The redefinition of fiduciary is the most important DOL initiative in the last 20 years, and the most controversial, says Steve Saxon, a principal at Groom Law Group in Washington, District of Columbia.
In Saxon’s view, the White House entered the fray because of several factors: the requirement that the regulation go through the Office of Management and Budget (OMB); the problems the DOL had passing the earlier regulation; and the intense amount of lobbying around this heated issue.
“There’s been a lot of activity,” he says, including letters from Capitol Hill initiated by Thomas Perez, the secretary of labor. (See “Congressional Hispanic Caucus Weighs in on Fiduciary Rules.”)
Saxon thinks the DOL will try to push as hard as it can to get the proposal to the table in January. But here’s what has to happen first: hearings, then a comment period, and a certain amount of time to digest the testimony at the hearings, as well as the written and other comments. “That’s going to take a while,” he tells PLANADVISER. “You don’t know whether they’re going to publish a proposal and then re-propose, and then do a final one, or just publish a proposal and base the final version on everything they receive.”
At a recent regulatory conference at the Insured Retirement Institute (IRI), Saxon pointed out that groups on both sides of the argument, both in favor of an expanded definition and against it, are using the press to put forward their viewpoints.
Frustrated Over Redefinition
Brokers are expressing a great deal of frustration over the impact of a redefinition. First, according to Saxon, the regulation must allow financial institutions to be able to continue to provide and sell proprietary products. “They have to be able to stay in business,” he points out. “We can’t just shut them down.” Saxon says he favors exemptions. “If you’re expanding the concept of who is a fiduciary, you need to provide workable, exemptive relief [so people can stay in business].”
The other key issue is the tremendous focus on the decision-making around rollovers of plan assets. Saxon says the DOL is not backing off the Deseret opinion and may even be expanding it. (See “Fiduciary Status Could Be Big Rollover Plus.”)
This would mean that all conversations between a provider and a participant discussing choices for an individual retirement plan (IRA) or investment options in connection with a retirement or distribution event would be fiduciary conversations, whether or not a product was being sold, Saxon says.
“Think about it,” Saxon says. “No one would be able to talk to participants about rollovers or distributions.” In situations where the provider is selling a product and the old rules do not kick in, he says, “you’ll need a path for people to provide meaningful, informed advice about real options. It’s a microcosm of the bigger issue, but it’s important.”
Without exemptions, it will be difficult to have those conversations and sell profitably because of the conflicts.
The definition affects anyone who works with plan sponsors or plan participants, Saxon says. Some people assume that everything they’re doing falls under the fiduciary rule and use that as a starting point. And in discretionary investment management programs, in which the participant turns over control of investments to another person, that person is also recognized as a fiduciary.
They may say they do not care about the proposal, he says, but that is untrue: Everyone cares about this.
“It makes sense in an election year that the White House, the whole administration, would be careful about the extent to which they want to issue controversial regulations,” Saxon says. “It’s going to be even more challenging for the DOL to get the reg through.”