Views on improving the integrity of global capital markets
01 October 2015

DOL Fiduciary Rule Proposal: Armageddon or Start of Promising New Era for Investors?

After more than 2,600 comment letters, four days of public hearings with 75 participants, and threats from Congress to end its funding, the Department of Labor (DOL) continues the race to finish its rule on fiduciary duty before the current administration — one of the rule’s biggest proponents — leaves office. And on top of it, both sides of the political aisle are weighing in with strong views. On 24 September, the second (and presumably final) comment period ended and the DOL set about crafting its final rule.

For those of you out of the country the past several months, the DOL proposed a rule that would require those providing investment advice under the Employee Retirement Income Security Act (ERISA) to retirement plans and to IRA accountholders to act in their clients’ best interest. Broker-dealers, and others not already acting under a fiduciary duty, would need to comply with the provisions of the Best Interest Contract Exemption when providing investment advice — a complex undertaking requiring the execution of a contract and a far cry from the suitability standard under which brokers currently act.

It’s hard to remember a regulatory proposal that has generated such polarization among factions within and outside of the industry. Broker-dealers, consumer groups, trade associations, public interest bodies, and members of Congress have firmly camped out in their corners, exchanging often vitriolic assessments of the proposal’s worth. Just this week, the House Financial Services Committee passed a bill to halt the DOL’s action until the SEC acts to implement a fiduciary rule.  Depending on who you ask, the proposed rule is either a welcomed and much-needed change to protect investors in the retirement arena from conflicted advice or is sounding the death knell for smaller investors to receive any advice at all in the future because brokers with commission-based models will remove themselves from that market.

When President Obama first endorsed the DOL as a response to analysis stating that investors stood to lose up to $17 billion from receiving conflicted advice, many were not surprised by the immediate Republican pushback. But as a surprise to some, even a number of Democrats have called for a major rewrite of the proposal.

In comment letters and testimony, CFA Institute has continued to support DOL’s efforts to ensure that advice providers put clients’ interests first, while also suggesting changes to streamline and simplify aspects of the final rule. In comments just this week, Timothy Hauser, a main author of the proposal, noted that the final rule will likely reflect a number of important revisions, particularly with respect to the Best Interest Contract exemption.

And we continue to question naysayers’ dire predictions that adoption of the rule would effectively deprive smaller investors of retirement advice. In our latest comment letter, we cite the December 2014 report commissioned by the UK’s Financial Conduct Authority on the 2012 implementation of its Retail Distribution Review (RDR) that concluded that there is little evidence consumers were abandoned by advisers, even in an environment where the regulator had banned commission-based advice models. This was a significant step further than what was proposed by the DOL. We instead are counting on innovations of the industry and technology to respond to new opportunities.

Secretary of Labor Thomas Perez has promised full steam ahead, apparently undeterred by the sideline traffic.

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Image Credit: khoj_badami

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.

3 thoughts on “DOL Fiduciary Rule Proposal: Armageddon or Start of Promising New Era for Investors?”

  1. Richard Stumpf, CFP says:

    LInda, as I understand the rule, I will have one standard for ERISA plans, a different standard for IRAs, either a suitability or fiduciary standard for 403b/457 plans, and either a suitability or fiduciary standard for individual accounts. I will also have one more disclosure document to add to the long list of documents I already have to give to clients. My paperwork burden will increase, my regulatory burden will increase, and my legal liability will increase.

    We have no clarity for consumers, and the cost of doing business for me will increase.

    I’m struggling to find what there is to like about this rule you are supporting. The only reason for this rule is the SEC hasn’t done their job. We would be better off insisting they get to it.

  2. Linda Rittenhouse, JD says:

    Dear Mr. Stumpf—

    Thank you for your comment. We have encouraged the SEC over the years to develop a fiduciary standard for those providing personalized investment advice to retail investors and have been disappointed that it has not taken action, much less a lead, in this area (we understand consideration of a fiduciary proposal is on its calendar for October 2016). To that end, we appreciate efforts by DOL to address this important issue.

    The respective jurisdictions of the SEC and DOL differ in large part, and action by the SEC to create a rule would not extend, in many respects to areas over which DOL has legislatively-designated authority. The DOL’s proposal would extend to both ERISA plans and individual IRA rollovers. As to the consumer confusion issue you raise, we encourage the DOL in our comment letter and testimony we provided to work together on the final outcome to reduce any confusion that may result.

    Please let me know if I can provide any additional information to address your comments.

    Linda Rittenhouse

  3. Keith says:

    My question is- if I understand this proposal correct the ability to provide a client with a low cost MF investment option or annuity will become more difficult. However, there will be a push to solicit advisory business that fits the Fiduciary rule.

    That being said please explain how an ongoing fee based relationship is better for a client long term than a traditional MF purchase?

    Example. $100k in advisory at 1.25% for 10yrs client pays 12,500 in fees, however $100k in MF client pays 3.5% upfront and a 12b1 of 25bps thus over 10yrs client pays $3,500 up front and $2,500 in 12b1’s for a total of $6,000 over 10 years…

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