Regulation and Supervision of Pension Plans in the USA The Honorable Phyllis C. Borzi Former Assistant Secretary of Labor Employee Benefit Security Administration U.S. Department of Labor

General Pension Supervision in the US There is no single source of supervision for US pension funds Instead, they are subject to a variety of rules administered by a wide range of governmental entities The supervisory structure is primarily a Federal system of pension supervision, but with some exceptions Because generous federal tax benefits flow to “qualified” pension funds, Federal tax regulation through the Internal Revenue Code (IRC) administered by the Internal Revenue Service (IRS) and the US Treasury Department is the most comprehensive scheme in scope, although the rules vary based on the type of pension fund

General Pension Supervision, cont. Other key Federal pension regulators US Department of Labor (DOL): Pension plans sponsored by private sector employers (including contributing employers to multiemployer plans) are subject to the Employee Retirement Income Security Act of 1974 (ERISA) Pension Benefit Guaranty Corporation Defined benefit pension plans sponsored by private sector employers (including contributing employers to multiemployer plans) are subject to Title IV of ERISA Office of Personnel Management (OPM) Retirement system for employees of the Federal government (including, under some circumstances, the military) are subject to the Civil Service Retirement Act, as amended, and other Federal laws

Scope of Oversight and Regulation of Pension Funds Multiple levels of supervision: Fiduciaries with respect to the pension fund Pension fund itself Service providers to funds By type of entities By type of service or function Services and products purchased by funds

Supervision of Service Providers to Pension Funds And Products That Are Recommended/Sold In addition to direct supervision of the funds themselves, various service providers to those funds are subject to regulation by other Federal and/or state bodies and the products they sell may be regulated by other Federal and/or state agencies Typically that supervision may apply more broadly than just to transactions involving pension funds, but to the extent that services are provided to pension funds, these entities are also subject to the Department of Labor’s supervision for the pension- related activities

Supervision of Pension Service Providers, Producers and Investment Products, cont. For example: Insurance companies and their agents are primarily regulated by state insurance departments, but the products they offer may be regulated by state and/or federal entities. investment advisers and brokers who recommend insurance products that are securities are also subject to Federal and state securities regulation Securities exchanges, registered investment advisers (RIA) and securities broker-dealers and mutual funds are subject to Federal regulation by the US Securities and Exchange Commission and state securities regulation Brokers and dealers must also register with FINRA (the Financial Industry Regulatory Authority), a self- regulatory organization under the supervision of the SEC which is responsible for regulating and examining securities firms that do business with the public. Banks are subject to supervision by the Comptroller of the Currency as well as state banking regulators Bank employees that provide financial advice to customers may also be subject to Federal and state insurance and/or Federal and state securities regulation depending on the products they recommend The Federal Deposit Insurance Corporation protects funds consumers deposit in insured banks and savings associations that are invested in certain types of products. The insurance covers both principal and interest on these investments.

Financial and Investment Advice for Pension Funds and Investors Individuals who are paid directly or indirectly to provide financial and investment advice to pension funds and individuals saving for retirement through Individual Retirement Accounts or Annuities (IRAs) are regulated by Federal and/or state regulators, including the US Department of Labor under the Employee Retirement Income Security Act of 1974 (ERISA) For example, in addition to DOL regulation: Securities are regulated by the SEC and state securities departments Insurance products are regulated by state insurance departments; variable annuities are also treated as securities and therefore regulated by the SEC and state securities regulators as well

Case Study #1 - Insurance In the US, insurance is primarily regulated by the states However, if insurance products are also securities, the sales of those products are also regulated under securities laws by the SEC and state securities departments For example, variable annuities are treated as securities (indexed and fixed annuities are not) Sales by insurance agents and brokers are regulated by the states and these individuals must be licensed to sell specific insurance products; sales involving securities sold by those individuals are covered under the Federal and state securities laws Under the 2010 Dodd-Frank Act, Congress also extended supervisory authority to a new office, the Federal Insurance Office (FIO), created in the Department of the Treasury Investments by retirement plans subject to ERISA and IRAs in insurance products are also regulated by the DOL

Case Study #2 – Investment Advice Fiduciaries Anyone who gives “investment advice” for a fee or compensation (direct or indirect) is a fiduciary under ERISA and/or the IRC If the advice involves a security, the firm/individual must register with the SEC and/or state securities departments Note that the federal securities laws administered by the SEC involve a narrower category of investments than ERISA and/or the IRC (all transactions in securities) but involve a broader category of investors (all customers, not just retirement savers) Investment advice with respect to securities and the individuals who provide it (registered investment advisers (RIAs) and brokers and dealers (BDs)) are also subject to a variety of other governing authorities The following chart (Fig. 2.2) reflects a simple summary of this supervisory structure that appears in “Regulating Advice Markets,” the Regulatory Impact Analysis that accompanies the publication of the Final Rule and Exemptions on Conflicts of Interest. This can be found at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and- regulations/completed-rulemaking/1210-AB32-2/conflict-of-interest-ria.pdf) at page 31.

Case Study #2 – Investment Advice Fiduciaries, cont.

Possible Approaches to Reduce Supervisory Inconsistency and Conflict Deregulation movement Single regulator Consolidation of regulatory authority Coordination among supervisory agencies Major supervisory responsibility Peripheral but important supervisors (for example, in US, the Equal Economic Opportunity Commission (EEOC))