Financial services and pension plan groups welcomed the Department of Labor's decision to go back to the drawing board with a proposed rule defining who is a fiduciary, while supporters of the rule urged the agency to not back down.
The proposal as originally made by the DOL “would have had unintended consequences,” said Kent Mason, partner at law firm Davis & Harman LLP, Washington, who represents retirement-related financial institutions and the American Benefits Council.
Pension plan sponsors had worried that the rule as proposed was so broad that it would inhibit investment guidance for plan participants and raise costs.
“It was such a sea change and it had so many ramifications for the marketplace,” Jeleen Guttenberg, a partner in the Seattle law firm Bracewell & Giuliani LLP, said of the previously proposed rule. Her clients, including investment advisers, fund managers and swaps dealers, rely on exemptions in the current rule. Had a revised rule gone into effect without specific exemptions being spelled out better, “we'd have to re-evaluate everything we do,” she said. “I think it was kind of a half-baked proposal. Once all of the other moving parts (are considered), I think it's going to come out more well done.”
The original proposal, which would have broadened the definition of fiduciary to include anyone who provides investment advice to plans for a fee or other compensation, was aimed at returning to ERISA's original intent of avoiding conflicts of interest. Opponents of the proposal worried it would be applied too broadly, especially for products like IRAs that didn't exist when the Employee Retirement Income Security Act was enacted in 1974.
The withdrawal of the proposal, which DOL officials had hoped to issue in early 2012, followed an unanticipated lobbying effort led by financial services lobbyists, which gained momentum as they enlisted support from nearly 100 members of Congress. One of the most controversial issues was how a new definition would affect service providers for 401(k) plans and IRAs.
But the winning argument for withdrawal was that the DOL's Employee Benefits Security Administration had failed to do enough analysis to prove that the benefits of a wider interpretation of a fiduciary outweighed what the industry warned would be substantial costs and reduced access to retirement investment advice by average consumers.
“Since the beginning, we have raised significant concerns about the proposal and lack of cost-benefit analysis on a rule that would affect millions of IRA holders and plan participants,” Kenneth E. Bentsen, executive vice president of public policy and advocacy for the Securities Industry and Financial Markets Association, Washington, said in a statement.
“Everybody has asked to look more deeply at the costs and benefits of the proposal, and that's what we're going to do,” Phyllis C. Borzi, assistant labor secretary for the EBSA, told reporters on a conference call Sept. 19 to announce the decision. “We weren't as clear as we could have been and so we're trying to fix that.”
Ms. Borzi said they hope to accomplish greater clarity and acceptance with more specific exemptions for swaps transactions and routine appraisals, and recognition of long-standing commission arrangements. “The agency will carefully craft new or amended exemptions that can best preserve beneficial fee practices, while at the same time protecting plan participants and individual retirement account owners from abusive practices and conflicted advice,” the EBSA said in a news release.
For Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries in Arlington, Va., a key test is how the EBSA treats IRAs. “If these rules continue to apply to IRAs, what will happen is that the heavily regulated firms like mutual fund and insurance companies will comply with the rules and less regulated companies won't because they know there is no enforcement,” Mr. Graff said in an interview.
Ms. Borzi believes the extra time “will enable us to strengthen the rule” and ensure that investment advice is solely in clients' interests.
That's crucial, said Knut Rostad, president of the Institute for the Fiduciary Standard, a Falls Church, Va., group representing investors. “It's a significant problem, and the current approach has failed to protect retirees,” Mr. Rostad said in an interview. n