In a letter to the Labor Department, the SEC and the CFTC, the House New Democrat Coalition urged the Department of Labor to repropose a regulation redefining the term fiduciary for purposes of ERISA and for purposes of IRC provisions affecting IRAs and similar arrangements. The Democrats believe that any changes to the term fiduciary should be made in consultation with the SEC and CFTC in order to avoid duplicative and contradictory guidelines governing investment in US financial markets. Moreover, a coordinated regulatory approach among the agencies will provide clarity and certainty to both investors and advisers. The letter was signed by 29 moderate House Democrats.
While recognizing the need to broaden the definition of fiduciary in a way that protects the interests of retirement plan participants and plan sponsors from unfair and deceptive practices, the Coalition is concerned that it would have an adverse effect by ultimately limiting access to investment decisions by participants and would, in turn, increase the costs of investment products and services that are critical to a sound investment strategy.
In an earlier letter, the securities industry expressed concern with the proposed redefining of the term fiduciary under Section 3(21) of ERISA and Section 4975(e) of the Internal Revenue Code . SIFMA believes that the proposed regulation would have unintended consequences including, but not limited to impacting the ability to save for retirement; and limiting access to markets, investment products and services providers.
The securities industry also urged the Labor Department to consult with the SEC and CFTC, as well as FINRA, on the coordination of standards and requirements among these statutory regimes, especially in light of recent regulatory initiatives from each of these regulators and on the effect of this proposed regulation on the capital markets.
SIFMA also contended that the proposed changes are inconsistent with the framework set forth in Dodd-Frank and the proposed implementing regulations with respect to business conduct standards applicable to the trading of swaps, thereby overturning the careful balance that allows financial institutions to deal with plans in derivative transactions. Trading counterparties will be severely limited because dealers will not know whether their affiliates will be deemed fiduciaries.
All of the exemptions for principal transactions prohibit transactions with anyone who is fiduciary with respect to the assets involved in the transaction. The proposed regulation will make it nearly impossible, said SIFMA, to determine whether market-makers are fiduciaries with respect to those assets because it requires no relationship with the plan and no mutual understanding between the parties. In addition, a futures commission merchant may not be able to provide services to plans and IRAs if it is a fiduciary with respect to the assets involved in the transaction.
In its comments to the Labor Department, the SEC said that the prohibited transactions of ERISA may require that broker-dealers refrain from trading as principal with employee benefit plans to which they provide services. This may have an immediate, wide-spread and detrimental impact on the operation and functioning of a significant portion of the capital markets, and may serve to restrict the ability of employee benefit plan managers to invest plan assets in equity and debt securities.
The Commission is greatly concerned about the potential severe disruption and dislocation in the capital markets, and the concomitant negative impact on employee benefit plans and their beneficiaries, which may occur, if, as a result of the present uncertainties concerning the scope and application of these provisions of ERISA to the activities of broker-dealers, a substantial portion of the business transacted between employee benefit plans and broker-dealers is suddenly terminated or substantially curtailed.
Thus, to the extent that employee benefit plans wish to utilize for execution the largest and best capitalized broker-dealer firms, those plans may be limited severely in their ability to buy and sell securities in the substantial segment of the market where transactions primarily occur on a principal basis, since many of the same large and well capitalized brokerage firms are the leading factors in such market.