Client has 401(k) plan which also covers employees of other members of controlled group. One of the members is a newly formed financial services company which sells mutual funds unrelated to client (e.g., Fidelity). The client wants to use it's FSC to sell mutual funds to its plan. The FSC will get 12b-1 fees from mutual funds. This sounds like a PT to me since the FSC is a party-in-interest to the plan. Then I think, "Surely local megabank is using its investment affiliate to sell mutual funds (including the bank's proprietary funds) to the bank's plan. Why can't my client do it?" Is there a PTE or DOL Advisory Opinion which allows this?

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They can do it as long as they aren't making any money from it other than expenses that can be traced only to necessary plan expenses. There are quite a few advisory opinions on this; I don't remember the sites. Also check the QPAM (Qualified professional asset manager) and IN-HAM (in-house asset manager) PTEs.