Welcoming Remarks of Assistant Secretary Phyllis C. Borzi at the Conflict of Interest Public Hearing

August 10, 2015

• Thank you. I just want to say a few words this morning to open this four-day public hearing.
• First, I want to thank you for coming and participating in this crucial dialogue about our proposal to update a 40-year old regulation on the definition of who is a fiduciary.
• That may sound a bit technical, but this is far from a dry exercise – the fiduciary definition is central to how the law protects retirement investors. When advisers are fiduciaries, they must give advice that is in their customers' best interest and protect investors from harmful conflicts of interest. In other words, they have to put their customers first.
• Unfortunately, our current rules are outdated and fail to ensure that all financial advisers act in the best interest of retirement investors. The 1975 rule makes it too easy for advisers, brokers, and consultants to evade fiduciary status – and to evade their central fiduciary obligation to put the retirement investor first. Unless the adviser meets each and every part of a rigid, outdated five-part test with respect to each instance of advice, the adviser is not a fiduciary with respect to that advice, and need not act in the customer's best interest.
• Whatever that rule's merits when first promulgated 40 years ago, the status quo does not adequately protect today's retirement investors and undermines the protective purposes of the broad fiduciary provisions in ERISA and the Tax Code. The retirement landscape has changed profoundly in the intervening years.
  • When the current rule was issued in 1975, the majority of workers didn't need to worry about how to invest retirement savings, 401(k) plans did not exist, and IRAs had just been created. Retirement investors looked to defined benefit plans and professional money managers to ensure the security of specific benefit promises.
  • But today, assets in 401(k) plans and IRAs exceed $14 trillion. Rather than receive guaranteed defined benefits, individual plan participants and IRA investors now have substantial responsibility to manage their own money. They are called upon to make important investment decisions themselves and to shoulder the risk of running out of retirement money just when they need it most.
  • As a result, these investors often depend on professional advisers to help them navigate their way through the financial complexities of the retirement marketplace, so that they can reach a secure retirement.
  • We strongly believe that individuals need assistance in making these decisions because there is no GPS that an individual can rely on to help them reach their retirement goals.
  • But unfortunately under the current ERISA rules, individuals have a hard time figuring out who they can trust to give them this vital information and assistance. It is not illegal for these advisers to steer the retirement investor to particular products based on the financial interests of the adviser and firm, rather than based on the investor's best interest.
• This is not a case of bad people doing bad things. It's about good people operating within a structurally flawed system. And it's that we are trying to change.
• Our regulatory impact analysis concluded that IRA investors can expect to lose more than $210 billion over the next ten years as a result of the underperformance associated with conflicts of interest. Our regulatory proposal aims to address this problem by re-examining the types of advisory relationships that should be held to a best interest standard.
• So the Department's conflict of interest proposal has a very straightforward goal: to align the best interests of the customer with those of the adviser and the firm. Simply put, we want to create an enforceable best interest standard that requires advisers to put their customer's best interest first. That's our North Star.
• But, undoubtedly, there are many ideas on how best to implement a best interest standard or mitigate the harmful impact of conflicts of interest.
• We have already received many suggestions on ways we could improve the rule and associated exemptions, reduce the possibility of unintended consequences, and enhance the workability of the exemptions. For example, commenters have offered suggestions on ways to
  • reduce the implementation challenges associated with the contract requirement in the best interest contract and principal transactions exemptions;
  • ease the transitional challenges by adjusting the timelines for compliance and reconsidering the scope of grandfathered transactions;
  • clarify the availability of exemptions for services, rollovers, and other transactions affected by perceived ambiguities or omissions in the text of our proposal;
  • adjust or expand the categories of assets covered by the exemptions;
  • simplify the disclosure and data retention requirements;
  • provide additional guidance on acceptable policies and procedures to mitigate conflicts of interest; and
  • reiterate that the rule does not extend to advice on the purchase of such non-investment contracts as health and disability insurance policies, as well as life insurance policies that do not have an investment component. We believe this is clear in the proposal but we can remove all possible doubt.
• I am heartened by the thorough input received through the comment period and through dozens and dozens of meetings. We look forward to continuing this dialogue by hearing your views on the proposal and by adding your testimony to the public record. With your help, we will publish a final rule that is both protective and reasonable.
• So, once again, thanks so much for your participation and your help.
• And now, I'll turn the proceedings over to Tim Hauser, Deputy Assistant Secretary for Program Operations and my dedicated and hard-working colleagues, and we'll start with the first panel. Thank you all for being here today and participating in this important step in the process.