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Brad Campbell, attorney with Faegre Drinker

Regulation and Compliance > Federal Regulation > DOL

DOL Can't Put Fiduciary Duty on IRAs, Ex-Labor Official Testifies

By Melanie Waddell

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What You Need to Know

  • ERISA lawyer Campbell, a former EBSA head, testified that the DOL doesn’t have the legal authority to do what it is trying to do
  • Phyllis Borzi, another former EBSA head, said the department could in fact regulate IRAs.
  • Rep. Wagner, chair of the Capital Markets Subcommittee, said she couldn't believe that Labor was still fighting the fiduciary fight.

The Labor Department lacks the legal authority to promulgate its new fiduciary rule, Brad Campbell, partner at Faegre Drinker, and former head of Labor’s Employee Benefits Security Administration, told House lawmakers Wednesday.

During testimony before the House Financial Services Capital Markets Subcommittee, Campbell maintained that the department “doesn’t have the legal authority to do what it is trying to do” because it cannot impose a fiduciary duty as it relates to individual retirement accounts.

“The reason we are here today is that the Proposals go well beyond DOL’s limited authority,” Campbell told lawmakers.

Labor’s plan ”would make DOL the primary financial regulator of $26 trillion, approximately half of which is held by individuals” in IRAs rather than employer-provided plans.

If Labor’s proposals “were limited to redefining fiduciary advice within the department’s actual authority — which is to administer the fiduciary standard expressly created by Congress to regulate employee benefit plans sponsored by private sector employers under Title I of ERISA — we wouldn’t be here today,” Campbell opined.

Such a proposal, Campbell continued, “would be a matter for the [House] Education and the Workforce Committee, unrelated to broader concerns about its effect on capital markets and the responsibility of the Financial Services Committee to regulate insurance, securities, and banking.”

‘Utter Disbelief’

The House Financial Services Capital Markets Subcommittee, chaired by Rep. Ann Wagner, R-Mo., held the hearing Wednesday to examine the DOL’s proposal and its impact on retirement savings and access.

In her opening remarks, Wagner — a staunch critic of Labor’s fiduciary efforts — stated that the current plan is DOL’s “fourth attempt since 2010 at disrupting the client-advisor relationship. DOL was forced to withdraw their first proposal after receiving a flood of opposition from retirement savers and broker-dealers. Then they lost in court — twice — when they tried to revive this harmful proposal.”

Wagner added: “I’ve been pushing back against this misguided effort since I first came to Congress in 2013, and I am in utter disbelief that we’re still having this fight.

“This latest proposal is yet another bite at the same rotten apple. It should be withdrawn immediately,” Wagner stated.

Employer Plans vs. IRAs Under ERISA

If Labor’s plan was finalized, Campbell testified, and those individual accounts in IRAs and annuities were subjected to Labor’s “authority in a manner similar to employer-provided plans, those insurance, securities and bank professionals serving them would now have to comply with a new, highly detailed, and very proscriptive federal regulatory regime led by the Labor Department that would simultaneously apply with — and in many cases, materially conflict with — the requirements of their ‘normal’ state insurance regulation, state and federal securities regulation, or state and federal banking regulation.”

The Employee Retirement Income Security Act regulates employer plans under Title I differently than IRAs under Title II, Campbell explains, and “DOL can’t change that by regulatory action.”

Title I of ERISA governs employer-provided retirement plans, and Title II governs individual savings vehicles, such as IRAs.

“While both enjoy special tax advantages designed to encourage retirement savings, they are not otherwise regulated in the same way,” Campbell explained.

Title I “includes a fiduciary standard of care, and creates a new cause of action to enforce rights under the plan — in Title I, DOL is directly authorized to enforce the fiduciary standard and to bring legal actions,” Campbell explained.

Title II of ERISA “does not contain a standard of care, it does not create a new cause of action, and it does not authorize DOL to do so,” Campbell said.

“This was not an oversight or sloppy drafting — it was an intentional design by Congress,” Campbell continued.

“Or as the 5th Circuit wrote in vacating DOL’s 2016 Rule, ‘Title II did not authorize DOL to supervise financial service providers to IRAs in parallel with its power over ERISA [Title I] plans,’” Campbell told the lawmakers.

Regulatory ‘Two-Step’

Labor’s current plan, as did the 2016 rule, uses “a regulatory two-step process to achieve indirectly the regulation of IRAs that Congress denied DOL the authority to impose directly,” Campbell argued.

The first step “is to expand the definition of fiduciary so widely as to include nearly all recommendations by financial professionals to any plan, IRA, or in connection with any related rollover, transfer or distribution,” Campbell maintained.

“This expanded definition makes the financial professional’s normal compensation a prohibited form of self-dealing, because the fiduciary advice is causing the professional to get a new or different fee or commission,” Campbell testified.

The second step “is to put out an exemption to the newly created prohibited transaction that allows the financial professional to give the recommendation and to receive a fee, but only after complying with many new conditions applicable to the transaction,” Campbell said.

In the fiduciary proposals, “DOL requires the financial professional to comply with a best interest standard of care that is nearly identical to the Title I fiduciary standard of care as a condition of the exemptions,” Campbell said.

Another ex-EBSA Chief Weighs In

Phyllis Borzi, another former head of EBSA, rebutted Campbell’s assertions in emailed comments to ThinkAdvisor on Wednesday.

As for IRAs, “under the Carter Administration’s Reorganization Plan #4, later codified by Congress into law, interpretive juridiction over the definition of fiduciary and PTEs in connection with IRAs was clearly given to DOL.”

“That was one of the inconvenient facts” that the U.S. Court of Appeals for the 5th Circuit “chose to minimize or ignore” when it invalidated Labor’s 2016 fiduciary rule, Borzi said.

Micah Hauptman, director of investor protection for the Consumer Federation of America, agreed in another email to ThinkAdvisor that DOL “does have authority to define fiduciary for purposes of employer-sponsored plans and IRAs,” citing the Reorganization Plan No. 4 of 1978, “which Congress subsequently ratified in 1984.”

At the time, Hauptman said, “the DOL was granted authority to interpret the fiduciary definition and issue administrative exemptions from the prohibited transaction provisions in Code section 4975.”

As to the jurisdictional argument, “if you examine the legislative history of ERISA, you will find that at a point one of the Houses of Congress (I believe it was the Senate …) considered and then rejected assigning the fiduciary and investment advice provisions to the SEC,” Borzi said.

“But because they were dealing with tax-favored assets, Congress decided that an agency focused on retirement plans was more appropriate to protect participants than an agency with broad authority over only the securities market. Clearly Congress made a deliberate decision to choose DOL as the primary regulator for assets in pension plans.”

Pictured: Brad Campbell, attorney with Faegre Drinker and former EBSA head.

Melanie Waddell

@Think_MelanieW

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