DOL Fiduciary Rule P II: The SEC Story

While the previous post discussed the Department of Labor’s (DOL) fiduciary rule, it is not the only government agency tackling the issue. In 2010, President Obama signed into law the Dodd-Frank Act, which authorized the Securities and Exchange Commission (SEC) to create its own uniform standard of care for financial advisors. To aid in this endeavor, it also authorized the creation of an Investor Advisory Committee (IAC) whose purpose was to submit recommendations to the SEC regarding, amongst other things, the regulation of securities products and the protection of investor interests.[i] In November 2013, the IAC issued a report endorsing, “that advisory services offered as a part of a transaction-based securities business can and should be conducted in a way that is consistent with a fiduciary standard of conduct.”[ii]

SEC Chairwoman Mary Jo White supports tighter regulations for those making funding recommendation to investors. At an industry conference, Ms. White stated that it was her “’personal view’” that brokers and those for whom the Commission provides oversight should be required to put “clients’ interests ahead of personal gain.”[iii]  Arthur Levitt, SEC chairman from 1993 to 2001, believes the SEC should have addressed the issue long before now, given the complexity of the products being presented to investors by brokers. “’I do not accept the notion that a broker is an order taker. If he’s a good broker, he’s much more than that.”[iv] Industry leaders, including Kenneth Bentsen, president and chief executive of the Securities Industry and Financial Markets Association, have expressed support in the SEC taking the lead in this matter. “’They’ve got the technical expertise.’”[v]

In testimony before the House Subcommittee on Financial Services and General Government Committee on Appropriations, Chairwoman White would not offer a timeframe for the completion, but made it clear that the SEC would be issuing its own fiduciary standards. Though the purposed rules may be similar, she stated that the SEC’s would differ from that of the DOL’s, even though the SEC did provide “’substantial technical assistance’” in crafting the DOL version.[vi]

Mark Trupo, DOL spokesman, claims there was close coordination between the two departments and that, “engagement with the SEC was comprehensive, and that the SEC’s input was incorporated into the plan.”[vii] The SEC refused to comment. Others, however, were more vocal in their questioning in the validity of the statement.

In his report, The Labor Department’s Fiduciary Rule: How a Flawed Process Could Hurt Retirement Savers, Sen. Ron Johnson, chairman of the Senate Homeland Security and Governmental Affairs Committee, claimed the DOL rule failed to address 26 significant concerns posited by the SEC. These included issues regarding the best interest contract exemption, “’conflicts with federal securities laws and [Financial Industry Regulatory Authority] rules, and a lack of cost-benefit analysis of alternatives.’”[viii]

So why hasn’t the SEC issued its own rule yet? It may have to do with administrative structure. While the DOL operates under a single administrator, the SEC has a five-person commission, complicating the approval process. Some believe the make-up of this commission would lead to a 3-2 vote on any fiduciary rule, given the current SEC commissioner and incoming commissioner, both republicans, are likely to vote against such a measure.[ix]

Only time will tell when the SEC releases its own fiduciary rule and how greatly it will differ from that of the DOL. Until then, one can only expect continued speculation and debate, a debate that many believe is long overdue.

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[i] U.S. Securities and Exchange Commission (2012). “Investment Advisory Committee” [Electronic format]. Retrieved from: http://www.sec.gov/spotlight/investor-advisory-committee-2012.shtml

[ii] U.S. Securities and Exchange Commission (2013).  “Recommendation of the Investor Advisory Committee Broker-Dealer Fiduciary Duty” [Electronic format]. Retrieved from: http://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf

[iii] Baer, J. & Ackerman A. (2015, March 17) SEC Head Backs Fiduciary Standards for Brokers, Advisors [Electronic format]. Retrieved from: http://www.wsj.com/articles/sec-head-seeks-uniformity-in-fiduciary-duties-among-brokers-advisers-1426607955?mg=id-wsj

[iv] Ibid.

[v] Ibid

[vi] SEC, DOL Fiduciary Rules Will Likely Be Different, White Says (2016, March 22). [Electronic format] Retrieved from: http://www.thinkadvisor.com/2016/03/22/sec-dol-fiduciary-rules-will-likely-be-different-w

[vii] Barlyn, S & Lynch, S (2016, February 24) U.S. Labor Dept., SEC Clash Over Retirement Advice Rule: Report [Electronic format]. Retrieved from: http://www.reuters.com/article/us-usa-brokers-fiduciary-idUSKCN0VX0XZ

[viii] Senator Blasts DOL for Ignoring SEC’s Fiduciary Rule Concerns (2016, February 24). [Electronic format]. Retrieved from: http://www.thinkadvisor.com/2016/02/24/senator-blasts-dol-for-ignoring-secs-fiduciary-rul

[ix] Why SEC Fiduciary Rule May Be ‘Unattainable’ (2016, March 10). [Electronic format]. Retrieved from: http://www.thinkadvisor.com/2016/03/10/why-sec-fiduciary-rule-may-be-unattainable?ref=related-embedded

U.S. DEPARTMENT OF LABOR ADOPTS FINAL SAFE HARBOR REGULATION FOR EMPLOYEE CONTRIBUTIONS TO SMALL PLANS

On January 14, 2010, the U.S. Department of Labor (“DOL”) adopted a final regulation to clarify the safe harbor period during which amounts that an employer has received from employees or withheld from wages for contribution to certain employee benefit plans will not constitute ``plan assets'' for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”). The new regulation aims to resolve an ongoing uncertainty by sponsors and fiduciaries of small welfare and pension plans as to when participant contributions will be treated as contributed in a timely manner to such plans.

As set forth in the new final regulation, the DOL, in 1996, published amendments to 53 FR 17628, which modified the outside limit beyond which participant contributions to an employee pension plan become plan assets. Since that time, the outer limit for participant contributions to a pension plan has been the 15th business day of the month following the month in which participant contributions are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer), or the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant’s wages). In addition, the general rule has been that amounts paid to or withheld by an employer become plan assets on the earliest date on which they can reasonably be segregated from the employer’s general assets.

The 1996 amendments created uncertainty among employers and plan advisers as to exactly when they must forward participant contributions to the plan in order to avoid the requirements associated with holding plan assets. Accordingly, on February 29, 2008, the DOL proposed a safe harbor with the goal of providing more clarity over the foregoing participant contributions concerns. The DOL ultimately received 28 comments to its proposal, which can be found here.

In response to the public comments, the DOL issued its recent final regulation, which is nearly identical to the 2008 proposal. The final safe harbor rule, and specifically Section 2510.3-102(a)(2), provides that participant contributions to an employee benefit plan with fewer than 100 participants at the beginning of the plan year will be treated as having been made to the plan in accordance with the general rule (the earliest date on which such contributions can reasonably be segregated from the employer's general assets) when contributions are deposited with the plan no later than the 7th business day following the day on which such amount is received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer from a participant's wages).

Click here for a complete copy of the DOL’s final safe harbor rule.