By now it should be apparent the Department of Labor (“DOL”) has opened a proverbial can of worms by proposing to expand the category of service providers who will be subject to ERISA’s fiduciary standard. Not only has the proposal been met with a tidal wave of negative comments from industry insiders, but Members of Congress from both parties have also weighed in with their objections.
While it may come as a surprise that an attorney who works with retirement plan professionals would support the DOL’s attempt to expand the fiduciary standard, I actually agree with the assertion that a change in the law is needed. As in-house counsel for a broker-dealer that supported the nation’s largest network of independent retirement plan professionals, I pushed hard to require our registered representatives to adopt the principles that form the basis for the proposed rule. Specifically, I encouraged our registered representatives to consider moving their practice to a fee-based advisory platform and affirm their fiduciary status. For those unwilling to make the switch, I pushed to require client agreements that affirmatively stated the representative was not intending to act in a fiduciary capacity. Like the DOL, I have my share of battle scars from the effort.
However, while I agree with the DOL’s goal, I cannot support its methodology for bringing about this change. Specifically, I believe the proposed rule (as currently drafted) violates the constitutional separation of powers by permitting an executive branch agency to rewrite existing law rather than interpreting the law as it is currently written.
The DOL has actually provided support for this argument by attempting to justify the revised rule with the argument that the world has changed dramatically since it last addressed this issue in 1975. While this is certainly true, our Constitution does not empower an administrative agency to change any law it believes has become outdated. While federal agencies have broad powers to adopt regulations necessary to enforce legislation, only Congress has the authority to fundamentally change the law (i.e., to legislate) – a prerogative I wish Members of Congress were more forceful in asserting.
In fact, the DOL announced its true intent in the title it assigned the proposed rule - “Definition of the Term ‘Fiduciary’.” As the title clearly indicates, the DOL’s was seeking to use the new rule to broaden the types of services that will render the provider a plan “fiduciary” pursuant to §3(21)(A) of ERISA. The constitutional issue with this approach, however, is that Congress already defined the term “fiduciary” in the statute and did so somewhat narrowly. While the DOL believes the definition must be expanded, it also realizes it lacks the constitutional authority to directly revise the statutory language. As a result, the Department has attempted to pound a square peg into a round hole by using over 1,100 words to redefine the meaning of the phrase “investment advice” – as used within the statute – to significantly broaden the definition of a plan “fiduciary.”
Needless to say, by straying so far from the common usage of the phrase, the DOL opened itself up for criticism stemming (presumably) from the unintended consequences of its proposed rule. For example, federal securities laws – namely, The Investment Advisers Act of 1940 – already regulate those who provide investment advice for compensation, and those rules apply whether the client is an 85-year old widow or a multi-billion pension fund. Therefore, if the DOL has its way, accountants offering to appraise the value of closely-held stock for an ESOP could find they are providing “investment advice” under one federal statute (ERISA) but not acting as an “investment advisor” under another (The Advisers Act). Similarly, brokers who have been servicing retirement plan clients for many years would be left to wonder whether they would now be required to register with the SEC to provide services to qualified plans when no such requirement existed for similar recommendations provided to non-ERISA clients. Needless to say, this seems to run afoul of President Obama’s recent instructions to federal agencies to avoid such confusing, inconsistent results.
Given that I have previously stated my support of the DOL’s stated goal, how would I recommend that it accomplish this end? Without intending to sound flippant, if the DOL wants to expand the definition of a “fiduciary” under ERISA, it must expand the definition of a “fiduciary” under ERISA. In other words, the language in §3(21)(A) should be amended to include those additional services (beyond providing investment advice or exercising control over plan assets) that will be subject to ERISA’s fiduciary standard. By taking this approach, brokers and appraisers could be brought within the definition of a “fiduciary” while not erroneously labeling their services “investment advice.”
However, only Congress has the power to amend ERISA in this fashion. As a result, the Department should be focusing its efforts on convincing Members of Congress of the value of its position rather than assuming it has the authority to change any law it feels has become outdated. While this is eminently more difficult, our Constitution created a series of checks and balances to ensure that ideas were thoroughly debated and flushed out before the law could be changed.
As I noted, I believe the DOL has a compelling argument for revising §3(21)(A), and it has already attracted the attention of important congressional leaders. The Department should use this opportunity to lobby Congress to enact the needed revisions to the language.
