How Department of Labor’s “Fiduciary” Rule Could Cripple IRA Choices on Crowdfunding

ByJohn Berlau CrowdFunding Beat Sr. Guest Editor, March 3, 2015

Last week, President Obama called on the Department of Labor to “update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests.” At a speech at the American Association of Retired Persons, the president proclaimed, “You want to give financial advice, you’ve got to put your client’s interests first. “

Yet, if the regulation the DOL is set to introduce at the president’s behest is anything like the “fiduciary” rule it proposed in 2010—and withdrew upon a groundswell of protest the next year—the government’s definition of “best interest” will likely not be in the best interest of individuals who wish to pursue alternative assets from gold to peer-to-peer loans to crowdfunding in their IRAs.

The last time around, the DOL tried to reclassify a broad swath of financial professionals and business as “fiduciaries” even if they did not provide regular investment advice. Not only were broker-dealers covered, but so were directed custodians of IRAs, even self-directed IRAs in which investors don’t rely on any “fiduciary” advice. Once again, the freedom of self-directed IRA holders to invest in assets of their choosing, including crowdfunding ventures, may be at risk.


Self-directed IRAs can invest in a wide range of assets. As worries about monetary policy have been on the rise, gold and silver have found popularity as IRA holdings. Real estate has long been a staple as well. The growth of peer-to-peer lending has stemmed in part from the ability to put the loans created by Prosper and Lending Club into IRAs.

And as CrowdFund Beat and others have reported, self-directed IRAs serving accredited investors now have access to crowdfunded startups available through SEC Rule 506(c), which legalized general advertising of investment of non-public companies in 2013 pursuant to the Jumpstart Our Business Startups (JOBS) Act. When Title III of the JOBS Act or new congressional legislation legalizing equity crowdfunding for ordinary investors is finally implemented—and hopefully that will be soon—there should be no barriers to self-directed IRAs serving the masses providing access to these exciting new investments.

Yet, much of this progress in lifting barriers to crowdfunding could be short-circuited if a broad, restrictive “fiduciary” rule comes to fruition. Last time, the proposal specifically included “appraisers” in its definition of fiduciaries, a category that included directed custodians of IRAs.

Tom Anderson, board manager of Pensco Trust, a San Francisco-based IRA custodian that is now one of the leaders in offering crowdfunding options, wrote in comments to the DOL in 2011 that imposing a fiduciary standard “would result in higher costs and potentially fewer service providers to self-directed IRAs,” which “in turn, could result in fewer investment choices.” Anderson’s comments were written on behalf the Retirement Industry Trust Association, a trade group for custodians of self-directed IRAs, who helped successfully shelve the first DOL rule.

Although it may be another month before the new revised rule is unveiled for public comment, several “red flags” indicate that it will be as bad for investor freedom as the previous DOL rule, if not worse. The first “red flag” is that although the previous fiduciary rule garnered opposition from more than 100 congressional Democrats—including then-House Financial Services Committee Ranking Member Barney Frank (D-Mass.), members of the Congressional Black Caucus, and even Vermont’s independent, self-proclaimed socialist Sen. Bernie Sanders—its most prominent supporters included sworn enemies of crowdfunding such as the AARP (to whom, as previously noted, President Obama announced the new rule) and Consumer Federation of America.

These groups almost torpedoed the JOBS Act as it was going through Congress and have been trying to undo it ever since. So, in endorsing enthusiastically a revised “fiduciary” rule, they would no doubt welcome any gutting of crowdfunding that may result from the new regulation.

The second red flag is that the DOL appears to be formulating this regulation without consulting the Securities and Exchange Commission, the primary regulator of broker-dealers and investment advisors. Unlike the SEC, which is an independent agency (though with the majority of commissioners from the president’s party), the DOL is an executive department that operates directly under the authority of the president. Thus, its decisions are often much more political, and the department has been particular politicized under this administration. Witness former Secretary of Labor Hilda Solis’ headlining of an Obama campaign fundraiser in 2012 while on an official government trip paid for by taxpayers, as The Daily Caller has reported.

