By: Randy Myers
You knew this was going to be tricky. In the aftermath of the most recent financial crisis, Congress called for stiff new regulation of the financial services industry. Now, some of the regulations proposed by various federal agencies appear to conflict with those suggested by others. Exhibit A is a proposal from the Commodities Futures Trading Commission (CFTC) under the Dodd-Frank Wall Street Reform and Consumer Protection Act. It says that when a firm recommends a swap transaction or trading strategy to a retirement plan or similar “special entity,” the firm must act in the best interests of that plan. On its face alone, the proposed rule seems troublesome, since a bank recommending or entering into a swap with a retirement plan would also be compensated for its role and potentially even serving as a counterparty in the transaction. The CFTC apparently recognized this conundrum. In making its proposal, it said explicitly that the rule is not intended to preclude banks or other swap dealers from recommending a swap and then entering into that transaction with a client.
If that weren’t puzzling enough, the Department of Labor (DOL) issued proposed regulations in October that redefine the circumstances under which banks and other financial services firms would be deemed fiduciaries under the terms of the Employee Retirement Income Security Act, or ERISA, when giving investment advice. Attorney Donald Myers, a partner in the Washington, D.C., office of Morgan, Lewis & Bockius LLP, says it is possible to envision scenarios under the DOL and CFTC proposals in which a swap dealer might not be a fiduciary under CFTC rules but could be under ERISA.
“And if you are an ERISA fiduciary, you can’t enter into a swap transaction with a plan that you are advising,” Myers told participants at the 2011 SVIA Spring Seminar. “So you’ve got a real tension between the proposed CFTC and DOL regulations.”
To further complicate matters, Myers noted that the Securities & Exchange Commission, also acting under the auspices of Dodd- Frank, recently recommended establishing a uniform fiduciary standard for broker-dealers that would align with the standard that now exists for registered investment advisors. Under cur- rent law, broker-dealers are not, in most circumstances, subject to fiduciary duty requirements under federal securities laws.
Myers said the Department of Labor has received more than 200 public comments on its proposed regulations. The biggest com- plaints have come from the brokerage industry, he noted, which worries that if a broker-dealer is classified as a fiduciary, it will be unable to receive compensation for recommendations it makes, not only to retirement plans but also to participants in those plans.
Retirement plan record-keepers that maintain call centers and field inquiries from plan participants also worry that some of those conversations could be viewed as constituting investment advice, Myers said, leaving them open to the possibility of violating fiduciary standards.
Many commenters on the DOL proposal have suggested that before it proceeds any further, it should coordinate its efforts with the SEC to minimize potential conflicts between their new standards.
“I’m not quite sure how this is going to get worked out,” Myers said, “but it is a good example of having three agencies all believing that the solution to any problem in life is to make someone a fiduciary, ensuring they’ll be subject to a higher standard and potential liability if they do something wrong.”