 
per hour. While the complexity of the compliance review likely would 
far exceed the Department's estimate of sixteen (16) hours, an 
allocation of just $119 per hour for legal services vastly understates 
the cost of legal services in the United States. See LAW FIRM SURVEY, 
supra note 29 and accompanying text.
    \36\ 75 Fed. Reg. at 65275 (``[The Department's] estimates of the 
effects of this proposed rule are subject to uncertainty.'').
    \37\ Id.
    \38\ Id. at 65276.
    \39\ Id.
    \40\ Improving Regulation and Regulatory Review--Executive Order 
13563 (Jan. 18, 2011), available at http://www.whitehouse.gov/the-
press-office/2011/01/18/improving-regulation-and-regulatory-review-
executive-order.
    \41\ Id. at Section 1.
    \42\ Id.
    \43\ Id. at Section 4.
    \44\ See infra note 46.
    \45\ 29 C.F.R. Sec.  2510.3-21(c).
    \46\ See, e.g., Employee-Owned S Corporations of America (Jan. 12, 
2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-040.pdf; 
American Council of Engineering Companies (Jan. 19, 2011), available at 
http://www.dol.gov/ebsa/pdf/1210-AB32-048.pdf; American Institute of 
CPAs (Jan. 19, 2011), available at http://www.dol.gov/ebsa/pdf/1210-
AB32-050.pdf; National Association of Realtors (Jan. 20, 2011), 
available at http://www.dol.gov/ebsa/pdf/1210-AB32-052.pdf; Glass Lewis 
& Co. (Jan. 20, 2011), available at http://www.dol.gov/ebsa/pdf/1210-
AB32-053.pdf; Securities Law Committee of Business Law Section of the 
State Bar of Texas (Jan. 11, 2011), available at http://www.dol.gov/
ebsa/pdf/1210-AB32-039.pdf; Retirement Industry Trust Association (Jan. 
26, 2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-064.pdf; 
International Corporate Governance Network (Jan. 21, 2011), available 
at http://www.dol.gov/ebsa/pdf/1210-AB32-065.pdf; New York City Bar 
Committee on Employee Benefits & Executive Compensation (Jan. 28, 
2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-070.pdf; 
Investment Adviser Association (Feb. 2, 2011), available at http://
www.dol.gov/ebsa/pdf/1210-AB32-082.pdf; International Data Pricing and 
Reference Data, Inc. (Feb. 2, 2011), available at http://www.dol.gov/
ebsa/pdf/1210-AB32-082.pdf; The ERISA Industry Committee (Feb. 2, 
2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-090.pdf; 
Institutional Shareholder Services Inc. (Feb. 2, 2011), available at 
http://www.dol.gov/ebsa/pdf/1210-AB32-104.pdf; U.S. Chamber of Commerce 
(Feb. 3, 2011), available at http://www.dol.gov/ebsa/pdf/1210-AB32-
111.pdf; CFA Institute (Feb. 2, 2011), available at http://www.dol.gov/
ebsa/pdf/1210-AB32-128.pdf; Business Roundtable (Feb. 3, 2011), 
available at http://www.dol.gov/ebsa/pdf/1210-AB32-139.pdf; and 
Committee of Federal Regulation of Securities of the Section of 
Business Law of the American Bar Association (Feb. 3, 2011), available 
at http://www.dol.gov/ebsa/pdf/1210-AB32-152.pdf
    \47\ Definition of the term ``Fiduciary'' Proposed Rule Public 
Comments, available at http://www.dol.gov/ebsa/regs/cmt-1210-AB32.html.
                                 ______
                                 
