DOL's Authority Over IRAs May Hinge on 1978 Order


The Labor Department's assertion of authority in its fiduciary rule proposal over those who advise on self-created individual retirement accounts may hinge on a Carter administration executive order.

John J. McGowan Jr., a partner with BakerHostetler LLP in Cleveland, told Bloomberg BNA that the Department of Labor has a legitimate role to play in regulating IRAs that are subject to the Employee Retirement Income Security Act, but that the department's authority to exert similar authority over IRAs that fall outside of ERISA's regulatory scheme is highly questionable. He said the department might be exerting such authority through Executive Order 12108, issued by President Jimmy Carter in 1978.

However, Barbara Roper, director of investor protection for the Consumer Federation of America, said the claim that the DOL lacks authority to regulate matters surrounding IRA holders and those who recommend their purchase is “ridiculous,” and she pointed to the terms of the executive order.

The Financial Services Roundtable, suggested in comments to the DOL that the department's assertion of regulatory authority over IRAs amounted to amending ERISA, something only Congress can do.

DOL's Authority Defended

Under the DOL's conflict-of-interest proposal (RIN 1210-AB32), advisers who want to continue receiving commissions for advising IRA holders would have to rely on a newly created best-interest-contract prohibited transaction exemption.

Under this exemption, to avoid the risk of having this compensation structure deemed to involve self-dealing—and therefore a prohibited transaction, subjecting an adviser to penalties—these advisers would need to contractually agree to adhere to ERISA-like fiduciary standards.

Under Executive Order 12108, also known as the White House Reorganization Plan No. 4 of 1978, authority under the prohibited transaction provisions of tax code Section 4975 governing certain aspects of the code's treatment of IRAs was transferred from the Treasury Department to the DOL.

Roper said that, under the Internal Revenue Code, IRAs are governed in the first instance by the Internal Revenue Service, but that this executive order gave the DOL the authority to write the prohibited transaction rules that the IRS relies on to regulate IRAs.

Norman P. Stein, law professor at Drexel University's Thomas R. Kline School of Law in Philadelphia, concurred, saying that, under the executive order, the DOL has “definitional responsibility” over all terms under the prohibited transaction provisions, and therefore has unquestioned authority to regulate IRAs.

Excerpted from a story that ran in Pension & Benefits Daily (8/12/2015).

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