Fiduciary Rule May Not Appear Until Spring, 408(b)(2) Guide Out Soon, Attorneys Say


Now that Assistant Labor Secretary Phyllis C. Borzi has confirmed the Department of Labor's new fiduciary rule won't be out in October, the forthcoming re-proposal realistically might not be seen by the public until early next spring, practitioners said during an audiocast sponsored by Drinker Biddle & Reath LLP.

“Speculation at this point is we'll probably see the regulation go to [the Office of Management and Budget] maybe towards the end of this year or early next year. Therefore, [it would] come out more in a roughly spring time frame,” Bradford P. Campbell, counsel in the law firm's Washington office and former assistant secretary of labor for DOL's Employee Benefits Security Administration, said during the Sept. 12 program.

Borzi, speaking Sept. 10 during a session of the Financial Services Institute's 2013 Financial Advisor Summit, said the re-proposal of a rule to revise and expand the definition of “fiduciary” under Section 3(21)(A) of the Employee Retirement Income Security Act is still under construction and won't be coming out in October, as was indicated in the department's regulatory agenda.

Some in the retirement community are in a state of unrest while awaiting the re-proposal because they can't make plans for the new fiduciary regime, but others are glad that EBSA is taking its time with the rule and not just “putting a gloss on what it had done before,” Campbell said.

One “wild card” in the fiduciary re-proposal will be how the DOL addresses individual retirement accounts and associated rollovers and rollover solicitations, he said.

Fred Reish, a partner in the firm's Los Angeles office, agreed, saying, “It's entirely possible that could be the biggest single fight over this regulation, and there's two ways that it can be addressed from the private-sector perspective.”

One way DOL could address IRAs would be to say, “what would be fiduciary advice to a plan would not be fiduciary advice to an IRA,” a scenario that Reish thinks is highly unlikely.

The DOL also could create a prohibited transaction exemption that said that “if a fiduciary adviser makes the following disclosure, then a certain number of conflicts of interest, for example, compensation that can vary depending on the recommended investments, is OK with appropriate disclosures,” Reish said.

Section 408(b)(2) Part 2

Reish also addressed the proposed rules the department sent to the OMB in June on a “guide or similar requirement” under ERISA Section 408(b)(2), saying the proposal might make an appearance in late September or early October.

The big question is what the proposal will look like, Campbell said.

“Is this going to be sort of a summary/road map that's given to the responsible fiduciary, like a one- or two- or three-page document that lays out the primary fees and so forth and therefore really just a distillation of the important points in a relatively easy format that's not that hard to prepare? Or will this be a very detailed recitation of all the various [Rule] 12b-1 fees that might be associated with every fund and where to go find those in the fund prospectus?” Campbell said.

Depending on the form the proposed rules take, it could be very easy for some service providers to comply, but for others, it could be “exceptionally difficult to prepare depending on the compensation arrangement, the number of funds, et cetera,” he said.

The final rules under Section 408(b)(2) that were released on Feb. 2, 2012, included a “sample road map” that was not required to be used, Reish said. If the proposed rules are similar to the sample road map in the final Section 408(b)(2) rules, it might become a lot of work for service providers, Reish said.

“I worry that if it's a same level of detail as the example in the regulation, it may be almost impossible to comply with,” he said.

Excerpted from a story that ran in Pension & Benefits Daily (9/12/2013).