Borzi: DOL Should Not Defer to SEC's Reg BI

Has it? "A federal standard has to protect investors, and what's currently being considered [in Reg BI] I don't think is going to move the ball forward. In fact, I think it might lull some consumers into thinking that the problem has been solved because under Reg BI, people can represent that they're acting in somebody's best interest without being legally obligated to do so."

How so? "There is no definition of best interest in the reg." A simple fix to Reg BI is to "take a lot of rhetoric that [the SEC] put in press statements and releases and actually use it as regulatory language … because if it's not in the reg, it's not enforceable."

Labor has already signaled that it's considering fiduciary options in the aftermath of its rule being vacated. How should Labor respond after Reg BI gets on the books?

"No doubt the industry would want the department to bless whatever conflicts of interest the SEC allows," Borzi said, "but in order for the department to issue a valid prohibited transaction exemption, ERISA requires the [Labor] secretary to make certain findings. The most significant one is that granting the exemption is protective of participants."

If the SEC finalizes its proposals "without significant change, it is nearly impossible to see how the department could legally make that finding."

For instance: If the SEC allows brokers "to claim they are acting in a client's best interest without eliminating the safe harbor in Reg BI and creating in the reg text itself a legally enforceable best-interest standard that applies to brokers who hold themselves out as advisors, allowing any recommendations they make to be exempt from ERISA's prohibited transaction rules cannot possibly be protective of participants or individual clients."

Her hope: that she'll be "pleasantly surprised and the SEC will make substantial revisions to its proposals which will transform them into a standard that better protects investors rather than the industry."

Parting thought: The SEC's proposed Customer Relationship Summary form creates "confusion," Borzi asserts. "There really isn't consumer confusion — people know what they want. They want people whom they rely on to give them advice in a way that puts the investors' interest above any financial interest the advisor might have. People are clear about that." The problem "is conflicts of interest that so permeate the business models."

— Related on ThinkAdvisor:

• Nevada Fiduciary Plan Has DOL Rule Similarities
• More IRS Guidance Needed on Unclaimed 401(k) Savings: GAO
• DOL Fiduciary Rule Helped Reduce Conflicts in Fund Sales: Morningstar