Fiduciary Proposal Needs Clarity on Advice, Broader Scope in PTEs, Practitioners Say


The Department of Labor's re-proposed conflict-of-interest rules touch upon a broad array of professionals that would be deemed fiduciaries, so the department will need to spend time thinking about how to make the rules less complex and confusing, practitioners told Bloomberg BNA.

Among the topics that the agency will need to consider include the narrowness of the prohibited transaction exemptions and how to draw the line between general investment education and advice that tips the balance toward fiduciary duties, practitioners said.

The proposed rule is a “dramatic expansion” of who will be considered a fiduciary and is not well explained, said Patrick C. DiCarlo, counsel in Alston & Bird LLP's Atlanta office.

The proposed regulation (RIN 1210-AB32) would require brokers to work under a fiduciary duty, meaning they would have to act in their clients' best interest. Presently, they are held to a “suitability” standard, meaning they can sell products that generally fit an investor's needs and tolerance for risk.

The DOL will also need more time to gather and consider all the comments on the proposal than is allotted, practitioners said.

Comments on the re-proposed rule are due by July 6—75 days after the guidance published in the Federal Register—after which public hearings take place, and then additional time for comments, the DOL said when it released the proposal and related documents.

The 75-day comment period is “historically brief,” said Kent Mason, a partner at Davis & Harman LLP in Washington, and outside counsel to the American Benefits Council.

The DOL may extend the comment period, said Thomas G. Schendt, a partner in Alston & Bird LLP's Washington office. “I don't think they're operating in a sealed box.”

Prohibited Transaction Exemptions 

The proposed PTEs are confined to a narrow set of products, so companies that sell alternative investments, for example, wouldn't be able to do so under the new regime, Schendt said.

The DOL couldn't deal with all products on the market or potential future products, so one way to broaden the parameters of the PTEs would be to prescribe which features products can have, and which are proscribed, thus creating safe and unsafe harbors, Schendt said.

DiCarlo said the proposed exemptions are “particularly protective” of individual retirement accounts, but don't address accredited investors to IRAs.

In the context of a natural person, an accredited investor is anyone who earned income that exceeded $200,000, or $300,000 together with a spouse, in each of the prior two years, and reasonably expects the same for the current year; or has a net worth over $1 million, either alone or together with a spouse, excluding the value of the person's primary residence, according to the Securities and Exchange Commission.

Under federal securities laws, a company or private fund may not offer or sell securities unless the transaction has been registered with the SEC or an exemption from registration is available. Certain securities offerings that are exempt from registration may only be offered to, or purchased by, persons who are accredited investors, the SEC said.

Provisions regarding accredited investors is an area that wasn't carefully enough considered, DiCarlo said.

Excerpted from a story that ran in Pension & Benefits Daily (04/20/2015).

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