WASHINGTON -- A top official with the Labor Department defended the controversial plan to expand the definition of "fiduciary" to cover people providing advice to retirement plans on a commission-based model, a proposal strongly opposed by industry groups representing independent broker-dealers and advisers.
Deputy Assistant Secretary Michael Davis took the stage here Tuesday at Financial Services Institute's annual advocacy summit, quickly acknowledging that he was in hostile territory.
"I understand I don't need security today, is that correct?" Davis quipped, prompting ripples of laughter throughout the audience.
But the mood became more adversarial as Davis outlined the department's proposal and how it would attempt to guard against conflicts of interest by extending the fiduciary obligations to act in investors' best interest to advisers to IRA plans and participants of plans governed by the 1974 Employee Retirement Income Security Act.
"I think you're on a slippery slope here," one audience member challenged. "I think you really have to carve out because when you really boil it down, what you're worried about is retirement protection for the people of this country. The IRAs are really the sole driver when you take a look at how people roll over those 401ks and manage their future. And to eliminate those choices ... I think you're really going to have some unintended consequences."
The FSI and other critics of the proposal warn that the expansion of fiduciary responsibility would be overly broad, exposing broker-dealers and financial advisers to unreasonable legal liability and forcing them give up the commission-based model in favor of a fee-based structure, ultimately compelling many to abandon the market of advising for IRAs, plans covered under ERISA and their participants.
Opponents scored a victory earlier this year when the Labor Department announced that it was shelving the proposal to expand fiduciary obligations, but Davis reiterated that the plan to revisit the rulemaking is still very much on track, likely for next year.
Members of the FSI in town for the summit plan to head to Capitol Hill on Wednesday to meet with the offices of more than 260 representatives and senators to make their case about the fiduciary issue and other policy priorities. The objections that some lawmakers expressed helped in part to delay the Labor Department's rulemaking process.
Davis offered a vigorous defense of the plan, noting that the 35-year-old ERISA statute already contains provisions under which advisers to retirement plans can be considered fiduciaries, but that the rules, written at a time when defined-benefit plans were the norm, need to be updated, particularly in the aftermath of the 2008 financial meltdown.
"That rule was written in a very different world," he said. "Pension plans don't cover most Americans like they used to."
Of central concern for the department is trying to curb potential conflicts of interest where an unscrupulous adviser pushes a particular financial product for which he receives a heftier commission than another package that might be better suited to investors' needs.
"We are not in the business of trying to constrain investment advice. Our concern is with conflicts," Davis said. "We think that is a different issue than investment advice in the broad sense. I know there are people who disagree, and we'll welcome the debate because that's what we're after. We're not trying to shut down the investment advice marketplace."
ERISA established a five-part litmus test for whether a financial professional would be deemed a fiduciary, offering an exemption if any one of the criteria was not met. In the view of the Labor Department, those evaluation metrics set the bar unreasonably high as the market has evolved.
At the same time, Davis noted that the proposed rulemaking will preserve meaningful exemptions that will carve out advisers engaged in certain practices, such as swap transactions.
The definition and scope of those exemptions figure to be major areas of contention when the department revisits the rulemaking proceeding next year.
Davis emphasized that the intent of the rulemaking is not to eliminate the commission-based model, but that the ERISA regulations currently on the books offer inadequate checks on revenue sharing and principal trading.
"We have not said anything about commissions versus fee models," Davis said. "We've been very agnostic about the fee models."
Kenneth Corbin writes for Financial Planning.