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Tags: Regulation | Retirement | Financial | Advisers

Controversial Plan to Tighten Regulation of Retirement Financial Advisers

Thursday, 13 March 2014 08:27 AM EDT

A U.S. Department of Labor official offered a sneak peek into a controversial plan to tighten regulation of retirement financial advisers, saying it will both minimize conflicts and still permit brokers to earn a living.

"Whatever business model you want to use is perfectly fine with us, as long as it is not a business model that is entirely based on conflicts of interest," said Phyllis Borzi, the assistant secretary of the Employee Benefits Security Administration, in remarks at an event held by the Financial Services Roundtable.

"There are lots of different ways that people get compensated that are called commissions, and we will ... propose ways that you can still be compensated," she said. "That will be part and parcel of the proposal."

Editor’s Note: These 38 Investments Have a 96% Win Rate

Borzi's remarks on Wednesday came more than two years since the Labor Department scrapped its first draft rule in September 2011 amid withering criticism from the financial services industry.

The department has been working now for several years to overhaul its rules governing how advisers provide advice to clients in workplace retirement plans such as 401(k)s and individual retirement accounts.

Borzi wants these advisers to be held to a higher "fiduciary" standard, meaning they must put their clients' interests ahead of their own.

The idea behind the plan is to reduce potential conflicts of interest because advisers who offer rollover advice to retirees stand to benefit financially.

The plan generated stiff opposition from the industry, which said it would drive up costs, curb commissions and ultimately hurt customers.

Critics also complained the Labor Department's rule could conflict with a separate fiduciary-rule making effort under consideration at the Securities and Exchange Commission that would harmonize rules between broker-dealers and investment advisers.

The measure has proven so controversial that last October, members of the Republican-controlled U.S. House of Representatives passed a rule that would delay the department's rulemaking until the SEC acted first.

However, Borzi made it clear on Wednesday that her department is well ahead of the SEC at this stage, and is hoping to release a new draft as soon as August.

"August is our goal," said Borzi. "Maybe we will be ready then. Maybe we won't." But the new plan will be "very different" from last time, she added.


While the Department of Labor (DOL) has long been expected to release a new version of the fiduciary rule, its unveiling has been delayed and the industry has been clamoring for details on how the new plan will differ from the first version.

On Wednesday, Borzi told the audience to expect a result that is "significantly reworked."
Federal retirement plans generally prohibit certain types of transactions, typically to prevent self-dealing and conflicts by people who manage the plan, among others.

The DOL, however, can carve out exceptions to those rules.

Borzi said on Wednesday that the new proposal will broaden exemptions for activities that would otherwise be considered prohibited transactions.

Those expansions will include new language related to revenue sharing - a practice in which investment companies with funds in a 401(k) may pay plan providers for services like research. Those amounts do not always show up clearly as plan costs.

The scope of the forthcoming proposal related to revenue sharing, however, was unclear.

Fee issues, including revenue-sharing, has been a strong area of concern for the DOL.

Some critics have said revenue sharing may give rise to conflicts of interest, especially if the specific costs are not properly disclosed.

Borzi said several other changes will also be made.

It will, for instance, strive to better differentiate between what is considered investment education and investment advice, and it will also provide a lot more economic analysis to help justify the rule — something critics originally said was lacking.

In addition, Borzi said the new rule will also try to make it clear that not every broker would be transformed into a fiduciary, and that those who just want to sell products can do so as long as they do not cross the line.

While some of these changes are designed to ease concerns, Borzi also warned the industry that it may still not be satisfied with all of the changes and should be prepared.

"We will not be surprised if what people say is we haven't gone far enough," she said.

"Many people have come in during this public process and simply said 'Wave a magic wand and say what we do today is OK tomorrow.' Well, that's not the way things work."


SEC Republican Commissioner Daniel Gallagher said at the event on Wednesday it is still very unclear whether the SEC will ultimately move on its own fiduciary rule.

The SEC has been collecting data to better understand whether customers are confused by the different legal standards that apply to brokers and advisers.

Under current law, brokers are only required to offer products "suitable" to clients, while advisers are held to the higher fiduciary standard.

So far, the SEC has not opted to propose regulatory changes.

Gallagher told the audience there still is a question as to whether a majority of the five-member commission will agree to press ahead with new rules to require brokers to act as fiduciaries.

Editor’s Note: These 38 Investments Have a 96% Win Rate

© 2022 Thomson/Reuters. All rights reserved.

A U.S. Department of Labor official offered a sneak peek into a controversial plan to tighten regulation of retirement financial advisers, saying it will both minimize conflicts and still permit brokers to earn a living.
Thursday, 13 March 2014 08:27 AM
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