Fiduciary Proposal Won’t Outlaw Commission Payment

WASHINGTON – The Department of Labor proposal dealing with a new fiduciary standard will not outlaw payment of commissions. In addition, the proposal will contain detailed language dealing with proposed prohibited transaction exemptions (PTE), Secretary Thomas E. Perez said.

Indeed, the “prohibited transactions scheme is a key to making this work,” Perez said in comments to the U.S. Chamber of Commerce. The secretary noted that “perceived weaknesses in prior approaches” to dealing with PTEs helped sink the prior fiduciary proposal, published for comment in 2010 but withdrawn in mid-2011.

Perez made a strong pitch for acceptance of the fiduciary standard to an obviously leery audience. In late February, the Chamber issued a white paper titled “Using PTEs to Define an ERISA Fiduciary: Threading the Needle with a Piece of Rope.” The document outlines the Chamber’s concerns with the proposal, especially with the process involving PTEs. The paper contends that “problems include that the PTE process is lengthy and protracted, causing confusion for investors; exemptions granted by the DOL are burdened by conditions, limitations and requirements; and the exemptive process is generally ineffective in addressing the needs of the employee benefits community.”

In answering a question posed by a Chamber official after his prepared remarks, Perez said to “stay tuned” as to how the PTE process will work.

The Chamber official lained in his question that he had been told that when the Employment Retirement Income Security Act of 1974 (ERISA) first became law, the PTE approval process was “flexible and broad.”

Since then, however, the process has morphed into something “with much less flexibility, much narrower, and with a lengthy process to get an exemption approved,” according to the Chamber official.

Perez said the proposed rule “will be able to address your concerns chapter and verse,” adding that it will “address the concerns you folks have raised.”

The secretary added that the proposal will draw a “clear line” between education and advice, and said it will not contain a provision dealing with Employee Stock Ownership Plans (ESOPs). He also reiterated that the proposal will contain a “robust” economic analysis, likely the document circulated by the Council of Economic Advisers in mid-January.

In answer to a question, Perez also said the proposal will draw “clear lines” between advice provided to investors, and services provided to people with self-directed individual retirement accounts “who are just purchasing items.”

Perez said DOL officials recognize that the proposed rule will deal with “many situations,” and that the comment process will be used to “ensure that we are moving the ball in the right direction.”

He acknowledged that the controversy dealing with the ESOP provision, especially because critics raised the specter of “unintended consequences,” also played a strong factor in the withdrawal of the earlier proposal.

A spokesman for the National Center for Employee Ownership said the controversy dealt with a provision of the 2010 proposal which would have required the independent appraisal firm that ESOPs must hire to value their stock annually would have to be certified as a fiduciary.

In his comments to the Chamber, Perez said that the DOL “is monitoring closely” the emergence of Web-based investment advice services that are being offered by such mutual funds as Vanguard and broker/dealers such as Schwab.

He answered this question within the context of how investment advisors and broker/dealers can service investment accounts of less than $100,000, which the questioner said the industry has found it can’t make money by servicing.

He said he found this issue is emerging in the United Kingdom as the advice industry in that nation deals with provisions of a new law that bars payment of commissions for investment advice.

“We are monitoring what is going on (in the U.K. and with Web-based advice) to see what we can learn,” Perez said.

“One of the things the U.K. industry has figured out is how to innovate in response to the new law, and they are innovating in ways that is making advice much more accessible,” he added.

Perez said “the current conversation was irrelevant to have in the 1970s,” when ERISA was enacted. That was because, at that time, most people had defined benefit plans, and didn’t have to worry about self-directing their savings for retirement. “Now people have to think about it,” he said.

“We need a level playing field on investment advice because our studies have found that consumers don’t know the difference between someone who provides advice based on the suitability standard and one who provides advice under the fiduciary standard,” Perez added.

“What they know is that they have worked hard to save money and they want to make sure they are getting advice that puts their interest first.”

He said the DOL is working to get the proposal published “as soon as possible, so we can transition from this round of informal feedback with you to another round where we can get your comments.”

He also said that his way of dealing with these issues “is to build a big table, listen, listen often and learn. That is my philosophy.”

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].