is intended to assure retirement security for workers in all jobs regardless of income level by ensuring that financial advisers and similar persons are required to meet ERISA’s standards of fiduciary responsibility when providing investment advice. Taking into account significant changes in both the financial industry and the expectations of plan officials and participants who receive investment advice, the proposed amendments would change a thirty-five year old rule that we believe inappropriately limits the types of investment advice relationships that give rise to fiduciary duties.
Opening the hearing, Subcommittee Chairman Phil Roe (R-TN), however, claimed that the proposed changes represent a “dramatic shift” that “may well disrupt stable, effective relationships between retirement savers and service-providers.” He added that:
For more than 35 years, regulations surrounding fiduciary responsibility have provided certainty to employers and other retirement plan sponsors. Currently, an investment adviser is considered a fiduciary under the law if they offer individualized advice on a regulator basis for a fee. The fiduciary’s advice must be provided pursuant to a mutual agreement and be the primary basis for a resulting investment decision. However, the Labor Department has now decided to rewrite the rules of the road. Among other changes proposed by the department, fiduciary status would no longer hinge on whether advice was provided regulatory or served as the primary reasons for an investment decision. While we support looking at ways to enhance this important definition, the current proposal is an ill-conceived expansion of the fiduciary standard. It will undermine efforts by employers and service providers to educate workers on the importance of responsible retirement plan. Regrettably, the proposal may deny investment opportunities and drive up costs for the individuals it is intended to protect.
Roe also criticized the EBSA for failing to properly consider the possible costs and fees associated with the rule and its potential impact on the IRA market.
During the hearing, Borzi explained that most retirement funds are invested in 401(k) plans and Individual Retirement Accounts (IRAs), which require employee participants to decide where and how their funds should be invested. According to Borzi, 35 years ago such plans were either not in existence or uncommon, and therefore the proposal to change the definition is in response to changes in the market. Borzi claimed that despite fact sheets and multiple public hearings on this subject, there remains a lot of misinformation about the requirements of the proposed rule. Her testimony included a chart outlining what broker-dealers are allowed and not allowed to do under the rule, and what actions do not make a person a fiduciary. Actions falling into the latter category include providing information about generally accepted financial and investment principles, issuing investment newsletters, participating in informal “water cooler” conversations, and discussing benefits of plan participation.
When asked why the EBSA would not consider re-issuing the proposed rule given the controversy it has generated from both political parties, Borzi claimed that this action was not necessary as no commenter has suggested an alternative structure subject to additional comment. Asked whether someone who is involved in a swap transaction becomes a fiduciary under the rule, Borzi responded that under the EBSA rule, the person would not be rendered a fiduciary, and that the final rule would clarify this point. A witness testifying at the hearing said that this response needs to be codified in binding legal language. An appraiser who provides an initial valuation of stock, however, would be considered a fiduciary under the rule, she explained.
During the second half of the hearing, the majority of panelists criticized the proposed rule, and urged the EBSA to re-propose it. Several panelists claimed that the rule would result in unintended consequences that are not outweighed by any clear, quantified benefits, especially since the EBSA, they argued, did not sufficiently carry out cost/benefit analyses of the rule. One witness pointed out that the agency did not perform an economic study of IRAs, and therefore one needs to be conducted and subject to public comment before a final rule is issued.
Others claimed that the rule would raise direct costs and increase risks associated with providing advice, and therefore cause many brokerage firms to leave the market. This result, they claimed, could potentially reduce the availability of investment advice and services, especially for small businesses.
Several witnesses also expressed concern that long-standing business practices in the financial services industry would suddenly be considered prohibited transactions under the rule, and that the DOL’s exemptions approach to address this problem is insufficient. According to one witness, “almost any discussion of investments would give rise to fiduciary status. So small business owners would face very serious potential liabilities and uncertainties if they or their managers respond to any employee inquiries regarding plan investments.” In addition, the feared lowering of the threshold for fiduciary status would raise “serious questions regarding which plan sponsor employees may be treated as fiduciaries.”
Yet another witness claimed that the proposed rule “directly conflicts with longstanding professional and regulatory standards of valuation practice requiring that an appraiser provide an independent and impartial opinion of value.”
A complete list of panelists, links to their testimony, and access to an archived web cast of the hearing can be found here.
Photo credit: Kirby Hamilton