The Department of Labor said late Monday afternoon that it is proposing a new exemption for investment advice fiduciaries, allowing them to receive “a wide variety of payments that would otherwise violate the prohibited transaction rules.”
Those payments include “commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties” and would extend to rollover advice, according to the proposal.
“Today’s proposed exemption would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers,” said Labor Secretary Eugene Scalia, in a statement. “The exemption would add to the tools individuals need to make the right decisions for their financial future.”
In a tweet, Barbara Roper, director of investor protection for the Consumer Federation of America, said the rule “reopens loopholes in the definition of fiduciary investment advice, making the standard easy to evade. It creates a new exemption to allow advisers to get conflicted compensation, subject only to Reg BI’s weak, non-fiduciary standard.”
Roper added in an email to ThinkAdvisor that under Labor’s plan, “many if not most rollover recommendations wouldn’t be covered….At the same time, the DOL is creating a new exemption that will allow fiduciary advisers to earn conflicted compensation, subject only to the weak ‘best interest’ standard and conflict ‘mitigation’ requirements of Reg. BI.”
The SEC, Roper continued, “was explicit in adopting Reg BI that it was not a fiduciary standard, and it includes only minimal restrictions on conflicts of interest. That’s a huge watering down of the strong fiduciary protections that are supposed to apply under ERISA to retirement advice.”
Labor’s Employee Benefits Security Administration plans to soon send its proposed new exemption to align with the Securities and Exchange Commission’s Regulation Best Interest to the Federal Register, which will open it up for a public comment period, a senior Labor official told reporters Monday.
Dale Brown, president and CEO of the Financial Services Institute, said in a Monday statement that FSI is ”thoroughly reviewing the rule proposal. However, we expect the Department heeded the concerns outlined by the Fifth Circuit Court of Appeals and consulted with the SEC to avoid conflicts” with Reg BI.
“These regulations must work in tandem to prevent conflicting requirements for financial advisors working to diligently comply with the rules and to avoid creating confusion among investors,” Brown said. “This will also ensure Main Street Americans have access to the quality, affordable financial advice they need to achieve their financial goals.”
The senior Labor official explained that under the proposed new exemption from ERISA’s prohibited transaction rules, Labor ”is not changing the definition of fiduciary,” and the 5-part test under ERISA “remains intact.”
The Labor official also explained that the best interest standard in DOL’s exemption “is aligned” with Reg BI “and the existing fiduciary duty of SEC-registered investment advisors.”
Labor’s rule, which is in the form of a prohibited transaction exemption, fulfills two important policy goals, according to a senior Labor Department official who briefed reporters. A fact sheet about the exemption is available here.