October 25, 2011 / 5:01 PM / 9 years ago

COMPLY: Labor probe seen clarifying fiduciary rule

* Probe could help Labor Dept revise fiduciary definition

* Dept asking brokerages for retirement plan documents

* At least eight broker-dealers targets of probe

By Suzanne Barlyn and Jessica Toonkel

Oct 25 (Reuters) - The U.S. Department of Labor is stepping up scrutiny of broker-dealers who have retirement plan customers, looking for potential conflicts of interest regarding how the broker-dealers are paid.

The probe could yield valuable details about how the broker-dealer world handles advice, compensation and conflict, lawyers in the industry say.

In turn, it could help the Labor Department — which has only recently begun to take on a larger oversight role over brokerages — more clearly revise a controversial proposal to update the definition of “fiduciary” under the Employee Retirement Income Securities Act, or ERISA.

At least eight broker-dealers, in recent months, received requests for an “enormous” amount of paperwork about their dealings with retirement plan clients, said Fred Reish, a lawyer for Drinker Biddle & Reath LLP in Los Angeles, which represents three clients being investigated.

The department has asked for documentation, including agreements between a broker-dealer and retirement plan clients, according to a report by Reish’s firm. The department is also asking for documents that describe services firms provide to retirement plans and details about their advice about for investing in securities.


The information could help the department better understand various compensation arrangements broker-dealers have in place, Reish said.

In turn, understanding how broker-dealers are paid will make it easier to investigate whether certain arrangements should be allowed under ERISA, he said.

“I don’t think this is a random investigation,” Reish said. “My suspicion is that people have reported some practices they have seen the broker-dealers do and (the department) is worried they are providing individualized advice and not acknowledging it.”

In September, the department withdrew a proposal that would have required brokers to act as fiduciaries when providing IRA advice.

But officials have said that they plan to include the provision in a revised proposal to be unveiled early next year, using what they learn to inform the revised proposal.

Such details could help the department describe specific examples of conduct in its rules, said Jason Roberts, chief executive of Los Angeles-based Pension Resources Institute.


Such clarity would be a welcome relief to numerous securities industry groups and insurers who opposed the rule. They have said it would prohibit them from collecting certain types of compensation and limit access to advice for IRA investors.

They have also said the rule wasn’t clear about everything from fees they may not be allowed to collect to the types of advice that would qualify them as fiduciaries.

The clarity could help brokerages understand if the rule applies to them, Roberts said.

The revised proposal could, for example, identify whether conversations a broker has with clients fall under the ERISA fiduciary standard — and if so, whether such conduct is prohibited. Brokerages are typically considered fiduciaries under ERISA if they provide personalized advice.

“Once (the department) understands what they’re dealing with, they can give better examples of what’s compliant, what’s isn’t, and how one can comply,” he said.

The earlier proposal confused brokerages partly because it spelled out only some of the compensation methods that would be prohibited under the rule update, Roberts said. “Now, they might understand,” he said.

Some of the challenges stem from a lack of familiarity with how brokerages run, he said. The department has been trying to beef up its oversight of the brokerage industry more broadly under ERISA and is “cutting its teeth” in the broker-dealer market, Roberts said.

“It would be hard to examine a broker-dealer if you didn’t speak broker-dealer,” he said.

Reporting by Suzanne Barlyn and Jessica Toonkel; editing by Jennifer Merritt and Chelsea Emery

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