Fiduciary Debate Rages On as Wagner Pushes DOL Rule Alternative

Wagner says her best interest standard ‘applies to both investment and retirement accounts, unlike Labor’s rule’

Rep. Ann Wagner, R-Mo. (Photo: AP) Rep. Ann Wagner, R-Mo. (Photo: AP)

Lawmakers and industry officials debated the merits Thursday of draft legislation put forth by Rep. Ann Wagner, R-Mo., that would repeal the Department of Labor’s fiduciary rule and apply a best interest standard to broker-dealers when providing investment advice.

During the Thursday hearing held by the House Financial Services Capital Markets Subcommittee titled the “Impact of the DOL Fiduciary Rule on the Capital Markets,” Wagner, chairwoman of the House Financial Services Committee’s Oversight and Investigations Subcommittee, and a steadfast opponent of Labor’s fiduciary rule, stated that her discussion draft “would apply a workable best interest standard for broker-dealers when providing investment advice without losing access for such advice for millions of low- and middle-income investors.”

Wagner stated that her draft bill also keeps the fiduciary issue “under the jurisdiction of the SEC, the expert regulator who has the experience of overseeing the industry.”

Broker-dealers, she said, “should provide advice that is in their customers’ best interest, and this draft bill will make that absolutely clear with a standard that applies to both investment and retirement accounts, unlike Labor’s rule.”

David Knoch, president of 1st Global based in Dallas, who testified at the hearing on behalf of the Financial Services Institute, stated that FSI supports Wagner’s discussion draft because “it creates a uniform standard of care enforced by the SEC as the appropriate jurisdictional agency with the necessary expertise, and provides for reasonable and streamlined disclosures as a way to require industry participants to communicate their conflicts.”

But Cristina Martin Firvida, director of Financial Security and Consumer Affairs at AARP, countered during her remarks at the hearing that “a big concern” AARP has about the discussion draft is that the best interest standard, “as described, is quite vague,” and that the current suitability standard placed on brokers “could satisfy” the standard.

“We don’t see how this bill is an improvement on the current situation,” Firvida said. “The fiduciary rule directs how to address conflicts. The concern we have is that disclosure alone could satisfy the benchmark.”

Jerome Lombard, president of the Private Client Group at Janney Montgomery Scott, who testified on behalf of the Securities Industry and Financial Markets Association, argued, however, that the standard in Wagner’s draft is “clearly a higher standard than suitability,” adding that it would also “apply to all accounts, not just retirement accounts.”

Knoch noted that the disclosure requirements as set out in the draft “appears to have the same effect as a Form ADV” that registered investment advisors are required to give to their clients.   

Lombard argued that SIFMA believes the “right answer for investors is a consistent best interest standard that could apply across all types of accounts, but does not have the additional onerous conditions created by the DOL rule.”

A best interest standard “done right by the SEC, the expert agency responsible for broker dealer standards of conduct, would provide protection for retail customers without a bifurcated compliance regime imposed on the same market participants by different regulators,” Lombard said.

Noting that SIFMA is “greatly encouraged” by the SEC’s June 1 request for public comment on standards of conduct for investment advisors and broker-dealers, Lombard stated that SIFMA intends to encourage the agency to “consider establishing a best interest standard for broker-dealers that mirrors the elements of the Impartial Conduct Standard under the DOL rule,” which became effective on June 9, “but unlike the DOL rule, would apply across all broker-dealer accounts, not just retirement accounts.”

For that reason, Lombard argued that Labor should, “at a minimum” delay the rule’s Jan. 1, 2018, applicability date “to allow the SEC to lead the effort to put in place a standard that works for all accounts.”

Wagner’s legislative draft, he continued, “provides this path forward by establishing a SEC applied, principles-based standard to ensure that all broker-dealer recommendations about securities are driven by the best interest of the retail customer.”

Rep. Carolyn Maloney, D-N.Y., a fiduciary rule supporter, argued that Wagner’s draft puts forth a “watered down” standard.

“There are bad actors out there. We have all had people come to us and say: ‘I put my savings with this advisor and they said they’d be protected. I lost everything.’ The reason this rule was put in place was to protect people.”

She encouraged panel members as well as her colleagues to take their concerns directly to Labor.

“I took six different problems to DOL and had the rule changed — after much negotiation, we got it changed. They’ll work with you. By the way, it’s a Republican leader now at DOL that has called for the rule to go in place … This is an important rule that will save people’s savings."

Problems Cropping Up Since June 9 Effective Date

Since June 9, when the rule’s Impartial Conduct Standards took hold, “we are beginning to see its harmful impact on America’s retirement savers - limiting product choice and access to advice, while raising costs,” Lombard argued.

“Our customers and advisors are very confused by the phalanx of new DOL rules applying to retirement plans. They do not understand why there are now two sets of rules, one for retirement accounts and one for taxable brokerage accounts,” Lombard continued.

Since June 9, “customers are restricted from making certain investments. Upwards of 10,000 of our customer retirement accounts will be relegated to a ‘no advice service’ desk — as they are too small for the risks imposed by the DOL or too costly to place in an advisory account that would remove the supposed conflicts the DOL is trying to regulate.”

Added Lombard: “How switching small retirement savers from a full-service advisor to a 'no advice' service desk is in their best interest, I will never understand.”

1st Global’s Knoch noted his firm’s challenge in offering SIMPLE IRAs, where account balances can be as low as $50.

“Many of these accounts are offered on a commission basis, and will be subject to the Best Interest Contract” on Jan. 1. “Due to the threat of class-action lawsuits, many of our affiliated firms will no longer offer these plans to small-business clients, and some will end their existing relationships.”

Since the beginning of 2016, he said, 1st Global has seen the number of SIMPLE IRA accounts drop by over 20%. “We project that these accounts will shrink from the 2016 levels by 28% before the end of this year, and by 41% by the end of 2018.”

But AARP’s Firvida argued that the litigation threat to the industry because of Labor’s rule is overblown. “The litigation that is permitted in the rule is class action — there has to be a systemic problem before a cause of action can be brought. If there is a systemic issue in advice, we’d want to address that.”

She added: “It is extremely difficult to certify a class. I wanted to be clear on what is the scope of the litigation risk.”

--- Check out SEC Chief Wants Public Input on a New Fiduciary Rule Before Starting on ThinkAdvisor.

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