DOL's Borzi says fiduciary rule will be simple: clients come first

Official calls economic analysis "robust," says process is completely transparent

By Darla Mercado   |  June 19, 2013 - 8:43 am EST - InvestmentNews

The Labor Department’s re-proposal on fiduciary duty is widely expected to land this fall, but Assistant Secretary Phyllis Borzi dropped a big hint on what the industry can expect: a simpler rule in which clients’ interests come first.

Speaking at the Insured Retirement Institute’s annual Government, Legal and Regulatory Conference in Washington yesterday, Ms. Borzi broke down three basic components of the re-proposal. The regulation aims to do away with a five-part test to determine who is a fiduciary under the Employee Retirement Income Security Act of 1974, applying this higher standard of care to brokers and advisers working with 401(k) plans.

“Our rule is simple and straightforward,” she said. “In the re-proposal, we’re making it very clear that there is only one rule: that you have to put the best interest of your client ahead of your own interest.”

“That’s what most people in this incredible public process tell us that they do, and if that’s what they do, then why not be accountable for it?” she asked.

The three parts of the regulation are the text of the proposal, the economic analysis — which critics of the rule have been calling for — and a series of prohibited-transaction exemptions.

This time around, the DOL has armed itself with detailed research on the costs and benefits of the rule, which the public can dig up.

”What you will see is an extremely robust economic analysis in which we document the cost of conflicted advice in terms of long-term retirement savings,” Ms Borzi said.

“Our economic analysis will be completely transparent,” she added. “We won’t be giving a conclusion in aggregate; you can go and read for yourself every bit of research we cite in the economic analysis.”

Meanwhile, the fact that there will be prohibited-transaction exemptions included in the rule proposal means that though ERISA prohibits conflicts of interest, the Labor secretary can exempt certain activities that the secretary finds are in the best interests of participants and beneficiaries, Ms. Borzi said.

“So even if there is a potential for a conflict of interest, the secretary can exempt those transactions from prohibited-transaction rules,” she said.

Indeed, industry groups representing broker-dealers, such as the Financial Services Institute Inc., and members of Congress have expressed concerns that by having the fiduciary label apply to brokers and rollovers into individual retirement accounts, fewer people would have access to any kind of guidance to begin with.

Members of the Congressional Black Caucus and the Congressional Hispanic Caucus sent a letter dated June 14 to acting Labor Secretary Seth Harris, asking that “this re-proposed rule enhance investor protection without reducing investor access to affordable retirement advice, products and services.”

“We believe the department should adopt policies that expand access to advice, particularly in light of the racial and gender disparities that currently exist in retirement savings,” they wrote.