WASHINGTON — A top official with the Labor Department defended the controversial plan to expand the definition of "fiduciary" to cover people providing advice to retirement plans on a commission-based model, a proposal strongly opposed by industry groups representing independent broker-dealers and advisors.
Deputy Assistant Secretary Michael Davis took the stage here Tuesday at the Financial Services Institute's annual advocacy summit. He quickly acknowledged he was in hostile territory.
But the mood became more adversarial as Davis outlined the department's proposal and how it would attempt to guard against conflicts of interest by extending the fiduciary obligations to act in investors' best interest to advisors to IRA plans and participants of plans governed by the 1974 Employee Retirement Income Security Act (Erisa).
"I think you're on a slippery slope here," one audience member challenged.
"I think you really have to carve out because when you really boil it down, what you're worried about is retirement protection for the people of this country. The IRAs are really the sole driver when you take a look at how people roll over those 401(k)s and manage their future. And to eliminate those choices … I think you're really going to have some unintended consequences."
The FSI and other critics of the proposal warn that the expansion of fiduciary responsibility would be overly broad, exposing broker-dealers and financial advisors to unreasonable legal liability and forcing them give up the commission-based model in favor of a fee-based structure, ultimately compelling many to abandon the market of advising for IRAs, plans covered under Erisa and their participants.
Opponents scored a victory earlier this year when the Labor Department announced that it was shelving the proposal to expand fiduciary obligations, but Davis reiterated that the plan to revisit the rulemaking is still very much on track, likely for next year.
Members of the FSI in town for the summit plan to head to Capitol Hill on Wednesday to meet with the offices of more than 260 representatives and senators to make their case about the fiduciary issue and other policy priorities. The objections that some lawmakers expressed helped in part to delay the Labor Department's rulemaking process.
Davis defended the plan. He noted that the 35-year-old Erisa statute already contains provisions under which advisors to retirement plans can be considered fiduciaries, but he said the rules, written when defined-benefit plans were the norm, need to be updated. "That rule was written in a very different world," he said. "Pension plans don't cover most Americans like they used to."
Davis noted that the proposed rulemaking will preserve meaningful exemptions that will carve out advisors engaged in certain practices, such as swap transactions.
The definition and scope of those exemptions figure to be major areas of contention when the department revisits the rulemaking proceeding next year.
Davis emphasized that the intent of the rulemaking is not to eliminate the commission-based model, but that the Erisa regulations currently on the books offer inadequate checks on revenue sharing and principal trading. "We've been very agnostic about the fee models."
Kenneth Corbin is a freelance writer for
