Fiduciary Proposal More Bark Than Bite?

Register now

The Department of Labor's controversial proposal for extending fiduciary responsibilities to brokers working with retirement plans will likely include significant exemptions permitting common business practices such as commissions and revenue sharing, according to people familiar with the drafting of the rules.

The DoL's proposal, intended to crack down on conflicts of interest in the retirement sector, is being sent to the White House's Office of Management and Budget for review -- the next step before it would be released to the public -- on Monday, according to published reports.

President Obama is set to make a speech in favor of the rules on Monday afternoon at the AARP with Sen. Elizabeth Warren (D-Mass.) and Consumer Financial Protection Bureau Director Richard Cordray.

The new rules would expand the definition of a fiduciary under the 1974 Employee Retirement Income Security Act, or ERISA, to brokers and other financial professionals serving retail retirement investors and plans. The fiduciary designation would likely impose a requirement that brokers act in their clients' best interests, and prohibit certain types of transactions where the conflicts were deemed insurmountable.

A spokesman for the department declined to elaborate on the substance of the proposed regulations.


The opposition from the brokerage industry has been fierce. Kent Mason, a partner at the law firm Davis & Harman who has been lobbying against the proposal, says that second set of provisions poses the greatest concern for brokers, who have argued that restrictions on commissions and other commonplace forms of compensation could cause them to abandon the low and moderate-income segment of the retirement market.

"There are two significances -- one is that the advisor has to act in the best interest of the customer, and that's really never been an issue. The industry has been fine with acting in the best interests of the customers, because if they don't they're not going to have those customers for very long," he says.

"The second significance of being a fiduciary for ERISA purposes," Mason adds, is that "prohibited transaction rules apply -- those rules say that a fiduciary cannot give advice if it can affect the fiduciary's compensation."

Phyllis Borzi, the assistant secretary of labor who has been leading the development of the rules -- and has often spoken publicly in their defense -- has repeatedly said that commission-based transactions would be permitted under the proposal.

And Mason says that in a recent meeting White House officials confirmed that certain types of revenue sharing arrangements between brokers and the investment vehicles they recommend could continue under the rules. Barbara Roper, director of investor protection at the Consumer Federation of America, says she has heard the same about 12b-1 fees.


After the department submits the new rules to OMB, the next step -- after a three-month (or longer) review by the White House -- would be to release them to the public for a comment period.

Given the expectation that many established forms of compensation that are so central to the brokerage business model appear likely to be allowed under the rules, Roper questions the contention of industry groups that they really are willing to accept a best-interest fiduciary standard for advice under ERISA.

"If that were true, why would they not be eagerly awaiting the public comment on the rule?" she says.

"I'd be willing to buy that argument if the entire industry strategy on this hadn't been to kill the entire rule before it could be re-proposed," Roper adds. "They have adopted such scorched-earth rhetoric, and they have been so misleading in how they represent the DoL's regulatory approach, that they've lost all credibility with me."

The Labor Department originally proposed a set of fiduciary rules in 2010, but withdrew them after widespread criticism from Wall Street groups and many members of Congress.

Roper and other consumer advocates argue that conflicted advice is deeply engrained in the brokerage business model, echoing the concerns outlined in a recent leaked White House policy memo in which officials concluded that "the current regulatory environment creates perverse incentives that ultimately cost investors billions of dollars a year" in the form of unnecessary rollovers of 401(k) plans into costly IRAs, and "excessive churning (repeated buying and selling) of retirement assets."

For his part, Mason, who has been lobbying on the issue on behalf of an industry coalition called the Broker-Dealer Coordination Group (whose membership is confidential), says that his clients could be satisfied with the proposed fiduciary rules if they provide sufficient latitude in the regulation of their business model, though he has his doubts.

"We find the news that they're going to cover everything with exemptions to be good news, but I think we're concerned as to how they will implement that," he says. "There have been a lot of exemptions in the past that haven't been workable because they contain conditions that the industry cannot meet."


As a practical matter, it will likely be some time before industry members and other stakeholders get to see what, in fact, is in the rules.

Although the OMB has 90 days to review the proposal and submit feedback, that is not a hard deadline and those reviews often take longer. Only after OMB approves the rules can Labor publish them and open the public comment period.

In the meantime, the very public sparring between industry groups and consumer advocates can be expected to continue, at least until the substance of the proposal becomes clear.

"From here on out it's just one nonstop battle of competing talking points until the rule itself gets made public," Roper says.

"You can call me a cockeyed optimist," she adds. "I actually think when the rule is made public, when it is put out for comment, I have to think there are some responsible members of the financial services community who will look at it and say, 'Well, this is what we've been arguing for the whole time. We might not love all of it, but we can live.'"

Read more:

For reprint and licensing requests for this article, click here.
Practice management Financial planning Compliance Law and regulation Retirement planning