The Department of Labor released 1,305 pages of public hearing transcripts Monday, igniting a final two-week comment period on its controversial proposed conflict of interest rule.
The public comment period will close at 6 p.m. Thursday, Sept. 24, DOL announced. To submit a comment use one of the following methods:
Email [email protected] and include "RIN 1210-AB32" in the subject line; through the regulations.gov website; or send a letter to: Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Conflict of Interest Rule, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210.
The four-day public hearing took place Aug. 10-13 and featured 75 speakers. The documents reveal moments of tension, patience and even some laughter among regulators and speakers invited to testify for and against the conflict of interest rule.
The rule proposes to adopt some of the most far-reaching changes to the way advisors handle retirement accounts in more than 40 years since the creation of the Employee Retirement Income Security Act of 1974.
We reproduce some of the exchanges below as the DOL prepares to draft the final rule, which will likely be published sometime in the spring.
The material has been edited for length and readability.
On the Deloitte Report:
KENNETH R. BENTSEN JR., president and CEO of Securities Industry and Financial Markets Association (SIFMA): Further, in its analysis of the costs associated with the compliance, the Department (DOL) greatly underestimates the cost to implement and comply with the rule. Deloitte conducted a survey of SIFMA member firms to estimate the actual cost of compliance and found start up and ongoing costs to be almost double the Department’s estimates.
TIMOTHY HAUSER, deputy assistant secretary for Program Operations at DOL: With respect to the Deloitte studies, the Deloitte reports come with, you know, a fairly substantial disclaimer. As I read the report, it appears to be an aggregation of information collected from a SIFMA working group, which I take it was a number of your member companies.
For its part, Deloitte's clear that they didn't independently verify, validate, or audit any of the information that was presented by the working group, and nor does the report, to the extent it relied upon survey data, include the actual survey questions.
On the NERA Report:
BENTSEN: I do want to point out that we felt that the RIA (Regulatory Impact Analysis) did not include sufficient study at an account level basis. We asked NERA (Economic Consulting) to conduct such a study and what we found was that commission-based accounts would become significantly more expensive when converted to a fee-based account, that investment returns show no meaningful difference between commission-based accounts and fiduciary accounts, and, in addition, we found that fee-based accounts trade much more often than commission-based accounts, which would make sense given what, the structure of the, of fee-based accounts.”
HAUSER: But if you look at a footnote, you know, at the start of that discussion, the footnote says that the fees in the commission-based model exclude fees received indirectly from the account holders such as mark ups, mark downs, 12b-1 fees. That is, after all, a big part of what this issue is about, and that's a big part of what the compensation is that brokers receive in this marketplace.
On a Best Interest Standard
HAUSER: So given that … we took care of the workability issues in terms of the … timing of the contract, the way in which the contract obligations would be imposed, the notice and disclosure provisions, and what we're just down to, really, is the notion of an enforceable up front commitment that your advisors, brokers and advisors are going to adhere to the best interest standard, you know, as we've defined it, including an obligation for prudent advice, for best interest advice, for services that are reasonable in relationship to the fees that are charged, and a requirement that they not create a set of financial incentives that are misaligned with those goals … an obligation not to incentivize people to violate those terms … is … any of that problematic?
BENTSEN: It's a lot to assume --
HAUSER: So I guess my question, which, you know, maybe is the way I should have put it the first time around was, I mean, is that naïve? Is there some reason why … you can’t, you know, warrant that that person is not going to be given an incentive to do -- you know, to push the product that isn't the right one for the customer, you know, that isn't prudent, that runs contrary to the best interest standard?
- MARK SMITH, Sutherland Asbill & Brennan, Counsel for SIFMA: I don’t think it’s naïve to think that we can do that.
HAUSER: But one thing I'm at least thinking hard about as I look at these suggestions is lurking in these policies and procedures, is there a sense in which the firm's conflict of interest is just being directly transmitted to the advisor? And that would worry me. If the policy and procedure essentially says the more money this recommendation will make for the firm, the more money I'm going to pay you, that's aligned all right, but it doesn't necessarily seem like it's aligning the advisor's interest with the customer.
SMITH: We’ll be glad to think along those lines.
