fi360 Blog

Practice 1.3: No self-dealing

The fundamental duty of an investment fiduciary is to manage investment decisions for the exclusive benefit of another party. In the second Practice for stewards and advisors, the objective is to identify and document all of the fiduciaries associated with a portfolio. The third Practice is making sure that those fiduciaries are clear of conflicts of interest.

In a December '09 Report to Plan Sponsors, Fred Reish and Joe Faucher wrote that conflicts fall into two broad categories, those where the plan sponsor has a conflict and those involving service providers. An example of the former would be where the fiduciary gains a personal advantage via their position to direct assets, such as by self-dealing. An example of the latter would be if the advisor is in a position to receive greater compensation by choosing one investment over another. While some conflicts are strictly prohibited, many others are not. Nonetheless, conflicts have the potential to negatively impact a portfolio and its investors/beneficiaries. For that reason and to help limit fiduciary liability, every fiduciary should have a stated conflicts policy that focuses on the disclosure and management of all material conflicts.

Let's take a look at Practice 1.3 and the associated criteria:

In forming a policy, you will want to identify the various types of conflicts that may exist and should be disclosed. An FDIC examination manual identifies the following areas of potential conflict: receipt of fees beyond the trustee's fees, securities related activities, own-bank deposits, administration of discretionary purchase, sale or retention, investment in securities underwritten by own-bank or affiliates, relationships with outside service providers, inter-account or multi-account transactions, contravention of the governing agreement, and privacy. These are obviously bank-specific, but it serves as a starting point for the type of conflicts that can be specified in your own policy.

The next part of the policy would be to specify what to do about them. Again, you would first want be aware of what the legal requirements are for the type of portfolio you are working with. If certain transactions are strictly forbidden, that needs to be noted. If other conflicts are allowable if properly managed, that needs specified as well. A memorandum written for the Council on Foundations advises that, in the case of a Foundation Board, some ways to manage a conflict are to require disclosure in plan documents of all conflicts and make that disclosure available to other decision makers and beneficiaries and to forbid the conflicted party from participating in discussions or votes that relate to the conflict.

Finally, to ensure that all parties are aware of this and other policies, you should include it in yearly reviews and require every fiduciary to acknowledge the policy; their acknowledgement should require them to disclose any conflicts.

Of course, the best thing you can do regarding conflicts is to avoid them altogether. If a fiduciary even thinks he or she may have a conflict of interest, then they probably do.  An excellent question to ask before deciding or voting on an investment issue is:  “Who receives the greatest benefit from this decision?”  If the answer is any party other than the client, participant, and/or beneficiary, the likelihood is the fiduciary is about to breach his or her duties.

One of the surest ways to avoid conflicts is to separate the four major roles--money manager, broker, custodian and advisor--to provide for a system of checks and balances. In examining cases involving breach of fiduciary responsibility, you most often find that one party was responsible for multiple functions. In the case of Madoff, he was essentially wearing all hats.

For additional resources on policies and procedures regarding conflicts of interest and self-dealing, consult the following resources:

• Complete text of Practice 1.3 from the Prudent Practices for Investment Stewards handbook
• Legal substantiation of Practice 1.3
• Reish article: The Plan Sponsor’s Ability to Evaluate Conflicts of Interest
• Reish whitepaper: The Fiduciary Duty to Avoid Conflicts of Interest in Selecting Plan Service Providers
• SEC/DOL joint Tips for Fiduciaries: Selecting and Monitoring Pension Consultants
• Office of the Comptroller of the Currency: Conflicts of Interest

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The Spotlight on Practices series highlights one of the Prudent Practices for Investment Fiduciaries in order each month. To learn more about the Practices, click "Spotlight on Practices" link in the categories list or visit the Practices page on fi360.com.  If you have any questions or comments, leave them in the comments section below each post, or email us at blog@fi360.com.

Slow progress, but more support for a fiduciary standard

With political momentum shifting on the heels of Scott Brown's victory in Massachusetts last week, the future of financial regulatory reform and how quickly it can get done is becoming a bigger question mark with each passing day. While many hoped the Senate Banking Committee would be ready to tackle financial reform issues by late January or early February, recent reports indicate that it likely will be spring by the time the the committee has a bill ready. Committee Chair Christopher Dodd is still working through several issues with Committee Ranking Member Richard Shelby in hopes of gaining the bipartisan support that will be needed for financial reform to pass in the Senate.  However, reports from the Hill are that no final decisions have been reached on key provisions in a proposed Senate bill.  

