A fiduciary standard? Don't hold your breath

DOL and SEC still far away from bringing forth concrete proposals

Mar 12, 2014 @ 1:46 pm

By Mark Schoeff Jr.

department of labor, phyllis borzi, fiduciary standard, daniel gallagher, sec, regulation
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DOL Assistant Secretary Phyllis Borzi

Both the Labor Department and the Securities and Exchange Commission may be farther away than supporters had hoped from promulgating fiduciary standards.

In a speech in Washington on Wednesday, Labor Department Assistant Secretary Phyllis Borzi said that more work needs to be done before it can re-purpose a rule that would expand federal retirement law investment advice standards to apply to more financial advisers helping clients save for retirement.

It has been four years since the Labor Department first proposed the rule.

In its current regulatory calendar, the Labor Department said that it would release the rule in August.

“We're not quite finished. We haven't made all our decisions,” Ms. Borzi told an audience at a meeting on retirement security sponsored by the Financial Services Roundtable.

“We're working slowly and deliberately because it's much more important for us to get it right than meet someone's arbitrary deadline. August is our goal," Ms. Borzi said.

"Maybe we will be ready then," she said. "Maybe we won't."

At the same event, Securities and Exchange Commission member Daniel Gallagher expressed doubts that the commission will propose its own fiduciary duty rule to raise advice standards for brokers providing retail investment advice.

The Dodd-Frank financial-reform law gave the SEC the authority to promulgate a fiduciary-duty regulation, but it hasn't yet moved forward. It is conducting a cost-benefit analysis of the regulatory impact of a potential rule.

“At this point, I'm not sure we need to use [the Dodd-Frank authority],” Mr. Gallagher said. “I'm not sure, quite frankly, a majority of the commission believes that or believes we should use it in any way.”

SEC Chairman Mary Jo White has said that pushing the five-member commission to a decision on whether to pursue a fiduciary-duty rule is a top priority.

Mr. Gallagher told reporters after the meeting that there had not been a discussion among the commissioners about the fiduciary standard since the SEC put out a request for information a year ago to help it draft a cost-benefit analysis.

“The chairman is pushing the staff very hard to get us something that will be a decision point,” he said. “I start from the position that it's not necessary until someone proves it out.”

Both the Labor Department and SEC fiduciary-duty rules would require advisers to act in the best interests of their clients, a bar that investment advisers already must meet. Brokers adhere to a suitability standard.

The Labor Department first proposed its rule in 2010. It withdrew the measure after fierce criticism from the financial industry, which said that it would impose for the first time a fiduciary duty on brokers selling individual retirement accounts and potentially force them out of the market serving investors with modest accounts.

The Labor Department's primary motivation in proposing the rule, which would expand the definition of "fiduciary" under federal retirement law, is to protect from conflicted advice small investors who are building their own retirement nest eggs, Ms. Borzi said.

She dismissed the criticism that a Labor Department rule would harm investors with small retirement accounts.

“Honestly, we've looked at all the literature we can find, and we can't find any evidence of that,” Ms. Borzi said.

“If you have any evidence, please share it with us," she said. "Please help us understand how we might structure our rule … so that if it's a serious problem, we can minimize that.”

Lee Covington, senior vice president and general counsel at the Insured Retirement Institute, wasn't swayed by Ms. Borzi's rebuttal.

“We just disagree,” said Mr. Covington, who was in the audience at the FSR event. “It's clear that studies show that middle-income investors will lose access to advice.”

The worry that groups such as the IRI have is that the Labor Department rule would curtail commissions and revenue-sharing on retirement investment products.

During the event, Ms. Borzi tried to allay those fears.

“We are not going to prohibit commissions in the new proposal. We will propose ways you can be compensated by commission — we might call it something different," Ms. Borzi said.

"We don't regulate business models," she said. "We regulate advice."

The new proposal will include prohibited-transaction exemptions related to commissions and revenue sharing. It also will address investor education and rollovers from 401(k) plans to individual retirement accounts.

“It's our No. 1 priority within the Department of Labor,” Ms. Borzi said. “We think it's a critically important consumer protection.”


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