As of today, in the retirement and savings plan matters, money managers are not required to register as fiduciaries. The Department of Labor (“DOL”) is about to clarify the situation by wiping out the difference that exists between financial advisors and broker dealers in regard to their responsibilities in retirement advices.
A fervent debate is currently on regarding whether the fiduciary duty should be applicable to broker dealers. Under section 3(21)(A)(ii) of the Employee Retirement Income Security Act (“ERISA”), a fiduciary advisor is a person who “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan … .” In other words, the fiduciary advisor has to act solely in another party’s interests. The main corollary of this principle, for the fiduciary, is to avoid any conflicts of interest between itself and its clients.
Recently, the United States Supreme Court clarified the scope of the fiduciary duty under ERISA – Tibble v. Edison International, No. 13-550 (U.S. 2015). The Supreme Court expressed that a fiduciary “has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the fiduciary’s duty to exercise prudence in selecting investments at the outset.”
Some financial services providers do not seem concerned about the possibility of a higher standard – i.e., they already support these basic safeguards in their work policy. Others who are under the pressure of their executives demanding large profit-return, seem to “forget” some of these principles and claim that they will not be able to serve their clients or stay in business if such a rule came into effect.
Who Takes the Lead?
Although initially the Securities and Exchange Commission (“SEC”) regulated broker dealers and investment advisors, it has delegated a large part of its prerogatives related to the broker dealers to the Financial Industry Regulatory Authority (“FINRA”). Nevertheless, when investment advice and securities transactions are related to savings and retirement plans the DOL also has a say in the matter.
Industry groups have widely expressed their concerns with the idea of a fiduciary standard commitment for broker dealers. The fact that the DOL is conducting the project understandably makes the financial services industry skeptical as the connection between them and the DOL is much less privileged than with the SEC or FINRA.
Financial services providers would welcome a consistent and coordinated interpretation of this new standard by the DOL and SEC; divergence between regulators would not serve anyone and would confuse both providers and clients. Trustees believe the industry and investors would be better served if the SEC took the lead and the DOL incorporated the standard guidelines in its interpretation of ERISA.
The Crisis Aftermath
Investment advisors – who provide investment advices – undertake to strictly respect the fiduciary duty. The objectives and interests of their clients must be their priorities when they suggest securities acquisitions. Any conflict of interest must be avoided or at least fixed in the Clients favor.
As opposed to advisors, broker dealers – who only execute securities transactions – have so far not been required to follow the fiduciary duty principle. However, as they suggest the purchase of securities, they are held to submit suitable products to their clients in regard to their financial situation and investment objectives. However, FINRA “suitability” standard does not mean that the products sold must be the best in respect to the purchaser profile.
During the latest financial crisis, many people learned the hard way that, even though those brokers were managing their savings, they were not fiduciaries and, consequently, were not held by the fiduciary duty. Thereafter, Congress adopted the Dodd-Frank Wall Street and Consumer Protection Act, with the intent to have the SEC examine the need of a new uniform federal fiduciary rule both for brokers and advisors. The SEC did so, and in 2011 released that a uniform standard would be appropriate.
At the same time, the DOL – which enforces among others the ERISA – implemented its own set of regulations in this matter with the intent to put some safeguards in place regarding retirement and savings accounts. In its new regulations, it focuses mainly on the conflict of interest facet of the fiduciary duty in respect to retirement accounts.
Two Week Extension
In 2010, the DOL wished to expand the definition of Fiduciary Duty under the ERISA but, eventually, overwhelmed by the industry pressure, had to withdraw it. In February 2015, President Obama asked the DOL to move ahead on its fiduciary rule.
Although Senators from both sides asked the DOL to extend the comment period, arguing that the matter is too complex to be commented in 75 days, the latter extended the period only for two weeks. Rule makers bode that a longer extension of this period could be prejudicial for their project.
Tags: Joseph Pastore, Securities Regulatory, Security
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