As an already embattled Department of Labor continues to craft a major revision to the fiduciary standard that governs the sale of retirement products in accounts covered by ERISA, some lawmakers on both sides of the aisle are trying to prevent the imposition of federal regulation that they feel does more harm than good.
The Department of Labor's Employment Benefits Security Administration (EBSA) has been under fire from the industry since last October, when it proposed Title 29, ?2510.3-21, Definition of "Fiduciary," which would regard the advice given by retirement advisers and broker-dealers as having the same fiduciary responsibility as other investment advice. It would be the first major revision of the fiduciary standard in the sale of investment products since ERISA was enacted in 1974.
For example, at a recent House hearing, Ken Bentsen, executive vice president for public policy and advocacy for SIFMA–the Securities Industry Financial Markets Association–said that the only reason EBSA wants to change the rule is "in order to make it easier for the DOL to sue service providers."
In another comment at the hearing, Kent Mason, a lawyer at Davis & Harman, LLP, Washington, D.C., noted the rule's impact on small companies, such as insurance agencies, for whom the sale of retirement products is a core component of their business.
He argued that the DOL "is unable to estimate the number of small service providers that would be affected by the proposal."
Moreover, he said, the DOL also "is unable to estimate the increased business costs small entities would incur if they were determined to be fiduciaries under the proposal."
The momentum in opposition has grown in recent weeks as members of Congress–both Republican and Democrat–have joined the call for having the rule withdrawn and rewritten.
Moreover, a recent court decision has emboldened the industry to make its point even louder that the rule should be withdrawn.
On July 22nd, a decision by a panel of the U.S. Court of Appeals for the D.C. Circuit struck down a Securities and Exchange Commission rule granting outside investors proxy access rights.
The decision, by Judge Douglas Ginsburg, said that the agency had failed to consider the economic impact of the rule.
"We … hold the Commission acted arbitrarily and capriciously for having failed once again–as it did most recently in American Equity Investment Life Insurance Company v. SEC, and before that in Chamber of Commerce, adequately to assess the economic effects of a new rule," the court said.
"Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters," the court said.
Unlike the Securities and Exchange Commission, which has in the past ventured into areas where angels fear to tread, the DOL is quietly slowing the pace.
In comments two days before the decision came out, on July 20, Phyllis Borzi, EBSA administrator, said a final regulation will likely emerge in 2012 as the agency prepares a more detailed economic analysis and continues to review comments to address industry concerns that the rule will be too costly to implement and enforce.
At a recent House hearing, Borzi defended the decision to propose the new regulation. She said the old one was "outdated," noting that, "too frequently [it] allows advisers to avoid responsibility for ill-considered recommendations and those involving financial conflicts of interest and self-dealing."
Moreover, Borzi said that current business practices have focused on building a trust relationship with the client. Under the current rule, however, advisers are not fiduciaries if they claim that they did not understand that their advice would serve as a primary basis for the investment decision. Likewise, an adviser is not a fiduciary if the advice was given just once instead of on a regular basis.
At the House hearing, Rep. Phil Roe, R-Tenn., chairman of the Subcommittee on Health, Employment, Labor and Pensions of the House Committee on Education and the Workforce, said that, "While we support looking at ways to enhance this important definition, the current proposal is an ill-conceived expansion of the fiduciary standard."
