Looming election slams brakes on fiduciary regs

Facing fierce financial industry resistance, a pending regulation that would expand the definition of “fiduciary” for anyone providing investment advice about retirement plans is confronting another hurdle: the fall election.

Lobbyists on both sides of the controversial issue indicate that the Labor Department likely will hold off on promulgating a rule until after Nov. 6.

“We've been hearing that for a couple weeks,” said Dale Brown, chief executive of the Financial Services Institute Inc., which represents independent broker-dealers and opposes the Labor Department rule.

“My understanding is that most administrations direct their agencies not to come out with significant regulatory proposals that might be deemed controversial before an election. Nothing sinister about that; that's the way the process works,” Mr. Brown said.

Meanwhile, another fiduciary-duty rule — the one being considered by the Securities and Exchange Commission that would impose on brokers providing retail investment advice the standard already met by investment advisers — continues its sluggish pace.

The SEC hasn't yet put out a request for data for a cost-benefit analysis of a potential fiduciary-duty regulation. Even if it acts by July 1, the comment period could extend for 90 or 120 days.

“We are at or past the election very quickly,” said Knut Rostad, president of the Institute for the Fiduciary Standard.

The Labor Department originally proposed its fiduciary-duty rule in October 2010, saying that it would better protect investors from conflicted investment advice as they build their retirement nest eggs through 401(k) and individual retirement accounts.

The rule was withdrawn last September after severe criticism from the brokerage industry and members of Congress from both parties, who said that it would subject IRA sales to fiduciary duty for the first time and drive brokers out of that market, depriving investors of retirement help when they need it most.

COST-BENEFIT ANALYSIS

The Labor Department said that it would re-propose the rule as early as this summer. But that timeline appears to be slipping as the agency conducts a cost-benefit analysis to undergird the regulation.

“We don't know if they're going to sit [on the rule] until the election,” said Karen Friedman, executive vice president and policy director at the Pension Rights Center.

“We would be happy to see a re-proposal now. This is something that shouldn't be left out there to hang,” Ms. Friedman said.

The Labor Department won't give a precise date for when it will take another crack at the rule.

“While it is important to provide these protections as quickly as possible, we recognize the importance of this rule making, and we are going to take the time needed to get it right,” a Labor Department spokesman wrote in an e-mail.

In his re-election campaign, President Barack Obama has stressed bolstering the middle class through his fiscal and economic policies. Expanding fiduciary-duty protections could fit within that theme.

“This is a key issue during an economic recession and a time when people are so dependent on their 401(k) money and IRA money for retirement,” Ms. Friedman said. “We would look at it as not just a middle-class issue but also [one for] people striving to be in the middle class.”

The other side is prepared to react whenever the Labor Department moves on a fiduciary-duty rule.

“We operate as if they're going to release it tomorrow,” Mr. Brown said. “We're going to continue to try to influence the outcome and educate members of Congress.”

The SEC is still trying to make its way to a proposed fiduciary-duty rule governing retail advice.

The SEC was given the authority under the Dodd-Frank law to promulgate a regulation. But when it released a report to Congress in January 2011 recommending that step, two commissioners — Kathleen Casey and Troy Paredes — dissented, asserting that the conclusion lacked sufficient economic analysis. Adding more pressure on the issue, a federal court vacated an SEC rule on proxy access last summer due to what it ruled was inadequate cost-benefit analysis.

Now the SEC is preparing to conduct such an analysis and then release a report that would outline the potential regulatory changes associated with universal fiduciary duty and serve as the vehicle to generate detailed public input about economic impact.

“We'd like to flesh out in some detail what a standard of care would look like under a harmonized fiduciary duty, and then think about some components of fiduciary duty,” David Blass, chief counsel in the SEC's Division of Trading and Markets, said last week the Financial Industry Regulatory Authority Inc. conference in Washington.

While the SEC has contributed considerable effort to the process, it is moving slowly, given all the other demands of the Dodd-Frank law.

“There's no specific timeline I can give you,” Mr. Blass said in an interview. “We're working on it across the SEC staff.”

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Related Topics: Financial Services Institute Inc. (FSI), Securities and Exchange Commission