Thursday, August 27, 2020



The DOL is rushing through a new "fiduciary rule" that guts who is subject to fiduciary standards for those providing investment advice to plan sponsors and plan participants. It further guts ERISA's fiduciary standard and prohibited transaction requirements by tying the interpretation of the fiduciary standard to the SEC's flawed Regulation "Best Interests" - which is only a very modest enhancement of the (non-fiduciary) "suitability standard" of conduct that has long shielded broker-dealers and their registered representatives from being held accountable for their investment and portfolio advice.

In this blog post I reflect upon whether the DOL, by proceeding at warp speed, may be violating the spirit, if not the letter, of the Administrative Procedures Act.


The Administrative Procedure Act (APA), which applies to all agencies of the federal government, provides the general procedures for various types of rule making. The APA details the rarely used procedures for formal rules as well as the requirements for informal rule making, under which the vast majority of agency rules are issued.

For what is termed "informal rule making" under the APA (which is the vast majority of agency rule making), the notice requirement of § 553 of the APA is satisfied when the agency “affords interested persons a reasonable and meaningful opportunity to participate in the rule making process.” Once adequate notice is provided, the agency must provide interested persons with a meaningful opportunity to comment on the proposed rule through the submission of written “data, views, or arguments.”

While there is no minimum period of time for which the agency is required to accept comments, in reviewing an agency rule making, courts have focused on whether the agency provided an “adequate” opportunity to comment—of which the length of the comment period represents only one factor for consideration.

Although the APA sets the minimum degree of public participation the agency must permit, the legislative history of the APA suggests that “[matters] of great importance, or those where the public submission of facts will be either useful to the agency or a protection to the public, should naturally be accorded more elaborate public procedures.”

Agencies are required to respond to all public comments to a reasonable extent, and sufficient public opposition to or criticism of a proposed rule may result in modifications to the rule or, in cases of significant opposition, re-drafting of the rule with a new publication and comment period.


The fiduciary rule is the product of more than ten years of work.

The actual history of efforts to re-define when fiduciary duties apply under ERISA goes back to the George W. Bush Administration. The U.S. Department of Labor (DOL) adopted as a final rule in the waning days of the Bush administration. The Obama Administration put the rule, which had not passed its effective date, on hold.

The DOL went back to the drawing board, under the Obama Administration. It first proposed a broadening of the application of the fiduciary standard to providers of investment advice to retirement plan sponsors and plan participants in 2010. After a comment period, the U.S. Department of Labor withdrew this proposal to address concerns that were raised. The DOL then consulted extensively, including with stakeholders and other government agencies, particularly the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

The next iteration of the rule was proposed by the DOL in April 2015. After receiving requests for additional time to submit input on the revised rule, the DOL extended the comment period by two weeks in July and held a four-day hearing during the week of August 10, 2015. The DOL then re-opened the comment period again for an additional two weeks for additional public testimony and comments. In total, there were over 100 days for the public to comment on the draft rule The Department received 3,134 total comments, including 30 petitions that encompass an additional 386,889 comments. The DOL's proposal was strongly opposed by most broker-dealer firms and insurance companies (and their lobbying organizations, such as SIFMA, FSI, and ACLI). While the public participation in the process was dominated by securities broker-dealer firms and insurance industry firms and lobbyists, the Obama Administration's DOL did receive substantial input from as compared to public interest or consumer groups.

The DOL finalized its rule in 2016. After lengthy court challenges, in which the DOL prevailed in most of them, a divided 5th U.S. Circuit Court of Appeals overturned the DOL's fiduciary rule in June 2018. The Trump administration declined requests from consumer groups and others for further judicial review or appeal of the 5th Circuit's opinion.

The DOL, now acting under the Trump Administration, and led by U.S. Secretary of Labor Eugene Scalia (who represented the securities industry firms that challenged the prior DOL's rule, which prevailed I the 5th Circuit opinion) then proceeded to draft a new proposed rule, which was published in July 2020. The proposed rule would substantially weaken the previous rule's application of ERISA's fiduciary standard and prohibited transaction rules, both as to who it applied to, as well the requirements under ERISA when fiduciary status was applicable. A short 30-day comment period was provided. Thereafter, on August 25, 2020 a Notice of Hearing was published, providing only 3 days for those desiring to testify to submit outlines, and restricting the topics to mostly "factual issues" that could not be covered in comment letters. Presumably, those selected to testify will be notified by Tuesday, Sept. 1st, with the hearing to be conducted on Thursday, Sept. 3rd (and, if needed, Friday, Sept. 4th). Only those who submitted written comments or previously requested to testify are permitted to testify at the Sept. 3rd/4th hearings.