Despite the slow progress in the Senate and increased lobbying by the insurance industry, remarks made by Goldman Sachs CEO Lloyd Blankfein and Bank of America's Sallie Krawcheck last week make it clear that support for applying a fiduciary standard to all professionals who provide investment advice is widespread.  What remains unclear, however, is whether these industry leaders support extending the existing fiduciary standard recognized by groups such as the IAA, Financial Planning Coalition, and the Committee for the Fiduciary Standard, or whether their views fall in line with SIFMA's call for a new federal fiduciary standard.  

And even if a new fiduciary standard is what is being referred to, it's still uncertain what SIFMA and its members think such a standard should look like or why such a new standard is needed.  Throughout the fiduciary debate, SIFMA and others have argued that fiduciary law lacks clarity due to the presence of state common law and a lack of understanding of when a fiduciary duty applies.  However, such arguments ignore the fact that requirements under the securities laws, including the Investment Advisers Act of 1940, are federal standards.  In fact, an outline on the SEC website describing regulation of investment advisers by the SEC explains that the fiduciary standard applied to investment advisers at the federal level does not rely on state law and is therefore a uniform standard (you'll find the explanation of fiduciary duty on pages 13-16 and the reference to the federal standard in footnote 80).  Even the Supreme Court has stated more than once that the anti-fraud provisions of the Investment Advisers Act establish "federal fiduciary standards" to govern the conduct of investment advisers.

Bottomline, the federal fiduciary standard is established and has been applied by federal courts and the SEC for years.  And though political momentum has shifted in Washington, it is still clear that the individuals in the investing public  are concerned about the economy, their financial futures, and their ability to rely on financial professionals.  It may take more time and compromise to make financial regulatory reform a reality, but both political and public pressure is mounting to make it happen and to ensure investor protection is a key part of reform.   

Fiduciary Links: Bogle's plan for restoring the faith of investors

When John Bogle speaks, we all should listen. In an opinion column last week in the Wall Street Journal, Bogle said, "the faith of investors has been betrayed." Betrayed by an industry that has failed to act as good stewards to the investors they serve and has placed short term returns over long-term value. To restore this faith, he calls for the legislation of fiduciary principles and policies to reward longer term investing.

Mr. Bogle's logic is so typically well reasoned and principled that it is hard to believe anyone could argue with him. But another spin around the headlines continues to show just how much of a role lobbying, politics and posturing is playing in financial regulatory reform.

Now on to the rest of the best links from the last week.

In the news/commentary:

• Sallie Krawcheck also has some suggestions for restoring investor faith [InvestmentNews]
• Everyone could use investment advice, the trick is figuring out how much you need, and how much it costs. [NYT]
• Conflict-free advice is among the changes needed to improve 401(k) plans, according to TIAA-CREF CEO Roger Ferguson [USA Today]
• Fee disclosure, target-date reform, fiduciary standard among reform to expect regardless of if Congress can enact large-scale reform [MarketWatch]
• Possible enactment of a more stringent fiduciary standard should be unaffected by Senate shakeup [WSJ]
• More fiduciary protections related to target date funds needed to fix DC retirement [Financial Times]
• A group of insurance organizations is pushing for a study into broker regulation, a move which some believe is designed to put off passage of reform [InvestmentNews]
• Supreme Court decides not to review Deere fee case [InvestmentNews]
• A call for fee transparency from Silicon Valley [Mercury News]
• Canadian media looks into the fiduciary debate occurring in the U.S. and Australia [The Star]

From the organizations/associations/government/academia:

• SEC Chairman Mary Schapiro outlines in a speech legal and regulatory goals for addressing a financial landscape that has changed drastically in the last 20 years [SEC]
• FINRA arbitration cases soared in 2009, led by breach of fiduciary duty claims [FINRA]
• The Western Michigan Fiduciary Forum, founded by AIF designees and friends of fi360, has proven successful and gained some attention for itself. [The 401(k) Fiduciary Advice Blog]
• BrightScope launches a 401(k) fee evaluation tool for plan participants [BrightScope Blog]

From the blogs:

• Goldman Sachs's Blankfein's support of a fiduciary standard is big news [WealthManagerWeb]
• A shift in thinking is occurring where not considering SRI factors, such as climate change, would be a potential fiduciary breach [Volans]
• FiduciaryNews last week talked to BrightScope about their news fee report and looked at the fall of target date funds as one of the top stories in '09 [FiduciaryNews]

Have a link we missed? Leave them in the comments section or email us at blog@fi360.com. For more of the best links during the week, make sure you follow us on Twitter.

