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Phyllis Borzi Former Assistant Secretary, U.S. Department of Labor

Regulation and Compliance > Federal Regulation > DOL

Phyllis Borzi: DOL’s New Rollover Rules a ‘Reasonable Step Forward’

By Melanie Waddell

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Phyllis Borzi, the former head of the Labor Department’s Employee Benefits Security Administration under President Barack Obama, sees Labor’s new fiduciary prohibited transaction exemption (PTE) 2020-02, Improving Investment Advice for Workers & Retirees, as “a reasonable step forward” for those firms and their representatives who want to continue to receive conflicted compensation.

But the “basic problem,” Borzi told ThinkAdvisor, “lies with the glaring loopholes in the 5-part test [of ERISA setting out who’s a fiduciary] that allows many to escape fiduciary status and accountability, and that needs to be changed directly.”

Borzi told ThinkAdvisor in a previous interview that she expects Labor to update the 5-part test rule in its upcoming new fiduciary rule proposal “… to formally incorporate the evolution of their thinking on several aspects of the five-part test that they discussed in the preamble to PTE 2020-02.”

We asked Borzi, who now serves on Edelman Financial Engines Board, to share her views on PTE 2020-02, which became effective on Feb. 16. Starting Friday, the PTE subjects advisors and firms to more stringent rollover rules.

THINKADVISOR: Do you have other views on PTE 2020-02? 

PHYLLIS BORZI: For those firms subject to [Regulation Best Interest], it clearly builds on what the SEC has done, and since those firms were required to comply with Reg BI in June 2020, their compliance activities should be less burdensome than for firms offering non-security investment products.

Unfortunately, the [National Association of Insurance Commissioners] NAIC model law simply codifies a less-stringent version of the existing suitability standard in those states that have adopted it.

Insurance companies and their representatives have a more significant task to comply with PTE 2020-02 than those firms who have already taken the interim step of complying with Reg BI, but the DOL has given them a reasonable period of time to get up to speed and comply.

Which firms will need to comply with the July 1 deadline?  

Not every financial institution or person providing financial advice is required to comply with any PTE, including PTE 2020-02. But those financial institutions and their investment professionals (both are defined terms in the PTE) who want to receive conflicted compensation in connection with IRA recommendations to plans, participants or IRA owners must comply.

Where are firms in their compliance?  

I have heard that many firms have been making genuine good faith efforts to come into compliance with the DOL rules, so they should be OK.

I also have heard that there are firms that have either continued to be oblivious to these requirements or have delayed compliance and have just begun to prepare, mistakenly thinking that it would all go away or that they could hire someone to provide an off-the-shelf compliance plan and disclosure template.

What are the biggest questions advisors/broker-dealers have about the July 1 compliance date? 

The questions I get generally fall into two categories: (1) Will DOL further extend the compliance date; and (2) What will DOL enforcement look like? With respect to the substance of compliance, the key issue seems to be how specific the DOL will insist that the “specific reasons” why a rollover recommendation is in the best interest of the investor be.

I’m still hearing that some firms think that “greater investment choice” will be sufficient, even though the DOL has clearly said that won’t be.

Also, there are firms who think that having to do some research on what the participant’s current choices and fees are is unnecessary, even though DOL has indicated that may be required to be able to justify a rollover recommendation.

I have heard that a few firms are trying to figure out how to avoid making a rollover recommendation by attempting to argue that the client is initiating the rollover and therefore they are just responding to a client request. I doubt that this strategy will be effective because the question of whether a recommendation has been made relies on an examination of the facts and circumstances of the situation.

Pictured: Phyllis Borzi (Courtesy photo)

Melanie Waddell

@Think_MelanieW

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