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Regulation and Compliance > Federal Regulation > DOL

FINRA Blasts DOL’s Fiduciary Redraft as ‘Fractured, Confusing’

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The Department of Labor’s plan to change the definition of fiduciary on retirement accounts is a “fractured approach” that will “confuse retirement investors, financial institutions and advisors;” plus, it will apply a “panoply of regulatory regimes” to different accounts served by the same advisor for a single client, the Financial Industry Regulatory Authority told DOL on Friday.

With the July 21 deadline for comments on DOL’s fiduciary redraft approaching, FINRA weighed in before the weekend, stating that the confusion created by DOL’s fiduciary redraft could be easily ameliorated if “a harmonized best interest standard” applied to all accounts, retirement and non-retirement, investment and advisory and broker-dealer.

“The customer and financial advisor could then properly consider the investment portfolio as a whole, subject to a single, harmonized standard,” FINRA said in its 21-page comment letter.

FINRA also states that the federal securities laws should “serve as the foundation of the best interest standard that will apply to broker-dealers,” adding that DOL’s redraft does not meet “some of the minimum criteria for such a standard.”

(Related on ThinkAdvisor: DOL Fiduciary Redraft Will Be Changed, Top Official Says)

Imposing a best interest standard “requires rulemaking beyond what is presently in place for broker-dealers,” FINRA explains, noting that the self-regulatory organization “stands ready” to work with the Department and the Securities and Exchange Commission to develop “this additional rulemaking.”

The redraft’s preamble makes “passing reference to the comprehensive, well-established system of regulation that the federal securities laws impose upon broker-dealers” under the SEC and FINRA, the letter states.

Furthermore, DOL’s plan “does not incorporate existing regulation and introduces new concepts that are fraught with ambiguity,” FINRA states. It also says the DOL should “consider that these ambiguities will frustrate the ability of a financial institution and advisors to comply with the proposal,” and “will necessitate interpretive guidance on a wide array of issues, which the preamble does not provide.”

In some ways the DOL plan “even conflicts with existing FINRA rules and securities market trading practices,” FINRA states.

FINRA also believes the DOL plan’s treatment of differential compensation should be simplified by offering financial institutions a choice: either adopt stringent procedures that address the conflicts of interest arising from differential compensation, or pay only neutral compensation to advisors.

DOL also should streamline the Best Interest Contract Exemption and Principal Transaction Exemption, so that these exemptions “only impose conditions that restrict conflicts of interest, and eliminate the ambiguous conditions that will not meaningfully address those conflicts.”

The SRO points out that the DOL should “clarify the effects of non-compliance with the Prohibited Transaction Exemptions and the extent that remedies can be defined in the BICE contract.”

DOL should adopt aforementioned “fundamental improvements,” FINRA stated “to ensure that highly-regulated broker-dealers can continue to serve small investors.”

FINRA cited a a 2011 study which found that 98% of IRA accounts with less than $25,000 are commission-based brokerage accounts. “Many investors are buy-and-hold customers who pay lower fees — commissions upon purchase – than would be paid as an annual percentage of their nest egg,” FINRA stated in its comments.

“Many broker-dealers will abandon these small accounts, convert their larger accounts to advisory accounts, and charge them a potentially more lucrative asset-based fee,” FINRA argued. BDs “will do so largely because of the BICE constraints on differential compensation, the ambiguities in the best interest standard, the lack of clarity concerning various conditions, the costs of compliance, and uncertainty about the consequences of minimal non-compliance.”

FINRA also cautions DOL to “not be sanguine about this result. Robo-advice may provide a valuable alternative for some classes of knowledgeable investors, but for many customers robo-advice is a poor substitute for a financial adviser who understands the customer’s needs and guides the customer through market turbulence or life events.”

— Related on ThinkAdvisor: DOL Fiduciary Redraft Will Be Changed, Top Official Says


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