Enhanced DOL Fiduciary Rule Questioned
By Arthur D. Postal
InsuranceNewsNet
WASHINGTON – Any change to the current fiduciary standard rules imposed by the Department of Labor (DOL) would lead to higher fees for investment advice and guidance. It also would lead to reductions in the number of low- and moderate-income retirement savers, and the amounts of money they set aside.
That is a key takeaway of a new analysis prepared by attorneys at Debevoise & Plimpton (D&P) of the potential impact of a new standard of care governing the sale of investment products sold to beneficiaries of retirement plans under the Employee Retirement Income Security Act of 1974 (ERISA). The study was commissioned by the Financial Services Roundtable.
If the DOL approves changing the standard of care, the department would be designated as another securities regulator, the analysis said. This would be one avenue to a court challenge, the analysis implies, contending that Congress has granted the role of securities regulator to only two agencies: the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
The analysis cites a 2011 study by Oliver Wyman indicating that many low- and moderate-income investors - the very people the DOL says it seeks to help through an enhanced fiduciary standard - prefer a commission-based fee structure over a fee-based advisory relationship.
Proponents of the “expansive new rules” likely fail to consider that without the encouragement that financial professionals provide to low- and moderate-income investors, these individuals would save less money for retirement or not save any money at all, according to the analysis.
“Given the complexity of investment products and services available in the capital markets, many Americans need - or prefer to use - professional guidance to achieve their financial goals,” the paper said. “Without such advice, including the inherent education about the need for retirement savings, these individuals may not take the actions necessary to establish adequate retirement savings.”
Specifically, the D&P study warns that any change to current rules under ERISA would have the effect of regulating the conduct of broker/dealers, which is the responsibility of the SEC and FINRA. In fact, this portion of the D&P paper outlines another avenue of potential court challenge.
The D&P study said that the Obama administration and the DOL should take into consideration the existing comprehensive regulatory framework applicable to securities broker/dealers.
“The SEC is the agency that Congress designated to oversee and regulate the conduct of persons providing investment advice and effecting securities transactions in the United States,” the paper says.
“Congress also mandated that any registered broker or dealer must be a member of a registered securities association unless an exemption applies,” the paper says. Since the enactment of the Securities Exchange Act of 1934 (the “Exchange Act”), FINRA (or its predecessor) has been the sole registered securities association, the paper notes, and is an independent, not-for-profit organization whose purpose is “to protect America’s investors by making sure the securities industry operates fairly and honestly,” the paper says.
FINRA views its mandate as playing “a critical role in America’s financial system — by enforcing high ethical standards, bringing the necessary resources and expertise to regulation and enhancing investor safeguards and market integrity — all at no cost to taxpayers,” the D&P paper says.
The analysis was released as the financial services industry, including issuers and agents, prepare to deal with a proposal calling for a fiduciary standard of care for selling investment products into retirement accounts. The DOL apparently has crafted such a proposal and the Council of Economic Advisers has drafted an economic impact study that would be the linchpin for defending such a proposal, if adopted, through a court challenge.
Industry officials say the DOL is expected to release the proposal to the Office of Management and Budget (OMB) shortly. The OMB then would have 60 days to approve the rule for publication.
InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].
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