Views on improving the integrity of global capital markets
22 July 2015

Labor Department Fiduciary Rule Proposal Takes Important First Step

Since the passage of Dodd-Frank five years ago we have been waiting for action to clarify the legal parameters of providing investment advice in the US. At long last the Department of Labor’s (DOL) proposed “best interests” standard is out of the gate. Most of you will be pleased to see CFA Institute support for the proposal here. I hasten to add we have heard from many members on both sides of the issue.

As we mentioned in April, this is an issue whose resolution is long overdue, and for that reason alone we are pleased to see liftoff for guidelines on fiduciary advice. The Securities and Exchange Commission (SEC) has had its chance to act on its own, most recently being directed by Dodd-Frank five years ago this month to consider action. However, little has moved since.

Why is a conflict of interest rule needed? Will smaller investors be harmed? Linda Rittenhouse recaps her testimony before the Department of Labor on the fiduciary rule proposal.

We are not completely unsympathetic to the SEC’s plight given the staunch political and commercial pushback on this issue. While we have vocally expressed our view and hope that the SEC would take the lead in rulemaking on standards of care for personalized advice, it was not going to happen in this environment.

And to that end, we commend the DOL for taking on the challenge. Based on the Employee Retirement Income Security Act of 1974 (ERISA), the proposal would permit broker-dealers and others not already subject to a fiduciary standard to provide personalized investment advice on the condition they act with a “best interests” duty, subject to meeting a number of conditions, including entering into a contract with their clients. Known as a “best interest contract exemption,” this approach hopefully sets the stage for far fewer conflicts of interest, while accommodating existing business models.

If it sounds complicated, that’s because it is. Complaints range from increased legal uncertainty, large compliance and record-keeping costs, and the potential that smaller clients will be dropped by current brokerage firms that deem the downsides of complying to be too great. While some of these concerns may have validity, industry is pulling out the stops to short-circuit any meaningful reform, reasoning that the current system gives investors choices.

Although the DOL proposal would raise the standard of care available to retirement account holders, investors still stand to be confused given the lack of harmony between securities regulations and ERISA’s provisions. Most investors won’t fathom that a broker can contract to provide services consistent with fiduciary duty with respect to retirement assets, but then rely on a suitability standard for their advice regarding nonretirement assets. The SEC should move quickly to minimize the gaps between securities law and pension law so that investors can expect a single fiduciary standard of care, no matter the type of account.

Now comes the effort by DOL to address as much of the concern and confusion raised through this consultation process as it can muster. Comments will be weighed and public roundtables will follow in the next couple of months to ensure that the rule is properly framed, workable, and leads to the ultimate goal of protecting the investor. We hope that the DOL and SEC will work together during this period to inform new SEC rules.

In the end, we would all like to have a single standard of care from those who advise investors that honors client interests above all others. Nothing is more fundamental, in our view, for an industry that seeks to better serve society. While the DOL’s proposal is not perfect, it is an important step in the right direction.

  • Related video: How do we resolve conflicts of interest in the investment industry?
  • Related video: Why is a new rule needed? Without one, it will cost investors – some $200 billion more in the next 10 years if the rule’s not changed, the DOL says.

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About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

7 thoughts on “Labor Department Fiduciary Rule Proposal Takes Important First Step”

  1. Stan Buell says:

    USA citizens are fortunate that DOL is taking such an important step and to have this supported by the President.
    In Canada the situation is much worse where our regulators allow sales persons to use titles of “Financial Advisor” without responsibility beyond suitability. As a result Canadians lose billions of their retirement savings each year because they are sold risky products that pay high commissions and are put in leveraged investments.
    As a result each market downturn results in a rash of investors suffering extreme life-altering loss.
    The DOL should face down industry efforts to defeat this needed move.

    1. Mark Jasayko, CFA says:

      It should be noted that in Canada the title of “Portfolio Manager” cannot be used unless one is licensed either through an SRO (IIROC) or one of the provincial securities commissions to engage in discretionary investment management, thereby being “fiduciary.”

      Most of the major Canadian financial institutions have acquiesced and permitted advisors to attain the license by following the required procedures. If anything, the reason Portfolio Managers are not more pervasive in Canada is that the institutions are somewhat reluctant to visibly highlight them as these “fiduciaries” don’t represent much of an opportunity to place newly underwritten securities from those institutions’ securities/investment banking subsidiaries.

      1. Stan is talking about the limited regulation of the “advisory” segment of the Canadian financial services’ industry. Advice has not been incidental to the transaction for a long time and the “promise” of service exceeds the regulated standards. For some reason Canadian regulators have long been aware of this misrepresentation (Fair Dealing Model 2004) but have yet to do anything about it. Yes PMs are considered to provide advice and are regulated in accordance with such by the Securities Act but this has little to do with the issues that currently dominate the advisory segemnt. Canada is well behind many international regulators when it comes to investor protection.

        1. Linda Rittenhouse, JD says:

          Thank you for your comments.

        2. Mark Jasayko, CFA says:

          Which international regulators?

    2. Linda Rittenhouse, JD says:

      Thank you for your views.

  2. Linda Rittenhouse, JD says:

    Thank you for your comments.

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