The Department of Labor’s Employment Benefits Security Administration (EBSA) announced in mid-July that they have delayed publication of the so-called “fiduciary standard” rule until the fall. Tim Hauser, an associate solicitor at the DOL, said at a recent Financial Services Institute conference that the DOL anticipates the rule will be published for comment in late October.
The rule was first proposed in 2010 but withdrawn in 2011 for reworking under withering fire from industry and members of Congress. Phyllis C. Borzi, director of EBSA and assistant secretary of labor, has made clear, however, that she plans to proceed with this rule.
Consumer interests are voicing strong support for the DOL’s initiative. The basic concept, the agency contends, is that the Employment Retirement Income Security Act’s (ERISA) consumer protection standards have not been revised since the law went into effect in 1977, and updates are needed based on how much investment markets have changed since.
Barbara Roper, director of investor protection for the Consumer Federation of America, said that since concerns were raised about the original DOL fiduciary rule proposal, “the agency has done everything it has been asked to do.” Specifically, she said, “It has promised to take concerns into account in re-proposing the rule. It has prepared an extensive economic analysis and has promised to issue the prohibited transaction exemptions, along with the re-proposed rule, so that commenters can assess its real-world impact.” In her view, the DOL “deserves to have its rule judged on its merits, not sidelined because of industry fears about what might be in the rule.”
The DOL also has public support, although in the intensely partisan atmosphere in Washington, that does not necessarily translate into government action. For example, former Rep. Barney Frank, D-Mass., is a long-time consumer advocate who managed to win enough support to get language into Dodd-Frank that gives the go-ahead for the Securities and Exchange Commision (SEC) to pursue a uniform fiduciary standard. Frank, however, wrote a letter to the DOL in 2011 voicing strong objections to the first DOL proposal, a letter which played a key role in the agency’s decision to withdraw it for further work. At a meeting regarding insurance issues and sponsored by the American Bar Association, one prominent lawyer observed that, “Frank has thrown Ms. Borzi under the bus.”
Steve Lewit, president and CEO of Wealth Financial Group, a Chicago-based marketing organization, said in a recent op-ed article in National Underwriter that his group’s data illustrates 73 percent of people between the ages of 45 and 80 do not have trust in financial professionals or the financial industry as a whole. “This is a shockingly high number that is most distressing to anyone who takes our industry seriously as a service to help people do better, rather than as a paycheck coming at the end of the month,” Lewit, who also maintains his own financial planning practice, said in the op-ed.
For the industry, in a nutshell, the concerns of investment advisors is that it will impose a higher sales standard than currently required on retirement products sold in accounts regulated by ERISA. Reshaping of the rule is clearly a top priority of the investment advisory industry.
The National Association of Insurance and Financial Advisors (NAIFA), through previously-submitted comments to the DOL, has indicated that any DOL proposal should:
- Not extend ERISA-based regulation to individual retirement arrangements (IRAs);
- Include both a robust seller’s exception and a practical prohibited transaction exemption to investment recommendations from broker-dealers and their representatives;
- Not contradict the provisions of Dodd-Frank, specifying that receipt of commissions and sales of proprietary products are not intrinsically fiduciary violations.
The core concern of investment advisors, as stated recently by a lobbyist for NAIFA, is that the rule they envision the DOL proposing will make it “too risky” for investment advisors to sell products into defined contribution accounts. “The DOL is saying that its revised proposal will be a ‘no conflict’ rule, but most advisors believe it will ultimately be a ‘no advice’ rule,” he said.
However, Kent Mason, a partner at Davis & Harman in Washington, D.C., a firm that deals with the complex world of insurance/investment products and the interplay of federal and state regulation, said this is a misunderstanding of the core issue. The issue, in his opinion, is not that the broker-deal has to act in the sole interest of the customer.
“That is not the core issue that is causing the controversy and the concern,” Mason said. “The core issue amongst the industry is that under the DOL rule, the agency’s prohibited transaction rules apply. The prohibited transaction rules would effectively make the compensation structure of broker-dealers illegal,” he said, meaning, essentially that broker-dealers would be prohibited from providing assistance to their customers. “That is the core of the issue, not standing behind their products, but being prohibited from providing assistance to their customers,” Mason said.
For example, under the original proposal, a study was done determining that seven million IRAs would lose access to investment advisors because they would be prohibited from providing assistance to those IRAs. The study further found that 360,000 fewer IRAs would be issued each year if the prior rule had become law.
Mason said that all indications are that EBSA is going forward with this proposal. “Our understanding is that they are making very significant changes to the proposal,” he said. “Some change we anticipate will be helpful, some will be unhelpful. This is based on the public statements they have made.” Implying deep concern about what the proposal might say, Mason, who is an industry veteran, said, “Unfortunately, according to the statements from the EBSA personnel, these detrimental results may not be fully cured in a revised proposed rule.”
One of the key areas of the rule is the economic analysis that an agency is required to do that gives regulatory agencies the power to revise its rules. Various industries have taken agencies to court, alleging faulty or incomplete financial analysis of the economic impact of a rule on competition and capital formation. In many cases, the courts have upheld their arguments and thrown out the rule on these technical grounds.
The DOL has sought industry input on its economic impact since various trade groups have made clear they will exhaust all efforts to change a rule they feel is inimical to their interests. One likely avenue, industry officials have said, is a court challenge on the basis of a flawed economic analysis. That has been made clear by officials of such trade groups as NAIFA, the Insured Retirement Institute, the Financial Services Roundtable and the Securities Industry and Financial Markets Association.
Mason believes the DOL has spent a lot of time on that and there will be a much longer and in-depth economic analysis than the one in the prior rule. “Whether it will be comprehensive, I don’t know,” Mason said.