PHILADELPHIA – Over the years the Department of Labor spent developing and then reworking the fiduciary rule, Assistant Secretary Phyllis Borzi and her colleagues regularly received support from a surprising quarter – people who work for some of the companies that most vehemently fought it.

"Wherever I would go, people would come up to me, wearing name tags of companies that were wildly opposed to what we were doing, and they would say, 'You go, girl,' " Borzi told an audience at an Institute for the Fiduciary Standard event this week. "And that kept us going."

Phyllis Borzi, Assistant Secretary, Labor Department (The Institute for the Fiduciary Standard)
Phyllis Borzi, Assistant Secretary, Labor Department (The Institute for the Fiduciary Standard)

Borzi spoke along with other prominent fiduciary advocates, including John Bogle, founder of the Vanguard Group, at a half-day conference that launched the Campaign for Investors, an initiative of the institute.

Bogle and other speakers lauded Borzi for her leadership, guiding work on the rule and seeing it to fruition. The department released the rule last month.

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"I used to joke before the final rule came out that many in the industry had two sets of red teams, you know what I'm talking about: SWAT teams," says DoL Assistant Secretary Phyllis Borzi.

'BENDING TOWARD FIDUCIARY DUTY'
"I think it's fair to say that we are at the beginning … of the arc in finance that is bending toward fiduciary duty," said Bogle, who, at 87, uses a cane to support his thin frame, but spoke from the podium in a deep voice that carried to the back of the room. "It is said that a journey of 1,000 miles begins with a single step. … And, thanks importantly to Phyllis Borzi, the Department of Labor has taken that first step."

The industry's divided view of the rule also manifested at the top levels, Borzi says.

"I know for a fact that some of the biggest names in the financial world, who have been fighting us tooth and nail, have already been building systems for almost two years … to comply," Borzi said.

These two approaches had an unusual outcome, she said.

"I used to joke before the final rule came out that many in the industry had two sets of red teams, you know what I'm talking about: SWAT teams," Borzi said. "One to help them figure out whether they still could kill it, and the other to figure out, if it was finalized, how they could avoid it."

'INTERESTING INTERPRETATIONS'
Since the rule was unveiled, "We have people coming in, suggesting all sorts of – I guess I'll be kind – interesting interpretations," she said, before sharing the guidance she offers in response. "The rule of thumb is this is a broad rule. It is intended to sweep broadly. When in doubt, assume that you are supposed to be under the best interest contract exemption. Any exemption to the rule we are going to construe extraordinarily narrowly."

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"I learned so much more from the opponents."

Borzi thinks the finalized rule hasn't inspired as much blowback as expected both due to changes the department made at the request of industry heavyweights, as well as the extensive comment period, which she said totaled 250,000.

OFFICIALS LEARNED FROM OPPONENTS
Borzi suggested that some opponents’ efforts against the rule may have had an unintended effect.

"I learned so much more from the opponents," Borzi said. "I don't know that they intended us to take as much constructive commentary from what they said."

She emphasized that the industry's conflict-of-interest problems come not from the people who work in it, but from the structure of the system itself.

"It isn't," she said, "a case of bad people giving advice. It's that people who wanted to do the right thing by their clients were trapped in a bad system, in a system that was characterized by misalignments of the interest of the investor and the interest of the adviser."