Fine-tuning the definitions of “recommendation” and “advice” are among the top concerns that commenters urged the Department of Labor to address in its proposed conflict-of-interest rule.
Business and industry groups and individuals flooded the DOL with comment letters as the initial period for public input came to a close July 21, and the department had posted nearly 600 comment letters by late afternoon the day after the deadline.
Many of the letters heavily criticized the proposal, though some backed it, but they also looked at particular aspects of the proposed rule and provided possible ways of improving it.
Concerns about those definitions were among a slew of common themes addressed in the letters on the proposed rule, commonly known as the fiduciary rule. Other concerns included employee stock ownership corporations, privacy and data security, and providing adequate time to implement the final rule once it's effective.
Groups such as the ERISA Industry Committee and the American Council of Life Insurers called for a honing of the term “recommendation” because of concerns about the term's vagueness and need for more specific guidance on how long after advice is given that it would still be considered to fall under the fiduciary definition.
Under the proposed rule (RIN 1210-AB32), issued by the DOL's Employee Benefits Security Administration in April, investment recommendations would bring advisers under the definition of fiduciary.
ERIC said in its letter that including suggestions in the definition of recommendation is “not appropriate.”
In the proposed rule, the definition of recommendation is a communication that “would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.”
ERIC said the final rule should drop the word “suggestion” from this definition, and offered an alternative. “It would be more appropriate to use a term such as ‘endorsement' or ‘encouragement' in the final regulation, which at least would impose some requirement that the person speak favorably or in support of a particular investment action.”
The American Council of Life Insurers said that the DOL should clarify that fiduciary “advice” isn't just “personalized” or “individualized to the advice recipient,” but “is advice that implicates relationships of trust and expectations of impartiality.”
The ACLI also took issue with the part of the definition of fiduciary investment advice that includes the provision of advice that is “individualized or specifically directed to” the recipient. The ACLI said that advice “directed to” isn't synonymous with “individualized,” and should be cut from the final regulation. Groups have been concerned that “directed to” could include mass mailings.
The ACLI also said that the proposal should be clarified to state that fiduciary advice should be “contemporary” with an investment decision. “ACLI members are concerned that advice, when provided, may be construed by a plan sponsor, participant or IRA owner as on-going in nature, rather than constrained by context, events and/or time,” the group said.
Five years ago, in its 2010 fiduciary rule proposal, the DOL included appraisers of employee stock ownership plans as fiduciaries. That proposed rule was later withdrawn and replaced by the present proposal, which would provide a carve-out for ESOP appraisers from the definition of fiduciary, as well as appraisals and fairness opinions provided to investment funds and to plans and individual retirement accounts.
Groups generally praised the DOL for providing the carve-out, but still voiced deep concerns with it.
The American Society of Appraisers, in a group letter with the National Association of Independent Fee Appraisers and the American Society of Farm Managers and Rural Appraisers, called the new proposal a “vast improvement” over the 2010 version, but also said “we are disappointed and frankly confused by the fact that the current proposal continues to designate appraisers as fiduciaries for a smaller, but still important, subset of ESOP valuations.” The three groups said the DOL should further carve out from the fiduciary requirements valuations of other property purchased, sold or exchanged by ESOPs individual transactions.
Fiduciary Counselors said it had “significant concerns” about appraisals “provided in connection with a specific transaction involving the acquisition, disposition, or exchange of securities or other property by a plan” or IRA.
Fiduciary Counselors said the carve-out doesn't go far enough, and “should be expanded to include other situations where the potential for conflicts of interest or self-dealing is remote, such as persons providing appraisals and fairness opinions to an independent fiduciary.”
The Appraisal Institute, which represents real estate appraisers, said that the department should address the distinction between appraisals and fairness opinions, and that further, neither should be deemed as fiduciary in nature.
“The proposed rule confuses the role of appraisals in buy and selling decisions, as the role of fiduciary is maintained by the investment manager, not the appraiser,” the real estate appraisers group said. In addition, the appraiser “performs its work in accordance with generally accepted appraisal standards without advocacy to the client.”
Excerpted from a story that ran in Pension & Benefits Daily (07/22/2015).
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