As of Thursday, August 27, 2020, it appears that the DOL is apparently rushing to finalize its new rule, which is decidedly pro-Wall Street, and pro-insurance company, so that it goes into effect prior to January 20, 2021 - which date could mark the beginning of the start of a new (Democratic) Administration, which no doubt would oppose the anti-consumer, pro-Wall Street proposed rule advanced and considered in July-September 2020 by the DOL.


The DOL ("Department") should not constrain the topics addressed in the hearing, or constrain who can appear to testify, as the notice of hearing states.

There is a clear need for the Department to hear more factual and legal information regarding this proposed rule making, including but not limited to:

(1) A legal rebuttal of various arguments put forward by various industry organizations in their comment letters, including but not limited to arguments not reasonably anticipated by the Department’s own proposed rule, as well as similar arguments advanced by various law firms and others on behalf of certain financial services firms in their comment letters just submitted earlier this month;

(2) A more complete factual rebuttal of various arguments put forward in the previously submitted comment letters, by those who did not submit comment letters, but who possess evidence that would address the previous comments submitted;

(3) A more complete legal and factual analysis as to why the Department’s proposal to permit conflicted advice is violative of the prudent investor rule under ERISA, ERISA’s provisions for the grant of class exemptions, and the requirements of pertinent fiduciary law;

(4) An economic analysis of the negative impacts of the proposed rule upon:

   a. individual retirement plan participants;

   b. those who engage in rollovers to IRAs from qualified retirement plans governed by ERISA;

   c. plan sponsors (including the viability and profitability of businesses, both large and small, when subjected to the increased risks, including those arising from class action lawsuits, which are certain to arise if the proposed rule is enacted);

   d. the number of ERISA-covered qualified retirement plans, given the increased liabilities to plan sponsors (and lack of ability to hold those providing investment recommendations to plan sponsors responsible), at a time when increased availability of qualified retirement plans in the United States should be promoted;

   e. capital formation in the United States (and the detriments to same occurring from higher fees and costs due to excessive intermediation, as well as from betrayals of trust);

   f. U.S. economic growth, resulting from excessive intermediation and the resulting lower amounts of capital available for investment, especially given the compounding effects of high fees and costs on the availability of investment capital; 

   g. the personal savings rate in the United States, due to investor perception that will arise from conflicted advice provided to plan sponsors and plan participants; and

   h. the investment advisory and financial planning professions, and the reputation and economic prospects of professionals within such professions, as plan sponsor and individual plan participant trust is increasingly betrayed.

(5) Recent developments regarding various interpretations of Regulation Best Interest, upon which the Department’s intended interpretation of its own rule expressly relies; and

(6) Much more, which time to properly consider the proposals would reveal.

I am concerned that the artificial limitation on testimony to “individuals or parties who submitted, in accordance with the instructions included in the proposed prohibited transaction exemption, a comment or hearing request on the proposed exemption before the close of the comment period” results in a lack of adherence to fundamental notions of fairness and the Administrative Procedures Act, especially given the Department’s receipt of evidence and legal arguments during the first short comment period. There would be, no doubt, interested parties who could provide meaningful insight to the Department, who do not meet the artificial constraints so imposed by the Department.

I am also concerned that the limitation of testimony is ill-advised: “Outlines should present material factual issues and demonstrate that the proposed testimony is both germane to factual issues needing exploration at the hearing that could not have been submitted in writing, and not duplicative of arguments and factual material previously included in the requestor’s comment letter.” This constraint is altogether non-sensical. Simple factual information, without more, could be presented in writing.

But the purpose of a hearing, to inform the government’s rule-making process, is much more than the mere receipt of explanations of faculty issues. There is a complex interaction between the application of a law (or rule, or proposed rule) and the factual circumstances as they relate to investments, the delivery of investment recommendations and advice, the marketplace for financial services, and the economic impacts that may occur. Limiting outlines to addressing “factual issues” alone ignores the absolute necessity to explore the complex and intertwined nature of the proposed rules and its legal, practical and economic impacts. “Factual issues” and “legal issues” are intertwined, especially in such a rule making as this proposed rule with its huge economic, industry, and social impacts.

As stated above, this stated constraint also likely runs afoul of the requirements of the Administrative Procedures Act, and is certainly evidence that the Department seeks to rush this rule making through without a proper consideration of its impact upon major areas of our economy, the financial services industry, consumers, financial professionals, and much more.