And the most important flag are the paternalistic statements from Obama administration officials about investors in 401(k)s and IRAs. “Like your doctor or your lawyer, your retirement advisor should be required to do what is best for you,” said White House Senior Adviser Valerie Jarrett on her LinkedIn page and the White House blog. Secretary of Labor Thomas Perez told reporters, “You don’t want your doctor telling you what’s suitable for you; you want that doctor to tell you what’s best for you.”

Jarrett and Perez don’t seem to get something informed patients and investors know well: that there is not one answer of what is “best for you” in either medicine or retirement saving. Patients should be able to choose their doctors—a right Obamacare is taking away from them—and savers should have the freedom to weigh the potential risk and return of various investment plans.

President Obama was right when he told the AARP last week that retirement “rules that existed 40 years ago haven’t caught up to the realities of most families today.” The solution however, is not to go back to a time of fewer choices, but to create policies that expand the saving choices we have today to include crowdfunding and many other options.


Note to readers: CEI Senior Fellow John Berlau, a contributing editor to CrowdFund Beat, will be moderating a panel on IRAs and crowdfunding on March 5 and discussing public policy issues in crowdfunding March 6 at the CrowdFund Beat Silicon Valley Crowdfunding Conference at the Computer History Museum in Mountain View, Calif. 

Tags: , , , ,


This RSS feed URL is deprecated, please update. New URLs can be found in the footers at [...]

TechCrunchFormer Gawker employees are crowdfunding an effort to buy Gawker.comTechCrunchWhile Univision acquired most of Gawker Media's sites last year (and renamed them as the Gizmodo Media Group), the deal didn't include Gawker itself. In fact, BuzzFeed reported last month [...]

ForbesCrowdfunding Do's And Dont's From iFundWomen's Karen CahnForbesDuring our conversation, she was transparent in sharing that her first software company, VProud, failed because she “did everything backwards” and spent too much time trying to perfect the product. “Pe [...]

VentureBeatAtaribox preorders and crowdfunding campaign open on December 14VentureBeatAtari will start taking preorders for its Ataribox game console starting December 14. The New York company will also start its crowdfunding campaign on Indiegogo. In an email blast, Atari said, “We a [...]

CurbedHistoric French chateau now has 13000 owners from crowdfundingCurbedThe Chateau de la Mothe-Chandeniers has had many owners since its construction in the 13th century. Now more so than ever. Over 13,000 strangers have recently banded together to save the fairytale home—which fea [...]

Crowdfunding For French CastlesNPRYou too can own a French chateau, in part, anyway. Romain Delaume, CEO of Dartagnans, tells NPR's Scott Simon about a crowdfunding effort underway to preserve La Mothe-Chandeniers. SCOTT SIMON, HOST: What if I told you that for about $60, you cou [...]

Financial TimesCrowdfunding a mission to save capitalism from itselfFinancial TimesJeff Lynn is on a mission to save capitalism from itself at a time when millions feel locked out, and unable to foresee themselves better off than their parents. His answer: to democratise capital. That [...]

Comics BeatCrowdfunding Watch: Women to the RescueComics BeatAlas, another Monday begins. We're all here at our computers, staring at the screen until our eyeballs turn into raisins. I'll try to keep this week's crowdfunding round-up short and sweet. This week we'r [...]

WRAL Tech WireNew crowdfunding platform launches in North Carolina: LocalstakeNCWRAL Tech WireEasley points out that LocalstakeNC “is the first investment crowdfunding platform exclusively serving North Carolina. Startups and small businesses ranging from technology startups to retail [...]

Crowdfunding Campaign Underway To Establish Freediving Lanzarote DestinationDeeperBlue.comFreediving Champion Marianna Krupnitskaya has set up a crowdfunding page to help her set up an amazing freediving destination in the Canary Islands. The Freediving Lanzarote project will ultimate [...]

CFB Finance


  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |