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DOL Tackles Key Fiduciary Plan Proposals at Hearings

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A hearing Monday on the Department of Labor’s proposal to amend the definition of fiduciary advice on retirement accounts, drew testimony on ways to fix the plan’s Best Interest Contract Exemption, mandatory arbitration as well as whether the plan as proposed would prompt class-action lawsuits.

While the topics might seem dry to someone outside the industry, their importance was vouched for in opening statements by Phyllis Borzi, assistant secretary of labor for DOL’s Employee Benefits Security Administration. She noted the hearing is “far from a dry exercise” in updating the 40-year-old Employee Retirement Income Security Act.

As ERISA stands now, Borzi said at the hearing at DOL headquarters in Washington, it’s “too easy for advisors to evade fiduciary status and put the retirement investor first.”

DOL, Borzi said, “has a straightforward goal” in its plan to amend the definition of fiduciary under ERISA: “We want to create an enforceable best interest standard that requires advisors to put their clients first. That’s our North Star.”

(See related ThinkAdvisor story, Democratic Senator Criticizes Fiduciary Rule as Hearings Near.)

As to the controversial exemption known as BICE, which requires brokers to have clients as well as potential clients sign an agreement before rendering advice, “timing is not as critical as the contract itself,” noted David Certner, legislative counsel and policy director for AARP, who sat on the first panel. “When the contract is signed is less important than having the contract and [it being] enforceable,” he said. “The signing of the contract can be later on when other papers would be signed in any arrangement.”

Raymond Ferrara, chairman and CEO of ProVise Management Group and former CFP Board chairman, added that the way BICE is written now a contract would have to presented upfront “and that would be intimidating and uncomfortable for the client and us.”

Indeed, Marilyn Mohrman-Gillis, managing director of public policy and communication for the Certified Financial Planner Board of Standards, added that existing clients could agree to a BICE contract through “notification or negative consent,” while new clients, depending on the type, “could pick a time” as to when they’d sign a BICE agreement.

When queried by DOL execs on what types of lawsuits could be sparked by the proposed plan, both Mohrman-Gillis and Certner said class-action lawsuits would be unlikely. “The bar to a class-action lawsuit is very hard, you have to have a systemic problem that cuts across clients,” Mohrman-Gillis said. “Most of any complaints about the rule would be in arbitration.”

Agreed Certner: “There’s a heavy bar to get to a class-action [as] there has to be a large systemic issue going on.”

James Keeney, a retired Florida lawyer and current arbitrator for the Financial Industry Regulatory Authority, said that the BICE is “self-defeating because it will allow brokerage firms to continue including mandatory arbitration clauses in their customer agreements.”

Under BICE, retirement investors, he continued, will still “be forced to waive their Sixth Amendment rights to trial by jury in the event of any dispute with their broker. In doing so, they will effectively waive the very fiduciary protections being established by this regulation.”

Mercer Bullard, professor of law at the University of Mississippi Law School and founder of Fund Democracy, said that while the proposed rule’s litigation risk will be both public and private the “biggest” legal threat will come from private litigation.

But unlike Keeney, Bullard said he does not “support banning arbitration for all claims.” Arbitration, he said, “is not set up to bring ERISA claims.”

DOL will conduct the series of hearings at its headquarters in Washington from Monday to Thursday and hear from 25 panels; DOL employees will conduct a question-and-answer session with each panel.

– See related ThinkAdvisor story, Democratic Senator Criticizes Fiduciary Rule as Hearings Near.


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