More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
According to the Semiannual Regulatory Agenda for the Department of Labor’s Employee Benefits Security Administration, a reproposal to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) will come in October.
Despite numerous efforts by Congress and industry lobbying groups to push that deadline back—or outright derail it—all signs point to the DOL sticking to that schedule. A recent letter from 10 Democratic senators to the Office of Management and Budget, where DOL is expected to send its rule proposal sometime in September, is a good indication that those senators expect the proposal to land at OMB any day now.
Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath in Los Angeles, told Investment Advisor that he believes the DOL’s controversial fiduciary “train has left the station” and is headed to OMB.
The next step, he said, will be “to see the proposed regulation and the related proposed prohibited transaction exemptions. If the DOL has responded to the most important concerns of the private sector, then the reproposal could be less controversial than contemplated.”
Both Reish and Robert Lewis, vice president of legislative affairs for the Financial Services Institute, agree that the recent confirmation of Assistant Attorney General Tom Perez as secretary for the department will not change DOL’s fiduciary course. “DOL has been moving forward [on its fiduciary plan] most of the year with an acting secretary,” Lewis says. “We do not expect anything to change with [Perez’s] confirmation.”
FSI, which has been a staunch opponent of DOL’s fiduciary plan, said in a statement that it “looks forward to working with [Perez] in the future, especially as his department moves forward on their rule redefining the definition of ‘fiduciary.’”
However, while the DOL may succeed in getting a reproposal to OMB by October, it could be held up once it gets there. Indeed, it looks as though the senators see OMB as a clear stalling point.
DOL is required to send its rule proposals to OMB, but the Securities and Exchange Commission (SEC) is only required to send final rules to OMB.
Once DOL sends OMB its reproposed fiduciary rule, OMB then checks the proposal’s cost-benefit analysis and gives DOL feedback on the proposal, asking for changes if necessary. DOL must then make the changes and have them approved by OMB before putting the proposal out for public comment.
As the senators—members of the Senate Banking and Health, Education, Labor and Pension Committees—told Sylvia Mathews Burwell, OMB’s director, in an early August letter, they want OMB to carefully review the DOL’s fiduciary redraft to ensure that it doesn’t “directly conflict” with or “upend” the Securities and Exchange Commission’s work on its fiduciary rule.
Given OMB’s role in “coordinating and streamlining” agencies’ regulations, the senators said, “We write to make you aware of the potential conflicts between these two regulations.”
The senators wrote 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, in its efforts to redefine fiduciary under ERISA, could work “at cross purposes” to the SEC’s rule.
At a minimum, the senators say 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.”
The senators told OMB that they “believe that Congress clearly intended that a single [fiduciary] standard should apply to retail accounts, including retirement accounts, based on specific guidelines enumerated in Section 913.”
While acknowledging that they don’t know what the DOL’s fiduciary reproposal will say, the senators cite DOL’s 2010 proposal that they say could have caused “all broker-dealers that service individual retirement accounts to be ERISA fiduciaries, which would have as a practical matter eliminated meaningful investment services for millions of IRA holders.”
SEC Chairwoman Mary Jo White told members of the Senate Banking Committee in late July that the agency is focused on crafting a rule to put brokers under a fiduciary mandate, stating that “it’s important for me to get to where we are going on that [rulemaking] as quickly as we can.” But exactly when the agency will release that proposal remains uncertain.
White told members of the Senate Banking Committee that she has met with senior officials at DOL regarding collaboration on both agencies’ fiduciary rules and has directed staff “to engage more actively” with DOL “to make sure they understand [the SEC’s] perspective” on its fiduciary rulemaking.
But she noted the “full plate” of rules mandated by the Dodd-Frank and JOBS Acts that the agency must wade through and act on. Dodd-Frank gave the SEC the authority to write a fiduciary rule for brokers, but it didn’t mandate that the agency do so.
Action on a fiduciary rulemaking could also be stymied by the arrival of the two new SEC commissioners—Kara Stein and Michael Piwowar—who were confirmed by the full Senate on Aug. 2.
While Stein, a Democrat who’s replacing Elisse Walter, and Piwowar, a Republican who’s replacing Troy Paredes, have voiced their support for White’s recent announcement that she’d be changing the agency’s “neither admit nor deny” settlement policy by seeking admissions of guilt in some of the more egregious cases, neither have expressed their view on establishing a uniform fiduciary duty rule for brokers and advisors.
Phyllis Borzi, assistant secretary of labor for EBSA, the primary architect of the revamped fiduciary proposal, has been adamant since crafting amendments to the definition of fiduciary under ERISA that while DOL would take the time to “get this right,” and that DOL is indeed “coordinating very closely with the SEC to make sure we don’t have outright conflicts,” she was not going to wait for the SEC to publish its rule before releasing DOL’s. As she told reporters at a recent conference: DOL “began working on its rule” to amend the definition under ERISA “before Dodd-Frank,” adding that it was ludicrous for lawmakers to think that “one statute is more important than another.”