DOL Can't Put Fiduciary Duty on IRAs, Ex-Labor Official Testifies

"This was not an oversight or sloppy drafting — it was an intentional design by Congress," Campbell continued.

"Or as the 5th Circuit wrote in vacating DOL's 2016 Rule, 'Title II did not authorize DOL to supervise financial service providers to IRAs in parallel with its power over ERISA [Title I] plans,'" Campbell told the lawmakers.

Regulatory 'Two-Step'

Labor's current plan, as did the 2016 rule, uses "a regulatory two-step process to achieve indirectly the regulation of IRAs that Congress denied DOL the authority to impose directly," Campbell argued.

The first step "is to expand the definition of fiduciary so widely as to include nearly all recommendations by financial professionals to any plan, IRA, or in connection with any related rollover, transfer or distribution," Campbell maintained.

"This expanded definition makes the financial professional's normal compensation a prohibited form of self-dealing, because the fiduciary advice is causing the professional to get a new or different fee or commission," Campbell testified.

The second step "is to put out an exemption to the newly created prohibited transaction that allows the financial professional to give the recommendation and to receive a fee, but only after complying with many new conditions applicable to the transaction," Campbell said.

In the fiduciary proposals, "DOL requires the financial professional to comply with a best interest standard of care that is nearly identical to the Title I fiduciary standard of care as a condition of the exemptions," Campbell said.

Another ex-EBSA Chief Weighs In

Phyllis Borzi, another former head of EBSA, rebutted Campbell's assertions in emailed comments to ThinkAdvisor on Wednesday.

As for IRAs, "under the Carter Administration's Reorganization Plan #4, later codified by Congress into law, interpretive juridiction over the definition of fiduciary and PTEs in connection with IRAs was clearly given to DOL."

"That was one of the inconvenient facts" that the U.S. Court of Appeals for the 5th Circuit "chose to minimize or ignore" when it invalidated Labor's 2016 fiduciary rule, Borzi said.

Micah Hauptman, director of investor protection for the Consumer Federation of America, agreed in another email to ThinkAdvisor that DOL "does have authority to define fiduciary for purposes of employer-sponsored plans and IRAs," citing the Reorganization Plan No. 4 of 1978, "which Congress subsequently ratified in 1984."

At the time, Hauptman said, "the DOL was granted authority to interpret the fiduciary definition and issue administrative exemptions from the prohibited transaction provisions in Code section 4975."

As to the jurisdictional argument, "if you examine the legislative history of ERISA, you will find that at a point one of the Houses of Congress (I believe it was the Senate …) considered and then rejected assigning the fiduciary and investment advice provisions to the SEC," Borzi said.

"But because they were dealing with tax-favored assets, Congress decided that an agency focused on retirement plans was more appropriate to protect participants than an agency with broad authority over only the securities market. Clearly Congress made a deliberate decision to choose DOL as the primary regulator for assets in pension plans."

Pictured: Brad Campbell, attorney with Faegre Drinker and former EBSA head.