By John M. Jascob, J.D.
NASAA has expressed support for a proposal by the Department of Labor that would extend the fiduciary duty standard of care to persons who provide investment advice to Individual Retirement Accounts (IRAs). In a comment letter concerning the Department’s proposed rulemaking defining the term “fiduciary,” NASAA wrote that the proposal represents an important step in raising the standard of care available to retirement investors and paves the way for additional regulatory initiatives to raise the standard of care for investors in general.
Greater investor protection. NASAA believes that the proposal’s extension of the fiduciary duty standard to IRAs would provide significant and much needed protection to retirement investors. NASAA noted that, although widely used today, IRAs had only just begun to exist in 1975 when the Department promulgated the existing ERISA fiduciary duty regulations. As a result, IRAs were likely not considered extensively as part of the 1975 rulemaking.
In NASAA’s view, the economic evidence supports a finding of the negative impact of conflicts of interest on retirement investment outcomes, thus demonstrating the need for the rule. The Department had cited to substantial failures in the market for retirement advice, noting that IRA holders receive conflicted advice and can expect the investments to underperform by an average of 100 basis points per year over the next 20 years. Moreover, state securities regulators routinely see abuse in IRA rollovers and account transfers, such where an investor is advised to liquidate a well-balanced portfolio in exchange for an over-concentration in a high-fee product. Even if a specific IRA rollover may be an adequate transaction for the investor, it may not be the transaction in the investor’s best interest, NASAA wrote.
Preservation of state remedies. NASAA also urged the Department to explicitly preserve remedies available under state securities laws, as they would serve to enhance the more limited remedies available under ERISA and the Internal Revenue Code. NASAA observed that participants in plans covered by Title I of ERISA have a statutory right of action to bring suit against fiduciaries under ERISA for violation of the prohibited transactions. In contrast, while the Department’s proposal includes IRAs in terms of extending fiduciary duty to IRAs, the sole statutory sanction available is an excise tax enforced by the Internal Revenue Service. Although the proposal bolsters these remedies for IRA owners through the addition of contractual remedies for transactions that include use of the Best Interest Contract exemption, deterrence and enforcement of remedies cannot rest on investors alone, NASAA stated. Accordingly, NASAA believes that adoption of the proposal should include explicit acknowledgment of the ERISA savings clause for state securities laws and enforcements.
Coordination with the SEC. Separately, NASAA sent a comment letter to the SEC stressing the importance of coordinating with the Department of Labor to ensure that the standard of care available to investors is a fiduciary standard not only for retirement accounts, but also for non-retirement accounts at broker-dealers. NASAA observed that the SEC, under the grant of authority of Section 913 of the Dodd-Frank Act, has the discretion to ensure that the standard of care that broker-dealers owe to customers be raised generally to a fiduciary standard on all account relationships. In NASAA's view, SEC rulemaking can and should occur in close coordination with the Department’s rulemaking, though regulatory harmony should not delay either the Department’s or the SEC’s rulemaking.