House Members Push DOL for Fiduciary Rule Details

About three dozen U.S. Representatives are urging Labor Secretary Thomas Perez to release more information about the Department of Labor’s controversial fiduciary definition proposal—especially information about whether or not the Department of Labor (DOL) is effectively collaborating with the Securities and Exchange Commission (SEC), which shares jurisdiction over key areas of investment advice regulation.

Details on the long-running fiduciary definition effort remain elusive and opaque a few weeks after President Obama warned the investment and financial services industry that the Department of Labor was about to submit proposed fiduciary rulemaking language to the Office of Management and Budget for a mandatory pre-release review.

As the industry waits for the rulemaking language, House Education and Workforce Committee Chairman John Kline (R-Minnesota) and Health, Employment, Labor, and Pensions Subcommittee Chairman Phil Roe (R-Tennessee) are asking whether the DOL has effectively collaborated with the SEC in creating the new fiduciary language under the Employee Retirement Income Security Act (ERISA).

Kline and Roe, along with 30 other member-signatories, are requesting by March 18 that certain documents and communications be released related to the Labor Department’s consultation with the SEC as it worked to introduce a new proposal to redefine the fiduciary standard.

“The public has been assured repeatedly that close consultation between these two agencies was underway to avoid any regulatory confusion and inconsistencies,” Kline says. “However, recent statements by a member of the SEC raise serious doubts about whether meaningful consultation has taken place. This rulemaking will affect the retirement security of millions of Americans, and I hope the department has done more than simply pay lip service to good government on this very important issue.”

The members also suggest that, as with past fiduciary redefinition proposals, they are “concerned DOL could establish a conflicting and confusing regulatory morass harming retirement savers.”

For example, the members point to Section 913 of the Dodd-Frank Act, which directed the SEC to study the standard of care for investment advisers and broker/dealers, and it authorized the SEC to promulgate rules based on the results. The members’ letter says that policymakers have “consistently warned DOL’s approach could conflict with SEC’s rulemaking … resulting in uncertainty, higher costs, and less financial information for investors.”

Despite these warnings, the members argue the president has directed the DOL to press ahead, without regard to SEC action. For its part, the SEC has been less forward than the DOL in terms of a timeline for changes to its fiduciary standards. 

“It is clear coordination between SEC and DOL is vital to ensure a functioning regulatory framework; it is unfortunately far less clear that such coordination is occurring,” the letter reads. “We are especially disappointed and alarmed by Commissioner Gallagher's allegations that no meaningful engagement has occurred.”

The letter then cites recent comments from SEC Commissioner Daniel M. Gallagher, Jr., who has testified that the DOL “has not formally engaged the Commissioners, at least not this Commissioner, on its fiduciary rulemaking process and the impact it may have on investors.”

Gallagher’s quoted comments continue: “And despite public reports of close coordination between the DOL and SEC staff, I believe this coordination has been nothing more than a 'check the box' exercise by the DOL designed to legitimize the runaway train that is their fiduciary rulemaking. This is inconsistent with public pronouncements from the administration. For example, in testimony before the Health, Employment, Labor, and Pensions Subcommittee, Assistant Secretary Borzi promised DOL, SEC, and others ‘are actively consulting with each other and coordinating our efforts.’”

The House members conclude their letter by noting concern over this apparent lack of coordination between the two government entities led directly to the House’s passage of the Retail Investor Protection Act (RIPA), which would require the DOL to delay its rulemaking until after the SEC acts, among other provisions. 

“The bill passed the House on a strong bipartisan basis,” the members note. “In recognition of this concern, a revised notice of proposed rulemaking should not be issued until after Congress is satisfied sufficient coordination has occurred. So that we can better understand the coordination between DOL and SEC, please furnish all communications after September 19, 2011, between DOL and SEC regarding this rulemaking. In addition, please provide all documents and materials addressing how DOL has considered, adopted, or discarded any concerns raised by SEC as it revised its regulatory proposal.”

For their part, industry experts have long discussed the regulatory push and pull that occurs between SEC and DOL.

Speaking with PLANADVISER in late 2014, Fred Reish, an ERISA attorney and partner with Drinker Biddle and Reath, said there has been friction between DOL and SEC in recent years—especially in the area of fiduciary rulemaking on individual retirement account (IRA) rollovers and other points related to money moving in and out of workplace retirement plans.

“I think DOL will eventually take the position [through the new fiduciary rule] that any advice or solicitation related to a retirement account rollover into an IRA is necessarily fiduciary advice,” Reish said. “This would give the DOL greater jurisdiction over the entire rollover process. Of course, it would be extremely controversial from the perspective of the SEC.”

Reish continued by observing the SEC has historically favored a disclosure-oriented approach to mitigate conflicts of interest, while the DOL looks more toward actually prohibiting certain transactions and advice. This tension can probably be expected to heat up throughout 2015, Reish noted, as the regulators each move forward on longstanding fiduciary issues and members of Congress seek to exert their own influence.

In a recent interview, Brad Campbell, counsel at Drinker Biddle and Reath and a former Assistant Secretary of Labor for the Department of Labor's Employee Benefits Security Administration (2007 to 2009), told PLANADVISER that during the Bush Administration, DOL adopted the first formal Memorandum of Understanding (MOU) between the Labor Department and the SEC to address this very problem.

“It set up a formal process requiring periodic meetings and designated staff contacts regarding matters of mutual interest, including regulatory issues,” Campbell noted. “It also required sharing of enforcement-related information. The MOU was updated and readopted in 2013, and signed by Secretary Perez himself.

“If this process is, in fact, being observed, there should be quite a number of records responsive to Chairman Kline’s request, such as records of these meetings and the officials involved,” Campbell concludes. “DOL officials have said there has been coordination. It will be very interesting to see what proof of this coordination the DOL provides to the Committee.”

The MOU is described here, in an SEC statement, and here, in a statement from Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. The U.S. Representatives' letter can be downloaded here.