Hearings on rules of this nature should be designed to permit adequate exploration of the interplay of the rule, in all of its complexity, and a due consideration of the major ramifications and impact of this proposed rule. This involves exploring both factual and legal issues, and their interplay, and what lies in between. The exchange between those testifying, and those who are charged with adhering to the requirements for the adoption of rules that are neither arbitrary nor capricious as well as being reflective of the true environment in which the rule is intended to operate, should not be artificially restricted by the limits as to who may testify, or by limiting the topics upon which they may testify.


I would also repeat my concerns that the Department’s proposed rule making, on an issue as complex as this, and which has such far-reaching implications for millions upon millions of business owners and retirement savers, as well as impacting upon capital formation and U.S. economic growth, is rushed in the extreme.

Additionally, there has simply been insufficient time to gather evidence and legal analysis and respond to the Department’s proposed rule, given the extraordinarily short comment period.

Nor has then been presented any time to submit comments to rebut the evidence, such as it is, and the legal arguments, from previously submitted comment letters (few if any of which were posted prior to the deadline of the comment period) of those who present arguments that are opposed to my own views.

The August 25, 2020 publication in the Federal Register of this “Announcement of Hearing,” with a reply required just three days later – by 11:59 p.m. on August 28, 2020, is also extremely rushed and gives little time to gather factual evidence and submit same.

Presumably, given the existence of Labor Day (a federal holiday), and with testimony to be scheduled on Thursday, Sept. 3rd (and “if necessary” Sept. 4th), those individuals invited to testify would receive notification that their testimony has been scheduled (at least in some, if not many, instances) less than 48 hours to prepare their actual testimony. This is insufficient time for those who desire to provide testimony to further consider the topics upon which they will be permitted to testify, and then to craft the succinct yet meaningful and impactful testimony the Department should expect.

I would note that if I possessed, myself, adequate time for thought on the complex interplay of the Department’s proposals with the complex web of financial services regulation at both the federal and state levels, the impact of preemption, the rise of state retirement plans which may or may not be covered by ERISA, recent SEC rule making, recent state legislative and regulatory developments, and for a review of all of the previously submitted comment letters earlier this month, no doubt I would identify other factual (as well as legal) issues deserving of commentary and, in many cases, rebuttal.

Accordingly, I remain concerned that the Department is not adhering properly to the Administrative Procedures Act by undertaking, in such a rushed and hurried fashion, with constraints on receipt of testimony and further comment letters, such a monumental rulemaking. The burdens of the COVID-19 pandemic, which are huge in terms of additional time to complete everyday work and personal activities, adds to my concerns over the inherent fairness of rushing the Department’s proposed rule through.

If the Department truly desires well-reasoned, thorough, thoughtful, and complete testimony, it would afford more time for those testifying to construct their testimony, both in establishing a far more reasonable time period to submit outlines, and with regard to permitting more time from notification of the testimony time and date to the actual date of the hearing.


Fiduciary rule-making under ERISA has been made into a complicated process. The requirements for who constitutes a "fiduciary" have been substantially narrowed, far narrower than the clear language of ERISA itself. Now, the DOL attempts to further narrow to whom ERISA's fiduciary duties apply, and then also to gut the fiduciary standard itself.

The current Administration's attempt to gut principles-based fiduciary regulation, which has for over a century been applied to the delivery of investment advice by the courts, and by federal and state statutory regimes, is an ill-advised cowtow to the greed of Wall Street and the insurance companies. It is couched in terms of "less government." But, as James Madison so eloquently stated, "“If men were angels, no government would be necessary.”

Furthermore, establishing a principles-based standard, such as the fiduciary standard, does not require detailed rules promulgated by government. It just requires the government to respect that, given the substantial public policy considerations that favor the application of the fiduciary standard of conduct in this ever-more-specialized society, and ever-more-complicated capital markets, that government agencies stick with the broad principles-based regulation and permit them to be enforced, without limitation or restriction, by the courts.

We must realize that it would be far simpler to just enact a rule that follows ERISA's statutory language, as to whom is a fiduciary for purposes of ERISA. Any augmentation to such should just clarify that "anyone in a relationship of trust and confidence" with a plan sponsor, or plan participant, should also be considered a fiduciary.

The fiduciary standard is a principles-based standard. The tough "sole interests" trust law-based standard in ERISA should be interpreted by the courts. Enacting exemptions that meet the "best interests" fiduciary standard, while also not running afoul of the requirements for class exemptions from the prohibited transaction rules, should be VERY carefully undertaken, and only for necessary and narrow exemptions.

The DOL suggests that it is trying to assist consumers, by creating more choice. Yet, the fiduciary standard, by its nature, constrains choice. The fiduciary standard ensures that "bad choices" - in this instance, bad investment products, not be recommended to plan sponsors and plan participants. The DOL's emphasis on "consumer choice" is but a red herring.


