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FSI Fires Back on DOL's 'Disappointment' with Industry Data Collection

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The Financial Services Institute (FSI) took umbrage at criticism in a letter today to Congress from the Department of Labor’s (DOL) key person overseeing the definition of a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) pertaining to data collection from industry sources.

The FSI’s President and CEO Dale E. Brown wrote to the chair and ranking members of the House Education & Workforce Committee that “such a sweeping request” for detailed data on every investment, every investor, and every recommendation in every context (IRAs, plans, and regular retail accounts) for the last 10 years, then returned in 30 days, “was impractical on its face.”

“Generating a decade’s worth of data in the manner requested by the Department is a difficult if not impossible task under any circumstances. However, the challenge associated with the Department’s request was increased by other important factors,” Brown said. These include regular year-end reporting and financial accounting obligations, the holiday season, and new compliance requirements with multiple regulators.

The letter was in response to the June 20 letter from DOL Assistant Secretary Phyllis Borzi to the same Congressmen, Education and Workforce Committee Chair John Kline, R-MN, and Ranking Member George Miller, D-CA, in which she expressed disappointment with not receiving many of the requested data elements from industry sources.

Voluntary data collection is often a huge undertaking for firms, fraught with many layers of concerns and stated barriers, from privacy to costs to future use, and with the fiduciary definition development, it is no different.

The DOL sent out two voluntary data requests in mid-December 2011 in order to develop an economic analysis of the fiduciary rule on workers, retirees and plan sponsors.

The first DOL data request was for underlying data supporting conclusions in an Oliver Wyman report cited for the record that purported to demonstrate that the costs of applying fiduciary rules to IRA advisors would be prohibitive.

The FSI, which has over 100 independent financial services firms and over 35,000 independent financial advisors, was not part of the Wyman study.

The other data request was broader, to financial services industry groups.

Borzi told the Congressmen she wrote to that the DOL was “disappointed not to receive many of the suggested data elements from the industry sources,” but noted it had met with industry representatives and asked them again to provide whatever information they deemed useful.

The FSI responded that it had contacted members to see if they could assist with the data request, but they were not able to for several reasons.

First, members, for business and regulatory reasons, do not maintain records of identifying or transactional information for the investors served by their independent financial advisors in the manner requested by the Department, the FSI letter stated.

Second, member firms do not have access to much of the data requested by the Department.

“For example, broker-dealers and investment advisers are not required to maintain records of some of the essential data points requested by the Department (e.g., whether the investor followed the recommendations or advice of the financial advisor). Neither broker-dealers nor investment advisors are required to maintain 10-year records of customer investment histories. Also, because financial advisors change broker-dealer affiliations from time-to-time, and investors often follow the advisors to their new firms, the history for a given IRA investor may be scattered across the records of more than one firm,” Brown’s letter on behalf of the FSI stated.

Moreover, the entire process of “collecting, compiling, extracting, formatting, inputting, normalizing, and validating that data would be an extraordinary undertaking,” and would be very expensive— even a partial data set would cost between several hundred thousand to several million dollars, depending on the size of the firm, according to the FSI.

And, even if a member firm had been able to start that process, it could not possibly have been completed in 30 days.

Add to that, concerns about the premises and methodology of the Department’s data request to determine the impact of conflicts of interests faced by brokers or others who advise IRAs from investment returns or trading histories in IRA accounts.   

Investor privacy was also cited as an issue.

“The Department acknowledged these concerns but asked us to put them aside for the purposes of the meeting. We did so and engaged in the discussion in good faith. However, the fact remains that we were never given any assurances by the Department that our member firms’ privacy requirements under SEC Regulation S-P and other applicable laws could be resolved,” Brown wrote.

The DOL staff had indicated significant interest in receiving copies of the FSI’s Broker-Dealer Financial Performance Studies, so the FSI did submit them in February, but complained they have not even received confirmation that DOL received them, let alone viewed them.  

Thus, the FSI was surprised that Borzi expressed disappointment “in light of the facts surrounding the data request because her depiction of events stands in stark contrast to the facts,” The FSI told the Congressmen. 

At the heart of this is the drama in developing the rule for fiduciary and its application. The DOL had to withdraw the original rule in September 2011 after intense lobbying throughout the industry about the potential harmful effects of imposing a fiduciary standard on sale of retirement products.

It went back to the drawing board, but many industry groups girded up to renew its opposition because DOL officials had indicated that a revised rule would likely still contain a provision imposing a higher sales standard on retirement products sold in accounts regulated by ERISA, according to a March National Underwriter interview with National Association of Insurance and Financial Advisors (NAIFA) President Robert Miller.

At the time, other financial services industry trade groups were signaling to the DOL that they would fight tooth-and-nail to sustain the current exemption of the sale of retirement investment products from a fiduciary standard.

Officials of the Insured Retirement Institute (IRI), the Financial Services Roundtable (FSR) and the Securities Industry and Financial Markets Association (SIFMA) had fired off a letter, and even in mid-February, NAIFA had sent a similar letter to the DOL indicating that it could not provide the data requested by the DOL because of privacy concerns voiced by its members.

The FSI also called for “real” coordination between the Department and Securities and Exchange Commission.

However, thus far, “the Department has shown little to no interest in engaging in joint data requests or coordinated rule-making,” the FSI noted.

Dave Postal contributed earlier material to this report.