July 2011 | Legislative Intelligence Update

July 2011—Legislative Intelligence Update | Deadlines Extended on New Disclosure Rules and
Congressional Hearing on Fiduciary Status Regulation

Welcome to this edition of IMCA's Legislative Intelligence update. This month's update discusses the Department of Labor's (DOL) extension of deadlines on new disclosure rules. The applicability date for the service provider disclosures was extended to April 1, 2012 to permit service providers sufficient time to come into compliance with the rules of the not-yet-issued final regulation. The DOL has extended the deadline for initial disclosures under the participant disclosure rules to no earlier than 60 days after the April 1, 2012 deadline. This update also discusses the July 26, 2011 pensions subcommittee of the House Education and the Workforce Committee hearing on fiduciary status regulation.

The purpose of this update, prepared by Morgan Lewis, is to give members legislative and public affairs intelligence and analysis and is strictly informational and educational. IMCA, as an education and credentialing organization, does not lobby legislators or regulators nor advocate for any particular legislative or regulatory position either on its own or through its relationship with Morgan Lewis.

If, after reading this update, you have additional questions please contact IMCA using the "Questions? E-mail IMCA" button at the bottom of this e-mail. We will either respond personally to your inquiry or include a response in an upcoming issue.
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ERISA

Deadlines Extended on New Disclosure Rules

As previously described in previous legal developments updates, two new ERISA disclosure rules had been scheduled to come into effect at the end of 2011:

1. Disclosures to be made by service providers to pension plans about their services and their direct and indirect compensation; and
2. Participant disclosures to be made by plan administrators of participant-directed retirement plans (generally 401(k) plans), who may require assistance from investment consultants to compile the necessary information.

Despite previous statements from the Department of Labor (DOL) that it was reluctant to extend these deadlines, DOL now has done so. The applicability date for the service provider disclosures was extended to April 1, 2012. The extension is to permit service providers sufficient time to come into compliance with the rules of the not-yet-issued final regulation (to replace the current interim final regulation). DOL intends to publish the final regulation before the end of the year.

The participant disclosure rules may require plan administrators to obtain from plan service providers the type of information (such as expenses) that would be provided under the new service provider disclosure rules. To coordinate the effective dates, DOL has extended the deadline for initial disclosures under the participant disclosure rules to no earlier than 60 days after the April 1, 2012, effective date of the service provider disclosure regulation (which will be May 31, 2012). The deadline for the first required quarterly disclosures also was extended.

Further extensions appear to be unlikely, particularly if DOL keeps to its schedule of publishing a final service provider disclosure regulation by the end of 2011. Therefore, service providers and plan sponsors should develop a schedule for coming into compliance with the rules based on these effective dates.

Congressional Hearing on Fiduciary Status Regulation

In October 2010, DOL proposed what proved to be a controversial re-write of a regulation on what constitutes “investment advice” that makes a person a fiduciary under ERISA and the Internal Revenue Code. DOL received several hundred comments and held a hearing. Now, Congress is taking an interest.

On July 26, 2011, the pensions subcommittee of the House Education and the Workforce Committee held a hearing on the DOL proposal. Assistant Secretary of Labor Phyllis Borzi testified and answered questions on DOL’s basis for proposing changes to a regulation that has been in place since 1975. Then a panel of four witnesses testified on the negative effects the changes are anticipated to have on the financial services industry (a fifth witness on the panel testified in support of the changes).

Assistant Secretary Borzi defended the need for the proposed regulation. She said that the world has changed in the past 35 years, and that a new standard is needed to protect 401(k) participants and individual retirement account (IRA) beneficiaries from receiving conflicted investment advice. She acknowledged the issues that have been raised on the proposal, saying that some (such as clarifying the distinction between investment “advice” and “education”) would be addressed through revisions to the regulation, and others would be addressed through clarifications of existing prohibited-transaction exemptions or grants of new exemptions.

The industry witnesses responded that there is no compelling need for such extensive changes to a long-standing rule and described a number of disruptions that would occur if the regulation were to go forward as proposed. Among other things, they indicated that the result could be to cut off plan sponsors (particularly small businesses) and plan participants, as well as IRA owners, from access to the assistance they need in creating and maintaining plans and IRAs, and in deciding how best to allocate plan and IRA assets. This could occur because of concerns that such assistance would be subject to ERISA and Internal Revenue Code prohibited-transaction rules, which could limit the compensation paid for the assistance. One witness discussed the potential impact on the appraisal industry in the event that appraisers were to be treated as fiduciaries in valuing plan assets.

Because of the significant changes they said are needed to the proposal, the industry witnesses and many subcommittee members (Republicans and some Democrats) said that DOL should repropose the regulation rather than proceeding directly to a final regulation. This would provide DOL and the public the opportunity to ensure that the result fully and effectively addresses the issues raised.

Despite the many concerns with the proposal, the DOL staff seems committed to moving forward with a final regulation by the end of 2011 or early 2012. It remains to be seen whether Congress will take any action on the concerns expressed at the hearing.