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From Securities Regulation Daily, April 14, 2015

DOL issues long-awaited fiduciary proposal, seeks ‘harmony’ with securities rules

By Mark S. Nelson, J.D.

The Department of Labor issued its highly anticipated proposal defining “fiduciary” under the Employee Retirement Income Security Act of 1974 late today. The DOL’s definition follows-up on the Obama Administration’s call for regulators to reduce the impact that conflicts of interest and hidden fees can have on millions of Americans’ retirement plans. The DOL said its 120-page proposal seeks to work amicably with related securities rules, but it will likely be hailed and criticized by many, including for the DOL’s having issued it before the SEC decides how to use its new Dodd-Frank Act powers in the same arena.

A hallmark of the DOL’s latest proposal is its "best interest contract exemption," a provision that would let fiduciary advisers and their firms collect fees not typically permitted to them under existing laws if they acknowledge their fiduciary status. The proposal also has many carve-outs, including for swaps and security-based swaps. Moreover, the proposal reflects changes in the DOL’s thinking since its failed 2010 proposal, and it takes into account the findings of a report issued by the White House Council of Economic Advisers.

Secretary of Labor Thomas E. Perez remarked that the proposed fiduciary rule is about putting retiree’s interests first. “As commonsense as this may be, laws to protect consumers and ensure that financial advisers are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisers can be paid in various ways, as long as they are willing to put their customers' best interest first.”

SEC helps DOL, but do conflicts loom? Dodd-Frank Act Section 913 required the SEC to report to Congress on broker-dealer standards of care. The law also gave the Commission the power to adopt a rule that brings the duty of care for broker-dealers into line with the standard for investment advisers. Earlier this year, the Obama Administration trumpeted its efforts to raise brokers’ standard of care.

In March, SEC Chair Mary Jo White told the House Financial Services Committee that that she believed her agency should move towards adopting a uniform fiduciary standard for brokers who give personalized securities advice to retail investors. White said any regulations would need to carefully define key terms, leave room for agency guidance, and be enforceable. She also confirmed that the SEC had provided “technical assistance” to the DOL regarding ERISA’s definition of “fiduciary.”

But White declined to give a specific time frame for the SEC to propose its own fiduciary duty rule, other than to say she planned to talk to the agency’s other commissioners in the “near term,” and that the SEC staff was busy drafting a recommendation for the Commission.

Investors and plan administrators alike may ask what impact the DOL proposal, if finalized before the SEC takes action, would have on the plans DOL regulates. This is a thorny question given the potential for investors’ plans to be subjected to conflicting rules from different federal agencies.

Last month, two Republican Congressman asked Perez to clarify how the DOL would implement the rules outlined today. Representative John Kline (R-Minn), Chairman of the House Committee on Education and the Workforce, and Rep. Phil Roe (R-Tenn), Chairman of the Subcommittee on Health, Employment, Labor and Pensions, said they worry about the lack of coordination between the DOL and the SEC, and the possibility of conflicting rules for investors.

The DOL’s proposal noted that the agency specifically coordinated with the SEC and the CFTC regarding a carve-out for swaps and security-based swaps. The provision, located in paragraph (b)(i)(ii) of the proposed rule, would not treat some persons involved in swaps transactions as ERISA fiduciaries when they perform duties required under applicable swaps and derivatives laws and implementing rules.

But the DOL cautioned that it cannot take into account all possible conflicts with securities regulations or other laws because of these laws’ varied duties and remedies. “In the Department’s view, it neither undermines, nor contradicts, the provisions or purposes of the securities laws, but instead works in harmony with them,” said the proposal.

Industry, investor groups mixed. Industry and investor groups have both criticized and exalted the prospect of a fiduciary standard for brokers. Both reactions tend to focus on many of the same issues raised by some members of Congress. 

Joseph C. Peiffer, president of the Public Investors Arbitration Bar Association (PIABA) welcomed today’s DOL proposal. “These are people who have played by the rules all their lives and put their trust in the advertising and other claims made by brokerage firms and individual financial professionals. Too many investors lose their hard-earned retirement savings because their brokers sell investment products that pay a large commission but are not in the best interests of their clients,” said Peiffer. He also said PIABA was ready to help the DOL work out the remaining details of the proposal.

PIABA had recently issued a report making its case for regulators to take action to curb what it sees as the brokerage industry’s misleading use of advertisements to sell financial services to customers who may be unaware that brokers often do not owe them a fiduciary duty. A PIABA press release said the report targeted nine brokerages the group studied in an effort to push the SEC and the DOL to adopt a uniform fiduciary standard.

“Firms routinely advertise themselves as giving personalized, ongoing, non-conflicted advice that puts the customer first. Brokerage firms have also taken the position publicly with the regulators that such a duty should exist,” said the PIABA report. “But, when called to account for their actions, these same brokerage firms litigate like they have no such duty.”

Meanwhile, the Securities Industry and Financial Markets Association (SIFMA) said it would review the DOL’s new proposal carefully and submit comments to the agency on its findings. Kenneth E. Bentsen, Jr., SIFMA's President and CEO, had this to say in a late afternoon press release: “This is a voluminous rule where the fine print matters. We want to ensure it protects investor choice and doesn't unnecessarily reduce access to education or raise costs, particularly for low and middle income savers.”

SIFMA had previously voiced concerns about whether the impending DOL proposal might not only conflict with rules issued by other regulators, but how it also may actually hurt investors. "This isn’t about whether brokers and investment advisers should be subject to a fiduciary duty when doing the same thing,” Bentsen said in a SIFMA publication earlier this month. “We agree with that. It’s a question of whether the Administration should proceed, irrespective of congressional intent and in conflict with regulators, with a rule that will ultimately make it harder to save."

Companies: Public Investors Arbitration Bar Association; Securities Industry and Financial Markets Association

MainStory: TopStory BrokerDealers Derivatives DoddFrankAct InvestmentAdvisers Swaps

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