Labor Department to rework advice reg

Having scrapped a long-delayed Bush-era rule that would have allowed more advisers to work directly with retirement plan participants, the Labor Department is moving to get a more restrictive revision on the books in the next few months.

A draft of the proposed rule is being vetted by the Office of Management and Budget, said Assistant Labor Secretary Phyllis Borzi. “We are hopeful that the proposed regulation will be out [for comment] in a few weeks,” she said.

The investment advice rule, originally proposed under the Bush administration, would have allowed representatives of mutual fund companies to offer direct advice on investments to participants in DC plans. But in January, the Obama administration put the rule on hold. Over the course of this year, the Labor Department has delayed the effective date three times — most recently last week, when it was extended to May 17.

But last Thursday, three days after announcing the delay in the effective date, the department said it was withdrawing the advice rule — sparking outrage from some members of Congress and observers who were concerned about yet another delay on this issue.

“It is outrageous that the Obama administration 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,” House Republican leader John Boehner, R-Ohio, said in a prepared statement issued Thursday.

But the delay was just an administrative issue, said James M. Delaplane Jr., a partner at Davis & Harman LLP.

In order to pull the rule, the Labor Department needed OMB approval, so implementation was delayed instead. That approval came earlier than expected, enabling the department move ahead with plans to re-propose it, Mr. Delaplane said.

As the new rule works its way through the administrative process, industry officials are concerned about how the Obama administration will view the issue of whether mutual fund representatives have a conflict of interest if they offer advice to retirement plan participants.

MORE RESTRICTIVE

There is no question that the proposal will be more restrictive than the Bush rule, but the industry is waiting particularly to see how the Labor Department interprets the term “affiliate.”

“The DOL got negative comments about whether an affiliate of an adviser can earn differential compensation and not have an effect on the advice given, so they will probably change the interpretation of “affiliate,’” Mr. Delaplane said. “But how far they go remains to be seen.”

“One could predict that investment advisers who are affiliated in some way with a fund company or a product will probably be prohibited from providing investment advice,” said Greg Ash, head of the Em-ployee Retirement Income Security Act litigation group at Spencer Fane Britt & Browne LLP. “This will open the door for fee-for-service advisers to jump into that market and dominate it.”

How far removed the potential conflict of interest could be is a real question, said Jason C. Roberts, a partner at law firm Reish & Reicher.

For example, an insurance company’s broker could advise DC plan participants to choose a fund from a separate fund manager, he said. But that fund, even though it is run by an outside manager, could be a subaccount in a variable annuity offered by the insurance company. Thus it could be argued that there is a potential conflict of interest because the insurance company could be profiting indirectly from the advice given in that case, he said.

“This issue of how far up the chain this conflict analysis will go is causing our clients hesitation,” Mr. Roberts said.

Gloria Della, a Labor Department spokeswoman, confirmed that the proposed rule is being considered by the OMB, but declined to comment further.

Congress is putting a lot of pressure on the department to make sure it addresses this issue, which worries many experts. “I suspect if they don’t go far enough, we will see Congress address it,” Mr. Ash said.

Most notably, House Education and Labor Committee Chairman George Miller, D-Calif., has been vocal in his objection to the Bush rules.

“There has been a turf war that has been ongoing since Rep. Miller first became interested in these issues a few years ago,” Mr. Ash said.

In June, Mr. Miller’s committee passed a bill requiring disclosure on 401(k) fees and requiring that workers get unbiased investment advice.

“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 worker’s best interest,” said Aaron Albright, a spokesman for the committee.

The committee hasn’t yet seen the draft of the new proposal, he said.

Many in the industry argue that by addressing the potential for conflicts of interest, the DOL will make it more difficult for workers to get access to advice.

“I would hate to see them totally gut a rule that would give participants who otherwise wouldn’t have access to some advice in an effort to get rid of any possibility of conflicted advice,” Mr. Ash said.

The mutual fund industry and adviser groups are taking a cautious approach.

“We look forward to seeing the new proposal and to working with the Department of Labor on a regulation that provides investors access to quality investment advice,” said Rachel McTague, a spokeswoman for the Investment Company Institute, which represents the mutual fund industry.

The Investment Adviser Association is closely watching the issue, said David Tittsworth, its executive director.

The group, which represents investment advisers registered with the Securities and Exchange Commission, most likely will submit a comment when the proposal comes out, he said.

FINE-TOOTHED COMB

In the meantime, attorneys are advising clients who provide advice to participants in defined-contribution plans to examine every potential conflict of interest they might have.

“If someone is sponsoring a conference or anything like that — even if it has no link to ERISA plans, we are telling clients to examine that,” Mr. Roberts said.

Ideally, advisers should counsel their retirement plan clients to outsource the advice to a third party, he said.

E-mail Jessica Toonkel Marquez at [email protected].

Related Topics: ING Group