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DOL Out of Bounds With Fiduciary Rule: Bachus, Kotz

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Former House Financial Services Committee Chairman Spencer Bachus as well as the Securities and Exchange Commission’s former inspector general, David Kotz, agreed Tuesday that the Department of Labor is out of bounds by moving forward on a rule to amend the definition of fiduciary for retirement advice.

“From a statutory standpoint, the DOL has no jurisdiction” to regulate investment and retirement products by amending the definition of fiduciary under the Employee Retirement Income Security Act, Bachus told attendees at the MarketCounsel Summit in Miami Beach on Tuesday. “The SEC is the primary securities regulator; they need to be more aggressive in defending their turf.”

Agreed Kotz: “That’s exactly right; I don’t know that DOL got that memo.” He added that while it’s possible that a rider may be attached to the omnibus spending bill to delay DOL’s rulemaking, it also wouldn’t “shock” him to see a final rule by DOL next spring.

It isn’t yet known how far the final DOL rule will stretch into the SEC’s realm of securities regulation. But Barbara Roper, director of investor protection for the Consumer Federation of America, says there are other issues at play.

“The SEC has absolutely no authority to write rules under ERISA,” Roper says in a comment on this article. “On the contrary, DOL has clear and exclusive authority to do so. The SEC’s jurisdiction relates exclusively to the securities laws. So, if the SEC were to write rules, those rules would not cover advice to retirement plans, and they would not cover advice about non-securities, like insurance, which plays a significant role in the retirement marketplace.”

On whether brokers should be held to a fiduciary standard, Kotz replied that “clarity and lack of confusion is what’s most important for investors, not necessarily higher standards.”

While “it’s important for investors to be protected, I’m not convinced that new rules will do anything to protect them.”

Bachus agreed, stating that BDs “are well-regulated now” by the Financial Industry Regulatory Authority.  “All of the rules and regs in the world didn’t prevent Enron, Madoff, or what we saw in 2008,” he said.

As to advisor exams, Kotz stated that RIAs have to explain their business to the SEC examiners, so the issue with advisor exams is “competence.” The agency missed the Bernie Madoff Ponzi scheme due to lack of competence, he said.

Kotz noted his concern that the SEC “lumps” advisors and brokers together, and that the agency is challenged to understand “what they do and how they do it; that’s a challenge in exams as well as rules and regulations.”

When it comes to exams, “redundancies and overlapping oversight is a big issues,” Kotz said. “An SEC exam is different than a FINRA exam; you have to make sure you have the right expertise in the entity you’re dealing with.”

Despite the fact that he backed a bill to require a self-regulatory organization be set up to help boost the number of advisor exams, and then ultimately supported Rep. Maxine Waters’ bill that would have allowed the SEC to collect user fees to increase the number of advisor exams, Bachus stated that sees the current exam structure as being “sufficient. I’m not sure that we need any more regulation.”


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