The U.S. Supreme Court has previously written about the fiduciary standard, generally, and in particular the fiduciary duty of loyalty. In Justice Douglas’s majority opinion in Pepper v. Litton, it was stated: "He who is in such a fiduciary position cannot serve himself first and hiscestuis second … He cannot use his power for his personal advantage and to the detriment of [the cestuis], no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. Where there is a violation of those principles, equity will undo the wrong or intervene to prevent its consummation … Otherwise, the fiduciary duties … would go for naught: exploitation would become a substitute for justice; and equity would be perverted as an instrument for approving what it was designed to thwart."

The observation that a person cannot wear two hats and continue to adhere to his or her fiduciary duties was again echoed early on by the U.S. Supreme Court, “The two characters of buyer and seller are inconsistent.” The U.S. Supreme Court also observed: “If persons having a confidential character were permitted to avail themselves of any knowledge acquired in that capacity, they might be induced to conceal their information, and not to exercise it for the benefit of the persons relying upon their integrity. The characters are inconsistent.”

In an early speech by the Louis Loss, for long the leading scholar on the federal securities law, presented at a time when he served the Commission, Professor Loss stated: “[A]s an eloquent Tennessee jurist put it before the Civil War, the doctrine ‘has its foundation, not so much in the commission of actual fraud, but in that profound knowledge of the human heart which dictated that hallowed petition, ‘Lead us not into temptation, but deliver us from evil,’ and that caused the announcement of the infallible truth, that ‘a man cannot serve two masters.’ ’ ” Louis Loss, Address entitled “The SEC and the Broker-Dealer” by Louis Loss, Chief Counsel, Trading and Exchange Division, U.S. Securities and Exchange Commission on March 16, 1948, before the Stock Brokers’ Associates of Chicago.

As well-known in the early case law regarding fiduciary relations: "The principle is undeniable that an agent to sell cannot sell to himself, for the obvious reason that the relations of agent and purchaser are inconsistent, and such a transaction will be set aside without proof of fraud.” Porter v. Wormser , 94 N. Y. 431, 447 (1884).

Simply put, you either possess a duty of loyalty to the client, as an expert, trusted adviser bound by ERISA's tough prudent investor rule and standard for due care. Or you are a product salesperson. You cannot be both, at the same time.

It is an undeniable truth that no person can serve two masters. And the DOL, and the SEC, must at some time revert back to this longstanding principle, establish more clearly when fiduciary standards apply (and always apply them where relationships of trust and confidence exist), and restore the fiduciary standard to its rightful place as the toughest standard of conduct found under the law.

                   - Ron A. Rhoades, JD, CFP

These views are my own, and are not necessarily the views of any institution, firm, organization, cult, or gang with whom I am currently associated or from which I have ever been expelled.

Monday, August 10, 2020

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Thursday, August 6, 2020

The DOL's Proposed "Fiduciary Rule" Guts Protections for Retirement Plan Savers and Investors


 Ron A. Rhoades, JD, CFP®

                                                                                                1441 Riva Ridge Ave.

                                                                                                Bowling Green, KY 42104


Via submission to the rulemaking portal:

Docket ID number: EBSA-2020-0003.  


August 6, 2020


Office of Exemption Determinations 

Application No. D-12011

U.S. Department of Labor, EBSA
Office of Exemption Determinations
200 Constitution Avenue NW,
Suite 400
Washington, DC 20210


Re:       ZRIN 1210-ZA29 [Application No. D-12011]

“Improving Investment Advice for Workers & Retirees”


Ladies and Gentlemen:

I write on my own behalf to express my severe concerns regarding the relaxation of ERISA’s high standards of conduct, and the non-application of the fiduciary standard, as proposed by components of the proposed rule. I am a registered investment adviser and Certified Financial Planner™ who often provides advice to participants in ERISA-covered plans. I am also an attorney, university professor,[1] and a researcher and writer/presenter on topics relating to the application of fiduciary duties to the delivery of investment and financial advice and recommendations. As a university professor, I have taught classes in Retirement Planning, Applied Investments, Advanced Investments, Insurance and Risk Management, Business Law, and Money and the Capital Markets, as well as several other classes relating to topics in financial planning. I have also served as a consultant to broker-dealer firms. As a result of my unique perspective, I believe my comments can assist the U.S. Department of Labor to effect a more reasoned rule-making.

