In testimony before the House Committee on Education and the Workforce, Subcommittee on Health, Employment, Labor and Pensions, Borzi said the Department of Labor’s October 2010 proposed amendment to its fiduciary rule represented its approach to accomplishing these goals.
Borzi said a new definition is needed because the variety and complexity of financial products have increased, widening the information gap between advisers and their clients and increasing the need for expert advice. In addition, consolidation in the financial industry and innovations in products and compensation practices have multiplied opportunities for self-dealing and made fee arrangements less transparent to consumers and regulators. At the same time, the burden of managing retirement savings has shifted dramatically from large private pension fund managers to individual 401(k) plan participants and IRA holders, many with low levels of financial literacy.
Borzi contended the narrowness of the regulation has harmed some plans, participants, and IRA holders. Research has linked adviser conflicts with underperformance. SEC reviews of certain financial sales practices may also reflect these influences. EBSA’s own enforcement experience has demonstrated specific negative effects of conflicted investment advice.
Borzi assured the panel the DoL is working on concerns related to coordination with other rulemaking entities such as the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC); the costs and unintended consequences to IRAs; the valuation of employer securities; and distinguishing education from advice.
In addition, the Department is working to better understand how specific compensation arrangements would be affected by the proposed rule and whether clarifications of existing prohibited transactions exemptions would be appropriate. As it further develops thinking in this rulemaking, the Department is paying special attention to the two primary exceptions to fiduciary status under the proposed rule: clarifying the difference between investment education that does not give rise to fiduciary status and fiduciary investment advice; and clarifying the scope of the so-called “sellers’ exception” under which sales activity is not fiduciary advice. In both cases, we will make sure to analyze and address the comments and concerns that were raised during our extensive public comment period.
Finally, Borzi said, the DoL is exploring a range of appropriate regulatory options for moving forward, taking into consideration public comments submitted for the record, EBSA’s economic analysis, and relevant academic research. “In so doing, we are aiming to address conflicted investment advice while not unnecessarily disrupting existing compensation practices or business models,” she stated.Text of Borzi’s testimony is at http://www.dol.gov/ebsa/newsroom/ty072611.html.