DoL's fiduciary rule replacement goes too far, and not far enough: Critics

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The Labor Department is hearing an earful this week from industry groups, consumer advocates and lawmakers about its new fiduciary proposal.

The criticisms are wide-ranging, with industry groups warning that it will automatically impose a presumption of fiduciary status on financial professionals, while others blast the regulation for failing to enact meaningful consumer protections.

Still others take issue with the process by which the Department of Labor advanced its proposal, with a 30-day comment period on the proposed rule ending Aug. 6. Its Obama-era predecessor had a 90-day comment period and three-and-a-half days of public hearings.

The latest proposal establishes a new prohibited transaction exemption under ERISA permitting advisors to receive various forms of compensation when providing advice that might entail conflicts of interest. It's meant to bring advisor regulation in line with the SEC's recently enacted Regulation Best Interest.

It also comes as a replacement for the Labor Department's vacated fiduciary rule from 2016, a stricter standard that was widely reviled by the brokerage industry and succumbed to a court challenge led by Eugene Scalia, who was a private attorney at the time and today serves as labor secretary.

The Financial Services Institute, one of the groups that sued to bring down the Obama-era fiduciary standard, is broadly supportive of the Labor Department's new proposal, though not universally so.

The group takes aim at disclosure provisions requiring firms taking advantage of the prohibited transaction exemption to inform clients that they are fiduciaries under ERISA. That is at odds with the SEC's calculated decision not to use the term "fiduciary" in Reg BI, and FSI cautions that the Labor Department's disclosure policy "will lead to investor confusion and even be misleading (resulting in disqualification under the exemption), particularly in the IRA setting where ERISA's enforcement standards do not apply."

The Labor Department’s short comment period is one reason to get up to speed, fast.
July 8

Another area of contention concerns the language in the rule's preamble that groups like FSI and the American Council of Life Insurers warn could be interpreted to broadly presume a fiduciary duty for retirement advisors in much the same way that the earlier, defunct fiduciary rule did.

"[I]t is critical that consumers retain access to both fiduciary and non-fiduciary services,” ACLI said in its comment letter. “We are concerned that the department's commentary ... could be understood to broadly impose fiduciary obligations in a manner similar to the Department's 2016 fiduciary regulation."

Criticism from the other side argues that the rule doesn't go nearly far enough, and in fact even amounts to a loosening of investor protections.

"The DoL will once again allow financial professionals to provide conflicted advice and benefit themselves, rather than requiring that they put retirement investors' interests first," charges the Public Investors Advocate Bar Association.

In particular, PIABA and other critics take issue with the Labor Department for reviving the five-part test to determine when someone will be deemed a fiduciary under ERISA. Critics say that standard, enacted in 1975, has failed to keep pace with the way that investment advice has evolved, allowing many advisors to escape fiduciary responsibilities.

"[M]any who provide investment advice will not meet all five parts of the test, thereby never being deemed investment advice fiduciaries," PIABA says in its comment letter. "Those advisors will continue to be allowed to be influenced by conflicts of interest and engage in transactions that would be prohibited if those same advisers were fiduciaries."

The Financial Planning Coalition, comprised of the FPA, NAPFA and the CFP Board, leveled similar criticism, contending the proposed regulation fails to provide clients with protection consummate with how advice is delivered today. The coalition says it's increasingly difficult for consumers to differentiate salesmen and advisors.

"A clear fiduciary standard, equally applied to all financial professionals who provide retirement investment advice, has become a necessity to protect investors in today’s rapidly-evolving marketplace," the coalition wrote in its comment letter to the department.

A Labor Department spokesman did not immediately respond to a request for comment on the criticisms of the proposal.

Many Democratic lawmakers have also chimed in, blasting the proposal both for relying on the five-part test and for choosing not to include a private right of action that would allow clients to sue if they felt like their advisor violated the rule.

But they also took issue with the quick pace by which the department has been advancing the rule. Last month, Sen. Patty Murray (D-Washington) sent a letter to the acting head of the Employee Benefits Security Administration asking for a public hearing on the proposal and an extension of the comment period, requests that the department did not grant.

"I'm incredibly frustrated that the Trump administration is charging ahead so recklessly with a proposal that could lead to retirement savers losing billions of dollars a year due to conflicted advice," Murray says in an emailed statement. "There is no reason for the department to rush this process when so many stakeholders have been clear they want more time to raise their concerns, and seemingly no grounds for Secretary Scalia to move forward on some of these proposals without a hearing as required by law."

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Fiduciary Rule Fiduciary standard DoL FSI FPA CFP Board NAPFA PIABA Regulatory reform Financial regulations