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Regulation and Compliance > Federal Regulation > DOL

FINRA’s Ketchum Blasts DOL Fiduciary Plan; White House Says ‘Work With Us’

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Just as President Barack Obama’s economic policy director, Jeffrey Zients, urged advisors and industry officials Wednesday to provide the Department of Labor with feedback on its plan to revise the definition of fiduciary on retirement accounts, critics of the plan complained the current plan is a costly compliance nightmare that needs work.

“Any advisor acting in their clients’ best interest should support this [DOL] rulemaking and work with us to get it right,” Zients told attendees at an event held by the Bipartisan Policy Center in Washington titled “Champions, Critics and Consequences of a New Fiduciary Standard.” Zients, director of the National Economic Council, added that not passing some type of DOL fiduciary revamp rule “is not an acceptable outcome,” and asked that industry stakeholders continue to be a “constructive” part of the process.  

Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, devoted his entire opening remarks at FINRA’s annual conference, held the same day in Washington, to criticizing DOL’s plan. He offered an alternative approach to move a best interest of the customer standard forward.

Bowing to pressure from lawmakers and industry trade groups, DOL said in mid-May that it would extend the 75-day comment period on its Conflicts of Interest proposal by 15 days to 90 days, with the department anticipating a total of 140 days for public comments.

The four-month comment period, Zients said Wednesday, provides “more than ample time” to weigh in.

Input from stakeholders over the past five years since DOL withdrew its original 2010 fiduciary rulemaking “has helped DOL shape” its new rule, Zients said, noting the new plan’s “streamlined exemptions that accommodate existing compensation” structures, as well as the best interest contract exemption (BICE), which Zients said allows firms to “set their own compensation practices as long as they acknowledge they are fiduciaries.”

But a panel of industry officials who spoke after Zients’ remarks debated exactly how the BICE works.  

Sameera Fazili, former senior policy advisor on the National Economic Council, who sat on the panel, stated that the DOL’s redraft attempts to create “a level playing field” so that investors “don’t have to worry that the person [they’ve] hired will put their best interest first,” as “it’s well-documented” that people are “confused” by advisor and broker regulatory standards. “We just need rules of the road so the best advice can win out,” she said.

While Fazili stated that BICE “is quite simple,” as it requires an advisor/broker to “make a promise that you’re putting your clients first,”other panelists noted the BICE standard is confusing, particularly as to when a customer must sign it. “BICE requires that you agree to act in the [client’s] best interest [and] have policies and procedures” in place, but “the [BICE] contract itself has its own problems; you have to have it signed before you have a conversation with someone,” said Felicia Smith, vice president and senior counsel for regulatory affairs at the Financial Services Roundtable.

Yet Mercer Bullard, professor of law at the University of Mississippi Law School and founder of Fund Democracy, countered that when an advisor is merely talking to someone about advice “they don’t have to sign the [BICE] contract.”

Pamela Everhart, senior vice president of government relations at Fidelity Investments, noted on the panel that while Fidelity would like “to work with the administration to get this [DOL proposal] right” as there are some “unworkable provisions” in the proposal, “it will be a challenge to get [clients] to sign a [BICE] contract because that’s not what they’re used to doing,” as they do that with the plan sponsor. “To suggest to them before having a conversation that they sign a contract, that would be frustrating and they would be confused.”

W. Mark Smith, a partner at Sutherland Asbill & Brennan, who specializes in the Employee Retirement Income Security Act, stated that BICE takes “400 columns” in the Federal Register to explain, adding that it will amount to a technology and compliance burden, noting that in some cases “six types of disclosures” are required under it.

Said Smith: “At the end of the day [a DOL fiduciary rulemaking] won’t be about a best interest [standard] or disclosure. These are heavily regulated industries. The question is whether this [BICE] exemption is workable or a poison pill.”

Fazili responded that “DOL has invited extensive comment” on the BICE. “The goal is for people to tell DOL how to make this more workable and streamline it.”

As to compliance costs of the plan, Micah Hauptman, financial services counsel for the Consumer Federation of America, which is a supporter of DOL’s fiduciary rulemaking, stated that “the industry has made a lot of … objections but that’s belied by the fact that there are already fiduciaries serving small investors and doing so profitably.”

Ketchum noted during his remarks at the FINRA event that while he believes moving to “a properly designed best interests standard is a must going forward,” the current DOL proposal “is not the appropriate way to meet that goal.”

Ketchum said that “it is time for us to reach agreement on a best interest solution that embraces three essential tenets: active identification and management of firms’ conflicts, dramatically improved disclosure of risks associated with the product and product-related fees, firm and third-party incentives, and more effective management of the compensation incentives to registered persons.”

He advocated once again for requiring broker-dealers to provide customers a Form ADV-like document annually that provides clear, plain English descriptions of the conflicts they may have and an explanation of all product and administrative fees.

Ketchum also stated that it’s “not optimal for investors to apply a different legal standard to IRAs and 401(k)s than to the rest of an investor’s assets,” as “a great many investors simply do not plan for their retirement by segregating tax-advantaged vehicles from their other investment strategies.” He argued that an effective regulatory environment “would apply a consistent best interest standard across, at least, all securities investments and have the examination and enforcement mechanisms to oversee compliance with the standard.”

Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, who spoke after the panel at the BPC event, stated that  SIFMA’s opposition to DOL’s fiduciary redraft “is not about being for or against the best interest standard. The industry’s position in support of such a standard is quite clear and well documented.”

Rather, he said, “It’s how you do it.” SIFMA believes DOL’s proposal “goes far beyond such a standard to limit choice and raise costs, unnecessarily so in our opinion,” he continued. “Equally troubling is that this experience underscores a failure in the public policy market place. Rather than adopting a policy prerogative that will apply across the entire retail marketplace, we are headed in a direction of bifurcated rules, compliance and disclosure regimes imposed on the same market participants from different regulators,” the DOL and the Securities and Exchange Commission.

“It is hard to see how investors won’t be confused and the industry forced to build duplicative and redundant systems that will further affect costs. It seems illogical that we cannot address this in a uniform manner.”


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