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Labor Department Reworking Investment Advice Rule

November 23, 2009
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Despite having seemingly killed its proposed rule on providing investment advice to participants in defined-contribution plans, the Labor Department expects to introduce a revised proposal for comment in the next few months, according to industry observers.

“We know that a re-proposed regulation is already at the Office of Management and Budget under review,” said James M. Delaplane Jr., a partner at Davis & Harman. The new proposal is expected to be put out for comment by early next year, he said.

“There will be a short comment period, and then there will be a final rule,” Delaplane said.

The investment advice rule, originally proposed under the Bush administration, would have allowed representatives of mutual fund companies to offer direct advice on investments to participants in defined-contribution plans. But in January, the Obama administration put the rule on hold.

During the course of this year, the Labor Department has delayed the effective date three times—most recently this week, when it was extended to May 17.

But on Thursday, November 19, three days after announcing the delay in the effective date, the department said it was withdrawing the advice rule—sparking outrage from some members of Congress and observers who were concerned about yet another delay on this issue.

“It is outrageous that the Obama administration would deny workers their right to high-quality investment advice that could help them restore valuable savings that have been lost because of this economic recession,” House Republican leader John Boehner, R-Ohio, said in a statement issued Thursday, November 19.

But the delay was just an administrative issue, Delaplane said.

The Labor Department wanted to pull the rule, which had been scheduled to take effect on Wednesday, November 18, and re-propose it. However, in order to do that, it needed OMB approval, so it delayed the rule. Surprisingly, that approval came earlier than expected, enabling the department to scrap the rule, Delaplane said.

Gloria Della, a Labor Department spokeswomen, confirmed that the DOL had a draft of the proposed regulation with OMB.

Industry officials are relieved to hear that the Labor Department will put the new proposal out for comment rather than merely issue a final rule. They’re worried, however, about how the agency interprets the term “affiliate” with regard to the potential for conflict of interest in providing advice.

“The DOL got negative comments about whether an affiliate of an advisor can earn differential compensation and not have an effect on the advice given, so they will probably change the interpretation of ‘affiliate,’ ” Delaplane said. “But how far they go remains to be seen.”

“One could predict that investment advisors who are affiliated in some way with a fund company or a product will probably be prohibited from providing investment advice,” said Greg Ash, head of the ERISA litigation group at Spencer Fane Britt & Browne. “This will open the door for fee-for-service advisers to jump into that market and dominate it.”

How far removed the potential conflict of interest could be is a real question, said Jason C. Roberts, a partner at law firm Reish & Reicher.

“This issue of how far up the chain this conflict analysis will go is causing our clients hesitation,” Roberts said.

Industry groups are anxiously waiting to see what the Labor Department does on this issue.

“We look forward to seeing the new proposal and to working with the Department of Labor on a regulation that provides investors access to quality investment advice,” said Rachel McTague, a spokeswoman for the Investment Company Institute, which represents the mutual fund industry.

The Investment Adviser Association is closely watching the issue, said David Tittsworth, its executive director.

The group, which represents investment advisors registered with the Securities and Exchange Commission, most likely will submit a comment when the proposal comes out, he said.


Filed by Jessica Toonkel Marquez of InvestmentNews, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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