More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
A day after Phyllis Borzi (left), head of the Department of Labor’s Employee Benefits Security Administration (EBSA), told AdvisorOne that the DOL’s reproposed rule on fiduciary would be applied to IRAs, EBSA’s deputy assistant secretary said that EBSA was attempting to mold exemptions to the rule around revenue sharing and principal transactions. Those are two areas advisors said they would not be able to receive commissions if a fiduciary duty is applied to IRAs.
Advisors are asking EBSA if some exemptive relief can be given to principal trades and revenue sharing when dealing with IRAs under a fiduciary standard, Michael Davis, deputy assistant secretary at EBSA, told attendees at the Financial Services Institute’s (FSI) 7th annual advocacy summit in Washington on Tuesday. Davis said EBSA has had several meetings regarding how to craft such exemptions.
Revenue sharing, he said, refers to third-party payments coming from sales of a product, and advisors have complained to EBSA that if there isn’t an exemption for revenue sharing arrangements then “we’d have to move [IRA holders] into a fee-based model. This is the problem that people are citing to us,” Davis said.
The standard practice at DOL when issuing an exemption, Davis said, is opening it up for a comment period, just as is done with a proposed rule. The idea, he said, “is to release the exemptions at the same time as the reproposed [fiduciary] rule next year.”
As Borzi stated at an industry conference earlier this year, since the mid-1980s, the EBSA has had class exemptions for brokers receiving commissions on such “run of the mill” products as securities, annuities and bank products—but not for hedge funds or private equity. “We are carefully examining the exemptions and if we need to tweak them, we’re going to do it,” she said.
Borzi told AdvisorOne on Monday that EBSA believes that including
IRAs “is a critical part,” of its rule amending the definition of fiduciary under the Employee Retirement Income Security Act (ERISA). But Davis pointed out at the FSI event that EBSA does not plan to “expand jurisdiction” of IRAs that DOL doesn’t currently have. Davis added that EBSA welcomes input regarding the exemptions and on including IRAs in the fiduciary rule so that EBSA makes "sure we get it right."
Brad Campbell, former head of EBSA who's now counsel with the law firm Schiff Hardin in Washington, told AdvisorOne on Tuesday that DOL's "approach to IRAs should be a source of concern to everyone involved, including IRA account holders."
"Without providing one word of economic analysis demonstrating either an existing problem or the impact of its proposal on a more than $4 trillion IRA marketplace, DOL decided providers simply would have to change their business models." Following a bipartisan outcry, he continued, "including criticism from consumer groups, DOL now says it will develop exemptions allowing at least some aspects of business models it originally prohibited, though how it might do this is less than clear."
The better solution, Campbell said, "is for DOL to admit that IRAs are inherently different than ERISA plans, and that rules designed to prevent misconduct by plan fiduciaries are a poor fit for a retirement product owned and controlled by an individual. Rather than trying to boot-strap its authority through the prohibited transaction rules, DOL should allow the SEC and other agencies that traditionally regulate the conduct of persons selling individual financial products to do their jobs."
Davis also said that EBSA’s investment advice rule was just “cleared” by the Office of Management and Budget (OMB) on Monday. The investment advice rule, mandated under the Pension Protection Act, says that if you are a fund provider you can also provide investment advice if you meet two criteria: under a level fee basis or via a computer model. That rule will be out soon.