The Department of Labor’s rule proposing expansion of fiduciary status to all advisors to IRAs and most 401(k) plans is all but a done deal, according to outgoing Securities and Exchange Commissioner Daniel Gallagher.
To date, Gallagher has pulled no punches articulating his disdain for the DOL’s efforts.
But in a comment letter addressed to Labor Secretary Thomas Perez, Gallagher effectively called out Labor’s chief, who has made consistent public promises that he intends to continue to work with industry to post a workable final regulation.
“It is clear to me that the DOL rulemaking is a fait accompli and that the comment process is merely perfunctory,” wrote Gallagher. “I am convinced that the rule, when finalized, will harm investors and the U.S. capital markets.”
The DOL’s rule is based on the “misguided notion” that fee-based compensation models are superior to commission-based models for every investor, said Gallagher.
The rule now under consideration differs from the DOL’s original attempts to write a fiduciary regulation in that it does not prohibit commission-based transactions, as the first rule attempted to do and as has been done in other developed economies.
But opponents to the rule say the prohibited transaction exemptions and Best Interest Contract Exemptions established in the new rule that will allow commission-based sales will be too costly and onerous to comply with, forcing the advisory industry to comprehensively adopt fee-based models.
Gallagher can be added to the growing list of stakeholders who believe that will be the case.
“Broker-dealers utilizing a commission-based fee structure will find it difficult, if not impossible, to navigate the labyrinth of prohibitions and exemptions contemplated by the proposal, and many will make the unfortunate—yet entirely rational—choice to stop servicing certain retirement accounts,” he argued in his letter to Perez.
High net-worth clients will be moved to fee models and “will pay a premium to the existing commission structure,” said Gallagher.
And “less-heeled” investors will be fired by their advisors and left to fend for themselves, he said.