                                                     July 29, 2011.
Hon. Phil Roe, Chairman; Hon. Robert Andrews, Ranking Member,
Subcommittee on Health, Employment, Labor and Pensions, Committee on 
        Education and the Workforce, U.S. House of Representatives, 
        Washington, DC 20515.
    Dear Chairman Roe and Ranking Member Andrews: We are writing today 
to personally thank you for holding a hearing on July 26, 2011 that 
focused entirely on the U.S. Department of Labor's proposed rule 
defining the term ``fiduciary.'' Tuesday's hearing was critically 
important because the public gained firsthand insight to the 
Department's approach to redefining the term fiduciary. We think the 
hearing made it abundantly clear that the Department should withdraw 
its fatally flawed proposal and re-propose a definition that corrects 
the numerous deficiencies in the current proposal.
    Our members share the Department's laudable goal to protect and 
promote retirement savings. Unfortunately, the long-term consequences 
of the proposed rule will jeopardize the retirement security of 
millions of hard-working Americans. The hearing highlighted the fact 
that the Department is unable to clearly present its rationale for why 
its proposal is necessary. More specifically, Secretary Phyllis Borzi 
never directly addressed the following critical issues:
     What specific harm is the Department trying to prevent?
     What data is currently available that quantifies the 
Department's concerns?
     Why is the definition of ``fiduciary'' being extended to 
IRAs?
     Why were essential exemptions not introduced with the 
proposed rule?
     A holders historically have used commission-based 
brokerage accounts or advisory (or wrap-fee) accounts. What other 
feasible business models exist for IRA holders?
     Why is the proposed rule the least restrictive way to 
address the Department's concerns under ERISA?
    After Tuesday's hearing, we are more convinced than ever that the 
Department should withdraw and re-propose a more effective definition 
of fiduciary. In summary, the Department has not demonstrated that the 
current definition needs to be completely re-written. Our members share 
the overwhelming, bi-partisan concern that American consumers will 
suffer harm over the long-term, because the proposed rule will reduce 
customer access to investment education.
    As leaders of the subcommittee, you are uniquely positioned to 
address the negative impact of the Department's proposed rule. Your 
leadership is needed to make sure that the Department takes the 
appropriate, measured steps to reach the right result for American 
consumers and our markets. The Roundtable stands ready to work with you 
and the Department on this important issue.
    If you have any questions, please have your staff contact Brian 
Tate at 202.589.2417 or Ryan Caruso at 202.393.0022.
            Best Regards,
                         Steve Bartlett, President and CEO,
                                 The Financial Services Roundtable.
                             Dale Brown, President and CEO,
                                      Financial Services Institute.
                                 ______
                                 

               Prepared Statement of the ESOP Association
                    (Employee Stock Ownership Plan)

    The ESOP Association's statement for the record will cover several 
topics concerning the Department of Labor's (DOL) proposed regulation 
on the definition of a fiduciary including:
Part I. Association's Education Mission Focuses on ERISA Compliance
    Part I explains why education is an important tool in helping to 
create well-managed, high performing ESOP companies.
Part II. Concerns Regarding the Definition of a Fiduciary
    The ESOP community address its concerns with the appropriateness of 
converting ESOP appraisers into ERISA fiduciaries.
Part III. Legal Precedent and ERISA Legal Regime Overlooked by Proposed 
        Regulation
    Part III will address the following concerns:

