The regulatory/legislative front will heat up in the New Year for advisors, with four issues taking center stage—the contentious issue of whether to create a self-regulatory organization for advisors; the Securities and Exchange Commission proposing a rule to put brokers under a fiduciary mandate; the Department of Labor reproposing its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act; and the “switching” of advisors from federal to state registration.
AdvisorOne has been following all of these issues as they’ve played out over the past year and will continue to do so as 2012 unfolds. Here’s an update on where each of these issues stand as we enter the New Year.
SEC’s Fiduciary Rule
SEC Chairman Mary Schapiro (left) in an early December interview said that the agency would issue a proposed fiduciary rule in 2012 that would be “business-model neutral” and allow brokers working with retail investors to sell proprietary products and charge commissions.
Her remarks drew immediate response from industry officials who said that exactly how the SEC crafts this business-model neutral approach will be crucial to determining whether the agency actually ends up putting brokers under a fiduciary mandate.
“If by ‘business model neutral’ the result is the one sought by many in the brokerage and insurance industry; i.e., redefine ‘fiduciary’ as enhanced ‘suitability’ with opt-out provisions, then we will end up with the worst of all worlds,” says Harold Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Fla., and a member of the Committee for the Fiduciary Standard.
Section 913 of Dodd-Frank creates a “fairly complicated roadmap” the SEC must follow in crafting a fiduciary standard, says David Tittsworth, executive director of the Investment Adviser Association.
Warns Tittsworth: “The SEC must take into account each and every word of Section 913 as it considers crafting a rule.”
Phyllis Borzi’s announcement in late October that the DOL’s Employee Benefits Security Administration plans to repropose its controversial rule amending the definition of fiduciary under ERISA “shortly after the first of the year” has garnered a lot of reaction from industry officials and members of Congress.
House Democrats and Republicans have both sent letters to DOL detailing specific areas that the reproposed rule should address.
Fred Reish, well-known among advisors as the ERISA guru, recently predicted areas of “relief” that the DOL will provide when it reproposes its rule.
Applying a fiduciary standard to IRAs is one of the more controversial aspects of the reproposal, and Reish, partner and chair of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, predicts that DOL will extend the exemptions of Prohibited Transaction Class Exemption 86-128 to virtually all advice given to the owners of IRAs.
In other words, he says, it is likely that both broker-dealers and RIAs will be able to give individualized advice to IRA owners and receive compensation that is not level. That is, the compensation may vary based on the recommendations, which would be more consistent with a broker-dealer business model than with an RIA business model.