Department of Labor (DOL) officials have heard plenty of reasons why the fiduciary rulemaking effort is flawed in the eyes of the investment service providers it’s meant to regulate—but that doesn’t mean the DOL is about to capitulate on its long-running plan to strengthen the fiduciary standard.
Despite a torrent of negative comments about the proposed rule changes aired during the first three days of public hearings called in Washington, D.C., Labor Secretary Thomas Perez seemed to double down on the rulemaking effort this week. A letter from Perez surfaced online that appears to reject outright an earlier call from a bipartisan group of U.S. lawmakers to halt or slow the new fiduciary rule’s adoption. The DOL remains fully committed to an updated fiduciary standard, Perez explains.
The lawmakers had asked Perez to put the brakes on the rulemaking process due to many of the same concerns shared by providers addressing the DOL in person. These include the worry that a stricter advice standard will push providers away from lower-balance savers and cut off the sources of advice people rely on when making IRA rollover decisions and other challenging plan-related choices. For their part, DOL officials fielding comments from providers again and again highlighted the flexibility they believe has been programmed into the fiduciary rule proposal.
Addressing the letter to Representative Ann Wagner (R-Missouri), Perez says the DOL has undertaken an “incredibly thorough public outreach over the past five years as we have designed this proposal.”
“When I became Labor Secretary two years ago, I committed to slowing down the process to ensure that all voices could be heard,” Perez notes. He goes on to argue that, “as a result of lessons learned from the 2010 proposal and the robust listening process since, we issued our re-proposal in April 2015.” He says the re-proposal was specifically designed to allow for the flexibility the “financial services industry requested.”
“This will ensure that your constituents are protected in a way that isn’t unnecessarily disruptive for those who provide investment advice to retirement savers,” Perez tells the Congresswoman. “We received so far a total of over 330,000 comments from a variety of public stakeholders, including 328,040 individual petition comments from members of the public.”
Perez closes the letter by saying the DOL “looks forward to the public hearings … where this open and useful dialogue will continue and DOL staff will have the opportunity to talk directly once again to stakeholders.”
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It's safe to say most organizations presenting at the hearings in Washington took the side of Rep. Warren and her Congressional allies, although some took a middle ground and others strongly backed Perez’s statements that the rule will be sufficiently flexible to prevent an exodus of advice providers from the retirement planning space.
One commenter, Carl B. Wilkerson, vice president and chief counsel for securities and litigation at the American Council of Life Insurers, charged DOL officials with overlooking the proposal’s potential harm to small businesses and small to moderate balance retirement savers.
In its economic analysis of the fiduciary proposal, Wilkerson said, the DOL extols a parallel 2013 initiative in the U.K. and cites a significant reduction in commissioned advice. “It fails to mention, however, an even greater drop in advice to retirement savers,” Wilkerson said. “In 2014, Morningstar U.K. reported that 11 million investors have fallen through an ‘advice gap’ following industry regulation. In response to this severe problem, the U.K. last week launched a comprehensive review of its regulations and its abandoned retirement savers.”
Another commenter, IRI Senior Vice President and General Counsel Lee Covington, suggested that the rule as currently written would limit the availability of lifetime income options, which he said is “a conclusion that was not considered in the regulatory impact analysis conducted to support the rulemaking.” He noted that IRI urged DOL officials to ensure the rule does not undermine the Obama Administration’s “important efforts to increase access to guaranteed lifetime income products, which help retirees ensure they will not outlive their savings.”
“Given the benefits of annuity ownership, before adopting its rule, the Department of Labor should fully evaluate the impact of any rule on access to guaranteed lifetime income products and the costs and market impact of the proposal associated with variable annuities,” Covington said.
NEXT: Siding with Perez
Towards the end of the day Wednesday, CFA Director of Investor Protection Barbara Roper shared some of the more DOL-friendly comments.
Roper called into question the common industry narrative “that many brokers will simply stop serving this market if the rule is adopted and that investors, particularly small savers, will be harmed if they lose access to advice or are forced into more expensive fee accounts.”
There are many holes in this argument, Roper said, “not least that there is actually no compelling evidence that commission-based brokerage accounts are consistently more affordable than fee-based accounts when the total cost of investing are taken into account. But the more fundamental point you need to keep in mind is that this is what they always say when faced with a rule they don’t like.”
Roper said a recent example of this phenomenon arose a few years back when the Securities and Exchange Commission (SEC) was considering whether to regulate all fee-based accounts as advisory accounts under the Investment Advisers Act.
“Many of these same organizations, indeed some of the same individuals, made exactly the same arguments they’ve made here, that brokers would be forced to stop offering the accounts and investors would lose access to valued services, if the accounts were regulated as advisory accounts,” Roper said. “The SEC backed down, but, in a rare win for investors, its decision was overturned in court. As a result, all fee-based accounts today are regulated as advisory accounts. And, guess what? The sky didn’t fall. Brokers didn’t stop offering the accounts. On the contrary, there’s more money in fee-based accounts at broker/dealers today than ever before.”