           The Proposed Regulation Exceeds the DOL's Authority
           The Proposed Regulation Interferes with the 
        Trustee's Traditional Oversight Role over the Appraiser
Part IV. Negative Impacts on Pension Benefits
    In Part IV, how making an ESOP appraiser an ERISA fiduciary will 
create a negative impact on retirement benefits.
Part V. Alternative Approaches
    Two alternative approaches will be discussed:
           Provide Guidance
           Appraiser Credentials
Part VI. Conclusion
    Final thoughts on the negative impact the DOL's proposed regulation 
on the definition of a fiduciary will have on the ESOP community.
The ESOP Association's statement for the record
    The following information will give you an understanding of the 
Association and its membership. These statistics are intended to 
provide an understanding of the natural pride and passion ESOP 
companies, and ESOP beneficiaries, have in their ownership structure.
    Of our 1,400 corporate members, 91.2% have fewer than 500 employees 
and 53.9% have fewer than 100 employees. Membership in the Association 
is dominated by small privately--held businesses.
    In each year since 1975, between 80% and 95% of ESOPs were created 
when an exiting shareholder(s) of a private company sold his or her 
stock to an ESOP. ? The Association's 2010 survey of its members showed 
22.1% are manufacturing companies, by far the dominant category, 
followed by construction companies at 13.2%. ? On average, the 
Association's corporate members have sponsored their ESOPs for 15 
years. ? ESOPs sponsored by Association corporate members owned an 
average of 77% of the stock of the sponsoring corporation.
    The average individual ESOP account balance of corporate members, 
according to the Association's survey, is $192,223. Among Association 
corporate members, 78% also sponsor a 401(k) plan.
    When creating their ESOPs, 96.7% of the corporations did not reduce 
wages or other benefits, and 70.35% did not utilize another plan's 
assets, to fund their ESOPs.
    Approximately 900 professionals are secondary members of the 
Association. Approximately 100 members provide valuation services to 
privately-held ESOP companies, which are required by law to obtain an 
independent valuation of ESOP shares annually. Other professional 
members include lawyers, plan administrators, lenders, trustees, and 
ownership culture management consultants.
    Privately-held small businesses that sponsor ESOPs, businesses 
considering ESOPs, and professionals that provide services to ESOP 
trustees and companies would be directly impacted by the Proposed 
Regulation ``Definition of the Term Fiduciary,'' (Federal Register, 
Volume 75, Number 204, Pages 65263-6578, October 22, 2010, Proposed 
Regulation).
    On behalf of our membership, the Association appreciates the 
opportunity to express its views in regard to redefining of the term 
fiduciary.
Part I. Association's Education Mission Focuses on ERISA Compliance
    The mission of the Association is ``To educate and advocate about 
employee ownership with emphasis on ESOPs.'' The leaders of the 
Association purposely listed ``education'' first, as a basic tenet of 
the Association is that well-managed, high performing ESOP companies, 
visible in local communities, are the best and most effective way to 
execute the advocacy mission.
    Over 50% of the Association's annual resources are spent on 
education. In 2010, 8,089 individuals attended Association educational 
programs. Education of ESOP company fiduciaries, focusing on their 
obligations to retain competent valuation firms, understand the 
valuation report, and decide whether to accept a valuation report, is a 
major topic at Association national and Chapter meetings. Other 
conference and meeting attendees had exposure to the topics related to 
ERISA compliant valuation of ESOP shares of private companies.
    The members of the Association's Advisory Committee on Valuation 
(VAC) are key to the quality of fiduciary education on valuation 
matters. They lead discussions involving thousands of attendees and 
write articles for the Association's monthly newsletter on valuation 
``hot'' issues, produce white papers on best practices, prepare 
booklets and handbooks on valuing ESOP shares, and contribute the 
chapter in the ``ESOP Fiduciary Handbook'' on reviewing, and rejecting 
or accepting a valuation report. VAC members educate companies, 
fiduciaries, and other professional members, and ensure that the latest 
information on valuation best practices is available.
    VAC members are volunteers. They agree with the basic premise that 
the best way to maintain current laws permitting and encouraging 
employee ownership via the ESOP model--the advocacy mission--is to have 
excellent ESOP practices, and ensure that ESOP trustees and 
fiduciaries, internal and institutional, understand and comply with 
ERISA. Compliance with ERISA law is the best path to a high performing 
company that will provide adequate retirement security to its ESOP 
participants.
Part II. Concerns Regarding the Definition of a Fiduciary
    In proposing the expansion of the definition of investment advice 
for purposes of the definition of a fiduciary under Section 3(21) of 
the Employee Retirement Income Security Act of 1974, as amended 
(``ERISA''), the Department of Labor (DOL) has identified three areas 
of concern: (i) a significant shift in the marketplace for employee 
benefit plan services since the DOL last provided fiduciary rules in 
1975, (ii) avoidance of conflicts of interest that may exist with 
service providers, and (iii) incorrect valuations of employer 
securities. The proposal states that these concerns were identified in 
the DOL's Consultant/Advisor Project (CAP), recent testimony before the 
Government Accountability Office (GAO) and in the Employee Benefits 
Security Administration (EBSA) national enforcement project relating to 
ESOPs.
    The Association believes the marketplace for ESOP transaction 
services generally has not changed since 1975, with the overwhelming 
majority of ESOPs created when a shareholder(s) of a privately-held 
company sells her/his shares to an ESOP.
    With regard to conflicts of interest, it is not apparent to the 
Association that ESOP appraisers regularly have conflicts of interest 
with respect to the plans for which they work. This would, of course, 
be contrary to Section 401(a)(28) of the Internal Revenue Code which 
requires appraisers be independent. Moreover, the DOL proposed 
regulation setting forth the definition of adequate consideration 
(Prop. Reg. Sec. 2510.3-18, referred to herein as the 1988 Proposed 
Regulation) also requires the independence of an appraiser as a 
condition to a prohibited transaction exemption.
    With regard to incorrect valuations of private company ESOP stock, 
the Association acknowledges and shares the DOL's concern but questions 
whether the problem is as widespread as the DOL implies. The 
Association has not heard significant numbers of complaints from its 
