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April 28, 2014 at 08:00 PM
The latest debate over whether the SEC and the Department of Labor should issue fiduciary rules this year recently turned to whether investors could be harmed by DOL’s rulemaking, or harmed by the lack of such a rulemaking by the SEC.
Indeed, fiduciary advocates told SEC Chairwoman Mary Jo White and the four commissioners in a mid-April letter that the SEC should act “expeditiously” to establish this year a uniform fiduciary standard of conduct consistent with Section 913 of the Dodd-Frank Act. That portion of the law gives the agency the authority to write a fiduciary rule for brokers that’s “no less stringent” than what is contained in the Investment Advisers Act.
The fiduciary advocates—including AARP, the CFP Board of Standards, the Consumer Federation of America, the Financial Planning Association, Fund Democracy and NAPFA—provided what they said is “empirical evidence” from academic research, market analysis and observation of industry practices that illustrates the harm to investors from allowing brokers to give advice to retail customers under a “suitability” standard.
Less Advice for Workers?
A report by Quantria Strategies, released in early April and commissioned by the law firm Davis & Harman LLP on behalf of a coalition of financial services organizations that provide retirement services, said that if the DOL expands its definition of fiduciary under ERISA to include rollover advice, it could spark “cash outs” of retirement plans at the time workers change jobs. The report claimed that could reduce retirement savings by as much as 40% for affected individuals.
Kent Mason, a partner at Davis & Harman in Washington, told me that if broker-dealers and call center representatives are fiduciaries, “the DOL rules would prohibit them from giving advice to workers regarding their distribution options. It is not a business decision by the BDs or the reps; it is a legal prohibition.”
The legal prohibition, Mason continued, arises under the DOL’s prohibited transaction rules. “Under those rules, a fiduciary is prohibited from giving any advice that could affect how much compensation he or his employer receives.”
For example, Mason—whose firm represents the companies that participated in the Oliver Wyman study on IRAs released to the DOL and the SEC last April—said that “if a BD or rep is associated with a financial institution, which is almost always the case, the financial institution may benefit if the participant rolls the money into an IRA that is maintained by the financial institution or into investments provided by the financial institution. Because of this potential benefit, the BD or rep would be precluded from providing any assistance regarding distribution options.”
Phyllis Borzi, assistant secretary for DOL’s Employee Benefits Security Administration, who’s the primary architect of the fiduciary rule, has said that rollovers will be included in DOL’s reproposed rule—which likely will be released later this year.
The Limitations of the Suitability Standard
As to the SEC’s rulemaking, the fiduciary advocates, who dub themselves the “Friends of Fiduciary,” told White and the commissioners that they “strongly believe that in order to be meaningful and consistent with Section 913, a uniform fiduciary rule must include more than the current suitability standard supplemented by additional disclosure requirements.”
Designed with a sales relationship in mind, the groups continued, “the suitability standard does not impose the same clear obligation that exists under a fiduciary standard, which requires the advisor to put the customer’s interest first.”
The groups go on to argue that the suitability standard “does not impose an obligation on brokers to appropriately manage conflicts of interest in order to ensure that they do not influence recommendations. These are among the standards that distinguish a suitability relationship from a fiduciary relationship.”
There is no justification, the groups said, “for applying different standards of care to financial professionals who are offering the same services to investors. Over the years, broker-dealers have not only identified themselves as financial advisors, but they have offered virtually identical services to investors in order to compete. The commission has permitted, at least tacitly, this evolution by failing to apply the appropriate regulatory standard.”
