Mixed Reviews on Wagner Bill to Scrap DOL Rule

New legislation proposed by Rep. Ann Wagner, R-Mo., would create a new advisory standard somewhere between fiduciary and suitability, said Rep. David Scott, D-Ga.

Scott, who has worked with Wagner on various fiduciary rule alternatives, is not on board with the congresswoman's latest bill -- unveiled today during a House Financial Services subcommittee hearing.

“This bill is a very troubling bill," said Scott, adding that it “undermines the SEC’s rulemaking authority in this space. What if the market evolves? ... Why are we being so prescriptive in drafting this bill? Why don’t we allow the SEC to do their job.”

Wagner's bill would eliminate the controversial DOL fiduciary rule and its 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. Her bill would apply consistency to the financial services industry, Wagner noted, by covering all investment advice.

The DOL rule only covers anyone working with retirement accounts.

Under Wagner's proposal, an investment recommendation would satisfy the best interest standard if it reflected “reasonable diligence” on the part of the agent/advisor. Her definition of "reasonable diligence" would be modeled on FINRA's existing definition.

Likewise, agents/advisors would need to exercise reasonable “care, skill, and prudence,” based on a customer’s individual investment needs, a draft of the bill stated.

Unlike the DOL rule, the Wagner bill does not make proprietary products or more expensive products subject to a prohibited transaction. The bill also includes language that would render state-level fiduciary rule efforts null.

Wagner has said she will introduce her bill soon. It stands a decent chance of passing the GOP-controlled House, but would face serious opposition in the Senate.

'Accounts Will Shrink'

The Capitol Markets Subcommittee hearing included five guests, four of whom supported Wagner's bill and a representative from AARP who opposed.

Anti-DOL rule speakers stressed the loss of services for small savers, a happenstance that is already taking place. Phase one of the DOL rule took effect June 9 and holds anyone giving financial advice in retirement accounts to a fiduciary standard. More onerous disclosures and the threat of greater legal liability comes with phase two of the rule, slated to take effect Jan. 1, 2018.

David Knoch, president of 1st Global and a board member of the Financial Services Institute, said his company has seen a 20 percent decline in the number of small-employer retirement accounts, particularly Simple IRAs, since the beginning of 2016.

"(We) project that these accounts will shrink from the 2016 levels by 28 percent before the end of this year, and by 41 percent by the end of 2018," he added.

Douglas Holtz-Eakin, president of the American Action Forum, testified that "several major companies have already left part of the brokerage business or are drawing down their
business and/or switching to a fee-based arrangement."

From these companies alone, reported compliance costs have already topped $100 million, affecting 92,000 investment advisors, $190 billion in assets, and at least 2.3 million consumers, he added.

Free Market Answer?

Rep. John Delaney, D-Md., argued that the free market, free enterprise system will fill that void for small savers.

“How long does that take?" Holtz-Eakin countered. "And in the interim what happens to everybody who had advice and is now without?”

If Wagner's bill were to become law, the Labor and Treasury departments would be unable to rely on the statutory authority under ERISA to promulgate new fiduciary requirements for brokers and insurance agents.

Several Republican committee members endorsed the Securities and Exchange Commission developing a fiduciary standard, a task assigned to the agency under the 2010 Dodd-Frank Act. Political infighting crippled the SEC in the years that followed, but new Chairman Jay Clayton recently endorsed efforts at creating a fiduciary standard.

The SEC solicited comments on a fiduciary standard last month. Delaney called the idea only one agency can produce a fiduciary rule "a false choice"

"I agree it would have been terrific if the SEC would have put forth this rule," he said. "They probably do have more expertise in this area. But they didn’t do it."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]

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