Phyllis Borzi
Phyllis Borzi

Borzi on Scottrade: “These People Were the Poster Child for Why We Did the Rule”

“There is nothing those people were doing that anybody could characterize as good faith compliance with the parts of the rule that went into effect in June," said Phyllis Borzi, former assistant secretary of labor.

When Phyllis Borzi was appointed by President Obama in 2009 to serve as assistant secretary for the Employee Benefits Security Administration of the Department of Labor, she made it a top priority to tightly define the fiduciary standard for investors in retirement accounts under ERISA rules. Her doggedness on the issue put her at odds with the brokerage industry, but was needed to eventually bring the rule to fruition, even after an initial setback early in her tenure when the department was prompted to withdraw a first attempt at the ruling after industry protests.

At that time, the brokerage industry “was so convinced that they had [killed the rule] they were popping champagne corks,” Borzi said. “But, anybody who knew me knew that that wasn’t the end of the story.”

What has she been up to since President Trump took office and she left the department? Most recently, the 71-year-old checked one thing off her bucket list: a month-long trip to Southeast Asia with a group of women friends. She was also recently appointed to the board of advisors of the Institute for the Fiduciary Standard.  

Borzi recently spoke with on her history with the fiduciary rule as well as her thoughts on more recent developments after she left office, including Massachusetts' charges that Scottrade violated the rule prior to being acquired by TD Ameritrade. Can you give us a little inside baseball into crafting and proposing the fiduciary rule? What were some of the conversations you had behind closed doors with the staff and industry stakeholders?

Phyllis Borzi: I had been concerned for a long time about salespeople masquerading as advisors and not being held accountable for the advice they give people. But, I worked on Capitol Hill for 16 years, and I knew that taking on the financial services industry—that has more money than God and until Dodd-Frank never lost—would be a challenge.

After I was confirmed, the consensus among the department staff was that we needed to do something about this fiduciary issue, the fiduciary definition, and how far the industry had strayed from the statute. So, we had a long discussion about what would it mean to take on this project. I’m a firm believer of consensus building. I always look for common ground. I never look for divisive things. I, naively, thought that I was going to be able to do that. Well, in the beginning, we couldn’t break through with anybody. They were uniformly opposed to what we were going to do, and they figured they could just tough it out, and that would be the end of it. So, we put out a proposal. We asked a whole bunch of questions, and they tried to blow us out of the water.

They were so convinced that they had done it that they were popping champagne corks when I pulled back the rule initially in 2010, I guess, or 2011. But, anybody who knew me knew that that wasn’t the end of the story. The interesting thing was the tide turned somewhat. In the time between the first and the second proposals, there were a number of very important developments.

The first was there had been a veritable explosion of new research in this area.

Before that, all we had was the self-serving industry stuff. It was all sort of puffery, and honestly that hasn’t changed in all the years. The industry stuff is still just hyperbole, hypothetical, no real data to support any of the arguments that they made, which was the reason that they weren’t overly successful in convincing us to make the kinds of changes that would’ve basically gut the standard. Maybe they’ll be more successful with this bunch.

So, we just kept working on it, but there was more data. One of the things that I did immediately once we started was to reach out to the SEC, because I recognized that while there was a lot of residual expertise about retirement investments in the Department of Labor, there were a lot of market things that we needed to learn more about. So, I just reached out to Mary Schapiro, then chair of the SEC.

I said to her, “This is like a Venn diagram. You’ve got the securities world. We’ve got the retirement world, which of course has a lot of securities in it, but we have lots of other things. We have insurance products that aren’t securities. We have bank products. We have real estate. We have all sorts of things that the law allows you to invest in if you have a retirement plan. So, neither of us, on our own, can solve this problem. We have to work together.”

The most important thing to me was to not do anything stupid. By that, I mean I didn’t want to do anything in our rule that would put the regulated community in a box and allow them to say compliance with our rule would put them out of compliance with the securities laws or vice versa.

Then the third thing that happened is the groups who would be our natural allies, suddenly Dodd-Frank had been passed, and now they had begun to pay attention to what we were doing. So we now had our natural supporters behind us.

I think those three things, more than anything else, began to turn some in the industry around. There were people in the industry for whatever reason—whether it was enlightened self-interest, whether it was altruism, whether it was just they were smart business people—saw this coming. We had a whole bunch of people who came in and said, “You don’t know what you’re doing. You’re complete idiots.” A very effective lobbying technique, I might add: This is none of your business. This is the SEC. Go away.

We had lots of those meetings. As a matter of fact, at one point, I was quoted as saying, “I felt every day when I came to work, I was in the movie Groundhog Day, because we had the same companies coming in in different combinations and permutations.”

There was an arrogance about their beliefs. I had a couple of people—friends in the industry—who would call me from time to time, saying “We just sat in this meeting, and they act like you’re an idiot. We’ve known you for years, and the one thing you’re not is stupid.”

There were the people that I would call the “hedge your bets” groups. These were lobbyists who clearly didn’t want us to do what we wanted to do, but they weren’t as confident that they’d be able to kill it as some others were.

So, they decided to work with us, and this was their attitude: If you would be so stupid as to want to do this, this is how you can make it work. This is how you can make it less harmful, more helpful. I will say it was a smaller group than I had initially hoped, but we did have people from the industry who would come in.

I think we got more of it once Tom Perez came, because Tom had a reputation in the business community and the financial community from when he was in the Maryland government.

The industry was absolutely convinced that the White House was going to squash me in the end. They sadly misjudged that, because every meeting they had with people in the White House convinced the White House not that the industry was right, but the industry was way out of line.

So, I don’t know how else to describe it except it was a give-and-take process where the reason we got the rule through is because we were willing to work with people. Was it perfect? Of course not. Are there things that we could have done better? I’m confident if you gave me a half an hour, I could come up with a list of them, but life is about choices, and you make choices. You let it go into effect, and then you’re willing to roll up your sleeves and adjust it when it needs adjusting. That was the plan until the Trump administration came in, and the industry decided their guy was in the White House. Therefore, they were going to get rid of the whole thing.

WM: What are your thoughts on the recent developments with the rule, with the delay to July 2019?

PB: Well, there’s no question that the delay is extremely harmful to consumers. Truth be told, many of the big players in the industry were positioning themselves to comply with it. They knew the direction the marketplace was going. The marketplace spoke, and one of the things that we were able to do in the years between the first and the second proposal was to educate the public about how important fiduciary status was and what they could potentially lose if they had somebody who wasn’t held to that standard of care—the true best interest, not this mealy-mouthed best interest standard that the industry keeps saying they support.

Now, the parts of the rule that went into effect in June of last year are critically important. They’re really the guts of the rule, but nobody in the industry seems to understand that they are on the hook for the impartial conduct standards. They keep thinking that the rule is not in effect at all.

Take William Galvin’s recent activity and the Scottrade case.These people were the poster child for why we did the rule in the first place, but the delay has caused the bulk of the improvements in the marketplace that were being implemented to grind to a halt.

The Department of Labor doesn’t usually, or hadn’t until this administration, adopted a non-enforcement policy. The non-enforcement policy is based on the notion that the actor who is taking advantage of the non-enforcement policy is actually making good faith efforts to comply. The Scottrade case illustrates the evils, the harm that this delay has caused, because there is nothing those people were doing that anybody could characterize as good faith compliance with the parts of the rule that went into effect in June.

WM: There’s been some debate over enforcement of the rule given the Scottrade case and whether the states have authority there. What are your thoughts?

PB: Well, it depends on state law. We couldn’t rely on the states to create and enforce a uniform standard. In the IRA context, one of the reasons we had to fall back on enforcement in the state law context was because the Department of Labor didn’t have, in my view, the statutory authority to do anything but enforce the prohibited transaction rules. So, that’s what we did. We relied on the excise tax; the only federal remedy for a prohibited transaction under ERISA in the IRA marketplace is the excise tax.

All of the prohibited transaction exemptions that have been issued since ERISA was passed in ‘74 have conditions. So, OK, we’re going to allow you to proceed with this conflict of interest which violates ERISA if and only if you comply with the conditions in this exemption. So, one of the conditions that we did in the best interest contract exemption is you need to make this commitment to the client in writing.

All we said is, “A condition of this contract, a new term in this contract has got to be a commitment that the standard of care you will apply when you give advice is that I’ll agree to operate under the duty of prudence and loyalty, and I’ll act in your best interest.” So, just like any other term in the contract that the brokers wants to, or the advisor, or the insurance salesman wants to enforce, in this case, the consumer can enforce a condition. That’s under whatever state law, whatever state contract law governs. That actually has been the sticking point in the industry.

WM: Who would you say was the biggest roadblock through the whole process?

PB: You can figure out who were the noisiest people, and they weren’t necessarily truth-tellers. Now, they believe they’re going to succeed in getting the rule either diluted so that it will be completely meaningless or deferred.

On the morning after the election, I went in into our staff meeting, and I said, “Look, we know that the tactic is going to be delay, dilute, destroy, and we just have to be sure that whatever we do, we don’t lose sight of the fact that this is a rule designed to protect consumers. It’s all about retirement savers, because for every penny that goes in somebody else’s pocket is that penny less that they have for their retirement savings.”

There’s a finite amount of money in the economy, and either you encourage private savings or you recognize that some people are not going to have adequate savings in retirement, and we’re going to have to deal with them in the social safety net.

The irony here is the people who are the most hurt by these conflicts of interest are the people who have done the right thing and saved. If you have no money to save, or if you’re a small saver, these people aren’t interested in you, despite the crocodile tears they cry about small savers not getting the advice they need. The only people they really care about are people with a lot of money. So, the perverse result here is the more you save, the more likely you are to be a victim.

WM: The SEC is currently working on a best interest standard. Your thoughts?

PB: I want to believe that the people at the SEC will see through this industry effort to claim that they support best interest, but if you look at how they’ve defined it in their comments to the SEC, the best interest standard is actually “suitability-lite.” Their strategy, of course, is to get the SEC to endorse something, and then get the DOL to say compliance with the SEC standard is OK for ERISA purposes. And I don’t see how that’s legally possible, myself.

WM: What have you been up to these days?

PB: One of my goals was to try to mend fences with all my family and friends that I had been stiffing for at least the past eight years. I’ve made several trips to visit my friends and relatives and I’ve just been going on these wonderful vacations that I just came back from.

I just came back from one of my bucket list trips, a month-long trip to Southeast Asia: Vietnam, Cambodia, Laos, Thailand. I had this group of women friends, all about my age. We’ve been talking about doing the Southeast Asia trip for probably the last seven or eight years, and they’ve been extraordinarily patient to wait for me.

I’ve also been doing some work, although I’m not being paid for this stuff. But I care a lot about the things that we did when I was at the Department of Labor. I also was responsible for administering and implementing the Affordable Care Act. It’s so sad to me to watch them—the new administration—completely dismantle some of the most important consumer protections.

WM: Do you think you will return to the business full time at some point?

PB: My former department chairman and the people at George Washington University, where I was for 16-plus years research professor in the School of Public Health, they call me just about every month saying, “Are you ready to come back? Are you ready to come back?” I probably would do that, but I just don’t want to work that hard. I’m 71 years old. I’ve worked since the time I was 16 years old. I don’t know how to do anything halfway, so when I agree to do something, I’m working 150 percent.

This has been edited for length and clarity. 

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