Thursday, January 19, 2012

Securities and Banking Industries Respond to DOL Request for Data in Drafting Reproposed Fiduciary Definition

Securities and banking trade groups have responded to a Department of Labor request for assistance in developing an expanded regulatory impact analysis of a proposed change to the DOL’s long-standing definition of fiduciary. In a letter to DOL, SIFMA and the American Bankers Association expressed the hope that this expanded analysis will help provide appropriate direction to the Department as it develops the re-proposed regulation defining an ERISA fiduciary. The trade groups believe that DOL, plan participants, plan sponsors and plan service providers will all benefit from a comprehensive and supportable regulatory impact analysis.

While the trade groups do not have the particular information requested, they do have access to providers who may be able to assist. The trade groups asked for a meeting with DOL to discuss clarifying and perhaps refining the requested information. Through an expanded dialogue on these issues, they noted, the securities and banking industry can fully understand the information and data needs of DOL and, in turn can then reach out to their respective members to determine what information the industry is able to provide.

In September of 2011, DOL said it would re-propose its rule on the definition of a fiduciary consistent with the President's January 2011 Executive Order on regulation. Thus, the re-proposal is designed to inform judgments, ensure an open exchange of views and protect consumers while avoiding unjustified costs and burdens. Consistent with the Executive Order, the extended rulemaking process also will ensure that the public receives a full opportunity to review the agency's updated economic analysis and revisions of the rule. DOL pledged to continue to coordinate closely with the SEC and CFTC to ensure that this effort is harmonized with other ongoing rulemakings.

Specifically, DOL will clarify that fiduciary advice is limited to individualized advice directed to specific parties, and respond to concerns about the application of the regulation to routine appraisals. DOL will also clarify the limits of the rule's application to arm's length commercial transactions, such as swap transactions.

The reproposed regulation will also contain exemptions addressing concerns about the impact of the new regulation on the current fee practices of brokers and advisers, and clarify the continued applicability of exemptions that have long been in existence that allow brokers to receive commissions in connection with mutual funds, stocks and insurance products. The DOL said it would craft new or amended exemptions that can best preserve beneficial fee practices, while at the same time protecting plan participants and individual retirement account owners from abusive practices and conflicted advice.

Last year, the securities industry asked DOL to coordinate with the SEC on redefining the term “fiduciary” under the Employee Retirement Income Security Act (ERISA), effectively changing 35 years of established regulatory certainty. In testimony before the House Education & Workforce Committee, SIFMA executive vice president for public policy and advocacy Ken Bentsen said that the proposed original regulation had far broader impact than the problems it sought to address. It would reverse 35 years of case law, enforcement policy and the understanding of plans and plan service providers as well as the manner in which products and services are provided to plans, plan participants and IRA account holders, without any legislative direction.

SIFMA asserted that the proposed rule was in conflict with Section 913 of the Dodd-Frank Act, which authorizes the SEC to establish a uniform fiduciary standard of care for brokers and advisors providing personalized investment advice. While current exemptions to the prohibited transaction rules of ERISA permit fiduciaries to select themselves or an affiliate to effect agency trades for a commission, there is no exemption that permits a fiduciary to sell a fixed income security or any other asset on a principal basis to a fiduciary account.

Lack of exemptive relief in this area is contrary to what Congress explicitly stated in authorizing the SEC to promulgate a uniform fiduciary standard of care for brokers and advisers providing personalized investment advice under Section 913 of Dodd-Frank. In SIFMA’s view, the result of that conflicting prohibition is that the broker would not be able to execute a customer’s order from his or her own inventory, but rather must purchase the order from another dealer, adding on a mark-up charged by the selling dealer.

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