Access to affordable financial help will be prohibited – even when it is in the investor’s best interest -- through the fiduciary standard template proposed by the Department of Labor (DOL), said a Fidelity Investments executive today in testimony.
The proposed best interest contract exemption was cited as particularly troubling in the testimony today of John F. “Jack” Haley Jr., Fidelity executive vice president.
“Small businesses and lower- and middle-income investors will be harmed the most,” Haley said before the Subcommittee on Health, Employment, Labor and Pensions of the House Committee on Education & the Workforce. The subcommittee approved the authorization to defund the DOL's work on its fiduciary standard late Wednesday on a party-line vote.
"I expect the fiduciary standard issue will be discussed at length at full committee markup," said a spokesman for the Democratic minority on the panel.
He said Fidelity’s concern is that although the framework of the DOL’s proposed rule would theoretically preserve different service models when acting in the customer’s best interest, “The proposed best interest contract exemption contains so many problematic conditions that the rule is unworkable as drafted and will have the effect of banning many well-established service models.”
Haley said the current DOL proposal regarding the definition of the term “fiduciary” for purposes of the Employee Retirement Income Security Act (ERISA) is “based on flawed assumptions that lead it to be too complex, too cumbersome and too costly.”
Six industry and consumer representatives spoke at the hearing, held on, “Restricting Access to Financial Advice: Evaluating the Costs and Consequences for Working Families and Retirees.”
At the same time, Dennis M. Kelleher, president and CEO of Better Markets, a consumer group, defended the DOL proposal.
“The industry’s arguments against the rule are simply not valid,” Kelleher said. “Make no mistake: the rule will not deprive small businesses or investors — including those with modest savings — of valuable investment advice or education.”
He also said there is no basis for claiming that the Securities and Exchange Commission (SEC) should be the agency to update the fiduciary standard under ERISA. Only the DOL has that authority, Kelleher said, “And only the DOL can adopt a rule that protects all types of retirement assets, not just securities.”
Kelleher added that that the SEC has not yet decided whether to do the rulemaking under its own statutory authority, a process that he said would take years.
DOL Secretary Thomas E. Perez outlined what the proposal says, what it does and the agency’s plans for an extensive notice-and-comment process as it finalizes the rule. This will include a public hearing following soon after the close of the initial comment period in mid-August, Perez testified.
In his comments, Perez indicated that he will work with interested parties regarding unintended consequences.
At the same time, in an investor's note, Ryan Schoen of Washington Analysis, said he expects the proposal to be "tweaked," saying that the DOL will agree to a longer implementation timeline and greater flexibility around circumstances when customers and brokers must sign any Best Interest Contract. "We continue to believe DOL will successfully complete the rule near year-end or early next year," Schoen said.
:We expect Republicans to continue aggressively pushing legislative proposals intended to derail or delay the rule, however, we continue to think the odds are against success," Schoen said. "Furthermore, intense lobbying efforts on the part of industry opponents are likely to drive 'anti-rule' headline flow in the coming weeks and months," Schoen said.
Among other witnesses, Dean Harman, founder and managing director of Harman Wealth Management, reiterated industry concerns about the proposal as board member of the Financial Services Institute. Kent Mason, a partner in the law firm of Davis & Harman LLP, also outlined industry concerns as counsel for plan sponsors as well as their trade associations.
Brian Reid, chief economist of the Investment Company Institute (ICI), said the ICI supports the principle at the heart of the DOL’s proposal — that financial advisors should act in the best interests of their clients when they offer personalized investment advice.
“Unfortunately, the DOL did not stay true to the meaning of that principle,” Reid said, and, “As a result, its proposed rule is hopelessly complex, confused, and, in its current form, unworkable.”
One of Reid’s problems with the proposal is that the DOL is refusing to work with the SEC on a joint approach, although, as David Tittsworth, counsel at Ropes & Gray, said in an interview with InsuranceNewsNet Tuesday, the legal basis for the DOL rule is different than the laws that allow other regulators, such as the SEC, to mandate consumer protection rules regarding investment products.
The depth of opposition from legislators to the fiduciary proposal was expressed by Rep. David P. Roe, R-Tenn., a senior member of the subcommittee majority, and a physician.
Objecting to Perez’s comparison of the “put your client first” to the medical profession, Roe said that, “As a physician with more than 30 years of experience treating patients, let me just say that the approach reflected in this proposal would destroy what’s left of our health care system.”
Roe added that, “Imagine what would happen if doctors were prohibited from receiving compensation, or were required to sign a contract with each patient before delivering services, or were forced to publish online each and every treatment that had been prescribed the following year. No doctor could run a successful practice under this type of regulatory regime, and no responsible financial advisor will be able to either.”
Roe agreed that the rule would limit financial advice access.
“If this rule goes into effect, a lot of people will quickly learn that their financial adviser – someone they may have known and trusted for years – will no longer be able to take their call,” adding that “it is important to note that low- and middle-income families are the ones who will bear the brunt of this misguided proposal. They will lose access to the personal service they rely on and be forced to find suitable advice online or simply fend for themselves.”
InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at email@example.com.
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