1.     The Time Permitted to Develop and Provide Comments Is Not Sufficient.

The Employee Benefits Security Administration (“EBSA”) had this proposed regulation published in the Federal Register, and the U.S. Department of Labor (“DOL”) only provided 30 days to submit comments on the proposed rule, an insufficient time for the American public to review and respond to a complex, 123-page proposed rule. I hereby incorporate by reference my prior submission of July 7, 2020, expressing my concerns that this limited period of time, especially during a pandemic, does not meet the requirements of the Administrative Procedure Act’s (“APA”). Under the APA, agencies are required to provide the public with adequate notice of a proposed rule followed by a meaningful opportunity to comment on the proposed rule’s content. See Rural Cellular Ass'n v. F.C.C., 588 F.3d 1095, 1101 (D.C. Cir. 2009) (citing Gerber v. Norton, 294 F.3d 173, 179 (D.C. Cir. 2002). This includes giving “interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments….” 5 U.S.C. § 553(c). Courts have emphasized that the APA’s notice and comment requirements “serve important purposes of agency accountability and reasoned decision making” and impose a significant duty on the agency” to allow for meaningful and informed comment.” Am. Medical Ass’n v. Reno, 57 F.3d 1129, 1132-133 (D.C. Cir. 1995). Given the unreasonably compressed time to comment on this proposal, I have not possessed a meaningful opportunity to research the law and the economic impacts, and to submit written data to properly inform this rulemaking. Nevertheless, I will submit what comments I can; however, these comments are necessarily less substantial, in both number and in terms of explanation and supporting argument, than previous comment letters I have submitted to the DOL and to the SEC on their fiduciary regulation and Regulation Best Interest and related rulemaking proposals, given the very limited time provided to analyze the proposed rule.

2.     The Proposed Rule Thwarts the Will of the U.S. Congress.

The plain language of ERISA establishes a multitude of protections for plan participants in ERISA-covered defined contribution plans, including fiduciary duties, the prudent investor rule, and the prohibited transaction rules. ERISA-covered retirement plans possess tax advantages. In addition, the U.S. Congress has long recognized, under ERISA and its various amendments, the need to ensure protection to plan sponsors and to plan participants. The proposed rule guts these protections, effectively (and especially by the release’s pointing to the use of Regulation Best Interest, a non-fiduciary standard of conduct for broker-dealer firms and their registered representatives) gutting the protections which the U.S. Congress expressly mandated be in place and maintained for ERISA-covered plans.

3.     The Proposed Rule Violates the Requirements for a Class Exemption, Generally.

Generally, the proposed rule violates long-standing interpretations of ERISA by granting a class exemption from ERISA that is not in “the interest of” plan sponsors and investors in retirement plans and IRAs, and which is not “protective of the rights” of such plan sponsors and investors.

Generally, the proposed rule ignores the established fact that no man can wear “two hats,” and that operating as a fiduciary to a qualified retirement plan, or in adherence to the requirements of the class exemption from the prohibited transaction rules, cannot be practically accomplished (without substantial transgressions occurring) when investment product sales are undertaken.

The “sole interests” fiduciary standard of ERISA can be modified by a class exemption, but under long-standing legal principles only if the “best interests” fiduciary standard is applied in a manner protective of the interest of plan sponsors and plan participants. The proposed class exemption does not meet the requirements of the “best interest” fiduciary standard of conduct, which requires that any conflict of interest not merely be disclosed (as Regulation Best Interest’s non-fiduciary standard of conduct effectively only requires, and under which the DOL states this class exemption will be interpreted). There is no requirement under the DOL’s proposal – as it is to be interpreted according to the DOL – that any resulting conflicts of interest be properly managed in order to meet the “best interests” fiduciary standard and the requirement that the interests of the plan sponsors and plan participants be protected.

The Secretary of Labor’s statement in a press release regarding the proposed rule, “Today’s proposed exemption would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers” is a red herring. The purpose of the fiduciary standard is to restrain inappropriate conduct – by eliminating poor choices for investors. One of the main tenants of the prudent investor rule as applied under ERISA is to ensure assets of plan participants are not wasted. By permitting conflict-ridden advice to be provided by fiduciary advisors, the Secretary of Labor does not protect Americans’ retirement savings, but instead protects the interests of Wall Street and insurance companies to the detriment of tens of millions of Americans, who will see a significant decline in the value of their retirement accounts due to the waste of their hard-earned assets.

4.     The Proposed Rule Fails to Consider Many, Many Alternatives.

Such alternatives include, but are not limited to:

A)     An application of the fiduciary standard of conduct to all those who, by virtue of their actions, enter into a relationship of trust and confidence with the plan sponsor and/or plan participants. The common law application of fiduciary standards should inform the DOL’s rulemaking, but has been wholly disregarded.

