Dalbar Puts a Sellers’ Exemption to Fiduciary Rule on DOL’s Desk

Louis Harvey could be described as a fiduciary statesman.

The founder and CEO of Dalbar Inc., a Boston-based market research company that provides compliance support throughout the financial services industry, falls into a unique category of stakeholders when it comes to the Labor Department’s fiduciary rule: a fiduciary wonk who thinks the DOL’s regulation is riddled with negative unintended consequences.

“I’ve rarely seen the level of minutiae included in this regulation,” said Harvey, who is also president of the nonprofit Fiduciary Standards Board. “It is simply amazing.”

Back in 2010, after the Labor Department pulled its first proposed fiduciary rule from the table, Harvey approached regulators with a suggestion: Craft a rule that prevents brokers selling investments from calling themselves fiduciary advisors.

“Our discussions at that time didn’t really go anywhere,” Harvey told BenefitsPRO, a partner site to ThinkAdvisor.

But these days, that idea is gaining traction.

In comment letters to the DOL, Empower Retirement and attorneys at Davis & Harmon are among those calling for a so-called sellers’ exemption, which would distinguish one-time sales of investments by brokers and insurance agents from fiduciary advice.

In its comment letter, Dalbar goes further, and actually submits a proposed sales professional exemption.

At its heart, the proposed exemption, which Harvey authored, would prohibit brokers and insurance agents from marketing themselves as fiduciaries, something many fiduciary proponents say the Securities and Exchange Commission should have been doing all along.

“Much of the problems the fiduciary rule attempts to address have their origins with the introduction of dual registration,” said Harvey, referring to the SEC permitting investment brokers to also register as fiduciary advisors.

“It led to a lot of false and misleading activity. A registered advisor could switch hats at will and become a broker seller. They found it was a lot easier to sell a product with the advisor hat on,” explained Harvey.

Regulators at the SEC turned a blind eye, which Harvey calls an “egregious” failure. “Had that been fixed, we wouldn’t be talking about a fiduciary rule today.”

But that genie is out of the bottle, in part because the brokerage industry resisted calls to enforce a firewall between selling and advisory marketing practices, says Harvey.

Language in his sales professional exemption claims it is essential that retirement investors understand the difference between sellers of investment products and fiduciaries.

“This clarity begins with eliminating overlapping and ambiguous titles. Retirement investors must know the distinction between the recommendation of an advice professional and the proposal of a sales professional,” according to language in the proposed exemption.

Harvey bases his exemption on the fiduciary rule’s best-interest contract exemption, which makes any recommendation to buy, sell or hold a security a fiduciary act.

The sales professional exemption would not replace the best-interest contract exemption, underscores Harvey, but rather it would complement it.

“We go to great lengths to not appear to be challenging the BIC — there is a place for it, just not in every corner,” said Harvey. “If you are intending to offer fiduciary advice, then you would use the BIC. But if you are not, and are only selling a product, then you would use the sales professional exemption.”

To be sure, the sellers’ exemption would offer tremendous relief from the BIC.

Sellers would have to adhere to a fiduciary standard of care, but there is no contract requirement under Harvey’s proposed exemption. Sales proposals would be given to investors, which would include disclosed, reasonable compensation on the sales.