DOL's Borzi says agency looking at third-party payments; not backing off fiduciary update, either
When the Labor Department issues a proposal early next year to expand the definition of “fiduciary” for investment advice related to retirement plans, it will include provisions related to individual retirement accounts and to revenue-sharing agreements that provide income to investment advisers.
“We've created a system in which people's retirement assets have gone from a regulated [defined-benefit] system … to a system in which most of the assets are moving out at a rapid pace into the IRA marketplace, which is far less regulated than any other marketplace,” Assistant Labor Secretary Phyllis Borzi told the annual conference of the American Society of Pension Professionals and Actuaries on Tuesday at National Harbor in the Maryland suburbs of Washington.
Ms. Borzi said that revenue-sharing agreements, in which investment advisers are paid to promote certain financial products, can confuse investors about whether they are receiving advice that's in their best interests.
“That climate has created a sense of uncertainty for people,” said Ms. Borzi, who heads the Employee Benefits Security Administration. “What we're trying to do in this regulation is focus on updating, modernizing and protecting people's retirement security.”
The agency is determining what kind of revenue sharing should be included in so-called prohibited-transaction exemptions that will be issued along with the proposal.
“We're trying to identify all the different types of revenue sharing,” Ms. Borzi said in an interview after her appearance at ASPPA. “We don't give exemptions to concepts. What we're trying to do is identify specific types of third-party payments that would be beneficial to keep flowing. Usually what we do in an exemption is, we attach conditions. It might be a disclosure condition; it might be something else.”
In September, the Labor Department withdrew its original fiduciary-duty proposal following a firestorm of protest from the financial industry and bipartisan members of Congress. The regulator had been set to promulgate a final rule by the end of the year. Opponents said that the initial regulation would subject IRA advisers to fiduciary duty for the first time and curtail commissions, while driving up regulatory and liability costs.
The agency is looking carefully at two areas of the initial regulation that drew many comments, according to Ms. Borzi. The new proposal will define more clearly the difference between providing investor education, which does not entail a fiduciary duty, and giving investment advice, which does.
The agency also is taking another look at a provision called the “seller's exception,” which would not require brokers to adhere to the fiduciary duty as long clients understood they were hearing a sales pitch.
“We do intend [to make clear that] when you render advice for a fee, that's a fiduciary act,” Ms. Borzi said.
Financial industry groups are misguided in celebrating what they think is the demise of the fiduciary-duty rule, Ms. Borzi warned. “We are actually going to re-propose this regulation shortly after the first of the year,” Ms. Borzi said.
That's exactly what executives as the Financial Services Institute Inc., which was helped lead the charge against the original rule, expected.
“All along, FSI has called for DOL to ‘withdraw and repropose,' not withdraw and walk away,” FSI president and chief executive Dale Brown said in a statement. “So we fully expected and urged DOL to come back with a more appropriate rule based off a sound economic-impact study and a true picture of the problem they're trying to solve.”
Ms. Borzi also dismissed critics that claim that the agency doesn't have the authority to regulate IRAs. because they're a tax code provision overseen by the Internal Revenue Service. “They are simply inaccurate,” Ms. Borzi said. “Go and find the presidential reorganization plan No. 4, issued in the Carter administration, and you will see very clearly that the [Labor] Department has jurisdiction over IRAs.”
Although she is getting strong push-back from the financial industry, Ms. Borzi said that the White House did not tell her to take her foot off the fiduciary-rule gas pedal. “I wouldn't say we're getting pressure from the White House at all,” Ms. Borzi said in an interview. “The concern was that we want to get it right. And they were supportive of that.”
The White House may be giving the Labor Department a green light, but the industry continues to flash yellow. “We're imploring the department to go slowly,” Brian Graff, ASPPA's executive director and chief executive, said at the annual conference Sunday. And that's the outcome he foresees, too.
“That regulation is probably going to sit on the shelf until after the election,” Mr. Graff said.
