Of the three Washington heavyweights who will play a crucial role in advisors’ lives this year, Phyllis Borzi, assistant secretary for the Department of Labor’s Employee Benefits Security Administration (EBSA), will have the most immediate impact.
Emboldened by another four years in her position under a re-elected Obama administration, Borzi is adamant that EBSA’s fiduciary rule will see the light of day this year. Stating in December that EBSA would release its fiduciary reproposal in the next several months, Borzi promised at a recent conference that industry concerns have not fallen on deaf ears. Said Borzi: “When people see the reproposal, reasonable people with open minds will say [DOL] listened, that [DOL] addressed the legitimate issues that were raised in the long comment process.” She added: “The reproposal will be better, clearer, more targeted and more reasonably balanced.”
While advisors will closely watch newly christened SEC Chairman Elisse Walter, as well as Rep. Jeb Hensarling, the incoming chairman of the powerful House Financial Services Committee, action will occur on the DOL’s controversial rule to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA).
EBSA’s reproposed rule will be backed by a “substantial economic analysis” and will likely apply “the strict ERISA fiduciary standard to nearly all those who provide investment advice to either plan sponsors or to plan participants,” said Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College. Even more dramatic, he said, will be the extension of ERISA’s fiduciary standard to cover IRA rollover accounts. “With these moves, ERISA’s standards will apply to over $15 trillion of financial assets held by individuals and in retirement plans in the United States,” Rhoades said.
Brad Campbell, former head of EBSA who’s now an attorney with the Financial Services ERISA Team at Drinker Biddle & Reath in Washington, added, however, that the changes to the revised fiduciary rule would have to be “quite significant” to address the concerns raised by many service providers, including broker-dealers.
Campbell said that he believes the revised rule proposal will actually become “more controversial” with respect to IRAs. “I think [DOL] not only will continue to apply the rule to IRAs much as originally proposed, but is likely to propose new restrictions on solicitation of IRA rollovers.”
Fred Reish, partner and chairman of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, said he believes the new version of the fiduciary rule will be “an expansion of the existing regulation.” The real key, though, will be in the prohibited transaction exemptions, he said.
For instance, Reish said he believes the definition of fiduciary advice will be the same for retirement plans and IRAs. The problem is that “over the years, the sales and compensation practices regarding IRAs have evolved in a way that is fundamentally in conflict with subjecting broker-dealer sales practices and compensation to the fiduciary prohibited transaction rules.” In fact, he continued, “but for PTCE 86-128, most IRA compensation practices would be illegal. So, if the definition of fiduciary advice is expanded, the DOL should also expand the exemptions in 86-128 to exclude, perhaps with better disclosure, most common compensation practices from the prohibited transaction rules.”
The re-proposal, Reish continued, will also likely provide “greater clarity” on the Seller’s exception and the Platform exception. As Reish explained, the Seller’s exception said that, “where a person is an agent of a principal, and where it was clear, then there was an exception to the fiduciary rules for ‘touting’ the principal’s products or investments.”
The Platform exception said that for recordkeepers, “there would be an exception for giving sample lineups of mutual funds to plans,” Reish said. “That might occur, for example, in connection with a conversion from one provider to another provider where the new recordkeeper gave the plan sponsor a list of similar mutual funds that it could recordkeep. It also occurs where a plan sponsor asks the recordkeeper to provide a list of mutual funds that pay revenue sharing that will cover the cost of carrying the plan.”