While the health care and tax reform debates continue apace in Washington, the ever-present fiduciary discussion also rages on. Fiduciary advocates breathed a sigh of relief in early June when the first phase of the Labor Department’s fiduciary rule became effective, but Rep. Ann Wagner, R-Mo., threw a wrench into the fiduciary rule’s unpredictable path in mid-July when she laid bare a draft bill that seeks to replace the rule and keeps a fiduciary rulemaking under the Securities and Exchange Commission’s jurisdiction.
Wagner’s discussion draft was the focus of a July 13 hearing held by the House Financial Services Capital Markets Subcommittee titled “Impact of the DOL Fiduciary Rule on the Capital Markets.”
Wagner, chairwoman of the House Financial Services Committee’s Oversight and Investigations Subcommittee, and a steadfast opponent of Labor’s fiduciary rule, stated that her draft legislation “would apply a workable best interest standard for broker-dealers when providing investment advice without losing access [to] such advice for millions of low- and middle-income investors.”
Wagner stated that her draft bill also keeps the fiduciary issue “under the jurisdiction of the SEC, the expert regulator who has the experience of overseeing the industry.” Broker-dealers, she said, “should provide advice that is in their customers’ best interest, and this draft bill will make that absolutely clear with a standard that applies to both investment and retirement accounts, unlike Labor’s rule.”
The Wagner bill is similar to other proposals introduced in the House — including House Financial Services Committee Chairman Rep. Jeb Hensarling’s Financial Choice Act, which passed the House and is awaiting Senate action — that would repeal the DOL’s fiduciary rule and “impose a lower standard of fiduciary conduct for broker advice” than is required under the Employee Retirement Income Security Act, says Duane Thompson, senior policy analyst for Fi360.
Thompson believes Wagner’s bill “has very little chance of being signed into law because any final version of the discussion draft is unlikely to survive a Democratic filibuster on the Senate side.”
House lawmakers were moving ahead at press time in mid-July to mark up the Affordable Retirement Advice for Savers Act, H.R. 2823, legislation introduced on June 8 by Rep. Phil Roe, R-Tenn., a member of the House Committee on Education and the Workforce, and Rep. Peter Roskam, R-Ill., chairman of the Ways and Means Subcommittee on Tax Policy, that would also overturn the Obama administration’s fiduciary rule.
H.R. 2823 also requires financial advisors to serve their clients’ best interests and enhances “transparency and accountability through clear, simple and relevant disclosure requirements,” Roe and Roskam said in introducing the bill.
Indeed, Democratic lawmakers on the subcommittee criticized Wagner’s draft bill, stating their dismay that GOP efforts continued to derail the fiduciary rule. “I did not think we were going to have to come back and have this fight all over again,” said Rep. Maxine Waters, D-Calif. “It looks like we’re going to have to.”
Rep. Carolyn Maloney, D-N.Y., another fiduciary rule supporter, argued that Wagner’s draft puts forth a “watered down” standard. “There are bad actors out there,” Maloney said. “We have all had people come to us and say: ‘I put my savings with this advisor and they said they’d be protected. I lost everything.’ The reason this rule was put in place was to protect people.”
But supporters of the draft bill like David Knoch, president of Dallas consulting firm 1st Global, who testified at the July 13 hearing on behalf of the Financial Services Institute, stated that FSI supports Wagner’s discussion draft because “it creates a uniform standard of care enforced by the SEC as the appropriate jurisdictional agency with the necessary expertise, and provides for reasonable and streamlined disclosures as a way to require industry participants to communicate their conflicts.”
Cristina Martin Firvida, director of Financial Security and Consumer Affairs at AARP, countered during her remarks at the hearing that “a big concern” AARP has about the discussion draft is that the best interest standard, “as described, is quite vague,” and that the current suitability standard placed on brokers “could satisfy” the standard.
“We don’t see how this bill is an improvement on the current situation,” Firvida said. “The fiduciary rule directs how to address conflicts. The concern we have is that disclosure alone could satisfy the benchmark.”
However, Jerome Lombard, president of the Private Client Group at Janney Montgomery Scott, who testified on behalf of the Securities Industry and Financial Markets Association, argued that the standard in Wagner’s draft is “clearly a higher standard than suitability,” adding that it would also “apply to all accounts, not just retirement accounts.”
DOL Request for Comment
While the fiduciary rule’s Impartial Conduct Standards took effect on June 9, Labor continues to gather public comments as part of President Donald Trump’s directive that Labor review the rule. DOL released on June 29 a Request for Information (RFI) regarding the rule, stating that information gleaned from comments “could form the basis of new exemptions or changes/revisions” to the fiduciary rule and its associated prohibited transaction exemptions, or PTEs.
Until July 21, Labor took comments on whether to extend the Jan. 1 applicability date of certain provisions in the Best Interest Contract Exemption; the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs; and Prohibited Transaction Exemption 84-24, which deals with annuities. Comments in response to the other 18 questions in the RFI are due on or before Aug. 7.
States Entering the Fiduciary Fray
While both SEC Chairman Jay Clayton and Labor Secretary R. Alexander Acosta told lawmakers on July 27 that they’d collaborate on a fiduciary rule, states have also started devising their own fiduciary laws.
Clayton told members of the Senate Appropriations Committee’s Subcommittee on Financial Services and General Government that Labor’s fiduciary rule is “going to affect the markets we [the SEC] regulate and vice versa. It’s my intent as chairman to try and move forward and effectively deal with that in a way that is coordinated so that our Main Street investors have access to investment advice and access to investment products. I don’t want to see any of these actions that we would take reduce the access to investment advice or the access to investment products, at the same time very much fulfilling our investor protection mission.”
Brokers in Nevada had to act as fiduciaries as of July 1, according to a newly revised law. Nevada Senate bill 383 revises the definition of financial planner “to remove the exclusions for a broker-dealer, a sales representative and an investment adviser, thereby making such persons subject to the provisions of existing law governing financial planners.”
Mark Halloran, senior director and head of Industry and Regulatory Strategy at Transamerica, who represented the American Council of Life Insurers at the July 13 hearing to discuss Wagner’s fiduciary draft, stated that the trend of states entering the fiduciary rule fray is “only going to create more conflict.”
State actions, he said, are “inconsistent with federal securities laws. … Having 50 states doing 50 different things [in the fiduciary area] doesn’t help. We deal with that in insurance law. Adding on state legislation just mucks up the water even more.”