corporate or fiduciary members about incorrect ESOP valuations. The 
Association provides seminars and educational sessions on the valuation 
of employer securities at conferences, and publishes written material 
on valuation.
    If the DOL is correct in its assessment, the Association also 
questions the effectiveness and appropriateness of converting ESOP 
appraisers into ERISA fiduciaries as means of reducing the number of 
incorrect ESOP appraisals. The Association believes there are other 
means of addressing the DOL's concern short of a wholesale change to 
over thirty five (35) years of statutory guidance, and respectfully 
requests the opportunity to engage in a dialogue with the DOL to assist 
in fashioning an appropriate and effective means for addressing such 
concerns.
Part III. Legal Precedent and ERISA Legal Regime Overlooked by Proposed 
        Regulation
            The Proposed Regulation Exceeds the DOL's Authority
    Section 3(21)(ii) of ERISA creates fiduciary status for a person 
who ``* * * renders investment advice for a fee * * *'' The preparation 
of an appraisal of an asset, whether employer securities, real estate 
or otherwise, was not intended by Congress to create an ERISA fiduciary 
status. Neither an appraisal, nor a fairness opinion rendered in a 
transaction, makes a recommendation to the trustee of a course of 
action. In either instance, it remains the trustee's ERISA fiduciary 
responsibility to make an investment decision, with the appraisal or 
fairness report a tool in that process.
    Federal courts have correctly instructed ESOP trustees that an 
independent appraisal does not automatically establish a transaction 
price for employer securities. Rather, the trustee is responsible to 
prudently review and then utilize the report in making an investment 
decision. In order to add asset valuations and fairness opinions to the 
list of items that constitute ``investment advice'' we believe the DOL 
would need Congress to add a new subsection to Section 3(21) of ERISA 
to this effect.
            The Proposed Regulation Interferes with the Trustee's 
                    Traditional Oversight Role over the Appraiser
    We assume the DOL believes that making the ESOP appraiser a 
fiduciary will create a system of oversight over the ESOP appraiser 
which has somehow been absent. This belief would be an incorrect 
understanding of the role that has developed between the ESOP appraiser 
and the ESOP trustee under current law and regulatory guidance. It is 
important to understand that an oversight system already exists. As the 
plan fiduciary, the ESOP trustee is responsible for determining the 
fair market value of the employer securities to be acquired by or held 
under the ESOP. The ESOP trustee retains and works closely with the 
ESOP appraiser as its financial advisor, to assist the ESOP trustee 
with undertaking the financial review and ultimate valuation 
determination. If the ESOP appraiser's skill, or analysis, is lacking 
under applicable professional standards, then it is the ESOP trustee's 
responsibility to investigate the relevant issues and make a 
determination regarding whether the ESOP appraiser can continue to 
provide the ESOP trustee with the necessary financial assistance on 
behalf of the plan. This relationship allows the ESOP appraiser to 
focus on the specific task of providing advice to the ESOP trustee who 
is the party responsible for decisions regarding transactions and the 
related fair market value of the employer securities. (See Chapter 6.C, 
``Review of Valuation Report'', ESOP Fiduciary Handbook, The ESOP 
Association, 2010, pages 36-42.) Further, the current structure already 
provides the DOL with adequate redress for an incorrect valuation, but 
such redress rests with the ESOP trustee the plan fiduciary charged 
with making the fair market value determination and ensuring a correct 
valuation.
Part IV. Negative Impacts on Pension Benefits
    The DOL's stated goal in expanding the definition of investment 
advice is to create a bright line identifying who is a fiduciary. The 
DOL states that its limited resources are stretched by the task of 
assessing who is a plan fiduciary, impacting its ability to assess 
whether a breach occurred. This reasoning is not justified, and is 
short sighted, because this sweeping shift in the fiduciary rules will 
have significant negative consequences for ESOP companies and the ESOP 
participants that the DOL seeks to protect. Further, because the ESOP 
trustee is always a plan fiduciary and acts in a fiduciary capacity in 
determining fair market value and adequate consideration, in each and 
every instance where the perceived ill is the incorrect valuation, the 
DOL's argument that it is unable to establish the ESOP trustee as the 
fiduciary is unfounded.
    In the Regulatory Impact analysis section of the proposal, the DOL 
submits a list of three benefits the proposed regulation will provide, 
but states that ``* * * the Department is unable to quantify these 
benefits, [but] the Department tentatively concludes they would justify 
their cost.'' The DOL then estimates the service provider community 
would incur a cost of $10.1 million to assess its fiduciary status 
under ERISA. Setting aside any disagreement over this initial cost, the 
Association's view is that the larger costs of the proposal will be 
felt by plan participants through: (i) a shrinking of the marketplace 
for competent appraisers (ii) higher costs to ESOP sponsors to retain 
competent appraisers and (iii) greater costs of protecting against 
litigation (i.e. additional involvement of counsel and greater 
documentation). The overarching cost however, is not so easily 
quantified and will be seen when business owners, instead of pursuing a 
transaction with burdensome regulation as well as cost, business owners 
choose to pursue other means of ownership transition, such as sales to 
third parties, which may result in less wealth in qualified plans.
    Many of the best appraisers currently work for large or mid-sized 
multi-disciplinary financial service organizations. Such firms have 
resources, depth of expertise, breadth of experience, and work on a 
variety of types of non ESOP assignments and bring this experience to 
their ESOP appraisals. Generally, none of the professionals in these 
organizations are ERISA fiduciaries, or fiduciaries under any set of 
Federal or state laws. The Association believes these firms will not 
have a financial incentive to accept fiduciary status related to ERISA 
appraisals and may cease providing services to ESOP sponsors and 
trustees. ESOP companies and trustees will lose the expertise that 
these firms bring to their clients when performing an ESOP valuation 
engagement. The ESOP community, including peer firms, will also lose 
the benefit of these firms' knowledge.
    For those firms that choose to continue to perform ESOP appraisals, 
significant costs will be incurred beyond the initial compliance 
assessment cost detailed by the DOL. First, firms will need to obtain 
fiduciary liability insurance, a more complex and expensive product 