B)     While the academic research disclosures are largely ineffective in the realm of the provision of investment advice, as to both plan sponsors and plan participants, they can possess mild positive impacts. The proposed rule fails to explore the alternative that all plan sponsors and/or plan participants, when receiving advice or recommendations regarding investments, be informed in writing: (1) as to whether the person and/or firm providing such advice or recommendations is, or is not, a fiduciary; (2) that a plan sponsor is at greater risk of liability when he/she/it relies upon non-fiduciary advice, given the limitations of liability upon broker-dealers and insurance agents and their representatives due to the application of the weak “Regulation Best Interest” and “suitability” standards; (3) that no undue reliance should be placed upon a non-fiduciary provider of investment recommendations, given the arms-length nature of the relationship and the application of caveat emptor (modified only by weak conduct standards applicable to broker-dealer firms and their registered representatives).

C)     The proposed rule fails to consider whether the language of ERISA should simply, and forthrightly, be applied to determine when a fiduciary relationship exist, rather than through the re-application of the distorted “five-part test,” which test runs counter to the express language of ERISA.

D)    The proposed rule fails to consider whether  the“best interests” fiduciary standard of conduct applicable to class exemptions, which is lower than ERISA’s default “sole interest” fiduciary standard, should be applied in a manner in which conflicts of interest and their potential ramifications to the entrustor are affirmatively disclosed, that entrustor understanding is assured, that informed consent be obtained, and even then the conflict of interest must not result in a transaction which is substantively unfair to the entrustor. The proposed rule fails to recognize that no informed consent can be present, under the best interests fiduciary standard applicable to class exemptions under ERISA, if the entrustor would be harmed by a transaction. And, as is well-established by the academic evidence, higher fees and costs borne by investors result in harm to investors, as the result of lower investment returns.

As a result, the proposed rule does not reflect a "fair and considered" judgment of the agency, as so many alternatives were not examined by the Agency.

5.     The proposed rule, by incorporating Reg BI as the means for its interpretation, and by permitting numerous conflicts of interest to exist, does not meet the requirements of ERISA, and effectively negates ERISA’s long-standing interpretation of the duties of an ERISA fiduciary to conduct a “intensive and scrupulous” and “independent” investigation “with the greatest degree of care.” See, e.g., Donovan v. Bierwirth, 538 F. Supp. 463, 470 (E.D.N.Y. 1981), order modified by 680 F.2d 263, 269 (2d Cir. 1982) (Independent investigation into basis for investment decision which presents potential conflict of interest must be both intensive and scrupulous and must be discharged with greatest degree of care that could be expected under all circumstances by reasonable beneficiaries and participants.)

6.     The proposed rule, by permitting commissions and 12b-1 fees to be received by a person acting in a fiduciary capacity, violates the regulatory regime established by Congress for broker-dealers and for registered investment advisers, and their separation of function, since 1940. 

7.     The Proposed Rule Substantially Fails in Its Economic and Investment Analysis.

The added costs borne by plan participants, as a result of actions which will follow from the proposed rule, will result in unreasonable compensation in many instances to providers of investment recommendations to the plan, a violation of the plan sponsor’s fiduciary duty of due care, and will not meet the requirements for a class exemption from the prohibited transaction rules as set forth by statute.

a.     The proposed rule does not reflect the reality of economic incentives, as to the provision of poor advice. By permitting a substantial increase in the conflicts of interest, the proposed class exemption provides incentives for investment advice fiduciaries to recommend higher-cost investment products. The simple truth is that economic incentives drive behavior. By providing the ability of fiduciary advisers to receive differential compensation, depending upon the investment products recommended, economic incentives result that will propel the use of higher-cost investment products in retirement plans.

b.     The proposed rule does not reflect the reality that higher-cost investment products will be provided as a result of the rule, and this will substantially reduce the returns to investors. The academic research is clear - higher-cost investment products result in lower returns for investors.

c.      The proposed rule fails to consider that defined contribution plans covered by ERISA, such as 401(k) plans, possess economies of scale. As a result, the costs relating to the selection and monitoring of investments for the retirement plan can be spread over all of the plan participants.

d.     The proposed rule fails to take into consideration that commission-based compensation is inappropriate under Modern Portfolio Theory, for individual funds. The typical sales commission of a Class A mutual fund, when provided to an investor in a 401(k) plan, will be 5.75%. The impact of this commission is huge, especially over a limited period of time, and even over long periods of time. Under Modern Portfolio Theory, rebalancing is required to maintain the investor’s strategic asset allocation, or when tactical asset allocation decisions are undertaken. The proposed rule fails to consider the costs of a new 5.75% commission due to such rebalancing actions. This will substantially reduce the returns to investors. I note that the average holding period of all mutual funds is less than 4 years, according to various surveys.

e.     The proposed rule fails to take into consideration that Class C shares, which typically possess a 1.00% 12b-1 fee, possess exorbitant fees for a defined contribution plan, especially since investment advice is provided by defined contribution plans via group educational meetings, web-based tools and educational materials, and only rarely in one-on-one advisor-participant meetings. 

f.      The proposed rule fails to take into consideration that 12b-1 fees do not benefit fund shareholders, and can over the course of many years result in unreasonable compensation to the provider of investment recommendations.

g.     The proposed rule fails in its economic analysis by failing to consider the huge increased liability plan sponsors will bear due to the receipt of investment advice that is not fiduciary advice.

