Regulatory “harmonization” has become a catchphrase for efforts to roll back investor protections to a universal, lowest-common-denominator standard governing investment advice. Now “coordination” has entered the regulatory reform vernacular as code for making sure the retirement business doesn't get left behind in those efforts. With Congress contemplating legislation that would require the Labor Department to coordinate with the Securities and Exchange Commission on fiduciary rule making, the ERISA standard of care is at risk of being watered down to something more palatable to old-guard elements of the brokerage and insurance industries, at the expense of participants and other investors saving for retirement.
The suggestion that the activities of the SEC and DOL are not aligned if they are not intermingled is a red herring designed to distract attention from the goal of reform — improved investor protection. The call for coordination is being pushed by those segments of the industry that would like to see a new fiduciary standard of conduct for advisers that more closely resembles the current suitability standard for transactional brokerage — a fiduciary standard in name only.
The calculated shift in focus to the regulators serves to detract from the real issues of investor confusion over the difference between transactional sales and professional advice, unmanaged conflicts of interest by nonfiduciary advisers, and the true costs and benefits of meaningful reform to both industry and investors. It also completely disregards the differing purposes of the Employee Retirement Income Savings Act of 1974 and the Investment Advisers Act of 1940, and the sound reasons why the laws have distinct regulatory structures.
The intent of the Advisers Act, according to its legislative history, is “to protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts, and to safeguard the honest investment adviser against the stigma of [these] activities.” The Advisers Act imposed broad regulation over the entire business of investment advisers, rather than focusing primarily on the nature of their duty to investors. ERISA, on the other hand, sought to protect employees “by establishing standards of conduct, responsibility and obligation for fiduciaries of employee benefit plans.”
CLEAR INTENT
At the time Congress passed ERISA, it made its legislative intent clear by plainly stating that the fiduciary section of the law effectively codified principles for plan fiduciaries based on existing trust law. The common law of trusts generally is considered one of the highest fiduciary standards in the law, having developed over two centuries. It is not surprising, then, that this mantle is now shared by ERISA, which shares general trust principles that favor prohibition of self-dealing and other conflicts of interest over the lesser standard of disclosure.
While the coordination effort attempts to make the argument that the overlap between the two laws is so great that a uniform structure makes sense, it fails to acknowledge that ERISA's objectives were limited to protecting a defined subset of investors, i.e., workers saving for retirement, that Congress determined should have stronger protection than was afforded by the legislative efforts that preceded it, including the Advisers Act itself. Again drawing on the history of trust common law, Congress determined that the assets of employee benefit plans, such as 401(k) accounts, must be held in trust, separate from non-retirement assets, so as not to confuse their special position of importance to the long-term financial well-being of workers. It is a lesson that should not be lost on today's lawmakers and regulators.
Moreover, in addition to any enforcement activity of the DOL, ERISA's legislative history suggests an expectation “that courts will interpret the prudent-man rule and other fiduciary standards,” ad-ding additional recourse for fiduciary breaches. By contrast, the Advisers Act does not provide for a private right of action except for recovery of advisory fees.
All of this is to say that despite any perceived benefits to coordinated rule making, the fiduciary standard under each law is quite different in its practical application to investment advice. The statutory frameworks of ERISA and the Advisers Act should be preserved to safeguard investor protection and traditional fiduciary concepts. It bears repeating that any legislative or regulatory update to the standards of care that does not preserve the fundamental fiduciary duties of care and loyalty is not a fiduciary standard.
Blaine F. Aikin is president and chief executive of fi360 Inc.