On Providing Advice to Small Plans
HAUSER: And in the SEP and SIMPLE IRA context, any advice to the individual IRA participant would be covered by the best interest contract exemption. And we specifically asked in the text of the rule whether the best interest contract exemption shouldn't be extended to the small sponsor. You may think all of those things are inadequate to deliver advice. But to simply tell sponsors in a survey that, you know, the Department of Labor is thinking about prohibiting advice when it quite plainly is not what we're intending to prohibit --
KENT A. MASON, Davis & Harman LLP: It is. No, I guess I just don't accept that in the sense that you're saying that I can go to somebody with 3,000 options and say do it yourself, here's my platform of 3,000. That's not the real world.
HAUSER: No. Mr. Mason, I did not tell you that … I didn’t tell you that. That’s not what I said. I gave you a variety of mechanisms by which I think the advice can be delivered and also indicated, as is a fact, that we asked in the preamble whether the best interest contract exemption shouldn’t be extended to small sponsors ...
MASON: I look at this and I'm just thinking about our HR person and somebody wanders into the HR office and says, hey … I spent a lot of time on picking out my funds, can you just take a look at it. I don't really know what I'm doing, but does this look like what -- does this lineup look like something that I should be doing or am I just way off base. And the HR person says, look, I'm not an expert, but that's very similar to what other people, sort of similar situated people are doing. That sounds like a suggestion, like this is OK about a very specific set of investment patterns and I don't see anything that carves that out --
HAUSER: Yeah, there is.
LINDA RITTENHOUSE, director, Capital Markets Policy-Americas, CFA Institute: Yeah, there is.
KATHLEEN M. MCBRIDE, chair, Committee for the Fiduciary Standard: Yeah, there is.
HAUSER: There's a specific provision on the HR --
MASON: No, it is not. No, it doesn't.
MCBRIDE: It's very specific.
MASON: No, it doesn't. Actually that's wrong, that's wrong.
HAUSER: So if you think --
RITTENHOUSE: It's in there.
MASON: No, it's not.
MCBRIDE: If you read it, it's in there.
MASON: No, it's advice to the fiduciary. This is advice to a participant, so that's wrong. I am right about this and I'll read it to you.
HAUSER: No, Kent, Kent, it's fine.
DAVID BLASS, general counsel, Investment Company Institute: And of course there are a number of other issues for the best interest contract exemption beyond just the one on insurance. The disclosure really should be simplified dramatically. We pointed to a model that you've already developed as one way to do that. Looking at mutual fund, a prospectus, a presentation of expenses would be a good way to go about it, in our view. The current proposal requires some projection of performance, which is both inconsistent with federal securities laws and generally not a great idea, so we think a standardization would really help in that regard with examples.
For example, over a, you know, one, three, five, 10-year period and examples of dollar amounts. $5,000, $10,000 amounts invested.
BARBARA ROPER, director of investor protection, Consumer Federation of America: So I mean I think that's an issue where we agree on standardization of those tables. I will say if I ever get finished working on this issue my next issue is to reform mutual fund cost disclosures so we would not advocate using the model for the mutual fund prospectus for that purpose, but that's another fight for another day.
BLASS: Well it's been through a reform a few times. It serves as a good model. People get it. So it's -
ROPER: No, they don't. People don't have a clue what they're paying for their mutual fund, so in that sense it's really not working very well.
On Objective Advice
JOSEPH PIACENTINI, economist, Office of Policy and Research, Department of Labor: So is it your view that a consumer who's talking with a representative about insurance products ought to be able, or usually does expect impartiality or not?
MAURICE L. STEWART, executive consultant, retired general agent: I believe that a consumer, a client that we are advising wants to: 1) be certain that we understand or -- let me back up. Most of our clients that we call on have never sat down and really thought through their financial future. They spend more time getting a hair cut than they do thinking about their financial future, unfortunately, and they certainly haven't thought through the retirement area and how much money, honestly, it's going to take to be able to retire in the way that they and their spouse, you know, they've been thinking about. So I really believe that it's important for us to understand their needs and the client to understand that we understand their needs …
BARTLETT. NAYLOR, public citizen: Mr. Piacentini, you're hearing some interesting quandaries. You're hearing from Mr. Stewart that there's no need for a fiduciary standard because we're all good guys and we weed out the bad guys. You heard from the previous panelists that, hey, let's be serious, nobody thinks that we're doing anything other than selling. That we're not actually offering financial advice. You're hearing the crocodile tears of an industry who believes it will not be able to help the small saver. … I think that, first of all, as Prof. Rhoades has pointed out, the small saver really isn't served very well at all. Frankly, I would welcome the Wall Street industry, if you will, staying away from the small saver. I think that will be a good thing if that threat is made good.