than the current errors and omissions insurance most hold; second, 
valuation firms will need ERISA legal counsel for each engagement to 
advise on their fiduciary duties and responsibilities in a particular 
transaction or valuation; third, valuation firms will likely change 
their interactions and business relationships with ESOP trustees in 
order to manage their own ERISA fiduciary risks; fourth, ongoing 
compliance costs may increase; and fifth, instances of litigation will 
increase.
    For ESOP sponsors, this means: (i) higher costs of valuation 
services, (ii) fewer qualified appraisers, and the need to replace 
appraisers who leave the market; (iii) confusion as to who is 
responsible for certain fiduciary functions; and (iv) loss in the 
industry of the benefits of working with multi-disciplinary 
organizations.
    The DOL has identified ``incorrect valuations'' as the principal 
concern in the Proposed Regulation. The Association disagrees that the 
Proposed Regulation will, in and of itself, result in more accurate 
appraisals when fewer qualified appraisers will perform ESOP 
valuations, and the remaining firms may be less well capitalized 
entities that may not have the resources to defend their opinions. 
Further the Association fails to see how making more parties 
fiduciaries solves the problem when a clearly identified plan 
fiduciary, the ESOP trustee, is already responsible for the ESOP 
valuation and its accuracy.
Part V. Alternative Approaches
            Provide Guidance
    We are not aware, and do not acknowledge, there is a widespread 
problem with ESOP valuations among our membership.
    However, to the extent the DOL perceives a problem, the Association 
believes it is more effective to focus regulatory efforts on prevention 
rather than punishment. Valuation standards already exist in a variety 
of professional organizations such as the American Society of 
Appraisers (ASA), American Institute of Certified Public Accountants 
(AICPA), as well as guidance used by the IRS, and could be easily 
adopted by the DOL. Hard-to-value securities held on companies' and 
ERISA plans balance sheets have been a significant focus of accounting 
standards. It would be very reasonable for the DOL to adopt general 
operating principles of valuation that are already generally accepted 
and well understood in the valuation profession.
    DOL's 1988 Proposed Regulation defining ``adequate consideration'' 
provides guidance on valuing employer securities. Though not issued as 
final, and therefore not binding. many appraisers choose to rely on the 
1988 Proposed Regulation as if it were final. With better guidance, the 
ESOP trustee's task of reviewing and approving valuations before 
accepting them would be improved because it would know the standard 
against which to measure the appraisal
    We respectfully suggest the DOL finalize the 1988 Proposed 
Regulation, and amend it to include a more detailed description of the 
trustee's role in assessing a valuation or the valuation report.
            Appraiser Credentials
    The Association's Valuation Advisory Committee, whose members 
consist of the most prominent ESOP valuation advisors in the United 
States, was formed to bring professionals together to discuss ESOP 
valuation issues. The Association also provides forums for the 
interaction among various ESOP professionals to address ESOP issues, 
including a recently formed Interdisciplinary Committee. ESOP 
valuations have, for the most part, been self regulated by those 
professionals who have endeavored to build solid ESOP valuation 
practices based on generally accepted valuation methods and procedures. 
These experienced ESOP professionals have worked together to develop 
consensus on many ESOP valuation issues.
    Most ESOP appraisers are well educated, informed, and credentialed 
and continue their education by reading industry materials and 
scholarly journals, and attend conferences and seminars to keep abreast 
of financial theory, regulatory changes, and other factors affecting 
business appraisals. Many have advanced degrees in finance and maintain 
appraisal-related credentials such as the ASA, Chartered Financial 
Analyst, or AICPA designations. One of the duties of an ESOP trustee is 
to choose a qualified appraiser, and various credentials can help an 
ESOP trustee discern who is qualified.
    In light of the fact that most ESOP appraisers are already 
credentialed, the Association believes that the DOL's resources would 
be best served by engaging in a dialogue with ESOP professionals, 
including the Association, to identify the DOL's specific concerns 
about appraiser competence so the ESOP community can self-regulate. For 
example, the DOL may find that those ESOP appraisals that it believes 
are ``incorrect'' are performed by appraisers without appropriate 
valuation credentials, or who are not part of the various professional 
organizations that provide training and education related to ESOP 
valuation. Further discussion and guidance may help the Association's 
members choose the most qualified appraisers.
Part VI. Conclusion
    The valuation of privately held stock is an imprecise science. This 
is the very nature of advanced finance theory. There is often no single 
``correct'' answer to the question of valuation. Imposing fiduciary 
standards on ESOP appraisers would expose ESOP appraisers to increased 
liability, without addressing the DOL's perceived need for improved 
financial advice regarding valuation.
    On behalf of our 1,400 corporate members, we believe the proposal 
to mandate appraisers of privately-held ESOP company stock be ERISA 
fiduciaries will increase the cost of the valuation substantially. We 
also believe there are more efficient, less economically burdensome 
ways to ensure valuations are done properly without reducing ESOP 
companies' profits (and the accounts of ESOP participants). The 
Proposed Regulation will confuse and blur responsibilities between the 
trustee and the valuation firm. The Proposed Regulation will confuse 
interpretation of the law about ESOP trustee decisions and will be very 
expensive for ESOP companies if more private parties sue ESOP companies 
and ESOP trustees in cases that Federal courts currently dismisses.
    Finally, ESOP companies provide locally controlled jobs, many in 
the manufacturing sector, that provide average pay employees with 
significant retirement savings. In fact, DOL's Office of the American 
Workplace under former Secretary of Labor Robert Reich labeled ESOP 
companies as examples of high performing companies, and highlighted 
quotes from The ESOP Association's then leader, the late Charles 
Edmunson.
    We respect and support the important and difficult job of DOL 
investigators in uncovering improper valuation work and agree that 
those responsible should be held accountable. We would welcome the 
opportunity to work with you to discover an approach that will help the 
DOL achieve that goal.
                                 ______
                                 
