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Regulation and Compliance > Federal Regulation > DOL

New fiduciary rules remain elusive

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The new rules were supposed to come sooner. Instead, it looks as if it will take yet more work, including a mix of intense lobbying, delicate negotiations and some more nail-biting, before Americans enrolled in retirement plans can be assured the investment advice they receive is delivered with their best interest in mind.

That, at least, is what appears to be the case, based on votes in Congress last week and the latest word from regulators that they’re once more running behind in formulating new fiduciary standards.

The soonest that the Department of Labor is now expected to submit its new rules is September, not July, according to DOL Assistant Secretary Phyllis Borzi.

See also: Fiduciary standard bill passed by House panel

The DOL has been mulling changes to the definition of who is a fiduciary under the Employee Retirement Income Security Act since 2010.

The SEC, meanwhile, has been working on its plan for nearly three years, and Commissioner Elisse B. Walter recently said it wouldn’t be finished this year.

Consumers are often confused by the distinction between brokers and advisors, who work under different standards. To help, regulators believe a common fiduciary standard is needed for those who provide personalized investment advice to retail clients.

In its first proposed rewrite of the rules, the DOL stated that broker-dealers who work with IRA customers should be covered by the higher standards governing registered investment advisors — meaning that if someone is giving investors advice on which investments to make, they need to give it in the best interest of their clients, or disclose that they are receiving a commission to recommend certain investments.

Many in the brokerage industry had a tough time swallowing the proposed rules, particularly because the DOL didn’t include a cost-benefit analysis with its proposal. Brokerages said the rules would cause them to lose millions of accounts.

The newly revised revisions of the rules would be subject to public comment within 90 days of their release, said Fred Reish, partner and chair of the ERISA Financial Services Team at Drinker Biddle & Reath in Los Angeles.

Reish doesn’t expect what lies ahead to be easy.

For starters, IRAs have, in fact, always been covered by the DOL’s fiduciary rules, though the IRS has never enforced them, Reish said. “As a result, over the last 30 or 40 years, a lot of practices have been built up about how advice is given and commissions charged to IRAs so that if those rules had been enforced along the way, there could have been a lot of prohibited transactions.”

He added that many of the practices built up around IRAs are inconsistent with the rules as they exist now, let alone any new regulation. That’s why broker-dealers, banks and insurance companies are fighting the fiduciary rules tooth and nail. They want the new rules to exempt them.

Reish said the prohibited transactions elements of the rule are to blame for slowing down the DOL in its attempt to get the new regulations out this year.

“If the DOL issues a prohibited transaction exemption that is satisfactory, or largely satisfactory, to the financial services community, that could be half of the fight over the fiduciary proposal. … I see that as looming large,” he said.

Robert Lewis, vice president of legislative affairs for the Financial Services Institute, said his organization is waiting to see what the proposal says. “Hopefully it will be better than the first one,” he said.

The Financial Services Institute lobbies Congress on behalf of the independent broker-dealer and financial advisor community.

Lewis said one of the big challenges is in addressing the concerns of financial advisors who work with clients who have assets in both IRAs and defined contribution plans.

“If you have an advisor sitting at the table with a client and they are under two different standards, how do you have a discussion with them? I think that … has the potential to be very problematic,” he said.

Last week, the House Financial Services Committee voted on a bill that, if it were to pass, would further slow matters.

The legislation would make the Labor Department rule contingent on the issuance of an overlapping rule by the SEC.

Members of Congress wrote a letter to Acting DOL Secretary Seth Harris June 14 suggesting his agency work more closely with the SEC to avoid “uncertainty and disruption” in the marketplace.

Lewis agreed with that sentiment, but Reish called it ridiculous to think the two agencies, which have different missions, can or should mesh their proposals into one.

“For people to say, ‘they should harmonize the two regulations,’ that’s impossible,” Reish said. “They cannot truly be harmonized because they can’t do the same thing.”

On the other hand, the DOL and the SEC have been meeting regularly to discuss the rule, Reish said.

“There are areas of overlap. By talking and working together they can take care of the areas that overlap to make the definitions as consistent as possible,” he said. “They can make it easier on the private sector. Where they can be similar they will be similar.”

But, again, none of this is happening overnight.

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