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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