DOL to Move Ahead on Fiduciary Plan Despite Criticism

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.”