How picky is picky? Advice regs an unknown

More-restrictive investment advice regulations are coming now that the Labor Department has killed a controversial Bush administration proposal that would have permitted the mutual fund industry to provide direct investment advice to defined contribution plan participants.

The key question remaining is how narrow the new Obama administration advice regulations will be, ERISA attorneys and pension industry lobbyists said.

“Hopefully [the DOL] won’t interpret the [the Pension Protection Act’s wording on investment advice] so narrowly that it doesn’t do anything for those trying to use it,” said Andrew Oringer, an Employee Retirement Income Security Act attorney for Ropes & Gray LLP.

ERISA attorneys also warned that the DOL’s new rules could be particularly damaging to the mutual fund industry if they undermine a Feb. 2, 2007, DOL field assistance bulletin. That bulletin interpreted the investment advice provisions in the PPA to permit direct advice as long as the fund’s advice provider works for a separate affiliate of the fund and the fees received by the separate affiliate don’t vary depending on the selection of the investment options.

Among the mutual fund companies offering advice arrangements that depend at least in part on that interpretation is The Vanguard Group Inc., said Linda Wolohan, a company spokeswoman.

“If the FAB goes, then [the DOL’s proposed rule] could be incredibly disruptive, because there are advice programs out there that rely on the FAB,” said Jason Bortz, an ERISA attorney with the law firm Davis & Harman LLP.

“For anyone who has tried to implement an advice program under existing authority, it is possible that final [DOL] regulations could require substantial revision,” Mr. Oringer added.

Assistant Labor Secretary Phyllis Borzi, who heads the Employee Benefits Security Administration, did not return calls seeking comment.

‘Sufficient doubts’

Spokeswoman Gloria Della said Labor Department executives declined comment on what they’re proposing and on when the proposed rule revisions will be issued publicly. But in its notice killing the Bush investment advice rule, the DOL said its proposal for a revised rule will be issued soon.

“The department decided to withdraw the rule based on public comments that raised sufficient doubts as to whether the conditions of the final rule and the class exemption associated with the rule could adequately protect the interest of plan participants and beneficiaries,” the DOL said in a Nov. 19 news release.

The effective date of the Bush administration advice rule had been postponed by the Obama administration three times, most recently until May 17. Mutual fund companies have long been effectively barred from offering direct, one-on-one advice to DC plan participants because of fears that the advice givers might steer participants to the companies’ own investment options.

The Bush rule essentially would have said advice would be OK if offered through computer models independently certified to be unbiased or if the compensation of the adviser providing one-on-one consultation didn’t vary depending on the investments selected based on the advice.

The Bush rule also would have permitted advisers to provide participants with follow-up advice if the participants wanted more options than those offered by a computer model.

“The [Bush] rule that was pulled expanded conflicts of interest, to the detriment of consumers,” said David Certner, legislative-policy director of the AARP, an influential foe of the Bush rule. “We would urge that the department come back with a new regulation that limits conflicts. You don’t want the person who is giving you the advice to have a financial interest in the advice, which the Bush rule would have allowed.”

“The Bush administration proposal was a special-interest giveaway to Wall Street at the expense of workers,” House Education and Labor Committee Chairman George Miller, D-Calif., said in a statement. “It would have opened the door to unscrupulous advisers to make recommendations based on their financial stake, and not in the best interests of workers. The Obama administration was right to pull this misguided proposal, and we hope they move forward on protections to ensure that investment advice given to workers [is] in the workers’ best interests.”

But Bradford P. Campbell, who headed the Labor Department’s EBSA when the Bush rules were developed, said it is a “shame” that the Obama administration agency has jettisoned the entire rule instead of just the parts it found to be most offensive.

“It is one thing for a new administration to have a policy disagreement with its predecessor about a portion of a regulation,” Mr. Campbell, an attorney with the law firm Schiff Hardin LLP, said in an interview. “It is another thing entirely to throw the baby out with the bath water.”

Workers denied advice

House Republican Leader John Boehner, R-Ohio, a longtime supporter of the Bush rule, said in a statement that the Labor Department’s action would “deny workers their right to high-quality investment advice that could help them restore valuable savings that have been lost because of this economic recession.”

“We’re disappointed by the withdrawal,” Elizabeth Varley, managing director of government affairs with the Securities Industry and Financial Markets Association, said in an interview. “As a result, very few people will have access to quality cost-effective investment advice.”

Jenny Engle, a spokesman for Fidelity Investments, said the DOL’s action would have no impact on the services Fidelity provides to plan sponsors and participants. “We feel it’s important for participants to receive education, tools and guidance,” she wrote in an e-mail statement.

Vanguard’s Ms. Wolohan said withdrawal of the Bush administration rule would not affect the company’s existing advice arrangements, “which remain fully compliant with all current statutory and regulatory guidance.” She also said, however, that Vanguard is offering a program under which plan participants can get advice from a certified financial planner. “Aspects of that service rely on the [FAB] bulletin,” she said.

The DOL’s cancellation of the Bush policy was anticipated by employers, Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401k Council of America, said in an interview. The continued absence of advice guidance “is an extension of a waiting period more than anything else,” Mr. Ferrigno said. “We all want some closure on the issue.”

Doug Halonen is a reporter for sister publication Pensions & Investments.