                                 
                                 
                                ------                                

    [Questions submitted for the record and their responses 
follow:]

                                             U.S. Congress,
                                   Washington, DC, August 31, 2011.
Hon. Phyllis Borzi, Assistant Secretary,
Employee Benefits Security Administration, 200 Constitution Avenue, NW, 
        Washington, DC 20210.
    Dear Assistant Secretary Borzi: Thank you for testifying at the 
July 26, 2011, Subcommittee on Health, Employment, Labor, and Pensions 
hearing entitled, ``Redefining `Fiduciary': Assessing the Impact of the 
Labor Department's Proposal on Workers and Retirees.'' I appreciate 
your participation.
    Enclosed are additional questions submitted by Committee members 
following the hearing. Please provide written responses no later than 
September 14, 2011, for inclusion in the official hearing record. 
Responses should be sent to Benjamin Hoog of the Committee staff, who 
may be contacted at (202) 225-4527.
    Thank you again for your contribution to the work of the Committee.
            Sincerely,
                                        Phil Roe, Chairman,
           Subcommittee on Health, Employment, Labor, and Pensions.
                  questions from representative rokita
    1. Can you provide the Committee with your reasoning for why it is 
unnecessary to reopen the comment period on this rule following the 
many changes that DOL is planning to make?
    2. Following up an earlier question I had regarding the comments 
DOL received during the open comment period, please explain how DOL 
weighted the comments?
     Were all the comments treated equally?
     If not, how was a formula derived to weigh the comments?
    3. Would you please provide the Committee with the studies DOL used 
as the basis of this proposed rulemaking?
    4. DOL has indicated that if the proposed regulation is finalized, 
it will likely release a series of prohibited transaction exemptions 
(PTEs) to remedy the negative consequences of the proposal. What actors 
and transactions are you considering for exemptive relief? Why were 
these actors and transactions covered by the initial proposed 
regulation?
                 questions from representative mccarthy
    1. In your testimony, you indicated that the proposed regulation 
would not disrupt the broker-dealer model, suggesting that existing 
class exemptions enable commissions to be paid without violating 
prohibited transaction rules. Would you explain how existing exemptions 
will enable fully disclosed revenue-sharing to continue under the terms 
of the proposed regulation?
    2. At the hearing, you assured Members that the Department would 
complete a robust economic analysis by the time that a final rule is 
proposed. You stated: ``We are looking to have the most solid cost 
information we can to justify the rule * * * We are in the process of a 
doing a much more thorough economic analysis.'' Could you please 
describe in detail the steps the Department is taking to ensure a 
robust economic analysis? Have you commissioned any outside experts to 
consider the issue? Will your analysis carefully evaluate the indirect 
costs to participants who lose access to information they need to make 
savings and investment decisions? In your view, how much uncertainty 
surrounding costs to participants, plan sponsors, and providers is 
acceptable?
    3. In addition to its impact on individual retirement accounts, I 
am also very concerned about the proposed regulation's impact on 
qualified plans. Under current regulations, a financial institution is 
able to provide extensive guidance--including model portfolios--to the 
owner of a small business who is considering establishing a plan. But 
as I understand, under the proposed regulation, helping the owner 
identify investment options would make the financial institution a 
fiduciary, which could make such guidance a prohibited transaction. Is 
my understanding correct? If so, how can we guard against considerable 
adverse consequences for plan sponsors?
                                 ______
                                 