12b-1 fees create conflict for fiduciaries

The House-passed financial regulatory reform bill (The Wall Street Reform and Consumer Protection Act) calls upon the SEC to “…examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.”  While the Senate is still deliberating its version of the bill and enactment of a new law is not yet imminent, it is worth noting that the SEC already has considerable rule-making authority in this regard.  For example, SEC Chairman Mary Schapiro recently announced that the Commission will be undertaking a review of 12b-1 fees to determine if they are appropriate.

In my Fiduciary Corner column that appeared in Investment News this week, I expressed the view that 12b-1 fee plans should be eliminated in favor of more straight forward disclosure of fees in a few key categories. These fees are confusing to investors, they create conflicts for advisors and fund company directors, and they complicate the comparison and control of costs across funds. In short, they are “contrary to the public interest and the protection of investors.”

The most compelling reason to keep 12b-1 fees is that they are pervasive and change isn’t easy. Roughly 70% of mutual funds have adopted 12b-1 fee plans and investors pay these funds about estimated $13 billion annually from 12b-1 fees.

Elimination of 12b-1 fee plans won’t automatically save investors billions in costs and wipe-out a comparable amount of annual fund company revenue. The point is, funds should show their costs in a few cost categories (such as investment management, administration, and sales compensation) so investors, and fiduciaries serving investors, can more clearly understand what they are paying for and include meaningful cost analysis in their due diligence. This transparency would almost certainly lead to lower costs over time as a result of competitive pressure.

Not all of the money currently collected through 12b-1 fees stays with the fund companies. In fact, the primary use of the fees is to pay trail commissions to brokers and advisors who distribute the funds. Here again, I am not arguing that compensation for distributors should end; I am arguing that, to be consistent with fiduciary duties and serve the interests of investors, this compensation must become more transparent. Moreover, if compensation is pulled out of the internal expenses of the fund, advisors can avoid having to go through a compensation-leveling exercise to manage the conflict of using funds that pay different trail commissions.

To me, elimination of 12b-1 fees is obviously a good thing in principle (especially in fiduciary principle) but I also recognize that implementing this change will be disruptive to current fund company practices. Post your thoughts on the merits and methods of eliminating 12b-1 fee plans.

The fiduciary role of investment managers

Thus far in our look at the different types of investment fiduciaries, we have been primarily concerned with those fiduciaries who manage investment decisions for investors. Now we will take a look at those who manage money or make investment decisions, the investment managers. And, yes, they too owe a duty to the end investor.

We define investment managers as "those responsible for buying and selling individual securities for an investment portfolio." This would include money managers who are responsible for separate accounts, mutual and exchange-traded funds, commingled trusts and unit trusts.  Their defining characteristic is they are prudent experts who have investment discretion of assets. And, of course, anyone who is able to act with discretion is clearly a fiduciary.

It is not technically required to use managers for making individual stock and bond selections to implement the investment strategy. However, it would be foolish not to. The stewards and advisors who manage the investment process are held to a "prudent expert" standard if under ERISA or a "prudent investor" standard if under UPIA or UPMIFA, basically meaning they would be expected to implement the strategy with the same competence as a professional money manager. If they are unable to meet that standard, then they become the managers of the managers, if you will, and are instead charged with the prudent selection and monitoring of professionals who can.

The fiduciary practices for investment managers are mostly qualitative and may not be as apparent nor as standardized as is the case with other fiduciaries. So instead of trying to make a qualitative-based selection of a manger, it is better to look at quantitative due diligence screens that reflect adherence to fiduciary standards. The following are the quantitative fields we suggest be used in evaluating investment managers:

1. Regulatory oversight
2. Minimum track record
3. Stability of the organization
4. Assets in the product
5. Holdings consistent with style
6. Correlation to style or peer group
7. Expense ratios/fees
8. Performance relative to assumed risk
9. Performance relative to a peer group

For more information on basic fiduciary responsibilities for investment advisors, check out the following resources:

• CEFEX/fi360's Self-Assessment of Fiduciary Excellence for Investment Managers: http://safe.actifi.com
• CEFEX/fi360's Prudent Practices for Investment Managers handbook: http://www.fi360.com/main/practices_im.jsp
• The CFA Institute's Asset Manager Code of Professional Conduct: http://www.cfainstitute.org/centre/codes/asset/
• The European Fund and Asset Management Association's Code of Conduct for the European Investment Industry: http://www.efama.org/index.php?option=com_docman&task=doc_details&gid=150&Itemid=35
• The Risk Standards Working Group's Risk Standards for Institutional Investment Managers and Institutional Investors: http://cmra.com/risk_standards_working_group.php
• United Nations' Principles for Responsible Investment: http://www.unpri.org/

Fiduciary Links: In support of the Senate reform bill

Last Monday, the Financial Planning Coalition, Consumer Federation of America, North American Securities Administrators Association, Fund Democracy, and Investment Adviser Association wrote a letter in support of the Senate Banking Committee's regulatory reform bill, which would hold anyone who gives advice to a fiduciary standard by closing loopholes to the Investment Advisers Act.

