More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
Bowing to pressure from members of Congress, industry groups, and the public, the Department of Labor’s Employee Benefits Security Administration (EBSA) said Monday it would repropose its controversial rule amending the definition of fiduciary under the Employee Retirement Income Security Act (ERISA).
In announcing the decision, Phyllis Borzi (left), assistant secretary of EBSA, said the group has “said all along that we will take the time to get this right to ensure that we provide the strongest possible protections to business owners and retirement savers in plans and IRAs.” Investment advisors, she continued, “shouldn’t be able to steer retirees, workers, small businesses and others into investments that benefit the advisers at the expense of their clients. The consumer’s retirement security must come first.”
The decision to repropose, Borzi added, means that this important consumer protection initiative will benefit from additional input, review and consideration. “The agency agrees with stakeholders and lawmakers that more public input and greater research will strengthen the rule,” she said. The extended input will supplement more than 260 written public comments already received, as well as two days of open hearings and more than three dozen individual meetings with interested parties held by the agency.
The new proposed rule is expected to be issued in early 2012.
Consistent with the President Barack Obama’s January executive order on regulation, “the extended rulemaking process also will ensure that the public receives a full opportunity to review the agency’s updated economic analysis and revisions of the rule,” Borzi stated. EBSA, she pledged, will continue to coordinate closely with the Securities and Exchange Commission and the Commodities Futures Trading Commission (CFTC) to ensure that this effort is harmonized with other ongoing rulemaking.
Borzi then offered details on areas of the rule that will likely be revised. EBSA, she said, anticipates revising provisions of the rule including, but not restricted to, clarifying that “fiduciary advice is limited to individualized advice directed to specific parties, responding to concerns about the application of the regulation to routine appraisals and clarifying the limits of the rule’s application to arm’s length commercial transactions, such as swap transactions.”
Also anticipated are exemptions addressing concerns about the impact of the new regulation on the current fee practices of brokers and advisors, Borzi said, and “clarifying the continued applicability of exemptions that have long been in existence that allow brokers to receive commissions in connection with mutual funds, stocks and insurance products.” EBSA, she continued, “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.”
EBSA is also seeking to amend a 1975 regulation, which defines when a person providing investment advice becomes a fiduciary under ERISA, in order to adapt the rule to the current retirement marketplace. “The proposal’s goal is to ensure that potential conflicts of interest among advisers are not allowed to compromise the quality of investment advice that millions of American workers rely on, so they can retire with the dignity that they have worked hard to achieve,” Borzi said.
Brad Campbell, the former head of EBSA who’s now counsel with the law firm Schiff Hardin in Washington, has been urging Borzi to repropose the fiduciary rule for some time. He told AdvisorOne in an email message on Monday that reproposing the rule “is the right decision as a matter of regulatory process and good public policy.” The issues raised by the proposal, he said, “are complex, and rushing to a final rule would have increased costs and uncertainty, as well as embroiling the Department in extensive litigation.”
Industry groups were quick to weigh in with their response. Dale Brown, president and CEO of the Financial Services Institute (FSI), said FSI applauds DOL and Borzi “for recognizing the correct course of action and taking steps to get the rule right for investors and financial advisors. The rule, as proposed, would have serious negative consequences for Main Street Americans in need of retirement advice.”
Robert Miller, president of the National Association of Insurance and Financial Advisors (NAIFA) said in a statement that NAIFA “is gratified that the Department of Labor has decided to repropose its fiduciary rule and clarify what types of investment information and fee arrangements will be exempted.”
NAIFA, he continued, looks “forward to reviewing the new proposal with a singular focus on ensuring that middle-market investors continue to have access to affordable professional investment guidance for their retirement planning.”
Ken Bentsen, executive VP of public policy for the Securities Industry Financial Markets Association (SIFMA), agreed that EBSA made the "right decision" by re-proposing its rule. "Since the beginning," he said, "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. We appreciate the Department’s announcement that they indeed will conduct further economic analysis and make changes that will be included in the new proposed rule."