Labor Secretary Tom Perez. (Photo: AP)

Industry officials are at odds over whether the recent letter from four lawmakers telling Labor Secretary Thomas Perez to “repropose” the Department of Labor’s fiduciary redraft is yet another stalling tactic or an attempt to get the rule right.

Four lawmakers told Perez in a Friday letter to repropose DOL’s fiduciary redraft after the comment period expires on the 2015 version Labor released in April.

“As the Department is well aware, this proposal consists of extensive changes to an already complex and highly regulated framework regarding the investment advice market for retirement savings,” wrote Rep. Ann Wagner, R-Mo., along with Reps. Andy Bar, R-Ky.; David Scott, D-Georgia; and Lacy Clay, D-Mo. “Such a rule will significantly change how millions of Americans seek help to make their investment decisions and the relationships that they have with their financial advisor.” 

The lawmakers ask for a “new formal rulemaking process,” and state that “given the concerns from stakeholders and a bipartisan group in Congress on this issue, there is a strong possibility that a final rule may widely differ in its substance from the initial proposal or contain provisions that were not part of the proposed regulation.”

As a result, they continued, “we feel it is in the interest of our constituents that the DOL repropose this fiduciary regulation to ensure adequate stakeholder involvement in the notice and comment period during a new formal rulemaking process.”

The official comment period on the redraft expired on July 21, with a set of hearings on the redraft to be held the week of Aug. 10. The transcript of those hearings will then be released for a 14-day comment period.

Kent Mason, a partner with Davis & Harman, a Washington-based law firm that represents big financial companies, told ThinkAdvisor in a Tuesday email message that the letter from lawmakers is “a very constructive effort to try to get the rule right.”

The 2015 proposal “is significantly less workable than the 2010 proposal, and would go even farther in jeopardizing access to investment and distribution assistance for low- and middle-income individuals and small businesses,” Mason said. “In that context, a letter urging the DOL to repropose makes great sense as an important step toward ensuring that the final regulation helps individuals, rather than adversely affecting them.”

But Barbara Roper, director of investor protection for the Consumer Federation of America, argued in her email to ThinkAdvisor that “there is absolutely no reason for the DOL to restart this process.”

DOL, Roper says, has “provided, and continues to provide, ample opportunity for input from all stakeholders. We are confident that they will use that input to craft a final rule that addresses legitimate concerns and ignores the self-interested hype from those intent on maintaining the status quo.”

Mason predicts at the close of the post-hearing comment period (likely in mid-September), DOL “will be working on finalizing the regulation,” with DOL aiming to publish the final regulation around March 2016.

Wagner is the author of H.R. 2374, the Retail Investor Protection Act, which would require the DOL to wait to repropose its rule until the Securities and Exchange Commission issues its own fiduciary rulemaking.

Steve Saxon, chairman of Groom Law Group, said recently that Wagner’s bill “will continue to be supported” and that DOL will push to issue a final rule (likely by May 2016) before Jan. 20, 2017, the day the new president takes office.

Perez told members of a Senate Health, Education, Labor and Pensions subcommittee on July 21 that DOL is “very flexible in how to get this [rulemaking] done.” DOL, he said, hasn’t “made any decisions yet on what to do [regarding amending the redraft] because the comment period is still open. But we’ve gotten some great advice.”

What’s Wrong With BICE? A Lot, Says ERISA Guru Reish

ERISA guru Fred Reish of the law firm Drinker Biddle & Reath says that one area of the rulemaking that must be changed is the best interest contract exemption, which requires an advisor to “get a signed contract at the time of the initial conversation” with a client or potential client.

“The likely solution will be to require some disclosures at the time of the initial conversation, and then have a contract signed before any transactions are made,” Reish says. “The contract will be likely retroactively effective to the initial conversation.”

Another problem with BICE is that the website disclosures, as proposed, “are impossible,” Reish says. “I believe that the Department now understands that.” While DOL hasn’t suggested an alternative, one possibility “is a website disclosure of basic compensation structures, such as brokerage commissions, mutual fund commissions, etc. The 408b-2 regulation requires disclosures similar to that. It’s also possible that, if a product is not described on the website, enhanced disclosures could be required at point of sale.”

Another “difficult issue” related to the BICE is the compensation of the individual “fiduciary advisor.”

The BICE proposal “may not be workable,” Reish says, because “in effect, it says that, if the individual advisor’s compensation is level, then the financial institution and its affiliates can receive additional compensation (eg., revenue sharing, investment management fees on proprietary products, and profits on insurance products).”

BICE then goes on to say that the individual advisor’s compensation can vary, but only on “neutral factors,” Reish explains.  For example, “the proposal says that a neutral factor could be compensation that is based on how much work it takes to sell different products. If an annuity sale took three times as much effort as a mutual fund sale, the advisor could earn three times as much money. The problem is that every case is individual, and the system needs clear lines. So, it won’t work. I believe the Department now understands that …. but, unfortunately, I don’t know how [DOL] can manage advisor incentives (to minimize conflicts) through compensation.”

— Check out Evensky: Fee-Only Advisors Face Annuity Dilemma on ThinkAdvisor.