More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Several potential stumbling blocks have surfaced in the past couple of months that could stymie—or outright derail—release of the Securities and Exchange Commission and Department of Labor’s fiduciary rules.
Two bills have surfaced—one in June and the other in July—that attempt to stop Assistant Secretary of Labor Phyllis Borzi’s plan to release a reproposal of DOL’s fiduciary rule in the fall. However, at least two industry officials believe that DOL's fiduciary train "has left the station," and is headed to the Office of Management and Budget (OMB).
Then in early August, a group of 10 Democratic senators urged the OMB to carefully review the DOL's fiduciary reproposal to ensure that it doesn’t “directly conflict” with or “upend” the Securities and Exchange Commission’s work on its fiduciary rule.
Meanwhile, with new data to digest after the July 5 close of its comment period on the costs and benefits of a fiduciary rule, as well as two new commissioners having taken their seats at the SEC, industry officials predict any rule proposal from the SEC won’t be released until year-end at the earliest.
“This should take time,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “With new commissioners on board” at the SEC “and new research data to absorb, in some key respects we are starting anew” on an SEC fiduciary rule.
Kara Stein and Michael Piwowar, President Barack Obama's picks to be the two new SEC Commissioners, were sworn in on Aug. 9. Stein, an aide to Sen. Jack Reed, D-R.I., replaces SEC Commissioner Elisse Walter, a Democrat. Piwowar, an economist on the Senate Banking Committee’s staff, replaces Republican Commis-sioner Troy Paredes.
For the DOL, the first bill, introduced by Rep. Ann Wagner, R-Mo., would require that the Department wait to repropose its fiduciary rule until 60 days after the SEC issues its fiduciary proposal. Wagner’s bill, the Retail Investor Protection Act, passed out of the House Financial Services Committee by a 44-13 vote and has been referred to the House Education and Workforce Committee for consideration.
Granted, Wagner’s bill would have to pass the full House and get Senate approval, but industry and consumer trade groups worry that it could stop both agencies’ rules in their tracks. In a joint letter, the groups—which included the Investment Adviser Association, the Financial Planning Association, the CFP Board, the AARP, the North American Securities Administrators Association and the National Association of Personal Financial Advisors—said that Wagner’s bill “linking” the DOL and SEC rulemakings would not only prevent the DOL from moving forward with a rule on the definition of fiduciary under the Employee Retirement Income Security Act (ERISA), but the bill “potentially halts DOL’s rulemaking altogether if the SEC does not act on a fiduciary rule.”
The second attempt by Congress to stymie the DOL’s effort to release its fiduciary reproposal came when Sen. Orrin Hatch, R-Utah, introduced legislation in early July that would return oversight of IRAs to the Treasury Department—stripping that oversight from DOL.
In the Aug. 2 letter to Sylvia Matthews Burwell, OMB’s director, the 10 senators--members of the Senate Banking and Health, Education, Labor and Pensions Committees--said that while they believe the SEC is moving forward in crafting a fiduciary rule that adheres to the congressional mandate set out in Section 913 of the Dodd-Frank Act, the DOL's efforts to redefine fiduciary under the Employee Retirement Income Security Act could work “at cross purposes” to the SEC’s rule.
At a minimum, the senators said in their letter, DOL should not issue “final” fiduciary regulations until the “SEC has completed its work” on its fiduciary rule and that “any regulation the DOL ultimately may propose should be carefully crafted so that it does not upend the SEC’s work.”
DOL has received significant pushback regarding its plan to include IRAs in its rule to amend the definition of fiduciary under ERISA, with the most notable complaint being that advisors would lose their ability to earn commissions on IRA advice.
The provision to nix DOL oversight of IRAs is included in a bill, the Securities Annuities for Employee (SAFE) Retirement Act of 2013, which would create a new public retirement plan in which insurance companies pay benefits through annuity contracts. The measure includes wide-ranging modifications to 401(k)s, including expanding employers’ ability to offer annuities in defined contribution plans and making target-date fund disclosure more effective.
The last title of the bill states that jurisdiction of IRA fiduciary regulation oversight should be returned to Treasury. “Prior to the issuance of a 1978 executive order, Treasury had jurisdiction over the fiduciary duty rules applicable to IRAs and those rules are still part of the Internal Revenue Code,” the bill states. That jurisdiction “will be returned to Treasury from the Department of Labor.”
Barbara Roper, director of investor protection for the Consumer Federation of America, said that under the bill, Treasury would be required “to start from scratch on a rule proposal,” which “would delay, and could derail entirely, final completion of these badly needed protections for workers and retirees.”
In addition, the bill says that Treasury will have to “consult with the Securities and Exchange Commission in prescribing rules relating to the professional standard of care owed by brokers and investment advisors to IRA owners.”
CFA, Roper said, “strongly supports allowing the DOL to move forward with strengthened fiduciary rules, and we believe application of those rules to IRAs is essential to protect the millions of middle-income workers who need to make every penny count in their efforts to fund a modest retirement.”
Hatch, ranking member on the Senate Finance Committee, said his bill “takes action to stop the DOL from unilaterally over-regulating 401(k) plans and IRAs.”