The securities industry wants the Department of Labor to coordinate with the SEC regarding a proposal to redefine 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SIFMA executive vice president for public policy and advocacy Ken Bentsen said that the DOL proposal should be withdrawn and reproposed and that necessary exemptions must be promulgated in advance of any final rule. Mr. Bentsen said that the proposed regulation has far broader impact than the problems it seeks 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 is 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. That mark-up would result in an added cost for these self-directed accounts, noted SIFMA. and would disproportionately fall on smaller investors, such as small plans and IRAs Of even more concern, it would eliminate the most obvious buyer when a plan wants to sell a difficult to see security. Further, given that the rule would eliminate a clear understanding when a broker is acting as a fiduciary, and thus increase liability risk, it is likely that brokers will transform such accounts into asset-based fee arrangements or wrap accounts so the brokers can comply with the prohibited transaction rules that govern fiduciaries under ERISA and the federal tax code. ERISA expressly states that a person paid to provide investment advice with respect to assets of a private-sector employee benefit plan is a plan fiduciary. The Internal Revenue Code has the same provision regarding investment advisers to IRAs. ERISA and the tax code prohibit both employee benefit plan and IRA fiduciaries from engaging in a variety of transactions, including self-dealing unless the relevant transaction is authorized by an exemption contained in law or issued administratively by DOL. On October 22, 2010, the DOL published a proposed regulation defining when a person is considered to be a "fiduciary" by reason of giving investment advice for a fee with respect to assets of an employee benefit plan or IRA. The proposal amends the current 1975 regulation that may inappropriately limit the circumstances that give rise to fiduciary status on the part of the investment adviser. According to testimony by Assistant Secretary of Labor Phyllis Borzi, the proposed rule takes into account significant changes in both the financial industry and the expectations of plan fiduciaries, participants and IRA holders who receive investment advice. In particular, it is designed to protect participants from conflicts of interest and self-dealing by correcting some of the current rule's more problematic limitations and providing a clearer understanding of when persons providing such advice are subject to ERISA's fiduciary standards, and to protect IRA holders from self-dealing by investment advisers. At the hearings, SIFMA also noted that, during consideration of the Dodd-Frank Act, Congress considered the question of a counterparty providing a fiduciary duty to plans engaging in swaps and it rejected such an approach because it wanted to be sure that plans could continue to engage in such activities principally for hedging purposes. However, as currently drafted, the Department's proposed rule would result in a counterparty being deemed a fiduciary, which would eliminate the ability for plans to enter into swap transactions. The SEC and CFTC were directed by Congress to establish business conduct rules for dealers engaging in swaps with plans, and the Department's rule would conflict with those rules. SIFMA noted that DOL has not fully considered the costs of this proposal on small plans and IRAs and the manner in which their investment choices will be curtailed, or the costs on large plans that may be unable to engage in swaps, prime broker their assets, invest in alternatives, obtain futures execution and otherwise have their investment choices limited by the proposal.
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