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DOL's Fiduciary Proposal Misses the Mark

The Department of Labor should go back to the drawing board on its fiduciary proposal before any further damage is done.

Mercer Bullard, 06/14/2011

The Department of Labor ("DOL") has proposed a substantial expansion of the category of persons treated as fiduciaries under the Employee Retirement Income Security Act of 1974 ("ERISA"). The proposal reflects DOL's strong commitment to protect participants in 401(k) and other pension plans. It follows a series of laudable regulatory initiatives that address qualified default investment alternatives, fee disclosure, conflicted fees structures, and annuity options.

Although DOL's fiduciary proposal is equally well-intentioned and has real potential, it badly misses the mark. It is unfair to theĀ industry because it disregards decades of administrative law and practice under ERISA. It is bad for investors because it strips them of fiduciary protections when they are needed most.

The proposal has provided fuel for anti-government forces that seek to weaken financial services regulation generally. And it may inadvertently help the insurance lobby derail the SEC's plan to extend a fiduciary duty to broker-dealers who provide retail, personalized investment advice.

DOL has dug itself a hole. Its best strategy at this point would be to stop digging and publicly announce that it is going back to the drawing board on its fiduciary proposal before any further damage is done.

ERISA "Fiduciaries"
A fiduciary under ERISA includes a person who provides "investment advice," which DOL has interpreted to include only advice that is both "regular" (i.e., not advice regarding a single transaction) and provided under an agreement that it will be "a primary basis" for investment decisions about plan assets.

This interpretation substantially narrows the normal usage of the term "fiduciary." For example, the Investment Advisers Act fiduciary duty applies to one-off investment recommendations and recommendations that do not serve as a primary basis for a client's decisions. The same holds for the common law fiduciary duty if the adviser's relationship with the recipient is one of trust and confidence.

DOL concedes that its current interpretation narrows even "the plain language" of ERISA, so it has proposed to remove the "regular" and "primary basis" restrictions. Its reinterpretation would bring the meaning of "fiduciary" in line with common usage of the term and harmonize the meaning of fiduciary under ERISA with the Advisers Act and the common law. So far so good.

But fiduciary status under ERISA, in contrast with fiduciary status under the Advisers Act and common law, triggers particularly onerous consequences. Fiduciary status under ERISA generally means that the fiduciary cannot enter into many arrangements that are otherwise permitted and often routine for fiduciaries. The analysis of these "prohibited transaction rules" is complex and costly; the penalties for violating them are draconian. ERISA is a model full-employment-for-lawyers statute and every financial professional's worst nightmare.

Mercer Bullard is president and founder of Fund Democracy, a mutual fund shareholder advocacy organization, an associate professor of law at the University of Mississippi School of Law, a senior adviser for financial planning firm Plancorp Inc., and a former assistant chief counsel at the Securities and Exchange Commission. He has testified frequently before Congress on regulatory issues. He can be reached at bullardm@funddemocracy.com. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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