The Department of Labor Monday took a big step forward in a move that immediately re-ignited the intense debate over whether securities brokers should be subject to the fiduciary rules in the Employee Retirement Income Security Act.
In sending its reworked and long-awaited "conflict-of-interest" rule to the Office of Management and Budget, the DOL triggered a 90-day review of a change aimed at protecting workers and retirees. The rule will not be made public until after that process.
The fiduciary standard has long applied to retirement plan advisors, meaning they must put their clients' interests ahead of their own. Broker-dealers, on the other hand, are held to a lower standard called "suitability." Critics say brokers who work on commissions often steer clients to the mutual funds that pay them the highest fees.
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While the proposed regulations were not available for review, the White House issued a fact sheet that said the rules would:
- require retirement advisers to put their client's best interest first, by expanding the types of retirement investment advice subject to ERISA;
- continue to allow private firms to set their own compensation practices by proposing a new type of exemption from limits on payments creating conflicts of interest that is more principles-based. This exemption will provide businesses with the flexibility to adopt practices that work for them … while ensuring that they put their client's best interest first and disclose any conflicts that may prevent them from doing so. This fulfills the (Labor) Department's public commitment to ensure that all common forms of compensation, such as commissions and revenue sharing, are still permitted, whether paid by the client or the investment firm.
- allow advisers to continue to provide general education on retirement saving across employer-sponsored plans and IRAs without triggering fiduciary duties.
Last month, a leaked White House memo from top administration advisors signaled that the proposal sent to the OMB would strike a "middle ground" between the DOL's initial position and the current level of regulation of securities broker-dealers, which White House advisors say offer little "meaningful" protections for retirement savers.
"Conflicted" advice, the memo said, is costing retirement savers more than $6 billion a year. The memo suggested the DOL's proposal will not include a ban on commissions tied to the sale of securities, a measure other industrialized nations have enacted. But all brokers will be required to follow what the White House advisors called a "best interest standard."
The memo did not elaborate on specifics, but did say all advisors and brokers will be required to mitigate conflicts of interest and refrain from "certain self-dealing transactions."
Also read: Bracing for battle over fiduciary rule
The financial services industry will also be subject to "enhanced enforcement" of the new standards, according to the memo.
Secretary of Labor Thomas Perez, at an AARP event in Washington, D.C., Monday where President Obama endorsed the DOL's efforts, said that "when it comes to financial advice, conflicts of interests can lead to bad advice and hidden fees that too often keep us from getting investment advice that's in our best interest."
Said Perez: "This isn't right, and we have an obligation to fix it. Consumers deserve to know that their advisor is working for them. Common-sense rules can protect investors and consumers, prevent abuse, and ensure that brokers and advisors provide advice that is in consumers' best interests."
A final rule could come before the OMB's exhausts the 90-day review period.
"My guess is we will see the OMB issue more quickly than the full 90 days," said Jim Klein, president of the American Benefits Council. "Those favoring the proposal likely won't want to give opponents a full three months to wage a campaign against it."
The DOL has been pushing its conflict-of-interest rule for more than four years.
In September of 2010, the agency, under then Labor Secretary Hilda Solis, announced its intent to redefine the term "fiduciary" to include anyone giving investment advice to individual investors, IRA owners and retirement plans.
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The financial services industry launched an immediate counter-assault, arguing that low- and middle-income investors would be hurt, because the regulation would prompt brokerage firms to limit their financial advice in order to comply with the new, broader interpretation of fiduciary liability.
In April of 2011, Democratic lawmakers wrote Phyllis Borzi, head of the Employee Benefits Security Administration and the DOL's chief architect in redrafting the proposal, saying too broad of a fiduciary standard rule meant risking the loss of "investment education and information if advisors withdraw from these services, leading to less choice and higher costs."
In March of 2012, Solis went before the House Committee on Education and the Workforce to face criticisms over the pace of formalizing a new rule and the uncertainty it was creating.
"I'm not interested in pushing this reproposed rule out until we have everything we need. We want to have a fully fleshed-out rule," Solis told lawmakers, signaling her department's intention to take industry's and lawmakers' concerns into consideration.
In July of 2013, the DOL announced another delay in a series of the rule's re-proposals. About the same time, Senator Orrin Hatch, R-Utah, introduced his SAFE Act, which, among other things, proposed to neuter the DOL's efforts by moving oversight of the sale of securities and retirement products from the DOL to the Department of Treasury and the Securities and Exchange Commission.
Once OMB signs off on the recrafted standard, it can be issued by the Labor Department. Then the public will be allowed to comment before a final regulation is completed.
Given the multiple rounds of hearings and expected lobbying efforts, not to mention a GOP-controlled Congress, any new fiduciary standard may not go into effect before next year.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
