More On Legal & Compliancefrom The Advisor's Professional Library
- U.S. Securities and Exchange Commission Information This information sheet contains general information about certain provisions of the Investment Advisers Act of 1940 and selected rules under the Advisers Act. It also provides information about the resources available from the SEC to help advisors understand and comply with these laws and rules.
- 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.
Secretary of Labor Thomas Perez is being credited with re-energizing the Department of Labor’s bid to ensure that a rule to amend the definition of fiduciary under the Employee Retirement Income Security Act gets reproposed soon.
After being sworn in last July, Perez “immediately started focusing” on DOL’s fiduciary rulemaking, said Knut Rostad, president of the Institute for the Fiduciary Standard. Being no political neophyte, “he spoke to pro-fiduciary groups and started his rounds on the Hill to hear the concerns of lawmakers directly.”
Perez told a Senate Appropriations subcommittee in mid-April that the redrafting of the proposal that was withdrawn in 2010 “has been slowed down at my direction significantly because we wanted to take a step back [to] listen and learn from everyone.”
Perez noted, “We’ve been engaged in a significant amount of outreach, and I’ve met with a number of senators and congressmen on both sides of the aisle, and we’re going to continue to do that.”
Dennis Kelleher, president and CEO of Washington-based Better Markets, agreed that Perez going to Capitol Hill “was a smart thing to do,” as “a lot of the industry generated misinformation about what the DOL is doing.” One of DOL’s main goals, he added, is stopping “undisclosed conflicts of interest in providing retirement advice.”
Perez has “a lot of deep experience in tackling tough issues; this is a tough issue,” Kelleher said.
In mid-March, Perez, a graduate of Harvard Law School who has served as the assistant attorney general for the civil rights division of the United States Department of Justice, noted the “importance” of the DOL fiduciary plan, stating that a redraft would be arriving “in the coming months,” and that DOL would continue its “due diligence” on the rulemaking.
After being bombarded with industry pushback, Phyllis Borzi, assistant secretary of labor for DOL’s Employee Benefits Security Administration, the main architect of the fiduciary proposal, withdrew the initial plan in 2010 and then took to redrafting the rule that she has called DOL’s “No.1 priority.”
Borzi stated at a Financial Services Roundtable event in mid-March that a redraft may come before or after August.
A DOL fiduciary rule is needed, Borzi stressed at the event, because “just like the marketplace has evolved, our structures for monitoring and regulating the marketplace need to evolve as well.”
Indeed, Kelleher noted that “DOL is required under the law to protect retirees, and that law [ERISA] has not been updated since President Nixon” was in office.
The fiduciary discussion “can’t be dominated by people with a financial stake in maintaining the current status quo, where undisclosed conflicts of interest” are prevalent, Kelleher added. “Those saving for retirement are being put into products that are not in their best interest.”
Before resigning last January, Perez’s predecessor, Hilda Solis, was taken to task by lawmakers over how the DOL’s recrafting of its fiduciary rule was progressing—specifically how the department was collaborating with the Securities and Exchange Commission, the timing of the reproposed rule and the rule’s inclusion of individual retirement accounts (IRAs).
Indeed, a report released in early April by Quantria Strategies found that because the DOL’s fiduciary rule will include classifying brokers or call center reps who give rollover advice as fiduciaries, more workers—particularly low-income ones—will be forced to cash out their plans.
The study, commissioned by Davis & Harman LLP on behalf of a coalition of financial services organizations that provide retirement services to millions of Americans, argued that DOL’s fiduciary rule could reduce retirement savings by 20% to 40% for affected individuals, costing Americans between $20 billion and $32 billion in annual retirement savings.
The DOL’s reproposed fiduciary regulation, which is expected to be released later this year, would effectively prohibit many financial professionals from providing workers with education and guidance regarding the options available to them when they leave their jobs, the study argued.
Lack of financial guidance would spur “cash outs” of retirement plans at job-change time.
“If broker-dealers and call center representatives are fiduciaries, the DOL rules would prohibit them from giving advice to workers regarding their distribution options,” Kent Mason, a partner at the Davis & Harman in Washington, which commissioned the study, told ThinkAdvisor.
“It is not a business decision by the BDs or the reps; it is a legal prohibition. The legal prohibition arises under the DOL’s prohibited transaction rules. Under those rules, a fiduciary is prohibited from giving any advice that could affect how much compensation he or his employer receives.”
For example, Mason—whose firm represents the companies that participated in the Oliver Wyman study on IRAs released to the DOL and the SEC last April--explained that if a BD or rep “is associated with a financial institution, which is almost always the case, the financial institution may benefit if the participant rolls the money into an IRA that is maintained by the financial institution or into investments provided by the financial institution. Because of this potential benefit, the BD or rep would be precluded from providing any assistance regarding distribution options.”
The study found that those most likely to cash out their retirement savings are low-wage workers, those with low account balances and workers under 30. High cash-out rates are also an issue for African-Americans and Hispanics.
(Check out Investment Advisor's full IA 25 for 2014 list on ThinkAdvisor.)