Along with their role in the letter of support, the Consumer Federation of America also released a must read myth-fact sheet on the reform bill, addressing misconceptions that a fiduciary standard would end the brokerage business model, would limit product availability, and more. It is a great look at how the bill is designed to ensure advice is given under a fiduciary standard.

Also last week, both the CEO of Goldman Sachs, Lloyd Blankfein, and SEC Chairman Mary Schapiro threw their support behind the fiduciary standard in testimony to the Financial Crisis Inquiry Committe, with Blankfein saying, "The advice-giving functions of brokers who work with investors have become similar to that of investment advisors. But, investors may not understand that the person they are getting advice from may be regulated under different rules and regulations"

Now on to the rest of the best links from the last week.

In the news/commentary:

• 401(k) automatic enrollment has had some unintended negative consequences, and it is being covered in consumer media [USA Today]
• In another story on negative consequences to otherwise good news, as 401(k) account balances recover, the less vocal the call for reform [LA Times]
• Shelly Banjo highlights firms that are getting ahead of the curb in preparing for a fiduciary future [WSJ]
• Mutual fund industry watching fee lawsuits with great interest [Financial Times]
• Bob Clark has nice things to say about fi360 and The Committee for the Fiduciary Standard [Investment Advisor]

From the organizations/associations/government/academia:

• Our friend Tom Kmak of Fiduciary Benchmarks says Americans are more prepared for retirement than you'd think [Portfolio]

From the blogs:

• A good fiduciary blog debates a name switch [The Investment Fiduciary]

Have a link we missed? Leave them in the comments section or email us at blog@fi360.com. For more of the best links during the week, make sure you follow us on Twitter.

Concerns about fiduciary responsibility are not U.S. specific

It was not long after we published the Practices in our first fiduciary handbook in 2003 that we were approached by a New Zealand financial services firm.  They had been referred by a common business associate and wanted to learn more about these defined fiduciary practices; it was something they felt was missing in New Zealand.  It was not our intention to expand beyond the U.S. so soon, but since that initial inquiry we have published fiduciary handbooks in New Zealand, Canada, and Australia and there is interest in doing so in Singapore, South Africa and the United Kingdom.  We have found that the Practices are substantially the same in these developed countries: managing money is managing money.

We have written numerous posts over the past several months highlighting what has been happening with financial services reform in general, both legislative and regulatory, and efforts to extend the fiduciary standard in particular.  In light of what is happening here, we decided to take a closer look at what is happening elsewhere and see if it might provide some useful insights.

New Zealand and Australia are grappling with the same issues and coming to the same conclusions; more must be done to protect those whom the fiduciaries serve: plan participants, beneficiaries, and investors.  In November 2009 the Parliamentary Joint Committee on Corporations and Financial Services in Australia completed what is commonly referred to as the Ripoll Report (www.aph.gov.au/senate/committee/corporations_ctte/fps/report/index.htm), which looked at issues associated with the collapse of Australian financial services firms including Storm Financial and Opes Prime.  The report made eleven recommendations; Recommendation 1 stated;

"The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL (Australian Financial Services License), requiring them to place their clients' interests ahead of their own."

Our adjunct faculty member in New Zealand recently heard from a colleague to whom he has preached the fiduciary message for several years now who said:

"I have noted that the Ripoll Report into financial advice in Australia is talking about enshrining advisers fiduciary responsibilities in legislation and that the code committee here (New Zealand) is looking at advisers fiduciary responsibilities.  It seems the time may well be coming where accredited fiduciaries would be well regarded."

New Zealand often looks to the U.S. to get a sense of where the financial services industry is headed.  With respect to fiduciary responsibility, we're please to see it appears Australia, New Zealand and the U.S. are heading in the same direction.

Fiduciary Links: Dodd's legacy to be a fiduciary standard?

