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DOL to Move Ahead on Fiduciary Plan Despite Criticism

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During a day-long public hearing on its fiduciary prohibited transaction exemption to align with the Securities and Exchange Commission’s Regulation Best Interest, the Labor Department heard from panels of officials, some of whom called for further changes to the proposal, as well as for Labor to defer final rulemaking until Reg BI effectiveness can be determined.

A Labor Department spokesperson told ThinkAdvisor late Thursday evening that a second hearing will not be held and the comment period will not be reopened.

“The Department has reopened the record for the purpose of taking testimony in today’s [Thursday's] hearing, and will supplement the record to reflect that testimony, as well as the outlines submitted in support of requests to appear today,” the spokesperson said.

In a letter to Labor on Wednesday, Sen. Patty Murray, D-Wash., ranking member on the Senate Health, Education, Labor & Pensions Committee along with Rep. Bobby Scott, D-Va., chairman of the House Education and Labor Committee, said the public hearing was too rushed and restrictive and that Labor should reopen the comment period after the hearing.

“DOL has not reopened the comment period more broadly,” the Labor spokesperson said Thursday. “DOL has a well-developed record on the proposal, and is grateful to the many commenters who participated in the public notice and comment process.”

Labor’s PTE allows the receipt of a commission when providing investment advice. The exemption for investment advice fiduciaries allows brokers to receive “a wide variety of payments that would otherwise violate” the prohibited transaction rules under the Employee Retirement Income Security Act, or ERISA.

Those payments include “commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties.”  Critics argue the PTE will put retirement savers at risk because the advice will not be held to a true fiduciary standard.

Barbara Roper, director of investor protection for the Consumer Federation of America, told ThinkAdvisor in an email on Friday that, under Labor’s PTE, “an advisor will typically get paid more selling annuities than they would selling a mutual fund, particularly variable and fixed index annuities.”

The advisor “could get more money by adding various riders, increasing the cost to the investor but justified by the advisor on the grounds that the riders offer some benefit to the investor,” she wrote. “(Will the DOL or SEC or state insurance regulators second guess them on whether the riders are needed?)”

Sam Edwards, president of the Public Investors Advocate Bar Association, a group of lawyers that represent investors in disputes against the securities industry, pointed to two chief concerns with Labor’s plan.

First, Labor should reconsider its reinstatement of the 1975 regulation applying a five-part test to determine whether an advisor is a fiduciary. “The regulation, if implemented, will result in ERISA’s fiduciary obligations applying to very few of the advisors who investors rely upon,” Edwards told Labor.

Second, “PIABA believes the new regulation, to the extent it would apply to any advisor or brokerage firm, weakens the fiduciary standard, especially as it relates to the proposed prohibited transaction exemption. If these rules are implemented, they will negatively impact workers and retirees and, essentially repeal ERISA’s fiduciary duty.”

Borzi: Labor ‘Abdicating’ Responsibility

Phyllis Borzi, former head of Labor’s Employee Benefits Security Administration, said after the hearing on a separate call held by the Institute for the Fiduciary Standard that with its planned PTE, Labor has taken the “unprecedented” step of “simply deferring to another federal agency” with a different mandate and statute, and therefore is “abdicating” its responsibility to plan participants.

Further, she argued, “Reg BI has only been in effect for two months,” and the fact that it has not been tested in practice is “troubling.”

“This [hearing] procedure was way too rushed and unfair,” Borzi added. “It’s perfectly clear to me they intend to move forward as quickly as possible” with their plan.

Campbell: Big Modifications Needed

Brad Campbell, another former EBSA head who’s now a partner at Faegre Drinker in Washington, argued the PTE should be “significantly modified” to provide strong protections for consumers while providing access to insurance and annuities.

The proposed class exemption, Campbell said, is written “to align with securities regulation, but insurance regulation is materially different.”

The department, he explained, “needs to provide additional alternative conditions for insurance transactions and use the NAIC model rule on annuity transactions as a guide, just as the department has used Regulation Best Interest as a guide” in the proposal.

Also, the guidance on the five-part test is “fundamentally flawed,” Campbell said. While at first it acknowledges that the sale of insurance products “is not fiduciary advice,” the guidance “goes on to create some significant ambiguity in the application of the five part test, making it impossible to know with clarity where the department thinks the line has been drawn.”

Roper: DOL Moving Too Quickly

Roper argued in her Thursday testimony that Labor “was wrong … to reinstate the five-part test, which it has previously found enables firms to evade their fiduciary obligations in circumstances where they are clearly functioning as advice fiduciaries and are reasonably relied on as advice fiduciaries by retirement savers.”

The number of comments Labor “has received on this point demonstrates just how unwise it was to reinstate the definition through a final rule, with no opportunity for input,” Roper said.

Also, Labor “issued its proposal one day before the SEC’s Reg BI was due to take effect, … there hasn’t been time for us  or the Department   to comprehensively study whether, or to what extent, Reg. BI has caused firms to change the way they do business,” she explained.

In particular, Roper added, “there hasn’t been time to fully assess whether Reg BI has caused firms to abandon incentive practices that [Labor] previously determined, as part of the regulatory record for this proposal, are likely to induce financial professionals to base their recommendations on their own interests, rather than their customers’ best interests.”

She also stressed: “We have even less information regarding the effect of the NAIC model rule.”

Under the PTE, Roper told ThinkAdvisor that advisors “could get incentive payments or prizes based on their production levels, encouraging them to recommend a rollover to purchase the annuity (which may, or may not, even be covered by the DOL standard, depending on whether it is part of an ongoing relationship).”

She added: “All of those conflicts can, and routinely will, apply to a single transaction. And nothing in Reg BI, the NAIC model rule, or the DOL proposed exemption would require them to do anything but disclose and ‘mitigate’ the conflict.”


In addition, Andrea Seidt, Ohio Commissioner of Securities and, chair of NASAA Regulation Best Interest Implementation Committee, urged Labor to defer “final rulemaking until it has a factual record validating the effectiveness of the SEC’s approach” in Reg BI.

— Check out 5 Groups That Aren’t Thrilled With DOL’s Fiduciary Rewind on ThinkAdvisor.


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