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Even Fiduciary Champions Push DOL to Change Rule

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Industry trade groups and lawmakers are urging the Department of Labor to revise, revoke or further delay its fiduciary rule — even the Investment Adviser Association.

Comments continued to flood into Labor on Monday, the last day of the comment period issued by Labor on President Donald Trump’s request that the Department review the rule in its entirety and consider revising the rule or rescinding it.

IAA, which represents advisors registered with the Securities and Exchange Commission and has lobbied in favor of the rule, told Labor in its 10-page comment letter that the fiduciary rule and exemptions, as interpreted by the department, “will have significant, unwarranted — and, in some cases, unintended — consequences for advisors that are already ERISA fiduciaries because the rule applies to pre-contract and sales discussions with prospective clients.”

The application of the rule in this respect, IAA warned, “may adversely affect the ability of investors to assess and access high-quality retirement information and advice.”

IAA urged Labor to address “the fundamental concern that IAA has repeatedly expressed — that an advisor should not be treated as a fiduciary before entering into a relationship with a client.”

In this regard, IAA continued, Labor “has failed to identify abuses in the sales context by persons, like investment advisors, who are seeking out fiduciary relationships, rather than trying to avoid such relationships.”

Attaching fiduciary status to sales conversations and other pre-contract interactions “will adversely impact investors’ ability to retain appropriate investment advisors to provide them financial advice,” IAA argued.

Labor should amend the definition of “recommendation” to exclude “pre-contractual conversations involving an SEC-registered, fee-based advisor, acting as such, who will be a fiduciary once the client engages the advisor,” IAA said.

To the extent that the Department does not amend the definition of “recommendation” as requested by IAA, the trade groups said that any reproposed or revised rule should: (1) adopt a broader, more practical, “hire me” exception to the fiduciary definition; (2) broaden and clarify the “independent fiduciary exception”; and (3) clarify that intra-company conversations do not trigger fiduciary status.

Vanguard’s Qualms

In his letter to Labor, Vanguard CEO Bill McNabb stated that while the rule should not be rescinded, Labor should “modify the scope of its definition of investment advice and certain operational aspects of the rule to protect investors in an efficient and cost-effective way while promoting access to high-quality investment advice, information and education.”

Vanguard’s founder and former CEO, John Bogle, is one of the most prominent advocate of a fiduciary standard for advisors, and the fund giant benefits richly from advisors’ and investors’ broad-based switch to products with lower fees.

Vanguard, McNabb said, believes the rule as drafted “harms investors through reduced access to products, information and advice and is likely to unnecessarily increase litigation costs to investors seeking retirement services.”

Further, Vanguard argued, Labor’s decision to move forward with the rule’s updated definition of investment advice and the rule’s Best Interest Contract Exemption’s Impartial Conduct Standards “will likely further increase the cost of compliance and reduce access to investment advice, information and education for retirement plan participants and individual retirement account investors.”

New Data, Orphaned Accounts

The Investment Company Institute, which represents fund companies and has been a vocal opponent of the rule, told Labor in its Monday comment letter that the department should extend the fiduciary rule’s current June 9 compliance date – which was extended from April 10 – because, as “DOL has acknowledged, [the June 9 date precedes] completion of the required re-examination” of the rule requested by Trump, which is “a recipe for chaos and uncertainty in the market.”

ICI Chief Economist Brian Reid told Labor that “based on market experience thus far and our analysis of the data, it is clear that the DOL will have to either rescind or revise the rule to comply with the president’s directive.”

The U.S. Chamber of Commerce, which has sued to block the rule along with other industry groups, agreed in its comment letter that Labor must further delay the rule so that it can use “new facts and new research” that are now available to come out with a “new economic analysis” to support the rule.

One Chamber member providing mutual funds, the pro-business group said, “has seen the number of orphaned accounts — accounts where there is no longer a financial professional providing assistance to the owner of the shares — double in just the first three months of this year. These small accounts, averaging about $21,000, are no longer being served by financial professionals because the fiduciary rule makes it uneconomical to do so, and the provider expects this number to rise until more than 16% of their accounts are orphaned.”

The president ordered a review precisely so the department could decide whether to repeal, amend or retain the fiduciary rule in light of new information from “real-world” experience gained in attempting to implement its requirements.

Reid said that ICI urges Labor, “in its updated analysis of the rule’s likely impact, to try to shed light on the concerns regulators seek to address in the rule and determine the best solution, rather than starting with a predetermined agenda of eliminating perceived potential conflicts in the retirement marketplace and using the regulatory impact analysis to justify that effort.”

ICI General Counsel David Blass added that the rule “limits choice of products and services, particularly for IRA investors, and constrains investor education in a variety of ways, including impeding conversations with investors about how to structure distributions from the retirement plans and IRAs.”

ICI, Blass reiterated, continues to call for a “best interest standard of care, developed by the DOL in coordination with the [SEC], that applies across retirement and nonretirement accounts and ensures all investors have affordable access to financial advice.”

GOP Lawmakers Urge Further Delay

GOP members of the House Committee on Education and the Workforce also told Labor that it’s “counterproductive” for the rule to be implemented on June 9 before conclusion of DOL’s analysis. “The Department should not establish an arbitrary applicability date for a regulation that should be rescinded or significantly revised,” the Republican lawmakers said. “Instead, we urge you to clarify that the applicability date of the regulation will be delayed until the analysis required by the President’s Memo is completed and rescission or appropriate revisions are finalized.”

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