More On Legal & Compliancefrom The Advisor's Professional Library
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
While Phyllis Borzi was adamant Wednesday that the Department of Labor will release a fiduciary reproposal, as the redraft is DOL’s “No. 1 priority,” Securities and Exchange Commissioner Daniel Gallagher was just as adamant that the commission lacks the votes to move forward on its fiduciary rulemaking.
Gallagher said that while it “sounds like real progress is being made” on DOL’s fiduciary redraft and that he was “looking forward to hearing about the new proposal,” he believes the commission will not exercise its authority under Section 913 of Dodd-Frank to put brokers under a fiduciary mandate.
“I’m not sure a majority of the commission believes we need to use” the authority under Dodd-Frank, he told attendees during an event in Washington held by the Financial Services Roundtable.
While Gallagher noted that the SEC, like DOL, is being “deliberative” in assessing a fiduciary rulemaking, the SEC has “the authority, but not a mandate” to issue such a rule proposal.
The economic analysis that the agency is currently conducting on such a fiduciary rule, he continued, “will help us to determine whether we need” to move forward.
SEC Chairwoman Mary Jo White said in late February that that agency would make a “threshold decision” this year on whether to proceed in adopting a uniform fiduciary standard for broker-dealers and investment advisors, and to then decide whether there should be “harmonization” of BD and advisor rules.
The commission needs three yes votes to move ahead with a fiduciary rulemaking. Industry sources say the commission is split — two commissioners for a uniform fiduciary standard and two opposed (who only want to enhance disclosures) — with White being the crucial third vote. However, she has remained tight-lipped about where she stands on the issue.
Borzi stated during the event that while August is the “arbitrary” goal set by DOL’s regulatory agenda for a redraft’s release, such a rulemaking could come sooner or later than that.
Both Borzi, assistant secretary of labor for DOL’s Employee Benefits Security Administration, and Gallagher spoke at the FSR event, which was titled Tackling America’s Coming Retirement Crisis, but focused mainly on the DOL’s fiduciary redraft. They were joined by Reps. Gwen Moore, D-Wis., and Blaine Luetkemeyer, R-Mo., both members of the House Financial Services Committee, as well as Dallas Salisbury, president and CEO of the Employee Benefits Research Institute.
Noting the 40th anniversary of ERISA will be marked in September, Borzi noted the importance of a DOL fiduciary rule because “just like the marketplace has evolved, our structures for monitoring and regulating the marketplace need to evolve as well. Our regulatory structure hasn’t evolved.”
Since pulling its 2010 fiduciary draft, Borzi said the DOL has spent countless hours getting feedback on the plan, which included “some nuggets of constructive criticsm, but most of the time it was just the same old thing: ‘go away.’”
There’s been “a lot of talk” about how two standards — one issued by the SEC and another by DOL — “will [create] all this confusion in the marketplace,” Borzi said. But “today there’s confusion in the marketplace.”
Borzi questioned why the industry is “so opposed” to DOL putting out a proposal to spark debate about an issue that needs “conversation at the national level.”
Moore said that she agreed with Borzi in the “importance of having a strong fiduciary standard” and noted her support for DOL moving ahead on rereleasing what she called “a discussion template,” as the redrafting has “taken into consideration” the comments made earlier.
However, Moore said she still had concerns about how the proposal will be reworked to address the distinction between investment education and investment advice — an area Borzi said would be updated.
“I’m concerned the an open-ended definition of who’s a fiduciary … would provide that any information could lead to liability on the part of advisors, and that this would have a chilling impact on providing education,” Moore said.
Borzi stated in her comments that DOL has “tried to be more specific [in the reproposal] about the difference between education and advice; both are important and there are different standards that apply.” Education, she said, “is not fiduciary in nature. Where you cross the line is a harder question, but that’s what we’ve tried to answer.”
Luetkemeyer noted that he was thankful that DOL pulled its initial rule proposal, and warned of the rulemaking’s “unintended consequences.” He noted that he wasn’t clear on “the overabundance” of problems the DOL’s redraft is trying to solve. “I haven’t seen this evidence yet,” he said. “Are there laws in place, if enforced properly, will solve the problem?”
But Salisbury of EBRI applauded DOL for its work on the fiduciary redraft. "There clearly needs to be some change in the marketplace to rebuild trust."
Check out Is DOL Fiduciary a ‘Solution in Search of a Problem?’ Consider the Data by Knut Rostad on ThinkAdvisor.