(1)   Non-fiduciary "retirement plan consultants" and others will increasingly provide recommendations to plan sponsors, as a result of the proposed rule.

(2)   Plan sponsors rely upon such recommendations.

(3)   Yet, plan sponsors are not investment specialists, nor trained in the application of ERISA’s standards, the prudent investor rule, Modern Portfolio Theory, the ability to discern and compare the benefits, costs, fees, and risks present with regard to mutual funds and other pooled investment vehicles, as well as different types of annuities and guaranteed investment contracts.

(4)   This investment advice and investment recommendations provided to plan sponsors under the proposed rule will often fail to meet the requirements of the prudent investor rule, particularly as to its requirement to not waste the assets of plan participants.

(5)   Plan sponsors will be increasingly sued by plan participants, via class action claims.

(6)   In such litigation, the "retirement plan consultants" and others who are not fiduciaries (as a result of application of the proposed rule) will be able to hide behind the low standard of conduct applied under the SEC's Regulation Best Interest, and will be dismissed from the litigation and absolved from any accountability for their recommendations.

(7)   Plan sponsors, who are business owners large and small, and who lack their own expertise to adhere to the requirements imposed by ERISA, will incur huge costs to plan participants due to the inappropriate, conflicted investment recommendations they received from such non-fiduciaries. Plan sponsors will be held liable for breaches of their obligations under ERISA, while under the proposed rule more and more providers of conflicted advice will not be so liable. Plan sponsors – U.S. corporations large and small – will incur liabilities to their plan participants in aggregate amounts, over time, of hundreds of millions of dollars, or even billions of dollars.

h.     The proposed rule fails in its economic analysis by failing to consider the increased deterrence effect to plan sponsors who might otherwise desire to initiate and/or maintain defined contributions plans for their employees. The proposed rule fails to consider the increased liability which will certainly result upon plan sponsors (corporations), who possess non-waivable fiduciary duties – not only in terms of the huge adverse financial impact from class action litigation, but also the deterrence effect upon other corporations – to start defined contribution plans covered by ERISA – due to the potential liability. This further endangers the retirement security of many Americans, which the U.S. Congress through its adoption of ERISA desired to effectively address by means of providing numerous protections under ERISA to plan sponsors and to plan participants.

i.       The proposed rule fails in its economic analysis by failing to consider the negative impact on the budgets of federal, state, and local governments. Increased burdens will result on governments to provide for their senior citizens, as a result, through governmental programs such as Medicaid, food assistance, low-income housing assistance, etc.

j.       The proposed rule fails in its economic analysis by failing to consider the impact of higher fees and costs on capital accumulation and U.S. economic growth. The higher fees and costs incurred by plan participants will lower the amount of retirement savings. In addition, by providing for the receipt of conflicted advice by plan participants and IRA account owners, those individual investors - who studies have shown rely upon the advice they receive - will see their interests betrayed. As a result, they will lose trust in our financial system of investments, and withdraw their capital from the capital markets. This will decrease the availability of capital, with an increasing impact over time. This raises the cost of capital to American business. In turn, this will severely impair future U.S. economic growth.

8.     The proposed rule is contrary to the requirement that plan sponsors and other fiduciaries must act in accordance with the prudent investor rule with respect to retirement plans covered by ERISA. Under Title I of ERISA, plan fiduciaries must act prudently and with undivided loyalty to employee benefit plans and their participants and beneficiaries. The proposed exemption will permit fiduciary advisors to provide advice which does not meet the prudent inventor rule.

