Phyllis Borzi on DOL fiduciary rule: ‘We forever changed the terms of the debate’

Phyllis Borzi is not mourning the death of the Labor Department’s fiduciary rule. Rather, this “mother of the regulation” celebrates how the rule has illuminated the importance of strong investment-advice standards.

“My staff did absolutely spectacular work, and nothing will ever diminish that,” said Ms. Borzi, an assistant secretary of labor and head of the Employee Benefits Security Administration during the Obama administration. “We forever changed the terms of the debate.”

The DOL rule, which Ms. Borzi shepherded from the initial proposal in 2010 through the release of the final regulation in 2016, required that brokers act in the best interests of their clients in retirement accounts. Its supporters say it had teeth and would make brokers follow through.

The rule was partially implemented last June, but the regulation was vacated in its entirety by the 5th U.S. Circuit Court of Appeals in March. The Department of Justice, acting on behalf of the DOL, failed to appeal the decision. It looks as if the measure will die in court.

But Ms. Borzi said that during its life — and even after its death — the fiduciary rule is educating the public about what they should expect from their financial advisers.

“Consumers now are beginning to understand and focus on the need to have people who are legally required to act in their best interest,” she said. “There is unquestionably a sense now that customers are well aware of the need to ask the question: Are you a fiduciary?”

(More: The story behind Phyllis Borzi’s fiduciary journey)​

She also points to the financial industry’s trend of reducing investment costs.

“The move toward lower fees, I think that will be a survivor,” Ms. Borzi said.

The DOL’s role in setting investment-advice standards has been taken over by the Securities and Exchange Commission, which released its own reform package in April. One piece of the SEC proposal is Regulation Best Interest, designed to be a step up from the current suitability standard that governs brokers.

The DOL and SEC took different approaches, Ms. Borzi said. The DOL regulation focuses on curbing broker conflicts of interest, while the SEC rule concentrates on straightening out consumer confusion about brokers and investment advisers, who already must meet a fiduciary standard of care.

“I’m not sure [SEC Chairman Jay Clayton] has taken on the right issue,” Ms. Borzi said. “Until people attack conflicts of interest, consumers are going to continue to be harmed.”

Some states are likely to use the DOL rule as a template to pursue their own investment-advice standards if they perceive the SEC regulation to be too weak.

“To the extent they continue to do that because they see a vacuum at the federal level, that’s an important legacy,” Ms. Borzi said.

If the Obama administration had completed implementing the rule during its term, rather than letting that process slip into a Trump administration that is hostile to the regulation, perhaps the rule wouldn’t be at death’s door.

But Ms. Borzi said the years-long rulemaking process ensured that the regulation got wide input and had high regulatory integrity.

“Do I regret that we didn’t move faster? You bet,” she said. “But what would I have sacrificed to move faster? I don’t know what piece of this I would have jettisoned in order to move it faster.”