A discussion draft of proposed legislation sponsored by Rep. Ann Wagner, R-MO., would stamp out the Labor Department’s fiduciary rule and its attending prohibited transaction exemptions.
It would also amend the Securities Exchange Act of 1934 to include a best interest standard of care for brokers advising investors in the retail market.
An investment recommendation would satisfy the best interest standard if it reflected “reasonable diligence” on the part of the broker, the definition of which would be modeled on FINRA's existing definition, and reasonable “care, skill, and prudence,” based on a customer’s individual investment needs, according to language in the draft.
The bill also includes language that would neuter efforts at the state level to hold brokers to a fiduciary standard of care. A Nevada law expanding fiduciary requirements to broker sales representatives went into effect on July 1. Other states are expected to follow suit.
Like other legislation introduced as replacement bills for Labor’s fiduciary rule, Rep. Wagner’s bill bases an alternative on new disclosure requirements on compensation, type of services issued to investors, and potential conflicts.
The proposed law specifically says commission-based compensation and recommendations on proprietary investment products do not in themselves violate the best interest standard. Under the fiduciary rule, each circumstance would warrant a prohibited transaction and require use of the Best Interest Contract Exemption.
It also says that brokers would not be required to recommend the least expensive investment products.
While it sets reasonable diligence as the standard for making an investment recommendation, the proposed law also states that brokers would not be required to “analyze all possible securities, other products, or investment strategies before making a recommendation.”
That language stands in stark contrast to language in the fiduciary rule’s BIC Exemption, which requires brokers and advisors to execute a cost comparison analysis when recommending rolling over 401(k) assets to IRAs.
Brokers who meet the best interest standard laid out in Wagner’s proposal would not be considered fiduciaries under the Employee Retirement Income Security Act.
Rep. Wagner also wants to limit future regulatory activity from the Labor Department. If the law were to pass, Labor and Treasury would be prohibited from using the statutory authority under ERISA to promulgate new fiduciary requirements for brokers and insurance agents.
Under Wagner’s bill, the prohibited transaction exemptions available to the sale of annuities before the fiduciary rule was finalized last year would be preserved.
In June, Rep. Phil Roe, D-TN, introduced the Affordable Retirement Advice for Savers Act. It too would repeal the expanded definition of fiduciary created under President Obama’s Labor Department, and replace it with a more forgiving best interest standard and new compensation disclosure requirements.
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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.
