WASHINGTON — Two organizations offered their alternatives to the Department of Labor (DOL) fiduciary standard proposals. The common theme of both alternatives is imposing a “uniform best interest standard” on all financial advice offered to consumers.
The alternatives were offered today by the Financial Services Roundtable (FSR) and the Securities Industry and Financial Markets Association (SIFMA).
Another theme, it appears, is that the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), instead of the DOL, would take the lead on the fiduciary standard.
That would appear to ensure that a final standard would be delayed beyond the end of the Obama administration, because it is unclear whether SEC Chairman Mary Jo White has the votes to push through a uniform standard any time soon.
Indeed, White just named a new chief of staff to oversee such a proposal. That person, Andrew J. “Buddy” Donohue, won’t start his job until next month.
In announcing SIFMA’s proposal, Kenneth E. Bentsen Jr., SIFMA president and CEO, said that “any consideration by the DOL to adopt a best interest standard should be consistent with a prospective FINRA/SEC standard.”
He said the problem with the DOL proposal is that it would create, among other things, an additional standard of care that would apply only to recommendations made by broker/dealers to retail customers in retirement accounts, and not to recommendations made in any other brokerage account.
“As a result, SIFMA believes the DOL re-proposed standard, with its applicability limited to tax-deferred retirement accounts, would likely add to investor confusion, and result in regulatory duplication and inefficiency,” Bentsen said.
SIFMA believes that this standard could be articulated, for example, through amendments to existing FINRA rules, as approved by the SEC, Bentsen said.
The standard would include the following core elements, a “legal and enforceable” best interests obligation; consideration of investment-related fees as part of the best interests standard; avoidance and/or managing material conflicts of interest, and providing disclosures about material conflicts and investment-related fees to enhance transparency.
Under the FSR proposal, the rule would be adopted across the board. It would apply to all financial products, including those administered under the Employee Retirement Income Security Act (ERISA) rules adopted by the SEC, FINRA and others.
FSR’s alternative crafts a new “Prohibited Transaction Class Exemption” (PTE) that is based on the investment advice exemption already allowed under the 2006 Pension Protection Act (PPA), which amended ERISA.
Under the FSR proposal, a rule based on this exemption still would require that financial professionals and firms act in the best interest of each customer and provide appropriate disclosures without such significant disruption to customers.
“This alternative would recognize that the fees and expenses of various investment products and services vary based on the type of product or service; thus, commissions or fees would be uniform among the same class of investment alternatives,” FSR officials said.
Its approach “recognizes there can often be more effort and analysis required for different types of investments, which should be reflected in compensation,” FSR officials continued.
“FSR’s proposal is modeled on a path Congress thought was reasonable for retirement advice that reflects our modern retirement system and the investment products and services currently available in the market,” the FSR statement went on to say.
It directly responds to the DOL’s proposal by incorporating an already existing exemption under ERISA. According to FSR officials, its proposal could be considered simultaneously by all regulators, including the DOL.
“We all agree that existing laws should be adjusted to clarify that a ‘best interest’ standard always applies, and it should not take several hundred pages of complex regulations and miles of red tape to accomplish this common-sense, agreed-upon goal. A simpler, more coordinated approach is needed,” said Tim Pawlenty, FSR CEO.
“Any financial professional who violates their client’s best interest should not be in businesses and regulators should vigorously hold those bad actors accountable.”
FSR also supports efforts by the SEC, FINRA and others to codify a best interest standard — a standard that FINRA already enforces against registered securities broker/dealers.
FSR also calls for enforcing the many laws already on the books, holding bad actors accountable, making disclosure work better for consumers, and ensuring that any final DOL rule does not limit access to retirement plans for small businesses.
InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at firstname.lastname@example.org.
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