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Transcript of Phyllis Borzi’s Opening Remarks at March Fiduciary Hearings

April 05
00:45 2011

US_Department_of_Labor_300On March 1, 2011, the Department of Labor’s Employment Benefit Security Administration began the first of a two day hearing on the proposed new definition of fiduciary in the auditorium of the U.S. DOL Francis Perkins Building. Of all the speakers at the hearing, perhaps the most important was the introductory statement of EBSA Assistant Secretary Phyllis Borzi.

The following represents a transcript of the entirety of the Assistant Secretary’s opening statement, as provided to the public by the DOL:

Thanks, Alan. I just want to say a few words to kick off this hearing this morning.

First I’d like to thank all the EBSA staff who have worked to so hard to make this hearing happen, and especially Susan and Luisa. And I want to thank all of you for coming today to participate in this hearing. In particular I want to thank our colleagues from the SEC who have been working closely with us as we develop this regulation and with whom we’ve been engaged in ongoing collaboration and coordination, not just on this regulation, but also on various other pension-related provisions in the Dodd-Frank Act where that new statute might intersect with ERISA issues.

I also want to welcome our colleagues from the CFTC, with whom we also have been working again to — on the Dodd-Frank issues. Our goal is to harmonize both statutes. And so whatever sets of rules both agencies put out, the regulated community will have clear and sensible pathways to compliance with both statutes, and we’re confident that this goal can be achieved.

So I want to thank again our colleagues at the SEC and the CFTC. We’ve been working with the SEC for many, many years. Our work with the CFTC is just beginning, so I’m happy to have them join us today, and we want to continue to work with them.

I want to just take one other moment to thank one other person who’s not here on the panel with us today and who normally would be on the panel. And I see him in the back of the room, and he’ll probably be very angry for me to say — because I said anything about him. But I want to thank Bob Doyle, who many of you know has long been an employee of EBSA and for the past 20 years has headed our Office of Regulations and Interpretations. Bob has recently announced that he’s leaving the Department at the end of this week, and so he isn’t up here on the panel because he’s recused from being on the panel. But I just want to tell you all how much we’re going to miss Bob, and he knows we’re going to miss him — I, in particular. I met Bob in 1979. We had a dispute over a proposed reg, and nothing has changed (laughter) in terms of our not always seeing eye to eye. On the other hand, I have a complete and utter respect for Bob, his expertise, and will miss both his expertise and his voice as we move forward on this and other regulations. So Bob, I just want to publicly thank you.

(Applause) Okay. Let’s get to the matter at hand. By way of background and to provide some context for today’s discussion of this proposed regulation, I just want to take a minute to describe the current law.

As you know, ERISA provides a simple statutory test for determining who is a fiduciary by reason of providing investment advice. Under this test, a person is a fiduciary if he or she renders advice for a fee or other compensation, direct or indirect, with respect to any monies or any other property of the plan. In 1975, however, the Department adopted a regulation that severely cut back the application of this statutory definition by creating a rigid five-part test for fiduciary status. Under this regulation, before investment professionals can be held to ERISA’s fiduciary standards with respect to their advice, they must first render advice as to the value of property or make investment recommendations. They must do this on a regular basis; they must do this pursuant to a mutual understanding that the advice will serve as the primary basis for investment decisions, and that that person will render individualized advice to the plan based on the particular needs of the plan. If the adviser meets any — fails to meet even any one of these criteria, it is not a fiduciary. So for example, if a plan hires an investment professional on a one-time basis to advise it on the expenditure of a million dollars on a single complex investment, the adviser has no fiduciary obligations, because the advice was given on a one-time basis rather than on a regular basis as the regulation requires. So it makes no difference under this regulation as to how important or non-important this particular advice was with respect to the plan.

You know since the Department promulgated the regulation in 1975, dramatic changes in the retirement marketplace have occurred, including the increased importance of investment advice. As you know, we have spent a good period of our time focusing on this question of investment advice. Our own experience with the regulations have led us all to question whether this 1975 regulation is still appropriate. And as you know, under the new executive order, we are directed to go back and look at all of our regulatory and other guidance to see whether they are still valid and useful, and this is part of that process.

As in most matters since 1975, the world has changed, including significant changes such as the introduction of 401k plans in 1978, three years after the current regulation was adopted. The shift from DB plans to DC plans; an increase in the types and complexities of investment products and services available both to plans and to IRA investors in the financial marketplace. This regulation addresses the conduct of investment advisers in both the plan and IRA context since, as you know, EBSA has long had the ability to regulate prohibited transactions in IRAs, although the enforcement for violating those provisions lies in the excise tax imposed by our colleagues in the Internal Revenue Service.

In enacting ERISA, Congress recognized that the security of American retirement plans depends on its fiduciaries. ERISA protects retirement benefits by holding important plan actors to fiduciary standards, protecting workers and retirees from conflicts of interest and providing remedies for violations. Thus, it’s vitally important when we define important terms, like who is a fiduciary, we get it right.

The proposed regulation that we issued last October and the hearing we’re holding today are part of our determined effort to get it right. We believe that the types of advisory relationships that give rise to fiduciary duties should be reexamined and that the rule should be updated so that plan fiduciaries receive the impartiality they expect when they rely on their adviser’s expertise and advice. In so doing, we want to be sure that we have the information that we need to create a regulation that accomplishes this purpose and makes sense in the context of today’s retirement plans and investment advice environment. We’ve already received 200 comment letters. Maybe some in this room besides us have read them all. And of course all of these are posted on our website.

We’re now ready to continue the dialogue that we intend to have in order to get this right by adding your views on this proposal and adding your testimony to the public record. And as Alan noted, the hearing record is going to remain open for 15 additional days so that those of you who will testify today and tomorrow and those of you who haven’t testified will have the opportunity, again as the executive order directs us, to have people comment on the comments on the comments. So there will be ample opportunity for public input here. And after the hearing is over and the record closes, we’re going to work through the issues that have been raised both here in the comments and the various meetings that I know will be coming after the hearing is over. We’re going to thoughtfully and carefully evaluate the suggestions and concerns we have heard. We’re going to continue the dialogue with the regulated community, and we’re going to refine the text of proposed regulation — because after all, that’s all it is, is a proposed regulation — so that we’ll be ready to issue final regulations by the end of the year in accordance with the timetable that we have announced publicly.

So again, I want to thank you all for your participation and your input, and so let’s just start with the witnesses, Alan.

For those interested in reading the entire transcript of both days of the hearings, you can find the first day’s transcript here, and the second day’s transcript here (both are .pdf files from the DOL’s site).

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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