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Regulation and Compliance > Federal Regulation > DOL

DOL Fiduciary Redraft Will Be Changed, Top Official Says

By Melanie Waddell

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A top Department of Labor official involved in crafting Labor’s rule to amend the definition of fiduciary on retirement accounts said Thursday that while DOL is committed to fixing “demonstrable injuries” in how retirement advice is delivered to retail investors through its fiduciary rulemaking, the current redraft will be modified.

By moving forward with its redraft to amend the definition of fiduciary under the Employee Retirement Income Security Act, DOL has “identified what we believe are demonstrable injuries in the way advice is delivered to retirement investors,” Timothy Hauser, deputy assistant secretary for DOL’s Employee Benefits Security Administration, said during comments at a meeting held by the Securities and Exchange Commission’s Investor Advisory Committee.

“We are committed to doing something to fix that [retirement advice] problem, but we aren’t wedded to any particular choice of words or regulatory text,” Hauser added. “The point is to improve this market. We’ve gotten a lot of helpful comments along the way. There will be changes [to the redraft], no doubt about it.”

Hauser said that DOL’s redraft includes “both a revision to our basic definition of who a fiduciary is, but also [includes] a set of prohibited transaction rules to allow the compensation streams to move forward in a way that we think honors the statute’s intent to mitigate conflicts of interest.”

The comment period on the redraft ends July 21, with three to four days of hearings to be held on the redraft the week of Aug. 10. Hauser urged those who want to testify at the hearings to submit their applications.

The same day as the Investor Advisory Committee meeting, DOL received petitions from more than 230,000 signers supporting its fiduciary redraft. The signatures were gathered by CREDO Action, MoveOn.org, Americans for Financial Reform and Public Citizen.

Jerome Lombard, president of Janney Private Client Group, argued during the Investor Advisory Committee meeting held at SEC headquarters in Washington that DOL’s rule is “confusing, burdensome,” would likely eliminate investment advice for lower-income savers and result in “endless litigation.”

Lombard, like other critics, took issue with the redraft’s Best Interest Contract Exemption, or BICE, which he said Janney has “no intention of utilizing” as currently laid out.

BICE, Lombard argued, would not only “impose new legal liabilities for firms who utilize it,” but it’s impossible to discern what’s “permissible and not” as the exemption is currently written. Janney, he continued, would also have to “revise our advisor compensation model” under BICE.

Hauser said the “fundamental idea” behind BICE is that if a broker/advisor chooses to give advice in an environment where they may receive compensation that “may skew that advice, you have to execute a contract upfront.” Exactly when that contract must be signed remains a sticking point among critics.

Barbara Roper, director of investor protection at the Consumer Federation of America, who chairs the committee’s Investor as Purchaser Subcommittee, said that while the DOL’s rule is much further along in its fiduciary rulemaking, the Securities and Exchange Commission’s staff “is hard at work” on its fiduciary rule.

While their jurisdictions differ, Roper added that both DOL and the SEC are grappling with the same problems as they craft their fiduciary rulemakings. “How exactly do you apply a fiduciary duty to a sales based advisor? How do you make the best interest standard real in a business model that is laden with conflicts of interest? How do you apply the standard in certain areas with regard to sales of a limited number of products?”

Industry trade groups like the Securities Industry and Financial Markets Association and the Financial Services Roundtable have proposed their own best interest standards to mitigate what they see as potentially conflicting fiduciary rules to be issued by DOL and SEC. Trade groups are also working on a bill that would legislate a best-interest standard.

– Related on ThinkAdvisor: DOL Fiduciary Foes Said to Be Writing Best-Interest Standard Bill

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