The comment deadline has arrived for retirement industry stakeholders and the public to weigh in on the fiduciary rule proposal published by the U.S. Department of Labor (DOL) in late June.

The structure of the proposed rule is based on the DOL’s existing, temporary policy adopted after the 5th U.S. Circuit Court of Appeals vacated its previous, 2016 fiduciary rule package. The long-awaited proposed rule was published in tandem with a new prohibited transaction exemption for investment advice fiduciaries as defined and policed under the Employee Retirement Income Security Act (ERISA).

As proposed, the exemption would authorize a wide range of investment advice compensation models and client relationship structures that could otherwise be prohibited under the new fiduciary rule, so long as advisers live up to a set of “impartial conduct standards,” such as those included in the Regulation Best Interest (Reg BI) framework recently implemented by the U.S. Securities and Exchange Commission (SEC). This is to say, they are still required to collect only reasonable compensation and to make no materially misleading statements.

Much of the financial services industry’s commentary about the proposal has been positive, with various commenters voicing appreciation that multiple national-level conflict of interest rules are now aligned.

Not everyone is pleased with the DOL’s proposal, however. Comments submitted by Barbara Roper, director of investor protection with the Consumer Federation of America, suggest the regulation is being unnecessarily rushed.

“This is a regulatory package being rushed through by the Department of Labor in the guise of improving retirement investment advice for workers and retirees. It would instead benefit powerful financial firms at retirement savers’ expense,” Roper says. “This regulatory package is a multi-billion-dollar transfer of wealth from the retirement accounts of American working families to the wealthiest, most powerful financial firms. Instead of strengthening protections for workers and retirees, it makes it easier for financial firms to profit unfairly at their expense.”

Roper’s argument is that the DOL regulatory package consists of two components “which work together to make it easier for financial firms to evade any fiduciary obligation” and to weaken the fiduciary standard when it does apply.

“A final rule reinstating a 1975 regulatory definition of fiduciary investment advice that it is so riddled with loopholes that it enables firms to decide for themselves when and if they want to be held to a fiduciary standard,” Roper says. “A proposed new exemption, modeled on the Securities and Exchange Commission’s weak, non-fiduciary Regulation Best Interest, which would enable firms providing retirement investment advice to engage in a wide range of conflicts of interest without adequate safeguards to prevent those conflicts from tainting their advice.”

Morningstar’s comment letter does not take nearly as strong a stance as that voiced by the Consumer Federation of America, though the diversified financial services firm calls on the DOL to “revisit” parts of its proposed regulation. In particular, Morningstar asks if the current proposal would lead to ambiguity about whether the fiduciary duty would apply in the case of an entity providing to a consumer one-time advice about an individual retirement account (IRA) rollover.

“We believe the Department of Labor should revisit the ‘regular basis’ prong of the five-part test to either eliminate this requirement or presume that it is satisfied in the context of a rollover,” Morningstar comments. “The fiduciary standards will not apply to advisers recommending rollovers or other transactions to many Americans who are seeking advice if the five-part test is retained as is. We believe that all advice on individual retirement account rollovers should be subject to the proposed prohibited transaction exemption and retaining this prong will undermine that goal, and ultimately retirement security, for many plan participants.”

Morningstar also says the DOL proposal could increase “confusion and inequity” by requiring that investment advice fiduciaries disclose that they are ERISA fiduciaries, without further explanation of what this means and without consideration that investment advice fiduciaries do not have to comply with all of the prohibitions of ERISA.

“We recommend that a more helpful disclosure—an expanded version of the Securities and Exchange Commission client relationship summary—be provided to all individuals receiving advice on a rollover into an IRA or on an IRA account, and that this document explain an individual’s rights and remedies under both SEC and DOL regulations,” Morningstar says.  

Regarding in-plan advice, Morningstar agrees with the DOL that limited plan and IRA lineups, particularly those with options that are either proprietary or provide third-party fees, can present significant conflicts and may not be in the investor’s best interest.

“As such, we believe that the documentation requirements do not go far enough in mitigating this conflict, and the DOL could do more to encourage the use of independent fiduciaries in these cases,” the Morningstar letter states. “In addition to IRA rollovers, we think that it is useful for investors to obtain fiduciary advice on health savings accounts [HSAs], in which flows and a percentage of assets being invested have been increasing. Therefore, we believe the proposed rule should cover HSAs.”

Both the Morningstar and the Consumer Federation of America letters suggest the proposed rule leaves open “major questions” about enforcement.

“The DOL should clarify when it will take the lead on enforcement and when it will rely on the SEC to enforce regulations regarding IRA advice,” Morningstar’s letter states. “Since the proposed rule does not create a private action, unlike the previous rule from 2016, it makes agency enforcement particularly important.”

Distinct comments were submitted by the American Council of Life Insurers (ACLI), which questions whether the proposal could limit consumer choice. The ACLI has been a big advocate of the SEC’s Regulation Best Interest.

“We are concerned that the Department’s commentary in the preamble … could be understood to broadly impose fiduciary obligations in a manner similar to the Department’s 2016 fiduciary regulation,” the ACLI comment letter states. “Before it was vacated by the Fifth Circuit Court of Appeals, this fiduciary-only approach restricted access to professional guidance that retirement savers with low and moderate balances want and need. We have concerns that such consumer choice may be at risk again.”

The ACLI letter continues: “The views expressed by the [DOL] could be read to capture, as fiduciary advice, sales activities in which recommendations are solely incidental to traditional sales activities. The department’s comments conflate the receipt of compensation incident with the execution of a recommended transaction with a payment for such advice.  That view does not align with the statutory text of ERISA § 3(21)(A)(ii), the Fifth Circuit ruling that vacated the [DOL’s] 2016 definition of ‘fiduciary,’ or the SEC’s interpretations of the Investment Advisers Act of 1940 promulgated as a part of its Reg BI effort. Further, in its efforts to explain how recommendations regarding rollover transactions from ERISA plans lead to the rendering of investment advice, the department obfuscates rather than clarifies the well-establish elements of the five-part test to both the detriment of consumers and financial professionals.”

The text of the comment letters should soon be made public on the DOL website.