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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