The biggest story from last week in regards to regulatory reform is the news that Senate Banking Committee Chairman Christopher Dodd (D-Conn.) is retiring at the end of his current term. As one of the architects of the Senate's financial regulatory reform bill, this has raised a number of questions about the affect his lame duck status will have on the legislation, which still has a ways to go before becoming law. Without reelection to worry about, he is certainly more free to act without regard to his political future. The question now is, which direction does that free him to move towards?

One sentiment says that he will seek to reward longtime supporters of his from the hedge fund and insurance company industries by influencing legislation to be more friendly to their interests. Another says that his influence is diminished by his decision and that makes consumer-friendly reform less likely. However, the most optimistic theory is that, freed from outside influence, Dodd will be able to concentrate even harder on pushing a bill that is for the best interests of investors, including a stricter fiduciary standard. We can't think of a better parting gift he could leave as his lasting legacy.

Now on to the rest of the best links from the last week.

In the news/commentary:

• Fred Reish looks at the fiduciary's duty to remove investments [PlanSponsor]
• InvestmentNews weighs the winners and losers of Dodd's retirement [InvestmentNews]
• Proposed legislation would make QDIA manager's act as fiduciaries [InvestmentNews]
• Kristina appears on a podcast addressing fiduciary duties for brokers under regulatory reform [Employee Benefit Adviser]
• Daily Finance has two stories of similar cases of John Hancock and Merrill Lynch arguing in court they are not fiduciaries despite marketing that suggests otherwise [Daily Finance]
• Some firms already preparing for a fiduciary future [Wall Street Journal]
• If InvestmentNews' 2010 Outlook comes to fruition, this will be a very good year for fiduciary standards. Make sure to check out the slideshow. [InvestmentNews]
• An article from two of our AIFA designees helps prepare plan sponsors for DoL examinations [PlanSponsor]

From the organizations/associations/government/academia:

• A new poll of nonprofit investment committees places liquidity issues and defining fiduciary roles among highest priorities for 2010 [SEI Institutions]

From the blogs:

• Do the events of the '00s mean an end to passive investing? [Fiduciary News]

Have a link we missed? Leave them in the comments section or email us at blog@fi360.com. For more of the best links during the week, make sure you follow us on Twitter.

401(k) plan fees: Three fundamental questions every advisor should be prepared to answer

If you advise 401(k) plans, you’ve probably heard the following fee questions from the plan sponsor or investment committee at some point in time.  If you consider the proposed 408(b)(2) regulations and the renewed focus by the SEC on the 12b-1 fee, the spotlight on fees is only going to get brighter in 2010. 

Here are three typical 401(k) plan fee questions you may encounter and some thoughts on how you might want to answer them:

Q. Why should I keep my plan with you when another firm is offering a “no-cost” solution?

Let’s start by examining two basic ways to pay for services in a 401(k) plan: 

• The plan can pay via check/invoice on a periodic basis based on a set price stated in the plan agreement. The price can be a flat dollar amount, a per-participant amount or a percentage of net assets (typically quoted in basis points).
• The plan can pay via the investments the participants hold, which is called revenue sharing. When using mutual funds, the total expense ratio paid to the mutual fund company can be used to compensate not only the fund manager, but also the investment advisor/broker/consultant and the service provider/TPA. Two components of the total expense ratio–the 12b-1 fee and the sub transfer agency (sub-TA) fee–are typically passed from the mutual fund to a third party.

It’s easy to see that when the services are paid via revenue sharing, an unknowing plan sponsor could consider the plan setup as “no-cost.”  Obviously, that’s not the case.  Have the plan sponsor ask the other firm for its revenue sharing arrangements with the fund companies the plan is using.

(Note: There is also an alternative method that many plans are moving towards, which we will address in Question #3.)

Q. How can I tell if our plan’s funds are paying any revenue sharing?

As mentioned above, a mutual fund can pay revenue sharing via the 12b-1 fee and the sub-TA fee. First, let’s look at the 12b-1 fee.

The maximum value for the 12b-1 fee is stated in the fund’s prospectus and can differ by fund share class.  Most financial reports, including the new fi360 Fee & Expense Report, also include the maximum 12b-1 fee as a standard data point.  What most plan sponsors don’t realize is that there can be two components of this fee:

• Sales fee: The most common use of the 12b-1 fee. It is used to compensate the selling agent, such as a financial advisor or broker. You could think of it as similar to a front or deferred load. Loads are typically much larger, but they are only assessed once. The 12b-1 fee is assessed annually.
• Service fee: Helps to reduce other costs of the plan, such as recordkeeping, custody, participant accounting, etc.

