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Labor Department Announces Do-Over on Fiduciary Definition Proposal

A collective sigh of relief was heard Monday from the financial services sector when the Department of Labor (DOL) announced that it was withdrawing its proposed new definition of a fiduciary under the Employee Retirement Security Income Act (ERISA). On Oct. 22, 2010, DOL proposed the new definition of “fiduciary” which met with significant and vocal opposition. DOL countered that the current definition of “fiduciary” under ERISA had not been updated since its enactment in 1975, and no longer provided necessary protections due to changes in the financial services industry over the last 35 years. The opposition to the proposal was in large part due to the more expansive coverage of the proposed definition. 

The proposal broadened the types of advice that make a person an investment advice fiduciary, as well as changed the standard for determining when advice is fiduciary in nature. 

Critics (who appeared to greatly outnumber the supporters) insisted that the proposed definition would lead to increased cost and less quality service.  Despite the cacophony of dissent, the DOL stood their ground and refused to vacillate their position that the new rule was needed and written correctly. 

Stalwart advocate of the proposal, Phyllis C. Borzi, assistant secretary of DOL and head of the Employee Benefits Security Administration (EBSA), headed the continued push towards finalizing the proposal which was expected to be released sometime at the end of this year.  Until Monday, when seemingly out of the blue, Borzi, announced that DOL was withdrawing the proposed definition and would be re-drafting the proposal. We will never know for certain what prompted the change in DOL’s position. Borzi indicated that EBSA now has information which was not available when the first proposal was issued, and that EBSA will look carefully at the costs and benefits when redrafting the proposal. According to EBSA, the re-proposed regulation will be issued sometime in early 2012, but for at least a little while opponents of the proposal have been given a reprieve, one that many hope will be permanent.

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