B-Ds plead for DOL, SEC to team up on fiduciary rule

Efforts to rewrite regulations produce overlap, angst

Mar 3, 2011 @ 3:44 pm

By Darla Mercado

Broker-dealer advocates yesterday pleaded with the Labor Department to coordinate its fiduciary rulemaking efforts with those of the Securities and Exchange Commission to forestall confusion.

At issue is a somewhat lax Dodd-Frank guideline that doesn't jibe with a stricter DOL rule change proposal.

“We heard that the DOL and SEC projects have overlapped in some way and have the potential to conflict, which would impede on providing investment assistance to individuals and affect the way [individual retirement accounts] are serviced in a commission-based environment,” said Randolf H. Hardock, a managing partner at Davis & Harman LLP.

He spoke yesterday at the Labor Department's hearing on its proposed rule to expand the definition of fiduciary.

“The department and the SEC should start working together now toward a clear standard of conduct for broker-dealers,” Mr. Hardock added.

The DOL held a two-day hearing this week on its proposed rule to expand the definition of fiduciary. The proposal would eliminate a five-part fiduciary test that regulators say has allowed service providers and brokers to give advice without being required to work in the best interests of retirement plans and participants. The rule would define as a fiduciary anyone who offers recommendations on investing in, buying, holding or selling securities, or anyone who provides advice or recommendations on managing securities.

The proposed regulation would also apply to IRAs.

Separately, as part of the Dodd-Frank reform bill, the SEC's staff in January released a report which suggested that investment advisers and brokers be held to the same fiduciary standard.

Dodd-Frank states that charging a commission and selling proprietary products aren't necessarily fiduciary breaches and that broker-dealers don't have a continuing duty of care beyond a product's sale. The DOL's proposed rule change, however, would keep firms from skirting fiduciary duty just because they advised a client only once. Further, fiduciaries under the DOL regulation would be unable to receive differing compensation for product sales.

The two conflicting rule regimes would place broker-dealers — who would answer to both the SEC and DOL — in a quandary, especially with retail IRAs, broker-dealer advocates said.

“The securities law concepts and insurance constructs don't exclude the possibility that a registered representative can both look after the best interest of the client and be paid on a commission basis,” said W. Mark Smith, a partner at Sutherland Asbill & Brennan LLP and speaker on the behalf of the Financial Services Institute. “The [Employee Retirement Income Security Act of 1974] has worked in a different way.”

He noted that while the department has spent the last 35 years crafting exemptions into ERISA law to allow broker-dealers to work with retirement plans, the proposal “is undoing work by the department to ensure that services remain available and viable to the plans.”

“The incremental risk and cost of being a fiduciary is beyond the prudent reach of firms' resources, and these firms will be driven out of the market by regulatory uncertainty,” Mr. Smith said.

The SEC staff aims to issue a rule proposal sometime between April and July and expects to work in the DOL's feedback, said spokesman John Nester. Phyllis C. Borzi, who heads the DOL's Employee Benefits Security Administration, said her agency has no intention of raising the cost of regulation by imposing multiple and conflicting standards.

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