The two components may be listed in the prospectus, but you should specifically ask your TPA (or equivalent) if they are receiving any of the 12b-1 fee and, if so, exactly what percentage they receive.

Secondly, the sub-TA fee is used to compensate a third party such as a TPA for participant accounting.  This third party executes, clears and settles buy or sell orders for mutual fund shares, and maintains shareholder records of ownership.  Typically, sub-TA fees are not disclosed in the prospectus and can vary depending on the client's circumstances. Therefore, you should specifically ask your TPA (or equivalent) if they are receiving a sub-TA fee and, if so, exactly what percentage they receive.

Q. What is a “level-compensation” or “revenue neutral” fee structure?

When paying the plan fees through revenue sharing, plan fees can vary and increase drastically over time as the assets grow.  The increase in plan assets doesn’t necessarily correspond one-to-one with the required level of service needed to support the plan.  Hence, fees should not always rise proportionately with assets.  Revenue sharing can also be problematic in that it may incentivize an advisor providing advice to participants to recommend options where they receive greater compensation.

To help with these issues and to encourage complete fee transparency, many plans are beginning to use a combination of flat/contract stated fees and revenue sharing.  Here’s how it works:

1. The plan’s investments pay revenue sharing to the third parties (advisor, broker, TPA, etc.) as described above.
2. The third parties aggregate this money and rebate it back to the plan.
3. The rebated money is then used to pay the plan expenses. If the amount of rebated money is less than the total stated fees in the plan agreement, the plan will cut a check to the respective parties for the difference. Otherwise, the plan will maintain a positive balance in what is typically referred to as an “ERISA budget account.” This money can be used in the future to pay plan expenses, or, if it grows too large, it can be given back to the participants. If it does grow too large, the plan agreement should likely be revised to utilize lower cost investment options with less revenue sharing.

One item to note with this structure is when the investments in the plan lineup don’t all have the same revenue sharing levels.  In this situation, some participants could be paying more (or less) of the plan’s fees if they choose funds with higher (or lower) revenue sharing.

I hope these Q&As provide some guidance and insight into the ever-complicated world of 401(k) plan fees and expenses.  What do plan sponsors ask you?  Please comment.

The year of reform is upon us

December was a big month for agenda setting in Washington as legislators and regulators looked ahead to making reform a reality in 2010. On the legislative front, Senators Christopher Dodd and Richard Shelby of the Senate Banking Committee issued a joint statement indicating progress was being reached on a financial regulatory reform package and that they hoped to resolve all issues prior to reconvening this month. In addition, Senator Herb Kohl, Chairman of the Senate Special Committee on Aging, announced plans to introduce legislation requiring target date fund managers to assume fiduciary responsibilities. 

Meanwhile, the House Ways & Means Committee was granted an extension until later this month to consider the 401(k) Fair Disclosure and Pension Security Act of 2009 (HR 2989), which would cover both investment advice and 401(k) fee disclosure. Consideration of the bill has been delayed to date as a result of reports that the investment advice provisions may be pulled from the bill.  Moreover, Congress appears content for now to defer these issues to the DOL, which posted its semi-annual agenda in early December. Under the agenda, DOL is expected to release final 408(b)(2) disclosure rules in May, and fee and expense disclosure rules for all 401(k)-type plans in September. DOL also will issue newly proposed investment advice rules in the next few months, and plans to issue a proposal in June to expand the definition of "fiduciary" under ERISA.

The SEC also appears ready to pursue aggessive reforms in 2010. In addition to preparing for initiatives adopted by Congress, including hedge fund manager registration, improved oversight of OTC derivatives, and extending the fiduciary standard to brokers providing advice, SEC Chairman Mary Schapiro added to her list of regulatory goals a review of 12b-1 fees and target date funds.  

Of course, questions remain on how quickly legislators and regulators will act in 2010. With much of the leg work completed in 2009, it appears that Congress may be poised to finalize financial regulatory reform legislation by early Spring.  The House has passed its bill, and the Senate seems closer to achieving the bipartisan support that will be necessary for its bill to pass. The SEC has been viewed by some as slow to respond to needed to reforms, but legislation improving its funding could allow it to act faster.   Moreover, the agency showed its ability to act by adopting new investor advisor custody rules and enhancements to proxy disclosures at the end of 2009.  DOL also reportedly has been hard at work behind the scenes drafting rules in order to stay on target with its agenda.  With all of this positive momentum, reforms are likely to begin taking shape by mid-year and many significant rule changes could be implemented by year end.