9.     By leading to widespread confusion, the Rule is ambiguous (and nonsensical), on its face, especially as a result of inclusion of the DOL's interpretation (via the application of Regulation Best Interest to interpret the “best interest” fiduciary standard applicable under ERISA and the requirements for a class exemption from the prohibited transaction rules) that runs directly counter to the express language of the Rule. The Rule is, accordingly, not a proper exercise of agency rule-making, as it is not rational; it is arbitrary and capricious. The Rule, together with the proposed Agency interpretation that directly contradicts the express language of the Rule, will cause great confusion in the industry. The interpretation made by the agency is not a reasonable interpretation. The DOL's interpretation falls outside the DOL's expertise, as the DOL has no expertise in Reg BI, which just became effective on June 30, 2020 and is just now being beginning to be interpreted by the SEC. Moreover, the DOL has no greater expertise, relative to that of a court, in applying common law fiduciary standards of conduct

Again, there are many additional flaws with the proposed rule, which I would seek to further discern and comment upon, if sufficient time for a thorough analysis of this proposed rule had been provided by the DOL. This area of rulemaking is complex, with regard to the application of ERISA’s fiduciary or non-fiduciary status, fiduciary standards of conduct (“sole interests” vs. “best interests”), ERISA’s prohibited transaction rules, and the requirements of class exemptions from the prohibited transaction rules. The inclusion of references to the ambiguous Regulation Best Interests, from the SEC, as a means for interpretation of certain requirements in the DOL’s proposed rule, and at a time when the term “best interests” has not been defined nor adequately interpreted by the SEC, further complicates the analysis of the DOL’s proposals.

Regardless, however, it is abundantly clear that the DOL, through this proposed rule, disregards fundamental economic analysis as to many impacts of the rule, seeks to thwart the will of the U.S. Congress, fails to even state much less adequately consider many alternatives that should have been explored in the rule-making processes as required by the APA, and generally disregards the plan language of ERISA.

The DOL effectively seeks to gut the protections of ERISA which are provided to plan sponsors and plan participants, and in so doing would reduce ERISA to an empty shell into which conflict-ridden product sales practices will creep, at great harm to individual Americans, Americans’ retirement security, and the accumulation of capital for use in American businesses. In short, this proposed rule possesses major economic impacts, and if adopted the DOL’s proposed rule will endanger the very economic health of our nation.

The DOL should formally withdraw its proposed rule, do its job, and then move (through careful exploration of the alternatives, careful consideration of the will of the U.S. Congress as expressed in the plain language of ERISA, and with due consideration of the practical and economic impacts) formulate a new proposed rule that meets the many statutory requirements of ERISA and the APA.


Ron A. Rhoades, JD, CFP®

[1] This letter, and my views contained herein, are submitted on my own behalf, and do not necessarily represent the views of any university, other institution, organization, nor firm in which I have or currently am involved.

Saturday, August 1, 2020

COVID-19, A Personal Journey

A friend's mother has gone blind due to COVID-19. Other friends have been hospitalized. A few colleagues I've shared dinners with, enjoyed conversations with at various conferences, and accompanied on visits to the U.S. Congress, have died.
Me? Sheltered at home. Old bears and pandemics don't get along. Yet, the risk still exists. My wife, Cathy, goes to the grocery stores during hours when there is far less traffic (and wears a mask). My daughters visit, and even though they are also hunkered down for the most part, every contact they possess is also a potential chain to which my wife and I may be exposed. (To their credit, when they fear they may have been exposed, my daughters stop their visits, for 14 days.)
I read of 20% of Major League Baseball games being cancelled, due to COVID-19 spread among some teams, despite millions of dollars spent to ensure players' safety. I read of 6,000 college students catching COVID-19 in recent months, despite mitigation efforts. I read scientific research demonstrating just how transmissible COVID-19 is, and just how dangerous (mortality risk, and damage to one's health) the infection can be. And I read that there is still much we don't know about COVID-19.
I see the stress evident - among family members, among my students, and among my clients. Fear. Anger. Anxiety. Depression.
Yet, I know there is hope. More and more Americans are understanding that wearing masks and practicing social distancing is a personal responsibility, and a responsibility to each other. Three major Phase III trials are underway, and more are to come, with a hope for a vaccine by late 2020 or early 2021. Hundreds of therapeutics are under investigation, and a few have already been approved for use - thereby slightly lowering the mortality risk.
Each week brings new insights. Ideas are received from my students. I learn of "best techniques" for online and hybrid learning, and I work diligently to implement them. Plans for the Fall semester continue to be adjusted.
As a nation, the United States has seen more deaths from COVID-19 than that seen from the Korean, Vietnam, Gulf, and Afghanistan wars combined. And more deaths will come, before we defeat this.
We will prevail. Not undamaged. Not without grief. Not without remorse over actions that could have been taken to lessen risks to our fellow citizens, but were not.
We will prevail. And, confronting this challenge will change us, as a nation. Perhaps in ways we don't fully understand at present.
We will prevail. Embrace hope. Reach out and assuage another's fear, or grief. Guide others when appropriate. For together, we can persevere.