                                 
                                 
             Response to Questions Submitted for the Record

            questions from representative todd rokita (r-in)
    Rokita Question 1: Can you provide the Committee with your 
reasoning for why it is unnecessary to reopen the comment period on 
this rule following the many changes that DOL is planning to make?

    Answer: On September 19, the Department announced it will re-
propose its rule on the definition of a fiduciary. The decision to re-
propose was in part a response to requests from the public, including 
members of Congress, that the agency allow an opportunity for more 
input on the rule. The extended rulemaking process also will ensure 
that the public receives a full opportunity to review the agency's 
updated economic analysis and revisions of the rule. The new proposed 
rule is expected to be issued in early 2012. When finalized, this 
important consumer protection initiative will safeguard workers who are 
saving for retirement as well as the businesses that provide retirement 
plans to America's working men and women.

    Rokita Question 2: Following up an earlier question I had regarding 
the comments DOL received during the open comment period, please 
explain how DOL weighted the comments? Were all the comments treated 
equally? If not, how was a formula derived to weigh the comments?

    Answer: As I stated at the July 26 hearing, the DOL does not have a 
formula for weighing comments. Instead, we examine each comment and 
consider its factual content and its policy and legal arguments.

    Rokita Question 3: Would you please provide the Committee with the 
studies DOL used as a basis of this proposed rulemaking?

    Answer: The Department cited the following studies in the 
regulatory impact analysis for the proposed rulemaking: U.S. Securities 
and Exchange Commission, Office Compliance Inspections and 
Examinations, Staff Report Concerning Examination of Select Pension 
Consultants (Washington, DC: May 16, 2005), accessible at http://
www.sec.gov/news/studies/pensionexamstudy.pdf; GAO, Conflicts of 
Interest Can Affect Defined Benefit and Defined Contribution Plans, 
GAO--09--503T, Testimony Before the Subcommittee on Health, Employment, 
Labor and Pensions, Education and Labor Committee, House of 
Representatives (March 24, 2009), accessible at http://www.gao.gov/
new.items/d09503t.pdf; Bergstresser, Daniel B.,, John Chalmers, and 
Peter Trufano. ``Assessing the Costs and Benefits of Brokers in the 
Mutual Fund Industry,'' Social Science Research Network Abstract 616981 
(Sept. 2007), accessible at: http://papers.ssrn.com/sol3/
papers.cfm?abstract--id=616981; Bullard, Mercer, Geoffrey C. Friesen, 
and Travis Sapp. ``Investor Timing and Fund Distribution Channels'' 
SSRN Working Paper, Dec. 2007, accessible at: http://ssrn.com/
abstract=1070545; and Zhao, Xinge. ``The Role of Brokers and Financial 
Advisors Behind Investments into Load Funds,'' December 2005, 
accessible at: http://www.ceibs.edu/knowledge/papers/images/20060317/
2845.pdf.
    The Department is reviewing a wide range of additional academic 
studies and information submitted by commenters as we work to re-
propose the rule.

