After nearly four years of waiting, the Department of Labor's proposed fiduciary regulatory package is here at last.
The proposed rule (RIN 1210-AB32), released April 14, would ensure that investment advisers put their clients' interest first, said Jeffrey D. Zients, director of the National Economic Council and assistant to President Barack Obama for economic policy, during a media conference call.
The rule 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. Obama administration officials have said this allows brokers to recommend products that net higher fees or commissions without yielding better returns for investors, and that investors lose as much as $17 billion a year as a result.
The proposed rule would update the definition of fiduciary investment advice, and would provide carve-outs from the definition for communications that aren't fiduciary in nature. The definition would cover investment recommendations, investment management recommendations, appraisals of investments, or recommendations of persons to provide investment advice for a fee or to manage plan assets, DOL said in the rule.
The proposed rule listed seven carve-outs:
• statements or recommendations made to a large plan investor with financial expertise by a counterparty acting in an arm's-length transaction;
• offers or recommendations to plan fiduciaries of plans covered by the Employee Retirement Income Security Act to enter into a swap or security-based swap regulated under the Securities Exchange Act or the Commodity Exchange Act;
• statements or recommendations provided to a plan fiduciary of an ERISA plan by an employee of the plan sponsor if the employee receives no fee beyond his or her normal compensation;
• marketing or making available a platform of investment alternatives to be selected by a plan fiduciary for an ERISA participant-directed account plan;
• the identification of investment alternatives that meet objective criteria specified by a plan fiduciary of an ERISA plan or the provision of objective financial data to such fiduciary;
• the provision of an appraisal fairness opinion or a statement of value to an employee stock ownership plan regarding employer securities, to a collective investment vehicle holding plan assets, or to a plan for meeting reporting and disclosure requirements; and
• information and materials that constitute “investment education” or “retirement education.”
Zients said that the administration is adamant about publishing a final rule, and will fight attempts to kill it.
“Now we all know, that for some special interests, the only good rule on conflicts of interests would be no rule at all. I want to make clear that that's not an acceptable outcome when the retirement outcome of so many Americans is at stake,” Zients said.
The DOL's project has been in the works since before 2010, when it was originally proposed, and then pulled a year later after much industry criticism.
Secretary of Labor Thomas E. Perez, who also spoke during the call, said that the proposed rules will provide advisers with the flexibility they need to be fairly compensated, such as through commissions, revenue sharing and 12b-1 fees, so long as they commit to acting in the best interest of their clients.
“Our rule is motivated by one simple goal: Advisers who are paid to provide advice to tax-preferred retirement plans and IRAs, should put their clients' best interest first,” Perez said.
Furthermore, the rule provides “guardrails, but not a straightjacket,” so that consumers know that they'll be getting advice in their best interest, Perez said.
The rule wouldn't apply to general investment education, such as provided by call centers, Perez said. Brokers that merely take orders also wouldn't be subject to the enhanced fiduciary requirements, Perez said.
Excerpted from a story that ran in Pension & Benefits Daily (04/14/2015).
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