DOL panelists mull “advice” and who should drive fiduciary revamp

The Department of Labor (DOL) has heard from a diverse lineup of speakers advocating for and against its proposed regulations concerning the definition of “fiduciary,” which would change how retirement advice is delivered under the ERISA. By the end of the DOL’s August 2015 public hearing, DOL officials will have heard from 25 panels consisting of nearly 75 persons appearing on behalf of industry and consumer groups regarding the Agency’s April proposal. The proposed regulations would treat persons who provide investment advice or recommendations to a plan, a plan fiduciary, a plan participant or beneficiary, IRA, or IRA owner as fiduciaries in a wider array of advice relationships than existing ERISA and Code regulations.

When is something advice?

One of the more intense exchanges took place between the DOL’s Timothy D. Hauser, deputy assistant secretary for Program Operations at the Employee Benefits Security Administration, and Bradford P. Campbell of Drinker Biddle & Reath LLP, an outside ERISA counsel for the U.S. Chamber of Commerce. Campbell said “ambiguities” about how the proposal defines “advice” or tries to spell out what compensation is allowed are critical because they may result in legal liabilities.

Campbell said the Chamber also is worried about what it means for communications to be “specifically directed to” someone. For the Chamber, the presence or absence of mutuality in the proposed rule could sway legal disputes over whether parties in fact entered into a contract.

Hauser told Campbell that the Agency would continue to work with interested parties even after it adopts a final rule and that DOL interpretations would be entitled to deference. Hauser emphasized that the text Campbell cited requires a “recommendation.” Moreover, Hauser explained that the proposal refers to a means of communication by which the recipient is asked to take or not take a course of action. Hauser also noted that the proposal asks commenters to say if the DOL standard should track one already used by the Financial Industry Regulatory Authority, Inc.

DOL or SEC in driver’s seat?

Business and consumer groups are split over whether the DOL or the Securities and Exchange Commission (SEC) should take the lead in updating fiduciary standards. Stephen W. Hall, a securities specialist at Better Markets, Inc., told the DOL that efforts to persuade the Agency to wait for the SEC to act would delay implementation of tougher standards for those who advise plan participants. He also said the SEC could not issue rules dealing with advice about non-securities investments.

“The SEC has no legal authority to issue or update any rules implementing ERISA,” said Hall in his prepared remarks. “Congress gave that responsibility to the DOL, recognizing the unique importance of tax-advantaged retirement assets and the need to protect them under a separate regime applying the highest possible standards of loyalty and care.”

Hall also told the DOL representatives that worries over compensation limits driving brokers and insurance agents out of business are exaggerated. Earlier, Campbell said it might happen that a new industry of “turn-key plans” for otherwise unadvised businesses may develop, but even this possibility could result in savers being deprived of needed investment advice.

Hall went on to urge the DOL to strengthen its proposal by barring the use of mandatory arbitration clauses, which he said are contrary to congressional intent that plan participants be allowed to sue in federal courts and would be subject to what his organization sees as an inherently unfair Financial Industry Regulatory Authority (FINRA) arbitration process.

According to Hall, the DOL proposal is not “radical” just because it would close regulatory gaps in a retirement advice system that allows “damaging conflicts of interest” to persist. He said Better Markets strongly backs the DOL’s proposal because it would end a system that puts savers’ interests behind those who advise them.

For Barbara Roper, director of Investor Protection at the Consumer Federation of America, a backer of the DOL’s plan, the retirement industry’s support for the best interest standard falls flat because she says industry backers are for the rule in “name only.” Roper said many in the retirement industry would prefer that the DOL rein in the best interest standard by limiting its scope and tacking on new exemptions.

Source: DOL August 2015 hearings.

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