    Rokita Question 4: DOL has indicated that if the proposed 
regulation is finalized, it will likely release a series of prohibited 
transaction exemptions (PTEs) to remedy the negative consequences of 
the proposal. What actors and transactions are you considering for 
exemptive relief? Why were these actors and transactions covered by the 
initial proposed regulation?

    Answer: ERISA prohibits broad categories of transactions between 
plans and their fiduciaries, but authorizes the Department to issue 
exemptions when specific transactions or classes of transactions are in 
plans' and participants' interests and protective of participants' 
rights. For example, there are already exemptions on the books 
authorizing brokers who provide fiduciary advice to plans and IRA 
customers to receive commissions with respect to securities, mutual 
funds, and insurance products. We are considering issuing additional 
exemptions to address concerns about the impact of the new regulation 
on the current fee practices of brokers and advisers, and considering 
clarifying the continued applicability of existing exemptions. The 
Department will carefully craft new or amended exemptions that can best 
preserve beneficial fee practices, while at the same time protecting 
plan participants and individual retirement account owners from abusive 
practices and conflicted advice.
    The original proposed regulation, consistent with ERISA's statutory 
language, covers actors who provide investment advice for a fee to a 
plan or IRA. ERISA's statutory provisions dictate what transactions are 
prohibited.
         questions from representative carolyn mccarthy (d-ny)
    McCarthy Question 1: In your testimony, you indicated that the 
proposed regulation would not disrupt the broker-dealer model, 
suggesting that existing class exemptions enable commissions to be paid 
without violating the prohibited transaction rules. Would you explain 
how existing exemptions will enable fully disclosed revenue-sharing to 
continue under the terms of the proposed regulation?

    Answer: Existing exemptions do not enable brokers who give 
fiduciary investment advice to receive revenue-sharing arrangements, 
even if they are fully-disclosed to the advice recipient. We will 
consider, in the context of the re-proposed rule, whether additional 
exemptions are warranted for revenue-sharing arrangements that are 
beneficial to plan participants and IRA holders.

    McCarthy Question 2: At the hearing, you assured Members that the 
Department will complete a robust economic analysis by the time that a 
final rule is proposed. You stated: ``We are looking to have the most 
solid cost information we can to justify the rule. * * * We are in the 
process of doing a much more thorough economic analysis.'' Could you 
please describe in detail the steps the Department is taking to ensure 
a robust economic analysis? Have you commissioned any outside experts 
to consider the issue? Will your analysis carefully evaluate the 
indirect costs to participants who lose access to information they need 
to make savings and investment decisions? In your view, how much 
uncertainty surrounding costs to participants, plan sponsors, and 
providers is acceptable?

    Answer: To ensure a robust economic analysis, we are reviewing 
academic studies addressing the ability of the market to address 
conflicts of interest by those who provide investment advice and the 
effect that such conflicts have on investment returns. We are also 
carefully reviewing relevant information contained in the comments on 
the original proposed regulation. We will then re-propose a rule to 
ensure that the public receives a full opportunity to review the 
Department's updated economic analysis and revisions of the original 
proposed regulation. Although we disagree with the assertion that plan 
participants will lose access to needed information as a result of the 
changes we are considering, we would take into account reliable 
information supporting such an indirect cost. Any effort to predict the 
economic effect of a regulation is subject to uncertainty. The degree 
of uncertainty will vary based on the quality of the available 
information and other factors. Whether the level of uncertainty on a 
particular issue is acceptable for purposes of informing a rulemaking 
decision depends on a wide range of considerations.

    McCarthy Question 3: In addition to its impact on individual 
retirement accounts, I am also very concerned about the proposed 
regulation's impact on qualified plans. Under current regulations, a 
financial institution is able to provide extensive guidance--including 
model portfolios--to the owner of a small business who is considering 
establishing a plan. But as I understand, under the proposed 
regulation, helping the owner identify investment options would make 
the financial institution a fiduciary, which could make such guidance a 
prohibited transaction. Is my understanding correct? If so, how can we 
guard against considerable adverse consequences for plan sponsors?

    Answer: Under the original proposal, financial institutions would 
be able to market and make available, without regard to the individual 
needs of the plan, a selection of securities or other investments from 
which a plan fiduciary may designate investment alternatives for a 
participant-directed plan. The financial institution may also provide 
general financial information and data to assist a plan fiduciary's 
selection of such investment alternatives for a plan, if the financial 
institution discloses in writing that it is not undertaking to provide 
impartial investment advice. The Department is considering the numerous 
comments it received on this particular issue.
                                 ______
                                 
    [Whereupon, at 1:09 p.m., the subcommittee was adjourned.]

                                 
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