From the April 2009 issue of Investment Advisor • Subscribe!

Retirement Planning: Advice Rule Revisited

Administration asks DOL to delay effective date; changes to investment reg likely

It looks as though the Department of Labor's (DOL) investment advice regulation is in for some changes. The new Administration has asked the DOL to delay implementing the rule, which was scheduled to take effect on March 23, until May 22, because a number of Democratic Senators, including Ted Kennedy (D-Massachusetts) and George Miller (D-California), chairman of the House Committee on Education and Labor, "have strong objections to the regulation as drafted," says Fred Reish of the law firm Reish Luftman Reicher & Cohen in Los Angeles. The notice of postponement reopened the comment period on the investment advice reg until March 6, 2009.

These lawmakers say the current investment advice regulation "goes far beyond what the law intended and that it will result in many participants being hurt by conflicted advice," Reish says, for example, "by mediocre and overly expensive investments."

Reish believes that the class exemption portion of the regulation "will be withdrawn or rewritten (or, if not, that there will be legislation that overrides it)." The regulation will be rewritten, he says, once the Obama Administration appoints a new Assistant Secretary for the DOL's Employee Benefits Security Administration (EBSA).

Regarding the technical aspects of the regulation, Reish says that it's divided into two parts--the interpretation of the statutory exemption and a new class exemption. The interpretation of the statutory exemption is "somewhat controversial," he says, "but falls within the category of 'reasonable minds can disagree' about how the statute should be read. That is, the DOL read the law to permit more conflicted advice than many observers felt that the statute intended." This is particularly true of the so-called "level fee" advice, Reish says, "where the advisor can give conflicted advice which favors a related entity, for example, a related mutual fund company."

The real controversy, however, is about the class exemption portion of the regulation, Reish says. "It goes well beyond the statute and beyond the statutory exemption and permits virtually any advice with little in the way of restraints that would prohibit the advisor from favoring related investments or would prohibit the advisor from favoring decisions that would benefit his employer." Critics, he says, argue that "it is so important that participants get investment advice that some conflicts will have to be tolerated, that is, the benefit to the many (i.e., most participants) of advice outweighs the fact that the few (i.e., some participants) will be taken advantage of."

While it's hard to gauge when a revised investment advice regulation will be issued that differs from the one released in January, Reish and his colleagues recommend that firms use the information used in the first final rule "for risk management purposes to avoid legal problems that may arise from engaging in prohibited transactions." Reish and his colleagues argue that "it is important to evaluate the extent to which your firm may be engaging in such activities and to take appropriate steps to mitigate these risks immediately. At a minimum, many of the requirements of the final rules establish a standard for best practices and should serve as a guide for complying with future regulatory action."

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