Fiduciary Changes Still Hard to Grasp

“My overall impression is that there is a ton of material to go through and that it’s going to take real time for business folks and other practitioners like myself to go through all this and fully digest it, and to understand and appreciate all the implications,” Russ Hirschhorn, senior counsel in the Employee Retirement Income Security Act (ERISA) practice center and the labor/employment law department of Proskauer, comments about the Department of Labor’s (DOL) proposed regulations about fiduciary investment advice. 

As a global benefits law firm with a substantial presence in the U.S. that extends into both the institutional and individual investing spaces, Hirschhorn notes that Proskauer is taking the new fiduciary rule language very seriously. “The DOL has limited its comment period to just a couple of months, so the pressure is on,” Hirschhorn says.

“The firm works with clients across the retirement plan services spectrum, so we issued an in-depth client alert that will be helpful reading for anyone looking to get caught up on the rulemaking language,” he notes. But even after putting together the informative fiduciary rule language summary, he and other ERISA experts at Proskauer believe its “far too soon to know on net whether this is going to help things or hurt things overall,” or if a strengthened fiduciary rule will truly protect retirement plan participants on the ground and bring more transparency and fairness to the financial system in the way the DOL is hoping.

“Many of the people you see speaking in the media, they are up to their eyeballs in the language just like we are,” he continues. “They are at some amount of peril when they make broad statements about where this is all going to end up, not least because it’s still a proposed rule. The important to thing to understand now is that a lot of people are approaching this from a lot of different angles and points of interest. I don’t think the financial industry is prepared to say today whether this is a catastrophe or a victory, or somewhere in between, and from whose perspective and why.”

But some things are becoming clearer, Hirschhorn says. “For example, one concern that I still carry based off the things I’m reading is whether the business folks at advisory firms will be less inclined to keep serving the small balance markets, especially the small balance individual retirement account [IRA] market,” he says. “Whether that’s going to result in less advice or no advice, I can’t say yet, but the proposed rule does seem to put some pressure on there. It’s something that we are exploring further, and I expect to formulate a deeper opinion soon.” 

Something else that is clear, Hirschhorn says, is that the rule language has “changed pretty substantially since the highly controversial 2010 version,” and interestingly the text of the proposal itself explains a lot of this and the thinking behind it from DOL. These changes have caused some to opine that the DOL has capitulated in critical ways to industry lobbying pressure, but Hirschhorn is not committed to that opinion yet.

“I think that the industry and the lobbyists on both sides of the new rulemaking language have achieved some of the things they wanted, and perhaps have not achieved some of the other things they wanted,” he explains. “There is definitely a give and take going on.”

One example he cited: the initial 2010 proposal would have made employee stock ownership plan (ESOP) valuations a fiduciary action—much to the chagrin of the financial services interests—and this seems to have been directly addressed under the new rule language, such that ESOP valuations get a specific fiduciary “carve-out.”

“There are also numerous carve-outs and prohibited transaction exemptions and other forms of blanket exemptions that seem to be partly a response to earlier industry criticism,” Hirschhorn says. “In another example, it seems there is a new blanket exemption that will apply to call center employees fielding calls and answering general questions from plan participants. But will these call center employees be able to render specific advice on products or transactions? That’s less clear at this point, and the interpretation of these things could change under revisions to the language or through supplemental guidance, as well, so that’s important to consider.”

Hirschhorn continues: “Many of the changes that have been made since the 2010 version are being interpreted as industry successes—that industry lobbyists have successfully pushed back against the DOL in some areas—and I would agree with that to an extent. But did the industry get everything it wanted and will there be no hiccups for advisers and brokers from the business perspective? I doubt it—we’re going to have to see.” 

Hirschhorn agreed with speculation that, since neither consumer protection groups nor the financial services industry is claiming total victory or defeat in the fiduciary fight, it can be surmised that the DOL is slowly but surely closing in on a workable fiduciary redefinition. (See "Changes Plan Sponsors Would See Under Fiduciary Proposal.")

“Since suffering such a backlash in 2010, the DOL has recognized that it’s hugely important for it to at least present the image that it is listening carefully to all sides and considering what everyone has said on this fiduciary stuff,” Hirschhorn says. “They want the industry to know that they have heard the concerns, and that they have taken action to address the concerns in a way they thought was appropriate. Despite this, some folks in the industry clearly think this is going to turn into a no-advice rule, once it’s implemented, and still others have suggested the prohibited transaction exemptions are being set up as overly broad loopholes that will allow negative practices to continue. It’s all ongoing.”

One other area that’s becoming clearer, he concludes, is that the DOL isn’t the only regulatory body making consumer protection a priority. The Securities and Exchange Commission (SEC) has signaled it could move sooner rather than later on its own changes to investment advice and conflict of interest rules that would apply beyond the Employee Retirement Income Security Act.

Media reports have cited comments from SEC Chair Mary Jo White, to the effect that the SEC will “implement a uniform fiduciary duty for broker/dealers and investment advisers where the standard is to act in the best interest of the investor.” Few additional details have emerged about the effort, especially given the groundswell of attention following the DOL's new rule language.

“The SEC has said it is developing its own fiduciary rule, while DOL has said that it has consulted extensively with SEC and other federal regulators and self-regulation bodies like FINRA—to make sure it’s not making things unworkable for the industry it’s supposed to be improving,” Hirschhorn says. “At the moment it seems that we are still pretty far off, very far off from anything like a unified fiduciary standard across these bodies, but you can see the early stirrings of that type of an effort.”