Phyllis Borzi: Her fiduciary fight is far from over

The financial services industry may have thought it notched a win when Assistant Labor Secretary Phyllis Borzi pulled a proposed regulation that would have expanded the definition of “fiduciary” when giving advice to a retirement plan.

But Ms. Borzi, 65, was just getting warmed up. She plans to reissue the proposal in the coming weeks, and those who have watched her don’t expect her to back off on any of the more controversial parts of the regulation.

Experts warn that a year of discussion with industry advocates may have given Ms. Borzi and her agency a better sense on how the fiduciary rule would affect broker-dealers and their share of the $4.3 trillion individual retirement account business.

“There’s a benefit to learning more about the industry, but it has led Ms. Borzi to be even tougher,” said Jason C. Roberts, chief executive of the Pension Resource Institute LLC, a consulting firm for broker-dealers.

Revenue-sharing agreements that compensate advisers, for instance, are in Ms. Borzi’s cross hairs, and she has indicated that they’d be addressed in the new proposal.

“When you’re getting revenue share, there are markups, and Ms. Borzi is starting to look under the hood,” Mr. Roberts said. “She’s not going to get any friendlier in the second round.”

Over the course of the past year, the proposed regulation generated more than 300 public comments, resulted in two days of public hearings and met fierce opposition from bipartisan members of Congress. Critics claimed that the regulation would go too far in extending fiduciary rules to anyone giving advice to IRA holders and predicted that it would cause brokers to abandon the market.

A slate of House Republicans this month sent the Labor Department a letter asking it to proceed with caution in its re-proposal and ensure that IRAs be distinguished from employer-sponsored plans.

For its part, the Financial Services Institute Inc., the independent-broker-dealer advocacy group, hopes that this year’s talks with Ms. Borzi and the DOL will lead to a revamped fiduciary rule that works with the industry’s business model.

“Over time, we fully expect to develop the same constructive dialogue with the DOL that we have with [the Financial Industry Regulatory Authority Inc.] and the SEC,” said Dale Brown, president and chief executive of the FSI. “A real indicator of this understanding will be in the substance of [the DOL’s] re-proposed rule. We remain hopeful.”

Ms. Borzi had indicated that the hot-button issue of IRAs will be covered in the new fiduciary regulation, and though she declined to provide details on its content now, she noted that the agency is examining issues raised during the original proposal and comment process.

“We received vigorous feedback on the rule and believe that effective regulatory initiatives should be informed by hearing the views and comments of the variety of stakeholders that are interested in our activities,” Ms. Borzi wrote in an e-mail.

Experts predict that Ms. Borzi’s interactions with the broker-dealer industry could yield a more workable way to address IRAs within firms’ business model.

But a tense compromise between the agency and the industry could follow, said C. Frederick Reish, a partner at Drinker Biddle & Reath LLP. Perhaps broker-dealers would have to fully disclose their compensation when selling IRAs so that investors could make educated decisions, he said.

A more stringent solution would be to require that brokers selling IRA investments collect standardized fees, regardless of what they recommend, Mr. Reish said.

“I think the DOL has learned a lot more about how business is conducted in the 401(k) community, and more so with IRAs, so they’ll take that into account and write some rules that are easier to deal with,” he added. “But the financial services industry will need to change some practices, so there will be continuing tension.”

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