March has already delivered several noteworthy developments regarding the proposed fiduciary rule. By way of background, the Department of Labor sent a proposed rule regarding the definition of fiduciary to the Office of Management and Budget (“OMB”) on February 23, 2015. Although the proposed rule has not been made public yet, the Department provided a glimpse of what it might look like in frequently asked questions available on the Department’s website. For example, the Department indicates that it is seeking “a balanced approach that . . . ensures that [investment] advisers provide advice in their client’s best interest, and also minimizes any potential disruptions to all the good advice in the market.” Further, the Department states that the proposed rule “will not prohibit common compensation practices, such as commissions and revenue sharing[,]” and will include proposed exemptions to restrictions under ERISA and the Internal Revenue Code (the “Code”). Review by OMB is a first step and will be followed by the notice-and-comment process under the Administrative Procedure Act.
As to the new developments, first, nine Republican members of the U.S. Senate Committee on Health, Education, Labor, and Pensions signed a March 10, 2015 letter to the OMB Director generally expressing concern that the proposed rule will be similar to the 2010 proposed rule that was withdrawn by the Department in 2011. The letter requests that OMB consider 11 specific concerns of the Senators. Most of the concerns revolve around perceived failures of the Department to coordinate with the Securities and Exchange Commission (“SEC”) and other agencies and the possibility that the proposed rule could increase the cost of investment-related services or reduce the availability of such services to ERISA plans and individual retirement accounts (“IRAs”). The letter is available here.
Second, Secretary of Labor Thomas Perez was questioned about the proposed fiduciary rule during a March 17, 2015 budget hearing before the U.S. House of Representatives Committee on Appropriations Subcommittee on Labor, Health and Human Services, Education and Related Agencies. Republican Hal Rogers, the Chairman of the Committee on Appropriations, asked Secretary Perez “how ERISA gives DOL jurisdiction over an individual’s relationship with a personal investment advisor.” In response, Secretary Perez briefly explained the roles of the Department and the SEC and referenced a letter that he had sent the previous day responding to an inquiry from the Chairman of the House Committee on Education and the Workforce. Secretary Perez also stated that “the law gives DOL the authority to define a fiduciary under the tax laws in the same way as the ERISA definition.” He further indicated that he has been involved in eight or nine meetings with SEC Chairwoman Mary Jo White relating to the proposed fiduciary rule. A video of the hearing currently is available here (the dialogue between Chairman Rogers and Secretary Perez starts at approximately 1:21:52).
The discussion during the budget hearing highlights the potential scope of the proposed fiduciary rule and the impact that it could have not only on 401(k) and other employer-sponsored plans, but also IRAs. The 2010 proposed regulation would have amended the definition of fiduciary for purposes of ERISA and the excise tax on prohibited transactions under Code § 4975. Code § 4975 applies to IRAs and contains a definition of fiduciary parallel to the one found in ERISA § 3(21)(A).
Finally, several sources, including PLANSPONSOR and the American Retirement Association, are reporting that on March 17, 2015, Chairwoman White stated that the SEC will “implement a uniform fiduciary duty for broker-dealers and investment advisors where the standard is to act in the best interest of the investor.”
While the extent of further interaction between the Department of Labor and the SEC and the ultimate fate of the proposed fiduciary rule remain uncertain, it appears quite likely that the discourse surrounding the proposed rule will continue to be politically charged.