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The Fiduciary Issue and the Election

October 30
00:16 2012

Everyone from 401k plan sponsors to retail investors may be affected by the coming election in a way they’re not even aware of. The politicization of the fiduciary issue began in the summer of 2009 when Dodd-Frank inserted wording asking the SEC to determine the viability of a universal fiduciary standard. With the political deafness of a hunk of seasoned firewood, SEC Chair then first lit the flames of controversy by failing to achieve bi-partisan agreement on the SEC’s report. She then fanned those flames in earnest by challenging the new Tea Party Congress in the winter of 2010. The fire quickly spread across the aisle with members of both parties soon questioning Shapiro’s tactics.

Meanwhile the DOL moved forward with a mostly quiet, less controversial effort to update ERISA’s generations-old Fiduciary Rule to better reflect the realities of today’s marketplace. Alas, the word “fiduciary” quickly became an albatross thanks to the SEC misplay, and the DOL fell victim to the same bipartisan pressure to stop their process. You’d think, being one of the few issues today seeing bi-partisan agreement, the fiduciary issue would have been consigned to the dustbin of history.

You’d think wrong. The SEC’s final report is still a legally required outcome of Dodd-Frank. In addition, the DOL doesn’t report to Congress, but to the President, and there’s no indication the current occupant of the White House desires to hold back his DOL appointees.

But the operative word here is “current.” The keys to the White House may soon change hands. What kind of impact might that have on the dual fiduciary fronts? had a chance to catch up with Duane Thompson when he wasn’t wearing his hat as fi360’s Senior Policy Analyst. Since he’s familiar with both of these fiduciary issues and the ways of Washington, we thought he might have some unique personal insights. He shared his thoughts with us, being careful to point out his answers were his alone and not those of fi360.

FN: Where does the fiduciary issue go if Romney is elected? 
Thompson: There are two outstanding fiduciary issues: the standard for brokers at the SEC and the ERISA standard for service providers who were not previously covered. A change in Administrations doesn’t mean the debate over an SEC fiduciary rule will go away. The securities industry is on record supporting it. So the SEC will move forward, just perhaps at a slower pace, if you can imagine that. However, we could see a whole new ballgame at the DOL, where Phyllis Borzi, Assistant Secretary, just announced plans to re-release a proposed fiduciary definition in 2013. I think that initiative would experience a quick and silent death in a Romney Administration.

FN: Where does the fiduciary issue go if Obama is elected? 
Thompson: If it took the SEC two years to get through one-third of the rules required under Dodd-Frank, then four more years should be enough time to complete the other 68 or so rules under its mandate, including the fiduciary standard for brokers. That is not to say there won’t be a legal challenge, but I would expect to see something out for comment under a new SEC chairman within a year or so, even if it begins with a concept release. That means, of course, that Schapiro will probably leave before her term is over in 2014. With regard to the DOL fiduciary proposal, the DOL will be re-energized and push hard for adoption of a slightly modified definition, even if there continues to be bipartisan carping in Congress over the change.

FN: Which presidential outcome is better for the fiduciary issue (and why)? 
Thompson: It was surprising to me to see the Obama Administration make the fiduciary standard a part of the Dodd-Frank legislation back in 2009, since that issue had nothing to do with the financial crisis. So I would think a new SEC chairman appointed by the Administration would be expected to continue to follow through with the mandates set by Dodd-Frank, including the fiduciary standard. On the other hand, Governor Romney has pledged to repeal Dodd-Frank, which means the fiduciary standard would go away, too. Realistically I don’t think Dodd-Frank would be repealed under a Romney Administration, but there would probably be less emphasis on moving forward with a strong fiduciary standard. It really should be a bipartisan issue, though.

FN: Which presidential outcome is better for investors (and why)? 
Thompson: Aside from the debate over who would do a better job in jumpstarting the economy, in terms of investor protection I believe that Obama would continue to press for reforms mandated under Dodd-Frank to enhance consumer protection. As you know, his original policy objectives for Wall Street reform included giving the SEC authority to impose a fiduciary standard for stockbrokers. This was ultimately included in Dodd-Frank. Separately, I think we could expect a second Obama Administration to continue support the DOL’s efforts to update the ERISA fiduciary standard for other service providers. James Madison once wrote that if men were angels, no government would be necessary.  Wall Street is not to be confused with heaven, as has been evident by the rising tide of financial scandals we have seen over the years. A robust fiduciary standard is, unfortunately, a necessity in the real world of human fallibility.

Thompson, though, is not alone in his assessment. Tim Dyer, Vice President at Sage Capital Advisors, LLC in La Jolla, California agrees the SEC will move forward under a second Obama administration. With Romney, he believes the SEC will “table this issue as not to distract from other, shall we say, more important financial issues.”

We’ll know in a few days which way the voters decide.

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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