Why New DOL Fiduciary Rule Is Not a 'Rehash' of 2016

I have reviewed and drafted scripts used by those in call centers and at some point in the conversation, even with the call center employee dutifully following the script, there usually comes a time when the caller asks:  “What should I do?” How the call center employee responds can mean the difference between advice and education. Looking at the script and materials used to train these employees can be helpful but is not dispositive of this question. So a blanket exemption for all call center operations is not a good idea.

But remember, this is just a proposal — the purpose of a proposal is to put something on the table to generate discussion and debate. As that process unfolds, I know that the EBSA staff will be listening and learning, just like they did in the run up to the issuance of the current proposal, which shows the impact that these important stakeholder interactions can have if everyone approaches them with a good faith and constructive mentality.

When do you think Labor will send the proposal to OMB and a final rule would be issued?

It will take some time for the EBSA leadership and staff to sort through all the comments and testimony they received so it is hard to tell, but, depending on how useful the comments they received are, I suppose it might be possible to send the final regulation to OMB for clearance by the end of April or May.

Since the finalization of the rule is an administration priority, I expect EBSA would continue to work with representatives of the Executive Office of the President and other federal agencies to secure their technical assistance and input prior to the formal OMB clearance process.

This was a very useful process as we worked on the 2016 rule. Depending on how long that OMB clearance takes, it is possible that a final rule could be published by the end of June, but that is sheer speculation on my part.

Groups are already saying this proposal will face lawsuits. Do you agree?

Regardless of what the DOL proposes, there are many powerful players in the financial services and insurance industry that have nearly unlimited resources to litigate over the proposal.

The fact that they are so willing to continue to spend millions of dollars to sue to block the implementation of a rule that at its core requires everyone who gives investment advice or makes investment recommendations for a fee to put their client’s best interest above their own pecuniary interests tells you how much money they are making from the weakness in the regulatory and enforcement structure of the current system.

This isn’t about bad people giving advice — most brokers and insurance agents genuinely try to do the right thing — it’s all about business models and/or compensation structures that reward people who steer their clients to certain products or investment strategies that generate the greatest profit margin, even though those products or strategies may involve high-fee, low-productivity, non-transparent or illiquid investments that lead trusting clients into believing that they’re getting advice in their best interest.

And the people who lose the most under the current system are those low-income families and people of color who can least afford to lose any of their hard-earned savings.

The so-called “choice” the industry wants so much to preserve is hardly investor choice — who among us would deliberately choose an advisor who is not legally required to put the investor’s interest above the financial interest of the advisor?

No, the choice they want to preserve, is the choice of the advice-giver to continue to hold himself or herself out as a trusted advisor when really what the advice-giver is trying to do is convince the investor that a relationship of trust and confidence exists so they can sell the investor a product. If you doubt my view, simply look at the marketing materials of the biggest industry opponents and judge for yourselves (or read the comment filed by the Consumer Federation of America, which details some of these materials).

Anything else you’d like to say about Labor’s new rule?

The department has made an important contribution to the applicable regulatory and enforcement structure to protect plans, plan sponsors, participants and beneficiaries and IRA owners. In many ways, I think that their job was both easier and harder than we faced in crafting the 2016 rule.

In 2016, we were the first federal agency to tackle the problem of conflicts of interests that were built into the business models and compensation structures of the financial services industry (including the insurance industry) that resulted in real losses in retirement income to investors. That made the hill we had to climb higher.

By the time the new proposal was unveiled on Oct. 31, 2023, two important developments had occurred: the SEC had issued its Reg BI package and the NAIC had issued its model regulation on financial advice.

While both documents had substantial weaknesses and left unfilled substantial gaps in regulation (the NAIC document by far the weakest), at least the DOL had something to build on.

As I have said many times, neither of these entities could, on their own or together, solve the problems caused by financial conflicts of interest in the investment advice world, even if their rules were perfect and consistent.

The SEC’s statutory jurisdiction is limited to securities, including insurance products regulated as securities. Moreover, Reg BI does not apply to investment recommendations made to plan sponsors or plans — an important omission.

The NAIC model laws and regulations are even less comprehensive because they require voluntary adoption by the states (that have the ability to adopt them in whole or in part) and only apply to insurance products. Moreover, they enshrine a weaker version of the current suitability rule as their standard and, more seriously, exclude cash incentives and compensation from the type of material conflicts that must be disclosed. Independent data shows that these incentives are the most significant source of financial conflicts of interest for sellers of insurance products.

Employee benefit plans and IRAs invest in many more categories of investment products than securities and insurance, including for example, direct real estate and REITs, bank products (such as collective investment trusts), private equity, other hard-to-value assets and, albeit controversial, cybercurrency).

These asset classes are not covered by the SEC or the NAIC standards. On the other hand, the department has authority to regulate investments that cover these asset classes, plus securities and insurance. So the only way to assure a uniform regulatory structure to protect retirement savers in all asset classes is through exercise of the department’s authority.

Finally, the department had a disadvantage that had to be overcome in the new proposal because it had to work carefully to accommodate the 5th Circuit’s concerns, even though, as I said previously, many think the case was wrongly decided.

The 5th Circuit had both procedural and substantive concerns and the department has done a good job of addressing both.