The Department of Labor (DOL) has proposed a new rule to broaden the definition of fiduciary. Fiduciaries under the Employee Retirement Income Security Act (ERISA) include persons who have discretionary authority over a plans management and provide investment advice. DOL’s original interpretation assigns fiduciary responsibilities only to individuals who provide advice regularly and are the primary provider of investment advice. The proposed rule change expands fiduciary duties by removing the language of primary and regular, leaving anyone who gives investment advice liable for losses to the plan. Besides the increased costs to the financial industry to comply with the rule change and loss of service to small and medium investors, DOL has not performed its duties as a department to justify the rule change.
DOLs proposed rule change intention is to protect American investors. However, DOL has not performed the proper procedures in rulemaking which potentially will cause more harm than good. As well, rulemaking of this sort, similar to Obamacare, of finalizing a rule before the details are worked out (seller exemptions and prohibited transaction exemptions) creates uncertainty, leading to less transparency in government — something the rule change is attempting to promote in the financial industry.
First, according to Executive Order 13563, agencies have been called on to eliminate duplicative, outdated, or unnecessary rules. In Phyllis Borzi’s (ESBA Assistant Secretary) opening remarks at the fiduciary hearing, she mentions how the Dodd-Frank Act, with the new definition of fiduciary, will intersect with ERISA issues and that her goal is to “harmonize both statutes. And so whatever sets of rules both agencies put out, the regulated community will have a clear and sensible pathways to compliance with both statutes.” From her statement, it is clear that the proposed rule is unnecessary since it will intersect with an existing law. Further, it is duplicative to the SEC rule to extend fiduciary duties to broker-dealers who provide retail, personalized investment advice (fiduciary duty is also covered by the Investment Advisers Act, which is similar to the proposed rule and common law fiduciary duty). The proposed rule change has been issued by DOL to provide clear fiduciary standards; this cannot happen when the proposed rule is not final. An incomplete rule cannot allow a “clear and sensible pathway to compliance.” These statutes are already on the books and should replace ERISA or their definition for fiduciary in order to rid the regulatory system of further rules that create uncertainty with respect to standards and compliance.
Second, DOL redefining fiduciary is categorized as an economically significant regulation, i.e., those costing businesses, consumers, and the economy more than $100 million. Even worse, this proposed rule is a commerce rule, which directly regulates and influences commercial behavior. The importance is that this kind of government intervention and the costs associated with the regulation decide the fate of firms and the industry as a whole. Government’s job is not to control commercial behavior or pick winners and losers.
Congress through the years has implemented a number of laws to bring transparency and accountability to regulatory process. DOL in this rulemaking has failed to comply with these standards and has not accurately estimated or quantified the costs to the industry or the economy.
One of Congress’s safeguards against unnecessary rulemaking is the Unfunded Mandates Reform Act (UMRA, 2 U.S.C. 658 and 1511). UMRA requires agencies to perform qualitative and quantitative assessment of the anticipated costs and benefits of the federal mandate, including costs and benefits of future compliance costs, and estimates of the effect of the rule on the national economy. Under UMRA, increased analysis is required for rules over $100 million in economic impact, including a reasonable number of regulatory alternatives, of which the least costly will be chosen that accomplishes the objectives of the rule. If the least costly rule is not chosen, then a report must be published with the final rule explaining why the least costly and burdensome rule was not chosen.
DOL does not perform up the standards of UMRA. The only costs they account for is legal fees incurred on investment services firms (which they lowball: they estimate a total of $16.7 million, $119/hour, for legal fees; 76 FR 15002 estimates attorney fees at $354 per hour). DOL fails to account for significant costs that would be incurred by employees of these firms or investors who use these firms’ services, and it does not quantify the remaining costs to service providers. These costs are estimated to be extreme and outweigh the benefits of proposed rule (see Fischel & Kendall comments and the Oliver Wyman report). Some of the costs which DOL has not quantified:
- Broker-dealers who will assume fiduciary duties must obtain Series 65 license, the time, materials, and exam fees. Overall costs of compliance estimated in the Fischel & Kendall comments could exceed $295 million.
- The proposed rule change eliminates commission-based brokerage for IRAs in favor of asset-based advisory service. Oliver Wyman‘s study estimates that over 8 million accounts will not be opened because of a lack in investment advice, resulting in over $96 billion in forgone assets over the next 20 years.
- The rule change will force investors to turn to other investments rather than IRAs, leading to investors to “cash out” IRAs. Investors will lose out on IRA tax advantages and studies show without investment advice, investors receive lower returns. Fischell & Kendall estimate the proposed rule change would incur losses of $790 million over 10 years in investment returns.