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Regulation and Compliance > Federal Regulation > DOL

Schwab Urges DOL to Withdraw 'Ill-Fated' Fiduciary Rule

By Melanie Waddell

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What You Need to Know

  • Labor is embarking on an ill-fated sequel to its now defunct 2016 rulemaking, Schwab's general counsel says.
  • The U.S. Court of Appeals for the Fifth Circuit ruled that a one-time IRA rollover is not fiduciary advice, Morgan states.
  • Labor's plan creates confusion, not uniformity, according to Schwab.

Charles Schwab is urging the Labor Department to withdraw its fiduciary rule proposal, arguing that Labor is embarking on an “ill-fated sequel” to its now defunct 2016 rulemaking.

In a Jan. 2 comment letter, Peter Morgan, Schwab’s general counsel and managing director, told Labor that its plan is “a solution in search of a problem,” and that “altogether, the Proposal is wrong as a matter of law and policy, and is destined to meet the same fate as its 2016 predecessor.”

Labor’s plan “defies ERISA’s statutory text, exceeds the Department’s authority, and will curtail the availability of financial advice,” Morgan stated.

Morgan highlighted several reasons Schwab thinks Labor’s plan is doomed.

The new proposal’s “redefinition of investment-advice fiduciary is little more than a do-over of the 2016 Rule,” Morgan argued. “The Department again defines ‘fiduciary’ in an expansive manner that draws in countless circumstances where there is no relationship of trust and confidence.”

The term “fiduciary,” Morgan wrote, “is not ambiguous, and may not be construed to capture broker-dealers and other financial professionals giving one-time advice. That the Department’s proposed definition would encompass such personnel is, therefore, a fatal flaw.”

One-Time Rollovers

The rule’s “overbreadth is evident, too, in the types of ‘investment transaction[s]‘ and ‘investment strateg[ies]‘ that trigger fiduciary status, when recommended by a financial professional,” Morgan wrote.

Most notably, Labor’s plan “replicates the 2016 Rule’s coverage of all rollovers from an ERISA Title I plan or an IRA,” Morgan wrote.

Yet as the U.S. Court of Appeals for the Fifth Circuit explained in its ruling that torpedoed Labor’s 2016 rule, “‘it is ordinarily inconceivable’ that a ‘one-time IRA rollover’ is fiduciary advice.”

Labor’s fiduciary rule “problems do not end with misinterpretation of the key statutory term, ‘fiduciary,’” Morgan states.

The Department is charged with regulating employer-sponsored benefit plans; it has no enforcement or regulatory authority over IRAs, which are governed by the Internal Revenue Service, Morgan said.

In order to regulate IRAs directly, Labor’s plan “seizes on two slivers of authority,” Morgan contends.

“First, it deploys the Department’s narrow authority to define ‘accounting, technical, and trade terms’ to effectuate a dramatic expansion of who qualifies as a fiduciary to ERISA-covered plans and IRAs,” Morgan wrote.

Second, the plan “gives these new ‘fiduciaries’ a prohibited transaction exemption [PTE 2020-02] laden with burdensome preconditions — and by amending other existing exemptions, pushes professionals into the Department’s preferred regulatory framework,” the letter states.

“With this one-two punch, the Department turns its ‘exemptive’ authority, meant to reduce regulatory burdens, into a vehicle for imposing industry-reshaping regulations that the Department could not issue directly,” according to the letter.

PTE 2020-02

Morgan further maintained that Labor’s plan “creates confusion, not uniformity.”

The Department could have made compliance with the Securities and Exchange Commission’s Regulation Best Interest “sufficient” to comply with PTE 2020-02, which covers rollover advice, “but it did not,” the letter states.

“Instead, the proposed amendments to PTE 2020-02 require, for example, that financial institutions conduct an extensive ‘retrospective review‘ of their compliance with the exemption at least annually, with a signed certification by a senior officer of the firm that the firm filed a Form 5330 with the IRS for ‘any non-exempt prohibited transactions’ and that the firm ‘corrected those transactions, and paid any resulting excise taxes,’” Morgan wrote.

Reg BI, however, “requires no such certification, and with good reason, because neither the SEC nor DOL has enforcement authority with respect to the reporting of prohibited transactions or payment of excise taxes,” the letter states.

The proposed amendments to PTE 2020-02 would also require “more detailed disclosures” to customers than required by Reg BI.

For instance, “before discussing a rollover, a service representative or financial professional would need to disclose not just the fees and costs associated with the destination account, but also collect and disclose substantial, detailed information about the investor’s existing account,” Morgan states.

“And, of course,” the letter adds, “the Proposal’s extremely broad ‘fiduciary’ definition pulls in so-called ‘recommendations’ that would not be covered by Reg BI, such as call center conversations and speeches at conferences.”

Melanie Waddell

@Think_MelanieW

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